For California, "A Rosary Bead Summer"

Tech execs were in for a serious electric shock. With billions of dollars invested in plants that require a steady flow of juice, the members of the Silicon Valley Manufacturing Group were eager for an update on California's power situation. So they gathered May 27 at the headquarters of Cisco Systems Inc. (CSCO ) in San Jose to hear from Federal Energy Regulatory Commission Chairman Patrick H. Wood III. It wasn't pretty. California, Wood said, is "skating on the edge" of another power crisis. Tight electricity supplies, he added, will make this "a rosary bead summer."

Four years after an energy crisis caused blackouts, soaring power prices, and the bankruptcy of the state's largest utility, California finds itself in an electricity hole once again. New power-plant construction has slowed, older plants have been shut down, and electricity demand has begun to accelerate along with the economic recovery. Another factor: Conservation efforts that sharply cut demand during the crisis have waned. The situation prompted the California Energy Commission on June 3 to predict that, in the event of a severe heat wave, the state's power reserves could fall below 5% -- a third of what regulators recommend. "There will be emergencies," says Stephen Conant, an analyst at consulting firm Energy Security Analysis Inc.

That could be bad news for Governor Arnold Schwarzenegger, who hardly needs rolling blackouts as he ramps up efforts to retain and attract spooked businesses. The state energy commission says power consumption this summer will run about 3.7% above 2003 -- and that's assuming normal weather.

Problem is, supply isn't keeping up despite efforts to speed new-plant construction. Since 1999, state regulators have approved 19,000 megawatts' worth of new-plant construction, a 35% capacity hike. But following the 2000-2001 power crisis -- in which a poorly conceived deregulation and alleged market manipulation by energy traders combined to send wholesale power prices spiking from $30 to $275 per megawatt/hour -- federal authorities imposed price controls. Prices soon fell to around $40 per megawatt/hour, though they are now around $70. As a result, about a third of the planned new-plant capacity was put on hold since the anticipated returns were no longer enough.

At the same time, the sky-high cost of natural gas has made a number of older plants too costly to run, operators say. And because of low snowfall last winter, hydroelectric supplies from the Pacific Northwest are below normal. All told, supply is flat with 2003, at 60,700 megawatts.

A battle over continued efforts to deregulate is also partly to blame. Legislators are considering a bill that would allow large customers to buy power from independent power providers rather than utilities. But utilities and consumer activists want to limit the ability of those customers to abandon the utilities, fearing that their departures will raise prices for everyone else. Independent producers say that until the issue is resolved, they can't get the commitments for long-term contracts they need to help finance new plants. "We're in ideological gridlock," says Michael Florio, an attorney for The Utility Reform Network, a consumer group. "It's the typical California mess."

How bad will things get this summer? To keep the lights on, the state could institute new conservation measures and restart mothballed plants. But clearly a long-term solution is needed. California Public Utilities Commission President Michael R. Peevey is speeding approval of new plants from in-state utilities Sempra Energy (SRE ) and Edison International (EIX ). The transmission infrastructure will be upgraded, too. And Schwarzenegger, now consumed by California's huge budget gap, is expected to focus more attention on energy if the new budget is passed on July 1. His predecessor lost his job in no small part thanks to the state's energy crisis. Arnie will have to move fast, lest he wind up starring in California Blackout: The Sequel.

By Christopher Palmeri in Los Angeles

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