The Sacramento Bee

Gov. Gray Davis acknowledged Tuesday that he expects California ratepayers to bear some of the burden for the state’s failed attempt at electricity deregulation, saying the alternative — utility insolvency — is an unacceptable scenario that would leave millions of people without power.

In a year-end interview with Capitol reporters, the Democratic governor said negotiations he is currently overseeing almost certainly will require consumers to assume a portion of the costs utilities are incurring in an electricity market gone haywire.

“I have made very clear to all parties they’re not recovering their costs, they’re only recovering a portion of their costs because everybody pushed for deregulation, the manufacturers and the utilities,” Davis said. “If it hasn’t worked, the consumers, while having to bear some of the burden, are not going to bear all the burden. (But) there’s no question that everyone has to be part of the solution.”

Pacific Gas and Electric Co. and Southern California Edison both have sued state regulators in federal court to try to recoup from electric customers money they have paid to wholesale power suppliers.

The state Public Utilities Commission has so far refused to allow the utilities to raise rates that were temporarily frozen under the 1996 law deregulating the state’s electricity market, a situation PG&E has argued could cause it “severe financial harm and threaten the safety and reliability of the state’s electrical supply.”

Davis noted Tuesday that utilities last week were paying up to $1,500 per megawatt hour for power they could sell for no more than $64.

“They have been saddled with costs that have greatly exceed the amount they can pass on to the customer,” he said. “The customers, of course, have done nothing wrong, and they were promised that deregulation would lower prices.”

But Davis said allowing utilities to go bankrupt is “not my first, second or third choice.”

“My job,” he said, “is to provide stability and certainty in the process.”

Davis said that if Southern California Edison, for example, were to run out of cash — “as they will at some point in the not-too-distant future” — the utility could face the prospect of rationing power.

A rationing plan, he said, could “leave about half of their customers, or roughly 5 million people, without power” for five to six hours a day.

“It will also probably preclude there being traffic lights, signals … (and leave) all hospitals without acute functions,” he said.

In recent newspaper ads, the utility has warned of the possibility of power rationing that would require rolling blackouts.

“The banks are not going to continue to loan us money without having a framework that’s put in place that allows a method to be repaid, and we currently don’t have that,” said utility spokesman Steve Conroy.

As negotiations continue, Davis said he is working to verify the utilities’ financial claims.

“We’re demanding documentation on every representation and we are sharing it with a number of different parties inside and outside the state,” he said. “I understand the difference between salesmanship and reality.”

Groups speaking for ratepayers vehemently oppose any rate increases, saying customers were promised rate decreases under deregulation.

Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, predicted the course Davis is pursuing would result in “a ratepayer rebellion” in 2002.

He rejected any claims that the utilities are faltering financially.

“If any one of these giant utilities were even near bankruptcy, (Federal Reserve Chairman) Alan Greenspan would be calling for a bailout,” he said. “It’s outrageous that the governor would require the ratepayers to bail out the utilities once again.”

With electricity in short supply, the state’s power operators Tuesday declared a Stage Two emergency and invoked a federal order requiring certain providers to sell here.

If those extra supplies don’t arrive, chances are “better than 50-50” that Northern California will experience rolling blackouts today, said Kellan Fluckiger, CEO of the Independent System Operator, which manages most of the state’s electric grid.

U.S. Energy Secretary Bill Richardson signed an order last week requiring the power sales in an emergency. The emergency was triggered Tuesday, Fluckiger said, when hydroelectric-producing reservoirs fell below historic levels and a 500-kilowatt transmission line connecting the state failed.

The latest power crunch comes as the top energy suppliers to California reported a huge rise in profits during July, August and September.

“There’s no doubt that a lot of money was made here in California,” said Lynne Church, president of the Electric Power Supply Association.

Church attributed the companies’ increased earnings to market forces that drove up wholesale prices when the power supply dwindled.

Power generators “take the rules as they find them,” Church said. “And this year they had a very good year.”

Generators and utility representatives met Tuesday before an administrative law judge in Washington, D.C., to begin discussing long-term contracts that could make the utilities less vulnerable to short-term price spikes.

Davis said he warned in a conference call to the participants that any utility insolvency would be laid at the doorstep of the people who have “charged outrageous profits.”

He also warned that the generators face the prospect of legislation or an initiative that would repeal deregulation.

“If that happened, the energy analysts would have them for lunch, because their greed would be the undoing of deregulation in America,” Davis said.

“It may be that they’re playing by the rules, and they do have a fiduciary obligation. … I know people have to make as much money as they can for their shareholders,” he said. “But I also told them, when I grew up my dad said, ‘If you ever play cards, son, always leave a little money on the table. Don’t try to get everything you can.’ That’s what they run the risk of doing — of trying to be so greedy and so overreaching that the public rises up and says no.”

Davis said he also has asked Richardson to extend for another week his emergency order requiring power sales to California.

Church, speaking for the generators, said the state can ease rising power costs by building new power plants, even in the face of environmental concerns. She also called on regulators to let utilities enter into long-term contracts.

“That would give stability to the price, assure supply and bring wholesale prices down immediately,” Church said.

Susannah Churchill, a legislative associate with the California Public Interest Research Group, accused power generators of exaggerating the tightness in supplies in order to raise prices.

She called Davis’ response “a complete scam.”

“Utilities agreed to shoulder the risk of high power prices in ’96,” she said. “Now that they’ve come up against those risks, they want to come to consumers with their hands out.”