State Purchased Electricity When Utilities Couldn’t

California averted blackouts this week and in December after the state spent upward of $25 million to buy electricity when utilities lacked the credit to purchase it themselves, officials said Friday.

The decision by the state Department of Water Resources to buy the power caught some state lawmakers by surprise, and a spokesman for Gov. Gray Davis said the governor was unaware of the purchases.

Some lawmakers lauded the decision as a necessary step to keep the lights on in the emergency, while consumer activists charged that the purchases were a move toward a bailout of private utilities, and were made without legal authority.

Davis administration officials said Friday they believe that U.S. Energy Secretary Bill Richardson’s emergency order issued Thursday requiring that generators supply California, like one he issued last month, empowered the department to buy the power.

But Santa Monica consumer advocate Harvey Rosenfield, who is considering a ballot initiative to overhaul the power system, said: “I’m just astonished. Aren’t we still in the form of government where the Legislature has to appropriate money? . . . No matter how worthy the cause is of keeping the lights on, it is supposed to be done under the rule of law.”

Details emerged as Davis, legislative leaders, utility executives and Clinton administration officials prepared for a cross-country telephone conference today in a further attempt to ease the crisis.

In Washington, federal officials signaled that the talks aimed at averting a financial meltdown of California’s electricity system could founder if Davis and the Legislature continue to balk at easing the multibillion-dollar debt now crushing Southern California Edison and Pacific Gas & Electric, the state’s two biggest utilities.

Among the day’s other developments:

* California’s electricity grid slipped into a Stage 3 power emergency for the first three hours of Friday. But no blackouts were ordered, said Kellan Fluckiger, chief operating officer of the California Independent System Operator, which runs the state’s electricity grid.

The state remained in a Stage 2 emergency late Friday, meaning that the grid is within 5% of running out of available power. But the situation has improved since Thursday, when California barely avoided blackouts, with only a few hundred megawatts to spare.

* The Assembly, in a special session, quickly approved a pair of bills sponsored by Davis that would give him and the Public Utilities Commission greater authority over the energy industry.

* Five Western governors, all Republicans, called on California to step up efforts to produce more regional power, while Davis conferred with the governors of Oregon and Washington in Sacramento.

At a news conference after the meeting, Davis said the state is moving quickly to build new power plants while also finding ways to conserve power.

Gov. Gary Locke of Washington and Gov. John Kitzhaber of Oregon, both Democrats, lauded California’s effort and vowed to work to restore stability to the power system that covers the western United States. The three Democratic governors said they intend to hold an energy summit in Oregon next month with all Western governors.

“People outside the region do not appreciate what California is doing,” Kitzhaber said, calling on Western governors to deal with the crisis without engaging in partisan attacks.

On Thursday, as California came dangerously close to blackouts, Davis and legislative leaders intervened by calling power suppliers to persuade them to sell electricity to California utilities.

“He has pulled a rabbit out of the hat before, and he’ll do it again,” said Davis spokesman Steve Maviglio.

Although Davis discussed his personal efforts Friday, Maviglio said the governor was not aware of the state Department of Water Resources action. While Davis did not endorse it, Maviglio said, the governor believes the department was acting under authority granted by the federal emergency order.

“Some megawatts became available,” Fluckiger of Cal-ISO said, explaining the state’s intervention, “because suppliers were more willing to make sales to the state, which can positively make payments, rather than some entity that has a cloud of uncertainty over how it can pay. The state is basically taking the risk position by reselling to us.”

Officials in the water department said Friday that they made the decision to buy the power for general public use Thursday and again Friday, as they had during power shortages in December.

Suppliers Refused to Sell to Firms

The power came from Northwest and British Columbian suppliers, who had refused to sell it to the financially strapped private power companies for fear that the firms could not pay for it.

“The Independent System Operators had hit their credit limits, so they asked us to buy it for them,” said Viju Patel, a water department official who oversees the department’s energy program. “We still had credit.”

The water department, itself a power generator and the largest single user of electricity in the state, often buys electricity and sells it into California’s power grid, but for its own use.

Patel said the department decided to buy power this week and in December for general public consumption specifically to avert blackouts. The blackouts didn’t materialize, in part because of conservation efforts, and also because the state purchases amounted to about 3% to 4% of the state’s needs during peak usage.

“This is something different we are doing,” Patel said.

The department spent $20.6 million on its purchases in December, and $4 million to $5 million Thursday. Patel was not sure how much the state spent buying power Friday. The state purchased 12,500 megawatt hours of electricity Thursday and was prepared to buy 11,000 megawatt hours Friday.

