F.Y.I.
                                          
  PG&E Presses to End Freeze That Keeps
  Power Costs Low in Northern California 
  By Rebecca Smith 
    
  09/15/2000 
  The Wall Street Journal 
  Page A3 
  (Copyright (c) 2000, Dow Jones & Company, Inc.) 

  California's largest utility is pushing to end a four-year-old retail rate 
freeze that has
  insulated millions of Northern Californians from the volatile wholesale 
electricity prices that
  have rocked San Diego this summer.

  PG&E Corp., parent of Pacific Gas & Electric Co. in San Francisco, said it 
wants to end
  the freeze imposed in 1996 by the state legislature as soon as possible, 
because it is
  losing money under the arrangement. In a filing with the Securities and 
Exchange
  Commission, PG&E said it has collected $2.2 billion less from customers 
this summer
  than it has shelled out to buy bulk power for them from the 
state-sanctioned California
  Power Exchange, a central auction.

  PG&E's disclosure sets the stage for a major confrontation between the 
utility and
  regulators. It will be up to the California Public Utilities Commission to 
balance conflicting
  needs: the utility's desire to protect its shareholders from potentially 
huge losses, and the
  commission's own duty, as regulator, to protect the public from a flawed 
market that
  appears incapable of delivering the "just and reasonable" rates required by 
law. Legislators
  now say they fear the state could be tipped into a recession if electricity 
prices don't drop
  soon.

  Under the state's 1996 deregulation law, all California investor-owned 
utilities were allowed
  to freeze rates at what seemed like high levels. Utilities were permitted 
to use surplus
  revenues to pay down generation-related debts that regulators said would 
render them
  uncompetitive in a deregulated world. It worked well until this summer. 
PG&E charged
  customers, on average, $54 for each megawatt hour of electricity supplied 
even though it
  paid only $26 and $31 a megawatt hour, respectively, for that power in 1998 
and 1999. By
  June 30, it had collected enough surplus money to cancel $6.2 billion of 
debts.

  But the situation went haywire this summer as wholesale power prices 
lurched upward. The
  utility paid an average price of $163 a megawatt hour for electricity in 
June, $110 in July and
  $187 in August. Prices may be higher yet this month. The average price of 
power to be
  consumed today, for example, is $200 a megawatt hour, or nearly four times 
the amount
  that PG&E can bill its customers.

  Until recently, it was assumed that the utility would be able to recapture, 
in times of weaker
  demand, any shortfall that occurred in high-priced summer months. But that 
is looking less
  and less certain. Power prices projected for coming months look higher than 
the $54 a
  megawatt hour that PG&E now charges, particularly with natural-gas prices 
roughly triple
  the price of two to three years ago. The latter pushes up generating costs 
at natural
  gas-fired plants. Another problem is that there is less power available to 
be imported from
  outside California. In fact, the Pacific Northwest is expected to run short 
of power this
  winter, with less water available than in recent years for hydroelectric 
generation, putting
  pressure on California's market right when plants normally are taken out of 
service for
  maintenance.

  PG&E's chief financial officer now says he sees no reason to prolong the 
pain. He wants
  the freeze ended or he wants protection from high wholesale prices. "People 
did not
  envision the situation we have today," says Peter Darbee. Yesterday, 
Moody's Investors
  Service Inc. issued a negative outlook on PG&E, Edison International and 
their big utilities,
  citing the "increased supply risk" assumed by the utilities and "the 
unsettled state of
  electric deregulation in California."

  But state officials are loath to let consumers feel today's market 
volatility. Knowing that,
  PG&E may seek to strike a bargain in which it would continue some sort of 
rate freeze in
  exchange for permission to recoup some of the money it has lost. But there 
is no provision
  for that under current state law. The law simply says that when the 
utilities have paid down
  certain categories of costs, the freeze ends. If they haven't paid down 
these debts by March
  31, 2002, it ends anyway, and they have to swallow any loss.

  The wild card is what will happen with PG&E's 4,000-megawatt hydroelectric 
network, the
  biggest such system in North America. The utility has offered to shave $2.8 
billion from the
  tally of debts billed to ratepayers, if it is allowed to move its 
powerhouses and dams into
  the hands of an unregulated affilate. Such a move would end the rate freeze 
since the
  proceeds would be more than enough to offset the amount PG&E says it is 
otherwise
  entitled to collect from ratepayers, some $1.6 billion.

