No Better Option

Gov. Gray Davis’ ambitious plan to prop up California’s debt-ridden utilities, including the proposed state takeover of most of the 36,000-mile-long electric power transmission system, has given rise to many questions and some doubts. But the first question to ask is this: What are the alternatives? One is to immediately grant Southern California Edison and Pacific Gas & Electric substantial rate increases--an option that may make economic sense but has zero political appeal. Another option is to simply allow the firms to go bankrupt. Few think that is acceptable, considering the potentially devastating impact on the California economy. Or the utilities could repay a state bailout by granting a form of stock option to the public. But this proposal raises still more questions and makes some huge assumptions, such as the survival of the utilities and a sizable drop in future power costs.

In the end, there is no way out of this mess without costs to both taxpayers and utility customers. That said, the Davis plan at least has an element of fairness. The utilities’ parent firms would make a significant contribution of assets. Ratepayers would pay a “dedicated rate component” to retire the private bonds needed to reduce the utilities’ debt.

Davis insists that this fix of the state’s disastrous 1996 deregulation plan can be made “within the existing rate structure,” meaning without raising consumer rates beyond the temporary 9% hike already approved and a 10% increase expected when a rate freeze ends a year from now. But just how that would be done is not yet clear. The freeze on rates--designed to make deregulation politically palpable--is a major reason that the utilities have gone as much as $12 billion in debt.

Under the old regulation scheme, the escalating cost of natural gas, the major power plant fuel, would have been passed on to consumers. But the deregulation rate freeze, defying economic logic, banned such surcharges for fuel costs. The ultimate answer to higher power costs will have to be development of additional gas supplies and gas pipelines to California, as well as additional generating capacity.

The governor must still sell his program to a voter-wary Legislature and must negotiate with the utilities, if they are willing.

Meanwhile, the generating companies and bankers are increasing their demands that they be paid the billions of dollars they have, in effect, advanced California for power this winter.

Both the state and the utilities need to be flexible in crafting the details of this solution. The power generators, who are still reaping record profits off California’s woes, and the financiers need to remain patient. There would be little benefit to them in forcing the utilities into bankruptcy, a condition that would only further damage the power industry’s reputation. With political careers at stake, the governor and Legislature have demonstrated a willingness to commit as much as $20 billion in state funds over at least 10 years to put California’s power system back on its feet. That should impress the bankers and power-generating companies with California’s determination to pay its debts.