Deal Could Cap Electricity Rates --but at a Price

Government and industry officials sought agreement Wednesday on a deal that would ensure California consumers pay no more for electricity in return for a promise that the state’s power producers could collect a fixed--and potentially lucrative--price for their product for years to come.

Negotiators representing the state and federal governments, California’s utilities and its electricity producers struggled to put flesh on an accord that would substantially shrink what producers now charge utilities for wholesale power and give the beleaguered utilities breathing room to come up with money to pay for the power they need.

Participants in the talks said the proposed contracts could last for up to nine years. The deal, while helpful to consumers in the short run, would short-circuit the state’s deregulation effort--which advocates said could still drive down the state’s traditionally high electricity bills if fixed.

As the negotiations continued, new evidence surfaced of the problems created by deregulation. The state’s biggest utility, Pacific Gas & Electric Co., said Wednesday that it faces $2.21 billion in power bills over the next eight weeks, more than four times the cash it has on hand. It repeated warnings that the company is near bankruptcy and said that customers are in danger of energy cutoffs.

California Gov. Gray Davis and other state officials said that the deal being hammered out in Washington would ensure that consumers are protected from the kind of drastic price increases that many have predicted they would face as part of the effort to straighten out the state’s utility mess.

“I think there’s a distinct possibility that we can contract on a long-term basis for power that is reliable and priced at a very attractive rate,” Davis said at a Sacramento news conference. He spoke after returning from Washington, where he had attended a marathon meeting Tuesday night where the outlines of the accord emerged.

“My overall objective is to provide reliable, affordably priced power for the people and businesses of this state,” Davis said.

Analysts said the reliability and price protection Davis is promising would come at a substantial--if largely hidden--cost. Negotiators, who spoke only on the condition of anonymity, said the long-term contracts they are considering would allow producers to maintain their wholesale prices at 5 1/2 cents per kilowatt hour--even if their production costs fall well below that, as is widely expected to happen.

The 5 1/2-cent price would indeed ease the state’s immediate crisis by reducing the financial pressure on PG&E; and the other big California utilities, which have been paying 30 cents or more per kilowatt hour for wholesale power. And it would almost certainly insulate California consumers from any new retail rate hikes.

Consumer advocates said such a price break could look less attractive later as power plants now under construction come online in California, causing an increase in supply and a potential price drop.

“The problem with a long-term contract is you’re locking in a long-term price,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “The longer the contracts last, the more danger there is that we will be locked into a rate that is higher than the market rate turns out to be.”

Analysts said the deal would throw California back into the very situation that prompted its ill-fated plunge into electricity deregulation--electricity prices that are locked in by contract and substantially above those in many states.

“Long-term contracts with high costs out into the future are what caused the problem that California thought it was solving” with deregulation, said Harvard energy economist William W. Hogan. “Long-term contracts may be necessary to get out of the current situation, but they are going to bring back the same problems we had.”

Tensions Rise at Meeting

The search for a solution to the state’s electricity crisis follows the extraordinary Tuesday night meeting in Washington organized by the White House and the Treasury Department, which fear that any worsening of California’s troubles could roil financial markets and damage the nation’s economy. The session, attended by virtually every major player in the current drama--including Davis, Democratic and Republican state leaders, executives of both the state’s near-bankrupt utilities and its wildly profitable power producers and no fewer than four Cabinet-rank administration officials--was originally billed as little more than a ceremonial get-together. But it quickly turned into a seven-hour session at which each side laid down markers for what it would and would not accept.

Participants said that tension ran particularly high between Davis, state Senate President Pro Tem John Burton (D-San Francisco) and power producers, whom the state officials have accused of price-gouging. And matters were hardly improved by the near-total absence of food at the meeting, which occurred in an ornate conference room at the main Treasury building only steps from the White House.

Besides endorsing the need for fixed wholesale prices and long-term contracts, bargainers settled on several other moves at the Tuesday session aimed at ending the crisis:

* Power providers agreed on some “forbearance” in their efforts to collect billions of dollars that they are owed by PG&E; and Southern California Edison, the state’s second biggest utility. Participants said that the agreement, which would give the utilities more time to pay, would be short-term--several mentioned April 6 as an outside date--and would depend on the parties agreeing to a longer-term solution.

* Providers and state officials agreed that PG&E; and Edison must be kept from going bankrupt, but there appeared to be disagreement on how to cope with the utilities’ $11-billion debt load.

* All sides agreed that the state’s dysfunctional system for pricing and distributing power must be overhauled.

A key federal regulator announced his resignation after the meeting, although aides insisted it had nothing to do with the session or the California crisis.

