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Enron Mail |
We have been pulling together these weekly(sometimes more often) summaries
for internal purposes. Would you find it helpful to be on the distribution list? Hope you are doing well. Look forward to touching base soon. ----- Forwarded by Suzanne Nimocks/HOU/NorthAmerica/MCKINSEY on 03/28/2001 03:41 AM ----- Memorandum TO: Pru Sheppard BCC: Suzanne Nimocks FROM: Pru Sheppard B. Venki Venkateshwara DATE: March 27, 2001 California Power Crisis Update (No. 10) DEVELOPMENTS THIS WEEK, 3/23/2001 The weeks highlights include: ? Continued indications that the issue of market power and possible remedies for it is likely to remain a high profile issue in California and elsewhere (both retroactively and prospectively) ? An ironical situation with respect to QFs in which QF power under contract is effectively being released into the market at higher prices ? A court order requiring Reliant to continue to sell power to the ISO even if it is not being paid in a full and timely manner ? Another Stage 3 emergency and rolling blackouts Market power There are continued indications that the issue of market power will not be settled simply. This week there was a lengthy and politically influential front page story in the New York Times about FERCs passive approach to policing generators (Critics Say U.S. Energy Agency Is Weak in Oversight of Utilities). The story was by Jeff Gerth and Joseph Kahn. (Jeff Gerth's 1992 story on the Whitewater deal is viewed by journalists to have been the origin of what eventually became a multi-year investigation of Bill Clinton.) The key issues are familiar: ? Does market power exist to a degree that warrants remedies such as price caps, refunds, and so on? ? If so, what is the basis for asserting that market power exists and what is the remedy? (See the discussion in the New York Times article on the "good hours" vs. "bad hours" approach and the associated political decision not to deal with "good hours"). ? Can market power be used as leverage to eventually settle generator bills in California at something less than 100 cents on the dollar. (The California ISO filed a complaint claiming $6 billion in overcharges this week.) The QF irony Through the 1990s, QF contracts were projected to be the source of stranded costs because they were priced "way above market." In recent months, in California, they look like a bargain (although some are not such great bargains because a portion of their price is tied to gas). You would think that the utilities would request QFs to maximize their output. But credit problems have created an ironical situation. The facts: ? PG&E and Edison have not been paying the QFs fully and promptly for some time. ? The QFs form a creditors committee and threaten to push PG&E and Edison into bankruptcy. (Some gas-fired QFs had to shut down because they did not have money to pay for the gas.) ? Last week's court decision allows MidAmerican/CalEnergy to essentially sell its power to others even though the QF contract "dedicates" the output to the purchasing utility. ? CalEnergy does so immediately, selling to El Paso. The Reliant Order A court ordered Reliant to continue to sell to the ISO, when requested, regardless of whether Reliant had been paid fully and promptly for past deliveries to the ISO. Reliant announced it will appeal the order. This is somewhat of a contrast to the QF situation except that the circumstances governing the 2 situations are probably different. The QF contracts pre-date the ISO and are with the utilities and most likely make no reference to providing power during emergencies. In fact, many QF contracts have the opposite provision: authority for the utility to cut takes during so-called "light load" periods. Stage 3 emergency and rolling blackouts--again There was another Stage 3 emergency in California ? with rolling blackouts this week. This prompted everyone to wonder why this was happening in March. Among the factors: ? Increased demand from summer-like temperatures ? Cutbacks in imports ? Loss of 1400 MW due to a transformer fire at an Edison plant ? Loss of about 3100 MW from QF plants that were forced to shutdown because they could not afford gas bills (VV) MARKET COMMENTARY (For easier printing of all the articles in this section use the file at the end of the section) Critics Say U.S. Energy Agency Is Weak in Oversight of Utilities By JEFF GERTH and JOSEPH KAHN 03/23/2001 The New York Times Page 1, Column 1 c. 2001 New York Times Company WASHINGTON, March 22 -- The pressure was intense when federal regulators met privately last month to debate remedies for soaring electricity prices in California. Officials of the Federal Energy Regulatory Commission, the agency whose mandate is to ensure ''just and reasonable'' electricity rates nationwide, had evidence that a few companies had been selling electricity to California at prices far above the cost of generating it. The agency faced an imminent deadline to challenge those prices or let the companies possibly pocket hundreds of millions of dollars in unfair profits. An internal memorandum laid out two choices. The agency could audit and punish ''bad actors,'' the companies that were exploiting the market. Or it could identify ''bad hours,'' when electricity shortages were most acute and spiking prices were arguably nobody's fault, and order refunds for only the most exorbitant prices. ''It may be easier to identify bad hours than bad actors,'' the memorandum said. The commission took the easier way. It decided not to investigate reports of abuses by companies, but issued an order that could require them to refund to the state utilities up to $124 million collected during a relatively few ''bad hours'' in January and February. That is hundreds of millions of dollars less than California might have claimed, since the most potential overcharging occurred during ''good hours,'' when power was more plentiful but prices were often just as extreme. The order ignored those hours. Today, in a criticism of the agency's lack of aggressiveness, California regulators estimated that generators had charged $6.2 billion above competitive levels over 10 months. They urged the agency to dig deeper, hoping it would demand more refunds or other stiff remedies. But the agency's track record -- one of complacency in the eyes of state officials -- leaves California regulators skeptical that Washington will confront the big power producers. The small, obscure agency, tucked behind the rail yard of Union Station here, has largely soft-pedaled its role as the electricity industry's top cop, even though it has wide authority to keep power companies in line. To keep rates reasonable, it can impose price caps, strip companies of the right to charge market rates, force them to return excessive profits and even suspend deregulation altogether. Instead, the agency has largely left it to private companies to pry open the $250 billion