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Davis to Propose Ratepayer Surcharge
Power: Plan calls for state to buy transmission grid for billions of dollars, would add an item to customers' bills. GOP voices objections, activists are skeptical and Edison is dismayed at some elements.
By DAN MORAIN and NANCY VOGEL, Times Staff Writers
SACRAMENTO--Gov. Gray Davis today will announce a rescue plan for the state's private utilities that would add an extra charge to monthly power bills and pay the companies billions of dollars in exchange for their massive high-voltage transmission system.
The plan, designed to stabilize California's troubled electricity system, would give the financially hobbled companies two new sources of revenue as a means of restructuring their debt, which they estimate to be almost $13 billion.
Many elements of the rescue plan have already been debated widely. But today's planned announcement marks the first time that Davis himself will spell out his proposed solutions.
Aspects of the plan have gained tentative support from key Democrats, some of whom had expressed impatience about the governor's lack of a remedy until now.
"I'm trying to make sure that whatever help they get, we get value back in return," state Senate President Pro Tem John Burton (D-San Francisco) said of the utilities. "It has to be a fair transaction."
Executives at Southern California Edison were taken aback by several points in the plan. Pacific Gas & Electric executives declined to comment.
"Some of these items are very difficult for us," said Bob Foster, Edison's executive who oversees governmental affairs. "We really need to have a discussion to understand them further."
Under the plan, Edison and PG&E would sell private bonds and gain state approval to repay the bond debt by adding a special charge to monthly utility bills--which critics immediately branded a rate hike for customers.
If Davis succeeds in persuading the utilities to sign on to the plan, and wins legislative approval, there would be a new line item on bills--a so-called "dedicated rate component" reflecting the utilities' cost of paying off their bonds.
It is unclear whether the plan would raise the monthly bills for Edison and PG&E customers or how much the increase might be. Davis has said repeatedly that he hopes to navigate the energy crisis without hikes beyond a 9% residential rate increase imposed last month. A probable 10% increase will occur next year when a rate cut imposed by the Legislature in 1996 expires.
While the dedicated rate component could raise bills, another part of the plan would drive down costs by requiring utilities to sell power from their generators to Californians for the next 10 years at prices far below current costs.
The draft plan, which could change by the time it is released today, also includes provisions that would ensure protection of environmentally sensitive land owned by the utilities.
The state also would require that the utilities drop lawsuits against it and that the parent corporations refund to the utilities tax money Edison and PG&E overpaid last year. PG&E's parent has said its utility subsidiary will refund $500 million to $1 billion, and Edison's parent expected to refund $500 million to the utility.
Davis spokesman Steve Maviglio, while declining to discuss specifics, said the Democratic governor's long-awaited proposal would "keep utilities solvent and give ratepayers an asset in return." "It's a buyout, not a bailout, as the governor likes to say," Maviglio added. "It's a framework for recovery."
The total price for the rescue plan is unknown. The sum the state would pay for the 32,000 miles of transmission lines would be left to negotiations among Davis and utility executives. However, the proposal says the state would pay "market value" for the transmission grid--and that could be $9 billion.
Davis intends to meet with utility executives today at the Capitol before unveiling the plan publicly later in the afternoon. The governor's aides were briefing key Democratic lawmakers Thursday night.
Republicans, who oppose a state takeover of the massive system of high-voltage transmission lines, attacked the plan. Sen. Jim Battin (R-La Quinta) said the proposal to grant the utilities a "dedicated rate component" on people's bills to pay off their bonds, along with a recently enacted bill that allows the state to purchase power, might result in rate hikes.
"I think people will see rates go up," Battin said. "It's not something I support." Consumer advocates also voiced skepticism. Michael Shames, executive director of the Utility Consumers' Action Network in San Diego, said the governor's willingness to allow utility rates to be high enough to help the companies recover their past costs "raises red flags."
"It isn't an element that causes us to blanch--yet," he said. More details are needed about what the utilities' future costs for power might be, Shames said. "It is going to cause consumer groups to be concerned."
