Davis’ power plan will cost taxpayers billions
Business Week
Ten months into California’s power crisis, a solution of sorts seems closer. For the past six weeks, the Water Resources Dept. has been buying electricity for some 10 million customers, relieving the state’s utilities of that burden. And now Governor Gray Davis has announced plans to buy some 26,000 miles of transmission lines from them, making California one of the world’s biggest owners of power lines.
That’s good news for the utilities, who are grudgingly going along with the transfer idea, and their creditors. But what does it mean for California and its taxpayers? Davis is adamant that over the course of several years, the state will recoup the cost, as high as $ 20 billion by some estimates.
He had better be right, both for the sake of taxpayers and of his own political future. In a state whose total budget annually is about $ 104 billion, and which spends about $ 33 billion on public schools a year, California remains on the hook for an enormous sum. ”The Davis proposal is a setup for disaster,” says Doug Heller, a consumer advocate at the Foundation for Taxpayer & Consumer Rights. ”He will overpay for the grid, and there is no way he can do that without increasing rates or spreading the bailout over generations. Our children will be paying for this.”
Figuring the final price of Davis’ plan is difficult because the state’s commitments are open-ended. California’s two biggest utilities, PG&E Corp. and Edison International, claim to have lost $ 12 billion in nine months buying power in the sky-high wholesale market. Davis says the state will avoid similar losses by negotiating long-term contracts directly with suppliers. But he has yet to announce major contracts at prices low enough to cover the full cost of providing power to consumers.
To finance its ongoing purchases, the state has hired J.P. Morgan Chase & Co. to represent it in bond sales that could reach $ 10 billion. Those bond financings are having negative consequences. The prospect of issuing so many billions in new state-backed securities has already lowered the price of California’s outstanding bonds relative to similar issues, notes Lee Cunningham, a bond-fund manager at Federated Investors Inc. And bond rating agency Standard and Poor’s, a unit of BusinessWeek’s parent, the McGraw-Hill Cos., has put the state on guard for a possible ratings downgrade. NO BARGAIN. Davis insists the risks are worth taking. ”We’ve had to take the route we’re taking,” he said recently. Buying the transmission lines could bring to an end one part of California’s nasty power mess. PG&E and Edison are suing the state utility commission, claiming they should be compensated for their losses on power purchases. Buying the transmission lines in exchange for forgiveness of those claims would give the state something of value for its money. And Davis argues that by using tax-exempt financing, the state can operate the lines more efficiently and cheaply than the private sector.
The buyout, though, won’t be any bargain. Edward Jones utility analyst Brian Youngberg notes that the lines of all three utilities could be worth as much as three times book value, or $ 9 billion. Those facilities may need as much as $ 1 billion more for repairs and capacity additions. Add those estimates to the $ 10 billion that the state is already contemplating for power purchases, and the total cost of the state’s commitments rises to $ 20 billion. That doesn’t even include the price tag for buying or building new power plants, which the State Senate authorized on Feb. 21.
Those kinds of numbers have a lot of California lawmakers wringing their hands. ”Buying the transmission lines doesn’t add an inch to the grid or a watt to the state,” says Republican State Senator Tom McClintock. Like many California Republicans, he believes the utilities should have to work out their debts with creditors on their own. That’s why even consumer groups that favor a state takeover of the power business are skeptical about the plan. No one doubts that Governor Davis has a plan. The only problem is that it may create more problems than it solves.
