Waiting for Gray

SACRAMENTO -- Gray Davis had a different sort of governorship in mind. He figured he’d raise tremendous amounts of campaign cash, stay out of the way of business, and preside over budget surpluses fattened by the flush new economy. Then he‘d raise tremendous amounts of campaign cash, go to the head of the education-reform parade, raise tremendous amounts of campaign cash, win another landslide victory in 2002, and see what happens in 2004.

He certainly never thought he’d be in the middle of what even some of his own associates describe as problematic negotiations to take over the power grid owned by California‘s reeling private utilities.

Amid the disaster of California’s electric-power deregulation and our sagging new economy, our avowedly middle-of-the-road, don‘t-rock-the-boat governor finds himself in a desperate scramble simply to keep the lights on. Increasingly, he is pushing government directly into the energy business to do so. Right now, he is negotiating for a state takeover of the power grid long owned by Southern California Edison, San Diego Gas & Electric, and Pacific Gas & Electric.

After early waffling, Davis has embraced the proposal for a state public power authority offered in January by Treasurer Phil Angelides and Senate President Pro Tem John Burton (D--San Francisco). After earlier pushing a more innocuous plan for the state to bail out the private utilities in exchange for stock options, Davis has embraced another Burton and Angelides proposal, this one to buy out utility transmission lines, further disrupting their former monopoly power, giving the state some leverage over out-of-state power generators, who oppose the plan, and placing the state in position to upgrade and expand the grid more cheaply than the utilities. The public, of course, will pay for these needed moves whether the grid is owned by the utilities or by the state. Davis was already engaged in a full-court press to buy power instead of the creditless utilities, promote conservation and bring a host of small ”peaker“ plants online to forestall a real meltdown with the coming crunch of summer air conditioning.

What’s brought about the shift in the governor‘s thinking? In short, Davis, who declined to criticize the utilities in his January State of the State address for their central role in the deregulation debacle, has discovered in his own public-opinion research that voters are very open to government involvement in the energy market. ”People want a sense of control, not the chaos which came with deregulation,“ says a Davis adviser.

Needless to say, the Republicans aren’t happy about any of this. At their state convention here last weekend, state Senator Tom McClintock (R--Thousand Oaks), regaled their power-crisis forum with a preferred alternative -- let the market reign and the nuclear plants bloom. But Davis‘ partisan opposition is in serious disarray, with only one statewide elected official and a decided minority in both houses of the Legislature, their fingerprints all over the ideological origins of the deregulation debacle. As they look to challenge Davis in 2002, they do so with fervent dreams of movie star Arnold Schwarzenegger as their standard-bearer, a would-be muscleman ex machina. Or of Bill Simon Jr., the ultra-rich son of the former treasury secretary, who spent the weekend skiing rather than meeting his potential followers. Or perhaps just mild daydreams about the only potential candidate actually on the scene, Secretary of State Bill Jones, a long-time party warhorse who to date has raised less money than many candidates for the Los Angeles City Council.

With the debate having moved sharply to the left and the Republicans far less relevant here than in Washington, consumer advocate Harvey Rosenfield of the Santa Monica--based Foundation for Consumer and Taxpayer Rights has emerged, at least for the moment, as the governor’s principal antagonist.

Rosenfield denounces most every move Davis makes as a bailout, threatening a massive omnibus energy initiative next year. ”John Burton is my hero,“ says Rosenfield. ”He‘s the finger in the dike in Sacramento. Gray Davis is not. He’s something else,“ which Rosenfield balks at specifying.

How Davis found himself being labeled a quasi-socialist by his Republican opponents and a sellout by his principal antagonist is a story in itself. Rosenfield is very critical of the recently announced deal to buy Edison‘s transmission lines. He says that he thinks the utilities should receive only half of book value for the grid, far less than the roughly 2.3 times book value the Davis team negotiated with Edison.

But book value is not market value, as Rosenfield’s hero Burton notes. Unless you think of the grid as being akin to a used car. In essence, book value is the amount invested in physical plant minus depreciation. Yet, quite unlike a used car, the grid is unique.