electricity industry, which has historically been controlled by monopoly utilities and state officials. The agency's defenders, including its chairman, Curt Hebert Jr., a fierce advocate of unfettered markets, say that its largely hands-off approach reflects the delicate balancing of competing interests -- a commitment to protect consumers while not stifling market forces. But politicians, utility executives, energy economists and local regulators say California's rolling blackouts and skyrocketing electricity prices are the signs of a market running amok. They accuse the agency of standing aside as companies manipulate their way to windfall profits. The agency's critics, who include one of its own commissioners and numerous staff members, say that its enforcement mission has been blunted by free-market passions and the influence of industry insiders in its ranks. When the agency began its first national investigation of high electricity prices last year, it named a newly recruited industry insider, Scott Miller, to lead the effort. Mr. Miller and his colleagues said in their report that there was ''insufficient data'' in California to prove any profiteering by generating companies. Yet his own former employer, PG&E Energy Trading, was at the time a subject of a civil antitrust investigation by the Justice Department that focused on electricity market abuses in New England. The agency has given state regulators a lead role in monitoring local power markets. Yet even as these regulators have urged the agency to be more aggressive in investigating suspicions that companies have abused their power in California, New England, the Midwest and the mid-Atlantic, they have frequently been ignored or rebuffed. Critics say that the agency began deregulation before it was ready or willing to make sure the markets worked effectively. They accuse it of showing favoritism to industry -- allowing companies, for example, to ignore requirements to file detailed reports of market transactions that are critical to proving accusations of market abuses. ''We need to wake up to the fact that this is a dysfunctional market that is being gamed and manipulated by those who participate in it,'' said William Massey, a commissioner of the agency who has become one of its leading critics. The agency's inaction, the critics say, leads to ''gaming'' -- jockeying for profits that does not necessarily involve illegality -- and outright market manipulation. Consumers and utilities are the victims, paying billions of dollars more for electricity than if the markets were truly competitive. Agency officials acknowledge that enforcement of market rules to curb gaming and manipulation had not been a high priority in previous years. But they defended their recent California order as proof that they intend to keep markets free of abuse. They add that the agency is also pressuring two generators to refund almost $11 million for possibly manipulating the California market last spring. Agency officials and some outside analysts say that poorly conceived deregulation plans by states, a shortage of power plants, rising natural gas prices, and even the weather have had more impact on electricity prices than abuses by companies or any failings by the agency. They say the agency must balance the competing interests of generators, local regulators and utility companies if it is to keep deregulation on track. ''We're trying to craft a system that gives breathing room to develop a market, but not so much room that undue market power punishes consumers,'' Mr. Hebert said. Fight Over Deregulation Today's debate traces back to the 1930's, when President Franklin D. Roosevelt backed legislation to break up utility monopolies. The Federal Power Act of 1935 gave the Federal Power Commission a mandate to ensure ''just and reasonable'' electricity rates. The Federal Power Commission was abolished in 1977 and replaced by the Federal Energy Regulatory Commission, an independent agency with 1,200 employees that also oversees oil pipelines and the natural gas market. The president appoints the chairman and four commissioners -- two Democrats and two Republicans with staggered terms of five years. Two Republican seats are currently unfilled. The deregulation of the electricity markets began in the late 1980's, after the agency had begun opening the gas markets. By 1996, the commissioners issued a landmark order that forced utility companies to open their transmission lines to other utilities and electricity wholesalers. The commission and many private economists expected that by prying open protected markets, electricity prices would immediately fall. That possibility set off a deregulation frenzy, most prominently in California, New York, New England and the mid-Atlantic states. Generating companies rushed to expand in the new, borderless market. But the agency's balancing act has grown more difficult as electricity deregulation has spread nationwide. Congress has forced it to trim its staff in recent years. Officials complain that investigating abuses in electricity markets strains their resources. And as the California crisis has worsened, the commissioners have begun sparring publicly among themselves about what to do. This week, Mr. Massey, a Democratic commissioner, and Mr. Hebert (pronounced AY-bear), a Republican, sat side by side before a House panel and argued diametrically opposed positions. Mr. Hebert said high prices in California ''were sending the right signals to get supply there.'' Mr. Massey called the prices that generators were charging ''unlawful'' and said that his agency, by not reining them in, ''is simply not doing its job.'' The agency's leadership has been in flux for months. Congressional and industry officials in Washington say President Bush is considering replacing Mr. Hebert, whom he named to the top post less than two months ago, with Pat Wood, who runs the Texas public utility commission. A White House spokeswoman had no comment on the reports. Though Mr. Hebert's positions are not far from those of the Bush administration, his relations with California leaders may have made his position tenuous. Mr. Hebert, a Mississippian who is a close ally of the Senate majority leader, Trent Lott, has warred with California politicians who have proposed new solutions to the crisis there. Mr. Hebert, who has served as a commissioner since 1997, has often taken the most ideologically free-market position of any commissioner. He flatly rejects the idea of price caps on electricity as hopelessly ineffective and contrary to market forces. When Gov. Gray Davis outlined a plan to have the state buy transmission lines to relieve utility companies' debt, Mr. Hebert's response was dismissive. ''It's not in the interest of the American public,'' he pronounced. Even as new electricity markets opened in the summer of 1999, they started producing nasty shocks. The mid-Atlantic region experienced some early volatility. As the turmoil