Message-ID: <17532600.1075851604125.JavaMail.evans@thyme> Date: Tue, 17 Jul 2001 12:03:00 -0700 (PDT) From: bandrews@quinngillespie.com To: enron@lists.qgadc.com Subject: Front Page WSJ Article Cc: enron@quinngillespie.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: enron@quinngillespie.com X-From: Bruce Andrews X-To: enron X-cc: ENRON X-bcc: X-Folder: \Dasovich, Jeff (Non-Privileged)\Dasovich, Jeff\Deleted Items X-Origin: DASOVICH-J X-FileName: Dasovich, Jeff (Non-Privileged).pst I suspect everyone has seen today's front page WSJ, but in case you have not . . . Hurt by Deregulation of Utilities, California Gives Itself Lead Role By REBECCA SMITH and JOHN R. EMSHWILLER Staff Reporters of THE WALL STREET JOURNAL SACRAMENTO, Calif. -- In a video made for a political roast, Gov. Gray Davis, mimicking the Mafia boss in "The Sopranos," complains to his therapist about Texas bad guys pushing electricity prices sky high. He vows to get tough. Soon, a Davis confederate ushers four men in 10-gallon hats into an office, shots ring out, and the aide, emerging blood-spattered, delivers the punch-line: "Tell the governor his Reliant problem is solved." While Gov. Davis hasn't gone that far in his fight with suppliers such as Houston-based Reliant Energy Inc., he is in other ways trying to blast his way out of the crisis. His moves are coming in rapid succession after months of criticism of the governor for inaction, and they are fast reshaping the state's electricity system. With the acquiescence of other state leaders, Gov. Davis has put California on the road to creating what amounts to a mammoth state-owned electric utility, answerable largely to the governor. Moreover, though designed to solve a short-term emergency, the governor's policies are loading consumers with obligations that could affect the economy of the most-populous state for 15 to 20 years. His actions in some ways hark back to the system of central control that preceded the disastrous 1996 foray into utility deregulation. But they aren't simply a return to the days of monopoly utilities strictly regulated by the state's Public Utilities Commission. What is emerging now is a California power colossus that operates in important ways beyond the reach of regulators or the public. Mr. Davis says his actions will ensure that Californians have a secure supply of reasonably priced electricity. "This is not a power grab," the Democratic governor says in an interview. "I had no desire to intervene. I would get out tomorrow if you would let me out. This is my least-favorite thing to do." 'Colossal Failure' Yet in the past six months, pushed by what he calls the "colossal failure" of a deregulation plan hatched under his Republican predecessor, the governor has put the state deep into the power business. In January, Mr. Davis ordered the state Department of Water Resources to begin buying power in place of California's cash-strapped utilities. Since then, the state has purchased or committed to purchase $45 billion to $50 billion of electricity, with some contracts as long as 20 years. The governor has in effect seized control of the state's electricity-grid operator, the California Independent System Operator, installing his hand-picked team as board members. As its name implies, the ISO was supposed to manage the grid without favoring any one participant. Mr. Davis also is pushing to have the state buy huge chunks of the transmission system that are owned by the financially beleaguered utilities. He recently signed into law a bill that creates a state power authority, whose director will be appointed by the governor. This agency, which so far exists just on paper, could be used to build power plants and help run a state-owned transmission system. Mr. Davis says that the authority is part of what he sees as a "hybrid" system where public power plays an important role augmenting private enterprise in the electricity business. Reviving the Utilities Having healthy utilities is extremely important, says the governor. He adds that he has been working hard to revive the state's two biggest utilities, the Pacific Gas & Electric Co. unit of PG&E Corp. and the Southern California Edison Co. subsidiary of Edison International. But as the state's role in the electricity business has grown, the utilities don't seem as essential as they once did. This is one reason the governor has had difficulty getting a rescue package for Edison through the state legislature. The plan, among other things, calls for the state to buy Edison's transmission system for $2.76 billion and envisions the utility eventually resuming some power-buying chores. Talks over a similar rescue package for Pacific Gas failed and that utility filed for bankruptcy-law protection. With the state locking up so much of California's future power needs, legislators openly wonder whether utility-rescue efforts are worth the billions of dollars they would require. In 2003, for instance, long-term contracts will cover 90% of the state's projected buying needs. "What does it mean for Edison to take