  But so long as power prices are volatile, nobody really wants the freeze to 
end but PG&E.

  In its SEC filing, the company said that it has no reason to believe, at 
the current time, that
  it will be able to recover lost monies and said it may be "required to 
write off the
  unrecoverable portion as a one-time charge against earnings" -- potentially 
amounting to
  billions of dollars. The same scenario exists for Edison International's 
Southern California
  Edison Co. unit, which serves most of the lower third of the state and has 
run a deficit of
  roughly $1 billion this summer.

  Observers say both utilities are wary of inciting consumer anger, should 
they be too
  aggressive in lobbying for an end to the freeze. A case in point: In 
hearings before federal
  energy regulators on Tuesday, Steve Baum, chairman of Sempra Energy, owner 
of San
  Diego 's utility, said the company's utility trucks are being defaced and 
workers are being
  intimidated by customers who are furious about power bills that have 
doubled and tripled
  since June. San Diego Gas & Electric Co. is the only utility, thus far, to 
end its rate freeze
  and pass wholesale power costs directly through to customers.

  State Sen. Debra Bowen, chairwoman of the California Senate utilities 
committee, said the
  legislature is reluctant to become involved. She said the legislature 
"feels like somebody
  who's fallen into poison oak enough times that all we have to do is walk 
past a bush and we
  break out in a rash. That's the way we react to these energy issues now." 


                                                  

  Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. 

  

                        
                                              
  Business/Financial Desk; Section C 
  A Dwindling Faith In Deregulation 
  New Ways to Harness Electricity 
  By NEELA BANERJEE 
    
  09/15/2000 
  The New York Times 
  Page 1, Column 2 
  c. 2000 New York Times Company 

  Over a few sultry days in the summer of 1997, the state of Wisconsin got an 
early taste of
  the electricity shortages that now threaten several other regions of the 
country. An
  unusually large number of nuclear plants that supply the northern Midwest 
were closed for
  maintenance just as an unexpected heat wave drifted into the area. 
Wisconsin Electric,
  which serves Milwaukee, shut off electricity to 80 businesses; every few 
hours, it
  beseeched consumers to limit their energy use.

  Wisconsin Electric averted blackouts, but the scare profoundly changed the 
state's
  approach to deregulating the power industry, a process it had begun to 
explore only a year
  earlier. Like many other utilities, Wisconsin Electric initially pushed for 
what it and others
  called the Big Bang: state regulators giving up control over the production 
and pricing of
  electricity almost immediately.

  But after the 1997 power shortage, Wisconsin Electric, along with most 
local businesses
  and consumer advocacy groups, began to support a go-slow approach to 
deregulation, first
  building in an extra margin of reliable power before encouraging the state 
to remove its
  decades-old grip on the electricity industry.

  Lately, the rest of the country has been drawing the same conclusion. Just 
like Wisconsin,
  several other states have lost their early faith in the instantaneous, 
smooth creation of a
  free and fair electricity market. Deregulation has faltered as surging 
consumer demand
  outstrips the supply of electricity, and regulators and utilities scramble 
to cope with
  successive summers of price volatility and power failures.

  More than a year ago, the wholesale price of electricity charged by power 
plants in the
  Midwest surged to $6,000 a megawatt-hour, compared with average costs of 
$21 to $22 for
  the same amount of power. Con Ed customers in New York paid 43 percent more 
for
  electricity this June than last year. Prices have spiked elsewhere as well.

  And when rolling blackouts rippled through Silicon Valley and electricity 
bills doubled in
  San Diego over several weeks this summer, California's pioneering approach 
to
  deregulation came to embody what many see as the failings of the process.

  Despite the second thoughts about deregulation, few experts expect a return 
to the days of
  strict government control. A world in which various power generators 
compete openly to
  provide electricity at market prices still offers the prospect of both 
lower costs for business
  and consumers and higher profits for utilities than is possible under the 
traditional, more
  inefficient system in which monopoly suppliers are supervised by government 
regulators.

  ''California is an indication to the rest of us that we need to do our 
homework to make
  deregulation work,'' said Dick Olson, legal counsel with the Wisconsin 
Industrial Energy
  Group, an association of large companies. ''Some people want to stop the 
process, but the
  genie is out of the bottle.''