grew, economists began raising the alarm about a phenomenon called ''market power,'' the ability of energy traders in the new national market to sustain prices above the competitive level. Proving such abuses is difficult, because it requires comparing tens of thousands of separate electricity transactions with the costs of the generators that initiated them. Joseph Bowring, who heads the market monitoring unit of the nonprofit entity that operates the mid-Atlantic transmission system, said that power companies there had exercised some market power. But only the Federal Energy Regulatory Commission, not local regulators, had the authority to collect the data to determine how much market power had been exercised and whether it had been abusive or not, he said. Mr. Bowring said he talked to agency officials about doing so. In the end, Mr. Bowring and several agency officials said, the agency chose not to investigate. The decision roiled some agency officials. Ron Rattey, a veteran agency economist, wrote a memorandum last June describing the staff as ''impotent in our ability to monitor, foster, and ensure competitive electric power markets.'' The staff, the memorandum said, did not even enforce a requirement that power companies file detailed quarterly reports listing essentially every sale they make. Such data would have been useful to Mr. Bowring. Local-Federal Clash Local regulators who want to ensure competitive prices often have to act on their own. Monitors in New England have intervened about 600 times since 1999 to correct prices they determined had been caused, at least in part, by market manipulation. The federal agency has sometimes chastised them for interfering too much. The industry, not surprisingly, shares that view. One vocal critic was Mr. Miller. Before the agency recruited him last July to head its division of energy markets, he was director of policy coordination for the national energy-trading unit of PG&E Corporation, the California holding company whose assets also include Pacific Gas and Electric, the California utility. Although the utility has lost billions of dollars during California's crisis, Mr. Miller's former unit has become one of the most profitable new energy traders nationwide. PG&E Energy Trading, by several estimates, is now the second-largest seller of electricity in New England. The company has had a rocky relationship with regulators. They intervened several times in 1999 and 2000 to retroactively cancel auctions they said produced excessive profits for PG&E and other companies. Mr. Miller denounced the practice, though he acknowledged in public testimony that his company sometimes charged ''very high'' prices when it could. ''One person's predatory pricing is another person's competitive advantage,'' Mr. Miller said at a public hearing on deregulation in Texas in 1999. New England regulators too often acted as ''judge, jury and executioner'' when overseeing the market, he said. One year later, Mr. Miller and his new colleagues at the federal agency got a chance to examine New England's problems from the regulators' perspective. Their Nov. 1 report attributed New England's frequent price gyrations to technical and regulatory flaws. As Mr. Miller's team was preparing its report, the Justice Department, whose threshold for stepping into possible industry wrongdoing is far higher than the agency's, began looking into whether price spikes in New England pointed to unlawful monopoly power or collusion, people contacted by the department during that inquiry said. One subject of the civil inquiry is possible price manipulation in one of New England's ancillary services markets, people contacted by the department said. They said the department was examining whether PG&E and two other companies tried to corner that market for several months early last year. PG&E confirmed that the Justice Department had contacted it, but denies wrongdoing and says it has cooperated with the department's requests. Mr. Miller has declined to comment on his role at PG&E or at the agency. His supervisors defended his work and said they had detected no conflict of interest between his work at PG&E and his duties at the agency. Those duties brought Mr. Miller to California last August. With electricity prices there soaring, he and his colleagues sat down with several utility executives at the agency's San Francisco office. One executive, Gary Stern, director of market monitoring for Southern California Edison, wanted the agency to stop what he suspected were market abuses by power generators. He provided a road map to help investigators figure out how power companies traded power contracts -- and whether they had manipulated the markets. But when Mr. Miller and his team approached 11 generators and marketers -- including his old employer -- a few weeks later, they did it their way. They asked eight questions, many of them imprecise, like: ''Describe your strategy for bidding generation resources into market.'' This question, Mr. Stern said in a recent interview, ''was equivalent to asking a suspected burglar how he spent his day.'' Some agency officials also thought the team should probe deeper. Mr. Rattey recommended that Mr. Miller seek the quarterly pricing reports that marketers were supposed to file. But his suggestion was not adopted, agency records show. Daniel Larcamp, Mr. Miller's supervisor, said ''there might have been more information that could have been obtained'' in the California inquiry. But he said the commission gave the staff only three months to finish, making it impossible to collect and analyze the reams of data involved. For Mr. Miller, agency documents show, the investigation was so time-consuming that he had no time to fill out the financial disclosure form required of new federal employees. Mr. Miller submitted his form in late January, after a reporter requested it. Agency lawyers approved the form, but only after he provided additional information about his job and compensation from PG&E. The lawyers said Mr. Miller's participation had been permissible because PG&E was not the subject of the investigation. When the staff report was issued on Nov. 1, it found high prices and problems in the design of the California market. But while the companies ''had the potential to exercise market power,'' the commission said, there was ''insufficient data'' to prove that they did. Some marketers saw the report as an exoneration. ''This has been looked at several times, most notably by the FERC and nobody has found any evidence of market manipulation and profiteering,'' Rob Doty, the chief financial officer of Dynegy Inc., told a reporter earlier this year. California Inquiry The agency has recently shown signs of wanting to apply pressure on generators. But its early efforts show how it is treading on new and uncertain turf. When the California crisis grew severe last December, the commission issued a refund order, a shot across the bow for generators