Davis Says California Will Purchase Transmission Lines to Save Utilities

Wall Street Journal 14feb01

SACRAMENTO -- California Gov. Gray Davis said Wednesday the state will have to take over the 26,000 miles of transmission lines owned by two of the state's largest utilities in order to help keep those companies solvent.

"It's become increasingly clear that we cannot [keep the utilities solvent] without purchasing the transmission lines," Mr. Davis said at a news conference on distributed generation at the University of California at Davis.

Mr. Davis said that buying the transmission lines owned by Pacific Gas & Electric and Southern California Edison will be the key part of a comprehensive legislative package he hopes to introduce by Friday. It will then take two weeks to negotiate the deal.

The 50-year-old transmission lines have a book value of $3.8 billion and need about $1 billion more in upgrades to improve the flow of electricity and to better handle additional capacity. Mr. Davis would not say how much the state will pay for the assets. Revenue bonds will be issued to purchase the transmission lines.

The utilities, units of PG&E Corp. and Edison International, have a combined $12.7 billion in debt because the price the utilities pay for wholesale power exceeds the legal amount they can charge their customers who are protected by a rate freeze.

It has become increasingly clear that if the state assumes ownership of the transmission lines municipal utility districts in California will lose several billion dollars in annual tax revenues.

"That's one of the many, many details we need to address," Mr. Davis said.

Generators owed hundreds of millions of dollars by PG&E and SoCal Ed have become increasingly impatient waiting for legislation that will ensure that the utilities pay their bills. Mr. Davis said he has spent many hours on the phone discouraging generators from pulling the utilities into involuntary bankruptcy proceedings.

The heads of both utilities, however, said they too are becoming impatient with what they call a slow legislative process to address their undercollected power costs.

John Bryson, the chief executive officer of SoCal Ed parent Edison International, has not spoken directly with the governor this week and has not receive a proposal from the governor regarding the company's financial crisis, according to SoCal Ed.

Furthermore, Mr. Davis said the state's intention on signing long-term contracts is hung up on whether the utilities' excess power costs are addressed. Although he said he hopes to announce the signing of additional long-term supply deals this week, he said generators must first be ensured that the state will help rescue the utilities.

Mr. Davis said the reason the state Department of Water Resources has not been backing all of the state's daily power needs is because it is being charged unreasonable prices by generators. The agency is only buying power at pre-set prices and leaving the rest to be bought by the California Independent System Operator, manager of the state's electricity grid. The ISO, in turn, bills the nearly bankrupt utilities for all the power the agency is forced to buy. An ISO official said the grid operator has purchased between 2,000 and 10,000 megawatts on any given day.

On Wednesday, the Water Department will exhaust the $500 million that it was authorized to spend to buy electricity in the wholesale market. The state Department of Finance sent a letter to several lawmakers seeking authorization to use an additional $500 million to buy power. So far, there has yet be a response to the request.