The San Diego Union-Tribune

SACRAMENTO — State power regulators appointed by Gov. Gray Davis defied him yesterday by blocking a $12.5 billion bond to repay the state for power purchases, potentially forcing big cuts in state programs next year.

But the Public Utilities Commission in San Francisco also drew the governor’s praise for a surprising court settlement that could keep Southern California Edison out of bankruptcy.

The settlement was criticized by consumer groups.

The governor said the 4-1 vote by the PUC to reject an agreement on electricity rates needed for the bond sale was an “irresponsible act” that adds more fiscal uncertainty as a weakening economy produces less tax revenue.

At the heart of the dispute between Davis and the president of the PUC he appointed last year, Loretta Lynch, are $43 billion worth of long-term power contracts obtained by the state after it began buying power for utility customers in January.

The state stepped in after utilities could no longer afford to pay soaring electricity costs that plunged the state into a crisis and contributed to blackouts.

Lynch contends that approving the rate agreement would lock in the contracts and force ratepayers to pay above-market electricity prices for more than a decade. Davis believes the contracts have helped reduce power prices and that undermining them would be a show of bad faith and trigger lawsuits.

A controversial provision in the contract, inserted to assure generators concerned about not being paid, gives payment of the power contracts first claim on ratepayer revenue, which also is needed to pay off the bonds over 15 years.

So to assure bond purchasers that they would be paid, the rate agreement required the PUC to automatically approve any rate increase requested by the state power-purchasing agency, the Department of Water Resources, to pay for the contracts.

“The rate agreement ties the PUC‘s hands and limits the (commission’s) ability to protect the ratepayers in unprecedented ways,” Lynch said.

She joined another Davis appointee, Carl Wood, and two appointees of former Gov. Pete Wilson, Henry Duque and Richard Bilas, in voting against the agreement.

A third Davis appointee, Geoffrey Brown, who cast the lone vote for the agreement, said it is needed for investors to maintain confidence in California’s government.

“The state could end up in a cash crunch because of the delay,” Brown said. He said failure to approve the rate agreement “seriously demeans the ability of the state to be seen as a creditworthy entity.”

Apart from the PUC rejection of the rate agreement, the $12.5 billion ratepayer bond is expected to be delayed by one or more lawsuits, presumably from Pacific Gas and Electric and perhaps others.

Two of the state’s top financial officials disagree about the impact if there is a lengthy delay in the bond and the state general fund is not repaid for a year or more.

State Treasurer Phil Angelides warned last week that failure to issue the bond could result in a $9 billion state budget shortfall next fiscal year, forcing cuts in education, law enforcement, health and other programs.

But state Controller Kathleen Connell disagreed with Angelides this week. She said the state could avoid cuts by obtaining a series of short-term loans during the next two years, or even longer until the legal action is settled, allowing for the bond to be issued.

Lynch and opponents of the rate agreement support legislation by Sen. John Burton, D-San Francisco, that would create a ratepayer-supported fund separate from the power fund to pay off the bond. The PUC could also review the long-term contracts under the bill.

The governor plans to veto the bill, SB 18XX, because it undermines the power-purchasing plan that the Legislature sent to the governor in January. A Davis aide said the Legislature could have avoided the legal entanglement by sending the Burton bill in January instead of last month.

It was not clear whether a Davis veto will create momentum for the first veto override in decades, which would require a two-thirds vote of both houses.

Burton said he and Assembly Speaker Robert Hertzberg, D-Van Nuys, could reconvene the Legislature without Davis’ support because the special session was not adjourned when the Legislature left for the year, at the end of the regular session, last month.

“It has very, very broad bipartisan support,” Burton said of his bill that passed both houses by a vote of more than two-thirds. “I assume people knew why they were doing it. It was cheaper. It was quicker. It was better.”

Burton said the rate agreement sought by Davis only appears to have the support of the governor and Angelides, who once supported the Burton bill.

Though not ruling out a veto override, Burton did not embrace it, either. A Davis aide said he thinks a veto override would be difficult and unlikely.

Davis aides suggested that the governor will continue to urge the PUC to approve the rate agreement. The governor cannot remove Lynch or any of the PUC members, who are appointed to six-year terms.

The governor has not asked Lynch to resign, and she reportedly has said she plans to remain on the commission. Davis could appoint another PUC member as president, but that would not change the 4-1 vote against the rate agreement.

In a letter to Commissioner Brown before the vote, Davis said “in these times of increasing economic uncertainty, it is irresponsible to endanger the revenue bond sale and put the state’s general fund in jeopardy.”

The state general fund is owed about $6.1 billion for power purchased before a $4.3 billion short-term loan, which will be paid off by ratepayers, was obtained in June.

The short-term loan was originally scheduled to be paid off by the big bond. Because the loan will not be repaid as expected by Oct. 11, the interest will increase.

“This would be the first default in the state’s history,” Davis said in his letter to Brown. “That would threaten the state’s credit rating and could cost tens of millions of dollars.”

The PUC‘s unanimous action on Edison led Davis to cancel his call for a special legislative session next week to push a relief plan for the utility. He had unsuccessfully tried for months to get the Legislature to approve an Edison plan.

Lower power prices have provided enough room in existing rates, which were raised twice this year, to allow Edison to pay off a $3 billion debt over several years. Edison rates would be frozen for two years, and the PUC said Edison shareholders would contribute $1.5 billion.

Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights said the PUC action is an “outrageous betrayal” of the public. He said federal court settlements cannot be overturned by a ballot measure, but a counter-measure of some sort will be studied.

Regulators step in

The California Public Utilities Commission yesterday took action on two key issues related to the state’s lingering energy problems.

Energy bonds

Action: The commissioners reject a plan to finance $12.5 billion in bonds, delaying the effort to repay the state general fund for billions spent on electricity this year.

Reason: The plan would have locked the state into expensive long-term power contracts possibly raising electrilcity rates, four of the five commissioners said.

Fallout: Gov. Gray Davis criticizes the vote. But the action is applauded by Senate leader John Burton, who has a bill with an alternative plan.

Edison relief plan

Action: The commissioners settle a lawsuit by Southern California Edison, allowing the utility to pay much of its estimated $3 billion debt by keeping in place record rate increases.

Reason: The settlement keeps Edison out of bankruptcy and restores its credit rating so the utility can buy electricity again for its customers, the commissioners said.

Fallout: Davis supports the action, but consumer groups call it a bailout for Edison‘s shareholders.