charging high prices. It required them to submit detailed data any time they sold electricity in California for more than $150 per megawatt hour, considered at the time a fair estimate of the highest costs any of them faced. It also told generators that for the next several months, they could be forced to give refunds if the agency found that they had charged excessive prices. The commission also said that it would examine bidding practices and strategies for withholding generating capacity to ferret out any efforts to artificially raise prices. When the agency's own 60-day deadline for examining market data in January approached, however, it became clear that staff members had not made any detailed examination. Instead, staff members said, the agency scrambled to forge a last-minute compromise that would allow it to issue a statement opposing high prices in the state without a time-consuming investigation. During this scramble, a senior staff member, Kevin Kelly, suggested focusing on bad hours instead of bad actors. ''Our attempts to find illegal behavior or legal 'misbehavior' by sellers ('bad actors') always seems to fail,'' his memorandum said. It said that the agency could more easily blame high prices on acute shortages during the most critical hours. The suggestion won the day. The commission decided to limit its order to the hours when California declared a Stage 3 emergency, when supplies are critically low. Mr. Stern of Southern California Edison and several private-sector economists have attacked the economic logic of that order. They said that the commission has focused on times when prices might be legitimately high. The bigger worry: Generators can and often do sustain artificially high prices when supplies are not as tight, they say. Mr. Massey, the Democratic commissioner, dissented from the decision for those reasons. Because most high-priced transactions in January and February did not occur during bad hours, he argued, the commission effectively chose to bless as ''just and reasonable'' the hefty profits generators are making from the California crisis. ''The problem with my agency is that we're so carried away with the rhetoric of markets that we've gotten sloppy,'' Mr. Massey said. ''We're talking about electricity. It's the juice of the economy, so it's got to be available and reasonably priced.'' Williams defends pricing of electricity 03/23/2001 Associated Press Newswires Copyright 2001. The Associated Press. All Rights Reserved. TULSA, Okla. (AP) - Williams Cos. Inc. says it can justify the rates it charged for wholesale power, despite accusations from federal regulators that it sold over-priced electricity to California. Federal regulators claim Williams Energy Marketing and Trading Co., a unit of Tulsa-based Williams, owes California more than $40 million in refunds for power it sold to the state's Independent System Operator. The Federal Energy Regulatory Commission says that Williams is one of several power providers responsible for $124 million in overcharges from transactions in January and February. The Independent System Operator, which manages the state's power grid, claims the state was overcharged $6.2 billion by 21 wholesale power providers, including Williams, between May and February. Williams says the rates it charged California were fair and were based on production costs and market conditions. "Williams is confident that it performed within the guidelines established by the ISO," said Williams spokeswoman Paula Hall Collins. "We felt like we had worked within the regulations set up by ISO." According to the commission, power prices levied by Williams in January and February exceeded federal price ceilings based on the cost of natural gas and other market conditions. However, the price ceilings were established after the ISO accepted Williams' power prices, Collins said. The commission will review Williams' explanation and either accept the justification or order the company to pay refunds. Allegheny Energy makes big California connection 03/23/2001 Associated Press Newswires Copyright 2001. The Associated Press. All Rights Reserved. HAGERSTOWN, Md. (AP) - Allegheny Energy Inc. said Thursday it has agreed to sell $4.5 billion worth of power to California's electricity-purchasing agency over the next 10 years. The company said the contract call for Allegheny to provide up to 1,000 megawatts that the Hagerstown-based company has secured from western generating plants through its new energy trading division, Allegheny Energy Global Markets - formerly Merrill Lynch Global Energy Markets. "This is a win-win for both the state of California and Allegheny Energy. It provides a long-term source of fixed-price energy and should help to stabilize prices in California," said Michael P. Morrell, president of the Allegheny Energy Supply division. Allegheny Energy is the parent of Allegheny Power, which delivers electric energy and natural gas to parts of Maryland, Ohio, Pennsylvania, Virginia and West Virginia. Williams plans expansion of pipeline to help power Calif. 03/23/2001 Associated Press Newswires Copyright 2001. The Associated Press. All Rights Reserved. SALT LAKE CITY (AP) - The Williams Cos. plans to expands its Kern River pipeline, which runs through Utah, to provide more natural gas for generating plants in California. Williams' gas pipeline unit in Salt Lake City said Thursday that it plans to construct nearly 700 miles of additional pipeline that will run parallel to its existing Kern River line. Construction on the $1 billion project is expected to begin next year and is scheduled for completion in May 2003, said Kirk Morgan, director of business development for Kern River pipeline. "Shippers are seeking more access to natural gas from the Rocky Mountain basin, where producers are aggressively stepping up production," Morgan said. The new pipeline is expected to deliver about 900 million cubic feet of natural gas per day to markets in Utah, Nevada and California. Most of the gas will be used for generating plants planned in California. If all of the pipeline's capacity were used to generate electricity, it could produce about 5,400 megawatts. "That is enough to light around 4.5 million homes," Morgan said. The original Kern River line was completed in 1992. It enters Utah from Wyoming then crosses into the Salt Lake Valley near Bountiful. It turns south near the Salt Lake City International Airport then runs the length of the state before passing into southern Nevada and winding up near Bakersfield, Calif. It currently transports 700 million cubic feet of natural gas per day. Williams, based in Tulsa, Okla., recently filed an emergency application with federal regulators to install additional pumping stations on the line to increase its capacity by 135 million cubic feet per day. That $81 million pumping station project should be completed by July 1. During the 2002 construction period, the Kern River project will employ between 1,500 and 