Daniel Weintraub: Are California utilities victims or bandits in suits?

(Published Feb. 20, 2001)

State Sen. Ross Johnson says his father had a simple way to describe the difference between a bank robber and a bank manager.

"Jesse James had a mask and a gun, and they called him a thief," Johnson says. "But if he'd had a nice suit and a fountain pen then he was a businessman."

Executives of the state's two biggest utilities wear nice suits, usually dark ones. But to Johnson, they might as well be thieves. He thinks they're trying to rob state taxpayers and utility customers of billions of dollars by inflating their debts and overstating the extent of their financial problems.

Johnson is a Republican, one of the most conservative in the Legislature. First elected in 1978, the Orange County lawyer has been the Republican leader in both the Assembly and Senate.

Earlier in his career he was derided as a "caveman" because Democrats considered his views only slightly more enlightened than the Neanderthals. Now, in an odd partisan role-reversal, Johnson islocking arms with consumer groups in opposition to the utility rescue plan Gov. Gray Davis unveiled Friday.

Davis wants the state to let the companies refinance part of their debts by selling bonds that would be repaid by consumers. He has also proposed buying the companies' high-voltage transmission lines as a way to infuse the firms with cash. The governor says it's a "buy-out" --not a bailout.

But Johnson and other Republicans say it looks more like a sellout. They may have a point.

Nobody doubts that the utilities are in a cash crunch. For much of last year, they were buying power at high wholesale prices while being forced to sell it at lower retail rates frozen by state law. This is not the road to profitability. By year's end, Pacific Gas and Electric and Southern California Edison were reporting unpaid debts of $13 billion between them.

About half that debt is owed to themselves and needn't even be an issue. But even those numbers don't tell the entire story. Before wholesale rates spiked last May, the retail rate freeze worked to the utilities' advantage. For 2 1/2 years, they were buying electricity cheap and selling it to us at a healthy profit -- guaranteed by the government.

This was part of the deal the companies cut with the Legislature in 1996 to ease their way from regulated monopolies to free-market competitors.

So let's look at all the numbers.

A new study of utility revenues and costs shows that the companies are still net winners in this game. PG&E wasn't complaining when it gained $2.1 billion off the restructuring deal in 1998 and $2.2 billion in 1999. Even after losing $2.6 billion in 2000, the company was still ahead $1.7 billion for the entire period.

Southern California Edison did not do as well but remains about $780 million in the black for the three years combined.

The utilities, understandably, want to divide the question. They don't want to balance their recent losses against their earlier winnings. The winnings, after all, are already gone. Much of that money went to pay off debts the utilities incurred in their days as regulated monopolies, when they built plants with the expectation that the costs would be recovered from ratepayers. Some of the money was returned to the utilities' parent companies and to shareholders as dividends.

But when the utilities helped write this deal in 1996, they acknowledged that they were not guaranteed to come out ahead. In effect, they agreed to supply their retail customers with electricity at roughly 6 cents per kilowatt hour for four years. They figured they could get the energy for half that on the wholesale market and come out flush.

For a while it looked as if they were right. Some bad judgment on their part and some foolish decisions by state regulators turned things sour.

The Public Utilities Commission has audited the companies' books but has yet to issue a definitive statement about their financial condition. Johnson and other Republicans in the Legislature are saying the state shouldn't step in to help without knowing more.

"I think before we leap to the idea that we should have some form of bailout of these investor-owned utilities, there should be a firm accounting of what their debts really are," Johnson said. "So far there's nothing but smoke and mirrors."

It's possible for the state to help the utilities out of this fix without socking it to consumers or the taxpayers. The state could float a bond, for instance, and have it repaid by the companies' shareholders rather than by ratepayers.

The state purchase of the transmission lines, if it makes sense on its own, could also be a fair deal that gives the utilities cash and the taxpayers a valuable asset for the long term.

The utilities deserve fair treatment. Given the way the state helped get them into this mess, the companies might even deserve a break of some kind. But they don't deserve a bailout. And certainly not one that is put together in a panic before all the facts are known.

Daniel Weintraub's column appears on Sundays, Tuesdays and Thursdays. He can be reached at (916) 321-1914 or at dweintraub@sacbee.com

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-- Swissrose (cellier@azstarnet.com), February 20, 2001