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Energy Crisis Has Gov. Gray Davis Looking Backward

Editor's note -- The Taskmaster will return from the J.P. Morgan conference Tuesday and will go back to watching the market.

SAN FRANCISCO -- California Gov. Gray Davis came to the JPMorgan H&Q Tech Conference today to discuss his "least favorite subject": California's energy crisis.

Standing alone at the podium in the Grand Ballroom at the St. Francis Hotel, the governor expressed relief to "be without three energy experts on one arm and two bankruptcy lawyers on the other." While jocular, he was clearly in blame-avoidance mode.

At least five times during the course of his speech, and in interviews afterward, Davis referred to the fact that not a single power plant had been built in California in the 12 years prior to his taking office in 1998.

"There is a limit to how quickly we can make up for 12 years" without new power plants, during which the state's population grew by 7 million, the governor said. Davis assured the overflow crowd that the state is moving at "warp speed" to resolve the problem. But he conceded the government would need to set new records for expediency in order "to avoid major disruptions" this summer.

With four new power plants set to come on line this summer, three more next year and still more in 2003 -- thanks to "emergency" legislation that sped up the permitting process -- Davis forecast California will attain an energy surplus by late 2003. (That may prove optimistic, but only time will tell.)

Federal Reserve chairman Alan Greenspan -- the governor's "new best buddy" -- has said the state needs at least 15% excess capacity to avoid being at the mercy of spot market power providers, Davis reported. California is "on a glide path toward that goal."

But reaching energy surplus by 2003 might not be quick enough to revive Davis' political fortunes, or to prevent business from fleeing California. However, the governor pledged to "do everything to make sure California [remains] a good place to do business."

Step one in that plan is the aforementioned fast track for new power plants. Step two is a conservation program that calls on the state to provide incentives for businesses to conserve energy, in the form of $800 million in cold-hard cash. Hewlett-Packard (HWP) and Sun Microsystems (SUNW) are among the firms that have already agreed to install so-called smart technologies in their buildings, for which the state will pay.

"The costs to reduce electricity usage are cheaper than paying the spot market" prices, Davis said in defense of the incentive program. He then criticized Vice President Dick Cheney's energy plan, saying it lacked focus on conservation. Cheney, speaking today to news executives in Toronto, said the nation cannot "simply conserve or ration our way out of the situation we're in." Additionally, the governor criticized the Bush administration for having an "energy bias" in favor of oil companies and "energy providers in the Southwest" -- he didn't specify which ones -- that are profiting from California's woes.

"The administration needs to come up with a realistic plan to help the most prosperous part of America," he said.

In a lighter moment, the governor discussed how -- after asking Californians to conserve 10% of energy usage -- he and his wife are trying to do more than their share.

The governor's house is "like a tomb," with only the most minimal use of lights and the thermostat set to 55 degrees, he said. "A trip in the middle of the night to get a glass of milk is like a trek to Antarctica."*

The anecdote generated thoughts of the governor walking through his darkened residence with an oil lamp and old-fashioned sleeping cap -- haunted by the ghost of bad energy policies past.

Meat and Potatoes

Aside from the pledges to do all he can to resolve the problem, and declarations that California will survive this "manmade disaster" much as it has survived natural ones throughout its history, the governor's address contained little investors could directly act upon.

In a Q&A session following the speech, Davis said negotiations continue regarding the state's efforts to purchase the transmission lines of the San Diego Gas and Electric Co., a unit of Sempra Energy (SRE).

The state already has agreed to spend $3.5 billion to buy the transmission assets of Southern California Edison, a unit of Edison International (EIX).

But Davis did not directly address the question -- raised here by RealMoney.com's Chris Edmonds -- whether the Federal Energy Regulatory Commission's recent plan requiring that California join a regional transmission organization (RTO) might jeopardize the state's plans to buy SoCalEd's transmission facilities. If the deal falls through, it raises the likelihood SoCalEd will follow Pacific Gas and Electric (PCG) into bankruptcy.

But "we don't think [the FERC plan] impacts the deal [between the state and SoCal Ed] at all," said Steven Maviglio, a press secretary in the governor's office. He also noted the RTO remains to be created and quipped: "It's difficult to commit to something that doesn't exist."

Davis, who has been very critical of the FERC's recent efforts (or lack thereof), did refer to the commission's ruling as "part-time relief" that aids "inefficient power producers." He also noted that the price caps suggested by FERC apply only to power generators, not power traders and marketers acting as middlemen.

The governor's office is going to "continue to pressure FERC to impose real price caps," Maviglio added. He also said that the governor's office is opposed to a FERC plan announced today to charge fees on power sales as a way to repay generators the billions of dollars they are owed by California's utilities.

RealMoney commentator Chris Edmonds contributed to this story.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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