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Flips and Switches 

Gray Davis wants it both ways

Wednesday, Feb 21 2001
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It has taken California’s congenitally indecisive governor nearly two months to finally announce his plan to get the state out of its energy-deregulation disaster. Davis has been in a huddle with executives from PG&E, Southern California Edison and San Diego Gas & Electric, along with Wall Street powerhouse Goldman Sachs, former Edison chief Michael Peevey and the occasional state legislator, nearly since he delivered his State of the State address on January 8. Back then, the governor announced, about as unequivocally as he could, ”The time has come to take control of our own energy destiny. And that will require either a joint-powers authority among the state and our 30 municipal utilities to develop the additional power we need, or a California public-power authority that can buy and build new power plants.“ Last Friday, the governor proposed to do just that. Sort of.

Davis unveiled his plan, which, it turned out, was a one-page precis, short on the kind of detail that could help clarify how far Davis plans to go to rescue the investor-owned utilities from the threat of bankruptcy while keeping his vow to consumers that there will be no rate increases. The governor is in a bit of a pickle: He risks a consumer backlash if he hands the utilities billions and sticks ratepayers with the tab; he risks Wall Street swooping in and closing down the debt-saddled companies if he does not. He also risks a summer of rolling blackouts when air-conditioning demand, driven by the inevitable scorcher, outstrips supply.

There is very little in the governor‘s proposal to confront the conundrum of an electricity shortage and price spikes. He has sidestepped, for now, state Senate President Pro Tem John Burton’s state power authority bill, adopted on Tuesday in the upper house of the Legislature. If approved by the Assembly, Burton‘s act would put the state in the energy-generating business, by financing new power plants, helping to retrofit old, polluting ones, and offering rebates and loans to promote greater energy efficiency and conservation. Davis prefers to prop up the private utilities with large infusions of taxpayer cash and state-purchased electricity, easing their existing debts and helping to keep them from piling on new ones. After weeks of quietly backing a unilateral taxpayer bailout, Davis was forced to adopt Burton’s other legislative strategy: that the state get something in return for its multibillion-dollar investment in the utilities. To do otherwise became politically impossible. So Davis endorsed Burton‘s plan to buy the utilities’ 32,000-mile electricity-transmission grid. The governor declined to name a price, but the figure being bandied about in Sacramento is roughly $6 billion to $9 billion, or two to three times the ”book value“ of the high-voltage pylons and wiring.

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”We should be getting the transmission lines at truly bargain-basement prices,“ consumer advocate Harvey Rosenfield says. ”This deal, if it goes through, shows that the utilities may be short on electricity, but they are just as politically connected as ever. The electric grid may be collapsing, but the political grid is doing just fine.“

Rosenfield, along with consumer groups, Burton and State Treasurer Phil Angelides, supports purchasing the grid as another step toward creating a state-owned energy authority, modeled on the Los Angeles Department of Water and Power, whose plentiful supply of electricity is also among the nation‘s cheapest. The governor does not appear to share that vision. ”We want the utilities back in business because they, better than anyone else, know how to keep the lights on and how to power our economy. We can’t reinvent their wisdom, their expertise and their experience,“ Davis said, without irony, at his news conference last week.

Meanwhile, the utilities, whose worldwide assets are valued at $67 billion, refuse to bear the brunt of their debts. ”For us to take money-earning assets and liquidate them and inject them into the utility is just not prudent,“ Edison International CEO John Bryson told the Orange County Register.

In exchange for overpaying on the transmission lines, the governor wants the utilities to dispose of some of their outstanding debts with federal tax refunds expected to total between $1 billion and $1.5 billion. At the same time, however, ratepayers will be asked to shoulder a new set of bonds the utilities would use to pay off the remainder of their debt. Again, no dollar figure was attached to this piece of the rescue package.

”I want to make clear it is my plan that all this can be done within the existing rate structure,“ Davis said on Friday. He readily acknowledged, however, that the ”existing rate structure“ would include extending indefinitely the 9 percent rate increase imposed by the California Public Utilities Commission in January, and a 10 percent hike that will begin at the end of March next year, when a mandatory rate reduction expires.

Rosenfield says that even the 19 percent jump won‘t cover all of the money the governor intends to hand the utilities. So far, the state has spent $2.3 billion buying power on the spot market, roughly $45 million every 24 hours. That expenditure will come either out of the state’s general fund -- and, thus, taxpayers‘ wallets -- or from utilities’ customers. Another $10 billion in bonds the state hopes to sell to pay for long-term power buying will also have to be borne by ratepayers -- mounting to $17 billion when interest on the bonds is included. Next, ratepayers will have to cover the price tag for buying the transmission grid, plus the undisclosed sum they will bear to make the utilities whole on the staggering debt incurred for skyrocketing energy prices. All together, these bills might top $30 billion.

Davis recognizes that this astronomical tab is a political bombshell. ”As you know,“ the governor said last week, ”there will be a period of time when citizens will be paying less than the true cost of electricity. And then there will be a period when they‘ll be paying more than the true cost of electricity. But that’s the only way you‘ll avoid sticker shock, which I think is important to consumers who were promised that rates would go down, not up.“ To avoid the fallout, the governor stealthily admitted, he ”will instead adopt a rate-stabilization plan that may last for five to 10 years.“

Add that new plan to the roughly $20 billion consumers have been forced to pay to the utilities for their ”stranded assets“ -- bum deals on nuclear-power plants -- and the cost of deregulation climbs to as much as $50 billion.

A few facts and figures can put the governor’s plan into sharp perspective. When deregulation began, California‘s three private utilities sold off nine power plants, which produce 20,000 megawatts of electricity, for $3.1 billion -- or two months’ worth of the state‘s recent power purchases. The companies that bought the power plants have collected profits from California’s crisis, estimated by Public Citizen at $1.2 billion, a windfall the governor called ”gouging.“ Instead of paying these generators $10 billion for 12,000 megawatts, taxpayers could have acquired a permanent source of nearly double that amount of electricity. The final irony here is that one of the largest companies, Duke Energy North America, which has four power plants in California, has declared that it will not sign any long-term contracts with the state until it is paid in full for power it sold to the private utilities. ”Those who think we‘re bluffing are wrong,“ a Duke spokesman said.

Back on January 8, Davis threatened to use his powers of eminent domain ”to prevent generators from driving consumers into the dark and utilities into bankruptcy.“ Talk of such seizures has disappeared from the governor’s rhetorical refrain. ”We want [a] shared paying contribution from all parties,“ Davis said last week. ”The result being solvent utilities, functioning utilities.“ Welcome to Deregulation II.

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