LA Weekly

Governor Gray Davis let slip away a key solution to California’s continuing electric-power mess last summer and spring when he refused to take up several companies on their offers to turn over generating plants to the state, the Weekly has learned.

Sources say that several power-generating companies, including Mirant, AES and Duke, discussed turning over power plants to the state as part of renegotiating their exorbitant long-term power contracts, which California officials signed in panic mode during the peak of the market frenzy of 2001. At least one company, Mirant, made a formal offer to turn over a plant and power turbines that could be used to create one or more plants. The Davis administration turned them down. (As part of a settlement with Williams, one of the power companies, the state is accepting a few turbines that can be used to produce power in emergencies as “peaker” units.) Details of the offers have not been disclosed.

By rejecting the offers, Davis chose not to give California more control over its own electric-power market, which was at the mercy of unregulated power companies during the recent crisis, especially after the state’s regulated private utilities sold off many of their a power plants. Davis had argued that regaining state control over generating capacity was a principal reason for the establishment of the California Power Authority. “We will never again be at the

mercy of private power generators,” Davis said earlier this year.

“The word is that we don’t want to own plants,” says one knowledgeable source, noting that the governor’s legal counsel Barry Goode rejected the idea whenever it was raised. Asked why state negotiators turned down the offers, gubernatorial Press Secretary Steve Maviglio said he did not know.

Davis’ rejection of the power companies’ offers creates problems for several reasons. Power supplies are narrowing again as the power companies have dropped many projects in the wake of nose-diving stock prices and profits that plunged following the exposure of the manipulated power crisis. Experts say there is a possible shortage of power for 4 million homes over the next decade. With reserve margins narrowing, this again creates the opportunity for unscrupulous operators to manipulate the market to drive up prices. This is especially so now that the U.S. Senate — which brandished endless subpoenas of the power companies during the Democrats’ control of the body — is back in Republican hands.

So getting back some of the plants — which slipped away from any state control as part of the disastrous 1996 electric-power deregulation scheme — would not only make it more difficult for generators to game the market, it would give the state more leverage over the market.

Having state-owned plants would also make it more difficult for the private utilities to extort government bailout money when they start buying power for themselves again next month, a task that the state’s Department of Water Resources took over nearly two years ago when the utilities slipped into insolvency. They must be creditworthy to buy power, and that has been an elusive goal. After failing to get its bailout bill through the Legislature last year, Southern California Edison thought it had found its way with a smaller, Public Utilities Commission–approved bailout. But that’s coming undone, as the result of a lawsuit by the Santa Monica–based Foundation for Taxpayer and Consumer Rights, which successfully sued to block the PUC bailout, which was negotiated in secret and sprung on the public as a surprise.Edison will have to post a huge bond to start buying power again. Pacific Gas & Electric’s situation is dicier

still. Believing that Davis couldn’t get a bailout plan passed, or at least one that the company wanted, PG&E declared bankruptcy last year. A big part of its plan was to escape all state regulation, a goal most creditors support, though the federal bankruptcy judge apparently does not. As a bankrupt company, PG&E lacks creditworthiness, which gives it brinkmanship ability that it might not have if the state had more control over its own power supply. But with Davis backing away from the brink, that’s not happening. “We need all the help we can get in blunting their leverage,” says one Public Utilities Commission source.

Davis has only made the job of renegotiating contracts harder by refusing to consider any offers made by the companies to turn over plants. One high-ranking state official complains that, for the most part, the governor is postponing savings while keeping high up-front costs in place at a time when the market price for electric power is very low.

None of this was discussed much in the just-concluded gubernatorial campaign, of course, as Republican nominee Bill Simon Jr. decided not to talk much about energy, despite the fact that it is the single biggest reason why Davis was unpopular and vulnerable. Simon’s own extreme free-market views — which he shared with his late father, one of the principal founders of the right-wing intellectual establishment — would not have fared well under public scrutiny. And the fact that much of the Simon family fortune derived from Arab oil money would not have played well with the post-9/11 electorate either.

But if Governor Davis thought he was past the energy crisis, he is mistaken — even as another huge crisis, that of the state budget, is also upon him.