Published Wednesday, Feb. 14, 2001, in the San Jose Mercury News

$500 million more sought for power BY DION NISSENBAUM Mercury News Sacramento Bureau SACRAMENTO -- As Gov. Gray Davis works to craft a bailout plan for California's two largest electric utilities, California's fledgling foray into the power business is coming at an ever more expensive price that is nearing $2 billion.

For the second time in about a week, the Davis administration alerted lawmakers Tuesday that it needs another $500 million to buy energy on the costly short-term market while negotiators try to work out long-term contracts with power suppliers.

That brings the two-month state price tag to about $2 billion, far exceeding early estimates that California would have to spend about $1 billion to launch its energy buying program. The news has left some lawmakers worried that the state is burning through money without making enough progress in resolving the underlying problems.

With the bills piling up, Davis is looking to present Southern California Edison and Pacific Gas & Electric with a plan by week's end to rescue the two companies edging closer to bankruptcy. The state was forced to start buying power because the two utilities have exhausted their credit.

For now, the governor's advisers appear to have decided on state ownership of the utility transmission lines as the foundation of any deal, according to sources involved in the negotiations.

In a Tuesday press conference, Davis said he has not settled on transmission lines, but wants to make sure that the state gets something in return for rescuing the companies.

``What I will propose, hopefully this Friday, will not be a bailout, it will be a buyout,'' Davis said.

Buying the transmission lines has become the most-favored option in the Capitol in recent days as what one consumer activist called the ``crown jewel'' of any solution. A state Senate committee formally embraced the idea Tuesday by approving a bare-bones bill that encourages Davis to buy the transmission lines as part of any utility deal.

More hurdles ahead

Several issues must be settled before a transmission line deal is final. It still isn't clear what the lines are worth, or whether the utilities will have to pay capital gains taxes on the lines if they sell them to the state. And under the law, the federal government may have veto power over any transmission line deal. But negotiators expressed confidence they can resolve those issues.

However, the state is still struggling to put together low-cost, long-term contracts with power companies that are essential to keeping electric bills close to current levels.

When legislators gave Davis the power last month to sign the energy deals, they set aside $500 million to tide the state over until it could get the contracts in place. That came on top of $1 billion from other funds that have been used to buy energy that now costs about $45 million a day.

California won't be able to stop spending so much until it signs enough long-term contracts. But negotiations have been plodding along and so far the state has managed to come up with only about 500 megawatts -- enough to power a half-million homes.

``I am starting to get concerned about the pace at which they appear to be entering into contracts,'' said Assemblyman Fred Keeley, D-Santa Cruz. ``It is slow and there don't appear to be many of them.''

Davis has released few details about the contracts but has expressed optimism that his negotiators will be able to put together enough deals to solve the problems.

``No one ever expected this to be a slam dunk because it's a tough negotiation,'' said Davis spokesman Steve Maviglio. ``But we're making progress.''

Bonds will defray costs

Ultimately, the state is supposed to be reimbursed for its mounting expenditures in the spot market, under terms of a $10 billion power-buying bond bill approved by the Legislature two weeks ago. The treasurer's office intends to sell the first of those bonds in May, and their proceeds will be transferred to the state general fund.

Later, bond issues will generate money to be used for the long-term contracts.

Bond investors will be repaid by utility ratepayers, but it is not yet clear whether that will involve a rate increase.

Staff writers Cheryl Devall, Mark

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-- Martin Thompson (mthom1927@aol.com), February 14, 2001