Bombshell Warning on Power Cost

Spending may double and rates skyrocket, governor's office tells Legislature

Greg Lucas, Lynda Gledhill, Robert Salladay, Chronicle Sacramento Bureau

Saturday, March 24, 2001, ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/24/MN176940.DTL

Top Davis administration officials told lawmakers yesterday that the state may have to spend twice as much as expected on electricity purchases over the next two years - requiring rate increases of as much as 100 percent.

The stunning admission by the Davis administration contradicts his repeated promises that his plan to ease California's energy woes could be done without a rate increase.

California will probably need to issue $23 billion in bonds for electricity buys, more than double the amount Davis said would be needed by the state to keep electricity flowing until California's cash-poor utilities can get back on their feet.

Administration officials told lawmakers to stop action on a bill that would have capped the state's energy purchases at $10 billion.

But a Davis spokesman said the numbers were far from firm.

"There are a lot of scenarios being run . . . and until we complete the negotiations, this can be added up any way you want," said Steve Maviglio, press secretary to Davis. "Those numbers are not based on any reality right now," he said. "There are too many things up in the air."

Assembly Democrats told a different story. They said Tim Gage, director of Davis' Department of Finance, Cabinet Secretary Susan Kennedy and John Stevens, Davis' top energy aide, met with Assembly Democratic leaders and dropped the bombshell.

And they did so just as those same leaders were trying to convince fellow lawmakers how important the bill was to the Davis administration. They also said that Davis, who was in the Palm Springs area for most of the day and briefly attended a fund-raiser at a golf club, was unaware of the figures.

PURCHASES IN BILLIONS

The three top aides said that electricity purchases for this year by the state would be $16 billion, not the $10 billion initially predicted. An additional $7 billion in state power purchases would be needed next year, they said.

The state has been buying power at a clip of $45 million a day since Jan. 17 because the troubled utilities could no longer afford to make the purchases.

From the start of the energy crisis, the state has planned to repay its power purchases through bond sales. The bonds would be paid off by a portion of the amount ratepayers are charged on their monthly bills.

Davis has so far insisted that enough money could be found to cover the $10 billion without raising rates. But his aides said if the size of the bonds ballooned to $23 billion, a hefty rate increase would be necessary.

INCREASE UPON INCREASE

The Public Utilities Commission is already planning to make permanent a temporary 9 percent increase. An additional automatic 10 percent is scheduled for no later than March 2002. But the aides said, on top of that, an additional 60 percent to 80 percent increase would be required to cover the debt service.

"For some time, I have believed a fundamental part of solving this problem is admitting there needs to be a rate increase, and the numbers that have been shared today make that inevitable, and we should start dealing with the reality as soon as possible," said Assemblyman Fred Keeley, D-Boulder Creek (Santa Cruz County).

One consumer advocate said the revelation means the utilities are closer to bankruptcy because the state and ratepayers won't have the cash to bail them out.

And it could mean political trouble for Davis.

"Unless the governor issues an ultimatum to lower the prices, everybody's bill will double, and he will not be able to run for re-election in 2002," said Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights.

PG&E THREATENS SUIT

The news came as Pacific Gas and Electric Co. threatened to take the state to court over Davis' plan to force the company to pay back certain creditors.

Davis' proposal would require the utilities to pay alternative power generators for all the power that they supply, something PG&E said it cannot afford to do. Several of the generators shut down earlier this week as rolling blackouts spread across the state.

The bill stalled yesterday in the Assembly as Republicans objected. Lawmakers will resume debate Monday. Earlier in the week, Davis announced that action would be taken by the Legislature and the Public Utilities Commission that would guarantee payment to the alternative energy providers. He also said the state -- which has spent $3.7 billion to purchase power -- should be paid back first.

Without that promise, several of the small biomass, solar and wind producing plants -- called qualified facilities -- said they would have taken Southern California Edison Co. into bankruptcy court. The alternative generators provide enough electricity to power roughly 6 million homes.

PG&E said it cannot afford to pay the alternative producers and reimburse the state for the billions it has spent purchasing power. "These actions approach the problem in a piecemeal and uncoordinated fashion and would force us to pay out far more than we collect in rates, further exacerbating an already precarious financial situation," Gordon Smith, PG&E's president and chief executive officer, said in a statement.

DIFFERING VIEWS ON COSTS

According to PG&E's numbers, the company collects $400 million a month in rates. It says the average price to pay all the generation sources exceeds $1. 4 billion a month.

But consumer advocate Nettie Hoge said the utilities are exaggerating their own costs in order to try to keep as much money as possible. "It's just absurd," said Hoge, the head of The Utility Reform Network. "They have a temper tantrum every time something doesn't go their way."

The bill PG&E objected to is necessary to allow the PUC to order utilities to pay small power generators who agree to sign lower-priced contracts to provide energy.

The proposal offers generators a choice of agreeing to a five-year contract at $79 per megawatt or a 10-year deal at $69 per megawatt, Davis said. The going rate now is about $150 a megawatt. The PUC wants to act as early as Tuesday to bring some financial relief to the generators, who have been paid pennies on the dollar.

Assembly Republicans objected to the bill in part because it would allow the PUC to change the formula for setting the price paid alternative producers so that it no longer considered the price of natural gas.

Co-generators -- some of the largest of which are operated by oil refineries -- say without the price of natural gas as a consideration, it would cost them more to produce energy than what they would be paid for it.

E-mail Lynda Gledhill at lgledhill@sfchronicle.com.

©2001 San Francisco Chronicle Page A - 1

-- Swissrose (cellier3@mindspring.com), March 24, 2001