Harry Snyder of Consumers Union called the governor's proposal to allow the utilities to float revenue bonds backed by their customers' rates "an obnoxious feature." Snyder said the provision would allow utilities to shut off people's power "because you chose to protest paying off their bad debts" by refusing to pay the "dedicated rate component."
The state would finance the grid's purchase by selling revenue bonds. Consumers would see the cost of the purchase reflected in a separate line-item charge on their utility bills, which would replace the transmission charge that already is on utility bills. The purchase of the grid would give utilities an infusion of cash to pay down their debt.
The proposal says the state would contract with the utilities to operate the grid. Bills to create a state public power authority, and to allow Davis to negotiate the purchase of the grid, passed the Senate Appropriations Committee on Thursday and are expected to be voted on by the full Senate next week.
Edison Chairman John Bryson has said he is willing to discuss the sale of the company's transmission system. PG&E Chairman Robert Glynn, however, has called the grid integral to his company's business, likening the potential loss of the system to denying supermarkets the right to sell milk.
The state already intends to sell $10 billion in bonds to finance its purchase of power that utilities can no longer buy because of their debt.
"It would seem to me," said Sen. Battin, "that we are getting to the point where we could be diluting the value of the bonds because we are issuing billions and billions of dollars in bonds immediately." In one of the most significant pieces of the plan, Davis is seeking to require that the utilities hold on to their remaining power plants for a total of 10 years, and sell power from the plants within the state at their cost, about 3.5 cents per kilowatt-hour.
If Davis can convince Edison and PG&E to agree to that, the saving would amount to almost $6 billion over the 10-year term, assuming, for example, that the companies otherwise would raise rates to 6.5 cents per kilowatt-hour, experts who have analyzed the plan say. "It is a well-balanced proposal for helping resolve the major issues of credit-worthiness for the utilities and offers substantial values to consumers, and to Californians generally," said Assemblyman Fred Keeley (D-Boulder Creek), who had been pushing for state control of the utilities' hydroelectric plants.
In another major component, the state would gain "conservation easements" to the utilities' watershed land, estimated at 165,000 acres. Much of the land is in the Sierra Nevada and other environmentally sensitive areas.
"We're hopeful that as part of this unfortunate mess we're all in, additional protection for Sierra lands controlled by PG&E and to a small degree by Edison will be one of the outcomes," said Thomas J. Graff, senior attorney with the Environmental Defense Fund in Oakland. Environmentalists began a serious push in late December to have the state take over the land, much of it along rivers and heavily wooded with old-growth trees, as part of any plan to give financial help to Edison and PG&E.
Graff said a straight sale of the property to the state would be "more reassuring." But he welcomed Davis' proposal to protect the land in some manner. A conservation easement would provide protection even if the utilities sold the watershed.
The plan comes as electricity reserves in California remain perilously low. On Tuesday, Wednesday and Thursday, grid operators warned PG&E and Edison to be ready to trigger rotating blackouts. Officials with the California Independent System Operator said they could not explain exactly why imports to the state have lagged so much in recent days, except that storage in key reservoirs used for hydroelectric generation is at 60% of normal.
California power plant owners under court order to supply Cal-ISO when necessary to stabilize the vast transmission grid are doing so, said Kellan Fluckiger, chief operations officer at Cal-ISO. But power generators owed hundreds of millions of dollars by Edison and PG&E are growing impatient for action by the Legislature and governor to prop up the utilities. Out-of-state generators have no legal obligation to keep selling power to California, and those based in the state are increasingly frustrated by the state's refusal to back all of Cal-ISO's purchases of power with taxpayer funds. They fear that the cost of emergency power will be billed to the utilities, which say they are nearly bankrupt, and never be paid.
Reliant Energy of Houston, for example, figures that it has supplied Cal-ISO with $40 million to $50 million worth of power since Jan. 20 with no guarantee of payment. The bill increases by at least $2 million a day, said Reliant spokesman Richard Wheatley.