James J. Hoecker, chairman of the Federal Energy Regulatory Commission, said he would leave Jan. 18 in advance of President-elect George W. Bush’s inauguration. Hoecker has been the chief federal official overseeing the state’s deregulation drive and a vocal opponent of Davis’ recent attempts to reimpose some state controls.

Virtually everybody emerging from the session praised the progress made during it, but cautioned that much more was needed before the crisis could be declared over.

“Notable progress was made . . . “ said Edison International President and Chief Executive John E. Bryson. “However, much more work remains to develop concrete solutions.”

“I’m more optimistic coming back than I was going in,” said Burton. “But with a plan like this, the devil is in the details.”

“If we can go forward with no rate increases for five or six years, then that’s an awfully good deal. That’s stability,” he said. “The key thing is what price do we finally agree upon and what’s the length of the contracts.”

Work on those issues and on what to do about the utilities’ crushing debt proceeded Wednesday on both sides of the country. Federal officials met in Washington with bargainers for the providers and utilities in separate sessions devoted to setting prices and handling debt, while Davis, Burton and others returned to Sacramento to tackle what the state could contribute.

Several players in the Washington end of the bargaining warned late Wednesday that a deal could founder over state refusal to help on two key points: ensuring that power providers get paid for future electricity supplies to utilities, and at least partially offsetting the utilities’ debt incurred from past purchases.

At his news conference, Davis appeared adamantly opposed to providing state assistance for utilities’ past debts. While the firms “asked me six or seven times” for help, he said, he had refused to promise a state bailout. “I am not making any commitments on that,” he said.

But Davis said, “It’s very important that utilities not go into bankruptcy, primarily because they know best how to keep the lights on.”

On the matter of a state role in ensuring that providers get paid, Davis appeared more accommodating. He said the state would undoubtedly play some role in the relationship between power suppliers and utilities, perhaps as a middleman--purchasing the power and then immediately reselling it to utilities--or as guarantor of the beleaguered utilities’ credit.

Davis said some of the $1 billion he has earmarked for energy problems in his proposed budget could be spent on projects related to the settlement. Most, however, he plans to use for other purposes, such as promoting conservation and financial incentives to get people and businesses to use less power.

The governor said he hoped to have long-term contracts between the utilities and providers finalized within the next 30 days and legislation to resolve other aspects of the electricity crisis approved within six weeks.

However, Washington participants in the bargaining, many of whom are members of the outgoing Clinton administration and will leave office in only nine days, suggested that the key decisions will have to come much more quickly.

Activists Fear Taxpayer Bailout

Consumer advocates, in addition to warning that the deal could hurt ratepayers in the long run, said the state must receive some protection if it agrees to act as a middleman in the transaction between suppliers and utilities.

“Is this going to be an interest-free advance that the utilities will pay back later?” asked Rosenfield, who was not at the Tuesday night session. “I see an indirect taxpayer bailout looming.”

Several officials who participated in the meeting expressed surprise both at how adamant Davis was in refusing to even consider a new consumer rate increase and in the willingness of the utilities and power providers to keep bargaining.

Burton said he believes the providers signaled their readiness to accept a relatively low wholesale price for two reasons--genuine anxiety about the solvency of the utilities and fear of what Davis or the voters might do if the crisis continues.

“When the Legislature is looking at some kind of state power authority, that gets their attention,” Burton said.

Meanwhile, PG&E; warned Davis Wednesday that it may start running out of natural gas in a few days unless the governor invokes emergency powers that would allow the state to buy natural gas for the San Francisco utility or provide some sort of credit guarantee.

PG&E; is nearly out of cash to make payments for both natural gas and electricity for its customers, and its natural gas suppliers are refusing to sell to the utility without immediate cash payment, PG&E; said in a letter to Davis and in a filing with the Securities and Exchange Commission.

Officials were expected to continue negotiations in Washington with utility executives and providers later today. Key players, including Treasury Secretary Lawrence Summers and company chief executives, are tentatively scheduled to meet in Washington or Sacramento on Saturday.

Meanwhile, Davis is expected to meet Friday with Washington state Gov. Gary Locke and Oregon Gov. John Kitzhaber. The two had been angry about a federal order that would permit California to tap their states’ already depleted hydroelectric power resources.

Because the utilities were granted extra time to pay their power bills, Davis did not press Energy Secretary Bill Richardson to extend that order, said Davis spokesman Steve Maviglio.

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Times staff writers Richard Simon in Washington and Rone Tempest and Dan Morain in Sacramento contributed to this story. Gosselin reported from Washington, Warren from Sacramento.

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PG&E; Declares Shortage: Utility chief warns that it may run out of natural gas without emergency help from Gov. Gray Davis. C1