Future Shmutz

Summer approaches, and California is facing the prospect of environmental degradation. Natural-gas shortages could create a greater reliance on fuel oil, a far dirtier source, to generate electricity. A looming “power strike” -- by mostly small alternative-power companies, which use wind, solar, geothermal, biomass and cogeneration to produce one-quarter of the electricity consumed by the customers of Southern California Edison and Pacific Gas & Electric -- could further muddy the waters and the air.

Some experts at the California Public Utilities Commission (PUC) and elsewhere are saying we‘re in danger of running out of natural gas later this year, even though the price of gas magically multiplies once it hits the California border. Says a PUC source, “We need to find a quick substitute for gas, or we’re in big trouble.”

Natural gas has become California‘s fuel of choice to generate electricity. Now state energy officials are seriously considering a step that would have been unthinkable a few years ago -- burning some fuel oil in place of gas to generate electricity. Environmentalists are being sounded out about the possibility.

The natural-gas supply crisis is one of the legacies of Pete Wilson’s failed deregulation scheme. Believing in the power of the free market, the Wilson PUC downplayed reserve power-generating capacity. Five years ago, in fact, the PUC decided against pushing the development of 1,400 megawatts of new alternative generation (wind, geothermal, and cogeneration), enough to power 1.4 million households. It was leaned on in this matter by SCE, which could make a bigger profit at the time by buying what was then cheap natural-gas-based electricity and reselling it to consumers at much higher rates guaranteed by the state. Besides, bringing more generating capacity on line tends to reduce the value of existing plants; the more plentiful the supply of power, the less potential for profit.

With neither the utilities nor the PUC much inclined to bolster reserves, the idea of storing more natural gas went nowhere fast. By any rational standard, this was about the most counterintuitive energy policy a state could pursue: You may not be able to store electricity, but you can store the natural gas that generates electricity for rainy days or inclement market conditions. Unless you believe, as did the Wilson PUC, that relying on the market is better than relying on planning.

Even as natural gas threatens to grow scarce, California‘s alternative-power generators are threatening to make themselves scarce, too. Through their contracts with the utilities, they are one of the three legs keeping utility customers’ rickety stool upright, the other two being the utilities‘ retained generation (the plants they haven’t sold) and the power purchased on the open market from the Southern power cartel.

The alternative generators are owed more than $1.8 billion, most of it by SCE, which simply stiffed them from November until last week. Many of them are small firms. They have stood by while the state rushed in to relieve the utilities of their task of buying power on the open market and to bail out the utilities for their past losses. Under Governor Gray Davis‘ plan, the utilities would get all the money they claim in losses, billions of which are in hot dispute by consumer advocates.

But the state is offering no such assistance to the alternative generators. The Davis plan would force the utilities to pay them from here on out, but it would do nothing to make up for their losses, incurred while they continued supplying power to utilities that had stopped paying for it. (SCE paid nothing from November to April; PG&E paid 15 cents on the dollar.)

On top of that, PUC Commissioner Carl Wood, who used to work for SCE, has launched an investigation of the alternative generators to determine why some of them aren’t supplying power to the utilities and why others are going to court to get out of their utility contracts. The answer is rather simple, notes one angry alternative generator. “We‘re doing it because Edison owes us millions of dollars,” he says.

These folks are extremely annoyed by the PUC investigation, which many see as punitive. Even before the PUC’s probe, they staged the equivalent of a power “work stoppage,” taking a few thousand megawatts off the grid, which helped trigger rolling blackouts in the L.A. area and around the state last month. Now, with a portion of their generation still offline, some say a “power strike” is in the offing. And, sources say, many of their leaders want to get out of the relationship with utilities entirely and sell their power on the open market. They figure that this may be the only way they have to make themselves whole.

“In trying to help Edison and PG&E,” says Jonathan Weisgall, who heads up the alternative generator CalEnergy. “The state has created a third dysfunctional utility,” namely the state Department of Water Resources (DWR), which buys power for the utilities‘ customers. Now state officials, he says, are focused on figuring out how to get the DWR repaid for the billions it has spent buying power, and how to get billions more to SCE and PG&E to get them back on a sound financial footing. But, he claims, they are ignoring the plight of the alternative-power generators. Indeed, SCE’s debt to the alternative generators is not even addressed in the lengthy bailout deal it crafted with the Davis administration.

Weisgall‘s CalEnergy, a geothermal firm owed at least $120 million by SCE, went to court and got out of its contract with the utility, putting its power on the open market instead. “We did what we had to do,” says Weisgall. “We were looking at bankruptcy ourselves.”

Weisgall downplays talk of a power strike. But with heavy opposition to the Davis bailout deal, he considers an SCE bankruptcy likely. In bankruptcy court, he notes, alternative generators would be more likely to be paid what they are owed. “Political solutions aren’t working,” he says. “Hard business decisions must be made.”


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