Davis Sees 'Good News' in Power Auction

By NANCY VOGEL and DAN MORAIN, Times Staff Writer

SACRAMENTO--An unprecedented Internet auction that would make the state the largest power purchaser in California yielded dozens of bids with prices that averaged higher than officials had hoped but significantly lower than they had feared.

Davis administration officials released only skeletal details about the bids and said they were turning to veteran public power expert S. David Freeman, head of the Los Angeles city electric agency, to negotiate final deals with the power providers.

"This is good news," Gov. Gray Davis said Wednesday night, flanked by legislative leaders of both parties. Davis hailed the bids as the first step toward recovery as the state endured its ninth straight day of extreme power shortages.

Davis also named other members to a team of advisors on the energy crisis, who--like Freeman--will serve without pay. They are Michael Peevey, former head of Edison, and Frank Zarb, CEO of Nasdaq and a former Ford Administration energy official instrumental in structuring a public takeover of the troubled Long Island Lighting Co. in 1997.

The state received bids from 39 power companies, which offered prices averaging 6.9 cents per kilowatt-hour, above the 5.5 cents Davis had sought.

But the figure is within the range--up to 7.4 cents--that some lawmakers say contracts must meet in order to keep consumer rates stable.

The auction was the latest move in the Davis administration's struggle to save the state's largest electric companies from bankruptcy without raising rates for consumers. Caught in an economic storm unleashed by California's deregulation of electricity, Southern California Edison and Pacific Gas & Electric Co. have been saddled with soaring wholesale electricity costs and mounting debt that made them unable to continue buying power. To seal deals under which the state would buy one-third of the state's electricity on behalf of the utilities for up to 10 years, Davis said he would rely on Freeman, head of the Los Angeles Department of Water and Power and a veteran of several public power authorities.

Bids Sent Over Internet

The Davis administration solicited bids over the Internet in a 27-hour process that ended at noon Wednesday. As a sense of urgency built in Sacramento, officials from the state Department of Water Resources reviewed several bids from energy producers seeking to sell the state power. One bid spanned 40 pages.

Water department Director Thomas Hannigan said most of the 39 bidders complied with state specifications. The average of 6.9 cents per kilowatt-hour covered energy use day and night, but not so-called super-peak periods when power demand is highest and electricity is most expensive.

By offering prices over long periods lower than those they are now charging, power-plant owners would lose money in the first few years but recoup it in the later years of the contract, when power supplies are expected to increase.

State officials left unanswered several key questions: which companies submitted bids, how much energy they offered to sell, and over what periods.

With utilities shut out of the power market, the state has already spent much of the $400 million allocated last week to the Department of Water Resources to tide over the utilities while a long-term plan is arranged. State officials contemplate issuing up to $12 billion in bonds to finance the purchase of electricity through contracts, but Davis has not said whether they would be handled through the water agency or a new power authority.

In another development that probably will be part of an overall solution to the power crisis, state Sen. Jim Battin (R-La Quinta) said a deal was near completion between the utilities and the independent producers of "green" energy such as solar, wind and geothermal power. A sticking point remained, he said, between Edison and some of those producers.

Battin said the agreement would slash in half the amount that the utilities have been paying the producers by bringing the price of a kilowatt-hour down to less than 8 cents.

"Pretty much everyone is in agreement," Battin said. "The contracts are getting written."

Independent producers account for about a third of the state's generation. Leveling the prices that the utilities pay to the producers has been a key element in helping to stabilize the state's energy crisis.

Battin said he did not believe that the new rate would force any of those energy producers out of business.

"I think they'll do fine," he said.

Davis administration officials said Wednesday that the work of shaping state power contracts will be left to Peevey and Los Angeles power chief Freeman, 75, an eccentric native Tennessean with a rich history in the energy world. Known as a tough and wily negotiator, Freeman has spent most of his career buying and selling power for government-owned utilities.

"We need a professional buyer," Battin said. "I don't think there's any objection to [Freeman]."

But although Republicans probably will welcome Freeman's help negotiating contracts, they are opposing his more ambitious goal of helping California establish a public power authority, which might be used to buy transmission lines or power plants.

"He appears to have run the DWP quite well and cautiously," said Assemblyman Rod Pacheco (R-Riverside). "His effort to create a California public power authority is troubling."

In a bit of irony, the energy crisis has proved to be a windfall for the Los Angeles DWP. The municipally- owned power agency has its own generators, and has made more than $200 million in the last 18 months by selling surplus power into the transmission grid. Recently, the DWP has been selling that electricity at cost.

The DWP chief declined to comment Wednesday night on news that he was being tapped to negotiate wholesale power contracts for the state.

Mayor Richard Riordan, who spoke to the governor about Freeman's role Wednesday, said he supported the arrangement. "He really knows the whole issue and is well-positioned to broker a good deal for everyone," he said.

Several consumers groups lauded the selection of Freeman, saying his expertise as a long-time insider will be invaluable--if he is given enough leverage.

"David's a wily old coyote, he knows lay of the land, he can negotiate this energy desert better than most," said Michael Shames, director of the Utility Consumers' Action Network in San Diego. "But he can only read the riot act to the generators if they have something to fear. The question is, what stick did the governor give him?"

