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Power Deal Just a Temporary Fix

Rescue: Experts say severe long-term energy problems remain. They warn that this summer's peak demand could bring even worse blackouts.


Beneath the giant, if pained, sigh of relief that came with passage of a $10-billion bond issue designed to stabilize California's electricity system, a grimmer reality is setting in.

At best, California has bought itself a few years of financial breathing room, energy experts say.

The power system's laundry list of problems--practical, political and philosophical--remains long and largely unaffected by the Legislature's Band-Aid.

The state still needs to build up its stagnant power supply and bring its soaring demand under control. It still must confront the ire of businesses and consumers demoralized by deregulation's collapse and by rate increases that have become all but certain.

And, perhaps most challenging, it must bridge the philosophical divide over deregulation and decide whether--and how--to move forward.

Of course, all this presumes that the electricity grid first survives this summer's power-draining glower.

"You don't need to be a rocket scientist to see that things could get a whole lot worse," said Frank Wolak, a Stanford University professor who specializes in utility deregulation.

The measure that passed the Legislature on Thursday and was immediately signed into law by Gov. Gray Davis allows the state to sell $10 billion worth of bonds so it can purchase power. It also allots nearly $500 million from state reserves to spend immediately, before the bonds can be sold.

The first key to how California weathers the next two or three years resides in the Ronald Reagan State Building in downtown Los Angeles, where the Los Angeles Department of Water and Power chief, S. David Freeman, is negotiating long-term contracts for the state with executives of leading energy suppliers.

Officials have portrayed such deals as a way to lock in bearable prices and guarantee the system's stability.

But with today's contract-signing deadline looming for some suppliers, many observers doubt that even the wily Freeman can obtain rates as low as the state would like. Federal regulators have refused to consider caps on wholesale energy prices, leaving him with little leverage.

"Freeman has got a tough job and not a lot of bullets to shoot," said Wolak, who believes the Bush administration must reconsider its opposition to price caps.

Even if Freeman works out the prices he seeks, about 15% to 20% of the state's electricity will still be bought on the spot market, where prices can lurch from $20 to $750 a megawatt-hour in the course of a day.

Long-term contracts will partially shield Californians from that sort of volatility, but they also commit the state to a relatively high, if stable, rate for several years. Consumers will absorb that premium, paying off the bond issue through a surcharge imposed on those who use more than their allotted portion of electricity.

Moreover, the contracts may have risky elements sewn into their fine print, particularly if power generators stipulate that the state must pay for pollution permits or increasingly expensive natural gas to run their plants.

"What if natural gas prices are even more volatile this summer?" Prudential Securities analyst Carol Coale said. "Then the state will be on the hook, with the same problem as the utilities have had."

Then, too, money can only buy power; it can't create it.

After the financial issues are settled, the problem reverts to one of engineering. The same grid that barely limped through the last two months will have to survive months of peak demand without much added supply.

Two new Northern California plants are scheduled to start churning out electricity, but not until late summer. The DWP will install six small turbine generators by summer, but they will add only 300 megawatts of capacity to the grid, less than 1% of the state's total demand.

Making matters worse, hydroelectric plants in the Pacific Northwest may contribute less than usual to California's summer supply.

"We've used so much this winter and we haven't had enough rainfall--not just here but in the Northwest," said Patrick Dorinson, spokesman for the California Independent System Operator.

Many analysts anticipate chronic Stage 3 emergencies, which bring with them the possibility of rolling blackouts.

"I think we shouldn't kid ourselves; the summer is not going to be a happy time," said Ted Gibson, an economist for the state Department of Finance. He expects to become an early riser this summer, when government offices are likely to open in the dawn coolness and close before midafternoon heat forces them to crank up their air conditioning.

Other Initiatives Aimed at Demand

While the state waits for more supply, it is launching handfuls of initiatives, aiming to curtail demand. Davis has imposed usage limits on retailers, ordering them to reduce outside lighting after business hours by 50% or risk fines, and he has proposed new funding for conservation efforts.

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