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California Capsule: Governor's Moves Could Bust Budget

LCG, Feb. 22, 2001—The fiscal implications of California's remedies for the state's power problems have been largely ignored as Gov. Gray Davis has put into motion a $10 billion plan to purchase electricity for distribution to retail customers, another scheme to take over the state's power grid that could cost as much as $9 billion and now a plan to create a state power authority to buy, build, own and operate power plants at a cost of $5 billion.

Throwing money at problems has never proved to be effective government, and now another voice says it might bust the state budget.

In a nonpartisan report, California legislative analyst Elizabeth Hill warns that Davis may have to trim his proposed $102 billion state budget to accommodate his electric power remedies.

In his 2001-02 proposed budget which he unveiled in his "state of the state" message last month, Davis had set aside just $1 billion to solve the state's power problems. The budget also included $2.3 billion in one-time spending proposals not related to energy. Something has to give.

Hill said legislative deliberations on the budget should wait until the full financial impact of the power problems are known. "General Fund fiscal exposure could easily surpass the amount set aside in this budget," her report says.

And that isn't all:

The California Public Utilities Commission is expected to consider at today's regular meeting an emergency request by the state Department of Water Resources to recover funds spent to purchase power which the state's near-bankrupt utilities distribute to retail electricity customers. The money spent belongs to the taxpayers, and the water agency has been spending $50 million a day on power, purchasing it in the volatile spot market which is what drove the utilities to insolvency. The utilities can't pay the water people because they are not allowed to charge customers what the power costs. It is unclear what the CPUC can do short of allowing large retail electric rate increases.

U.S. District Court Judge Frank Damrell extended his order to four merchant power companies to continue through tomorrow their power sales to the California Independent System Operator. The companies would rather sell power to a state agency with taxpayer money.

The Federal Energy Regulatory Commission yesterday disappointed California state officials and anti-utility activists by refusing to modify a reorganization by PG&E Corp. that effectively shields assets of its unregulated businesses from the financial problems of its operating utility Pacific Gas & Electric Co. The reorganization effectively protects the unregulated businesses if the parent holding company is forced into bankruptcy by its regulated utility's problems.

The chief executive of Reliant Energy Inc. thinks his company will be paid the money California utilities and Cal-ISO owe it for power produced at plants it acquired from the state's utilities. Testifying before Texas state legislators in Austin, he said "I am not overconfident, but relatively confident that because of the legal system we have in this country and because of the substance of the economy in California, that we will ultimately be paid even for the $370 million that we are owed." The Texas lawmaker want to make sure California's problems aren't repeated in the Lone Star State.

Power supplies in California were so robust yesterday that Cal-ISO declared only a Stage 1 power emergency. "The supply picture has improved somewhat," said Lorie O'Donley, an ISO spokeswoman.

-- Martin Thompson (, February 22, 2001

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