On Wednesday, a Reliant power plant in Ventura County shut down after a voltage spike knocked out the control system. That plant is capable of supplying 215,000 homes. Repair crews worked through the night but could not get the unit running by Thursday afternoon, Wheatley said.
On Thursday morning Reliant shut down a second plant in Ventura County to avoid violating federal and local air pollution rules, he said. That plant supplies enough power for 150,000 homes.
Cal-ISO officials quickly reached an agreement with Ventura County air pollution officials under which Reliant can run that plant when the state's electricity reserves are at 3% or less, as they were for a period Thursday afternoon. Without that agreement, Wheatley said, the plant might have been shut down for the rest of the month.
"It is a very difficult situation we and other generators are in," he said. " . . . We're being forced to supply needed power to the state of California with no assurances of being paid for sales of that power, now or in the past."
--- Times staff writers Jenifer Warren, Carl Ingram and Miguel Bustillo contributed to this story.
Copyright 2000 Los Angeles Times
-- Martin Thompson (email@example.com), February 17, 2001
Buying lines seems up in the air as a fix ELECTRICITY: Proponents say it would give state more control over power. Opponents say it won't help costs or supply.
February 16, 2001
---------------------------------------------------------------------- ---------- Related stories: • Utilities deal is detailed • Transmission-line deal drafted
• State's power tab might exceed $2 billion
• Electricity notebook
---------------------------------------------------------------------- ---------- By ANNE C. MULKERN The Orange County Register
Lawmakers pushing the state to buy 26,000 miles of electricity transmission lines from the big three utilities say it's the route to energy reliability. Critics call it an expensive misstep.
Supporters say the plan would give the state a valuable asset in exchange for providing the utilities with money and helping them avoid bankruptcy.
It would put the state in charge of its energy future, they say, giving it authority to make decisions without federal approval. It would save taxpayers money long-term by using the state's credit to finance much-needed grid repairs at lower cost.
But energy economists and private power producers say it's a shell game. Many benefits gained through the purchase could be achieved without a state takeover, they said.
More importantly, they say, the purchase would do nothing to increase power supplies, and could have the unintended consequence of scaring off investors and exacerbating the state's power supply crisis. In the end, they say, it's a ruse to funnel money to the utilities without the political repercussions of a direct bailout.
"Quite frankly, I don't know what it is they expect to get out of it,'' said Robert Michaels, an energy economist with California State University, Fullerton. "If it's simply a way of channeling some funds to utilities that have problems, then we ought to view it like that.''
The plan, designed by Senate Leader John Burton, D-San Francisco, is poised to take another step forward todayas Gov. Gray Davis and lawmakers wrap up negotiations on the specifics. Next comes negotiating with the utilities.
The future of some 26,000 miles of electric lines now owned by the utilities is at stake. The grid of wire, steel and aluminum delivers power over 75 percent of the state.
Borrowing to buy grid
While terms of the deal are still being negotiated, Burton's plan would require the state to borrow money to buy the grid. The state proposes paying the utilities two to three times the grid's book value, estimated at $3.2 billion in Public Utilities Commission documents.
Amounts for a potential purchase price have varied from $4 billion to $10 billion. The latest proposals Thursday put the figure at $6 billion to $7 billion. The Federal Energy Regulatory Commission would need to approve the sale.
That price promises to be controversial. Consumers Union, non-profit publisher of Consumer Reports, said it supports the idea of buying the transmission grid, but opposes paying more than book value. Ratepayers, they say, already have paid once for these assets through the transmission fees on their monthly bills. That fee is regulated by PUC.
Whatever the final sale price, the idea is that the utilities could then pay down some of the $12 billion debt they've accrued. The companies ran up debt in the past 10 months as they paid more for wholesale power than they could charge residential customers, whose rates are frozen.
Southern California Edison Co. and Pacific Gas & Electric Co. have said they might consider the sale if the price were right.
For Edison to consider an offer, said Tom Higgins, senior vice president with Edison's parent company Edison International, it would have to include fair compensation not just for the transmission assets, but also for the debt the company has amassed buying power. The company needs to assure lenders that it can pay its debts, he said.
