Grid purchase, bonds key to proposal; PG&E objects

The San Diego Union-Tribune

But as he outlined the framework for negotiations, Davis faced disagreement from the largest utility, impatience from generators owed large sums of money and skepticism about whether a rate increase can be avoided.

Although Davis wanted to unveil a “consensus plan,” he acknowledged that Democratic legislative leaders have not yet signed off. Republican legislators had previously opposed the state purchase of the transmission grid.

Nonetheless, the governor was optimistic as he described the second step of his plan to ease the electricity crisis that resulted from a disastrous deregulation effort.

“I expect we will have some positive news early next week,” Davis said of the negotiations with utilities that began yesterday and will continue at the staff level through the weekend.

Davis released a one-page outline of the plan that contained no numbers and few details. What the state will pay for the transmission system of Pacific Gas and Electric Co., Southern California Edison Co. and San Diego Gas & Electric Co. will be negotiated.

The governor also wants cash from the utilities’ healthy parent companies, cheap power from the utilities’ remaining generating plants for five to 10 years, a dismissal of utility lawsuits seeking rate hikes, and conservation easements on scenic watersheds around PG&E‘s hydroelectric facilities.

“My entire premise from the outset has been to protect ratepayers,” Davis said. “Believe me, if I wanted to raise rates I could have solved this problem in 20 minutes.”

The governor’s plan assumes that a temporary, 90-day rate increase of 9 percent imposed last month on the residential customers of PG&E and Edison will become permanent.

The rates, now 7.2 cents per kilowatt-hour for Edison and 6.7 cents for PG&E, will increase 10 percent next year when a rate reduction that was part of the 1996 deregulation plan expires. Ratepayers will continue to pay off the bonds used to finance the rate reduction.

The 10 percent rate increase won’t apply to SDG&E customers. SDG&E paid off its long-term debt under deregulation sooner than expected and returned $390 million to customers in August 2000 from the unspent portion of its rate-reduction bonds.

But when SDG&E‘s rates were unfrozen, bills doubled and tripled last summer. Legislation capped those rates for residences and most small businesses at 6.5 cents per kilowatt-hour.

As wholesale power costs soared, SDG&E has run up a debt of $605 million, more than three times as much as legislators predicted when the rates were capped.

The state has begun buying power for SDG&E. A spokesman said SDG&E will continue to pursue its request before the state Public Utilities Commission to charge customers 17 percent more. A preliminary hearing on the proposal was held in downtown San Diego yesterday.

Davis said he does not think his utility rescue plan will result in a rate increase for SDG&E customers. The main rescue plan for PG&E and Edison includes separate negotiations with SDG&E‘s parent company, Sempra, to pay off its debt.

The governor said the state will pay “some multiple of book value” for the 32,000 miles of transmission lines owned by the three utilities. One of his aides said book value was about $3.1 billion.

Under state ownership, Davis said, cheap financing can be obtained to expand the transmission system and remove bottlenecks that reduce imports and stem the flow of power between the southern and northern parts of the state.

Davis said he thinks two of the three utility executives “are open” to a state purchase of their transmission systems. PG&E said it is willing to negotiate, but does not think the governor’s plan is fair.

“PG&E wants to make clear that it is not seeking a rescue or a bailout,” the utility said in a statement. “We are asking the state simply to follow the law, which allows us to recover wholesale power costs incurred for our customers.”

The rates that PG&E and Edison can charge customers were frozen under deregulation as the wholesale price of power soared, producing what they say is a combined debt of more than $12 billion. But the governor says that figure is inflated.

Pressure is building for a prompt solution.

When PG&E and Edison were no longer able to borrow last month, the state was forced to begin buying power for their customers on the expensive spot market. The state has been spending roughly $45 million a day and expects to reach a total of $2.3 billion around the end of the month.

The first part of the governor’s plan, buying power through much cheaper long-term power contracts, was approved by the Legislature last month. But the state is having trouble negotiating contracts, in part because some generators want their previous bills paid first.

Davis plans to use a portion of the current rate to pay off an estimated $10 billion in bonds that will spread out the cost of the long-term contracts, which will be high in the first years and lower later on.

The second part of the governor’s plan unveiled yesterday would give part of the revenue from the existing rate to the utilities, which could use the money to issue bonds to pay off part of their debt.

But Davis’ fitting everything into the existing rate structure is “like threading a needle.”

He said he also needs inexpensive long-term contracts, a reduction in the rates being paid to small generators under the federal “qualified facilities” plan, and cost-based rates from the utilities’ own generators.

The reaction from consumer groups was mixed. Douglas Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica said the plan is virtually certain to result in a rate increase.

“Governor Davis wants the ratepayers to take the heat and the utilities to skate on this,” Heller said.

Michael Shames of the Utility Consumers’ Action Network in San Diego said the plan could work without a rate increase. But everything will depend on the negotiations, which he compared to a high-stakes poker game.

“The governor has put down an ante, and the big question is whether the utilities and the generators play,” Shames said.

A spokesman for generators said the financial industry, as well as the generators, want to see prompt action on payment of the huge debt owed by the utilities.

“There are not enough specifics in the governor’s proposal to give people a great deal of comfort,” said Gary Ackerman of the Western Power Trading Forum. “It’s too little, too late.”

Assembly Republicans oppose a state purchase of the transmission system and have criticized Davis for not acting last fall.

One Assembly Republican, Keith Richman of Northridge, said that instead of buying the transmission system, the state should help the utilities build a number of new power plants.

Meanwhile, as California endured a 32nd straight day under a Stage 3 alert yesterday, a federal judge in Sacramento, Frank Damrell Jr., extended his order requiring three power-generating companies to continue to sell power to the state on an emergency basis until Wednesday.

State officials argued in court that the order is a critical part of their efforts to avoid blackouts. Company attorneys argued that the state was abusing the order to get lower prices for the high-cost power it has been buying on the spot market.

Another part of the puzzle, construction of power plants, got a boost yesterday when President Bush directed federal agencies to speed up review of proposed plants.

Davis requested the action last week.

Governor’s energy plan:

The state would buy transmission systems owned by San Diego Gas and Electric, Southern California Edison and Pacific Gas and Electric at a price to be negotiated.

The utilities’ healthy parent companies would provide cash to the utilities to help pay off their debt.

Utilities would sell power they produce at their plants at cost for 10 years. The utilities would be banned from selling the plants.

The state would acquire easements from utilities to protect land around dams.

The utilities would dismiss all pending lawsuits against the state.

Edison and PG&E have sued to receive rate hikes.

STAGE 3

DAY 32

A Stage 3 alert was declared yesterday for the 32nd day in a row after reserves dropped to less than 1.5 percent of available energy.