State Takeover of Grid Gains Favor
Support is building for a state takeover of California’s massive electricity transmission grid, a top advisor to Gov. Gray Davis said Thursday as discussions continued over how the state can best be compensated for its $10-billion plan to keep the lights on.
Michael Peevey, a former Southern California Edison executive who is advising Davis on the rescue of Edison and Pacific Gas & Electric, said in an interview that he believes a takeover of the transmission grid is the best option to solve the energy crisis.
Peevey’s remarks suggest that Davis is leaning toward having the state take control of the transmission grid, possibly in addition to taking warrants--similar to stock options--in the utilities. State Senate President Pro Tem John Burton (D-San Francisco) and several legislative leaders strongly favor a state takeover of the transmission grid. Previously, Davis had said he favored the state taking warrants only.
Speaking to reporters, Davis declined to specify his position, saying only that he had “no philosophical objections” to a grid takeover.
“It’s just a question of can we negotiate successfully with utilities to make sure we get benefits commensurate with the benefit they get,” he said.
Peevey spoke as Davis met with the top executives of Edison and PG&E; several hours after the governor unveiled a plan that he said would dramatically boost the state’s energy supply by bringing 20,000 new megawatts of power online by 2004--enough to supply electricity to 20 million homes.
To achieve that goal, the governor said, he would use his emergency powers to step up production at existing generating stations, accelerate the construction of power plants and get proposed plants approved faster. Environmentalists expressed fear that the plan would relax state air pollution standards.
Davis’ plant-building plan represented his latest step to address California’s energy meltdown. No power plants have been built in California since the early 1990s, and the state’s demand for electricity now far outstrips its supply. That is one reason that wholesale electricity prices shot into the stratosphere in the last six months of 2000, crippling Edison and PG&E; and forcing Northern California into rolling blackouts on two occasions.
Davis previously unveiled a multifaceted conservation plan intended to reduce the state’s hunger for electricity.
If the state purchases the 26,000-mile system of high voltage wires from the utilities, the companies could use cash from the purchase to restructure and pay off their debt, estimated at between $6 billion and $12.7 billion.
At the end of the process, Peevey said, the companies would still have debt but would be restored to a “triple B” credit rating, which is a step above junk rating. While they are unable to borrow money now, a triple B rating would allow them to get loans.
“There are plenty of companies and many utilities that are triple B,” Peevey said.
“There is clearly movement in that direction,” Peevey said, referring to the proposal to purchase the transmission lines. “That is not to say it is all locked up. But the general structure and thrust is generally broadly supported.”
The alternative of having the state take stock warrants in the utilities is losing support in part because under that plan, the state would end up controlling a majority or near majority of the utilities’ stock.
“I think you get into governance problems,” Peevey said, although he added that the state might ask for some warrants as part of the final deal.
Peevey outlined his proposal to legislative leaders in a five-hour meeting run by Davis at the governor’s office Wednesday night, and was working on details Thursday. Lawmakers who attended the Wednesday meeting said the governor supported the grid takeover too.
“I think he’s there,” said Burton’ who is advocating the state takeover of the transmission grid. “It makes sense. The transmission lines are very much what is going to happen.”
State Seeks Court Delay
In meetings Thursday with Edison chief John Bryson and PG&E; head Robert Glynn, state officials asked that Edison agree to postpone a scheduled federal court hearing in Los Angeles on Monday--the day that Davis had said was the “drop-dead date” for working out a deal.
Utility lawyers are seeking a court order requiring that the state allow the companies to pass on to consumers the full cost of the skyrocketing wholesale prices for electricity. That step could result in significant rate hikes.
After the meeting, Bryson said no proposal was offered and there was no negotiation. Any deal must await a final audit of the utilities’ debt, and a Senate hearing on the audit set for next week. Edison and PG&E; say their combined debt is $12.7 billion. State officials believe it is half that.
“Legislators are dealing with complex issues,” Bryson said. “We want to work with them. We’re not seeking a bailout.”
Bryson said earlier this week that the company, which serves 11 million people in Southern California, might be willing to part with its portion of the grid.
The cost of the grid remains to be negotiated, however. Some authorities value it at about $4 billion. Under the plan offered by Burton and now Peevey, the utilities could use cash from the sale of the grid to restructure their debt and avoid bankruptcy.
