Power Rescue Plan Rests on Many ‘Ifs’

The success of Gov. Gray Davis’ plan to end California’s energy crisis rides on assumptions that, if wrong, could lead to billions of dollars in runaway costs for taxpayers.

Davis, who signed a historic $13.4-billion bond measure Thursday to finance the plan, has refused to release key data and presented a single model for how California will buy electricity--and pay for it--over the next 15 years.

If Davis and his cadre of financial advisors are right, the state will emerge from the most ominous period of the crisis in less than two years, flush with cash and the prospect of electricity rate cuts. By then, the hope goes, the power suppliers Davis has vilified will be reined in.

If his predictions are off by modest margins, which even many state officials and energy experts say is likely, the state may have to employ tactical blackouts to control costs, siphon money that could be used for other services, go deeper in debt or raise electricity rates above the record increases of this year.

The governor’s plan largely rests on these crucial assumptions: that consumers will conserve a record amount of power at peak usage times, that energy prices will drop precipitously, and that the state will lock in far more contracts for long-term power. But those three assumptions could prove faulty, according to government financial records and interviews with state officials, Wall Street analysts and energy experts.

Davis is banking on that troika to quickly tame the wild prices of last-minute power--which hit an apparent record of $2,000 for a megawatt-hour Wednesday. Such purchases so far have put the state on the hook for $6 billion and pushed major utilities to the brink of ruin.

Davis’ plan assumes that the state will reduce peak demand by 2,484 megawatts--enough to supply nearly 2 million homes--through three programs run by the California Independent System Operator, which keeps power running to homes and businesses across the state.

But Cal-ISO managers say they will be lucky to achieve a fraction of that savings this summer.

They say that one of the programs listed in the governor’s plan was shelved because regulators had raised concerns about air pollution. Another, aimed at businesses, is likely to yield only about half of the 600 megawatts the governor has assumed will be saved when supplies are tight this summer, said Cal-ISO Project Manager Bill Wagner.

“There’s a lot of ‘ifs’ in there,” he said of the conservation program, which would pay businesses to cut back during critical hours. He said the utilities are months behind in installing meters to measure the savings.

Officials at another state agency in charge of a similar conservation program, the Public Utilities Commission, also said they are not sure about hitting targets on which the bond plan is based.

PUC Senior Analyst Robert Strauss said he has no idea how many businesses will agree to curtail electricity consumption in exchange for cheaper power rates this summer. The program is only a month old, he said.

“We’re in a new situation that we don’t have good experience with,” Strauss said. “Who’s going to sign up for these programs? We don’t really know.” Another program that Davis hopes will conserve 1,600 megawatts has attracted interest from just two businesses since March.

“It’s pretty ambitious to think we’re going to get 1,600 megawatts by June in that program,” said Cal-ISO’s Wagner.

Beyond Davis’ assumptions about conservation, the success of his hard-fought bond measure relies heavily on how much the state will pay for electricity during the next two summers. If the price is higher than forecast by Davis, the bond money could be consumed more quickly, potentially forcing the state to borrow more, dip into tax funds or raise customer rates again.

To keep prices down, the Davis administration has struggled to lock up in contracts most of the peak-hour power needed for the next two summers to avoid premium, eleventh-hour prices.

In his effort to push his bond legislation through the Capitol, he has suggested that about 50 such contracts will be signed to produce half of the peak demand the state needs. And that, his advisors say, doesn’t count other contracts they think will materialize.

So far, the administration has fallen far short, achieving final agreements on only 28 contracts as of Thursday.

If that gap persists, the state will probably be forced to buy electricity on the expensive spot market, which could eat into the bond money.

“I think the operative word is uncertainty,” said Paul Patterson, an energy analyst with Credit Suisse First Boston. “There are too many pieces, [and] all you need is for one or two of those not to work out substantially and things change.”

Patterson, who says he remains cautiously optimistic about the governor’s plan, was among a group of Wall Street analysts who were briefed last week by Davis’ top advisors.

Some wondered about who would provide the additional power that Davis had incorporated into his plan. Others questioned whether investors would buy the bonds with so many assumptions built into the measure.

During the briefing, the governor’s advisors said one option being considered is to refuse to pay the highest prices for power and “accept some sort of rolling blackout scenario.”

One of the governor’s chief energy consultants, Joseph Fichera, told the Wall Street analysts that if suppliers think they can profit by holding back power until the threshold of blackouts, the state may simply say no, leaving them with no sale.

Through calculations that include contracts and conservation, Davis’ advisors arrived at another assumption that has drawn skepticism. They insist that the purchase of any power not under contract will average just $195 per megawatt-hour this summer--helping slash overall power costs by hundreds of millions.

Critics say the California market is simply too volatile to forecast. Before Tuesday’s blackouts, for example, prices on the last-minute market had been below $800 for a megawatt-hour, a considerable amount. But not as much as it was Wednesday when the state paid Houston-based Reliant Energy $2,000, Davis said Thursday.

A report by Republican Assembly members concluded that if Davis’ assumption that non-contracted power will average $195 is off by just 10%, electricity would cost an additional $250 million by September. Over two years, those additional costs could soar to $1.1 billion, the GOP study found.

Democratic state Controller Kathleen Connell, whose staff has attempted to analyze the governor’s report, is warning that rising power costs could tear through the bond funds and possibly expose the state’s general fund.

Connell accused the governor of tailoring his assumptions and numbers to neatly fit his goal of assuring the public--and Wall Street--that an end to the crisis is near.

Fichera, who helped prepare the report, insists that the administration’s bond plan is conservative and presents the most reasonable scenario of the converging forces of conservation and prices.

Even if things do not fall into place, Fichera said, there is an extra $1 billion packaged into the measure, along with an expectation of billions more in later years to cover any shortfalls.

“Any realistic scenario,” Fichera said, “we believe we have the resources to cover.”

Fichera said he sees only a slim possibility that power costs in the next two years could outpace the available bond money, forcing the state to borrow more. He said such a loan could easily be paid back by the recent utility rate increases, which would cover both dropping costs of power and the bonds within the next three years.

Fichera declined to provide The Times with figures showing at what point higher power costs could consume the cushion he said is built into the governor’s plan. Public officials and newspapers, including The Times, have sued the administration for more details about the state’s power costs.

But Davis and his consultants say key financial information must be kept secret to prevent energy traders from gaining more leverage in the state’s power market.

But that confidence was tempered in a state document given to Wall Street analysts that recently accompanied an unrelated bond issue.

The document acknowledged that the assumptions underlying Davis’ financial plan to restore stability to the California electricity market were “subject to many uncertainties.” “There can be no assurance,” the document concluded, “that there will not be future disruptions in energy supplies or related developments which could adversely affect the state’s economy.”

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Making Assumptions

Gov. Gray Davis’ energy rescue plan, financed by a $13.4-billion bond measure he signed Thursday, rests on several questionable assumptions. Key among them:

CONSERVATION: California businesses and residents will cut more than 7,200 megawatts from peak demand this summer. That is about one-sixth of the height of demand on a hot August day.

PRICES: Conservation and new energy sources coming online soon will create downward pressure on California’s wholesale electricity market, causing the average prices the state pays for power to drop sharply.

CONTRACTS: The state will finalize about 50 long-term contracts for power that will cover the expected shortfall in electricity expected this summer during periods of the highest energy use. So far, the state has only 28 signed contracts.

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