Californian Governor to flick the switch By Robert Lusetich, Los Angeles correspondent 16jan01

With his political stock falling as fast as the share prices of the near-bankrupt California utility companies, Governor Gray Davis goes to the state legislature tomorrow with a deal that might avert the worst power crisis in the state's history.

California, the world's sixth-biggest economy, was on the brink of darkness last week, threatening the first intentional blackouts since those decreed during World War II to deny Japanese bombers easy identification of their night-time targets. Governor Davis, who has emerged as a leading contender for the 2004 Democratic presidential nomination, wants the legislature to approve a plan in which the state would buy power and sell it to the utilities.

In the short term, it would avert disaster, but consumer advocates say that in the long term, when market prices return to what they were last year, the taxpayer will be left subsidising the utilities.

California's power market was deregulated by Republican governor Pete Wilson in 1996, but no one forecast the huge increase in demand a booming economy and the clustering of internet companies in the state would bring.

With no new power generators built in California since 1992 – mainly because of environmentalists' objections – the dwindling supply drove the cost of power to stratospheric levels last year.

Whereas the two main utilities, Pacific Gas & Electric and Edison International, were paying about US3c (5.3c) per kiloWatt hour in 1999, the price on the open market rose as high as US30c. However, as part of the deal cut during deregulation, the consumer could be charged only a maximum US7c. Hence, the utilities say they have lost about $US12 billion ($22 billion) over the past year. Their credit ratings have been downgraded by Wall Street to the status of junk bonds and their stock prices slashed.

Both companies say they cannot operate any longer under these conditions and might be forced into bankruptcy. Twenty million Californians rely on these utilities for their power.

Under the Davis plan, the state would negotiate long-term contracts with energy providers and then resell to the utilities at much lower prices than they pay now. Governor Davis wants to buy at about US5c per kW hour, but the power suppliers reportedly want the figure to be at least US7c.

Under that scenario, either power bills would have to rise or the utilities would be forced to operate as virtual non-profit entities.

Harvey Rosenfield, the president of consumer advocacy group the Foundation for Taxpayer and Consumer Rights, said the state should not agree to pay long-term prices because rates would drop even more once the crisis was resolved.

"Whenever they've got a gun to your head, it's a bad time to cut deals," he said, adding that the foundation would sue to overturn any deal that committed the state to paying "artificially high" prices, or offered bailouts to utility companies.

One of the more absurd spin-offs to the crisis is that three West Coast aluminium smelters, which last year negotiated to buy electricity from a federal agency, have closed down the smelters and gone into the business of selling power.

http://www.theaustralian.com.au/common/story_page/0,4511,1613624%255E2703,00.html

-- Martin Thompson (mthom1927@aol.com), January 16, 2001