Multibillion-dollar poker game over energy approaches final round

(Published Aug. 19, 2001) There's a point during a high-stakes Las Vegas poker tournament game when the remaining players go "all in," shoving their stacks of chips into the middle of the table, knowing that there will be one winner when the final card is turned.

A similar mentality surrounds the confrontation between Gov. Gray Davis and critics over how Californians will be charged for tens of billions of dollars in past and future power purchases.

The Democratic governor is demanding, in effect, that he be given first call on ratepayers' money to repay a state bond issue and finance at least $43 billion in long-term power contracts, and the state Public Utilities Commission, controlled by Davis appointees, is poised to approve the plan this week. The pending "rate agreement" would preclude any review of whether state power purchases have been prudent. Indeed, the state is refusing even to release details of those purchases.

The plan has sparked a backlash from a strange-bedfellows coalition that includes utilities, consumer activists, some power generators and brokers and, very quietly, business leaders. Their motives for opposing the administration plan vary, but they agree that it would amount to a "blank check." If the PUC pushes ahead, opponents will unleash a barrage of legal and political challenges that could tie up the plan for years and, if even marginally successful, block the state from issuing up to $13.4 billion in bonds that Davis needs to finance the state's budget. The state's general fund has advanced $8 billion for power purchases, and if the fund is not replenished from the bond issue, the budget will drown in red ink.

Davis contends that the guaranteed revenue stream is needed to satisfy Wall Street's conditions for marketing the bond issue -- but that's a bit of a red herring. No one is questioning the bond issue's portion of the money. The conflict is over Davis' demand that future power purchases also be guaranteed without any outside review, or even public disclosure of data.

Although the state contends that current utility rates are adequate, executives of Pacific Gas and Electric and other utilities are worried that giving the state first claim on the money would, in effect, make utilities the bad guys if revenues fall short in the long run. And the consumer groups share that concern.

Power suppliers not involved in the state's long-term contracts and large commercial and industrial power users, meanwhile, contend that once the state's massive power purchase program is set in concrete, it would be impossible to reinstate independent power purchases by big customers because the state would need their revenues for its own purchases. And, business leaders say, California's soaring energy costs, and the ban on "direct access" to power, are already forcing some companies to shut down.

Underlying the maneuvering is a widespread belief that the administration doesn't want to subject its long-term contracts to "prudence review" because they would be shown to be many billions of dollars too expensive -- and thus would embarrass Davis.

If, however, the plan's opponents can raise enough issues to delay the bond issue -- perhaps by persuading bond-buying lenders that the plan is legally shaky -- Davis would be forced to face the critics. He could agree to separate the bonds from the future power purchases and submit the latter to review, but that could put him on the hook for raising utility rates to cover poor decision-making. Or he could allow the state's general fund to take an $8 billion hit.

There may be a way, however, for Davis to save face if opponents stall the bond issue. He could renege on the long-term contracts, perhaps citing the conflict-of-interest problems that have afflicted his power purchase program. Those holding the lucrative contracts would howl and perhaps sue, but one of the biggest of the suppliers, Calpine, is a California corporation with close ties to the administration and might be jawboned into backing off.

This is an "all in" poker game, and we'll soon see who's bluffing and who's got the cards to win.

http://www.capitolalert.com/news/capalert03_20010819.html

-- Martin Thompson (mthom1927@aol.com), August 19, 2001