April 18, 2001

Governor Gray Davis
State Capitol Building
Sacramento, CA 95814

Re: California Energy Crisis

Dear Governor Davis,

We would like to offer you our perspective and some recommendations for helping you solve California's energy crisis.

As Robert Glynn explained in an editorial in the San Francisco Chronicle (April 16), PG&E was forced into bankruptcy by a combination of unreimbursed costs, recent PUC decisions, and a lack of progress in negotiations. We think it is important that each of the three aspects mentioned by PGE be addressed in any plan to solve the crisis.

The currently proposed 38-page MOU with SCE has a number of good provisions that protect the utilities from bankruptcies in the future, but unfortunately, the MOU does not go far enough in protecting both the utilities and the public. For example, the utilities have no assurances that the state won't change the rules again. The public has no visibility into the cost of the deal and the source of funds, and the state seems to be obligated to pay the net short until 2002, even if the utilities are creditworthy before then. For these and other reasons, the MOU currently appears to be unacceptable to both the Legislature and also to PGE. However, we understand there is new data being supplied to the Legislature to address some of the missing information. We hope that you will continue to work collaboratively with the Legislature and the utilities to create an agreement that is acceptable by all parties. All parties clearly have a vested interest in reaching such an agreement and we hope that you will continue to remain open to changes so that a deal can be consummated.

The 800 alternative energy suppliers (Qualifying Facilities or QFs) who provide power from wind, solar, and geothermal sources are collectively owed over $1B. Many are going out of business because none have them have been paid for months imperiling 25% of the energy on which California relies. So it's critical that rate increases be sufficient for the IOUs to pay the QFs.

Rate increases are also needed to cover the state's bills for power. The state's bills for buying power are threatening to exceed its ability to pay. The state's sinking credit rating is endangering its ability to issue bonds. The state has been spending $50 million a day on power purchases since Jan. 17 and that number has recently risen to $73M per day. By some estimates, that number may exceed $100M per day during the summer. Controller Kathleen Connell said that the state's cash on hand had fallen from $8.5 billion in January to $3.2 billion on March 21.

A number of efforts are underway to increase supply and reduce demand. Efforts are also being sponsored in Congress by Senator Feinstein to require the FERC to impose temporary price caps to eliminate the price gouging that is occurring. Unfortunately, the leadership in Washington seems unresponsive to these requests. For example, Senator Feinstein can't even get a date for a meeting with President Bush.

While we applaud all of these efforts, here are twelve suggestions that we believe you should champion in parallel with these other efforts:

