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Lawsuit, supplies deepen crisis

By Dale Kasler and Stuart Leavenworth Bee Staff Writers

(Published Feb. 14, 2001) California's energy crisis intensified anew Tuesday as a major electricity supplier sued the state, three others threatened to haul the beleaguered utilities into bankruptcy and the electricity grid came perilously close to more rolling blackouts.

As California's energy problems worsened, Duke Energy Corp. sued the state Department of Water Resources and the ISO, saying it is being ordered to sell electricity without assurance of payment.

At the same time, Pacific Gas and Electric Co. disclosed it is burning natural gas at alarmingly high rates and its reserves are running low.

A day after a federal judge gave top state officials a breather of sorts -- by refusing to grant immediate rate hikes to Southern California Edison -- a rash of developments sent California's energy market into further disarray.

With the state in its 29th straight day of Stage 3 power alerts, the Independent System Operator on Tuesday began preparing utilities for the first rolling blackouts since Jan. 18, citing unexpected plant shutdowns and a run-up in demand.

Tuesday's developments Governor hopes to have debt-relief plan for utilities by Friday, says it will be a "buyout" not a "bailout."

Duke Energy sues state, saying it is being ordered to sell electricity without the assurance it will be paid.

PG&E warns that natural gas reserves are running low.

Officials from California's three college systems seek state money to pay higher energy prices.

Blackouts were averted -- barely. The ISO, the venue for buying and selling wholesale power, secured several thousand emergency megawatts from the Pacific Northwest and had PG&E and Edison get voluntary shutdowns from industrial customers on so-called "interruptible" contracts, easing the strain on the electric grid.

Some PG&E customers agreed to the shutdowns even though they were no longer obligated under their contracts to have their power cut off, said spokesman Jon Tremayne. Among them: the J.R. Simplot Co. fertilizer plant in the San Joaquin County town of Lathrop.

ISO officials say the risk of blackouts should diminish later this week as temperatures rise and power demands ease. Also, Duke Energy's 750-megawatt Moss Landing 6 plant was expected to start generating electricity again early today after a three-month shutdown.

But the supply situation could change by the hour, especially if the cold weather sticks around and customers continue to crank up electric heaters.

Meanwhile, PG&E spokeswoman Staci Homrig said the cold weather -- coupled with the refusal of one of the utility's biggest vendors to deliver natural gas supplies -- leaves PG&E with an increasingly dangerous natural gas shortage.

"At the rate we're going, we're facing the depletion of reserves by the end of February," Homrig said.

With the reserves gone, the utility would be forced to scrounge for whatever it can, day to day, to meet demand.

Reserves could last into early March, however, if the weather warms as expected, Homrig said.

PG&E persuaded most of its gas vendors to keep supplies flowing, although many are selling at high prices on the daily spot market, she said. Those spot purchases likely will translate into continued high fuel bills for customers.

Despite PG&E's credit problems, the vendors are still shipping supplies because of an agreement by state regulators that segregates customer payments for gas purchases to guarantee that vendors will get paid.

Not all the players are cooperating. The cutoff last week by a major supplier, the Goldman Sachs Inc. subsidiary J. Aron & Co., leaves PG&E about 10 percent short of what it needs, Homrig said. At the same time, the utility is using about 50 percent more gas than usual, she said.

If PG&E actually ran out of gas, it would be forced under state law to first cut deliveries to large industrial users, including the gas-fired electricity generators. Then, under a "doomsday scenario" that it has outlined for state regulators, PG&E would begin shutting off gas service to some of its 3.9 million residential and small-business customers.

Also Tuesday, Edison continued to wrestle with U.S. District Court Judge Ronald Lew's refusal to grant the Southern California utility immediate rate hikes to cover the cost of billions of dollars it owes for wholesale power purchases. Edison and PG&E have been pushed to the brink of bankruptcy because they say they've been unable to recoup from ratepayers more than $12 billion worth of wholesale purchases.