  But getting from here to there is proving far more difficult than expected. 
Lacking a clear
  federal approach, states are finding their own way and, in the process, 
casting doubt on
  some early promises.

  ''Deregulation was definitely oversold to consumers by many people,'' said 
Severin
  Borenstein, director of the Energy Institute at the University of 
California at Berkeley. ''To
  economists and a few others, deregulation was a calculated experiment, and 
we knew it
  would have its costs.''

  Historically, a regional electric utility, which was owned by investors and 
regulated by the
  state, generated power, transmitted it over high-voltage lines and then 
distributed it in
  low-voltage form into homes and businesses. In broad terms, deregulation 
calls for
  separating generation, transmission and distribution into distinct 
businesses.

  Deregulation advocates argued that if power plants were sold to private 
owners, they would
  compete among themselves to sell power to transmission and distribution 
companies at
  cheaper prices, driving down the cost of electricity. But that outcome was 
predicated on the
  realities of the mid-1990's, when power plants had spare capacity.

  But with few power plants coming on line recently, particularly in 
California and the
  Northeast, deregulation was introduced in the late 1990's at the worst 
possible time. In the
  thriving economy, businesses demanded more electricity, and people built 
bigger homes
  and bought more gadgets, sharply narrowing the gap between available 
supplies of
  electricity and peak demand. Fuel for generation has also become more 
expensive,
  especially natural gas, whose price has doubled even as it has grown 
increasingly popular
  because it is cleaner than other fuels.

  ''I think that the expectation that deregulation will always give you lower 
prices is
  unrealistic,'' said John B. Ramil, president of the Tampa Electric Company, 
a unit of TECO
  Energy Inc. ''Consumers think that competition will lead to lower prices 
automatically, when
  actually they will be paying market prices for power.''

  Advocates rallied support for electricity deregulation by asserting that it 
would deliver the
  choice and the low prices that deregulation of telecommunications has 
brought. But they
  forgot that the restructuring of the telephone industry, like power 
deregulation now, angered
  consumers early on, when local calling rates rose and the proliferation of 
choices baffled
  many people. Lawmakers and regulators took years to iron out the process, 
which is still
  going on. And because electricity is even more vital than telephones, there 
is far less
  tolerance for interruptions in service and volatile prices.

  ''You can't assume that you can deregulate in one year and sit back and 
watch how things
  work,'' said Barry Abramson, senior utility analyst with PaineWebber. 
''Regulators and utility
  officials have to come back frequently and correct problems they never 
expected until the
  system gets it right.''

  Seeing an Example In Pennsylvania

  So far, 24 states have tried some form of deregulation, but regulators and 
utilities in other
  regions say changes in their local electricity industry are inevitable, too.

  Among states where deregulation has occurred, Pennsylvania has emerged so 
far as the
  place where the promises of competition and lower prices are being met most 
successfully.
  The state began to draw up a deregulation blueprint in 1996, around the 
same time
  California did, driven by electric rates in Philadelphia and other major 
cities double the
  average in the United States.

  But Pennsylvania opted for a plan that calls for substantial government 
involvement in the
  market at every step. The state protected the utilities against losses from 
their older plants;
  in return utilities had to agree to freeze rates until 2006 at 1997 levels 
to protect
  consumers.

  The state aggressively advertised a choice of new electricity providers. 
More important, it
  set the benchmark generation rates for traditional utilities at a fairly 
high level, which made
  some outside competitors' prices look favorable in comparison and which 
spurred
  consumers to choose new power providers.

  As a result, more than 528,000 residential and business users, about 10 
percent of the
  total, have switched to other providers that sell them power at a fixed 
price over long
  periods. A recent study by the State of Pennsylvania estimated that 
consumers have saved
  about $2.84 billion in energy costs over the last three years.

  As consumers sought new power providers, those same companies began to 
build new
  plants in and near Pennsylvania, shoring up electricity reliability in the 
area. About 19,000
  megawatts of power, adding 50 percent more capacity, are expected to come 
on line in
  Pennsylvania in the next five years.

  Pennsylvania also cobbled together the independent system operator PJM from 
a network
  of neighboring states that could transmit power easily to one another, 
creating a grid third in
  size behind the entire transmission systems of France and of Japan.

