If It Works, Bonanza; If Not, No Gain for State

Under a plan gaining support in Sacramento, California’s taxpayers would get a financial stake in two giant utility companies in exchange for saving them from bankruptcy.

If the rescue plan works, taxpayers could make a bundle. If it fails, they could get nothing.

Legislators have vowed not to simply give the utilities the money they need to pay their bills without extracting something in return. But taking assets such as hydroelectric plants or transmission lines would be too radical for some lawmakers.

Instead, the consensus--and a keystone of a plan released by Gov. Gray Davis Friday afternoon--is that the state would receive warrants in PG&E; Corp. and Edison International, the parent companies of the state’s two largest utilities, in exchange for state help in easing their debt. A warrant is a security functioning like a stock option that allows the holder to buy a specified number of shares at a set price.

If the price of the underlying stock rises beyond the stock price set by the warrant, the holder can profit from the difference. While the stock price remains below the warrant’s value--as might occur in this case, if the utilities’ financial woes continue--the holder gets nothing.

Ideally, according to legislators, the state would get its warrants at a discount. State Senate President Pro Tem John Burton (D-San Francisco) has said the state could ultimately sell its warrants and use any profit to give consumers a rebate.

Amid the daily chaos in Sacramento, it is unclear, both how much in warrants the state would demand for helping the utilities and what the terms of such a deal would be. “First of all, it’s got to be agreed to, and then it’s got to be worked out,” Burton said.

But consumer advocates warn that warrants would create a conflict of interest by giving the state a financial interest in a business it regulates.

“We don’t want to tie the state’s financial health into rate increases,” said Mindy Spatt, spokeswoman for the Utility Reform Network in San Francisco.

A rescue plan such as California is considering has never been attempted in the utility industry, but the model for it is the federal government’s historic 1980 bailout of Chrysler Corp.

As Chrysler lurched toward bankruptcy, its charismatic new chairman, Lee Iacocca, persuaded Congress and the Carter administration that it was in the nation’s interest to prevent the Big Three auto maker from going under.

Chrysler negotiated a $1.5-billion package of federal loan guarantees and sweetened the pot by granting the government 14.4 million warrants--rights to purchase Chrysler stock at an exercise price of $13 a share.

When Chrysler rebounded strongly a few years later, its stock soared and the warrants became worth a fortune. Iacocca tried to talk the government out of cashing in the rights, but then-Treasury Secretary Donald T. Regan refused.

The government not only reaped $311 million for the warrants, which Chrysler bought back in a special auction, but it earned $33 million in fees for its loan guarantees.

Susan Abbott, managing director of utility research for Moody’s Investors Service, said the use of warrants in a California rescue plan is a promising idea.

When warrants are exercised, they cause new shares to be issued, so such a deal would dilute the holdings of current Edison and PG&E; shareholders, Abbott noted. On the other hand, dilution is better than bankruptcy.

The warrants approach is “more sensible” than requiring the utilities to hand over hydroelectric plants or other assets, Abbott said.

“That way, the state would have to get into the business of running power plants, which I’m not sure is a business they want to be in,” she said.

Abbott also said that, providing the utilities recover enough to make the warrants valuable, such financial instruments are far easier to sell than power plants would be.

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Times staff writer Nicholas Riccardi contributed to this story.