CA Power Market Awaits Bailout

California power watchers were hoping for results early this week from the 
marathon government-industry negotiations. The principals of last Tuesday 
night's marathon session were expected to meet by video-conference over the 
weekend to review solutions developed by staff working groups, which met 
through the end of the week. (see Daily GPI, Jan. 11) 

On the West Coast the week ended with emergency legislation starting its dash 
through the state capital, and the governor holding a 90-minute meeting with 
two neighboring western governors to piece together a regional strategy on 
joint energy conversation/supply cooperation. 

On Friday Gov. Gray Davis said if FERC fails to act, he is sure Congress will 
take up legislation to stabilize power prices throughout the country, "or at 
least give governors the option to opt into a stabilized pricing mechanism. 
Sen. Diane Feinstein, D-CA, announced she was working on a bill to be offered 
later this month, which would allow the energy secretary to impose price 
caps. 

Davis indicated that he and federal officials would be working over the 
weekend and he expects to have something to announce early next week, and in 
the long term he expects to "solve this problem in the next 90 days and in 
six months hopefully this whole episode will be a distant memory." 

Also on Friday Standard & Poor's assigned an investment grade triple B-plus 
corporate credit rating to subsidiary PG&E Energy Trading Holdings, and said 
subsidiaries Gas Transmission Northwest and PE&G Generating also would 
maintain their investment grade rating, based on each entity's own 
creditworthiness and economic self-sufficiency. These units would be 
insulated from any downgrades of the parent PG&E Corp., or the utility 
subsidiary, Pacific Gas & Electric. This action came after PG&E suspended its 
fourth quarter dividend and announced it was cutting staff and services (see 
Daily GPI, Jan. 12). 

Following their meeting in Sacramento Friday, Gov. Davis and his counterparts 
in Oregon, John Kitzhaber, and Washington, Gary Locke, announced a Feb. 2 
western governors' meeting would be held in Portland, OR, to push for a 
western region wholesale power price cap, and a region-wide push by each 
state to conserve energy and finally to share energy supplies on a seasonal 
basis. As fellow Democrats, Washington's Gov. Locke and Oregon's Gov. 
Kitzhaber expressed strong support for Gov. Davis's efforts and pushed for 
solutions from FERC 

"It is extraordinarily important that this not be a partisan struggle between 
West Coast Democratic governors and the inland governors who are mostly 
Republican," said Kitzhaber, noting that not all the solutions have to come 
from new generation. Conservation can play a major role, too. Both visiting 
governors said they strongly support the state of California becoming the 
purchaser of long-term power and then reselling to the utilities. 

They are banking on the fact that the state's creditworthiness will gain much 
better prices than the cash-strapped, near-bankrupt two major utilities, 
Southern California Edison Co. and Pacific Gas and Electric Co. 

The lower house (Assembly) of the state legislature cranked out about a dozen 
proposed laws, including one to completely restructure the oversight boards 
of the state-chartered grid operator (Cal-ISO) and wholesale spot power 
market (Cal-PX) from large stakeholder panels of 26 to 30 industry 
representatives to small units of three people each --- all appointed by the 
governor. Another proposed law would prevent the state's three major 
private-sector utilities, including the two near bankruptcy, to sell their 
remaining generation units, which are comprised mostly of nuclear, 
hydroelectric and interests in out-of-state coal-fired plants. 

Gov. Davis indicated he expects state lawmakers to pass the bill this 
Wednesday, establishing three-person boards, and the members of the ISO panel 
will be the head of the state's three principal agencies overseeing 
electricity --- the California Public Utilities Commission, California Energy 
Commission and Electricity Oversight Board, of which two of the three are 
headed by Davis appointees. 

The near-rolling blackouts of Thursday, caused by storm-driven wave surges 
that curtailed power production at coastal plants, were eliminated over the 
weekend through stepped up conservation, restoration of major units at PG&E's 
Diablo Canyon Nuclear Generating Plant, and by what the grid operator called 
"the biggest single-day" lowering of demand he has ever experienced. This 
week Cal-ISO expects to have 5,000 to 6,000 MW that were out of service last 
week back online, further improving the chance of avoiding power emergencies. 

Salvaging the state's system last week at the critical Stage Three was 
California's water resources department, which operates the massive 
north-to-south network of aqueducts. It purchased 1,200 MW from out of state 
using the state's creditworthiness to get around the Cal-ISO financial 
problems. 

As it has done on a lower-profile basis in the past, the water resources 
department acted as a quasi-state power authority, and the Cal-ISO COO Kellan 
Fluckiger said that other market participants also are providing this sort of 
"intermediary financing" in light of the credit concerns surrounding the ISO 
and utilities. The water department also contributed to the supply crunch --- 
as it does routinely --- by shutting down its heavy electricity consuming 
pumps that move massive quantities of water around the state. 


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