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From:  webmaster@cera.com@ENRON 
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Sent: Friday, January 19, 2001 5:17 PM
To: messages@cera.com
Subject: High Speed Regulation in California - CERA Alert


Title: High Speed Regulation in California
URL: http://www20.cera.com/eprofile?u=35&m=2208


A Feverish Pitch
The pace of regulatory and political events in California has taken on the
feverish pitch of the energy market crisis itself. Important decisions
regarding a wide range of market structure issues are being made quickly at 
the
California Public Utilities Commission (CPUC) and the state Legislature,
increasing the level of uncertainty most market participants already perceive
in the quickly evolving California market. Sudden changes are being made to 
the
market structure, changes that used to require years in California,s complex
regulatory and legislative proceedings.

As rolling blackouts have rippled through urban centers of Northern California
on January 17 and 18, including in portions of downtown San Francisco,
Sacramento, and the Silicon Valley, state officials are scrambling to set up
the appropriate credit mechanisms to ensure the continued delivery of scarce
western energy supplies to California,s two largest utilities. Even at prices
near $800 per megawatt-hour (MWh), the California Department of Water 
Resources
(CDWR), attempting to buy power on behalf of Pacific Gas and Electric (PG&E)
and Southern California Edison (SCE), has been unable to secure enough to keep
the lights on. In the mean time, legal actions by some energy suppliers
threaten to tip the utilities into bankruptcy*and are being held at bay only 
by
direct intervention of California,s governor.

Below is a summary of the various state actions being pursued concurrently:

*California governor. California Governor Gray Davis continues to attempt to
act on behalf of PG&E and SCE to secure long-term contracts for supply from
merchant generation owners and marketers in California. On the same front, the
governor has been negotiating with generators in an attempt to keep them from
seeking compensation through the courts for energy delivered to the utilities.
Court-ordered reimbursement could prompt bankruptcy.

*Legislature. Bills have been approved to authorize continued power purchases
on behalf of PG&E and SCE by the CDWR, to restructure the independent system
operator,s (ISO) governing board to consist of five members appointed by the
governor, to restrict the ability of the ISO to enter into a broader 
interstate
regional transmission organization (RTO) without the explicit approval of
California,s Electricity Oversight Board, and to prohibit the divestiture of
the investor-owned utilities, remaining generating assets until 2006. The
vehicle for pursuing authorization of state bond financing for acquisition of
transmission assets and construction of new generation facilities is still
being developed.

*California Public Utilities Commission. On January 18 the CPUC adopted a
decision prohibiting the sale of SCE,s Mohave Generating Station to AES. This
voids a sale that was announced but not closed. The CPUC also delayed 
decisions
regarding SCE,s application to end its rate freeze and the prudency criteria
for utilities entering into long-term supply contracts.

Some of these issues will continue to evolve as they progress along their
respective and sometimes intersecting paths, and some will need to pass 
through
multiple review bodies. This rapid and erratic evolution has not helped to
decrease either the financial risk associated with supplying energy to
California,s two largest utilities, or the level of uncertainty in developing
new generation to supply California in the future.

The ISO anticipates that it will call stage 3 emergencies (reserves less than
1.5 percent) for January 19 and will most likely continue to curtail
interruptible customers through the weekend. Western energy supplies are being
strained by recent heavy usage of hydroelectric facilities where water 
supplies
are already as much as 25 percent below average, owing to low precipitation 
and
continued plant outages near 9,000 MW in California. The gravity of the
financial condition of California,s two largest utilities is exemplified by 
the
need for other, more creditworthy intermediaries, including California
municipal utilities, state agencies, and some unregulated energy suppliers, to
act as temporary  guarantors for the acquisition of energy on behalf of PG&E
and SCE.

**end**

Follow above URL for full report.

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E-mail Category: Alert
CERA Knowledge Area(s): Western Energy,

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