Davis Discloses Plan to Purchase Power Lines From Utilities

ANALYSIS: In the long run, utilities likely to benefit at expense of ratepayers

David Lazarus, Chronicle Staff Writer Saturday, February 17, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/02/17/MN208819.DTL

So, will it work?

Not even Gov. Gray Davis seems to know for sure whether his plan to rescue California's cash-poor utilities will leave consumers holding the bag.

But analysts say power rates or taxes -- or both -- could go up if Davis succeeds in having the state purchase the utilities' transmission lines.

As of last night, it still was not clear whether the utilities would go along with the scheme, even though they have a very good reason to agree to sell their networks to the state.

Actually, they have a billion of them.

"We're looking at $1 billion in upgrades to the system over the next five years," said Terry Winter, head of the Independent System Operator, which oversees California's electricity network. "At least $1 billion. Probably more. "

By selling off the lines, the utilities essentially would be transferring responsibility for upgrades and maintenance to the state. It isn't hard to guess who would end up paying the tab.

"Ultimately, end-use consumers pay, either through taxes or rates," Winter said. "That's the only way."

The governor pledged yesterday that ratepayers' bills would not go up as a result of his plan to rescue Pacific Gas and Electric Co. and Southern California Edison from the brink of bankruptcy.

That proposal rests largely on the state purchasing transmission lines from PG&E, Edison and San Diego Gas & Electric for an as-yet undisclosed sum and helping the utilities pay down nearly $13 billion in debt.

"It is my plan that all this can be done in the existing rate structure," Davis said.

However, the governor later said he expects consumers' bills to increase by 10 percent when a current rate freeze is lifted in March 2002 -- on top of a 10 percent "temporary" rate hike approved last month.

"I'm worried about the guy," said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. "Either something's wrong with him or he thinks we're stupid."

He and other consumer advocates called Davis' plan a bailout of the utilities in disguise -- a way of passing along billions of dollars of debt to consumers without power rates immediately going higher.

"It looks like the total package is everything PG&E and Edison wanted," said Harry Snyder, senior advocate at Consumers Union in San Francisco.

Consumers could feel the pinch several different ways. First, they would face a surcharge on their power bills to pay for bonds issued by the utilities.

Second, future work on transmission lines -- now clogged with bottlenecks and insufficient capacity -- would be passed along either in the form of higher rates or higher taxes.

Finally, there's still the question of who will pay for $10 billion in bonds that the state is issuing to purchase electricity on behalf of the utilities. That, too, could haunt consumers in the form of a tax increase.

"The governor is giving away the store," said Medea Benjamin, executive director of Global Exchange, a grassroots organization. "It's a huge bailout that he wants us to believe is actually us getting something."

As for what Californians would be getting for their troubles, that's still up in the air. Davis is negotiating with the utilities for the state to purchase 32,000 miles of transmission lines for as much as $6 billion, or about twice their book value.

From the utilities' perspective, analysts see considerable advantage to their agreeing to sell and then license back power lines.

Because they already have agreed to at least $1 billion in upgrades over the next five years, the work would proceed but the utilities could blame subsequent rate hikes on the true owner of the system -- the state.

Ultimately, analysts said, it would be business as usual for the utilities, which would continue to profit from operating the network even though Sacramento holds the pink slip.

"The state would own it nominally, but ratepayers would still be paying for it," said Rosenfield at the Foundation for Taxpayer and Consumer Rights.

Yet this is precisely the reassurance Wall Street has been seeking to justify a resumption of bank loans.

"There is clearly room for the financial community to reopen credit lines to the companies," said Paul Fremont, an analyst at Jefferies & Co. in New York. "It doesn't matter how you get there. All that matters is that you get to something that's creditworthy and solvent."

PG&E insisted yesterday that it is not seeking "a rescue or a bailout," even though the utility is suing the state in federal court for the right to hit customers with almost $7 billion in recent losses.

Nevertheless, the company said in a statement that "our team continues to be willing to negotiate to achieve a fair solution, and our chairman remains personally available to meet with the governor any time on this issue."

In an internal memo to employees, PG&E Vice President Linda Chinn said talks with the state "could take up to three weeks to negotiate the details."

In any case, there are numerous hurdles to be cleared. Even if the utilities sign off on the governor's plan, sufficient backing must be found among lawmakers.

Republican legislators have said they will oppose any purchase of the power grid. Considering that California is grappling with a statewide energy crisis, it would be nothing less than remarkable for the governor to engineer a fix that lacks bipartisan support.

Among other problems, this would raise the possibility that any agreement reached today might collapse under a future Republican administration.

"The governor's been outfoxed by PG&E and Edison," said Snyder at Consumers Union. "And to lose out to people who lose more than $12 billion in a year, you really have to not be paying attention."

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CALIFORNIA'S ENERGY CRISIS

Gov. Gray Davis outlined a plan yesterday to help the state's utilities avert bankruptcy and resolve the energy crisis. Davis did not say how much the plan would cost but repeated his pledge not to raise rates.

The problem

-- The state's 1996 deregulation of its electricity market - intended to increase competition and reduce rates - is the biggest factor. Competition has remained limited, and wholesale prices have skyrocketed.

-- On many days, an unusually high number of power plants have been shut down for maintenance and repairs, reducing supply.

-- Rising energy needs elsewhere have limited the amount of power out-of- state generators can sell to California.

-- Natural gas prices have tripled in the past year because of cold weather and reduced supplies. Many electricity plants run on natural gas and have become exponentially more expensive to operate.

The solution

-- Under Davis' plan, the state would buy 32,000 miles of high-voltage transmission lines owned by the utilities. Negotiations would start at $3.1 billion, and utilities would have to use the money to settle debts.

-- The parent companies of PG&E and Southern California Edison would be required to return some of the $3 billion to $4 billion that the utilities funneled to them last year to help settle debts that the firms say approach $13 billion.

-- Utilities could sell 20-year bonds to pay their debts. The bonds would be paid off with money earned selling electricity. Ratepayers would pay off the bonds, but Davis insisted that the costs would be contained within "the existing rate structure."

-- Utilities would be barred from allowing logging and development on some of the 88,000 acres of land they own around dams, reservoirs and generators.

-- PG&E and Southern California Edison would be required to drop lawsuits against the state seeking rate increases.

What happens next?

-- Next week, Davis and the Legislature will begin drafting legislation needed to enact the plan. Energy industry analysts and power generators have said lawmakers must move quickly to head off utility bankruptcies.

-- Federal regulators must approve portions of the proposal, including state takeover of transmission lines.

E-mail David Lazarus at dlazarus@sfchronicle.com.

©2001 San Francisco Chronicle Page A1

-- Martin Thompson (mthom1927@aol.com), February 17, 2001