1,800 people. The company estimates annual property taxes it pays to Utah counties will increase from $3.5 million to about $7 million. Questar will be one of the customers on the new pipeline, Morgan said. The utility wants to supply additional gas to southern Utah cities, including St. George and Cedar City. "Our own pipelines serving southern Utah are at full capacity so this is an opportunity to transport additional gas into those areas from company-owned supplies in Wyoming," said Questar Gas spokeswoman Audra Sorensen. Calif Energy Commission OKs 3 Pwr Plants Worth 2,076 MW 03/23/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) (This article was originally published Thursday) LOS ANGELES -(Dow Jones)- The California Energy Commission Wednesday approved three power plants worth 2,076 megawatts, two of which are scheduled to come on line by the end of 2002, a CEC spokesman said Thursday. The plants approved include BP Amoco PLC (BP) unit ARCO Western Energy's 500 megawatt Western Midway Sunset Project, slated to come on line in October 2002; Caithness Energy's 520 MW Blythe Power Plant, to come on line by Dec. 31, 2002; and Thermo Ecotek's 1,056 MW Mountainview Power Plant, scheduled to come on line in April 2003. All three of the new plants will be natural gas-fired combined-cycle plants. The $550 million Mountainview plant will be located in Southern California, near San Bernadino. The $300 million Western Midway-Sunset plant will be located in central Kern County, while the $250 million Blythe plant will be located in the city of Blythe in Riverside County. The latest approvals bring to 13 the total number of plants approved since April 1999 by the CEC, a spokesman said. Those plants will supply 8,405 MW to the state, which has seen rolling blackouts and spiking wholesale power prices in the last six months, in part due to lack of supply. -By Jessica Berthold, Dow Jones Newswires; 323-658-3872; jessica.berthold@dowjones.com Some CalEnergy Power Could Be Sold Outside Calif - CEO 03/23/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) (This article was originally published Thursday) LOS ANGELES -(Dow Jones)- Some of CalEnergy Operating Corp's power could end up being sold outside of California, though that is not the company's intent, CalEnergy Chairman and CEO David Sokol said in a conference call Thursday. CalEnergy, an affiliate of MidAmerican Energy Holdings Co, which is majority owned by Warren Buffett's Berkshire-Hathaway (BRKA), was given legal authority Thursday to suspend 270 megawatts of power delivery to Edison International (EIX) utility Southern California Edison and sell on the open market, because SoCal Edison has not paid its bills since November. CalEnergy stopped supplying power to SoCal Ed immediately following the court ruling. "We stopped supplying power at 1 PM (PST) and have been selling to parties that will pay since then....We are selling it to marketers; our current marketing agent is El Paso Corp (EPG) and they will sell it for us," Sokol said. Sokol added that while it was his company's intention to have its power sold to California, that could not be guaranteed. "We leave the energy selling to El Paso....We've directed them that we would like the power to stay in California but we can't stop them," from selling out of state, Sokol said. Wholesale prices on the open market are about $400-$500 a megawatt-hour, three times more than what the company had received under its contract with SoCal Ed. The court's ruling did not address the $45 million SoCal Ed still owes CalEnergy for November and December power, and Sokol said that his company's separate lawsuit on that matter sought to attach the utility's assets as payment for that debt. Sokol said the court's ruling had "significant implications" for the entire community of small, independent generators, known as qualifying facilities or QFs, who have not received payment from SoCal Ed. "Edison's own lawyer said it best....that every QF in the state will begin to mitigate if the judge allowed us (to sell on the open market)," Sokol said. Sokol said his company was prepared to push SoCal Ed into involuntary bankruptcy Friday if CalEnergy hadn't won the case, but said he couldn't speculate whether other QFs may be more or less inclined to do so as a result of the court outcome. A group of renewable power suppliers, owed more than $100 million from SoCal Ed, said late Wednesday they want state lawmakers to release them for their supply contracts with PG&E Corp. (PCG) unit Pacific Gas & Electric and SoCal Ed until the utilities are restored to financial stability. The utilities claim close to $13 billion in undercollections due to an inability to pass high wholesale power costs to customers under a rate freeze. In a statement, SoCal Ed said it opposed CalEnergy's bid to suspend its QF contract because the utility believed Gov. Gray Davis and state regulators are close to resolving "very legitimate financial concerns of CalEnergy and other QF suppliers." SoCal Ed said it was concerned that CalEnergy's request to sell to third parties would lead to a major supply shortage in California. The utility said it has informed the QFs that it is working to resolve the issue without giving unfair advantage to one class of creditors. While many of the state's large power suppliers have been paid by on a forward basis for the power they sell into California, the QFs, which make up one-third of the state's total power supply, haven't been paid by SoCal Ed since November. PG&E has made partial payments to its QFs. -By Jessica Berthold, Dow Jones Newswires; 323-658-3872, jessica.berthold@dowjones.com (Jason Leopold contributed to this article.) California and the West Judge Frees Small Firm From Edison Contract KEN ELLINGWOOD; DAN MORAIN TIMES STAFF WRITERS 03/23/2001 Los Angeles Times Home Edition A-3 Copyright 2001 / The Times Mirror Company El CENTRO -- California's balance of electrical power shifted slightly Thursday when an Imperial County judge temporarily freed a small geothermal energy producer from its contract with Southern California Edison, allowing it to sell power on the open market. The ruling by Superior Court Judge Donal B. Donnelly could lead to a mass exodus by hundreds of small energy producers that have been selling power to the state's financially troubled utilities for months without getting paid. At the same time, it may have staved off plans by a group of the small generators to send Edison into involuntary bankruptcy as early as today. In Sacramento, energy legislation pushed by Gov. Gray Davis passed in the state Senate but foundered in the Assembly. The measure was intended to ensure that the state gets repaid for the electricity that it has been buying on behalf of Edison and Pacific Gas & Electric, which say they lack the cash and credit to purchase power. The bill also was supposed to guarantee that the small, alternative energy producers--which together provide nearly a third