State would buy electricity cheaply, re-sell it to utilities

Sacramento Bee

State officials Friday revealed details of a plan for the state to buy wholesale electricity and re-sell it to California utilities at cost over a long term, relieving the companies – and ultimately their customers – from paying massive premiums for the companies’ bad credit.

The plan, which is the subject of negotiations at the Capitol and in Washington, could include provisions for the retirement of the nearly $12 billion owed to power generators by the state’s two largest investor-owned utilities, Pacific Gas and Electric Co. and Southern California Edison.

In one scenario under discussion, the debt would be repaid over time by indefinitely extending the 10 percent, 90-day rate increase granted last week by the state Public Utilities Commission.

Legislative sources said a deal with utility companies and power generators could be struck as early as this weekend, allowing voting to begin at the Capitol on Tuesday.

They said the deal – if several complicated and touchy provisions can be worked out – would ultimately result in a stable electricity market, and allow the cash-strapped utility companies to get out from under their debt.

Meeting Friday with Govs. Gary Locke of Washington and John Kitzhaber of Oregon, Gov. Gray Davis did not speak of the the most politically tenuous part of the package – the debt reduction.

But by lending the state’s good credit to either buy power or essentially co-sign for the utilities’ purchases, Davis said, power generators could be assured of a “creditworthy customer” and power could be delivered to the electricity-starved state under a long-term contract at a far lower cost than is being charged currently.

Locke said the plan “will send a stabilizing message to our utilities in the state of Washington” that sell power to California, particularly in the summer months.

Davis said the deal is being structured so the state would not be financially at risk for the buying and selling of power.

Under the concept, the state would buy power directly from generators under long-term, high-volume contracts, enjoying a far lower price than utilities now pay because of their lingering debt. The state would then re-sell the power to the utilities at its cost plus minor state administrative expenses.

If the Department of Water Resources is used as the purchaser, aides said, the money would come from funds the department has earned selling its own power – not directly from taxpayers.

The department already has spent at least $25 million on a spot basis buying power from sellers worried about utility credit.

Assemblyman Fred Keeley, D-Boulder Creek, the chief legislative architect of the plan, said the power purchasing component of the deal hinges on the state being able to secure contracts that guarantee a huge share of the state’s power needs for a long term at an attractive price. And he said it must not result in a rate increase for utility customers or put the state’s treasury at risk.

Davis spokesman Steve Maviglio said power generators are likely to seek relaxation of air quality rules in exchange for a favorable power purchasing deal, but the administration would not agree to that.

Keeley said there is “very little support” in the Legislature for a so-called “securitization” plan under which the state would sell bonds – repaid by the ratepayers – to retire the utilities’ debt. Consumer groups have criticized the idea as a bailout of investor-owned companies that made bad business decisions in California’s deregulated power market.

But there is more support, Keeley said, for a debt-reduction plan that would maintain the 10 percent rate increase, as long as state ratepayers collectively receive something in return from the utilities, such as generation facilities, company stock or transmission lines.

Keeley said that would be “anything that you could describe as an asset that would provide a tangible benefit to ratepayers.”

“It’s the difference between a business deal and a bailout,” he said.

Consumer advocates were wary as details of the proposed power purchasing plan trickled out Friday.

“We don’t necessarily reject it out of hand, but the price (of electricity) should be reasonable and the state should have some guarantees and the utilities should have to pay interest,” said Douglas Heller with the Foundation for Taxpayer and Consumer Rights.

Mike Florio, attorney for The Utility Reform Network, said state power purchases made sense at least “during a period when the utilities have no credit. … I’m not sure it would be necessary or valuable in the long term.”

Kitzhaber said he was heartened by a letter from five other Western governors – all Republicans – who said they would support the efforts of California, Oregon and Washington to seek a temporary limit on wholesale power prices in the West.

But the letter blasted Davis’ response to the crisis as incomplete, suggesting that California needs to work harder to build more generation facilities and encourage its residents to conserve more.

The three Democratic governors said they would seek support for price controls from the Republican-controlled Congress and the incoming Bush administration if the Federal Energy Regulatory Commission fails to act.

Meanwhile on Friday, Northern California’s electric grid wobbled briefly in the morning, with a regional Stage 3 emergency declared between 1 and 3 a.m. The emergency was scaled back to a statewide Stage 2.

The grid was bolstered Friday as the Diablo Canyon nuclear plant ramped up to full power after clearing kelp from its cooling water intakes, and another large power plant returned to service.

“Today has been relatively calm,” said Patrick Dorinson, a spokesman for the state Independent System Operator, and “the weekend should be OK.”

He said that by Monday, the state might put the latest round of electric emergencies behind it, with less than one-fourth of its generating capacity still disabled, down from one-third Thursday.

In the state Assembly on Friday, lawmakers hurriedly approved two energy-related bills, the first to be considered during the Legislature’s special session on the power crisis.

One of the proposals, AB 5x, by Keeley, seeks to revamp the governing boards of the Independent System Operator and the Power Exchange, entities that control the state’s power grid and electricity trading.

Currently, both boards are made up of stakeholders in the energy marketplace. Under the bill, the boards would instead become three-member bodies, with members appointed by the governor.

The bill passed 60-9, receiving enthusiastic support from lawmakers who believe the current system encourages conflicts of interest.

Another measure, AB 6x, passed 60-10. It would require investor-owned utilities to obtain permission from the state PUC before selling their power-generating facilities.

The intent of the bill, said its authors, is to keep power generated in California, and to ensure that utilities only sell their power plants when the transfer would be in the public interest.