  Trying Rate Caps In California

  Yet the lurching progress of deregulation in the country as a whole and the 
loss of old
  certainties like reliable power at steady prices have ignited a popular 
backlash in many
  areas, most vividly in California. There, the state has decided to cap 
rates in San Diego at
  1999 levels for the next two years. Other Californians have urged a 
rollback of deregulation,
  demanding that power plants sold to private owners be placed under 
government control
  again.

  The widespread short supply of electricity and the peculiarities of the 
commodity itself have
  given generation companies enormous leverage in the marketplace. Unlike 
most other
  goods, electricity cannot be stored to be used when there is a shortage. 
Nor is it something
  consumers can do without, which means the companies that supply people with 
electricity
  will pay just about any price to keep the lights on.

  Most analysts say that the exercise of such influence is not illegal --nor 
unexpected --
  since companies can be expected to try to maximize their profits. But 
California's complex
  power buying mechanism has created a situation in which relatively small 
players have
  extraordinary influence.

  On June 14, for example, the temperature in San Francisco hit 103 degrees 
and heat
  records were broken all over the Bay Area. The state's Independent System 
Operator,
  which coordinates transmission of electricity, predicted that during peak 
use on that
  weekday afternoon, California would need 43,000 megawatts. But reports from 
the power
  plants working that day showed only 36,000 megawatts available. As a 
result, the California
  I.S.O. paid $1,500 a megawatt to various plants that were not running; some 
of those plants
  had bet on a shortage and delayed generation until the price of power 
reached the cap.

  ''The world knows we'll make up that energy shortfall somewhere,'' said 
Spence Gerber,
  director of settlements at the I.S.O. ''People go in and make their bids 
knowing we're not
  going to shut the lights off. We have no choice.''

  In California, rate freezes have prevented most utilities from passing on 
much of the higher
  price of power to consumers. In San Diego , however, the rate freezes were 
lifted just as
  the city strained under a heat wave. That led to the doubling of customers' 
bills in the span
  of a month.

  One part of any long-term solution, experts say, is to increase the supply 
of electricity,
  through building new power plants and transmission lines. But few 
communities want power
  plants or transmission towers on their turf, adding to delays.

  So far, states have relied on caps on the wholesale price of power to keep 
costs down. In
  California, the price cap, until recently, was $750 a megawatt, and in 
Pennsylvania, it is
  $1,000. But California officials concede that power plants sometimes get 
$1,500 a
  megawatt-hour -- $750 for being on standby and $750 for the power itself.

  Caps, if set too low, may dissuade companies from producing electricity and 
from building
  new power plants. ''If you fix caps at $250, you have to realize that if in 
a neighboring state
  someone is offering $251 for power, you will have a serious shortage,'' 
said Richard Priory,
  chairman of Duke Energy, a nationwide power generation and trading company.

  Given the complexities, deregulation, with its connotation of a 
laissez-faire management of
  an industry, seems a misnomer. The focus is now on reorganizing the 
electricity industry,
  rather than cutting it loose, and of using sophisticated forms of 
regulation to foster
  competition and efficiency.

  ''What we're looking at is re-regulation, regulation in a different manner 
than we had before,''
  said Douglas Hale, senior economist with the Energy Information 
Administration in
  Washington. ''Electricity is not one of those commodities that you can walk 
away from and
  let take care of itself. You need a central authority to make sure it 
doesn't all come
  crashing down.''

  In Wisconsin, rather than having the legislature adopt an overall plan, the 
central state
  authority has moved to revamp the transmission sector before tackling 
generation, the
  reverse of what most other states have done. The Midwest price spikes in 
1998 revealed
  that while neighboring states were willing to provide power, there were not 
enough
  transmission lines in Wisconsin to bring it in. As a result, the Wisconsin 
government has
  compelled the state's four major utilities to surrender operation of their 
transmission lines to
  the Midwest Independent System Operator, which covers several states, to 
make sure all
  companies have equal access to power lines.

  ''The problem with the big bang in an industry like ours is that you take a 
large risk,'' said
  Larry Salustro, senior vice president of Wisconsin Electric. ''Maybe in 
three years, the
  market will be better. But in those three years, people will go through 
difficult personal and
  financial times.''

