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Get That Grid!

SACRAMENTO -- Not so fast.

Back on January 27, after a Gray Davis press conference, the Los Angeles Times reported on a supposed bipartisan consensus in which the state would bail out California’s big private utilities in exchange for warrants, a form of stock options.

That, however, was wrong. There was no consensus. The utilities don‘t want to give up anything in exchange for being rescued from their creditors. And powerful Democrats think the utilities should have to give up something more strategic than stock options, namely, hard assets -- like transmission lines or hydroelectric facilities -- that will give California more control over the market-based chaos now swirling about this most fundamental of commodities.

Indeed, a struggle over just that question is under way now in the Capitol. State Senate leader John Burton, the frequently irascible and usually colorful San Francisco Democrat, has just introduced legislation requiring a state takeover of the private utilities’ transmission lines in exchange for picking up their debt. “If they expect to get money from the ratepayers, the ratepayers have to get something from them,” Burton, a longtime liberal told the Weekly. “The California Transmission Authority will start to give us back control over electric power. We can do this with a majority vote.” (Last week‘s legislation, putting the state in the business of buying power from the generators, was an emergency action that required two-thirds -- that is, Republican -- support.)

Purchase of the grid, financed by state revenue bonds, would solve some of the financial problems facing Southern California Edison and Pacific Gas & Electric, which are claiming over $12 billion in losses in the electric-power deregulation debacle. Those estimates, hotly disputed by many, will be the subject of hearings by Senator Debra Bowen (D--Marina del Rey), a co-sponsor of the power-grid legislation. Burton’s plan would have the state buy and upgrade the 60 percent of the state‘s transmission lines currently owned by the reeling Southern California Edison, PG&E and San Diego Gas & Electric. (The balance of the lines is owned by municipal utilities or the federal government.)

Meanwhile, the utilities are arguing before a federal court that they should be able to recoup their losses with mammoth, immediate consumer rate increases -- thereby avoiding having to give up anything. Governor Davis and Assembly Speaker Bob Hertzberg (D--Sherman Oaks) have pointed to the February 12 court-hearing date as the deadline for coming up with a plan to help the utilities. Senate leaders don’t see it that way. “There‘s not going to be a bum’s rush,” says Burton. “Dates and rulings come and go. We‘re going to find out what they [the utilities] really need, and in exchange get something of real value for the public. If they try to ram through big increases based on a court decision, they will be run out of town on a rail.”

Some consumer advocates don’t want any bailout at all. A buy-out, however, may be another matter. “This power-grid takeover is a buy-out that is very much in the public interest,” says Lenny Goldberg of The Utility Reform Network (TURN).

In the Capitol, the watchword is “utility stabilization.” Bankruptcy is regarded here as an unacceptable option, in part because the utilities have always carried a very big stick in state politics, and in part because throwing matters into bankruptcy court, where creditors and shareholders take precedence over citizens and ratepayers, could give the state even less control over its energy future than it has in the wake of deregulation. With bankruptcy and immediate rate hikes both off the table, the debate here centers on what the state should get in return for helping the utilities out of their latest mess.

Last month, Speaker Hertzberg proposed with much fanfare that the state should get the private utilities‘ hydroelectric facilities. But there were always fundamental problems with that idea. For one thing, agricultural interests feared that too much of the state’s water would be used to generate electricity rather than irrigate their lands. For another, hydropower is no panacea in a greenhouse era characterized by warming temperatures. This year‘s Sierra snow pack is just half what it was two years ago at this time. In a little-noted report, the U.S. Geological Survey said in December that climate change from global warming could have a major negative impact on the state’s hydroelectric systems for years to come.

And, of course, the utilities didn‘t want to give up their hydro facilities. Davis quickly took the proposal off the table. Though Burton and State Treasurer Phil Angelides had proposed the takeover of the transmission lines, Hertzberg and Davis instead embraced the idea of warrants -- that is, stock options, which could help reimburse the state if utility stocks rise, but would do nothing to enable California to regain strategic control over electric power.

But there are big problems with the warrants idea -- not the least of which is its constitutionality. According to the Constitution of the State of California, “The legislature . . . shall not have power to authorize the State, or any political subdivision thereof, to subscribe for stock, or to become a stockholder in any corporation whatever.” State Attorney General Bill Lockyer takes this to mean that warrants aren’t legal. Despite backing from Davis, Hertzberg and Senate Republican Leader Jim Brulte, the actual legislative author of the 1996 deregulation scheme, the stock-options idea is in trouble. Proponents now say that some unspecified third party might be able to hold the stock options on the state‘s behalf. But that doesn’t answer the pointed questions of consumer groups, who wonder about the state‘s built-in conflict of interest as its Public Utilities Commission contemplates utility rate hike requests when the state is a major stockholder in the utilities. And this stock deal could give the state the options on as much as 40 percent of the utilities’ equity.

Which leads us back to the power-grid takeover, floated last month by Burton and Angelides, who are also pushing for a state power authority. Burton says the two proposals can be melded together in the future. The transmission authority comes first because of the utilities‘ proclaimed immediate need for recapitalization.

“By acquiring transmission lines, we will have greater control over our whole system,” says Senator Byron Sher (D--Stanford), Senate Environment Committee chairman. “Utilities haven’t had the wherewithal to improve lines. Bottlenecks have already emerged. Secondly, it‘s a good way to deal with their financial problems. Transmission lines are already encumbered by long-term debt. This acquisition will pay off those creditors with first liens on transmission lines. Next to the long-term contracts [for power, currently being negotiated for the state by David Freeman of L.A.’s Department of Water and Power], this is the best thing we can do right now to stabilize the situation.”

John White, director of Citizens for Energy Efficiency and Renewable Technologies, agrees that a grid takeover could help solve a range of problems. “We can‘t control wholesale prices by owning the grid,” he says. “But we regain influence with power generators by controlling their terms of service.”

The transmission lines have a book value of $3.8 billion, but their market value could be higher, though probably not as high as the utilities’ claimed losses. As Sher points out, transmission upgrades are urgently needed not just for the distribution of existing generating capacity (almost daily, there are difficulties moving power from south to north), but also to handle the 6,000 megawatts in already approved new capacity that will come on line in California in the next few years. The state can make these improvements more economically than the utilities, he adds.

Should the state be taking this on? “We‘re in the power business already,” says Burton. “The question is how much control we get.”


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