California Nears Crossroads in Power Crisis

California will soon face a critical juncture when it opens sealed bids for the sale of power, say lawmakers who toiled Saturday to craft legislation that would put the state in the electricity-buying business for a long time to come.

Davis administration officials said they intend to solicit anonymous bids as soon as possible from power producers willing to sell electricity to the state for a variety of terms, from days to months and years.

The prices revealed in those bids, lawmakers said, seem certain to dictate whether the state’s power woes worsen or ease.

In the meantime, the state Department of Water Resources continued to spend millions of dollars a day to help keep the lights on. The state’s power reserves plunged precariously low Saturday, but no blackouts were triggered.

Water department officials said they spent $18.8 million Saturday buying power to help avoid the intentional, rotating blackouts that disrupted lives across California on Wednesday and Thursday.

The water department became California’s chief power buyer Friday, when the Legislature and Gov. Gray Davis gave it $400 million to step in as the purchaser for Southern California Edison and Pacific Gas & Electric. The two firms have been driven to near bankruptcy by astronomical wholesale prices in California’s deregulated electricity market.

Power generators unwilling to sell to the utilities for fear of not getting paid are now selling to the credit-worthy water department. But power market experts predict that the $400 million will last no longer than a week, given the current price of electricity.

Officials hope to avoid making frequent, massive appropriations for power purchases--the bill for 90 days’ worth could top $5.4 billion, some experts say--by quickly signing fixed-cost contracts at prices cheaper than those the state water department pays by buying an hour to a day in advance.

Davis last week ordered the department to solicit sealed bids from generators. On Saturday, officials of the water agency, the Department of Finance and the state’s electricity market huddled in an office building in suburban Sacramento to craft the rules and mechanics of such an uncharted auction.

It could take a week or more before bids are actually solicited and returned, participants said.

“This sealed bid mechanism will allow the state to either accept all bids, reject all bids or anything in between,” said state Sen. Debra Bowen (D-Marina del Rey), chairwoman of the Senate Energy and Utilities Committee.

If bids are higher than Davis and lawmakers hope, the state must brace itself for massive expenditures of money from taxpayers, simply to keep electricity flowing--or hikes in monthly electricity bills to cover the costs.

“It’s a reality check, that’s for sure,” said Bowen.

While work progressed on creating the bidding process, lawmakers focused on revamping a bill by Assemblyman Fred Keeley (D-Boulder Creek) that would dramatically expand the state’s involvement in the buying and selling of low-cost energy through multiyear contracts.

Bowen said the bill will not be finalized until the bids are opened and lawmakers get a good sense of the prices and terms offered.

Representatives of power sellers welcomed that idea.

“At least it keeps your legislation from being out of sync with the reality of the market,” said Gary Ackerman, executive director of the Western Power Trading Forum.

Davis has repeatedly said that California should pay no more than $55 per megawatt-hour for electricity. Keeley’s bill reflects that goal, but in recent days that provision has sparked concern that it was far too low. Some lawmakers branded the price target a “fantasy” that will have to be abandoned.

Power sellers insist that it costs $80 per megawatt-hour to generate electricity in even the most efficient natural gas-fired plant. California’s aging power mainstays, many of them built in the 1950s and 1960s, are much more expensive to operate.

For recent emergency purchases, the water department has been paying between $180 and $440 per megawatt-hour.

Bowen and Keeley, the Assembly’s energy point man, are uncertain whether they can fashion a solution that does not raise consumer rates, a point that Davis and legislative leader have demanded.

“Is it doable? The answer is yes,” said Keeley. “But all the moving parts have to happen together. If any part of it doesn’t happen, the answer is no.”

Crucial to the outcome, he said, is to find a way to reduce the cost of long-term contracts that alternative energy companies have with PG&E; and Edison. Such generators supply electricity generated by wind, sun, industrial byproducts such as steam, and the burning of farm waste.

These small producers supply the utilities with about one-third of their energy requirements at comparatively high prices. Federal and state laws force the utilities to purchase the electricity under contracts of 10 years and longer.

Alternative Power Sources

The California Public Utilities Commission on Thursday deferred a proposal to limit to $67 per megawatt-hour the charge allowed these small power producers. It’s a price that many generators said is so low that they would lose money running their plants.

The Legislature will get involved in finding a way to keep the plants operating while seeking to lower the price utilities must pay, Keeley said.

Edison has already defaulted on more than $600 million owed to these small generators.

“We still have to find a way to drive the power down,” Keeley said of the alternative producers. “It really isn’t in their interests for Thelma and Louise to go over the cliff into bankruptcy. They become creditors.”

Legislators have nicknamed Edison and PG&E; “Thelma and Louise” after two movie outlaws who drive their car over a cliff into the Grand Canyon to avoid pursuit by police.

“If Thelma and Louise drive off the cliff,” said Keeley, “this problem gets significantly harder for the state government to resolve.”

Still unresolved in the Legislature are other contentious issues, including payment of the utilities’ past debts and whether consumers should foot that bill. The 24 million Californians they serve have been protected by a rate freeze under a 1996 deregulation law.

Lawmakers also have yet to tackle whether to require large commercial and industrial companies to find their own sources of electricity outside the utilities by signing contracts directly with generators.

Some lawmakers--noting that large businesses sought deregulation--argue that any rate hikes that might be necessary should be paid by such large users.

“Not one single residential customer, one single small business or any hospitals or schools came in here in 1995 and 1996 and demanded that we deregulate electricity in California,” said Bowen.

“If the large industrial users believe they are better off in the long run maintaining a deregulated market, they are very likely to have to pay the lion’s share of the costs of the failures of this experiment.”

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