March 30, 2001

California Rate Increase Threatens Bailout Passage (Update2)

(Sacramento, California) Electricity rate increases for California consumers make it less likely that PG&E Corp. and Edison International will win state help to restructure their debts and prevent bankruptcy, legislators said.

The state is considering the sale of $12.4 billion in bonds to pay for past power purchases, and another $10 billion to buy 32,000 miles of electric lines. The purchase of the transmission grid, now being negotiated by Governor Gray Davis, would give PG&E and Edison cash to reduce debts estimated at more than $13 billion.

Regulators approved the $4.8 billion rate increase on Tuesday. Public outcry, including protests in San Francisco and Sacramento this week, hurts the prospects of bills authorizing more spending on the power crisis, legislators said.

“I think it’s going to be very difficult to tell people that, not only are we imposing rate increases on you, but now we are imposing a $10 billion surcharge on you to buy transmission lines,” said state Senator Tom McClintock, a Republican from Thousand Oaks.

Even before the rate increase, Republican lawmakers opposed the purchase of the utilities’ transmission lines, saying that running power grids was a job better left to private enterprise than a new state bureaucracy.

Support Weaker

Democrats, led by Davis and Senate President John Burton, said they proposed buying the grid so taxpayers would get something to offset the expense of the utility bailout. Some Democrats now say they will take a harder look at the plan because of its growing costs to taxpayers.

“We do have to consider the rate increase as it impacts the other ideas,” said Senate Majority Whip Richard Alarcon, a Democrat who supports the transmission-grid purchase.

The transmission-grid purchase shouldn’t be affected by the rate increase because it addresses the utilities’ past power-buying debts, while the rate increase deals with power purchases going forward, PG&E spokesman John Nelson said. Edison spokeswoman Clara Potes-Fellow declined to comment.

State Controller Kathleen Connell said this week that the $12.4 billion bond offering for state power purchases, even when combined with the rate increase, won’t cover the state’s power purchases. The expense will leave California with a deficit by October, she said. Her projections don’t take into account the grid purchase, which she estimates will cost $9 billion.

“There is some real concern,” said Assemblywoman Hannah-Beth Jackson, a Democrat from Santa Barbara. The state needs to “stop the enormous outflow of money.”

Negotiations Continue

Davis’s team is now negotiating to buy the grids owned by the state’s three biggest investor-owned electric utilities, PG&E’s Pacific Gas & Electric, Edison’s Southern California Edison and Sempra Energy’s San Diego Gas & Electric.

Edison reached a tentative agreement with the state to sell its power lines for $2.76 billion last month. A final agreement is expected soon, followed by agreements with PG&E and then Sempra, said Joseph Fichera, chief executive of Saber Partners LLC and Davis’s top financial adviser in the negotiations.

The rate increase approved by the state’s Public Utilities Commission has affected the negotiations, Fichera said.

A preliminary agreement with Edison allowed for the utility to issue bonds to collect part of its power-buying costs. Davis’s negotiating team now needs to determine how the rate increase will affect that, Fichera said.

“The PUC has put another card on the table,” Fichera said. “Whose hand does it go to and what does it do to the game is still an open question.”

The bond offering to pay for power and the rate increase, which are designed to keep the lights on, should not be lumped with elements of the utility bailout plan such as the grid purchase, some legislators said.

“I think they’re separate issues,” said Senator Debra Bowen, who chairs the Senate Energy, Utilities and Communications Committee.

Hard Asset

Some consumer groups say the grid is worth the expense because the state could reap financial gain from owning it. Grid operators charge fees for moving electricity on their lines.

“The difference with the grid is you’re not throwing money down a rat hole,” said Mike Florio, senior attorney with the Utility Reform Network, a San Francisco-based consumer group. “You’re getting a hard asset.”

While the state is spending a “mind-boggling amount of money” on the state’s power crisis, lawmakers need to recognize that spending to buy power now doesn’t help pay back the utilities’ past debts, PG&E’s Nelson said.

“I don’t know if it’s that responsible to say that because power costs a lot of money today, it doesn’t really matter that it also cost a lot of money yesterday,” Nelson said.

–Daniel Taub in (Sacramento, California) (310) 770-1292 or dtaub@bloomberg.net, with reporting by Christopher Martin in San Francisco, through the Princeton newsroom (609) 279-4000/alp/slb