State’s Energy Woes Not Over, Officials Claim

By HOWARD FINE

Staff Reporter

Think the days of rolling blackouts and spiking power prices are behind us? Not so fast.

Power may be plentiful and prices stable for now, but that could change as early as this fall when federal price controls end. And a recent report by federal regulators warns that California could suffer from tight energy markets over the next few years, as fewer power plants than expected come on line and funding drops for conservation efforts.

“There is a risk that Californians are being lulled into a false sense of security,” said William Massey, one of four members of the Federal Energy Regulatory Commission, the federal body charged with overseeing the nation’s wholesale power markets.

“It’s reminiscent of April 2000, when prices were very stable and low,” Massey said. “All of a sudden, wham, in May 2000, prices skyrocketed. I don’t want to see a repeat of that.”

The report prepared by FERC staff cited instances of power companies pulling back on plans to build new generating plants and state government cutbacks of funds to promote conservation. “(The state’s) supply and demand situation could deteriorate” if these conditions continue and are coupled with low water supplies and increasing industrial demand from a rebounding economy, the report said.

On the conservation front, the report noted that the state’s budget crisis has forced Gov. Gray Davis to end programs offering financial rebates to those who conserve electricity. A major reason for the avoidance of blackouts last summer was a 9 percent reduction in electricity use, thanks in large part to those rebates.

Those factors have contributed to the fear that if federal price caps, which expire on Oct. 1, aren’t extended or replaced by similar caps, spot market electricity prices could again spiral out of control.

Lobbying underway

The Davis administration has been lobbying FERC to extend the caps, with state officials saying they planned to press ahead with their request to have FERC review the power prices charged to the state at the height of the crisis last year. FERC already has indicated that some of the prices charged were “not just and reasonable.” The question remaining is how much the state would get back from various power sellers.

A ruling from FERC that the prices charged last year were excessive would send a strong signal to power sellers this fall and next summer that they cannot gouge the state or the utilities, state officials maintain.

Also, if not enough plants are being built by the private sector to meet the state’s power needs, the newly-created Public Power Authority has the authority to order and finance the construction of new power plants, said Steve Maviglio, a Davis spokesman.

But political concerns could intervene.

A move by the Bush administration to extend price caps could give Davis a boost on the eve of the Nov. 5 gubernatorial election and hurt the chances for his Republican opponent, Bill Simon. Thus, some power market watchers believe the Bush administration will be loath to extend those caps.

Meanwhile, on Dec. 31, the state’s authority to buy power on behalf of the three investor-owned utilities is set to expire, once again leaving those utilities to fend for themselves on the open market. (In January 2001, the state stepped in to buy power when wholesale prices outstripped regulated retail power rates and left the utilities practically insolvent.)

PG & E; Corp., the parent company of Pacific Gas & Electric, filed for bankruptcy protection in April 2001, and its ability to purchase power come Jan. 1 depends largely on bankruptcy court rulings. While Southern California Edison is slowly returning to fiscal solvency, there’s no guarantee it will be ready to resume buying power on Jan. 1.

Gas prices key

The key to whether power shortages and price spikes return to California, Massey and other power market watchers said, is what happens to the natural gas market. Most of the state’s power plants run on natural gas; if gas prices spike, as they traditionally do in fall and early winter, they could drive up the spot market price of electricity.

“Natural gas prices are the real wild card here,” said Arthur O’Donnell, editor and associate publisher of California Energy Markets, a Bay Area newsletter.

There is an important difference, though, compared to the situation 18 months ago, when a spike in natural gas prices helped drive the cost of electricity up tenfold. Today, about 40 percent of the state’s power supply is locked up in long-term contracts signed by the Davis administration early last year at the height of the power crisis.

“That’s an important buffer for us. A big chunk of power that had been on the spot market 18 months ago has now been removed from that spot market,” said Greg Fishman, spokesman for the California Independent System Operator, which is charged with ensuring the state has adequate supplies on a daily basis.

Now, Fishman said, only about 20 percent of the state’s electricity supply comes from the spot market.

Ironically, Davis has come under intense criticism for signing those contracts, which are two to three times the current spot price of electricity. Because of that criticism, the governor has pledged to renegotiate at least some of those contracts.

However, those renegotiation efforts could become complicated if spot market prices rise again.

Also, FERC is reviewing those contracts to see if they meet federal standards of being “just and reasonable” and could declare some contracts invalid.

The concern over the state’s power market extends well beyond the fall. The summer of 2003 could be troublesome, especially if it is warmer than usual. The problem: a lack of new power plants.

Last year, Davis secured pledges from private power companies to build dozens of new power plants. But since then, as spot market prices have fallen and energy companies like Enron Corp. and Calpine Corp. have run into financial problems, companies have pulled back from those commitments. Enron, of course, filed for Chapter 11 bankruptcy protection last December; Calpine saw its debt downgraded by Standard & Poor’s.

Also, several of the proposed projects, including two in L.A. County, ran into intense community opposition and were dropped.

According to the California Energy Commission, 15,000 megawatts of new electricity production has been postponed or permanently cancelled. That represents a 47 percent drop from the level of new production that as of last spring had been expected to come on line by 2006.