"You can't deal with the issue of creditworthiness until you are willing to state clearly and unambiguously that the debts that have been racked up will be paid,'' Higgins said.
One stock analyst for the power companies said it could be in their best interest to sell if they could invest the proceeds elsewhere.
"They'd probably be better off if the state bought it because they wouldn't have the headaches they have now,'' said Joan T. Goodman, analyst with the Pershing division of Credit Suisse First Boston in Chicago.
WHO's in charge
It's unclear exactly who would manage the grid if the state becomes owner.
The state could create a state power authority to operate the grid. Or, it could keep control with the Independent System Operator, the not-for-profit grid operator created under deregulation. Burton said the state would likely contract with the utilities to continue to operate and maintain the power lines.
Consumer advocate Michael Shames, executive director of Utility Consumers Action Network who endorses the proposal, called it a "paper transfer of title'' only.
The state, as the new owners, would collect transmission fees from ratepayers - estimated by various groups as somewhere between $894 million and $1.4 billion annually. The revenues collected from transmission fees would help the state pay ongoing costs, Burton said.
"You're issuing bonds to take ownership of something that pays for itself,'' Burton said.
The state also would take on responsibility for future costs. The state will have to spend $1 billion to $3 billion immediately for needed upgrades. Annual maintenance on the grid will run another $200 million to $600 million.
Currently, high-voltage transmission lines lack the capacity to move enough power throughout the state on high demand days, which has exacerbated the energy crisis.
Armando Perez, ISO director of grid planning, said the ISO has begun making those upgrades. Burton, however, said the state can do it at lower cost because it has better credit than the near-insolvent utilities.
HOW WE GOT HERE
The transmission system in question was developed over the past 40 years in separate chunks built by PG&E, Edison and San Diego Gas & Electric Co. The ISO controls operations on 75 percent of the grid.
City-owned utilities, such as the Anaheim Public Utility and the Los Angeles Department of Water and Power, own the other 25 percent of the transmission wires in the state. Those would not be purchased under the current proposal.
Currently, the ISO and the utilities work together to plan expansion of the system. Then the Federal Energy Regulatory Commission must approve.
Consumer groups that support the plan say it gives the state more control over California's energy future and over the long-term could lower power prices. Backers of the plan say owning the grid could give lawmakers the ability to plan independently, without seeking approval from the Federal Energy Regulatory Commission.
"It would loosen some of FERC's control,'' said Tony Braun, attorney with the California Municipal Utilities Association.
How the proposal would fare with FERC is difficult to judge because so few specifics have been made public, said FERC spokeswoman Barbara Conners. But she said it appears the state would be allowed to set prices and conditions for use of the grid.
The state, for example, could tell in-state power generators that they couldn't use the transmission system to send power out of state unless California's power needs have been met.
PRICES LESS CONTROLlABLE
But buying the grid alone would not necessarily lower prices. It wouldn't give the state the authority to cap wholesale prices. Some people think, however, the state could institute policies that could create incentives for generators to sell at lower prices.
Buying the grid would put the state closer to complete re-regulation of the electric industry, while other states and nations open their energy markets to competition.
Independent energy producers are concerned the state will have too much power if it owns the grid, and also buys electricity contracts. The state could then develop policies that discriminated against independent businesses, said Jan Smutny-Jones, executive director of Independent Energy Producers, a California trade group of power plant owners.
Over the long term, state ownership of the grid could drive prices higher by reducing electricity supplies, said energy economist Michaels. With the market in flux, companies might be reluctant to invest in new power plants that the state needs to increase supplies.
"We don't know what the state is going to do,'' he said. "If it's one thing investors require, it's a bit of certainty about the environment they're going to operate in.''
-- Martin Thompson (firstname.lastname@example.org), February 17, 2001.
Oh that’s good. Put a federal ordered cap on a private industry so you can have the state take over and then start raising the cost to consumers. We are a third word country in disguise. I’m gonna pwuuuuke!
-- NdewTyme (NdewTyme@NdewTyme.com), February 17, 2001.