Lawsuits must be dropped, parent firms must return billions

The San Francisco Chronicle

Gov. Gray Davis took the first baby steps yesterday in negotiations with utilities that could leave California with ownership of a huge part of the power system and customers with the prospect of higher rates.

Davis promised that his proposal would make the state’s financially hobbled utilities whole again and that he could pull it off “within the existing rate structure.”

But the governor’s plan had no shortage of critics. Pacific Gas and Electric Co. called it unfair and consumer groups said it was sure to result in higher electricity prices. In the Legislature, Democrats offered tentative support, while Republicans — whom Davis doesn’t need to win approval for any legislation — said the plan would be a disaster for the state.

The centerpiece of Davis’ proposal would be the state acquisition, for billions of dollars, of 32,000 miles of transmission lines from the utilities. That would allow the cash-strapped firms to issue long-term bonds that would help pay off their debt.

In addition, Davis wants the companies to dismiss all pending lawsuits that would lead to higher rates for power, agree to continue selling electricity they generate at cost and set aside land for conservation in some watershed areas. Utilities’ parent companies would also have to return some of the $3 billion to $4 billion that the utilities funneled to them last year.

“I want to make clear that it is my plan that this all be done within the existing rate structure,” Davis said. “It is my hope and expectation that we will not have to ask any more of consumers beyond the existing rate structure.”

CRITICS SAY RATES WILL RISE

But critics say that will not be possible. Davis himself admitted that electricity bills will go up another 10 percent next year, when a rate discount is lifted. That is on top of the average 10 percent rate increase that the state Public Utilities Commission approved last month.

Nettie Hoge, executive director of the consumer group TURN, the Utility Reform Action Network, said the expiration of the rate discount was supposed to be followed by lower prices that deregulation advocates promised would result from free market competition.

She said Davis was implying that a 10 percent increase in 2002 would not count as an increase for consumers, under the “existing rate structure.”

“It’s a preposterous claim,” Hoge said. “If that was a trial balloon, we’ve already got our darts into it.”

Other consumer groups were equally critical of Davis’ plan.

“If the Legislature rolls over and approves this, the public will get reamed,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights, which plans to sponsor a ballot initiative that would put the state back in control of the power markets.

TURN and others criticized Davis for not specifying how much the state would pay for the transmission system or how much the parent companies must return to the utilities.

Davis said yesterday that the book value on the power lines is $3.1 billion and that the state would pay that or “some multiple” of the number. Lawmakers have estimated that the state will pay about $6 billion for the grid.

Davis said “aggressive” negotiations were under way between his office and PG&E, Southern California Edison Co. and San Diego Gas & Electric Co. But representatives of one of the utilities said they had been given no cost details or any other information that reporters had not gotten.

Even when Davis does make an opening bid on such items as the transmission lines, it will be just the beginning of a high-stakes process. That could be complicated by the fact that PG&E, unlike the other two utilities, has not said publicly that it is interested in selling.

Yesterday, the company said Davis’ overall plan is not acceptable.

“Any solution must be fair both to shareholders and ratepayers,” PG&E said in a statement. “The governor’s framework does not yet meet this objective.”

A MATTER OF TIMING

Davis refused to put a timetable on negotiations, but generators and others who are owed money from the utilities said time is running out.

“We think progress is being made, but I want to really stress the importance of getting these issues fixed and fixed quickly,” said Jan Smutny-Jones, executive director of the Independent Energy Producers Association, which represents out-of-state generators.

Davis is trying to craft a delicately balanced plan in which all the numbers add up in such a way that rate increases are not needed.

The math is relatively simple: The amount paid for electricity has to add up to less than the rate utilities are allowed to charge consumers.

How much is paid depends on three different types of electricity: that created by the utilities themselves, that produced by alternative sources such as solar and biomass, and whatever is bought on the open market.

The state is trying to reduce the rate charged for alternative sources and hopes to cut the amount it is spending on the exorbitant spot market by signing long-term contracts with generators.

DEMOCRATIC REACTION

Democrats offered mixed praise for Davis’ plan.

“PG&E would be well-advised to take it, because I want more,” said state Sen. Don Perata of Oakland.

Senate President Pro Tem John Burton, D-San Francisco, has been the primary advocate of the transmission line purchase.

“We’ll have to wait and see the outcome of the negotiations,” he said. “As for the parameters of his proposal, they’re wide enough to be OK for anything.”

Republicans are opposed to the purchase of the transmission lines, saying the state would be taking on a creaky, aged system in need of an overhaul.

“There’s no way this can take place without massive rate hikes,” said Assemblyman John Campbell, R-Irvine. “Maybe that’s the real bailout — a ratepayer bailout of Gray Davis‘ neglect.”

GOP Assemblyman Keith Richman of Northridge proposed his own solution, in which the state would float bonds in exchange for stock options in the utilities and a 40 percent equity position in plants the utilities would build over the next 10 years.