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Los Angeles Times

Gov. Gray Davis for the first time Friday backed off his insistence that rate hikes would not be part of any solution to California’s energy crisis, as he and legislative leaders announced a bipartisan agreement on a framework for solving the state’s protracted power woes.

Hours after Davis’ top financial advisor said he thought consumers would pay more, the governor, when pressed on the point, would say only that it is his “hope and expectation” that rates won’t rise.

But he seemed to acknowledge that market forces could dictate otherwise when he said: “Obviously, nobody can guarantee the future. I can’t guarantee what the price of milk is, I can’t guarantee what the price of a home is.”

Details of a nine-point plan unveiled by Davis remain to be worked out. But key Democratic and Republican leaders in the Assembly and Senate believe the plan represents the best hope for California to extricate itself from one of the worst crises in its history. Passage of some aspects could come as early as Monday.

Among other things, the consensus proposal calls for the state to establish its own power authority and strike a deal with the largest private utilities that would give them much-needed cash. In exchange, the state would receive what amounts to stock options, giving taxpayers an ownership stake in the companies.

Davis, speaking at a Capitol news conference on another day of short energy supplies and long legislative meetings, said the stock deal would be “the simplest and easiest thing to comprehend” and would offer consumers a tangible benefit, while giving utilities the money they need to survive.

Utilities could also benefit from the prospect of rate increases, both by burnishing their battered image on Wall Street and by gaining a future cash infusion.

State Finance Director Timothy Gage, while not specifying when a rate hike might occur or how much it might be, testified before a Senate committee that he believes the state cannot get out of its crisis with prices as they are.

Such increases could be needed to reassure those who buy bonds–assuming the state uses them to purchase power–that there is enough money backing them to make them attractive investments.

“It is my sense,” Gage said, “that there will need to be some modest increase in the future, based on the numbers I have seen.”

Gage testified on the need for the state to enter into long-range contracts with power suppliers, the other key unresolved piece of the short-term solution to ensuring that the utilities, shut out of the market, can continue to keep the lights on.

Negotiations between the state and the energy companies that offered bids this week will continue through the weekend.

As a consensus formed on the idea of the state obtaining warrants, akin to stock options, Davis stressed that taxpayers could benefit from the state’s role in bringing the utilities back to fiscal health.

“I expect that if we restore them to financial viability, their stock prices will appreciate more than they have in the last day or two, and ratepayers will benefit from that,” Davis said.

Stocks of the parent companies of California’s two largest utilities, Pacific Gas & Electric and Southern California Edison, have been battered in recent weeks, and dropped again Friday after having rallied the day before.

The only serious sticking point for some Republicans is a provision in the plan authorizing the creation of a public power authority.

Assembly Republican leader Bill Campbell of Villa Park said he fears that such a measure could set the stage for a state takeover of hydroelectric assets or transmission lines owned by the utilities, ideas strongly opposed by Republicans and many Democrats.

“We agree with the first eight points ,” Campbell said. “No. 9 we disagree with because it could lead to the taking of assets from those utilities. I don’t think that is needed to solve this problem.”

Consumer advocates were underwhelmed by Davis’ proposal and blasted his retreat on his “no new rate hikes” pledge, charging that he has lined up with financial advisors from Wall Street who have personal stakes in keeping utilities solvent.

“It’s really unfortunate the governor chooses to give these interests his ear when it’s the consumers of the state he’s supposed to represent,” said Mindy Spatt, spokeswoman for the Utility Reform Network in San Francisco.

‘Nothing has changed to justify a rate increase,” said Spatt. “It sounds like he’s softening his stance, and I want to be clear that we’re not softening ours.”

Jamie Court of the Santa Monica-based Foundation for Taxpayer and Consumer Rights called the public authority “an interesting idea” but said it was meaningless if not coupled with ratepayer protections such as a windfall tax on excessive profits.

“This is basically a market incentive model where the public is bailing out the market once again.”

Getting the State Into Power Business

Besides establishing a power authority and working out a stock deal with utilities, the agreement calls for the state to sell power directly to ratepayers, with the utilities merely serving as billing agencies.

It declares that the state should promote energy efficiency and conservation while also streamlining the approval process for new power generating plants.

Electricity prices surged upward last year, two years after California deregulated its wholesale electricity market. Since the retail side of the market was still regulated, the two utilities were prohibited from raising rates and lost billions of dollars in unrecoverable costs. Meanwhile, surging demand and frequent power plant outages left the state continually strapped for electricity.