over the role [of buying power] if the state already has signed all these contracts?" asks State Sen. Debra Bowen, a Democrat who heads the senate's energy committee. Nonetheless, the governor says he is "cautiously optimistic" the legislature soon will approve an Edison rescue package. Mr. Davis has been deeply enmeshed in almost every aspect of the electricity mess this year, after having once been relatively aloof from the burgeoning crisis. The state's utility-deregulation law, which was enacted in 1996, worked fairly well until May of last year. Under the deregulation plan, the state's investor-owned utilities sold off many of their power plants to other companies and repurchased that electricity through a state-sponsored auction. Consumer rates were frozen and customers were given the option to buy electricity from nonutility retail suppliers. But tight electricity supplies and a flawed auction system led to a sharp rise in wholesale power costs. With retail rates frozen, Pacific Gas and Edison racked up multibillion-dollar deficits. In January, Mr. Davis declared an emergency and put the state into the power-buying business. Since then, he hasn't been bashful about exercising his emergency powers. When Mr. Davis couldn't get legislative permission to borrow money short-term for power purchases, he signed an executive order authorizing the state to borrow up to $5 billion from commercial lenders. That borrowing is supposed to be repaid from a roughly $13 billion municipal-bond issue, the biggest in U.S. history, scheduled for later this year. In another executive order, the governor suspended emission standards for power plants to let them run more hours during the peak-demand periods. And the state has hired a small army of energy consultants and traders. Despite such actions, some think Mr. Davis isn't being forceful enough. For example, the state senate last week passed a resolution supporting the governor's power to "commandeer power plants" if he deems such a step to be necessary. Mr. Davis has said he doesn't have any plans currently to take such an action. 'Crisis of Governance' The electricity mess has produced "the most extraordinary crisis of governance we've had in California in the postwar period," says Bruce Cain, director of the Institute of Governmental Studies at the University of California at Berkeley. Mr. Cain says more power has been placed in the governor's hands and, as a result, the state has "gotten away from the separation of powers and the checks and balances that we expect in American government." Mr. Davis says his actions have been essential and are working. He credits the long-term power contracts with helping to cool the spot market for electricity, where prices in recent weeks have dropped sharply. In June, the state paid an average price of $167 a megawatt hour for electricity. That was down from $243 in May, though still far above the $25-to-$27 range of two years ago. But some worry about how this rush to address a short-term problem will affect the longer-term future. An economic forecast issued late last month warned that continued heavy state involvement and spending in the electricity business could produce enough of a drag on the California economy to reduce state output by a total of $90 billion by 2005 and lead to higher unemployment. "California is at a crossroads" between what amounts to a "state takeover of the electricity industry" and a more market-oriented approach to fixing the problem, says the joint study by the Anderson business school at the University of California, Los Angeles, and Cambridge Energy Research Associates. Under a law enacted in February, none of the tens of billions of dollars of state electricity purchases or related costs can be challenged as imprudent by the Public Utilities Commission. That's an immunity that regulated utilities in the old regime could only dream of. Then, if they spent too much, the PUC could make their shareholders take a hit. Under the new system, any purchasing missteps the state makes will be borne by consumers. "It scares the hell out of me," says Henry Duque, a Republican PUC member appointed by former Gov. Pete Wilson. "The state is so busy looking after its own interests. ... Who's looking out for the ratepayer?" PUC President Loretta Lynch, a Davis appointee, acknowledges that the commission's authority has been seriously eroded. Under the new law, the commission is supposed to charge consumers for whatever sum the Water Resources Department spends on energy. She hopes to hold hearings to review the spending "even if we can't do much about the result." Gov. Davis says concern about less oversight of power purchases is a "bogus" issue. "It is not as if a private company or utility was making the decisions. The PUC doesn't need to second-guess the decisions of a public body," he says. But other state moves suggest there's a role for oversight. The state is only now doing a conflict-of-interest inquiry after several of its new energy hires filled out disclosure forms that showed they held stock