of the state's power--get paid. But Assembly Republicans opposed it, saying it hadn't been given sufficient scrutiny. The impact of the small producers was made clear in Imperial County, where Edison's failure to pay CalEnergy, the county's biggest property taxpayer, had outsize implications. CalEnergy had put county officials on notice that it was about to miss a $3.8-million property tax payment. The uncertainty had prompted the tiny Calipatria Unified School District to postpone a bond issue for badly needed school repairs. Among CalEnergy Chairman David Sokol's first acts after the judge's ruling Thursday was to promise Imperial County Supervisor Wally J. Leimgruber that the company would pay its property taxes on time. "That is great news," Leimgruber said. Within hours of its court victory, CalEnergy had stopped transmitting geothermal power to Edison and begun selling it to El Paso Energy, a marketing company that purchased the energy at prevailing rates and resold it on the spot market. Some of the more than 700 other small energy producers in the state said they were considering similar action against Edison and Pacific Gas & Electric. "We absolutely need the right to sell to third parties," said Dean Vanech, president of Delta Power, a New Jersey company that owns five small gas-fired plants in California and is owed tens of millions of dollars by Edison. Sokol praised the Imperial County judge and said his company simply wanted the authority to sell its power "to a credit-worthy company that, in fact, pays for the power." An Edison spokesman said the company was disappointed with the ruling, but sympathized with CalEnergy and other small producers because "California's power crisis has placed [them] in financial distress, just as it has placed utilities in financial distress." Edison expressed concern that the ruling would prompt CalEnergy and other small producers to sell their power out of state. Sokol said CalEnergy had specifically told El Paso Energy that it hoped its power would remain in California, "but if someone wants to pay a higher price out of state, we can't stop them." Sokol said that Edison still owes CalEnergy $140 million and that the company--along with seven other small producers--had been prepared to file a petition in federal bankruptcy court in Los Angeles today forcing the utility into involuntary bankruptcy. He said his company no longer intends to do so, and he believed--but wasn't certain--that the other companies would shelve their plans. Edison filed papers Thursday with the federal Securities and Exchange Commission showing that it owed $840 million to various small electricity producers, many of which rely on renewable energy sources such as geothermal steam, solar energy or wind. The alternative energy producers--and utilities--strenuously objected to the legislation considered in Sacramento on Thursday. The bill, spelling out how the utilities are to pay the state and the small producers, passed the Senate on a 27-9 vote, the exact two-thirds margin required. But it stalled in the Assembly on a 46-23 party-line vote, well short of two-thirds. "When I was a citizen back in Lancaster, I heard these stories about pieces of legislation that were cooked up late at night, that . . . were cut and pasted together and were rammed through by the Legislature," Assemblyman George Runner (R-Lancaster) said. "That's exactly what we have before us." The alternative electricity generators, including oil companies, warned that they would lose money under the Davis proposal, while representatives of Edison and PG&E, which have amassed billions in debt in the worsening energy crisis, said the legislation would push them deeper into the hole. "There isn't enough money," Edison attorney Ann Cohn testified at a Senate hearing on the bill Thursday. "It is a very simple question: Dollars going out cannot be greater than dollars coming in." The bill, AB 8X, combined several proposals. First, it sought to clarify earlier legislation by spelling out that Edison and PG&E must pay the state all money collected from consumers for electricity that the state has been buying. Additionally, the bill would turn over to the California Public Utilities Commission the thorny issue of how much to pay alternative energy producers for their electricity. Wind, solar and geothermal producers might agree to the prices offered by the administration. But most of the alternative energy producers, including Chevron and British Petroleum, use natural gas to generate electricity through "cogeneration," a process of creating steam for both electric generation and heat. With natural gas prices high, they contend, they would lose money at the prices Davis is offering. * Ellingwood reported from El Centro, Morain from Sacramento. Times staff writers Mitchell Landsberg in Los Angeles and Jenifer Warren, Nancy Vogel and Carl Ingram in Sacramento contributed to this story. (BEGIN TEXT OF INFOBOX / INFOGRAPHIC) Power Points Background The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state's biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity. * Daily Developments * Overcharges by major electricity suppliers were estimated at $6.3 billion, up from the $5.5 billion first thought, California's power grid operator said. * Electricity producers denied that they have profiteered and argued that Cal-ISO's figures don't take into account all their costs. * A Superior Court judge's ruling Thursday freeing a small producer from its contract with Edison could lead to a mass exodus by small energy producers that have been selling to the utilities without getting paid. * Verbatim "If these guys have such high costs ... how come they're making so much money?" --Gary Stern, Edison's director of market monitoring and analysis, referring to power producers Complete package and updates at www.latimes.com/power Grid Operator Says California Paid Too Much for Power By Rebecca Smith and John R. Emshwiller Staff Reporters of The Wall Street Journal 03/23/2001 The Wall Street Journal A2 (Copyright © 2001, Dow Jones & Company, Inc.) California's electric-grid operator said power suppliers may have overcharged the state and its utilities by $6.2 billion, or a total of 30%, in a 10-month period, and has asked federal regulators to step up their policing of electricity markets. Meanwhile, a California state judge handed down a decision involving small power producers that could result in more electricity being made available in the energy-starved state, but likely at greater cost to the state government. The $6.2 billion figure was contained in a market analysis by the California Independent System Operator filed yesterday with the Federal Energy Regulatory Commission. The ISO says it isn't seeking a refund -- for the May through February period -- because its analysis lacked important market data. For example, it estimated costs for 21 suppliers based on published prices for natural gas, not on specific