Message-ID: <28129995.1075848154035.JavaMail.evans@thyme> Date: Sat, 24 Mar 2001 04:57:00 -0800 (PST) From: jeff.dasovich@enron.com To: karen.denne@enron.com, james.steffes@enron.com, skean@enron.com, mpalmer@enron.com, joe.hartsoe@enron.com, linda.robertson@enron.com, sarah.novosel@enron.com, alan.comnes@enron.com, susan.mara@enron.com, sandra.mccubbin@enron.com, paul.kaufman@enron.com, tom.briggs@enron.com, janel.guerrero@enron.com Subject: SIGNIFICANT DEVELOPMENTS; Davis Staff Admit that DWR Costs for Purchases Is Staggering and Rates Must Increase Dramatically; PG&E says it will sue over QF payment plan; Mike Kahn Takes Pot Shots in Editorial Defending Davis/Lynch Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Jeff Dasovich X-To: Karen Denne, James D Steffes, skean@enron.com, mpalmer@enron.com, Joe Hartsoe, Linda Robertson, Sarah Novosel, Alan Comnes, Susan J Mara, Sandra McCubbin, Paul Kaufman, Tom Briggs, Janel Guerrero X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf Please see the following important stories. It appears to be quickly slipping through Davis' fingers. May be useful to re-group a bit in light of the following events. In sum: Most importantly, in today's Chronicle, it's reported that Davis' staff met with key Democrats yesterday and lowered the boom. DWR purchases likely to be about $25 billion and rates may have to go up by 100%. (See attached story.) Apparently, one of the big reasons that 8X got held up yesterday is because Davis' own staff went to D leadership and said, "don't move 8X (a bill that Davis was said to support) because the $10 billion cap on bonds won't work; they need much more." It appears that rate increases will now become part of the mix, whether Davis likes it or not. The staff alleged that they were conveying the information before Davis had been informed of the "bombshell." Davis was criticized for being at yet another fund-raiser yesterday while the situation significantly deteroriated in Sacramento. (See attached story.) Meanwhile, PG&E has sued--or may be about to sue--the State, saying they won't pay the QFs according to Davis' plan (which the PUC is supposed to implement on Tuesday). (See attached PG&E press release.) Finally, Mike Kahn has issued an opinion piece in yesterday's Chronicle, in which he attempts to lump together into one pile Republicans, market proponents, price gougers and Texans, and defending Davis and Lynch. ****************************************************************************** *********************************************************************** Davis' Measured Plan To Fight the Darkness Michael Kahn Friday, March 23, 2001 ,2001 San Francisco Chronicle URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/23/E D103778.DTL COMMENTS on Gov. Gray Davis' energy programs by apologists for former Gov. Pete Wilson bring to mind Robert Kennedy's admonition that it is better to light a candle than curse the darkness. Let's examine the darkness created by Wilson's energy deregulation scheme. The 1996 law he signed could not have been more wrong headed. -- Why did it hand energy price control over to the Federal Energy Regulatory Commission? -- Why did it free wholesale prices, while capping the price utilities could charge customers? -- Why did the former state Public Utilities Commission force utilities to sell off their fossil fuel power plants, leaving them vulnerable to predatory pricing by out-of-state merchant generators? -- Why did the Wilson-era PUC bar utilities from entering into contracts to ensure a long-term supply of cheap electricity? -- Most pointedly, why did California enter into deregulation without enough available generation to ensure a fair market based on balanced supply and demand? These are tough questions. It is not hard to understand why former proponents of the 1996 deregulation scheme would rather not answer them, preferring to bemoan the darkness and curse Davis' actions. The Wilson apologists jeer at plans for the state to purchase the power grid, though they surely know the value of a well-maintained, fully functioning electric transmission network. Bottlenecks in the grid impede the sharing of power between Northern and Southern California. This was a main reason Northern California experienced rolling blackouts in January while Southern California had plenty of power. The state's purchase of the grid will infuse new cash into the utilities, pulling them back from the brink of bankruptcy, while giving the state a tangible and valuable asset in exchange. And ownership of the grid will allow the state to modernize it, removing bottlenecks and upgrading technology - something the utilities have long failed at doing. The apologists ignore the state's strong record on energy conservation and Davis' actions to enhance these efforts. California now has the nation's second-best energy conservation record. The governor has budgeted $404 million in new conservation measures and added an executive order offering 20 percent rebates to those who reduce their consumption 20 percent over last year. These measures will reduce commercial lighting, encourage residential and industrial efficiency and make state and commercial buildings more energy efficient. The apologists disregard the fact that the governor has also reversed a trend that had seen power plant construction in California drop to insignificance in the '80s and '90s. Since April 1999, the California Energy Commission has licensed nine major new power plants. Six are under construction. This is part of a streamlined, fast-track plant licensing process that aims to put an additional 20,000 megawatts on line by the summer of 2004, a nearly 50 percent increase in generation. And the apologists refuse to recognize that California is building the