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PUC, Utilities Wrangle Over Plan to Cut Power PG&E denies it proposed drastic reductions David Lazarus, Chronicle Staff Writer

Saturday, January 20, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/01/20/MN189639.DTL

State regulators accused California's two biggest utilities yesterday of hatching a plan to save money that would leave as many as 5 million consumers in the dark for hours at a time.

The Public Utilities Commission issued an emergency order preventing the cash-strapped utilities from cutting power to nearly half their customers as a way to save money.

The utilities denied that they had any intention of doing so.

Meanwhile, observers suggested that this was all an elaborate charade being played out by the utilities to secure more favorable terms for possible bankruptcy.

The strange spat came amid new developments in the state's deepening electricity crisis:

-- Standard & Poor's warned that California's credit rating could be downgraded because the state plans to spend $400 million to buy power for Pacific Gas and Electric Co. and Southern California Edison Co.

-- U.S. Energy Secretary Bill Richardson ordered generators to continue sending natural gas to California, where it is used to run power plants and heat homes.

-- The California Power Exchange, where wholesale electricity is bought and sold, said it would lay off 15 percent of its staff. It said the move was the beginning of an "orderly transition out of this market," signaling a further dismantling of the state's deregulation structure.

For its part, the PUC said it was forced to act yesterday because it had received reports that PG&E and Edison planned to offer customers only as much power as the two utilities could generate themselves -- about half the state's needs.

Such a move could leave as many as 5 million utility customers statewide in the dark for hours at a time.

"This information caused considerable confusion and apprehension regarding the continued supply of electrical service to California homes and businesses, " said Loretta Lynch, the PUC president.

But the heads of PG&E and Edison promptly issued statements saying that their companies had never made any such plans and that they were affronted by the PUC's action.

'INSULT' TO UTILITY WORKERS

"The commission's rhetoric today is an insult to the 19,000 men and women of PG&E who have worked tirelessly to minimize customer inconvenience this week," said Gordon Smith, the utility's chief executive officer.

Similarly, Edison CEO John Bryson called the PUC's emergency order "an insult to the ethic of the 13,000 employees of SCE who have worked to keep the lights on for their customers."

So what really happened?

The PUC's Lynch said three state power agencies -- the Energy Oversight Board, the Independent System Operator and the Department of Water Resources --

reported being told by the utilities that service cutbacks were in the cards.

She said the ISO subsequently said the utilities had backed off from the proposed move.

Nevertheless, the PUC was forced to act, Lynch said, "to assure the public that the utilities must serve all customers in the future."

She also said state law requires PG&E and Edison to continue providing power to customers even in the event of bankruptcy.

TIMING NOTED BY ANALYSTS

Analysts were struck by the timing of yesterday's events. They said that with both PG&E and Edison having defaulted this week on outstanding payments, it appeared that more was going on than met the eye.

"It seems very odd," said Paul Patterson, an energy industry analyst at Credit Suisse First Boston in New York. "At least one of these guys is almost certainly going to file Chapter 11 very soon."

"Everything that's been done has been a means of stepping up pressure to get the best possible deal," said Michael Worms, an analyst at Gerard Klauer Mattison in New York.

Other observers offered a more complex -- and highly speculative -- theory to explain what may have transpired over the past few days.

Bankruptcy experts said the utilities may have been trying to force the hand of state officials by intentionally provoking yesterday's emergency order.

In essence, the utilities may have been looking for a good excuse to declare bankruptcy -- an opportunity to tell shareholders and creditors that they had no choice but to file because of the state's actions.

PG&E and Edison have teetered for weeks on the brink of bankruptcy because of a combined $12 billion in debt accrued from sky-high wholesale electricity prices. The utilities say they need higher rates to get out of the hole.

A CASE FOR CHAPTER 11

"They may be hoping that if they have a good case to file for Chapter 11, the court may find there's a good reason to increase rates," said Jason Engel, a Los Angeles accountant specializing in corporate bankruptcies.

"They can say they were in a very tough position, and the judge may be sympathetic to that," he said.

Kenneth Klee, a law professor at the University of California at Los Angeles who also specializes in bankruptcy matters, agreed that the utilities' lawyers may have engineered this entire episode to lay the groundwork for more favorable bankruptcy terms.

"They're being advised by some of the best bankruptcy lawyers in the country," he said. "Don't sell them short.

"Everybody wants to be forced into bankruptcy," Klee added. "Nobody wants to take the blame."

He said he expects PG&E and Edison to declare bankruptcy at any time. "I'm amazed that they haven't already," Klee said.

But PG&E's Smith insisted that the PUC was tilting at windmills.

"At a time when we need real solutions to the state's energy crisis, the commission has wasted precious time chasing after a problem that did not exist, " he said.

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California Power Shuffle Energy officials in California remained on alert yesterday as they took stock of the state's power demand and supply a day after a Stage Three electricity alert was declared. Here is a look at how California's electricity distribution system is set up and what steps the regulatory body can take in times of extreme need.

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ISO Stats Volume: 164 billion kilowatt hours a year Size: 124,000 sq. miles, or 75 percent of state Day-by-day shortage: The ISO forecasts electricity usage throughout the state and monitors actual peak usage.

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Stages of emergency The stages of electrical power emergencies in California: Stage One: Declared when the state's operating reserves of energy dip below 7 percent. All power consumers are asked to conserve energy. Stage Two: Declared when operating reserves fall below 5 percent. Customers who have gotten lower rates for agreeing to go off-line when a power crunch hits are ordered to reduce or shut off their power. Stage Three: Declared when operating reserves fall below 1.5 percent. Rotating blackouts could result, with power to different areas temporarily cut off.

-------------------------------------------------------------------------------- Remedies for a Stage Three alert The ISO can order the state to conserve power during a Stage Three alert by:

Asking large facilities, such as a mine or water pump, to shut down for a day to lessen demand.

Depriving some areas of power in order to maintain others by initiating rotating blackouts or brownouts - temporary sags in power. Note: Because of the alert, preferred customers who have agreed to have their power shut off in the event of an emergency account for a savings of 1,000 megawatts which is included in the peak usage figures. Not included in the figures are another savings of 1,000 megawatts for calls for public conservation. Source: California Independent System Operator

http://www.sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2001/01/20/MN189639.DTL&type=printable

-- Martin Thompson (mthom1927@aol.com), January 20, 2001

Answers

For its part, the PUC said it was forced to act yesterday because it had received reports that PG&E and Edison planned to offer customers only as much power as the two utilities could generate themselves -- about half the state's needs.

If power wholesalers refuse to sell electricity to PG&E and Edison because of their bad credit, the two will have no choice but to offer customers only as much power as the two utilities can generate themselves. If you can't buy extra power on the market, you can't distribute it to customers!

PG&E had a contingency plan in case it had to rely only on the power it could generate itself.

In doomsday plan, lights would be off 12 hours a day

http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=004Rmk

-- The (blame@game.escalates), January 20, 2001.