Copley News Service

The $2.76 billion price tag assigned by Gov. Gray Davis to the purchase of Southern California Edison‘s transmission lines is flipping some advocates of the idea into opponents or skeptics.

At the same time, experts are raising questions about purported benefits that California might derive from ownership of the statewide grid, regardless of price.

The issues could make it hard for Davis to win support for a key component of his plan to resolve the electricity crisis.

The purchase of the entire 32,000-mile transmission system owned by Edison, Pacific Gas & Electric and San Diego Gas & Electric would cost $7.4 billion or more, if Davis offered the latter utilities terms comparable to those he has tentatively reached with Edison.

State Senate President Pro Tempore John Burton has called the purchase a means for the utilities to get badly needed cash while the state gets comparable value for its contribution. ”You give me a dollar, I give you a hot dog,” said Burton, in what has become a widely quoted rationale.

But many of those who have studied the transmission-system deal say Davis may be paying more than the hot dog’s worth. They say the purchase may evolve into something Davis has promised to avoid: a bailout of the utilities, with the state failing to receive full value for its investment.

”All the benefits we claim from ownership of the transmission system can be undercut by paying too much,” said Nettie Hoge, executive director of The Utility Reform Network, or TURN, a consumer group based in San Francisco.

”And that’s where I think we’re headed.”

Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego, and a prime force in lobbying the governor to adopt the purchase of transmission systems as part of the energy crisis solution, is withholding judgment of the Davis plan.

”It will have to be demonstrated that the governor’s plan won’t raise rates,” said Shames, who said his proposal called for a significantly lower price tag.

Shames and others who advocate state ownership of the transmission system had said a purchase at the right price could lower consumer costs, allow more efficient use of state power resources and bolster the state’s hand in dealing with the Federal Energy Regulatory Commission, with which California has clashed.

The benefits could be significant, but they wouldn’t allow the state to separate itself from the federal desire for deregulation and for transmission systems open to all generating companies, said a key federal regulator.

”California cannot become a transmission island,” said William Massey, a FERC commissioner who agrees with Davis on the need for wholesale power price caps.

All agree that FERC almost certainly would have to approve the state’s purchase of the transmission system, and would require that California’s transmission system cooperate with others in the region.

Assembly Republican Leader Bill Campbell added that California would need to continue to trade power with other states and thus also would find itself still under FERC regulation.

”To say getting out from under FERC jurisdiction would be a benefit of buying transmission sounds like a straw man,” said Campbell, who opposes the purchase.

MIGHT DIVERT FUNDS

Campbell added that other purported benefits, including speeding needed upgrades to the transmission system, would be better accomplished by the utilities. He argues that ownership of transmission lines would entail state investments in upgrades that would divert funds from other purposes, such as schools and highways.

Enron Corp., the nation’s largest electricity trader, meanwhile, is pressing to broaden FERC’s jurisdiction over transmission lines in a case to be heard later this year by the U.S. Supreme Court.

Marketers like Enron prefer what would in essence be a broad federal regulation that would allow them to move power unimpeded around the country, expanding the scope of deregulated power trading.

”Owning the transmission lines could be a protectionist measure that would invite countermoves by other states upon whom California depends for (imported) power,” said Steven Kean, executive vice president of Enron.

But the deregulated power market that Enron advocates is what critics say has been manipulated to raise prices and is the source of California’s crisis.

”So if we could buy the transmission system at a good price, it would help protect ratepayers and lower prices,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

But Rosenfield says the deal Davis proposes is a disguised bailout for the utilities, the same companies he says pressed for deregulation in the first place and earlier profited from it while consumers suffer higher prices.

Rosenfield said the transmission lines should be bought for far less.

”If the utilities are broke and nearing bankruptcy, they should welcome any amount,” said Rosenfield, who has also advocated state seizure of power plants.

BOOK VALUE

Valuing the transmission lines is difficult, experts say, but a typical reference point is the book value assigned by utility regulators, which they use to compute regulated profits.

The National Grid Grid Group Plc last year purchased the transmission and distribution assets of New England Electric Systems for $3.2 billion, or exactly twice the $1.6 billion book value.

Under Davis’ proposal with Edison, however, the state would pay $2.76 billion for assets valued at $1.2 billion, or 2.3 times the book value for a 12,000-mile transmission system.

That kind of premium sounds high to regulatory veterans, although Stephen Angle, a former assistant general counsel at FERC, said prices for transmission lines are beginning to rise.

Shames, who worked with a consulting firm to craft a detailed proposal to buy the transmission system, said his proposal was based on paying no more than twice book value. He said he would not support paying nearly $2.8 billion for Edison‘s transmission lines, but expects final terms to differ from those announced last week.

”I feel I should give the governor the benefit of the doubt and reserve judgment until then,” Shames said.

Said TURN’s Hoge: ”Michael is giving the governor too much benefit.”