Shorting Out

Events in California‘s power crisis are happening too swiftly and too slowly. Too swiftly for informed, democratic decision making. Too slowly for the pace of events.

As is his custom, Governor Gray Davis called this week’s announcement of some long-term power contracts ”a major breakthrough.“ But the situation is still far darker than he describes. Deals to take over the Southern California Edison and San Diego Gas & Electric transmission lines are still incomplete, and Pacific Gas & Electric is balking. There is real concern in the governor‘s ranks about the negotiations with all the utilities. The long-term contracts are coming in way over the governor’s target price, and the state is still looking to the exorbitant spot market for the summer. In fact, some of the contracts he says he has are denied by the companies. And looming over all is a supply problem with the coming summer air-conditioning crunch.

The more we wait, the more we pay. And the out-of-state power generators that bought much of the state‘s generating capacity after deregulation want every dime they are overcharging for. In the longer term, a big revenue-bonds deal is to reimburse the general fund for all these emergency short-term purchases. But the total is swiftly mounting.

The latest installment of $500 million has been set aside from the state’s general fund to buy power on the spot market, bringing the total committed so far to $3.2 billion. The state is buying about a third of the power used by customers of Southern California Edison and Pacific Gas & Electric, both of which have been denied credit by suppliers who haven‘t been paid by the reeling utilities. The plan is for the state to recover those short-term costs not covered by consumer payments by issuing $10 billion in revenue bonds in May, with the balance going to finance cheaper long-term contracts.

The normally voluble David Freeman, the L.A. Department of Water and Power chieftain who negotiated the long-term power contracts as a volunteer for the state, has been virtually incommunicado since accepting his appointment from Davis. One reason is Davis’ management style, which frowns on substantive comments from policymakers in favor of carefully controlled spin from the governor‘s press office. Another reason is the difficulty Freeman encountered in the negotiations with power generators, who have California over a barrel.

The long-term contracts that have just been agreed to are at much higher rates than the governor’s oft-declared goal of 5.5 cents per kilowatt-hour. Indeed, the price over the first five years is a whopping 44 percent higher.

What will this mean for consumer rates next year, already certain to be about 20 percent higher than at the beginning of this year? That‘s not clear yet, since some energy experts believe that further increases will be amortized over the life of the contracts, neatly holding down consumer rate increases through the 2002 elections.

And a Davis source concedes that the long-term contracts lauded by the governor won’t cover much of the coming crunch time -- summer peak demand, when some 30 percent to 45 percent of the state‘s power will still have to be bought on the expensive spot market.

There’s another pitfall with these deals. ”Signing all these long-term contracts tied to natural gas may shortchange new investment in renewable techn logy,“ notes Center for Energy Efficiency and Renewable Technologies director John White.

While the Public Utilities Commission works to get Edison and PG&E to pass on the money they are collecting from ratepayers to partially reimburse the state‘s buying of power for them in the expensive spot market, state Treasurer Phil Angelides is working to arrange short-term ”bridge financing“ to reimburse the state’s general fund for the billions flowing now to out-of-state power generators to keep the lights on. ”We intend to have $3 billion to $5 billion in short-term loans from banks and financial institutions in place by the end of the month,“ says Deputy Treasurer Cathy Calfo.

These short-term bridge loans to make the general fund whole again are to be paid off by the proceeds from what will be the biggest municipal-bond sale in U.S. history, the $10 billion revenue-bond sale slated for May to finance the state‘s long-term power contracts. But that original $10 billion will almost certainly have to be more. For, as the negotiations over long-term contracts dragged on, the general fund’s hemorrhaging into the sky-high spot market increased.

One way or another, as you see, the Southern cartel of out-of-state power generators will get the money they say they are owed. But they insist on getting their money upfront, as well.

Davis says that one or two power companies will accept partial payment. It‘s not clear which companies those might be, and Davis won’t say. What is clear is that some of the biggest players in the power business say they will not accept partial payment. Enron, Reliant and Duke Power all say they won‘t take a penny less than they are owed. And they have engaged in heel dragging on long-term contracts for more affordable power to try to ensure that they will be paid for all the power they’ve already provided at their gouge-plus rates.