in big power suppliers to the state. The governor's press secretary, Steve Maviglio, says he doesn't know whether they were asked about their holdings before being hired. He says the state will take "appropriate action" where conflicts of interest are found. The rush to beef up an outgunned state energy team may have contributed to the hiring problem. Early on, "we had two or three people sitting around and dealing with" big and savvy electricity suppliers, says Mr. Davis, almost like a "tee-ball team playing the New York Yankees." The state has since hastily assembled a group of about 20 energy traders, headed by a 30-year-old manager with one year of experience in the energy business. The manager, Susan Lee, has held four jobs in the past four years and is getting paid up to $480,000 over two years for her services. Ms. Lee declines to comment. Good Enough Even so, Mr. Davis argues, state negotiators did well enough. They managed to help lower current power costs, he notes, although that required signing deals that could force the state to "pay a little more" than it otherwise would have in the years ahead. "I think Californians are willing to accept that bargain," he says. Still, he and some other state leaders are urging the PUC to revoke a fundamental tenet of deregulation: the right of consumers to shop around for low-cost electricity. Removing this option is essential to prevent a "jail break" of customers seeking prices lower than what the state must charge, says Carl Wood, one of Mr. Davis's three Democratic appointees to the five-member PUC. A flight of customers could leave too few to pay for state-purchased power and repay the planned bonds. The PUC is scheduled to vote in August on the request to revoke consumer choice. Some users are concerned about being stuck with what amounts to a state monopoly. "We don't want to lose our options" to shop for lower-cost electricity, says Shawn Covell, a senior manager at Qualcomm Inc., the telephone-equipment maker. Earlier this year, Qualcomm signed an agreement to buy power from an alternative supplier, the kind of move state officials seek to ban. While consumer choice is in doubt, public disclosure has already been lessened in some ways. For months, the state refused to divulge terms of power deals it was signing, saying that doing so would harm negotiations on additional contracts. It finally made public the long-term contracts this month after a lawsuit by a group of newspapers, including The Wall Street Journal. Details of short-term power purchases were disclosed for the first time on July 9. They showed the state spent nearly $8 billion on spot-market purchases in the first five months of 2001, exceeding its projections. Some Davis allies are troubled. "Decisions are being made, with almost no public discussion, that foreclose other options," says Ms. Bowen, the state senator, who is close enough to the governor that she played his therapist in the "Sopranos" skit. While Sen. Bowen says the governor needed to act forcefully, she is troubled that so much power has been bought at what she fears will prove to be extremely high prices in the years ahead. Still, she voted for the bill that gave the executive branch carte blanche to make those huge commitments. The right to go to court also has been limited. Under a law soon to take effect, challenges to certain aspects of the planned $13 billion bond issue can be taken only to the state Supreme Court. That panel has accepted only two utility-related cases over the past decade. Backers of the measure say it gives adequate opportunity for review without unduly slowing the bond offering. 'One Voice' The state's enlarged role in the utility business was on display when negotiators convened recently at the Federal Energy Regulatory Commission in Washington to discuss alleged supplier overcharges. California's major utilities played only a secondary role, even though they paid much of the purported overcharges and ran up giant deficits in doing so. The governor had named one of his advisers, Michael Kahn, as head of the 20-person state delegation, and Mr. Kahn says the delegation "spoke with one voice -- mine." Mr. Kahn told FERC that California was owed $8.9 billion in refunds. Others, including the FERC administrative-law judge overseeing the talks, said the number was probably much lower. The state wouldn't budge, and the talks ended without an agreement. Last week the judge recommended that a "trial-like" proceeding be held to sort out who owes what to whom. Mr. Davis says the state will go to an actual court if it doesn't get all the money it is seeking through the FERC proceedings. And he vows to do whatever else is necessary to get California through the electricity crisis. "I have no desire to subsume the legitimate role of the private sector," he says. But, he adds, Californians got such a "raw deal" from the deregulation mess that "I have had to had take a very militant, hard-line view." Write to Rebecca Smith at rebecca.smith@wsj.com and John R. Emshwiller at john.emshwiller@wsj.com