  • Ask the Legislature to pass a resolution asking the FERC to impose temporary price-caps in the western grid. If the California Legislature won't support such action, how can we expect FERC to?
  • Quickly refine the SCE MOU. The MOU is a start, but there are still missing pieces. We'd encourage you to work with PGE and gather their objections. The SCE MOU should be something that PGE could accept as well, so share those objections with the Legislature. Be sure that all three reasons for PGE's bankruptcy filing are addressed.
  • Change the players. Everyone has a an incentive to reach an agreement because the alternative is bankruptcy which puts the solution out of everyone's control. A negotiated settlement should be possible if you have the right players sitting at the negotiation table and if they are given the proper direction. At this point, the direction to your negotiating team would be to ask the IOUs for the minimum set(s) of conditions that the IOUs require. Then you make the call whether to accept any of these or not, i.e., you have to decide whether forcing them into bankruptcy is a preferable alternative. If you can't get to a settlement, change the players on your side.
  • Enforce the law: raise rates to cover costs. The intent of the current rate freeze was for the utilities to make a big profit to recover their stranded costs and then subsequently sell at cost. Never was intent to have the utilities subsidize selling electricity for below cost. The utilities believe that, by law, the rate freeze is over. Why not find out? Why not hire an accounting firm to determine when the exact date was? Then publicly ask the PUC to enforce the law, both as written and intended. If they fail to listen to you, ask the Legislature to pass a law requiring the PUC to stop requiring the utilities to sell for less than cost. You will be enforcing both the intent and the letter of the law, as well as providing the needed cash to pay the QFs. If you still think the utilities have been holding back cash, take them to court later. Let's not add SCE and the state of California to the list of bankruptcies in the meantime. Raising rates to cover costs will also encourage conservation and it will send a message to the FERC that California is taking necessary economic steps to combat the crisis. In addition, you'll have all the ratepayers in California on your side when asking the FERC for price-caps. 
  • Spread the pain. Price increases should hit all sectors equally. Right now, under some proposals (not yours), industry will foot the major portion of the price increase. This will drive more industry out of the state.
  • Get out of the power business as soon as possible. Government should only enter businesses that can't be served by private industry. Buying the investor owned utilities (IOUs) or their power lines solves nothing. It just transfers an asset from one balance sheet to another. That's just a fancy accounting trick. It doesn't create positive cash flow. It doesn't create more power. It doesn't reduce demand. It's risky and unnecessary. If you enforce the law as written and as intended, the utilities won't need to sell the state any assets because they will be able to collect on the debt that they are owed. Unfortunately, we aren't aware of any public official who has asked the PUC to comply with the law and determine the date when the stranded costs were recovered. Why not?
  • Align everyone's interests. Contract power purchasing back to the IOUs and let them keep a percentage of any cost savings. That way, power purchasing is done by experts and there is a financial incentive to purchase power at the lowest possible price. Everyone will win in that scenario.
  • Allow the IOUs to enter into long-term contracts. Forcing the IOUs to buy on the spot market doesn't serve any purpose. While the PUC recognizes this, they seem unable to issue guidelines for purchase of long-term contracts. Why not ask the PUC to approve the exact same guidelines for the IOUs as the Department of Water Resources is using now to purchase power?
  • Stop trying to please everyone. There isn't a solution that avoids referendums and protests. There isn't a solution that everyone in the Legislature is going to like. No matter what happens, the ratepayers will end up paying the tab, so please act in a way to minimize our total costs. For example, a rate increase that covers costs will mean the IOUs will be able to pay the QFs. This would mean that the QF's don't go out of business or sell to the state on the spot market. So a rate increase done now will avoid huge costs later. We can't afford to lose 25% of our power supply because of our failure to pay the QFs.
  • Develop a cohesive long-term plan for California energy. Part of that plan should involve efficiency. Wind and other renewables should play a major role. It should be drafted by a small committee with experts from alternative energy sources, power companies, etc.
  • Start negotiating with the power suppliers, not just the IOUs. The major power companies may be willing to adopt some concessions in return for certainty about the California market. But right now, all the talk is just the state asking for T's and C's on the sale of power to the state. That's not very constructive. In return for a broader energy policy, a wider range of solutions may be available.
  • Create a small, qualified task force to suggest a workable action plan. If you don't like the suggestions here or the suggestions from Enron, then select a five member task force of experts from the major constituencies who can work together and have them come up with one or more action plans that can be passed into law.

Sincerely yours,

Steve Kirsch, CEO, Propel
Tony Ridder, Chairman and CEO, Knight Ridder
Gordon E. Moore, Chairman Emeritus, Intel Corporation
Wilf Corrigan, Chairman and CEO, LSI Logic
Robert W. Frick, Former Vice Chairman of the Board, Bank of America
William S. McKiernan, Chairman and CEO CyberSource Corporation
L. William Krause, retired Chairman & CEO, 3Com
Gary Lauder Lauder Partners
Chris Alden, Vice-Chairman, Co-Founder Red Herring Communications, Inc.
David F. Marquardt, Partner, August Capital
Craig Taylor, Partner, Alloy Ventures
DuBose Montgomery, Managing Director, Menlo Ventures
David E. Liddle General Partner U.S. Venture Partners
Bill Murphy Chairman and CEO Clos LaChance Wines
Harry Motro, Managing Director, Motro Ventures
Sam Perry, Founder and VP, NextSet Ventures
Chet Kapoor, VP Marketing, KnowNow
Gregory C. Gretsch, Sigma Partners
John Gilmore, co-founder, Electronic Frontier Foundation
Dan Lynch, Lynch Enterprises|
Jeff McFadden, CEO, Gator.com

Cc: California Legislature members