Published Friday, Feb. 16, 2001, in the San Jose Mercury News

Davis seeks backing to buy power lines from utilities NETWORK COULD COST STATE UP TO $8 BILLION

Governor's tentative rescue plan, which is facing criticism, would allow utilities to bill ratepayers for at least $2 billion of their debts. BY DION NISSENBAUM Mercury News Sacramento Bureau

SACRAMENTO -- California would pay its troubled electric utilities up to $8 billion to buy their transmission lines -- more than twice an independent estimate of the network's value -- as part of a proposal Gov. Gray Davis is shopping around in an effort to bring the state energy crisis under control.

The purchase of the high-voltage transmission lines, a 26,000-mile network which carries electricity around the state, is the foundation of a complex package Davis is shaping to prop up Pacific Gas & Electric Co. and Southern California Edison, according to a draft of the governor's proposal obtained by the Mercury News and legislative staffers who were briefed on it Thursday.

The package includes other key elements, including an agreement that the utilities can bill ratepayers for at least $2 billion of their debts and a protection plan for wilderness land that the utilities own.

While details remained in flux Thursday, the plan came under attack from a spectrum of interests accusing Davis of giving away too much in a frenzied rush to avert looming bankruptcy threats by the utilities.

``It really smells like a bailout,'' said Doug Heller, a consumer advocate with the Foundation for Taxpayer and Consumer Rights. ``We're not holding the companies responsible for anything.''

The Democratic governor has said he will unveil his plan this afternoon, but it now appears he will outline only a thin framework and leave details to be negotiated directly with the utilities.

Still, the governor's key energy advisers devoted much of Thursday to discussing some details with Democratic lawmakers in an effort to round up the legislative support necessary to move ahead with the rescue plan. An agreement would signal a unified front by state leaders who have been floundering for weeks in search of a way out of the political and financial morass.

Under the governor's proposal, legislative sources said, the state would pay Edison, PG&E and San Diego Gas & Electric from 2 to 2.3 times the independently assessed book value for the lines.

Depending on how the transmission lines are valued, that would provide the companies with about $6 billion to $8 billion to pay off an estimated $12 billion in debts created by their inability to pass on the skyrocketing costs of buying electricity to their customers under the terms of the state's retail rate cap.

As owner of the lines, the state would be able to charge a fee to companies that send power through the lines and consumers that receive it.

Other components of the deal, the legislative sources said, include:

An agreement by the utilities to drop lawsuits that could allow the companies to raise customer rates without limit by voiding the rate cap. In exchange, the state would essentially allow PG&E and Edison each to bill their customers about $1 billion -- the value Davis has placed on settling the lawsuits -- to pay off their debts. It is not clear whether this portion of the deal would necessitate a rate increase, although many observers believe an increase is inevitable.

An agreement from PG&E and Edison to set aside thousands of acres of wilderness land they own as part of their hydroelectric system. Some lawmakers want the companies to instead donate the land, valued at about $300 million by one legislative source, to the state.

The parent companies of each utility would agree to return about $1 billion in overpaid federal taxes to help their utilities fend off financial collapse. Davis has vowed in recent days that the parent companies, which have largely shielded their assets from the utilities' creditors, must participate in the rescue plan.

An agreement by the utilities not to sell their waterways and dams that generate hydropower for at least 10 years. This hydropower is currently the cheapest power available in the state.

GOP opposition

But it was clear Thursday that Davis has not done enough to shield his plan from criticism.

``Voting for this is voting for a bailout,'' said Assembly Republican leader Bill Campbell of Orange, who was joined by a half-dozen other GOP lawmakers opposed to the state buying the transmission lines.

Buying the transmission lines has emerged in recent days as the most popular proposal for rescuing the utilities. But Republicans favor another idea once backed by Davis and other Democrats to become investors in the troubled companies.

Under that plan, the utility parent companies would give the state a form of option to purchase their low-priced stock on the presumption that the value would rise if their financial fortunes turn around.

But that concept ran into a host of concerns that it would give the state few guarantees of getting something in return for rescuing the companies.

Another plan to take over the utilities' hydroelectric plants also failed to gain favor with Davis, Republicans or moderate Democrats.

Final alternative

That left the transmission lines as the last alternative, although the idea will face a series of hurdles. The deal may require approval from reluctant federal regulators and a waiver from Washington to avoid payment of a huge capital gains tax if the power lines are sold.

Also, the state would have to invest up to $1 billion to improve the sometimes-congested transmission system.

While the idea was embraced by some consumer activists, they are now expressing reservations about paying the companies anything more than the book value for the electricity lines.

Heller questioned the deal -- once referred to by main proponent Senate President Pro Tem John Burton, D-San Francisco, as ``I give you a dollar, you give me a hot dog.''

``It sounds like we're getting half a hot dog for our dollar,'' said Heller.

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-- Martin Thompson (mthom1927@aol.com), February 16, 2001