The judge's decision could substantially alter the terms of a rescue package being negotiated by the utilities, legislative leaders and Gov. Gray Davis. State officials are demanding that the utilities sell to the state assets such as transmission lines in exchange for state assistance; the utilities are resistant.

State lawmakers Tuesday fine-tuned a bill authorizing Davis to negotiate the purchase of the grid.

While the bill previously would have charged a new public authority with pursuing the transmission deal, the amended version approved by the Senate Energy Committee gives the bargaining reins to the governor. Any potential deal still requires legislative approval.

Senate President Pro Tem John Burton last week proposed that the state purchase 32,300 miles worth of transmission lines from three private utilities, thereby helping them remain solvent and leading the way for a state-owned power grid.

That proposal outlined funding mechanisms and the creation of a new transmission authority. But in order to move quickly and calm fears that the authority would act without oversight, lawmakers streamlined the bill, said David Sebeck, Burton's press secretary.

It now serves as more of a legislative vote of confidence in the transmission line idea.

Also, the Senate Energy Committee approved a bill creating a public power authority that would pursue new power generation and conservation programs.

With Judge Lew putting off Edison's claim for immediate rate relief until March at the earliest, "the utilities lost whatever bargaining leverage they might have had," said investment analyst Ed Schuller of Sutro & Co. in San Francisco. "Now they're completely dependent on the Legislature."

PG&E has a similar case pending.

Davis spokesman Steve Maviglio said most creditors are "being patient" as state officials and the utilities' work on a solution.

But some wholesale generators began turning up the heat in an effort to secure payment for billions in uncollected bills.

"Everybody's patience gets thinner as we move forward each week," said Ted Craver, Edison's treasurer.

Duke Energy's lawsuit against the state Department of Water Resources was one more sign of increasing tension in the crisis. The lawsuit is the latest flare-up in a dispute between state officials and the generators over the water department's purchases.

The department is buying roughly $40 million worth of electricity a day on behalf of the two nearly broke utilities.

Those purchases don't cover all of the state's needs, however. The ISO routinely makes last-minute purchases to balance supply and demand, and under its rules, it can order wholesale generators like Duke to deliver the power within minutes.

The water department has decided not to pay for some of those purchases if it deems the prices too high. The shortfall has left the ISO on the hook financially for those purchases, angering wholesale generators who are still waiting to be paid by the ISO for previous purchases.

In its lawsuit, Duke wants the water department to pay for the ISO's last-minute purchases.

The water agency "has refused to step into the shoes of the utilities with respect to energy that the Cal ISO orders supplied for the benefit of the utilities' customers," said the lawsuit, filed in U.S. District Court in Los Angeles. "As a result, Duke Energy continues to supply energy under orders of the Cal ISO with little or no prospect of being paid."

Duke is the fourth wholesaler to tangle with state officials in court over the issue of mandatory sales to the ISO.

The ISO launched a pre-emptive strike last week, obtaining temporary orders in U.S. District Court in Sacramento forcing the continuation of power deliveries from four wholesalers that had balked at selling to the ISO: Reliant Energy Inc., Dynegy Inc., AES Pacific and Williams.

Several wholesalers, in a pre-emptive move of their own, reintroduced the specter of the utilities' involuntary bankruptcy. Reliant, Dynegy and fellow wholesaler Mirant Corp. are prepared to haul PG&E and Edison into bankruptcy if need be, said Mirant's chief financial officer, Raymond Hill.

Mirant, Reliant and Dynegy have formed a "creditors committee" -- a term usually used in bankruptcy proceedings to describe an alliance of creditors -- to pressure state officials to find a solution to the crisis.

Mirant considers bankruptcy "a last resort," said a spokeswoman, adding that the company is increasingly impatient.

Bee staff writer Kevin Yamamura contributed to this report.

-- Martin Thompson (, February 14, 2001

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