The Federal Energy Regulatory Commission, which most believe must approve a grid takeover, won‘t go along with a buyout that doesn’t represent some semblance of market value. Indeed, its new George Bush--appointed chairman says he finds the proposed grid takeover to have the troubling overtones of socialism.

Not everyone in the consumer alliance agrees with Rosenfield‘s scorched-earth assessment. The Utility Consumers Action Network (UCAN) and The Utilities Reform Network (TURN) express real skepticism about aspects of the emerging grid buyout, but laud it as a conceptual breakthrough. And there is some exasperation with Rosenfield. ”I like Harvey,“ says longtime advocate Lenny Goldberg, ”but to him any rational price is a bailout.“

Yet some in Davis’ own operation share some of Rosenfield‘s frustration. The administration is spending billions from the general fund to buy power, yet it is having to fight with the utilities over the question of passing through the price-controlled payments they continue to receive from their customers to the state as at least partial reimbursement for the state’s present buying of power distributed through utility networks. ”So far,“ says a Davis adviser, ”everything goes in to the utilities and nothing comes out!“

And some were troubled by last week‘s negotiations with the utilities. Edison started by demanding an exorbitant $6 billion for its portion of the grid, assuming it decided to sell at all. That price came down by more than half, a process helped in part by some public saber rattling by Davis chief political strategist Garry South, who mused about seizing the grid under police powers granted the governor in his declared state of emergency.

But another Davis associate worries that the governor’s negotiators in the room, former Edison president Michael Peevey, who oddly sees no conflict of interest, and San Francisco attorney Michael Kahn, are out of sync with his public statements. Worse, that they have been negotiating for things they need not negotiate for, in effect paying for things the state already can get under its existing authority.

Specifically, this associate feels that it is foolhardy to use up negotiating capital to get the utilities to agree to provide cost-based rates for 10 years and to hold on to their remaining power plants when these seeming concessions can already be forced by the state. And assigning value to a utility agreement to drop lawsuits aimed at forcing immediate rate increases is especially foolhardy, since prospects for this legal action are poor.

In this view, the agreement to sell the transmission lines, already in hand from Edison and all but certain from the much smaller San Diego Gas & Electric, is a breakthrough. But the price is very sweet, especially since the utilities haven‘t performed upgrades on the system for over 15 years.

And then we come to PG&E, which remains loathe to sell its transmission lines and threatens to take its chances in bankruptcy court when it is not demanding an even sweeter deal than Edison’s. Perhaps, say Davis aides, it would be best to simply seize PG&E‘s transmission lines.

Davis cabinet secretary Susan Kennedy, who is quarterbacking much of this for the governor, was not available for comment.

Davis has wandered very far afield from his original game plan for this governorship. If he harbors hopes of mounting a presidential candidacy as a self-proclaimed moderate friendly to Wall Street, seizing facilities would be an odd way of going about it.

In any event, the entrenched powers at PG&E may not find the threat credible. There is a special arrogance about PG&E, stemming from its San Francisco base at the hub of what was the power center of the Old Far West.

Yet PG&E is by far the least popular of the utilities in private political research. ”And this is before Julia Roberts wins the Oscar for Erin Brockovich!“ exclaims a Davis associate, referring to the true-life tale of a fight against the utility for its toxic contamination.

Davis advisers did discuss using California National Guard troops to inspect suspiciously non-operating plants earlier in the crisis.

But would Davis move in to seize the grid from the recalcitrant corporation?

According to an associate, he is certainly closer to the frame of mind necessary to do that than he was two months ago. However, unless Davis has done it himself, it does not appear that anyone has mapped this out, as his advisers and operatives are busy scrambling buying power, negotiating with the utilities, pushing for new generating capacity, and working on conservation plans.

Gray Davis, the reluctant interventionist, has often been criticized for reacting rather than acting. He may soon get the opportunity to reverse that perception once and for all.