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Power Play

Last year, when he was still new in the office, Assembly Speaker Bob Hertzberg (D--Sherman Oaks) said he would avoid pitting consumers against business. So it‘s no particular surprise that he has been looking since January for a way to bail out the troubled Southern California Edison utility, which has such strong ties to the state’s power elite that Governor Gray Davis‘ new communications czars are on the Edison payroll even as they work for the state.

The PR gurus hired last month, Mark Fabiani and Chris Lehane, remain on the Edison payroll, even though they will receive a combined $30,000 monthly under their six-month state contract. Lehane was Al Gore’s press secretary. Fabiani was Gore‘s communications director; before that, he was the damage control counsel for the Clinton scandals. He rose to prominence as Los Angeles deputy mayor during the last Tom Bradley term, when he handled the mayor’s late-blooming scandals.

Lehane confirms that he and Fabiani continue to work for Edison as well as the state, saying only that the utility is paying them “more than $10,000” a year. How do they justify working for both the state and the corporation seeking a huge state bailout? As Lehane puts it, “Governor Davis and Edison have the same energy policy. There‘s no conflict in working for both.”a

A Davis spokeswoman has also said there is no conflict, because Lehane and Fabiani disclosed their SCE paychecks before starting work in the Governor’s Office. The role of the two Edison employees in the Governor‘s Office has come under intense fire in Sacramento, however, with Secretary of State Bill Jones, a Republican who will run for governor next year, calling for an investigation.

None of this deters Davis from wanting to bailout SCE. Davis spent weeks looking for a legislative author before finally coming up with Senator Richard Polanco (D--Los Angeles), who hasn’t generated much support for his bill and seems to be acting as much out of courtesy to Davis and past solidarity with Edison as anything else. But the clock has been ticking down on the deal and Hertzberg doesn‘t want Edison to go bankrupt on his watch, especially since most in the Capitol believe that Davis will blame the Legislature if anything bad happens as a result.

Enter D.J. Smith, a big-time Sacramento lobbyist who was one of the principal players in crafting the 1996 deregulation bill. He represents big industrial-power users. Several weeks ago, he approached Hertzberg with an idea -- a new way to do the Edison bailout. Separate the state’s utility customers into two classes, he said, “core” and “non-core.” Core customers, or residential consumers and small businesses, would be served by the power plants the utilities still own. Non-core customers -- i.e., larger businesses -- would go into the open market and cut their own deals with power generators and marketers. This is called “direct access.” In one version of this concept, non-core customers would also pay off the utilities‘ debts, wiping out the need for a public bailout and allowing the utilities to retain all their assets, including the transmission lines that have been in play for months.

Meanwhile, a couple of private firms are nosing around to buy those same transmission lines. (In that case, Edison would make out twice.) In another version, the state would infuse capital into the utility by buying its transmission lines. Hertzberg and Smith convened a working group of major players: large energy users; oil refiners; retailers and energy producers, including Enron; Silicon Valley; and some environmental and consumer reps. Many of these folks were instrumental in pushing through the original deregulation.

Retired veteran liberal Assemblyman Phil Isenberg (D-Sacramento), now a lobbyist, coordinates the group, whose goal has grown beyond bailing out Edison to the reinvention of deregulation. The group has gained a lot of support, and, in fact, this is a very intriguing approach. It could protect consumers from the vagaries of the market and open up more opportunities for renewable energy, which gets short shrift from the Davis administration in its jury-rigged plans.

But there are several problems. While the group’s plan would stabilize and perhaps lower the price for “core” customers, who would be getting their power from the still-regulated utilities‘ plants, businesses could pass the cost of the bailout on to their consumers in the form of higher prices. And some businesses don’t want to pay anything to bail out Edison and the other utilities, and are fearful of taking their chances in the open market with direct access, even though the outrageous price spikes Californians have experienced seem to have been reined in by last week‘s limited and temporary price controls, imposed by the Federal Energy Regulatory Commission. Besides, there is another problem, and perhaps the largest: As the state redesigns its energy system, it also must figure out who will pay, not just the utilities’ debts, but also the $43 billion bill the state is running up with its vaunted long-term power contracts.

Hertzberg‘s people say that Davis gave his imprimatur to the group in its exploration of setting up separate power markets for core and non-core customers. But now Davis is shifting away from the idea. Joining him is his sometime antagonist, State Treasurer Phil Angelides. He and Davis are pressuring the Public Utilities Commission to approve everything that the Department of Water Resources has done with its power-buying to date and with the long-term contracts for the future -- including money for Edison consultants to work for the state, all without further PUC review -- and to come out against direct access.

With Davis willing to flex his political muscle -- he recently attempted to force PUC chief Loretta Lynch out of her post -- insiders expect her and the PUC to be amenable to the governor’s views.

The state could reopen the question of the long-term contracts, which were negotiated without any credible leverage threat from the governor. These contracts contain serious drawbacks. For one, they lock in energy prices much higher than those being charged before the recent run-up. They also provide the great bulk of their energy stream later in the decade. And, it turns out, the contracts actually spur the building of new fossil-fuel plants to the exclusion of new renewable-energy sources. In addition to contributing to the greenhouse effect, these new plants will use tremendous amounts of fresh water for cooling, just as state water experts warn of potential future shortages.

Many historical and financial ties underlie Davis‘ hopes for bailing out Edison. Davis has long been friendly with Edison chieftain John Bryson, who made his reputation as a pro-alternative-energy Public Utilities Commission president in the Jerry Brown administration, in which Davis also made his reputation, as Brown’s chief of staff.

Of the million dollars Davis has raised from utilities and energy companies since he started running for governor (he has since stopped taking energy money), Edison has provided by far the biggest chunk, over 35 percent. This is twice as much as was given by now-bankrupt Pacific Gas & Electric, a larger company.

The ties and tilt are obvious. Former Edison president Michael Peevey initially headed the governor‘s negotiation with the utilities. Former Edison executive Vikram Budhraja has a $6.2 million state contract to manage the long-term power contracts.

The state will soon ask Wall Street to buy $13.4 billion worth of bonds; this, in turn, will reimburse the state for the purchases of electricity it has made since January, and leave, according to Angelides, about $3 billion for future purchases. Ratepayers will then pay off the bonds, with interest, for 15 years. The interest cost won’t be known until closer to September and October, the new period in which the bonds are to be sold, but it will be north of $7 billion. It‘s a $20-billion-plus deal for Californians.

One overarching factor in any Edison deal is the overall cost of the bailout, which hinges on the size of the agreed-upon debt. Davis says power generators have overcharged the state by $9 billion. Settlement talks are under way now in Washington. But the federal administrative-law judge conducting them said, “If there are refunds, it will be in the neighborhood of a billion or so.” Later, he averred that it might be twice as much. A nice sum, but one that would still leave the state very much on the hook in an Edison bailout.