The San Francisco Chronicle

California enters undiscovered territory this week with the launch of a new Power Authority that will have unprecedented control over the state’s energy system.

Gov. Gray Davis will announce his four appointees to the authority’s five-member board of directors tomorrow, and sources say his top energy adviser, S. David Freeman, will be named chairman.

Freeman will preside over the most ambitious experiment on energy policy since the disastrous 1996 deregulation scheme that plunged California into crisis last year. By statute, state Treasurer Phil Angelides will take the fifth seat on the board.

The California authority, with billions to spend and a broad range of powers, is coming to life just as controversy is building over the huge role the state has already staked out in the energy future.

The low-profile state water agency that stepped in as power buyer in January, after California utilities buckled under soaring wholesale electricity prices, was initially seen as only an emergency pinch-hitter. But as hopes receded for a financial rescue of the utilities, the water department — with Freeman as the Davis administration’s chief adviser — lined up contracts that will define the shape of the energy market for more than a decade.

Davis’ critics say those contracts came too dear, and revelations of potential conflicts of interest among state energy traders have made even public power advocates uneasy.

But with Southern California Edison still teetering on the edge of joining Pacific Gas & Electric Co. in bankruptcy court, no consensus has emerged to develop a coherent new plan that would relieve the state of duty. California is muddling along with a crisis-crafted power system that has been described by observers of various political stripes as a “patchwork,” a “mixed economy,” and a “mish-mash.”

“I’ve never seen this kind of a strange hybrid that evolved out of events,” said Peter Navarro, a University of California at Irvine economist.

Many think California is on the brink of a fateful choice — either a stepwise rebuilding of the private energy industry, or a burgeoning commitment to public power.

“What we’re seeing is a fundamental reversal in the nature and manner of handling this industry,” said Bill Booth, a spokesman for large industrial electricity customers.

And now comes the debut of the power authority — proposed by Senate leader John Burton, D-San Francisco, and approved by the legislature and Davis in May.

At the first meeting of the authority’s board later this month, Davis will publicly outline his vision for the agency. Its potential mission is vast. Burton’s bill allows it to issue up to $5 billion in revenue bonds to build power plants, finance repairs of aging generators, buy land, make loans, seize property by eminent domain and restructure the state’s dysfunctional natural gas market.

Freeman, a public power advocate who once headed the Tennessee Valley Authority, said New York’s power authority might be the closest example of how California’s agency could work. Created 70 years ago by then-Gov. Franklin Roosevelt, the New York Power Authority runs 10 power plants and 1,400 miles of transmission lines and supplies about a quarter of the state’s electricity.

“It supplements the electric power supply and rushes in when the private companies don’t rush fast enough,” Freeman said.

But the eventual scope of California’s power authority, and the state’s future as an energy trader, will depend in part on who wins an ideological struggle simmering in Sacramento.

Republicans and free market advocates say it’s time to slam on the brakes before the state role grows even further, if only by default.

“We are not locked in to a future of bureaucratized power,” said state Sen. Tom McClintock, R-Thousand Oaks. “We can turn back from that dismal road the minute the political will changes. As ratepayers survey their grossly inflated electricity bills month by month, I believe they will demand it.”

Jan Smutney-Jones of the Independent Energy Producers Association, a trade group of power generators, said public power has few advantages.

“Governments build large bureaucracies,” he said. “They’re not necessarily things that function well when you’re dealing with volatile energy markets.”

Assembly Speaker Robert Hertzberg of Sherman Oaks thinks it would be best to revive the utilities quickly and diminish the state role, said his aide Luke Breit. But opinions on the Democratic side of the aisle are all over the map at this point.

“There are some members of the Democratic caucus who believe the best thing that could happen would be for the state to take a much larger role,” Breit said.

The ideas flying around include buying the utilities’ transmission lines, buying out the entire assets of PG&E and Southern California Edison, or transforming California into a network of municipally owned public power systems to shield consumers from further free-market price explosions.

The newborn power authority will be the catch-all agency that could administer any of those public power initiatives, especially if efforts to restore the utilities fail, Breit said.

However, even stalwart backers of public power are worried about the potential for corruption in an independent state entity, under the sole supervision of the governor, making deals with energy giants that have shown themselves to be well-connected political players on a national scale. They fault Davis’ program so far for resisting public scrutiny.

“The ideal would be a public power system that ensures there’s enough power on line but is accountable to a public process so we’re sure we’re getting the best deals,” said Doug Heller, a consumer advocate with the Foundation for Taxpayer and Consumer Rights.

Crucial decisions facing the legislature when it returns to session August 20 could sculpt the future contours of California’s energy market. Bills are pending for a financial bailout for Edison — a deal that could also be extended to PG&E. Other proposals could either resuscitate free-market elements — like allowing industry to bypass the utilities and make its own deals for electricity — or strengthen the state’s grip as the sole power buyer.

While all those balls are still in the air, the state water agency is continuing to move deeper into the energy business. To ensure low costs on some of its power contracts with natural gas-fired plants, the state is setting up shop as a gas buyer so it can supply those plants with inexpensive fuel, said Ray Hart, deputy director of the state Department of Water Resources.

Freeman believes that California’s energy future will be a hybrid that includes a relatively robust free energy market but with overarching government control to make sure the state has a continual surplus of power.

“It’s obvious the Legislature wanted the state to have a supplemental force, not to displace private enterprise,” said Freeman, giving only his “personal opinion” since the authority doesn’t start until Wednesday. Freeman said the legislature was wise to put a $5 billion ceiling on how much the authority can spend. But he noted that the Tennessee Valley Authority started out with a $15 billion ceiling and that rose to $30 billion, and the California Legislature might be willing to increase the spending if investments are successful.

“The lesson to be learned (from deregulation) is that a pure unadulterated free market gives you dog-eat-dog competition, which leads to shortages, which leads to runaway prices.”

Bill Booth, an advocate for large industrial customers, said his clients still think they would be better served by a free market system. But he said they’re not driven by any kind of ideological fervor.

“They just want to pay lower prices,” Booth said. “If you can keep the costs down, maybe the way you deliver the energy doesn’t matter much.”