California Is in the Dark

With California's utilities on the brink of bankruptcy and the state's power demands exceeding supply, the manager of the state's power grid took the unprecedented move of ordering rolling blackouts Wednesday in Northern California.

Outages were reported in the afternoon in the San Francisco area, in Davis, near Palo Alto and in Cupertino, home of Apple Computer. Each block of customers was to be affected for no longer than 90 minutes.

The California Independent System Operator, or ISO, ordered utilities "to implement their rotating outage programs and curtail 500 megawatts within Northern California beginning at 11:40 a.m. PST," according to a statement. "The outages are anticipated to last all afternoon and possibly into the evening."

The Stage Three emergency, declared by the ISO when rolling blackouts are possible, was called at 1:45 a.m. PST Wednesday, when the ISO projected there would not be enough power to make it through the day. The ISO estimates that a peak load of 32,379 megawatts will be reached at 6 p.m. PST.

While not a record, even for winter months, the demand is greater than the supply. More than 10,000 megawatts of California generation capacity is off-line for maintenance, according to the ISO. "One of our problems is all summer long we operated units at tremendous load factors," said Terry Winter, president and chief executive officer of the ISO. "Many of these units are over 30 years old and when you run them that hard, they tend to break." He dismisses the claims of some California politicians that generating companies may be withholding power from the California market to manipulate prices.

"The generators are continuing to provide power to us," despite concerns about the utilities' financial struggles.

By midafternoon, the outages were limited to Northern California customers of Pacific Gas & Electric, the utility subsidiary of PG&E (PCG Quote - Cramer on PCG - Stock Picks).

The lack of power in Northern California comes partly from a reduction in hydroelectric capacity in the Northwest. "Clearly, in the Northwest, we have a water situation," Winters said. The reduction in hydro production along the Columbia River combined with the lack of rain to keep water levels at levels required to produce maximum amounts of power have significantly reduced hydro-generation capacity throughout the Northwest, especially in California.

Winters says the blackouts could quickly roll south. "The magnitude of the problem will likely mean an extension to Southern California later this afternoon."

Compounding the problem, the state's transmission system can't move power into the northern part of the state to meet demand. "When you try to serve the load with power outside of the area, you run into transmission overload," Winter said.

He warned that this action might only be the beginning. "If we don't get hydro available, when we start to get heavy and hot loads -- in summer, peaks hit 45,000 to 47,000 megawatts -- if we don't have any hydro to serve that load we are looking at severe outages," said Winters, predicting the problem may spread outside of California. "We are really short in Northern California, but I am talking about the entire Northwest."

State Talks Continue, Little Progress Made

While the California Legislature continues to develop a plan to establish a state agency to purchase power for the state's cash-strapped utilities, representatives of generation companies have arrived in Sacramento in attempts to broker a deal for a short-term fix to the Golden State's power woes.

Meanwhile, the state's utilities -- PG&E and Edison International (EIX Quote - Cramer on EIX - Stock Picks) -- moved closer to bankruptcy. Tuesday, Edison said it would default on nearly $600 million in debt payments, including a $150 million payment to the California Power Exchange, the agency responsible for brokering power between generators and the utilities.

One analyst says the legislature must act quickly, or both utilities are likely to seek bankruptcy protection. "We believe without quick action on the part of the California Legislature and a concrete agreement between the governor, the generators and the utilities, the bankruptcy of PG&E and Edison International may come about very quickly," said Credit Suisse First Boston utility analyst Paul Patterson.

One source in Sacramento said progress is slow. "We are making progress, just not very fast."