data showing what each generator actually paid for the fuel. "We don't know how much gas actually was purchased at spot-market prices," said Anjali Sheffrin, the ISO's head of market analysis. Charles Robinson, general counsel for the ISO, said FERC needs to become "more aggressive about market-power mitigation." The ISO's filing, he said, was intended to push the agency in that direction, since FERC is responsible for policing deregulated electricity and natural-gas markets. He said that if the FERC doesn't act, the state of California may find ways to discipline the market, such as through the state attorney general's office. The attorney general has been investigating the state's electricity market for many months but hasn't brought any court action. Dynegy Inc., a big owner of power plants in California, said it will provide additional information to FERC supporting its position that the prices it has charged for power have been "just and reasonable." The Houston company was one of 13 energy suppliers that the FERC this month ordered to pay refunds totaling $124 million or "show cause" why it should be excused. Dynegy said the FERC analysis was flawed, because it used "inaccurate" prices for natural gas and pollution credits. While big power producers such as Dynegy came under attack, small power producers won a potentially significant victory in a state court in Southern California's Imperial County. A judge granted 10 geothermal plants operated by the CalEnergy Co. unit of MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway Inc., of Omaha, Neb., permission to suspend deliveries of electricity to Southern California Edison Co. and instead seek other buyers. These plants, known as "qualifying facilities," are under long-term contract to Edison and other utilities but haven't been paid for months. Edison, a unit of Edison International, of Rosemead, Calif., says it has been unable to pay hundreds of millions of dollars in power bills to CalEnergy and others because it has been driven to the brink of insolvency by the state's failed utility-deregulation plan. While the CalEnergy case involves only about 320 megawatts of power, the repercussions could be far greater. Collectively, hundreds of qualifying facilities, or QFs, produce as much as 30% of California's electricity needs. QFs totaling 3,000 megawatts cut their production in recent weeks for lack of payment. This loss of output was a significant cause of the blackouts that hit California this week. Observers believe the CalEnergy court decision could give other QFs an opportunity to sell power in the open market, presumably to the state government that now is California's biggest energy buyer. An hour after the court decision yesterday, some 400 megawatts of power came back into the market, the ISO said. However, additional QF power sales on the open market could substantially increase the state's tab. Already, the state has allocated more than $4 billion for electricity purchases. Separately, Edison said in a Securities and Exchange Commission filing that its unpaid power bills could contribute to a write-off of as much as $2.7 billion for 2000. Because of uncertainty caused by the energy crisis, the company hasn't yet reported year-end earnings. Power regulators debate who should be exempted from blackouts By KAREN GAUDETTE Associated Press Writer 03/22/2001 Associated Press Newswires Copyright 2001. The Associated Press. All Rights Reserved. SAN FRANCISCO (AP) - State power regulators said Thursday they are working to exempt all California hospitals, regardless of size, from rolling blackouts. The Public Utilities Commission met with representatives from hospitals and investor-owned utilities after Los Angeles lawyer David Huard filed an emergency motion with the PUC on behalf of more than 500 hospitals throughout the state. Under PUC rules, hospitals with more than 100 beds are exempt from losing electricity during power emergencies. But during rolling blackouts Monday, at least a dozen hospitals from Long Beach to Clearlake were forced to use their backup generators. Pacific Gas and Electric Co. and Southern California Edison Co. say they blacked out those hospitals specifically because they have backup generators. Both utilities said the temporary blackouts were part of their overall efforts to spread the burden of blackouts over more of their customers. Linda Ziegler, director of business and regulatory planning for SoCal Edison, said the utility is following state law and will implement new guidelines if the PUC changes them. But hospitals say there is a 10-second lapse before emergency generators kick in, which could harm patients in the midst of delicate surgical procedures such as organ transplants or brain surgery. "You wouldn't fly a plane with only your emergency backup systems in place," said Ann Mosher, a spokeswoman for California Pacific Medical Center in San Francisco. "Backup generators are just that, they're not designed to keep the hospital up and running at full capacity." Ziegler said that power still goes out for reasons beyond the energy crisis, from incidents like lightning or a knocked-down power pole. "If it's a serious problem for the hospital it's certainly something they should be address just from an ongoing basis," she said. The exemption would cover all hospitals within the territory of the state's investor owned utilities PG&E, Southern California Edison and San Diego Gas and Electric. Hospitals within the range of municipally owned utilities, such as the Los Angeles Department of Water and Power, are separately regulated. For more than two decades, prisons, hospitals with more than 100 beds and emergency services such as fire and police departments have been classified as "essential" services, and are exempted from blackouts by order of state power regulators. After rolling blackouts began darkening the state in January, many other public service groups began seeking relief from power interruptions, including transit systems, schools and water districts. --- On the Net: http://www.cpuc.ca.gov Federal Judge Orders Reliant To Keep Selling Pwr To Calif 03/22/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) SACRAMENTO, Calif. (AP)--A federal judge issued a preliminary injunction Wednesday ordering a major electricity wholesaler to continue selling to California despite its fear that it will not get paid. U.S. District Judge Frank C. Damrell Jr. said Californians were at risk of irreparable harm if Reliant Energy (REI) stopped selling power to the Independent System Operator, which oversees the state's power grid. The ISO buys last-minute power on behalf of utilities to fill gaps in supply. Damrell dismissed Reliant's attempt to force the state Department of Water Resources to back the ISO's purchases for the state's two biggest utilities. The state has been spending about $50 million a day on power for Pacific Gas and Electric Co. and Southern California Edison, both denied