  The transmission company will be responsible for building new lines to 
improve the
  importing of power, and though they own shares in the concern, no single 
utility controls it.
  Wisconsin plans to double transmission capacity in the next four or five 
years, by which
  time the state would be ready to deregulate generation.

  ''You won't have low prices unless you create an effective market 
structure,'' said Lee
  Cullen, counsel for Customers First, a Wisconsin consumer advocacy group. 
''Everybody
  can support competition as a superior system, but we're not rushing 
headlong into it.''

  Building safeguards against the volatility deregulation brings will clearly 
take years, as more
  generation -- mostly in small natural-gas-fired power plants -- starts up, 
as more power lines
  are built to move electricity to where it is needed most and as business 
and consumers
  respond to higher prices by finding ways to conserve power and limit use 
during peak
  periods.

  Some businesses and the occasional residential customer have set up links 
with their
  utilities to respond to electricity prices in real time, by turning down 
lights or allowing air-
  conditioning to shut down briefly when a computer message informs them of 
price spikes.
  So far, however, such operations are rare.

  ''Until consumers can see and respond to real-time prices, price caps will 
remain a
  necessary evil,'' Mr. Borenstein said. ''The dirty secret of restructuring 
is that it is replacing
  old forms of regulation with new ones.'' 

  Photos: Lee Cullen is a lawyer for Customers First, a Wisconsin consumer 
advocacy
  group. He stands outside the switching station and coal yard of Madison Gas 
and Electric
  in Madison, Wis. (Andy Manis for The New York Times)(pg. C4); Individual 
states are trying
  to find answers to the problem of deregulating the electricity industry. 
Power lines in
  Wisconsin, left, are symbols of a state that is trying to revamp the 
transmission sector. In
  Pennsylvania, where a power plant is being built in Lebanon, below, the 
government is
  involved with the market at every step. (John Zeedick for The New York 
Times); (John Saller
  for The New York Times)(pg. C1) Chart/Graph: ''Shocks to The System'' In 
deregulated
  electricity markets, prices have been far more volatile than expected, at 
times jumping to
  extraordinary levels during shortages. *Volume-weighted wholesale spot 
prices for on-peak,
  next-day delivery of a megawatt-hour of electricity. (Source: Bloomberg 
Financial Markets;
  Cambridge Energy Research Associates)(pg. C1) ''Approaching Electricity 
Deregulation
  More Cautiously'' As some states struggle with tight supplies and high 
prices, others are
  moving more slowly on deregulation. Graph tracks supply and demand since 
1980. Map
  tracks Deregulation by state. (Sources: Edison Electric Institute; North 
American Electric
  Reliability Council; Energy Information Administration)(pg. C4) 


                                                  

  Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. 

  

                              
 
  

                                        
  Metro; Letters Desk 
  Bidding Rules Costly for Electric Rates 
    
  09/15/2000 
  Los Angeles Times 
  Home Edition 
  Page B-8 
  Copyright 2000 / The Times Mirror Company 

  * Re "Davis Walks a Political Tightrope on Energy Prices," Sept. 12: The 
deregulation of the California utilities
  didn't include a change in the strangling bidding rules to which these 
utilities, unfortunately, are bound. They are
  required to buy their power through a state-sponsored day-ahead market, 
rather than being allowed to bid on
  longer-range contracts on the free market, which would permit them to lock 
in lower pricing.

  The California Legislature wanted to retain controls on pricing, thinking 
it would result in the lowest costs. Well,
  the legislators were wrong! The real damage is that the public now believes 
energy price increases were due to
  deregulation, but in fact the utilities still aren't deregulated enough to 
permit freedom of bidding. Take the reins off
  the bidding prices, and prices will come down.

  JAN WINNING

  West Hills

  *

  Why do the state taxpayers have to pay to keep San Diego residents' 
electric bills down to $68 a month? Either
  the power providers are ripping the people off, or they have had really 
cheap electricity because San Diego Gas &
  Electric didn't invest enough in increasing power-generating capacity.

  They could shut off the air conditioning and probably keep their bill that 
low. My parents never had any air
  conditioning, and they lived where it got over 100 degrees every year. In a 
lot of cases we would be better off
  without it, just not as comfortable. There is no constitutional right or 
guarantee that we have to have air
  conditioning or cheap electricity. It sounds like a good time to start 
conserving.

  KEN WALTERS

  Apple Valley 


                                                          

  Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.