San Jose Mercury News

 SACRAMENTO, Calif.–Seeking a broad solution to California’s energy woes, state, federal and industry officials are negotiating a deal that could provide beleaguered utilities with a guaranteed supply of electricity in exchange for an agreement to hold down the costs they will charge consumers over the next several years.

The details of the plan — first broached in a seven-hour, closed-door summit Tuesday in Washington D.C. — remained sketchy Wednesday as key players continued to negotiate the particulars. But participants in the negotiations said the proposal envisions state government using its financial resources to act as a broker between the power generators on one side and Pacific Gas & Electric and Southern California Edison on the other.

In essence, the state would purchase huge amounts of power for up to $ 5 billion annually from independent energy producers under fixed-price contracts that might extend as long as eight years. It would then sell that power to PG&E and Edison, who would agree to some form of limits on what they would be allowed to charge residential and business power users.

The potential advantages of the deal for the utilities and generators are many: By selling to the state, energy producers are dealing with an entity far more creditworthy than PG&E or Edison, both of which say they are in dire financial straits. And the utilities would be able to buy that power from the state at a guaranteed price, which would help keep them financially stable and ensure they have enough power to supply California’s needs.

Under this scenario, California consumers would be insulated for some number of years from the possibility of being charged market rates for power — as happened last summer in San Diego, causing some bills to triple. State negotiators seem to be trying to curb the ability of utilities to raise electric rates markedly once the current rate freeze is lifted. Under the terms of the state’s electricity deregulation law, that could happen as early this year.

“If we can contract on a long-term basis for all the additional power we need at an affordable rate then that is definitely a goal worth pursuing,” Gov. Gray Davis, a participant in the talks, said Wednesday. Davis did not discuss the plan in any detail, but he did say he is seeking a comprehensive solution that appears to go far beyond what most observers expected when the talks began.

“It does us no good to deal with this issue in little pieces,” the governor said in a Capitol corridor interview after a press briefing on the state budget, which was released Wednesday. “My normal incremental approach will not work on a problem like this. You have to solve the whole problem before you can solve any single part of it.”

Because the plan envisions a large role for state government in the power market into the foreseeable future, it further undermines California’s 1996 deregulation law, which sought to create a free market for the buying and selling of electricity.

The plan also contains several controversial elements and many unknowns: How much profit would utilities make on the resale of power they purchase from the state? How much would consumers have to pay for that power, and — even if some sort of rate freeze continues — would they be asked to pay appreciably more than they pay now?

Two key legislators who participated in the Washington talks insisted that consumers should not worry.

“There would be no windfall to the utility,” said Senate President John Burton, D-San Francisco, who said he wants utilities to assure the state they will sell the power to customers for about the same price they paid the state. “The whole purpose of the thing is for you to provide the long-term stable power.”

Senate Republican Leader Jim Brulte, of Rancho Cucamonga, made a similar point.

“Much like a homeowner buys a fixed rate mortgage to protect against interest rate increases, the long term solution is additional power purchased at a fixed rate for a long term contract,” he said.

“That’s a good thing.”

But consumer advocates were skeptical.

The Foundation for Taxpayer and Consumer Rights objected to any plan that obliges the state to buy energy and then sell it to the utilities.

“This is a taxpayer subsidy that could turn into a full-blown multi-billion bailout,” the group said in a statement noting that no consumer advocates had been asked to participate in the latest talks.

The talks began late Tuesday, one day after Davis — in his annual state of the state address — had labeled deregulation “a colossal failure” and called on California to take control of its energy destiny.

Davis and other critics say deregulation, sold to California with the promise of lower electricity prices, is threatening to push rates ever higher while making the state’s energy supply uncertain.

Under deregulation, utilities — who had traditionally produced most of California’s power — were encouraged to sell their plants to independent energy companies who were expected to compete aggressively on price. Instead, due in part to a shortage of supply, wholesale prices have skyrocketed over the past year.

And the utilities, who must now buy much of their power from the independent companies like Calpine and Duke Energy, say they are losing money because the state continues to cap how much they can charge consumers.

The talks are expected to continue at least through the weekend. Many details about the state’s participation in the power market — the most surprising element of the plan — remain to be worked out.

However, Davis administration officials stress that under any scenario, the Public Utilities Commission would still determine — as it does today — whether utilities could raise prices charged customers.

Officials familiar with the talks say the state would not risk its good credit by buying electricity for the utilities, even if the companies filed for bankruptcy. The state, they say, would still control a valuable asset — contracts for 7,000 or 8,000 megawatts of power — that it could use to recoup its costs.

Another bargaining point is what the contract price for power will be. Burton said that negotiators want independent energy producers to agree to a price of about 5 1/2 cents per kilowatt hour. That is far below the current market price of about 40 cents per kilowatt hour. But it is possible it could still be a good deal for the producers if they expect the market price of electricity to plummet in the near future as more supply comes on line.

A spokesman for Edison would not comment on the details of the negotiations Wednesday, but said his company hopes they will produce something of substance.

Steve Hansen said: “We’re still looking for something to come out of the summit in Washington.” He added, “The big thing is cash flow. We have to establish some cash flow so we can continue to buy power.”