News
Buying lines seems up in the air as a fix Electricity: Proponents say it would give state more control over power. Opponents say it won't help costs or supply.
ANNE C. MULKERN
The Orange County Register

02/16/2001
The Orange County Register
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PageD

Lawmakers pushing the state to buy 26,000 miles of electricity transmission lines from the big three utilities say it's the route to energy reliability. Critics call it an expensive misstep.

Supporters say the plan would give the state a valuable asset in exchange for providing the utilities with money and helping them avoid bankruptcy.

It would put the state in charge of its energy future, they say, giving it authority to make decisions without federal approval. It would save taxpayers money long-term by using the state's credit to finance much-needed grid repairs at lower cost.

But energy economists and private power producers say it's a shell game. Many benefits gained through the purchase could be achieved without a state takeover, they said.

More importantly, they say, the purchase would do nothing to increase power supplies, and could have the unintended consequence of scaring off investors and exacerbating the state's power supply crisis. In the end, they say, it's a ruse to funnel money to the utilities without the political repercussions of a direct bailout.

"Quite frankly, I don't know what it is they expect to get out of it," said Robert Michaels, an energy economist with California State University, Fullerton. "If it's simply a way of channeling some funds to utilities that have problems, then we ought to view it like that."

The plan, designed by Senate Leader John Burton, D-San Francisco, is poised to take another step forward todayas Gov. Gray Davis and lawmakers wrap up negotiations on the specifics. Next comes negotiating with the utilities.

The future of some 26,000 miles of electric lines now owned by the utilities is at stake. The grid of wire, steel and aluminum delivers power over 75 percent of the state.

Borrowing to buy grid

While terms of the deal are still being negotiated, Burton's plan would require the state to borrow money to buy the grid. The state proposes paying the utilities two to three times the grid's book value, estimated at $3.2 billion in Public Utilities Commission documents.

Amounts for a potential purchase price have varied from $4 billion to $10 billion. The latest proposals Thursday put the figure at $6 billion to $7 billion. The Federal Energy Regulatory Commission would need to approve the sale.

That price promises to be controversial. Consumers Union, non- profit publisher of Consumer Reports, said it supports the idea of buying the transmission grid, but opposes paying more than book value. Ratepayers, they say, already have paid once for these assets through the transmission fees on their monthly bills. That fee is regulated by PUC.

Whatever the final sale price, the idea is that the utilities could then pay down some of the $12 billion debt they've accrued. The companies ran up debt in the past 10 months as they paid more for wholesale power than they could charge residential customers, whose rates are frozen.

Southern California Edison Co. and Pacific Gas & Electric Co. have said they might consider the sale if the price were right.

For Edison to consider an offer, said Tom Higgins, senior vice president with Edison's parent company Edison International, it would have to include fair compensation not just for the transmission assets, but also for the debt the company has amassed buying power. The company needs to assure lenders that it can pay its debts, he said.

"You can't deal with the issue of creditworthiness until you are willing to state clearly and unambiguously that the debts that have been racked up will be paid," Higgins said.

One stock analyst for the power companies said it could be in their best interest to sell if they could invest the proceeds elsewhere.

"They'd probably be better off if the state bought it because they wouldn't have the headaches they have now," said Joan T. Goodman, analyst with the Pershing division of Credit Suisse First Boston in Chicago.

WHO's in charge

It's unclear exactly who would manage the grid if the state becomes owner.

The state could create a state power authority to operate the grid. Or, it could keep control with the Independent System Operator, the not-for-profit grid operator created under deregulation. Burton said the state would likely contract with the utilities to continue to operate and maintain the power lines.

Consumer advocate Michael Shames, executive director of Utility Consumers Action Network who endorses the proposal, called it a "paper transfer of title" only.

The state, as the new owners, would collect transmission fees from ratepayers -- estimated by various groups as somewhere between $894 million and $1.4 billion annually. The revenues collected from transmission fees would help the state pay ongoing costs, Burton said.

"You're issuing bonds to take ownership of something that pays for itself," Burton said.

The state also would take on responsibility for future costs. The state will have to spend $1 billion to $3 billion immediately for needed upgrades. Annual maintenance on the grid will run another $200 million to $600 million.

Currently, high-voltage transmission lines lack the capacity to move enough power throughout the state on high demand days, which has exacerbated the energy crisis.

Armando Perez, ISO director of grid planning, said the ISO has begun making those upgrades. Burton, however, said the state can do it at lower cost because it has better credit than the near- insolvent utilities.

HOW WE GOT HERE

The transmission system in question was developed over the past 40 years in separate chunks built by PG&E, Edison and San Diego Gas & Electric Co. The ISO controls operations on 75 percent of the grid.

City-owned utilities, such as the Anaheim Public Utility and the Los Angeles Department of Water and Power, own the other 25 percent of the transmission wires in the state. Those would not be purchased under the current proposal.

Currently, the ISO and the utilities work together to plan expansion of the system. Then the Federal Energy Regulatory Commission must approve.

Consumer groups that support the plan say it gives the state more control over California's energy future and over the long-term could lower power prices. Backers of the plan say owning the grid could give lawmakers the ability to plan independently, without seeking approval from the Federal Energy Regulatory Commission.

"It would loosen some of FERC's control," said Tony Braun, attorney with the California Municipal Utilities Association.

How the proposal would fare with FERC is difficult to judge because so few specifics have been made public, said FERC spokeswoman Barbara Conners. But she said it appears the state would be allowed to set prices and conditions for use of the grid.

The state, for example, could tell in-state power generators that they couldn't use the transmission system to send power out of state unless California's power needs have been met.

PRICES LESS CONTROLlABLE

But buying the grid alone would not necessarily lower prices. It wouldn't give the state the authority to cap wholesale prices. Some people think, however, the state could institute policies that could create incentives for generators to sell at lower prices.

Buying the grid would put the state closer to complete re- regulation of the electric industry, while other states and nations open their energy markets to competition.

Independent energy producers are concerned the state will have too much power if it owns the grid, and also buys electricity contracts. The state could then develop policies that discriminated against independent businesses, said Jan Smutny-Jones, executive director of Independent Energy Producers, a California trade group of power plant owners.

Over the long term, state ownership of the grid could drive prices higher by reducing electricity supplies, said energy economist Michaels. With the market in flux, companies might be reluctant to invest in new power plants that the state needs to increase supplies.

"We don't know what the state is going to do," he said. "If it's one thing investors require, it's a bit of certainty about the environment they're going to operate in."

Contact Mulkern at 714-796-6855 or amulkern@notes.freedom.com