The New York Times
The chief executive responded knowingly this past week to an array of detailed business questions, talking about the value of stock options, about floating several billion dollars in bonds, about how a 1.4 cent price difference between his organization and sellers of a critical resource would not stand in the way of negotiating contracts. Most of all, the chief executive spoke about a financial strategy for his organization that promises to be in place for years, perhaps a decade.
The comments would have been unremarkable but for the fact that the organization was the state of California, and the chief executive its governor, Gray Davis.
The comments were a sign that something unusual was happening here as political leaders took big steps last week toward devising legislation to settle the state’s unnerving energy crisis. What was critical, and all but overlooked, was not the overt details of the legislative package, but its underlying philosophy.
The issues hidden in the details of the comprehensive rescue plan were that it could force state officials, from the governor down, to think more like business managers than public policy officials, more worried about stock prices and increasing profits than purely focused on the public good. And it could lock them into this mind-set not for a short time to get the state through the energy crisis, but for many years.
California’s crisis began three years ago when the electricity market was deregulated. Under the plan, the major utilities could sell off some of their generating plants and begin buying power instead on a competitive wholesale market. The problem was that wholesale prices were freed, but retail prices were not. The result, which no one foresaw, was a catastrophe when wholesale prices soared this year to as much as 40 cents and 50 cents per kilowatt-hour, while retail prices were stuck at less than 7 cents per kilowatt-hour.
The state’s two largest utilities have said they have suffered roughly $12 billion in losses in recent months because of the soaring wholesale prices, to the brink of bankruptcy. Meanwhile, the market is struggling with power shortages because many generating plants are not operating, forcing the state to contend with periodic rotating blackouts.
The legislative plan fashioned last week would have the state become the principal buyer of power, which it would then sell to consumers. It would sell billions of dollars in bonds to make those purchases at rates determined by long-term contracts, extending as long as 10 years. The utilities, Pacific Gas and Electric and Southern California Edison, appear likely to receive a rate increase and to be given the right to split off a small part of every monthly bill, money they could use to pay off the $12 billion in debts.
But perhaps the most ideologically charged part of the plan is the state’s proposal to take a kind of stock option in the two financially battered utilities in return for the relief.
The idea sounds simple: if taxpayers take on a lot of financial risk in nursing the utilities back to health — by selling state bonds to assist them in buying power or absorbing rate increases — then taxpayers should profit with shareholders when better times return. It seems like a new-economy solution to the problem. There is a precedent. When the federal government bailed out the Chrysler Corporation in the 1970’s with loan guarantees, it received stock warrants that turned a profit of hundreds of millions of dollars.
“People are very familiar with stock,” Governor Davis said on Friday. “They understand stock options. They understand participation in the upside. I think that’s a clear benefit.”
But experts now say that owning such an interest would make the state less than a disinterested party in energy policy, an area in which it has far more influence than the federal government had over the automobile market in the 1970’s.
Severin Borenstein, director of the University of California Energy Institute, said the most obvious problem would be applications by utilities for electricity rate increases. Any such increase could send the share prices soaring, raising the question of which impulse state regulators would follow. This is an issue that could come up with even greater force several years from now if, as expected, wholesale electricity prices start to fall, perhaps sharply, and ratepayers agitate for cuts. Who would the regulators listen to?
A longer term concern, Mr. Borenstein said, comes later, when the state is expected to begin considering introducing more competition into the power business. How would it respond to applications from other companies that want to compete directly with Pacific Gas and Electric and Southern California Edison in the retail market? That competition could drive down stock prices.
“This plan does set up serious conflicts of interest that could affect us for years,” Mr. Borenstein said. “There’s a reason states generally don’t take equity stakes in private companies.”
He added: “At the very least, this has to be treated with great caution. But the real problem is that this imposes enormous constraints on any effort to deregulate this market in the future, particularly at the retail end, perhaps for 8 to 10 years.”
Aides to Governor Davis dismiss the concerns, saying, first of all, that there are simply few options, and second, that the state would never be unduly influenced by the demands of the stock market over the policy needs of the state.
At least for now, consumer advocates are skeptical, on several grounds. First of all, they feel that the utilities, their management and their shareholders should pay for the deregulation debacle, not ratepayers, who never pushed for the plan. But if the ratepayers are made shareholders, that would be impossible. Also, the advocates say the warrants would never produce a level of profits that could cover the risk taken on by taxpayers — to the tune of many billions of dollars.
“Ultimately, there is a real conflict, but more important is the fact that this is just window dressing for a $10 billion bailout,” said Harvey Rosenfield, an official at the Foundation for Taxpayer and Consumer Rights. “If we’re going to bail these companies out, we should get a dollar-for-dollar return, with interest, not a few stock warrants.”
Janee Briesemeister, a senior policy analyst at Consumers Union, agreed. “Under deregulation, all California consumers got was a bunch of empty promises,” she said. “Now that deregulation has failed, they’re being asked to foot the bill.”