Wall Street Journal - 1/18/01


After bouncing off the guard rail for eight months, California's electricity market finally crashed for the first time. Rolling blackouts were ordered in Northern California by the state's grid operator shortly before noon and still threatened other parts of the state late in the evening. Blackouts could be even more widespread Thursday.

The state's grid operator started Wednesday 30% short of the amount of electricity it needed. The situation looks even more dire Thursday. So little power had been offered to the market for delivery Thursday that the grid-operating Independent System Operator believes it will begin the day 62% short of what it needs to keep the system running. Such a deficit is without precedent in California.

The critical power shortages come on the heels of a continuing financial crisis at the state's two largest utilities, Southern California Edison, a unit of Edison International, and Pacific Gas & Electric Co., a unit of PG&E Corp. PG&E failed to pay off $76 million worth of commercial paper that came due Wednesday in part because it was shut off from its existing bank credit lines. Southern California Edison said earlier this week that it wouldn't pay nearly $600 million in power bills and bond payments. Both utilities have said they may soon be forced into U.S. bankruptcy court.

Some energy experts have suggested that power suppliers are deliberately withholding energy from California's market because of fears that they won't be paid by the utilities. Several investigations are looking into this possibility, but none have been completed. Addressing this concern Wednesday, the U.S. Department of Energy threatened enforcement action against suppliers that fail to heed a federal emergency order that requires them to share all available supplies with California.

It was difficult to pinpoint the blame for the blackouts Wednesday. More than 11,000 megawatts of in-state generating plants were down for repairs. Roughly 3,400 megawatts had been expected to come back on line, but failed to do so. An important power transmission corridor that connects Northern California with Southern California became so overloaded that power available in the south couldn't be sent north. And less power was available for import from the Pacific Northwest because of poor hydroelectric conditions.

"We've certainly painted ourselves into a hell of a corner," said S. David Freeman, general manager of the Los Angeles Department of Water and Power, who helped set up the state's deregulated system. That botched deregulation plan has produced sky-high prices that have nearly bankrupted California's biggest utilities and now has undermined the reliability of the state's power system.

In a Securities and Exchange Commission filing Wednesday, PG&E said that its utility unit "is not in a position to pay maturing or accelerated obligations." The utility has more than $1 billion due in the first half of February to pay for wholesale electric purchases, the filing said. The company said it is trying to negotiate extension of payment times on some of those power bills. PG&E said that it and its utility subsidiary have a total of about $700 million of commercial paper coming due by Jan. 31 and several hundred million more after that.

PG&E may be preserving cash, possibly for a future bankruptcy filing. In the filing, the company said it had cash reserves of $347 million while its utility unit had $700 million. Earlier this week, Edison failed to make payments to bondholders and power suppliers, citing the need to conserve cash. PG&E has hired bankruptcy counsel and said it might file for bankruptcy-law protection.

Early Wednesday, the California grid operator called the highest level of electrical emergency, a Stage Three, which gave the state access to extra megawatts of power from the federal power system and prompted stepped-up conservation efforts. But despite their best efforts, it became apparent by 11 a.m. that there just wasn't enough power coming into the state to satisfy demand.

Meanwhile, business across the state braced for rolling blackouts by readying emergency plans. Engineering giant Bechtel Corp., for instance, has emergency generators in its headquarters building in downtown San Francisco. Company officials said they have been making sure to keep all computer data backed up on the company network, which has storage servers located safely out of state. "So far, the blackouts aren't causing us any inconvenience, but we are on standby," said Bechtel spokesman Alexander Winslow.

PG&E gave advance notice to many businesses and consumers Wednesday morning, but many people were still surprised. At the Hastings College of Law in downtown San Francisco, two students were stuck in an elevator for about an hour until a maintenance crew could help them out with a ladder. A Ben & Jerry's ice-cream shop closed as soon as the lights went out because its freezers only stay cold for four hours without power. And ticket takers at a ferry-boat line on Fisherman's Wharf were forced to switch to hand-held calculators from computers.

In response to the emergency, Gov. Gray Davis met most of the day Wednesday with legislative leaders. The state assembly Tuesday night passed a bill that would empower a state agency, the Department of Water Resources, to step into the utilities' shoes and buy power that could be supplied to consumers. But a price limit in the bill -- $55 per megawatt hour -- increasingly is being regarded as inadequate in view of market prices.

Other power-supply problems continue to surface. Big customers are increasingly reluctant to voluntarily reduce their demand.

-- Jim Carlton and David Hamilton contributed to this article.

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