State may buy more electricity

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Legislature approves spending $400 million over 12 days to prevent blackouts.

The Orange County Register

Taxpayers risk losing as much as $400 million in an emergency plan passed by the Legislature on Thursday that allows the state to dip into its general fund to buy electricity for the next 12 days to prevent further blackouts.

Under the deal, the state would use its good credit to buy electricity from power generators and resell it to the utilities who are having trouble buying power because of their poor credit. The utilities’ poor financial status and other factors make full repayment unlikely. Following Senate approval the Assembly approved the plan 70-0 late Thursday.

There is no guarantee we’re going to get the money back. We’re in a terrible situation. However, if a third of the state blacks out at once, we are very likely to have rioting, looting, public-safety hazards,” said Sen. Debra Bowen, chairwoman of the Senate’s energy committee.

I’m simply not willing to play a chicken game that results in one-third of the state going into blackouts at the same time.”

Senate Leader John Burton, D-San Francisco, said there will be a substantial gap” between the money paid for electricity and the amount it could recover, but he also believes the state has no choice.

If we do not step in at this point for the short term, this will get out of our control and cost the taxpayers more money out of the general fund or out of lost business,” said Burton, D-San Francisco, defending the plan before members of his house, who voted 34 to 2 for the bill.

Dozens of lawmakers were wary of the plan, driving them into closed-door party caucus negotiations for more than 10 hours Thursday — where promises were made to create a state power authority and to quickly sign long-term contracts for low rates — before votes were secured.

Gov. Gray Davis could sign the bill today.

By throwing its chips into the high-stakes electricity market, the state is placing at risk money from the general fund — usually meant to pay for large state programs such as education and health care.

In the worst case scenario, should the utilities go bankrupt, the state could receive nothing. There’s also a belief that the state would only be able to recover a small percentage of the $400 million. This is because utilities, under state-mandated rate freezes, recover far less than what it costs to currently purchase power.

The legislation would allow the Department of Water Resources to negotiate short-term contracts, lasting as long as 12 days. While it doesn’t guarantee the 5.5-cent kilowatt-hour rate that lawmakers would like to secure in multiple-year contracts, it at least shelters the state from the volatility of the spot-time market, where prices are as high as 60 cents a kilowatt-hour.

However, a large gap still remains between what consumers pay for electricity and the price paid by the state. Currently, state law freezes the rate consumers must pay for raw energy at 7.5 cents per kilowatt-hour — additional charges are added for cost of transmission. The concern is that the utilities will not be able to make up for the gap when it comes time for them to reimburse the state.

Davis called the plan a bridge” to a long-term solution, which he said is coming together. On Thursday, he said the state is already receiving bids for multiple-year contracts that would lock in the rates he desired — just 5 to 5.5 cents per kilowatt-hour, which is eight times lower than Thursday’s market rate.

On Wednesday, Davis declared a state of emergency and ordered the Department of Water Resources to immediately use about $450 million, from money it receives from the state’s general fund, to buy electricity for the state. The account is funded by profits made when it sells off extra energy it produces. Those funds could run out as soon as today.

Davis also said his emergency powers — which would have allowed him to also dip into the state’s $1.9 billion reserve fund — would only allow the state to enter into one- to two-day contracts.

The bill approved by the Legislature on Thursday would give the state more leverage to secure a slightly better rate since it extends for 12 days.

  The state would save a lot of money if I could see a bill late tonight that appropriates money,” said Davis.

On Wall Street, the top credit-rating agencies, which have already downgraded Edison and Pacific Gas & Electric, are now shifting their attention to the state government, which has begun buying power for the reeling utilities.

Although no one is sounding the alarm yet, the credit watchers say they’re keeping their eyes on the developments.

If it can be done in a way where the state is simply a broker bringing down the price of the power and not incurring any liability, there should be no problem,” said Claire Cohen, vice chairman of Fitch, one of the top fixed-income rating companies.

But if there’s no (deal with the power producers), if the state has to purchase power at a cost that exceeds what it can recapture from ratepayers, and it finds itself in the same position as the utilities, that’s clearly going to hurt the state’s credit a lot.”

Consumer advocates said the announcement confirms their fears.

If the state moves in to buy power for the utilities, the money might never be returned to the general fund, which is used to pay for large state programs such as public schools, hospitals, highways and water.

This is a holdup. It’s economic extortion,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights.

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