Enron, incidentally, is headed by George W. Bush intimate Ken Lay, an old Texas buddy of the new president who helped lobby through California‘s deregulation scheme. Lay and Enron have provided over half a million dollars to Bush, along with his campaign plane. Lay is regarded as the most influential member of the Bush Energy Advisory Team. He took notable pleasure in turning Davis down when the governor phoned him asking for support of California’s takeover of the power grid. Which was hardly a surprise, since the generators association had already signaled its opposition to the plan, which will give the state more influence over its energy future. Reliant, yet another Texas firm, boasts as an influential board member one James Baker, U.S. secretary of state in the administration of George Bush the Elder and, more recently, the Bush family field marshal in blocking the Florida recount.

Why isn‘t Davis making the Bush connection a big issue? One Davis adviser says they simply need to work with the new administration, which most experts say holds the ability to block a state takeover of the power grid. One potentially good sign is that President Bush will replace his initial choice as head of the Federal Energy Regulatory Commission, who was very hostile to the grid takeover.

And why aren’t Edison and PG&E making more of an issue of the Big Gouge? (After all, the Southern cartel is refusing to sell to them.) Because they are part of the high-flying power generators‘ club now. With the once conservatively managed Edison now transformed into Edison International and Mission Energy, the Edison crew has invested in fossil-fuel plants in Mexico and throughout Asia. And PG&E has done much the same, emerging as a huge force in the power markets of the Northeastern U.S.

Indeed, PG&E is now the fourth-largest electricity marketer in the nation, just behind Duke and ahead of Reliant. Enron is number one.

What of the state’s proposed takeover of private-utility transmission lines?

”I‘m not feeling better yet,“ says one Davis associate of the overall utility negotiations. Some around the governor think the tentative deal to buy Edison’s transmission lines he announced last month was too soft and favorable toward the corporate giant, though the governor‘s negotiators toughened up some as events progressed.

With regard to the glacial PG&E negotiations, a Davis adviser describes the utility’s position as ”a ridiculous wish list.“ After first refusing to consider a sale, PG&E reportedly wants a whopping $10 billion for its transmission lines.

With troubled negotiations, attention turns to the governor‘s negotiators, in particular to former Edison president Michael Peevey. Why is Peevey even there? He is, after all, a former top Edison executive who some observers say would like nothing better than to ride back to the top slot there in a blaze of glory, and who, as head of the utility-backed Council for Economic and Environmental Balance, sponsored the notorious junket of regulators and regulatees to England that inspired Pete Wilson’s Public Utilities Commission to move ahead with Thatcherite deregulation.

”Peevey is a Democrat, people like him,“ explains former state Senator Tom Hayden. ”Like [Edison CEO] John Bryson, he‘s a friend of Gray’s. He‘s personable and seems reasonable because he doesn’t want to build nuclear plants, so he‘s accepted as a good-guy business executive and never held accountable for the past.“

Finally, there is the shortfall in supply. One good sign for Davis is that California’s electric-power consumption dipped 8 percent last month, a heartening development, if still short of the governor‘s goal of a 10 percent reduction, which he announced last month on Meet the Press.

We shouldn’t be having the problems we‘re having this winter. In 1996, when deregulation was passed, California’s private and public utilities owned 46,000 megawatts of generating capacity, half again as much as needed to meet peak demand in the winter. But the private utilities chose to sell off much of their generating capacity, investing much of the proceeds in projects outside the state. The out-of-state firms that bought their former California plants have manipulated the market, keeping plants offline for unusual amounts of maintenance and driving up prices.


But we definitely have a problem in summer, with air conditioning driving the state‘s peak demand up 50 percent higher than it is now. The Davis plan to deal with this includes the 10 percent reduction in demand from conservation and a crash program to bring 5,000 megawatts of new generating capacity online through small ”peaker“ plants. The state is off to a very late start in securing the peaker plants. And while last month’s reduction in power consumption was good, it‘s not clear how long-lasting it will be. Davis is looking into ”real time“ pricing, advocated by University of California economist Severin Borenstein and former Davis boss Jerry Brown, which would encourage a shift in consumption to cheaper, off-peak power. But he’s starting very late on this, as well.

Meanwhile, the Legislature is scuffling. While erstwhile deregulation champion Senator Steve Peace (D--San Diego) warns that ”the Lone Star flag will fly over the Capitol dome“ unless the governor seizes Texas-owned power plants, which he shows no sign of doing, an agreement to pay renewable-power producers is not yet in place. And, aided by one Democratic absence and a couple of quibbles, Senate Republicans succeeded for now in narrowly blocking a $1 billion energy-conservation program requiring a two-thirds emergency vote.

Needless to say, we‘re not out of the woods yet.

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