BAILOUT TO AFFECT CONSUMER rates

San Jose Mercury News

SACRAMENTO — Gov. Gray Davis‘ plan for the state’s energy future faces a crucial test in the next three weeks as he seeks to sell legislators on his multibillion-dollar plan to bail out the state’s second-largest utility.

Although the state averted many predicted power calamities, how the state’s leaders resolve the fate of Southern California Edison before the Legislature adjourns in mid-September will profoundly affect utility customers throughout the state.

State leaders still hope to use an Edison deal as a blueprint for pulling Pacific Gas & Electric Co. out of bankruptcy. And they say another utility bankruptcy will drag out the crisis and the state’s controversial role as power supplier while exposing consumers to higher rates and damaging California’s business climate.

“We’ve worked very hard to get this crisis under control,” said Assembly Speaker Pro Tem Fred Keeley, D-Santa Cruz. “And although it hasn’t been easy or cheap or pretty, I believe we have much of it stabilized. I don’t want to return to the time when we had a wildly out-of-control wholesale market and rolling blackouts.”

But consumer advocates have grave doubts that the Legislature can craft a solution that’s any better for ratepayers than bankruptcy. After all, they say, lawmakers started the whole mess with the disastrous 1996 electricity deregulation law, enacted in a similar rush of last-minute deal-making.

“You get the feeling the Legislature is shooting in the dark,” said Mindy Spatt, spokeswoman for the Utility Reform Network. “On the one hand, there are negative consequences to bankruptcy, but negative consequences can arise from a deal like this as well. What do we get out of it that’s so much better than bankruptcy?”

There are enormous political stakes as well. Davis has staked his reputation on saving Edison, personally lobbying lawmakers to approve a deal, and rejection could hurt his credibility.

“The governor’s putting a lot of his political capital into this Edison bailout,” said Nettie Hoge, director of the Utility Reform Network.

Given those stakes, Davis is likely to continue trying to cut a deal even if lawmakers kill the current proposal.

“Every time it seems dead in its coffin it comes back to life,” Spatt said.

The deal carries risks for lawmakers, too. Consumer advocate Harvey Rosenfield has vowed to challenge it through a ballot initiative. That would put lawmakers in the awkward position of seeking election while they’re being accused of selling out consumers to bail out a corporation.

“None of those legislators want to have an initiative on the November ballot,” said Peter Navarro, a University of California-Irvine economist and energy expert. “This issue is going to be troublesome enough for them.”

The problem arose a year ago when the state’s deregulation plan left California’s three major investor-owned utilities paying more for wholesale electricity than they could charge their customers.

By January, they were more than $13 billion in debt, and the state had to step in and buy power for their customers because energy suppliers would no longer sell to them. Edison now owes $3.9 billion to power companies, banks and bondholders.

Davis’ plan has been to restore the utilities’ credit through a cash infusion by having the state buy their transmission lines. Allies in the Democratic-controlled Legislature have supported the concept, which Senate leader John Burton, D-San Francisco, characterized as a “dollar for a hotdog.” But the deal has been hung up on the details.

Frustrated with the pace of negotiations and suffocating under a $9 billion debt, PG&E filed for bankruptcy protection in April.

Three days after PG&E filed, Davis announced a tentative deal with Edison in which the state would buy the utility’s transmission lines for $2.76 billion — more than twice their assessed value.

Edison in return would agree to protect 21,000 acres of watershed lands around its dams, sell power from its plants at a cost-based rate, contribute $400 million toward its debt and drop lawsuits seeking rate increases.

Edison said that 40-page deal had to be approved by Aug. 15. But the pact got a chilly reception among lawmakers who thought it too rich for the company.

The version that emerged from the Senate last month in a 22-17 vote differed in that Edison would give the state an option to buy the transmission lines at their current value. And Edison would instead have to raise cash by issuing $2.5 billion in bonds that would be paid off by its largest industrial customers.

But Edison said that version wouldn’t help the company avoid bankruptcy, and consumer advocates wondered what customers get in return.

“It’s just a straight bailout,” Spatt said. “It’s an empty bun.”

The deal is so much in flux that Edison officials declined to comment Tuesday. The Assembly energy committee working on the bill postponed a vote until today. The current version of the bill calls for a larger bond issue with the cost spread among more businesses. Key details include:

Edison would issue $2.9 billion in bonds.

The bonds would be paid for by the 180,000 Edison business customers using 20 kilowatts or more during peak times, rather than the 3,600 using 500 kilowatts or more.

The state would have a five-year option to buy the utility’s transmission lines at $2.4 billion, twice their book value.

Edison would contribute a $400 million tax refund toward its debts.

If federal regulators order refunds from energy suppliers for overcharges, Edison would set aside the first $500 million for consumer rebates.

Businesses would have the option of shopping for another power supplier.

But those changes didn’t bring the proposed deal much closer to approval Tuesday.

“It was difficult enough to get the bill out of our house as it was, and this bill is a lot, shall we say, sweeter for Edison and the industry,” the Senate’s Burton said.

Republicans oppose the Democratic plans, arguing Edison needs more money to avoid bankruptcy and that businesses shouldn’t be singled out to pay off the debts.

Democratic lawmakers say existing rates are high enough to cover the bonds without further increases, but argue that repayment should come from the businesses that urged deregulation.

Business leaders say it’s unfair to make them cover residential customers’ costs and believe such a deal could lead to rate increases. And they say any deal must allow them to retain the option of shopping for a better power deal and generating their own power.

But consumer advocates complain that allowing businesses to shop around for power could expose residential customers to higher rates. As companies flee to other suppliers, residential customers would get stuck paying off the state’s costly power contracts.

Edison and most of its creditors have vowed not to seek bankruptcy voluntarily, but three creditors could force the utility into court.