Gray Davis has a credibility problem. The governor’s deal to stabilize Southern California Edison, hurriedly cut on the heels of Pacific Gas & Electric‘s bankruptcy filing, contains many items that tip it from a buyout to a bailout. His announcement that the power crisis will wind up costing taxpayers “not one penny” is simply wishful thinking. And his office’s maneuverings around the proposed state power authority raise questions about trustworthiness and competence.
An examination of the deal Davis struck with SCE, detailed in a 38-page legal memorandum, reveals many items that have not hitherto been disclosed. It also makes it clear why one Wall Street source calls the deal “a home run for Edison!”
It was widely known that the state was about to buy SCE‘s transmission lines for $2.76 billion, though the value of those lines without a similar deal with PG&E seemed dubious. So rushed was the negotiation that SCE’s fee for managing and maintaining the transmission lines has yet to be determined. Davis accepted all of SCE‘s loss claims, and negotiated for things which, according to Public Utilities Commission sources, the PUC can already get without compromising.
The state agreed to finance the rest of SCE’s claimed losses — whatever they turn out to be — by imposing a rate surcharge on consumers. The state also would guarantee SCE a rate of return highest among the private utilities, free from PUC scrutiny. And the state would retroactively take on SCE‘s debt for the power it has received — but not paid for — since January.
SCE agreed to provide power from its remaining plants at cost plus an agreed-on profit, which the PUC could have required anyway. The company also agreed to drop plans to sell several power plants, which the PUC would certainly have forbidden in the teeth of the crisis. The state actually agreed to boost SCE’s profits from the San Onofre nuclear plant, which was previously bailed out as part of the 1996 deregulation scheme, overriding PUC oversight, and one unit of which has been offline for months following an accident that cost the state $1 billion for replacement power.
“This is a regulatory jailbreak,” says Center for Energy Efficiency and Renewable Technologies director V. John White.
There are good reasons for the state‘s sloppiness on some of the key details in the SCE agreement. PG&E’s woes increased the pressure on Davis to hurry up and strike a deal lest Edison go bankrupt, too. And so he did, without his longtime negotiator, former Edison president Michael Peevey, who had been criticized by some for his coziness with the utilities. Peevey was moved aside in favor of Davis‘ legal counsel, Barry Goode.
Like PG&E, Edison is a strong candidate for bankruptcy, whether Edison wants it or not. Alternative-power firms, which rely on co-generation, wind, solar, biomass or geothermal energy sources powered the utilities for months for little or no payment. Now these mostly small companies are owed $1.8 billion, much of it by Edison, which just began paying them. This could force the giant utility into bankruptcy at any moment.
Reaction from consumer groups has been hostile, and legislative reaction has been cool. Indeed, Senate Energy Committee Chairwoman Debra Bowen (D–Marina del Rey), who will conduct the Senate’s hearings on the deal, is against it.
One reason is that despite the transfer of billions from the utility to its Edison International holding company, only $400 million in over-assessments for taxes will be transferred back. The PUC was moving toward ordering much larger returns from the holding company. SCE does agree to pay the state‘s costs for the protracted negotiations — as long as it can pass the cost along to its customers, that is.
Gray Davis has an even more serious problem than weak negotiations with utilities: A dime is less than a quarter, far less than half a dollar and, unfortunately, much more than a nickel.
A dime is what the new, increased rate would be, on average, for a kilowatt hour of electricity. A quarter is roughly what it is actually costing the state to buy a kilowatt hour on the fluctuating but generally sky-high spot market. Half a dollar and more is what it may cost on the spot market this summer. And a nickel is what the governor said in January that it would cost when he trumpeted what turned out to be nonexistent deals with power generators.
You don’t hear these numbers because this is a complicated issue and the numbers are inconvenient. The Davis administration still refuses to release information about the state‘s power buying, which began in January.
Even without price increases on the spot market, a number of experts say the new rate increase, widely contested by consumer groups, won’t cover the real numbers, even when coupled with the state‘s pending biggest-in-U.S.-history bonds sale, which Davis wants to increase from $10 billion to $12.4 billion. And there are ample signs that the spot-market price will go up.
Indeed, information compiled by the Weekly from inside the PUC and from other sources makes it clear that the increased revenue base from utility customers and the proceeds from the bigger bond sale — the combination of which Davis said would cover all power spending through 2002 — will run out before then. (Davis also neglects the roughly $7 billion in interest that Californians will pay for the bond deal.)
“We’ve traded a regulated monopoly for an unregulated cartel,” says state Treasurer Phil Angelides. “We have to stop figuring out how to pay their ransom, and take action to stop it.” Sentiment in favor of seizing power plants is on the rise in the state Senate.
With things in such disarray, it would be comforting to report that strong steps are being taken to ensure California‘s long-term future. Unfortunately, there is substantial disarray in this area as well, though things may be getting better.
Maneuverings around the state public power authority proposed in January by Angelides and Senate President John Burton have been very strange. After some early waffling, Davis endorsed the idea of such an authority on January 26, then began feeling serious heat from the utilities and power companies, giving him major second thoughts. The power-authority proposal passed the Senate two months ago, then languished in the Assembly. It passed the Assembly’s Energy Committee more than a month ago and stalled out as stories of Davis‘ cold feet grew.
Then Davis’ Press Secretary Steve Maviglio proved the accuracy of reports of gubernatorial backpedaling. In a March 29 letter to the editor of the Sacramento News & Review — responding to “Asleep at the Switch,” a cover story I wrote on the governor‘s management of the power crisis — Maviglio rejected Davis’ endorsement of the power authority.
“Governor Davis,” his press secretary wrote, “has not ‘embraced the proposal for a state public power authority’ offered in January by Treasurer Phil Angelides and Senate President Pro Tem John Burton. The governor is more interested in streamlining state agencies, not adding to red tape.”
I immediately contacted Angelides about the letter of disavowal from the Governor‘s Office. He expressed surprise and immediately told Burton, who then phoned one of Maviglio’s superiors.
Less than two days later, speaking before the California Democratic Party Convention in Anaheim, Davis renewed his support for the power authority. Now DWP chief David Freeman is slated to head up the power authority, which has at last begun moving again in the Assembly.
The governor would prefer to make all the appointments to the new agency — a problem, given his spotty record of energy appointments — but has agreed to include Angelides, who first proposed the power authority. Some worry that the agency could be tarnished by having to manage the state‘s power-buying function even before getting to its real tasks of building power plants and promoting conservation and renewable energy. But let’s not begrudge the governor a little progress.