Deepening Crisis Raises Specter of Power Rationing

California’s energy crisis took an ominous turn Wednesday when Southern California Edison threatened to begin rationing electricity over the Christmas weekend and a major Wall Street agency warned that it might downgrade the credit ratings of the state’s two biggest utilities to junk bond status.

With the power emergency beginning to devolve into a political game of chicken, the California Public Utilities Commission was expected to begin laying the groundwork today for an electricity rate increase that could be approved as early as Jan. 4. How much more consumers will be paying in the months ahead is still unknown.

A top aide to Gov. Gray Davis said Edison warned the administration that unless speedy action is taken, the utility could be forced to begin rationing electricity as soon as Friday, a step that could leave some of its 11 million customers without power for hours at a time. Davis has said he fears that power could be cut to traffic lights and even hospitals.

For weeks, state regulators have been warning of rolling blackouts throughout California because of inadequate supply. But in Edison’s case, apparently the problem is not a shortage of electricity, but of money to buy it. Turning off the juice would save the company the cost of purchasing electricity in the state’s haywire wholesale market.

A spokesman for Edison would neither confirm nor deny the company’s rationing plan. He would only say that the governor’s aide, who is involved in the effort to solve the crisis, was wrong about the timing.

“I’m only responding to the idea we’d start rationing on Friday,” Steve Conroy said. “There is no such plan.” Asked if rationing could be imposed after Friday, he replied, “It’s unclear what circumstances would dictate initiation of a rationing plan at this time.”

The prospect of utility blackouts has been discussed privately with state officials during several meetings, including one Tuesday. Davis met for several hours with legislative leaders and top executives of Pacific Gas & Electric and Edison. Among those attending was former Secretary of State Warren Christopher, a member of Edison’s board of directors.

Christopher gave what one participant described as a lecture to Davis about the nature of leadership, and the need for the governor to take control of the situation.

“My sense is that they [Edison officials] are quite serious,” said the participant. “There is no question that what Edison said will come to pass. If there is no [state] action, you only can buy what you can buy.”

The Public Utilities Commission, which will meet in San Francisco, does not have the authority to immediately grant requests by Edison and PG&E;, which have asked for rate increases of between 10% and 17%.

However, Davis’ aide, requesting anonymity, said the commission intends to act quickly on a series of requirements leading up to a rate increase, which could be granted at its Jan. 4 meeting or later in the month.

Although Davis has not said what he would do if Edison makes good on its threat of blackouts, a California governor has extraordinary emergency power.

The state could use its own purchasing power to buy electricity for use in California. In the extreme--a step that no official will discuss--Davis could direct the National Guard and California Highway Patrol to seize power plants within the state’s borders and order that they supply electricity.

While those measures remain in the hypothetical realm, most discussion on Wednesday swirled around the inevitability of bigger bills for utility customers.

As the rate increase began to take on the buzz of inevitability, a coalition of consumer groups launched a withering attack on Davis for what they perceived to be his role as an advocate for the utilities.

“This falls into a new, lower level of sellout than I’ve ever seen . . . in Sacramento,” said Harry Snyder, a top official in the West Coast branch of Consumers Union, the advocacy group that publishes Consumer Reports magazine. He said he was particularly outraged that Davis had been negotiating with the utilities over the possibility of a rate hike without including any representatives of the state’s ratepayers.

“It’s been easy to solve the problem,” Snyder said. “You get a bunch of people in a room, and the person who’s paying the bills isn’t in the room. Then it’s easy.”

Davis said he had no choice but to negotiate one-on-one with the utilities. Because the utilities sued the PUC recently for blocking rate relief, the talks are being held under the rubric of legal settlement negotiations. Under the law, he said, third parties aren’t allowed to participate.

But Davis promised to involve the public soon. In a brief interview with The Times, the governor said his office was starting to reach out to consumer groups. “At the end of the day, consumers will be full partners in the decision as to whether the utilities survive and the lights stay on,” he said.

Representatives of two consumer groups said Davis’ office had called them to set up discussions.

Other Western States Not Sympathetic

As the rhetoric escalated Wednesday, Western governors met in Denver to consider broader solutions to what is fast becoming a regionwide crisis--and to take turns pummeling California for its role as the 800-pound, electron-eating gorilla.

“Frankly,” said Wyoming Gov. Jim Geringer, “if we got to the point where everyone is suffering like this and we found out that California wasn’t doing absolutely everything to solve its problems, we’d start to see some real resentment.”

California was a national pioneer when it passed legislation deregulating its electricity market in 1996, freeing its major investor-owned utilities from government price restrictions on energy. That experience turned sour this year when electricity prices, instead of going down, soared skyward, and electricity supplies in California could not accommodate the load.

Edison said Tuesday that it would be forced to declare bankruptcy next month if it is not granted relief in the form of a rate hike and a federal cap on energy prices. PG&E; officials avoided use of the word “bankruptcy” but said they would soon be unable to buy power to serve their customers.

The Los Angeles Department of Water and Power and some other municipally owned utilities have been largely unscathed by the crisis. DWP, in fact, announced Wednesday that it was running at a sizable, 1,000-megawatt surplus, most of which was being sold to help its ailing counterparts such as Edison and PG&E.;

Standard & Poor’s, a major Wall Street debt-rating agency, agreed Wednesday that Edison and PG&E; are headed toward insolvency, and said it could downgrade the utilities’ credit ratings as early as today unless state officials take steps to increase electric rates paid by consumers.

The two utilities say they have spent $8 billion more on wholesale electricity purchases than they have been allowed to collect from consumers because rates are frozen under terms of the state’s electricity deregulation. Consumer groups say the true figure is probably half that much.

