Warning of a summer power 'Armageddon'

Davis aide paints dire scenario in push for bonds to buy power

Lynda Gledhill, Greg Lucas, Chronicle Sacramento Bureau Tuesday, May 1, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/05/01/MN192706.DTL

Sacramento -- Trying to drum up support to issue $12.5 billion in bonds to buy power, a top adviser to Gov. Gray Davis warned lawmakers yesterday of "Armageddon" this summer if key assumptions on energy generation and conservation fail to materialize.

Presenting a 67-page document to lawmakers, Davis' top energy consultants said numerous assumptions -- such as increased conservation and more alternative generating facilities returning to full operation -- must pan out.

Without that, Davis' Cabinet secretary, Susan Kennedy, said an "Armageddon scenario" would take place, according to numerous lawmakers in the meeting.

That could include more blackouts or additional borrowing, Kennedy said in a briefing later with reporters. "Everything has to fall in place."

But one key assumption was immediately blasted by an energy industry official as "completely unrealistic."

The administration document forecasts that 90 percent of the state's alternative generators will be back on line by June. About one-third are currently not operating because they are not being paid by California's debt- ridden utilities.

"That is complete lunacy at this point," said Jerry Bloom, a spokesman for the California Cogeneration Council. "The assumption simply does not reflect the reality of the market. It shows once again that the governor is not listening."

Among the other assumptions is a 7 percent conservation rate and the approval of the deal between the state and Southern California Edison Co. for the purchase of the utility's transmission lines. Davis has set a target of conserving 10 percent.

In San Francisco yesterday, Davis told a high-tech business conference that the state will have to walk a tightrope to get through the summer.

"We are going to have to set the Guinness Book of Records in this state in order to avoid disruptions this summer," he said.

State Treasurer Phil Angelides said the assumptions were "fair and rational" but warned many of the assumptions are beyond the state's control.

"The biggest threat to making this plan work is if generators take prices from the current level, which is horrendous, to obscenely horrendous," he said after meeting with Assembly Republicans for an hour on the proposed bond sale.

The dire scenarios were used by the administration officials to convince Assembly Republicans to approve a bond authorization, which is scheduled to come up for a vote on Thursday.

GOP members balked at approving the huge bond issuance without further details from the administration. But yesterday's information simply raised more questions in many minds.

"It's kind of like peeling back an onion -- as you peel something back you find something else out," said Assemblyman George Runner, R-Lancaster.

Assemblyman Tony Strickland, R-Thousand Oaks, said Republicans want to be sure there won't be a continuing need to issue larger amounts of bonds in the future.

"The governor's office is asking us to approve the biggest bond in American history, and we're just supposed to trust them on a lot of this stuff," he said. "What happens if the assumptions don't happen? Do we need another $7 billion or $10 billion in loans? Is the existing rate structure enough or will they ask for more? We want to know."

Republican votes are needed to approve the bond issuing authority on an urgency basis.

The current bill only allows for $10 billion, but the administration now says it needs $12.5 billion. Kennedy said another request for more financing will be made later to close that gap.

The predictions use the rate increase proposed by Davis, which averages about 37 percent. His rate increase would pay off not only the revenue bond issued by the state, but also a $8 billion bond issued by the utilities to pay off some of their back debt.

Angelides has pressed for the bonding authority because the commitments for short-term bridge loans -- which would provide the state with money during the several weeks it would take to issue the bonds -- expire on May 8.

However, most of the GOP members of the Assembly said they have not been convinced of the need for the bridge loans.

Runner said normal budgetary borrowing will keep the general fund whole until the bonds can be issued. Republicans believe the emphasis on the short term funding is to allow Davis to present a rosier budget later this month.

Tim Gage, Davis' director of finance, said the authorization is needed immediately to give sellers confidence that the state is credit-worthy and can continue to purchase power. Currently, the state is being charged a credit premium, he said.

"I'm deeply concerned if the bridge loan, the first step, doesn't come together it will do harm getting the energy bond to the market," Angelides said.

Meanwhile, the state Public Utilities Commission yesterday accused Pacific Gas & Electric Co. of trying to use bankruptcy to escape state regulation and raise rates drastically.

The PUC asked a federal bankruptcy judge to dismiss PG&E's challenge to accounting changes ordered by the state commission on March 27 that would make it harder for the utility to pass along to customers its $8.9 billion debt for electricity purchases.

Chronicle staff writers Bob Egelko and Tanya Schevitz contributed to this story. E-mail Lynda Gledhill at lgledhill@sfchronicle.com and Greg Lucas at glucas@sfchronicle.com.

-- Martin Thompson (mthom1927@aol.com), May 01, 2001