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To: jim_p who wrote (71021)	8/16/2000 1:57:31 PM
From: Jon Cave	Read Replies (2) \| Respond to of 95453

DJ POWER CUTS: California Offers Anatomy Of A Meltdown By Jason Leopold Of DOW JONES NEWSWIRES LOS ANGELES (Dow Jones)--Some people are calling it the Unhappy Meal. At over 100 McDonald's Corp. (MCD) fast-food restaurants in San Diego County, the price of a Big Mac and just about everything else on the menu has gone up about 10 cents since July. Franchise owners, whose electricity bills have risen to $9,000 a month from $3,000, have hung signs inside their restaurants blaming the higher food prices on utility San Diego Gas & Electric, a Sempra Energy (SRE) company. Consumers in San Diego this summer became the first in the nation to pay market-based rates for electricity as a result of California's 1996 deregulation law. Residential and business utility bills there have more than doubled as blistering heat and power shortages jack up the price of wholesale electricity, and SDG&E passes its costs on. San Diego's power woes have forced officials to rethink the state's four-year-old deregulated electricity market, with some lawmakers acknowledging it as a failed experiment. Since June, President Clinton, California Gov. Gray Davis, and nearly a dozen state lawmakers have weighed in on the state's power crisis, suggesting regulatory solutions on a weekly basis. Rate Rollback May Get Okay This Week The state Assembly will decide this week whether to roll back electricity rates to 1999 levels. Last week, the state Senate approved the measure. Some of the steps lawmakers have proposed to stabilize the situation include: restoring electricity rates to pre-deregulation levels, streamlining the process for permitting new power plants, having utilities buy back some of the power plants they were ordered to sell off earlier, and allowing the state's three investor-owned utilities to enter into long-term fixed rate power contracts with independent suppliers. What went wrong? Much criticism is being directed at the California Independent System Operator, a state agency located in Folsom, north of Los Angeles. Created in 1998 as part of utility deregulation, it was handed the reins over most of the state's power grid. The ISO's board of directors is made up of power generators, utilities and other market participants, who stand to benefit from high electricity prices, according to some state lawmakers. The ISO's main charge is to keep the lights on, not to control prices. But it has lowered a cap on the price of wholesale electricity three times in the past two months, due in large part to political pressure. The cap, first imposed in July 1998, limits the amount the grid operator can pay for power in emergency situations like possible blackouts. State Sen. Steve Peace, D-El Cajon, an influential architect of California power sector deregulation, is one of the ISO's biggest critics. Peace was instrumental in getting the ISO to lower the price cap on wholesale electricity to $250 per megawatthour this month, after several failed attempts. ISO leaders oppose a lower price cap, charging that it will lead to generators selling their power to other states that don't mind paying a premium for electricity. "That's nothing but bunk," said Peace, who has threatened to draft legislation to dissolve the ISO board. Looking Behind Other Bushes Not everybody believes the meltdown in California's power markets is the ISO's fault. Supply shortages are really the root cause of the pain San Diego consumers are feeling now, said Severin Borenstein, the head of University of California, Berkeley's Energy Institute. Huge demand for power in the state is a result of the booming economy and the "virtual absence of (new) power plants in the last decade," according to Borenstein. He acknowledges there's a close relationship between deregulation and the continuing supply shortage. The different approaches states have taken to opening their retail electricity markets have left investors unsure of how to proceed with plans for new power plants and lines. "The lack of supply has to do with deregulation and the uncertainty of a financial return on new investment of generation," Borenstein said. "But we still would have a supply problem under regulation and prices would still be high." Terry Winter, chairman and chief executive officer of the ISO, agrees with the shortage theory and contends that his agency is being targeted unfairly. "We haven't had any new generation in 10 years," Winter said. "That's the reason you have price spikes." Shortages led the agency to issue 20 emergency warnings telling people to curtail power consumption this year because its operating power reserves dipped below 5% due to severe heat. How long will high prices persist? The state is likely to muddle along for a couple of years before wholesale power prices stabilize and consumers see lower bills, according to Borenstein. That may be too long for the U.S. Navy, which currently conducts its business in San Diego in the dark. "We're working by the light of our computers," said Navy spokesman Lt. Sean Banks of the Commander Southwest Region. "We shut off all the power during the day so we can reduce the cost of our electric bill." Lt. Banks said the Navy, which has three bases in San Diego, now expects its quarterly electricity bill to climb to $39 million over the next month, substantially more than the $20 million budgeted for the period of June to September. "This is the first real sign that California's energy crisis poses a threat to national security," said energy analyst Peter Beutel. -By Jason Leopold; Dow Jones Newswires; 323-658-3874; jason.leopold@dowjones.com