State Looks to Public Power as Solution to Energy Crisis

California, which led the nation into electric power deregulation, is about to give it another model to contemplate: public power.

The bankruptcy filing Friday of PG&E; Corp.’s Pacific Gas & Electric Co. only underlines the role that a new state power authority is slated to play as an electricity supplier of last resort.

The authority, which is being set up through legislation, would finance power plants, even build them if necessary. It probably would own and expand the transmission lines that carry power throughout the state.

Energy experts such as S. David Freeman, general manager of the Los Angeles Department of Water and Power, say a California power authority is the only way to get plants built and paid for. State Treasurer Philip Angelides has been preparing since January to set one up. And Mayor Richard Riordan of Los Angeles says that “a state authority is the only way to get siting for power plants and get things moving.”

The Pacific Gas & Electric bankruptcy filing will delay some plans, such as the state’s proposed purchase of the utility’s transmission lines. But ultimately, state ownership will be necessary because no private party seems able or willing to invest $1 billion or so to upgrade the lines to meet California’s needs.

In the long term, public power would ensure that California has a surplus of electricity instead of the shortages it has today. But that security is expected to come at a price, as the costs of power may be higher than many other states will be paying.

Electricity deregulation nationwide may yet fulfill its promise of lower rates and better service. Time will tell. But California’s flawed deregulation plan has failed, and now state funds and public agencies are picking up the pieces.

The state’s costs will be high. Angelides plans to sell $17 billion in revenue bonds to finance purchases of electricity and transmission lines. But Thursday night, after Gov. Gray Davis’ speech on energy, state officials gave a briefing to financial analysts in which state debt numbers totaling $20 billion were discussed, as well as revenue bonds for utility debts of $8 billion.

California electricity users would pay such debts over 15 years, reports Gerald Keenan, a utility strategist for the accounting firm PricewaterhouseCoopers who participated in Thursday’s briefing.

The prospect is that electricity delivery in California a few years from now will not be in the hands of the three investor-owned utilities but will be owned by municipal and regional agencies.

Yet the real story, amid today’s chaos and uncertainty, is that California residents and even the investor-owned utilities themselves welcome the shift from private to public ownership.

Political support has been growing. Last summer, when electric bills first rose in San Diego, residents called for the city to take over Sempra Energy’s San Diego Gas & Electric subsidiary. Similar groups in San Francisco were calling for city-owned power long before supplier Pacific Gas & Electric filed for bankruptcy.

The Los Angeles Department of Water and Power is the model other cities are looking to.

The nation’s largest municipally owned utility at $2.7 billion in annual revenue, the DWP has been hailed for having abundant power supplies at low prices all through the state’s energy crisis. It has those supplies because the DWP, like all municipal utilities, was exempt from deregulation.

“Public power is taking a giant leap, and private power meanwhile has fallen on its face,” says DWP chief Freeman, veteran of public power agencies for more than 30 years.

Freeman, who favored deregulation when he came to Los Angeles in 1997, now says it has wrecked a good system.

“Since the days of Thomas Edison, private utilities were responsible for keeping the lights on,” he says. “The deal was you got a local monopoly. For that you earned a rate of return on your assets and paid a secure dividend and widows owned your stock.”

But deregulation, which sought to spur competition among generators of electric power, changed all that.

In California, Pacific Gas & Electric, Edison International’s Southern California Edison and SDG&E; were forced to sell their power plants to other companies. Subsequently they got caught up in the ruinous spiral of paying high prices for wholesale power but having to sell it at low, fixed prices to retail customers.

Now the role of investor-owned electric utilities in the state may be at an end. And the irony, sources say, is that their parent companies are quietly happy to relinquish the business.

All have developed profitable, unregulated subsidiaries and non-utility divisions.

PG&E; Corp., for example, gets more than 50% of its $24 billion in annual revenue from unregulated power-generating facilities in other states and from energy trading. Without its utility, PG&E; sees itself as a growing company participating in the transformation of electricity markets nationwide and worldwide.

Elsewhere, after all, utility companies such as North Carolina’s Duke Energy, Kansas’ Utilicorp United and Georgia’s Mirant Corp. (formerly Southern Co.) are hailed as attractive growth companies by investment analysts.

Similarly, Edison International earns almost $400 million a year in profit from its Edison Mission Energy and Edison Capital subsidiaries. A company headquartered in a state short of power plants, Mission Energy is the second-largest owner of power plants in the United States, with facilities in Pennsylvania, Illinois and the Midwest as well as plants in Europe and Asia.

Edison and PG&E; have taken pains to segregate those moneymaking subsidiaries from their regulated businesses, although lawyers for creditors in the PG&E; bankruptcy proceeding will surely try to attach such profitable assets.

A comparable pattern of regulated and unregulated divisions holds for Sempra, which is not threatened by the massive debts overhanging PG&E; and Edison.

So what’s the real outlook for the state’s utility companies--and for the state’s electricity supply?

The DWP’s Freeman sees the companies spinning off their utility subsidiaries to shareholders or selling them to municipalities. He notes: “Their boards of directors are saying, ‘Why do we need this heartache?’ ”

Fine, but will a change in utility ownership help solve California’s energy crisis?

Not really, says Lawrence Makovich, senior electricity analyst at Cambridge Energy Research Associates.

“California is pursuing distractions, arguing about transmission lines and utility finances,” he says. “It needs to build power plants.”

But Freeman counters that state authority and public ownership are just what will ensure that plants are built.

“We’ll see to it that enough plants are built and old plants re-powered to give the state a 15% reserve of power,” says Freeman, who has headed the Tennessee Valley Authority, the New York State Power Authority and the Sacramento Municipal Utility District in a long career. Attaining a 15% reserve would mean adding at least 5,000 megawatts of power--enough to serve about 3.75 million typical homes.

The price of power, he reckons, will be $60 to $70 a megawatt-hour. That’s about double the cost before the energy crisis--but a bargain compared with current rates in California’s dysfunctional spot market. Many electric bills are sure to rise 30% to 40%.

But we’ll have our power, and that rate may be reasonable compared with those of other states a few years from now, Freeman says. “By 2003 we’ll be out of the woods, and by 2004 California will be a model to the rest of the country.”

Will the California model of state power work better than its deregulation did? We’d better hope so.

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James Flanigan can be reached at jim.flanigan@latimes.com.