“This is not our normal mode of operation,” said Pete Garris, another water department official involved in the power operation. “Because of the Stage 3 alert, we got into the market to see if we could help out.”

The cash used to buy the power was not general tax money. Rather, it came from a state account funded by water users who rely on the state water system. The department expects that it will be repaid in full.

Harry Snyder of Consumers Union suggested that if the utilities end up going bankrupt, the state could be on the hook for the money.

“What’s outrageous is that the state of California is bailing out privately held companies,” Snyder said. “[The utilities] didn’t have the money to buy power. So that means that legally they may have been insolvent. The forces of economics suggest they would have had to lose control of their companies. . . . Instead, the state kept these companies alive.”

State Senate President Pro Tem John Burton (D-San Francisco) defended the decision, although he added that he would reserve final judgment until he learned all the details.

“Would it have been a better idea to have a brown-out and have people dying on the operating tables?” he said. “It was an emergency thing.”

As this week’s power shortage eased, state lawmakers and Davis continued their efforts to find ways to solve California’s short- and long-term electricity shortages.

Under one option being considered, the state would use its purchasing power to enter into long-term contracts to buy energy from various generators.

At the same time, Edison, PG&E; and San Diego Gas & Electric would dedicate the electricity from their remaining power plants to California consumers. Additionally, the state and utilities would push to reduce the costs on contracts for solar power, wind power and other renewable sources.

Utilities would be able to buy the power at a slight discount, while reselling it to ratepayers at no more than what people currently are paying for electricity. The utilities would use the profit to restructure their debt and pay it down.

In Washington, however, officials, speaking only on condition that they not be identified, indicated that time is running short. They said they fear that California’s plan to have the state purchase power for the utilities at low rates, while helpful, won’t repair the firms’ damaged finances sufficiently to protect them from bankruptcy.

Both PG&E; and Edison face huge cash payments Tuesday that could prove enough to sink at least one of the firms. PG&E; said in federal filings Wednesday that it has $2.21 billion in bills coming due over the next eight weeks and only about $500 million with which to pay them. A spokesman said that amounts due Tuesday are not enough in themselves to cause bankruptcy.

Negotiators to Confer Via Phone

Top negotiators for the state and federal governments, the utilities and the state’s big power providers are scheduled to talk today. Davis and other state officials will participate via phone and video hookup. Leading talks on the federal side will be Treasury Secretary Lawrence Summers.

Summers and other bargainers in the four-way talks last met Tuesday in a marathon, seven-hour session that produced a cautiously worded outline of a settlement. Lawyers, financial analysts and engineers have been meeting with senior Treasury and Energy department officials since then, trying to hammer out details of the plan.

Davis has said the state might help the troubled utilities by buying cheap power through the water department or a newly formed state power authority and reselling it to the firms. But the governor adamantly rejected the notion of helping the utilities get out from under their crushing debt loads by, for example, issuing state-guaranteed bonds to help spread out the repayment costs.

“The governor,” Maviglio said, “is committed to keeping the utilities out of bankruptcy and is resolved to do it without putting additional costs on ratepayers.”

In the Assembly, meanwhile, lawmakers approved a bill, AB5x, that dramatically shrinks the governing boards of the state’s Independent System Operator and Power Exchange from 26 voting members to three gubernatorial appointees. Under deregulation, the two nonprofit agencies buy, sell and trade power. The bill by Assemblyman Fred Keeley (D-Boulder Creek) was sent to the Senate on a 60-9 vote.

The second measure, AB6x by Assemblyman John Dutra (D-Fremont), would make it tougher for private utilities in California to sell their remaining generating plants without final approval of the PUC. It passed 60-10.

Sales of these plants, which generated about 15% of the energy used in California, was part of the state’s 1996 deregulation scheme. But some plants have been purchased by companies that now are selling the electricity at unprecedented prices.

Approval of the two proposals marked the first time in the 2-week-old special session that an energy bill had passed either house. The Senate is expected to take the bills up next week.

*

Times staff writers Nancy Rivera Brooks and Carl Ingram contributed to this story.

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Peak Demand

Statewide power usage is highest in the summer. Average monthly peak load for 2000:

In thousands of megawatts (1 megawatt will power 1,000 typical households)

August: 38,029 megawatts

Source: California Independent System Operator; Researched by NONA YATES/Los Angeles Times

A Typical Day on the Grid

Summer power demand peaks in midafternoon, when air conditioning is most needed. During winter’s shorter days, demand peaks in early evening as people turn on lights. Figures here reflect electrical flow overseen by the state’s power system operator, about 75% of the total.

Source: California Independent System Operator; Researched by MALOY MOORE/Los Angeles Times