right sort of power plants - efficient, clean and environmentally friendly, with a strong bent toward renewable power sources. In fact, while some would go Texas' route and build plants that meet only the bare minimum of environmental requirements, California is continuing the effort that has made it the nation's leader in the use of clean, renewable power sources. Instead, the apologists engage in name calling, such as the charge leveled by former Wilson communications director Dan Schnur on this page that Loretta Lynch, the Davis appointee as PUC chair, is inexperienced and has failed to deal effectively with the energy emergency. Forget for a moment that of the 22 people who have served as PUC commissioners since 1980, only six had any energy expertise before their appointments. Forget for a moment that one of the principal architects of deregulation was Daniel Fessler, the UC Davis contract law professor with no special expertise in energy issues whom Gov. Wilson appointed as PUC president. Just consider this: It was the PUC under Lynch that freed the utilities to buy electricity on cheaper, forward contracts outside the Power Exchange. This corrected a huge Wilson-era PUC blunder that put utilities in an energy price straitjacket. The Lynch-led PUC also prohibited utilities from selling additional power plants, and it began the successful effort to make California's ISO (the Independent System Operator that runs the state's power grid) independent of the industry-connected officials who controlled it. Meanwhile, what sort of grand solutions have the apologists presented? Drill for oil in the Arctic National Wildlife Refuge in Alaska, build nuclear plants on closed military bases and encourage the construction of dirty Texas- style power plants in California. Drilling in the Arctic will not produce a watt of new power for California. Californians have long said they do not want the risks presented by new nuclear plants. And lax Texas pollution rules prompted the Dallas Morning News to charge in a Dec. 17 editorial that Texans are choking on the exhaust from power plants. Most disingenuously, the apologists would "let the market work," claiming that unfettered market forces will soon bring fair and balanced prices. But the market doesn't work now, as the Federal Energy Regulatory Commission has repeatedly admitted, most recently with its finding that generators overcharged the state in January. Unfortunately, for the most part the same commission had refused to clamp down on sky-high prices charged by generating companies. Look at New York's deregulated market, where there are no caps on retail electric prices. Market forces have done consumers there little good. New Yorkers pay the highest prices for electricity in the country. And the New York Times has reported that rates paid by consumers have increased a whopping 40 percent just since 1999. Those who would allow the market to work (let the darkness reign) know well that if the market "works" to produce New York-style rate increases in California, the consequences to the public would be dire. Compare this to Gov. Davis' well-structured plan for effective energy conservation and stabilization of the state's electricity market and his expedited program to bring clean, efficient new power plants on line quickly. Robert Kennedy would understand Gov. Davis' approach and his critics' perspective. Michael Kahn is a member of the state Independent System Operator's board of governors. ,2001 San Francisco Chronicle ? Page?A - 25 Bombshell Warning on Power Cost Spending may double and rates skyrocket, governor's office tells Legislature Greg Lucas, Lynda Gledhill, Robert Salladay, Chronicle Sacramento Bureau Saturday, March 24, 2001 ,2001 San Francisco Chronicle URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/24/M N176940.DTL Top Davis administration officials told lawmakers yesterday that the state may have to spend twice as much as expected on electricity purchases over the next two years - requiring rate increases of as much as 100 percent. The stunning admission by the Davis administration contradicts his repeated promises that his plan to ease California's energy woes could be done without a rate increase. California will probably need to issue $23 billion in bonds for electricity buys, more than double the amount Davis said would be needed by the state to keep electricity flowing until California's cash-poor utilities can get back on their feet. Administration officials told lawmakers to stop action on a bill that would have capped the state's energy purchases at $10 billion. But a Davis spokesman said the numbers were far from firm. "There are a lot of scenarios being run . . . and until we complete the negotiations, this can be added up any way you want," said Steve Maviglio, press secretary to Davis. "Those numbers are not based on any reality right now," he said. "There are too many things up in the air." Assembly Democrats told a different story. They said Tim Gage, director of Davis' Department of Finance, Cabinet Secretary Susan Kennedy and John Stevens, Davis' top energy aide, met with Assembly Democratic leaders and dropped the bombshell. And they did so just as those same leaders were trying to convince fellow lawmakers how important the bill was to the Davis administration. They also said that Davis, who was in the Palm Springs area for most of the day and briefly attended a fund-raiser at a golf club, was unaware of the figures. PURCHASES IN BILLIONS The three top aides said that electricity purchases for this year by the state would be $16 billion, not the $10 billion initially predicted. An additional $7 billion in state power purchases would be needed next year, they said. The state has been buying power at a clip of $45 million