While some Republicans oppose state control of the electricity transmission system, others have stopped short of rejecting it. But given Democratic majorities in both houses, the Legislature could take control of the system with simple majority votes.
Early Thursday, Davis drove to Yuba City, about 40 miles north of Sacramento, to announce his plan to speed up the process of bringing power plants on line. The governor chose the site of a 500-megawatt plant under construction. He said he believes that 5,000 megawatts of electricity can be brought online by this summer--just in time to avert rolling blackouts--and another 5,000 megawatts by the following summer.
“We are moving heaven and earth to make sure megawatts are online this summer,” Davis said. “We will demonstrate that California can cut red tape, build more power and protect the environment.”
Calpine Corp. is building the $300-million Yuba City plant, which is expected to be running by July, one month earlier than the state previously had projected.
To get his plan rolling, Davis signed an executive order that would provide a financial bonus to developers who can bring power plants online by July 2001.
Another order directs the California Energy Commission to complete the approval process for small “peaking” plants--those that are designed to operate only during the periods of greatest need--within 21 days, down from an average of about four months now. The process for larger plants would be cut to four months; it now takes about a year.
To help build the plants faster, Davis directed the state Air Resources Board to create a bank of pollution credits. Gas-fired turbines provide a quick burst of power during peak demand, but they can be heavy polluters. Power companies typically compensate for the emissions by buying credits from sources that have reduced smog, but those credits are not always available and can be expensive.
The air board will use $100 million in state funds to build the new pollution credit bank. Generators will also pay into the program. The money will be used to clean up diesel trucks, buses and heavy equipment, ensuring a steady supply of credits for the peaking power stations, said Mike Scheible, deputy executive officer of the air board.
Although Davis insisted that his order would not increase air pollution, environmentalists reacted with alarm.
“We’ll sacrifice environmental protection, we’ll sacrifice clean air, to no benefit,” said Tim Carmichael, executive director of the Los Angeles-based Coalition for Clean Air.
Natural Gas Problems Cited
Another question swirling around the governor’s plan concerns the availability of natural gas to run the new plants. Even before the governor announced his plan, Bill Wood, the chief natural gas forecaster for the California Energy Commission, said he doubted that pipelines delivering natural gas to the state would have enough room to accommodate the volume needed to fire up proposed plants.
“Oh yeah, it’s tight,” Wood said.
According to calculations by Ed Blackford, site manager at AES Corp.’s Huntington Beach power plant, generating 5,000 megawatts of electricity takes 768 million cubic feet of natural gas per day. That represents about 10% of the state’s current incoming pipeline capacity.
Davis, however, said that he is confident that supplies will be adequate to meet the state’s need and that prices will stabilize over the next several years.
There also were these developments:
* A federal judge extended a temporary order directing Houston-based Reliant Energy and other generators to continue selling power in California to avoid blackouts. Judge Frank C. Damrell Jr. continued the order until Feb. 16, when he will decide whether to issue a preliminary injunction against Reliant and other producers, Dynegy, AES and Williams.
* Davis named Larry Hamlin of Southern California Edison the state’s new “energy construction czar.” Hamlin, an Edison vice president, has more than 30 years’ experience licensing, operating and building power plants.
The governor also named Winston Hickox, secretary of the California Environmental Protection Agency, the state’s new “permitting czar.” Hickox’s job, according to Davis, will be to get noncontroversial projects on a fast track for approval.
* To promote renewable energy sources, Davis said he will support legislation that would add $50 million to the Energy Commission program to increase rebates for small, renewable systems and create a 50% tax credit for home and business owners who buy and install such systems, among other incentives.
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Times staff writers Mark Z. Barabak, Nancy Rivera Brooks, Christine Hanley, Carl Ingram, Mitchell Landsberg, Gary Polakovic and Nicholas Riccardi contributed to this story.
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Power Points
Background
The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.
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Daily Developments
* Gov. Gray Davis and the Legislature appear to be moving toward support of a plan to take over the state’s electricity transmission grid.
* The governor said he would use emergency powers to increase production at existing power plants and accelerate the approval and construction of new ones.
* PUC President Loretta Lynch defended her handling of the energy crisis to an Assembly oversight committee.
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Verbatim
“If you’d proposed building a new nuclear plant five years ago, you’d have been committed.”
-- Jay Brister, an executive at Entergy, a utility holding company
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Complete package and updates at www.latimes.com/power