credit by suppliers after amassing billions of dollars in debts. The judge said he had no authority to force the DWR to pay for that power. Gov. Gray Davis has said the state isn't responsible for purchasing the costly last-minute power ISO buys for Edison and PG&E, despite a law authorizing state power purchases on the utilities' behalf. ISO attorney Charles Robinson said the ruling gives ISO operators "a tool to assist them in keeping the lights on in California." "Had the decision gone the other way, one could expect other generators to simply ignore emergency orders," Robinson said. Damrell's preliminary injunction will remain in effect until the Federal Energy Regulatory Commission rules on the matter. Damrell denied the ISO's request for preliminary injunctions against three other wholesalers - Dynegy Inc. (DYN), AES Corp. (AES) and Williams Cos. (WMB) - which agreed to continue selling to the ISO pending the FERC ruling. Spokesmen for Reliant, Dynegy, AES and Williams were out of the office Wednesday night and didn't immediately return calls from The Associated Press seeking comment on the ruling. The ISO went to court in February after a federal emergency order requiring the power sales expired. The judge then issued a temporary restraining order, requiring the sales, but dropped it after the suppliers agreed to continue sales to California pending his Wednesday ruling. The ISO said it would lose about 3,600 megawatts if the suppliers pulled out, enough power for about 2.7 million households. One megawatt is enough for roughly 750 homes. Grid officials said Reliant's share alone is about 3,000 megawatts. Reliant said the amount at issue actually is less than a fourth of that, because most of its output is already committed under long-term contracts. Reliant, which currently provides about 9% of the state's power, worries it won't get paid due to the financial troubles of PG&E and Edison. PG&E and Edison say that together they have lost about $13 billion since June due to soaring wholesale electricity costs that California's 1996 deregulation law bars them from passing onto customers. Calif Small Pwr Producers To Shut Plants If Rates Capped By Jason Leopold Of DOW JONES NEWSWIRES 03/22/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) LOS ANGELES -(Dow Jones)- Many of California's independent power producers late Wednesday threatened to take their small power plants offline this week if state lawmakers pass legislation that would cap the rates the generators charge for electricity they sell directly to the state's three investor-owned utilities. At issue is a bill that would repeal a section of the state's Public Utilities Code, which links the 688 so-called qualifying facilities' electricity rates to the monthly border price of natural gas. Lawmakers, however, are poised to pass the legislation. State regulators are then expected to approve a measure that would restructure the fluctuating rates the QFs charge PG&E Corp. (PCG) unit Pacific Gas & Electric, Edison International (EIX) unit Southern California Edison, and Sempra Energy (SRE) unit San Diego Gas & Electric from $170 a megawatt-hour to $69-$79/MWh, regardless of the price of natural gas. Whereas each of the 688 QF contracts differed, largely because natural gas prices are higher in Southern California than Northern California, the state wants the QFs to sign a general contract with the utilities. The cogeneration facilities, which produce about 5,400 megawatts of electricity in the state, said the rates are too low and they won't sign new supply contracts with the utilities. "For $79/MWh, natural gas would have to be $6 per million British thermal unit at the Southern California border," said Tom Lu, executive director of Carson-based Watson Cogeneration Company, the state's largest QF, generating 340 MW. "Our current gas price at the border is $12.50." Other gas-fired QFs said the state could face another round of rolling blackouts if lawmakers and state regulators pass the legislation, which is expected to be heard on the Senate floor Thursday, and allow it to be implemented by Public Utilities Commission next week. Lu, whose company is half-owned by BP Amoco PLC (BP) and is owed $100 million by SoCal Ed, said the proposals by the PUC and the Legislature "will only make things worse." David Fogarty, spokesman for Western States Petroleum Association, whose members supply California with more than 2,000 MW, said the utilities need to pay the QFs more than $1 billion for electricity that was already produced. State Loses 3,000 MW QF Output Due Of Financial Reasons The QFs represent about one-third, or 9,700 MW, of the state's total power supply. Roughly 5,400 MW are produced by natural gas-fired facilities. The rest is generated by wind, solar power and biomass. About 3,000 MW of gas-fired and renewable QF generation is offline in California because the power plant owners haven't been paid hundreds of millions of dollars from cash-strapped utilities SoCal Ed and PG&E for nearly four months. Several small power plant owners owed money by SoCal Ed have threatened to drag the utility into involuntary bankruptcy if the utility continues to default on payments and fails to agree to supply contracts at higher rates. The defaults have left many of the renewable and gas-fired QFs unable to operate their power plants because they can't afford to pay for the natural gas to run their units. Others continue to produce electricity under their contracts with the state's utilities but aren't being paid even on a forward basis. The California Independent System Operator, keeper of the state's electricity grid, said the loss of the QF generation was the primary reason rolling blackouts swept through the state Monday and Tuesday. Gov. Gray Davis, recognizing the potential disaster if additional QFs took their units offline, held marathon meetings with key lawmakers Monday and Tuesday to try and hammer out an agreement that would get the QFs paid on a forward basis and set rates of $79/MWh and $69/MWh for five and 10 year contracts. He also said he would direct the PUC to order the utilities to pay the QFs for power they sell going forward. "After next week the QF problem will be behind us," Davis said Tuesday. "We want to get the QFs paid...the QFs are dropping like flies...and when that happens the lights go out." But this just makes the problem worse, said Assemblyman Dean Florez, D-Shafter, a member of the Assembly energy committee. "I don't know how we are going to keep the lights on," Florez said in an interview. "Many of these congenerators are in my district. They said if the legislation doesn't change they are going offline. This compounds the issue of rolling blackouts, especially now when we need every megawatt." Davis, who didn't meet with people representing the QFs, said he was handing the QF issue to the PUC because lawmakers failed to pass legislation that
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