a day since Jan. 17 because the troubled utilities could no longer afford to make the purchases. From the start of the energy crisis, the state has planned to repay its power purchases through bond sales. The bonds would be paid off by a portion of the amount ratepayers are charged on their monthly bills. Davis has so far insisted that enough money could be found to cover the $10 billion without raising rates. But his aides said if the size of the bonds ballooned to $23 billion, a hefty rate increase would be necessary. INCREASE UPON INCREASE The Public Utilities Commission is already planning to make permanent a temporary 9 percent increase. An additional automatic 10 percent is scheduled for no later than March 2002. But the aides said, on top of that, an additional 60 percent to 80 percent increase would be required to cover the debt service. "For some time, I have believed a fundamental part of solving this problem is admitting there needs to be a rate increase, and the numbers that have been shared today make that inevitable, and we should start dealing with the reality as soon as possible," said Assemblyman Fred Keeley, D-Boulder Creek (Santa Cruz County). One consumer advocate said the revelation means the utilities are closer to bankruptcy because the state and ratepayers won't have the cash to bail them out. And it could mean political trouble for Davis. "Unless the governor issues an ultimatum to lower the prices, everybody's bill will double, and he will not be able to run for re-election in 2002," said Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights. PG&E THREATENS SUIT The news came as Pacific Gas and Electric Co. threatened to take the state to court over Davis' plan to force the company to pay back certain creditors. Davis' proposal would require the utilities to pay alternative power generators for all the power that they supply, something PG&E said it cannot afford to do. Several of the generators shut down earlier this week as rolling blackouts spread across the state. The bill stalled yesterday in the Assembly as Republicans objected. Lawmakers will resume debate Monday. Earlier in the week, Davis announced that action would be taken by the Legislature and the Public Utilities Commission that would guarantee payment to the alternative energy providers. He also said the state -- which has spent $3.7 billion to purchase power -- should be paid back first. Without that promise, several of the small biomass, solar and wind producing plants -- called qualified facilities -- said they would have taken Southern California Edison Co. into bankruptcy court. The alternative generators provide enough electricity to power roughly 6 million homes. PG&E said it cannot afford to pay the alternative producers and reimburse the state for the billions it has spent purchasing power. "These actions approach the problem in a piecemeal and uncoordinated fashion and would force us to pay out far more than we collect in rates, further exacerbating an already precarious financial situation," Gordon Smith, PG&E's president and chief executive officer, said in a statement. DIFFERING VIEWS ON COSTS According to PG&E's numbers, the company collects $400 million a month in rates. It says the average price to pay all the generation sources exceeds $1. 4 billion a month. But consumer advocate Nettie Hoge said the utilities are exaggerating their own costs in order to try to keep as much money as possible. "It's just absurd," said Hoge, the head of The Utility Reform Network. "They have a temper tantrum every time something doesn't go their way." The bill PG&E objected to is necessary to allow the PUC to order utilities to pay small power generators who agree to sign lower-priced contracts to provide energy. The proposal offers generators a choice of agreeing to a five-year contract at $79 per megawatt or a 10-year deal at $69 per megawatt, Davis said. The going rate now is about $150 a megawatt. The PUC wants to act as early as Tuesday to bring some financial relief to the generators, who have been paid pennies on the dollar. Assembly Republicans objected to the bill in part because it would allow the PUC to change the formula for setting the price paid alternative producers so that it no longer considered the price of natural gas. Co-generators -- some of the largest of which are operated by oil refineries -- say without the price of natural gas as a consideration, it would cost them more to produce energy than what they would be paid for it. E-mail Lynda Gledhill at lgledhill@sfchronicle.com. ,2001 San Francisco Chronicle ? Page?A - 1 Davis at Fund-Raiser as His Bill Languishes Critics say he should have been at Capitol Greg Lucas, Robert Salladay, Chronicle Sacramento Bureau Saturday, March 24, 2001 ,2001 San Francisco Chronicle URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/24/M N171337.DTL While the Assembly struggled -- and failed -- to pass a bill aimed at keeping hundreds of small energy generators from bankruptcy, Gov. Gray Davis attended a $10,000-a-head golf fund-raiser yesterday in Palm Desert. Organized by Duane Dauner, president of the California Healthcare Association, the event was held at Bighorn Golf Club, a luxurious private country club of which Dauner is a member. Davis' top political adviser said the governor didn't play golf, just stopped by a luncheon before the round began so he could return to Sacramento. But during Davis' absence, a bill he backed -- critical to bailing out small power generators -- languished in the Assembly. On Thursday, lawmakers canceled next week's long-planned annual trip to Washington, D.C., to focus on energy issues. "There is not a lot of electricity to be found on the golf course," said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights, a