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Los Angeles Times

Gov. Gray Davis and legislators Thursday moved toward a possible state bailout of private utilities struggling to pay runaway electricity prices.

At the same time, influential officials called for the state to create a public power authority to provide electricity for Californians.

And the state’s Public Utilities Commission unanimously gave formal approval to an emergency, 90-day rate hike of 7% to 15% designed to help the state’s two biggest utilities stay afloat.

Wall Street quickly judged that aid inadequate. Stocks of the parent companies of Southern California Edison and Pacific Gas & Electric nose-dived, and one rating agency downgraded their bond ratings to junk status.

As state officials and utility executives continued to seek a way out of the current chaotic power situation, there were several new developments:

* Lawmakers discussed the possibility of having the state borrow money to help the utilities out of their financial crisis. The loan would be repaid over time by customers.

* The state’s treasurer and other senior officials prepared to endorse the idea of a state power authority that could generate or transmit electricity.

* The head of the federal agency that regulates the wholesale power market said he might reconsider his opposition to caps on electricity prices.

* The Clinton administration offered to host a White House meeting early next week to bring all major players together in search of a solution to the state’s power woes.

Edison and PG&E have begged state officials to allow them to charge retail customers more for electricity because the cost of the wholesale power they buy has skyrocketed in California’s deregulated energy market. Company executives have said the utilities are on the brink of bankruptcy.

To avoid that possibility, Davis and key legislators have been negotiating with utility executives. The outline of a possible rescue package remains very much in flux. But a key aspect that became public Thursday is the possible use of state bonds.

According to Democratic lawmakers involved in the negotiations, the state could issue bonds to help the utilities cover the difference between the current high wholesale cost of power and what they are allowed to charge retail customers. Lawmakers are attempting to decide what help, if any, the state should offer the utilities to pay off the $ 11-billion debt they have piled up in recent months. So far, they have reached no consensus on that issue.

Customers would bear the cost of repaying any bonds, but would not have to pay the bill all at once. The bonds would allow the cost to be spread out over a much longer period and would allow the utilities access to the state’s ability to raise money at low interest rates.

Davis spokesman Steven Maviglio acknowledged that there have been discussions among the governor and lawmakers about the state taking additional steps to help the utilities, but did not go into detail.

“The governor said, ‘Nobody in their right mind wants to see the utilities go bankrupt,’ ” Maviglio said.

Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, attacked the idea of a state bailout.

“There will be a blood bath in the Legislature if they try to do this,” Rosenfield said.

A major topic still under negotiation is what the state would receive in return for the aid. Possibilities range from assurances that consumers won’t face rate increases to a share in the companies’ power plants or other assets.

A senior official of Southern California Edison suggested Thursday that another possibility would be for the state to use its condemnation power to take over power plants the utilities sold to energy companies–all but one based out of state–as part of the state’s deregulation plan.

“It’s something that needs to be looked at,” said Senior Vice President John Fielder. “It can’t be any worse than this.”

Condemnation of power plants could, theoretically, provide the basis for a state power authority, which state Treasurer Phil Angelides is expected to propose today, according to a government official familiar with Angelides’ plans.

He will call for the creation of a public authority that, among other things, would buy private electricity generating stations. The authority would generate the state’s power, rather than rely on out-of-state companies.

Such public power authorities exist in other parts of the country; New York state’s Power Authority and the federal government’s Tennessee Valley Authority are among the largest.

In the current environment, such an idea, which was dismissed as radical just a few weeks ago, has become increasingly popular, even among traditional opponents of government intervention.

At the PUC meeting in San Francisco, Commissioner Richard Bilas called on the Legislature–which is meeting in special session to deal with the power crunch–to immediately create a power authority to begin buying back power plants at fair market prices.

Bilas, a Republican appointed by one of deregulation’s biggest boosters, former Gov. Pete Wilson, earned applause from a packed auditorium when he said, “That’s coming from a free-market economist’s mouth.”

Consumers Union representative Harry M. Snyder called Bilas “very brave.”

“Bilas’ statement was a clear warning that temporary fixes are not going to do it,” Snyder said. “We need a radical plan because we’re in a crisis.”

After the vote to approve the rate hikes, a raucous demonstration of roughly 100 people erupted on the steps of the PUC headquarters, with protesters waving signs that read, “State Controlled Power Now” and “Just Say No to Rate Hikes.”