Meanwhile, lawmakers pursued other plans for helping the utilities recover without raising consumer rates or providing direct bailouts.

Among the ideas receiving serious consideration: requiring that Edison and PG&E give the state warrants in their companies, similar to stock options, in exchange for helping them avert bankruptcy. As the companies regain financial stability, the state could use the warrants to give refunds to consumers on utility bills.

Senate President Pro Tem John Burton (D-San Francisco) floated the idea several weeks ago. It is gaining support as opposition mounts from Republicans and some Democrats to other proposals that the state take control of the utility's hydroelectric plants or transmission lines.

"If we are forcing the ratepayers to be investors in the utilities," Burton said Wednesday, "they ought to be able to obtain stock at very, very, very below-market costs that then are converted when the value of stock goes up."

The concept is similar to what the federal government did 20 years ago when it bailed out Chrysler Corp. by helping it arrange loans. In return the government attached warrants that allowed it to buy Chrysler common stock at a set price.

In a separate idea that could help sweeten deals for energy producers, state Treasurer Phil Angelides is proposing a financing mechanism that would allow the state to pay power-plant owners up front the full value of the long-term contracts that Freeman is to negotiate.

In exchange, plant owners would be expected to give the state a discount.

Many of the plant owners are owed huge sums by PG&E and Edison, which have been unable to pay their debts in recent weeks. Angelides said they also would find the arrangement attractive because the current cost of producing electricity is higher than the bids they would have to make to win the contract.

The state could offer the cash because it can use its bonding authority to borrow money at an interest rate of 6% to 7%, while power companies pay higher rates.

"If we prepay on the contracts," Angelides said, 'and then guarantee our position with the right forms of insurance, there are some possibilities to perhaps reduce the price of the contracts."

Deadlines Looming

Davis and lawmakers face several deadlines as they try to help avert bankruptcies by PG&E and Edison. The utilities have large payments due in coming weeks. With each passing day, questions mount as to whether creditors will continue to allow them to default.

At the same time, a federal order requiring power generators to sell electricity to California expires in two weeks. President Bush, in a closed meeting with congressional leaders Wednesday, said the emergency order issued on Tuesday was a one-time intervention.

"He emphasized that three or four times," Sen. Harry Reid (D-Nev.), the second-ranking Senate Democrat, said after the meeting with Bush. Reid said the president expressed concern about the impact of the crisis on neighboring states, but sees it as something that California must resolve for itself.

White House press secretary Ari Fleischer, affirming that Bush has no intention of extending the emergency orders, said the federal government could give California waivers on federal clean air rules, allowing it to use dirtier power plants--although several state lawmakers oppose relaxing environmental standards.

"The federal arsenal is small in this issue; it's mostly a California matter," Fleischer said.

In other developments:

* Edison won a three-week reprieve from its banks, which have the right to demand immediate repayment of debt the utility has accumulated. With the grace period, Edison should have enough cash to continue to operate until the Feb. 13 deadline set by its group of 23 banks, said Ted Craver, chief financial officer of Edison International, parent company of the Rosemead-based utility.

* San Diego Gas & Electric asked the California Public Utilities Commission to add a surcharge to customer bills of 2.3 cents per kilowatt-hour beginning March 1 to manage the swelling electricity costs that SDG&E cannot yet pass along to customers.

Rates for residential and small-business customers were capped at 6.5 cents per kilowatt-hour by legislation passed last year, but the same law also allowed the utility to eventually recover its costs. SDG&E said the surcharge would add $11.50 to the typical monthly residential bill of $72 for the next five years.

* Davis is considering using his emergency powers to take over long-term electricity contracts signed by Edison late last year with electricity suppliers, said David S. Chaney, a senior assistant attorney general, in a state court proceeding Wednesday.

The California Power Exchange, a market where power is traded, is trying to seize $215 million worth of these long-term contracts, representing about 670 megawatts of power that is relatively cheap compared to current prices, to satisfy Edison's unpaid electricity bills. Los Angeles Superior Court Judge David P. Yaffe issued an order barring the Power Exchange from acting until Feb. 2 so that Davis can make up his mind.

PG&E, which has not defaulted on its electricity payments to the Power Exchange, filed suit Wednesday seeking to block the electricity exchange from seizing any of the San Francisco utility's long-term electricity contracts.

* In Washington, Sen. Frank Murkowski (R-Alaska), chairman of the Senate Energy and Natural Resources Committee, announced plans to conduct a committee hearing Wednesday on California's power crisis.

He said the state needs to make a "good-faith effort to accept its responsibility in this energy crisis and pay some of the bills." "It is then that the federal government can take a look at possible efforts to help," he said. "But it is not up to the federal government to bail out California for a series of bad decisions."

--- Times staff writers Nancy Rivera Brooks, James Gerstenzang, Miguel Bustillo, Carl Ingram, Eric Lichtblau, Richard Simon, Julie Tamaki, Rone Tempest, Robin Fields, Terence Monmaney and Jenifer Warren contributed to this story.

Copyright 2001 Los Angeles Times

-- PHO (owennos@bigfoot.com), January 25, 2001