chief critic of Davis and the state's utilities. "He ought to be in Sacramento to try and solve the crisis and not prospecting for contributions in the grass in Palm Springs." The Democratic governor has been frequently criticized for the time he spends raising money for his campaign fund, money that comes from well-heeled interests with dozens of issues pending before his administration. Since becoming governor, Davis amassed $25 million by the end of 2000 -- averaging more than $1 million a month in contributions, often from fund- raisers directed at specific industries. Garry South, Davis' political adviser, said Davis was in Palm Springs to dedicate a University of California building and "dropped by a lunch" preceding the golf. South said the fund-raiser "was a diverse group of people that paid varying amounts of money." Lawmakers canceled their yearly visit to federal officials on issues important to the Golden State because they didn't want to give the impression that "there was somewhere else more important than California," said state Sen. Don Perata, D-Oakland. Raising money at a tony golf resort during the crisis simply looks bad, Perata said. "We have to be really careful because the public's patience and their confidence in what we're asking them to do depends on how they see us reacting to the problem," he said. "This will be negatively interpreted." Other lawmakers said the governor's top-level staff was working on the problem but acknowledged the golfing fund-raiser looked bad. "It's not the best symbolic message, but I feel we have to give him the benefit of the doubt," said Assemblywoman Carole Migden, D-San Francisco. Davis did appear briefly yesterday on nationally broadcast CNBC to talk about the energy crisis and blast power generators for allegedly overcharging the state. He appeared live from Palm Springs. The California Healthcare Association represents nearly 500 hospitals and boasts on its Web site that it "influences public policy development through both legislative and regulatory advocacy efforts." Last month, the group introduced a legislative package to expand nursing education and streamline college requirements for nurses. One of the bills calls for spending $120 million a year on nursing classes. The group also is lobbying the new Department of Managed Health Care, which is staffed by Davis appointees, to speed up payment of $1 billion in late bills owed to hospitals. Davis signed a bill last year that gave the HMO czar the power to sanction health care plans for failing to pay Dauner's clients, the hospitals, on time. In his first six months in office, Davis attended a fund-raising dinner at Dauner's house that brought in an estimated $100,000. It was part of a spree that netted the governor a record-breaking $6.1 million in half a year. At the time, Dauner told the Los Angeles Times: "We don't talk policy at those kinds of things, or legislation. This was really more of a social event. He talked about his goals and probably spent more time discussing education than anything else." Dauner could not be reached for comment yesterday. E-mail the reporters at glucas@sfchronicle.com and bsalladay@sfchronicle.com. ,2001 San Francisco Chronicle ? Page?A - 13 FOR IMMEDIATE RELEASE March 23, 2001 CONTACT: PG&E News Department (415) 973-5930 PG&E Responds to Energy Proposals in Sacramento San Francisco -- Pacific Gas and Electric Company today announced that it will be forced to challenge actions now being contemplated by the State of California to impose new demands on its frozen rate structure. The proposed actions will destabilize its current situation with creditors and put the entire possibility of reaching a balanced solution to California's energy crisis at risk. This week, the State has made clear its intention to use Pacific Gas and Electric Company's existing rate structure to begin fully paying Qualifying Facilities (QFs) in advance, for future power purchases, starting April 1, and to reimburse the Department of Water Resources (DWR) in advance of any other generating source, including utility-retained generation, bilateral contracts, QFs or the Independent System Operator (ISO). "These actions approach the problem in a piecemeal and uncoordinated fashion and would force us to pay out far more than we collect in rates, further exacerbating an already precarious financial situation," said Gordon R. Smith, president and chief executive officer of Pacific Gas and Electric Company. "The numbers just don't work." Currently, under frozen rates, Pacific Gas and Electric Company has been collecting approximately $400 million per month for the purchase of electric power. This revenue has been used in payments to power suppliers, including power purchases from irrigation districts and bilaterals, to cover costs of operating our retained generation, and is insufficient to cover payments to the ISO and QFs. The average combined energy bill from all of these sources exceeds $1.4 billion a month, and may go even higher in the coming months. Moreover, the utility's financial condition has been further jeopardized by the failure of the DWR to acknowledge responsibility for the full "net open position," i.e. the power that must be purchased on the spot market. This dispute over the net open position is threatening to accrue additional liabilities for Pacific Gas and Electric Company. "We continue to work with State officials to develop a constructive, comprehensive solution that assures that California has a reliable and fairly priced supply of power. Nevertheless, we have a duty to our suppliers, lenders and shareholders to protect the assets of the utility, and we must challenge any action by the State to force us to pay out more than is collected in rates," Mr. Smith concluded. ?