Rate Hikes Revive Calls for Seizure of Power Plants

Private energy companies spent less than $3 billion to buy the power plants at the heart of California’s electricity crisis.

Those firms made record profits in the past year as their plants generated such high-priced electricity that the state has committed $14.7 billion toward buying power--burning through its budget surplus and authorizing record rate increases that again raised the question of whether it would be cheaper for California to simply seize the plants.

It would be a radical step, and one fraught with complicated legal issues, but even the normally cautious Gov. Gray Davis broached the possibility of grabbing power plants during his annual State of the State speech.

“If I have to use the power of eminent domain to prevent generators from driving consumers into the dark and utilities into bankruptcy, then that’s what I will do,” Davis said in January when he used the legal term for government’s ability to seize private property.

Davis has since backed away from such rhetoric, and now his spokesman says taking the plants would be “a last resort.” But last week’s approval of rate increases as high as 46% is renewing calls by consumer groups and some political leaders for him to do just that.

“This is really radical,” admitted Nettie Hoge, director of the Utility Reform Network in San Francisco, who said she initially opposed the idea. “But what I’ve realized is, this is a very radical situation we’re in. Extraordinary circumstances call for extraordinary actions.”

Numerous other observers--including economists, attorneys and at least one other consumer advocate--caution that a state takeover of the generating plants could make matters worse.

It could saddle the state with decades-old, dirty plants and scare energy firms away from building power stations in California.

“It wouldn’t be much of an improvement, because there aren’t enough electrons going around at the price everyone wants,” said Robert Michaels, an economist at Cal State Fullerton.

Davis, through his spokesman, echoed that sentiment. Steve Maviglio said the governor now has no reason to take the plants because California is entering into long-term contracts with power providers that will bring down the runaway cost of electricity.

The state is also trying to speed the construction of plants. California has not built a generating plant in a decade, contributing to electricity shortages and driving up prices.

“We’re making great progress here in less than three months,” Maviglio said.

Richard Wheatley, a spokesman for Reliant Energy, which owns four large plants in Southern California, said eminent domain makes good headlines for consumer groups but won’t solve the complex problems facing California.

“We and other generators have been vilified for months on end for alleged abuses,” Wheatley said. “The fact is we’ve been doing everything we can to keep our plants running.”

Seizing power plants, said a spokesman for another generator, would send an ominous message to California’s business community, which could have a devastating effect on the state’s ability to bring new plants on line.

“I don’t see how any reasonable person could argue that the outside capital for such projects wouldn’t cease,” said Aaron Thomas, a spokesman for AES Corp., which owns three plants in Southern California and is trying to operate a fourth plant in Huntington Beach.

The generators’ critics contend otherwise. State Senate President Pro Tem John Burton (D-San Francisco) said California could step in and build power plants through a public power authority he has proposed. Burton said he thinks seizing the plants “could be helpful” but added, “I’m not the governor.”

Burton is not the only state official still talking about taking over the plants. During the state Democratic Party convention over the weekend, state Treasurer Phil Angelides warned that generators “may leave us no option but to [seize] your power plants”--a line that won a standing ovation. And a few Democratic legislators in Sacramento have begun discussing the option because of the recent rate hike.

Even if Davis does not want to take the plants, Harvey Rosenfield may try to do so for him. The Santa Monica-based consumer advocate said his lawyers are studying whether voters can force the state through a ballot initiative next year to seize the plants.

“There’s no other choice,” said Rosenfield, who has repeatedly called on Davis to act first. “It’s a black hole and the only way out is to seize the plants. Probably nothing could be worse than this.”

Under California’s pioneering 1996 foray into electricity deregulation, the state’s investor-owned utilities were forced to sell off their fossil-fuel power plants to break their monopoly on electricity generation.

The plants were snatched up by a handful of companies for prices well above book value, totaling about $2.8 billion, according to records.

It was an eye-catching price at the time, but the investment has paid off handsomely for most of the buyers, who have seen their stock value rise along with the price of electricity. Last summer, power prices soared so fast that utilities were pushed toward bankruptcy.

The state stepped in to buy power for the financially struggling utilities in January, and authorized a $10-billion bond sale to cover the cost of electricity over the next several years.

But prices have remained so astronomical that economists and state officials have questioned whether the state will have enough money to continue buying power, even with last week’s rate increases.

The state has accused the energy companies that bought the power plants of gouging consumers of as much as $6.3 billion. Federal regulators have ordered wholesalers to justify or refund $124 million--well below what the state has requested. The generating companies deny the gouging charges.

The fact that the power plants have become so lucrative for energy companies presents the first obstacle toward a state takeover. When government seizes private property, it must compensate the owner for the property’s fair market value. And all agree that the value of the plants has sharply increased.

“The purchase price would be multiples of what the sale price was,” said David Huard, a partner at Manatt, Phelps & Phillips in Century City with 25 years of experience in energy law.

Generators would also likely mount lengthy legal challenges to seizure.

California’s entry into long-term contracts with some plant owners could complicate any attempts to seize them, Huard said, because generators could argue in court that the state is using police powers because it did not like the outcome of a business transaction.

California would also have to prove that the plants need to be taken for the public good--a tougher argument to make, Huard said, because the state relinquished public control over the plants just five years ago.

Finally, some observers wonder whether the deal would be worth it.

“The state would be forced to pay Cadillac prices for beat-up circa 1970s Pintos,” said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego. “The state would be much better off investing in newer, efficient plants than buying junk-yard plants.”

Consumer activist Medea Benjamin holds out hope that a court would find that the generators have been charging inflated prices, which could drastically reduce the amount the state would be required to compensate the companies for their property.

“I feel there’s been a tremendous manipulation of supplies,” she said.

Because of the potential problems, seizure of power plants may have had more use as a negotiating tool, said Peter Navarro, an associate professor of economics at UC Irvine. But “the window of opportunity may be closed on that,” after last week’s rate increases, he added.

“In many ways, this is a situation where the governor has failed,” Navarro said. If Davis had threatened to seize the plants, “and they had called his bluff and he’d actually taken them, we’d be in a better situation today.”

Many believe that such an extreme tactic as seizing power plants is unpalatable, not only to the habitually cautious Davis, but also to most politicians.