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State Electricity Auction May Push Prices Up

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TIMES STAFF WRITERS

As California prepares to solicit bids starting today in an unprecedented auction to buy electricity, a representative of power generators said Monday that the state’s entry into the market may be having the unintended effect of driving up prices.

Attempting to bring the energy crisis under control, Gov. Gray Davis ordered the state Department of Water Resources to begin accepting bids via the Internet starting today at 9 a.m. and to keep the auction open for 24 hours.

Davis has pinned his hopes of stabilizing skyrocketing electricity prices on receiving affordable bids from energy suppliers, whose wholesale prices have pushed Southern California Edison and Pacific Gas & Electric to the brink of financial ruin.

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But Gary Ackerman, who represents power generators and marketers, said traders in recent days have raised the price at which they offer five-year contracts for electricity.

Ackerman explained the run-up by saying that power generators are rushing to secure sufficient natural gas supplies--which are used to power most generators in California--in anticipation of selling electricity to the state under long-term contracts. This, in turn, has raised the price of electricity.

“When you buy at the top of the market, there’s no end to the punishment you might see in terms of prices,” said Ackerman, executive director of the Western Power Trading Forum.

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7 Days of Stage 3 Power Emergencies

The events in Sacramento came on a day when electricity supplies were so thin that California remained in a Stage 3 power emergency, for the seventh day in a row.

The state’s top electron traffic cop--the Independent System Operator--said blackouts are “likely” this morning because of depleted hydroelectric supplies and power plant outages, colder morning temperatures and the loss of a key program run by PG&E; that had slashed electricity use by large customers.

The end of that program illustrates the fragility of California’s electricity market.

Large power users that had agreed to pull the plug when supplies were tight--in exchange for discounted rates--have played a crucial role in averting rolling blackouts.

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But only three weeks into January, PG&E;’s version of the program already has reached the annual limits set in the contracts with those big customers. That limit--30 incidents or 100 hours per year, whichever comes first--was reached at 6 p.m. Monday.

“Conservation is going to be more important now than ever,” said Jeff Butler, PG&E; vice president of operations, maintenance and construction.

In Southern California Edison territory, the program is in slightly better shape because power interruptions have been less frequent and the contracts lengthier. As of Monday, 12 interruptions of 72 hours in all had occurred in 2001, Edison spokesman Gil Alexander said.

Elaborating on the electricity auction, Ackerman of the Power Trading Forum wondered how many bids the state will receive, especially because the auction was not formally announced until after 5 p.m.

“The hard part [for traders and generators] is getting authority from their bosses on how many megawatts can they dedicate to California,” Ackerman said, “given the fact that we haven’t yet gotten paid for November and December deliveries. There’s a lot of nervousness out there.”

Last week, power generators were offering long-term contracts at 8.5 to 8.8 cents per kilowatt-hour. By Monday, Ackerman said, the offers had risen to 9.2 cents. The average home uses 500 to 600 kilowatt-hours a month.

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Davis hopes to secure long-term contracts averaging 5.5 cents, about the price that was offered last summer before wholesale prices skyrocketed, bleeding the utilities and forcing the state to intervene by buying power.

“This is a key step in our efforts to keep the lights on in California at a reasonable price,” Davis said Monday.

In Sacramento, legislators continued piecing together a complex assortment of fixes that they hope will provide the framework for a way out of the crisis. Chief among them was a measure by Assembly Democrats, now under consideration by their counterparts in the Senate, that would have the state seize hydroelectric plants operated for decades by PG&E; and Southern California Edison. Republicans denounced the idea as confiscatory.

“Republicans do not want to confiscate generation assets,” Senate Republican leader Jim Brulte of Rancho Cucamonga said. “We do not want to be in the generation business.”

Brulte said the state should place a lien on the utilities’ assets, allowing the state to seize the property if the utilities default on debts to the state.

Senate President Pro Tem John Burton (D-San Francisco) on Monday called for the creation of a public power authority to take ownership of both the electricity transmission grid and hydroelectric assets of Edison and PG&E.;

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“If I had my options, if the state could take over both, it would be very helpful,” Burton said, “because the transmission lines are like the highway for all electricity in the state.”

State ownership of hydroelectric plants would put the state in control of dams and reservoirs that affect dozens of Sierra Nevada streams and endangered species.

Under the proposal advanced by Assembly Speaker Bob Hertzberg (D-Sherman Oaks), PG&E; would give up its hydroelectric plants in exchange for receiving state aid to pay off part of its multibillion-dollar debt. But in a statement, PG&E;, operator of the largest privately owned hydroelectric system in the nation, was skeptical.

“We want to make it clear that our hydroelectric plants are highly valued assets of PG&E;,” the statement said, “and their effective ownership and management we take very seriously for all our constituencies.”

Edison spokesman Clarence Brown said: “The best we can say is we’re continuing to review the [proposal] and at this point we have to reserve comment.”

Tensions Rising in Sacramento

As proposals were being floated, tensions were rising in the capital. A dozen consumer activists showed up at the governor’s office to demand a meeting and give him petitions protesting high energy prices and opposing any state bailout of utilities. The governor did not meet with them, although Davis spokesman Steve Maviglio said Davis would meet with consumer groups shortly.

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In other developments:

* Davis spoke Sunday night with President Bush’s Energy secretary, Spencer Abraham, and asked that Abraham extend emergency orders issued by the Clinton administration requiring that power generators continue selling electricity and natural gas to California utilities. As of Monday, Davis had received no decision.

* President Bush selected Curt L. Hebert Jr. as chairman of the Federal Energy Regulatory Commission. Hebert has been an outspoken foe of federal intervention in California’s crisis.

* Of the $400 million in state funds that Davis authorized for emergency purchases of electricity, $113 million has already been spent.

* Assemblyman Fred Keeley (D-Boulder Creek) and Sen. Jim Battin (R-La Quinta) led negotiations over the weekend with independent producers of so-called green energy, relying on solar, wind, geothermal and other renewable sources of power. The lawmakers said they made considerable progress toward a deal in which the producers would slash their prices in half, helping the utilities cope with their mounting debt.

“They knew they would rather deal with a recovering utility than a bankrupt one,” Battin said at a hearing Monday.

Still, some Senate Democrats were skeptical of the deal, fearing that those energy producers, which have been subsidized, could end up losing the ability to remain in business.

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A reduction in the cost of such power is a key element in any overall settlement and in stabilizing wholesale electricity prices paid by PG&E; and Edison.

Independent producers account for about a third of the state’s power generation, while the utilities produce another third. The final third--the portion that the state is considering buying--is bought from generators, many of which are headquartered outside California.

It is the price for that final third that the state hopes to stabilize with long-term contracts.

S. David Freeman, head of the Los Angeles Department of Water and Power, doubted that the state would receive an acceptable price through the sealed-bid process that begins today.

“Ordinarily, you don’t get your best price in a sealed bid,” Freeman said. “Ordinarily, you get it when you sit down and negotiate it with them. . . . [The auction] is the beginning of the process, not the end.”

Freeman also doubted that the state’s entry into the power market was raising prices, though the cost of natural gas has jumped by $4 per 1,000 cubic feet since last week. He attributed it to purchases by a subsidiary of Sempra Energy, which has been seeking to restock its natural gas supply.

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Vogel and Morain reported from Sacramento. Rivera Brooks reported from Los Angeles. Times staff writers Carl Ingram and Miguel Bustillo in Sacramento also contributed to this story.

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