Davis Says State Will Buy Power for Resale to Utilities

With California’s major utilities teetering near bankruptcy, Gov. Gray Davis announced a plan Saturday under which the state would buy power at reduced rates and resell it to the battered companies to stabilize California’s haywire electricity market.

The proposal--meant to end the threat of blackouts and economic chaos in California--came near the end of an extraordinary bicoastal video and telephone conference in Washington, Los Angeles and Sacramento.

While Davis presided over a gathering in Los Angeles of two dozen top state officials and energy company executives, U.S. Treasury Secretary Lawrence Summers chaired the Washington end, flanked by top federal officials as well as representatives of utilities and power generators.

Seven hours into the meeting, Davis, joined by legislative leaders, held a news conference to proclaim a bipartisan agreement that could help solve California’s vexing energy problems. Davis said the Legislature would consider the plan Tuesday.

He said the state would buy electricity through long-term contracts at rates sharply lower than utilities have been paying. California would then resell it to the companies at cost, although terms have not yet been determined.

As Davis made the announcement, however, participants in Washington ended their meeting sounding glum about what had been accomplished.

“We’re still digesting it,” said Joe Bob Perkins, president and chief operating officer of of Reliant Energy Wholesale Group.

And in Los Angeles, state Senate Republican leader Bill Campbell appeared less than convinced that the state’s ordeal was over. “I guess I’m encouraged,” he said, adding, “The answer is going to be in the numbers.”

Those numbers would be the price of energy the state can negotiate, and the length of the contract the producers demand.

Earlier in the day, Summers had asked Davis to hold an auction in which generators and middlemen would sell electricity to the state, which would then resell it to the utilities. The state’s two biggest utilities, Pacific Gas & Electric and Southern California Edison, are so cash-strapped that they they lack the credit to strike deals with some electricity sellers.

The top executives of the two utilities were at the table with Davis at his office in the Ronald Reagan State Building in downtown Los Angeles. They did not, however, join him at the news conference announcing the plan.

Davis said the state intends to move forward “at warp speed,” and urged energy producers to begin making bids to the state immediately. It was not clear whether the bids would be considered at an auction or through a more traditional state bidding procedure.

The governor said the state expects to purchase power at “vastly reduced rates,” and he promised that consumers would not see any more rate increases.

The utilities said they needed some kind of relief by Tuesday, when they face major debt payment deadlines.

One or both utilities could go bankrupt as early as Tuesday, said some involved in the talks.

The idea behind Davis’ deal is that it would allow the state to guarantee a return to stability for energy consumers--not only residential customers but businesses whose future in California depends on the availability of reliable, affordable energy.

Davis, a participant in the meeting said, indicated that he wants limits on the state’s liability and guarantees that its coffers would not be bled if it enters the electricity business in a major way.

At one point, Assembly Speaker Bob Hertzberg (D-Sherman Oaks) said that the utilities would have to suffer more financial pain. Though it was not a topic of the conference on Saturday, lawmakers have suggested receiving concessions from utilities, ranging from a seat on their boards of directors to stock options for consumers.

Davis said the utilities would not be getting back all the money they lost in the state’s runaway energy market last year. But he said it was important to save them.

“Clearly, we want to avoid bankruptcy,” he said. “Our fate is tied to the utilities’ fate. They know better than anyone how to keep the lights on.”

Under the proposal, state government would strike long-term deals for electricity, which it would sell in the state’s energy marketplace. The state also would push to restructure long-term contracts that utilities have with wind, solar and other alternative power producers to lower the cost of electricity.

For their part, utilities also would make power from their nuclear and hydroelectric plants available for consumption in California, rather than selling it in the market as they are required to do now. While consumers might not have higher bills, the utilities could use the difference between what they pay and the retail price to restructure their debt and pay it down over a period of years.

Not present at the meeting, and apparently not invited, were any representatives of consumers, who stand to ultimately pick up the tab for the deal.

Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights in Santa Monica, said consumer advocates had asked to be represented at the meeting but were told there wasn’t room.

“When politicians, bureaucrats and utilities get together behind closed doors, it’s always bad news for consumers,” he said. “You know the outcome is going to leave consumers footing the bill.”

Political and business leaders say the sense of urgency surrounding the negotiations can be explained by the fact that the state’s situation is so dire and because PG&E; and Edison owe installments on their debts Tuesday.

California deregulated its energy market beginning in 1998. It was a leap into the unknown that was nevertheless expected to lead to lower prices for consumers. It has done anything but that since last May, when electricity prices--prodded upward by rising natural gas prices and by supply shortages--went through the roof.

PG&E; and Edison together spent more than $11 billion more for electricity in 2000 than they received from consumers, who remained insulated by the remnants of state regulation.

The state nearly had to resort to statewide rolling blackouts Thursday when power reserves dipped below 1.5% of total usage.

The utilities--and their customers--were rescued at the last minute by the state Department of Water Resources, which bought power that the state energy marketplace couldn’t buy because its credit, backed by utilities, is so poor.

One participant in the negotiations, natural gas executive Kenneth Lay, has been a friend, donor and advisor to incoming president George W. Bush.

Lay, chairman of the Houston-based natural gas pipeline company Enron Corp., who attended the meeting in Los Angeles, was part of a large group of outside advisors involved in shaping Bush’s energy policy, campaign aides say. Now Lay is serving on an energy policy advisory committee that Bush assembled for the transition.

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Times staff writer Peter Gosselin contributed to this story.