Bailout Watch #12 – Feb 23, 2001

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BAILOUT WATCH: Keeping an eye on the energy industry and the politicians

Bailout Watch #12 – Feb 23, 2001

Stick this in your "existing rate structure."

No matter how you slice it, the Davis plan will make ratepayers responsible for a multi-billion dollar bailout. But more important for the Governor and legislators is this fact: the rescue package isn’t going to fit within the "existing rate structure," which the Gov. defines as last month’s 9% increase, plus the 10% increase that will occur when the illusory 10% "rate reduction" is removed from the bill next year. The price tag for the full bailout is $38.5 billion. That does not include the nearly $20 Billion estimated cost of the long term contracts (up to $17.5 billion for the bonds plus interest) plus the emergency purchases of electricity ($2 billion and counting), which will be folded into the long term contract bonds, nor does it include the $20 billion paid for the "stranded assets" under AB 1890.

The Davis Plan:

"Dedicated Rate Component" (DRC) — Utilities opener:$13 Billion
Interest on DRC bonds — $9.75 Billion
Transmission — Utilities opener:$9 Billion
Interest on Bonds — $6.75 Billion
Total Cost of Bailout Plan –$38.5 Billion


The utilities know how to start out a negotiation by demanding twice what they really want; after all, they’ve been playing that game with the PUC for years. And elected officials would no doubt prefer to portray a 50% reduction in the bailout as a "victory" for consumers. Either way it would be a massive bailout ? perhaps with no more than the $3.2 billion transmission grid in return.

Davis plan faces reality hurdles.

Beyond the fact that it is simply wrong to force consumers to shoulder the pain of the state’s dangerous experiment with energy deregulation, there are some reality hurdles that stand in the way of Governor Davis’s plan. The plan, in conjunction with the long-term contracts proposal, depends on a market for upwards of $32 billion in bonds. That’s a lot to ask of a market that wouldn’t lend the utilities a dime if they were begging on a street corner and is getting skittish about California’s economy. Another issue: what happens if "emergency power purchases" burn through the $10 billion before the state signs any actual long-term contracts? Why would the generators cut a deal with the state, so long as the state is paying the extortionary price and has no inclination to get tough with the profiteers?

Bailout Bonds: Is The State On The Hook or Not?

Ordinarily, bonds backed by the "full faith and credit" of the state must be approved by California voters at the ballot box. According to the utilities and other supporters of the proposed utility bailout bonds, those bonds are going to be styled as "revenue bonds," and will not be backed by the full faith and credit of California — and so don’t need to go before the voters. But they also insist that if the bonds are rejected by an initiative or referendum vote, the state will be on the hook for the full amount of the debt. Which is it? They can’t have it both ways: either the state is on the hook, in which case the voters must approve the bonds, or it’s not. FTCR will litigate this question if bailout bonds are enacted.

"And what if Plan A doesn’t work — a very distinct possibility? There is no Plan B."

So says Sacramento Bee columnist Dan Walters. Another Bee columnist, Dan Weintraub, notes that the Republicans have been promoting a Plan B, which is based on the utilities finding their own way out of their financial troubles. "The state could float a bond, for instance, and have it repaid by the companies’ shareholders rather than the ratepayers," suggests Weintraub. Let’s not forget that, with the state purchasing the high priced net shortfall of electricity, the utilities are earning profits in all aspects of their business once again.

The architect of deregulation says Davis must change his strategy.

State Senator Steve Peace made his pitch for a Plan B. "’This is the only choice the kidnappers have given us,’ he said. Either take control of the generation plants ‘or raise the Lone Star flag to the top of the Capitol…’"

Consumer Watchdog
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