In the midst of the hubbub, retired janitor Valentin Polienko arrived on a bus, clutching the notice of a rate hike she had received in the mail Wednesday from PG&E. She said she wanted to talk to somebody about what the notice would mean to her.

“I rent and I am alone,” said the Russian immigrant in broken English. “If it be $ 30, $ 40, I am retired; I cannot pay.”

“I am very, very sensitive for bills,” she said.

Deregulation Backfires

The current chaos in the state’s electricity market began with the deregulation law, passed in 1996, which lifted caps on wholesale energy prices and led to private utilities selling their power plants. Rather than generating their own power and reselling it to consumers, the utilities are supposed to buy power from competing generators. The architects of deregulation argued that competition among generators would lead to lower prices.

Instead, prices have risen tenfold.

All this has occurred while the utilities’ retail rates are frozen at 1996 levels. The companies have asked for increases of up to 30% to calm their creditors and allow them to keep buying electricity, but the PUC granted only 9% increases for residential users. Businesses will see hikes of 7% to 15%, with larger industries paying the highest.

The increases–technically called surcharges so the rate freeze can remain in place–will immediately hit the 24 million Californians served by Edison and PG&E. Residents of cities that have municipal utilities, including Los Angeles, Riverside and Sacramento, will not be affected.

Soon after the PUC unanimously approved the rate hike, one credit rating agency, Fitch Inc., chopped the two companies’ bonds to junk status. The rate hike was insufficient to guarantee the utilities’ financial stability, the agency said.

“With access to cash and bank credit for the utilities drying up, possibly only a few weeks remain before funds are exhausted,” the agency said in a statement.

Another rating agency, Standard & Poor’s, dropped the ratings to a notch above speculative grade. Edison and PG&E stocks also dropped sharply before recovering slightly after reports began circulating about the negotiations for a further bailout.

Edison International closed down $ 1.50 a share, at $ 10.75, and PG&E Corp.’s stock tumbled $ 5 a share, to $ 12, on the New York Stock Exchange.

“We’ll do our best to stay out of bankruptcy,” Fielder said after the vote. Edison had warned that it might have to curtail service if the PUC did not grant a larger increase.

Davis, meanwhile, was planning to fly as early as Tuesday to Washington, where top Clinton administration officials had agreed to convene a meeting of utility executives and federal power regulators.

Energy Secretary Bill Richardson, Treasury Secretary Laurence Summers and Clinton’s top economic advisor, Gene Sperling, will preside. Federal Energy Regulatory Commission Chairman James J. Hoecker also pledged to be there.

One White House official said, however, that the administration has little direct authority to intervene in California’s crisis. The administration does not have time before the president leaves office Jan. 20 to offer a federal bailout to the utilities, even if Clinton thought such a step might work.

“Obviously, we would not be doing this if the parties didn’t think it was useful,” the official said. “How much this moves the ball forward I don’t know. But this isn’t a show meeting.”

Davis has sharply criticized Hoecker and the federal commission for failing to impose price caps on power generators, whose rates for electricity have skyrocketed in recent weeks, sending the state’s utilities to the brink of bankruptcy.

On Thursday, Hoecker appeared to moderate his stand, issuing a statement that “price caps can lower prices, at least temporarily.”

“They look and feel like real consumer protection,” Hoecker said, adding that he would support caps, but only for a “short time-out.” He also said in the statement that caps could be used to prevent “clearly unwarranted price explosions.”

“There is no doubt in my mind,” Hoecker said, “that the powerful economy of the state can extricate itself from this crisis if its leaders do not jump from the frying pan into the fire by trying to reinvent the industry once again.

“Competition is the solution, not the problem,” he said. But, he added, deregulation “was not well-conceived or well-executed in California, and for that, we all share the blame.”

Adding to the politics of the situation, Secretary of State Bill Jones, the state’s top elections official, called on Davis and the Legislature to stop accepting campaign donations from utilities and energy producers, at least until the crisis is resolved.

” Jones is concerned that the public believes judgment has been clouded by contributions, and he wants the focus to be on resolving the situation,” said Jones’ spokesman, Alfie Charles.

Jones, a potential Republican challenger to Davis in 2002, has taken $ 34,000 in contributions from the state’s three major utilities since 1998, a relatively modest sum by California standards.

Davis, by contrast, has accepted more than $ 500,000 from utilities and energy producers since taking office, though he canceled a fund-raiser last month that was to be held by power companies.

Davis aides dismissed the challenge as politically motivated.

Consumer Watchdog
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