San Jose Mercury News

SACRAMENTO, Calif. _ With California’s two major utilities on the ropes financially, the Assembly late Tuesday sought to calm Wall Street’s jitters, passing hastily drawn legislation that would fundamentally shift the state’s role in buying and selling power.

The proposal, which is aimed at preventing blackouts, would direct the state Department of Water Resources to purchase electricity and then and sell it to the cash-strapped utilities _ Pacific Gas & Electric Co. and Southern California Edison.

After two committees OK’d the measure, the full Assembly approved the proposal 60-5. It now goes to the Senate.

Even before the action, Gov. Gray Davis voiced optimism.

“It is my hope and belief that it will come to my desk in the next eight or nine days, and possibly sooner, to allow us to go into business of providing power at a much cheaper rate,” Davis told reporters.

The swift Assembly action came as the state faced the threat of rolling blackouts, credit ratings for the two major utilities were downgraded by investment services and Edison said it wouldn’t pay $596 million in outstanding bills.

“We don’t have the cash to buy any more power,” William V. Manheim, PG&E‘s general counsel, told lawmakers during a hearing on the proposal.

The legislation, AB 1by Assemblyman Fred Keeley, D-Santa Cruz, is designed to overhaul the current electric system, set up in 1996 to increase competition and cut prices by partially loosening government control over the generation of electricity.

With wholesale prices skyrocketing, Keeley’s proposal would create a new hybrid system, mixing the free-market ideas of deregulation with a renewed role for government. Generation of power would be partially deregulated but at the same time the state would act as a go-between, buying power from electric generators and then selling it for the same price to the credit-hungry utilities.

“What we are doing resembles changing a flat tire without stopping the car,” Keeley said, referring to his midcourse fix.

Under his proposal aimed at settling volatile energy markets, the state is seeking to enter into long term contracts with power generators some as long as 15 years _ for a limited amount of power at an average price of 5.5 cents per kilowatt hour. But according to an Assembly analysis of the bill, many generators want rates closer to 7 or 8 cents.

Parties in ongoing negotiations to fix the mess say the state and the generators are at loggerheads over the price.

A spokesman for Southern Energy, which owns generating plants in Northern California, said his company wasn’t capable of putting in bids to sell electricity at 5.5 cents. The utilities are now buying power at 15 to 30 cents, Keeley said.

On Tuesday, Gov. Davis, who a week ago sketched out a plan for the state to act as a power broker, continued bargaining with generators and utilities.

“We are still talking and trying to move forward,” said Steve Maviglio, the governor’s press secretary.

The Davis administration is pushing the state to plunge into the electricity business to rescue the utilities. But the state would need to borrow up to $400 million from the state general fund to set up the new system. Under the plan, the money eventually would be repaid.

Keeley’s proposal would not alter the way customers receive their electricity from utilities.

But questions remain about the final shape of the bill and the way it is being reviewed.

One potential snag revolves around independent energy companies that produce power under contract with utilities. Congress encouraged development of these alternative or environmentally friendly sources such as wind or geothermal power, but the cost of the power often is higher.

Keeley said any final resolution to the electricity crunch hinges on the state Public Utilities Commission‘s ability to drive down the price of power produced by these facilities. He said the deal wouldn’t work without a settlement on that issue.

During a committee hearing that lasted about three hours, only one person voiced unqualified opposition to Keeley’s bill. Douglas Heller, a consumer advocate with the Foundation for Taxpayer and Consumer Rights, warned lawmakers against making the same mistake the Legislature made in 1996 when it unanimously passed a complex deregulation scheme.

“The lesson from 1996 is that speed kills,” Heller said. He said that hasty action would deny elected officials the ability to fully examine the Keeley measure.

Lawmakers and the Davis administration indicated that quick action is needed because of the dire straits of the utilities.