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Handling of Power Crisis Under Fire Dec 27 7:48pm ET

By Nigel Hunt

LOS ANGELES (Reuters) - Federal energy regulators faced a barrage of criticism on Wednesday for not more firmly regulating electricity prices in California and allowing the state's power crisis to take utilities to the brink of bankruptcy.

Meanwhile, a federal court ordered the Federal Energy Regulatory Commission (FERC) to respond within a week to a legal challenge from Southern California Edison seeking a return to a form of price controls.

In a sign of the financial toll from the state's skyrocketing wholesale power prices, Southern California Edison also said it has been shut out of the market for bank loans and short-term debt.

Concerns about the financial standing of the utilities have also hurt their ability to buy power, and U.S. Energy Secretary Bill Richardson extended for the second time a rarely used order mandating electricity generators to sell them power.

"I remain concerned that the reliability of the grid in California may be endangered," Richardson said in a statement extending emergency decree, which would have expired on Wednesday, until January 5. "Electricity generators and marketers continue to express reluctance to sell power in the state," Richardson noted.

California Gov. Gray Davis, who met with President Clinton earlier on Wednesday, had lobbied for the extension, saying FERC had erred in lifting wholesale price caps earlier this month.

"I think they miscalculated because they thought raising the price would assure California had plenty of power but four days after they raised the price thirteen generators withheld any power saying we don't think the utilities have enough money left to pay us," Davis told CNN in an interview. "Clearly the theory under which the price cap was lifted didn't work."

SHUT OUT OF MARKETS

Southern California Edison, a unit of Edison International , said in a regulatory filing it has been unable to syndicate a $1 billion revolving credit line and cannot sell commercial paper and other short-term debt securities.

The utility also filed a lawsuit against FERC seeking a return to cost-based wholesale power prices. On Wednesday, the clerk of the Court of Appeals in Washington D.C. ordered FERC to file a response by January 2.

Pacific Gas & Electric said it is preparing a similar suit.

California utilities have run up billions of dollars in power purchase costs this year which they have been unable to pass on to customers due to a rate freeze.

At the end of November the shortfall stood at $7.7 billion, comprising $3.2 billion for Southern California Edison and $4.5 billion for Pacific Gas and Electric, a unit of PG&E Corp .

Wholesale power prices have soared to record levels in California this year amid accusations that a chronic shortage of electricity has led to "price gouging" by power producers.

Federal regulators have refused to order refunds from power generators despite admitting prices were not "just and reasonable" as required by U.S. law.

Calif. Gov. Davis has accused power generators of charging 800 percent to 900 percent above their costs, forcing utilities to pay far more than they can recover under a retail price freeze imposed under the 1996 legislation which deregulated power markets in the state.

On Wednesday, California regulators held the first public hearings on lifting that retail price freeze. Southern California Edison is seeking a 30 percent rate hike and Pacific Gas and Electric an initial 26 percent rise.

Loretta Lynch, president of the California Public Utilities Commission (CPUC), said inaction by federal regulators had contributed to sending the California power market spinning out of control.

And CPUC commissioner Carl Wood told the hearings in San Francisco that FERC is telling California its economy can "go down the toilet."

The hearings are scheduled to continue on Thursday and could be extended into next week ahead of a January 4 commission meeting that will decide on rate hikes.

CHALLENGE FROM POWER EXCHANGE

A FERC order issued on December 15 aimed at controlling electric prices in the state also came under fire from the power exchange created by deregulation.

The Pasadena-based California Power Exchange (CalPX) asked federal regulators to reconsider a potentially crippling price cap which it said would drive business elsewhere.

FERC imposed a $150.00 per megawatt hour "soft" price cap for CalPX, effective January 1. The cap does not apply to rival exchanges such as the Automated Power Exchange.

"If you put an anchor around our neck how are we going to swim. We are not going to swim, we are going to sink. We are just seeking fair treatment," said CalPX spokesman Jesus Arredondo.

Many sellers may quit CalPX in a bid to avoid the new price cap, threatening the exchange's viability, industry sources said.

Wholesale power prices in California started to soar in late spring with with surging demand linked to a buoyant economy.

California's power problems are also rooted in the lack of any new power plant construction during the last decade, partly due to uncertainty connected with the deregulation of the state's electricity industry.

http://www.siliconinvestor.com/headlines/financial/20001227/269383.html

-- Martin Thompson (mthom1927@aol.com), December 27, 2000