S&P;, which in October put both utilities on “negative watch,” said the utilities are “running out of cash” and could default on payments due on $15 billion in total direct debt early next year. As a result, S&P; warned that it could downgrade the two utilities from their current sterling “A+” ratings to “below investment grade”--”reflecting the likelihood of imminent default”--unless it gets clear signals within the next 24 to 48 hours that rates are headed upward.

Such a downgrade could increase the utilities’ costs for borrowing money and depress their stock prices. It also could compound California’s problems by making out-of-state power generators even warier of selling energy in the state, which some companies are doing only because U.S. Energy Secretary Bill Richardson has ordered them to do so.

“We are not advocates--not taking a position either on the side of the utilities or ratepayers--but keeping investors apprised as to the risks associated with their investments,” said David Bodek, a director of Standard & Poor’s in New York.

The California Public Utilities Commission cannot act unilaterally to raise consumer rates at its meeting today. But to avoid the downgrade, Paul Fremont, a utility analyst with the investment firm Jefferies & Co., said the commission must at the very least send an unmistakable signal that consumer rates are headed upward and that the utilities will recoup some of their losses.

Severin Borenstein, director of the UC Energy Institute in Berkeley, said the PUC has little choice but to authorize an increase to avert the utilities’ running aground.

“It’s clearly going to happen--the only question is the structure of what’s going to happen and how much,” he said. “We clearly are not going to keep rates at this level. Some pain will be borne by consumers; we are just arguing over how much.”

The perception of the utilities’ problems worsened in the last week after Edison disclosed it was having difficulty finding loans to finance the continuing purchases of wholesale electricity in light of the growing pile of debt related to undercollections.

PG&E; had to borrow $2.7 billion in such funds in October alone, and Edison $1.3 billion. The critical date for refinancing that debt is “just weeks away,” Bodek said, yet it is not at all clear that lenders will front the money without action by California to assure investors of repayment.

Another Stage 2 Emergency Declared

The state’s electricity reserves sank low enough Wednesday afternoon to trigger a Stage 2 emergency, the 34th of the year. The California Independent System Operator, which is charged with keeping energy flowing through the state, was forced to declare the emergency in large part due to congestion on the main electricity transmission path that brings power from Southern California plants to Northern California.

Anticipating just such a problem, Cal-ISO on Tuesday had asked the U.S. Department of Energy to use its emergency authority and force power generators across the West to sell any surplus electricity to California.

The request, which was quickly granted, helped bring the state enough electricity Wednesday to serve between 300,000 and 400,000 homes.

Most of the extra supplies came from small power plants within California that had not been running at full capacity because their federally mandated contracts did not allow them to recover the full cost of the natural gas used to generate the electricity. The U.S. Energy Department’s emergency order allows those power plant owners to get a price high enough to cover their gas prices, which have jumped tremendously in the last several months.

U.S. Energy Secretary Richardson said Wednesday that he was extending his order by a week. Speaking to the Western governors in Denver, he proposed a regional electricity price cap. The governors rejected the idea, offering a five-point plan of their own to stave off what many called an impending energy crisis in a region that holds eight of the nation’s 10 fastest growing states.

The tone of the five hours of meetings among governors, utilities officials and federal regulators was far from neighborly toward California, whose absent officials were scolded for not having done enough to solve their own problems. Some governors wondered aloud why their constituents should have to pay for a neighboring state’s inaction.

“In Colorado, we’ve been building the power plants to serve our energy needs,” said Gov. Bill Owens. “It’s tough, no one wants one in their backyard. It takes political will. Gov. Davis is a new governor but you can’t brag on the one hand that California is No. 3 or No. 4 in the world as an economic force and on the other can’t supply your own energy needs. I don’t want Coloradans to pay higher rates because someone else can’t build plants and transmission stations. It’s going to take political will to build the generating capacity.”

Some also questioned whether California was operating its power stations at full capacity and whether the state’s citizens were being asked to conserve energy as much as their smaller, less affluent neighbors in the interior West.

In its five-point action plan, the group said California must take prompt steps to conserve energy and straighten out its unraveling market.

The governor’s proposals also called for an investigation by the Federal Energy Regulatory Commission of the implications of regional price caps and bilateral contracts, and an answer as to why Western electricity prices are higher than in the rest of the nation. The group asked President-elect George W. Bush to form a team to work with the governors on the issue.

Davis already has said he intends to earmark $1 billion in next year’s budget for energy conservation efforts. The initiative could include tax credits for people to buy energy-efficient appliances.

The governor collected $464,000 in campaign donations from energy producers, marketers and utilities between the time he took office in January 1999 and last June. Unions representing electrical workers, including many who work for utilities, gave him $113,500 during his first 18 months in office.

Davis won’t report any donations from the second half of 2000 until early next year.

Utilities themselves have accounted for $239,263 of that amount. Edison accounted for $105,000. PG&E; reported giving his campaign $72,500, and Sempra, the parent company of SDG&E;, has given him $56,763.

Enron, the Houston-based firm that is among those that have profited during California’s energy crisis, has given Davis’ campaign $42,000.

The utilities also have a large stable of lobbyists. PG&E; is among the clients of Davis’ 1998 campaign finance chairman, Darius Anderson.

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Morain reported from Sacramento, Kraul and Landsberg from Los Angeles. Also contributing to this story were Times staff writers Nancy Vogel in Sacramento, Julie Cart in Denver and Stuart Silverstein and researcher Vicki Gallay in Los Angeles.

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* PRO-ENERGY AGENDA

President-elect Bush discusses expanding the supplies of oil, natural gas and coal. A35

* BOOSTING GAS SUPPLIES

PG&E; is planning to expand its natural gas pipeline to ease shortages. C2