In other developments Friday in the struggle to regain stability in the state’s electricity market:

* The state endured its 11th straight day under a Stage 3 electricity emergency, meaning that reserve supplies of electricity fell within 1.5% of capacity, well below what is considered prudent for an electrical grid.

* Veteran utility manager S. David Freeman said he will take a leave of absence as general manager of the Los Angeles Department of Water and Power to negotiate long-term power contracts for the state.

* Several state legislators, concerned about the state’s low electricity supplies, called on the California Energy Commission to approve a power plant proposed in San Jose. San Jose’s City Council voted down the plant, but the Energy Commission can overrule local officials.

* State officials raised the possibility that Davis might need to authorize more spending to buy electricity on an emergency basis. The Department of Water Resources gained legal authority last week to buy $ 400 million worth of power.

In the first six days, which ended Wednesday, it had spent $ 205 million. A rundown obtained by The Times shows that California is buying increasing amounts of electricity, and spending more than $ 40 million a day on it, giving state leaders a powerful motive to solve the crisis and staunch their losses.

Davis released the bipartisan framework to fix the state’s electricity problem partially at the suggestion of his new team of advisors, principally Frank Zarb and Michael Peevey, as well as bankruptcy lawyers with whom the governor has conferred.

They are concerned that utilities’ creditors could force Edison and PG&E into bankruptcy.

“It’s a statement that we’re roughly together in solving this problem and hopefully we’ll calm the fears of the market,” said Senate President Pro Tem John Burton (D-San Francisco).

As part of the plan, Davis said he is supporting a proposal first offered by Burton that would give the state stock ownership in Edison International and PG&E, and possibly Sempra, the parent of San Diego Gas & Electric Co.

The state would receive ownership through warrants, securities that allow the holder to buy a specified number of shares at a set price. If the price of the underlying stock rises beyond the price of the warrant, the warrant holder can profit from the difference.

Davis, anticipating the sale of bonds to finance the scheme, said: “We are going to have find a way to accommodate an appropriate portion of the utilities’ long-term debt. There is not total agreement on that issue. But we are moving in the right direction.”

Ultimately, he said, proceeds from the warrants could go to pay back state bonds. Or, he said, “the benefits could go to some rate reduction if perchance somewhere way down the line there was a rate increase.”

Davis Backs Creation of State Power Authority

The other major aspect of the plan–the creation of a public power authority–was included in the framework at Burton’s request. He is carrying a bill to establish such an authority, although the extent of its role is not yet defined.

The tasks of such an authority could range from financing conservation efforts to building new transmission lines to using eminent domain to seize power plants. The governor announced Friday that he supports a public authority “that could assure power supply and adequate transmission capacity.”

Meanwhile, the Assembly Energy Committee resumed a hearing on AB 18X–the measure by Assembly Speaker Bob Hertzberg (D-Sherman Oaks) and Assemblyman Fred Keeley (D-Boulder Creek) that would allow private utilities to pay off their multibillion-dollar debt with ratepayer money.

A central issue to emerge Friday was whether utility giants PG&E and Edison should be allowed to recover “reasonable” costs they have incurred from having to purchase high-priced electricity without being able to pass the expense on to ratepayers.

The utilities and consumer advocates are divided over how much the utilities should be allowed to recover, with proposed amounts ranging from nothing to billions of dollars.

Ann Cohn, associate general counsel for Edison, said that Edison under-collected $ 4.5 billion in costs from customers through the end of 2000. The legislation, she said, would reduce the amount owed to her company to $ 2.8 billion.

Tom Bottorff, vice president of consumer affairs for PG&E, pegged his company’s recoverable costs at $ 8.2 billion through the end of this month.

When asked if the amount was gross or net, Bottorff replied “net,” triggering a harsh response from one of the measure’s most outspoken critics.

“That is a lie,” said Mike Florio of the Utility Reform Network and a Davis appointee to the newly reconstituted board that oversees California’s power grid.

Florio’s outburst triggered an equally harsh warning from Assemblyman Rod Wright (D-Los Angeles), the committee’s chairman.

“I’m running the show.” If you’re going to stand up then you have to get . . . out,” Wright told Florio. “You don’t jump up in my hearing and call anybody a liar. So if you want to speak out of turn go out in the hall.”

Florio apologized for his outburst, but said that an $ 8.2-billion net figure “boggled” his mind. He said that under AB 1890, the massive utility deregulation law enacted in 1996, the utilities are owed nothing.

“We don’t owe them a dime,” Florio said.

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