State May Face Bill of $5 Billion for Power

SACRAMENTO —  In a staggering estimate of the potential cost to California taxpayers, officials said Friday that the state could spend as much as $5.4 billion in the next 90 days to avert rolling blackouts.

The $400 million in funds that Gov. Gray Davis and the Legislature allocated Friday to cover for cash-strapped utilities will probably last no more than a week at current wholesale prices, some officials warned.

If an unusual state-sponsored power auction next week does not lock in substantially lower power rates, California may be plunged more deeply into the same chaotic electricity market that has nearly bankrupted the state’s two largest and oldest utilities, Southern California Edison and Pacific Gas & Electric.

Without a long-term solution, the state could burn through more than $5 billion in three months, said Roger L. Johnson, chief electricity market strategist for the California Department of Water Resources, the agency designated to buy the power.

“In an extreme case, because we are the buyer of last resort,” he said, “those are the kinds of numbers you have to at least contemplate.”

Davis, in an interview with The Times on Friday, defended his legislatively approved plan to spend state funds to cool the overheated market--money that even state lawmakers concede may never be paid back by the utilities they are trying to keep afloat.

“This is an emergency,” he said. “When we fight a fire, people don’t say, ‘Are we going to get our money back? If we’re not going to get our money back, we’re not going to fight the fire.’ ”

At the same time, he reiterated his vow not to raise consumer rates and asked the public to trust in his stewardship.

“I know I am asking you to take this on faith,” Davis said. “We will work our way through this problem in 30 days or so. . . . Something unexpected will happen, and there are many things beyond our control. But we will get on top of each piece.”

Among other developments Friday:

* The board overseeing California’s main electricity marketplace announced that it will lay off about 15% of its work force and probably cease to exist in a few months. The Power Exchange’s two biggest customers--Edison and PG&E--are; no longer trading because of stifling debts. The exchange, which once handled 90% of the electricity consumed in California, appeared to signal deregulation’s death rattle.

* Debt evaluators at Standard & Poor’s warned that they might downgrade California’s bond rating from AA to A because of doubts about whether the state can find a long-term solution to the power crisis. California Treasurer Phil Angelides called a downgrade unlikely, given the state’s $10-billion surplus and his confidence that lawmakers will craft a solution.

* The state Public Utilities Commission ordered Edison and PG&E; to continue to serve 25 million Californians. Both utilities insist they have no plans to cut anyone off.

The order, issued during an emergency meeting, heightened tensions between Sacramento and the power industry. Edison International Chief Executive John E. Bryson called it a “political act” and an “insult to our employees.”

* Atty. Gen. Bill Lockyer said he will try to block a move by PG&E; to shelter some non-utility assets if the company goes bankrupt. A week ago, PG&E; got permission from the Federal Energy Regulatory Commission to protect those assets.

On Friday, the state filed a petition with the energy commission to overturn the decision. “Given all the talk about potential bankruptcy, we are concerned PG&E; used a stealth move to shield assets,” Lockyer said.

Official estimates of the potential huge costs to California of buying power indefinitely sparked heated debate--and considerable worry--in Sacramento and elsewhere.

“The situation has to be stabilized very quickly,” said state Treasurer Phil Angelides, who has proposed creating a new state energy authority.

Water agency officials mandated to buy the power said they intend to use their leverage as the only sizable credit-worthy buyer in the market to hold down costs and wrest control of prices from generators.

“We’re playing hardball,” said state water official Johnson. “We’re trying to hold the line on price to conserve our resources as best we can and to break this market psychology.”

But the prices paid since Thursday by the water resources board average nearly $400 per megawatt-hour, well above the $55 per megawatt-hour that Davis and legislators have targeted for long-term contracts.

Owners of natural gas-fired plants say they need a minimum of $80 per megawatt-hour just to cover their fuel costs, and a price in the range of $270 to $330 per megawatt-hour is not unreasonable given other costs, including air pollution credits.

The governor and others backing his approach are placing great hopes on the outcome of an electricity auction on Wednesday, at which buyers and sellers will enter blind bids for long-term energy contracts in an attempt to forestall the wild run-ups that have marred the spot market so far.

Davis said he believes that California will get many offers in the range of $55 per megawatt-hour.

But market players see that as unrealistic.

Jan Smutny-Jones, executive director of the Independent Energy Producers Assn., which represents power plant owners, predicted that few if any companies would sell at such a low price, but he applauded the auction idea.

“The quicker we do that, we are then dealing with a factual base,” said Smutny-Jones. “There are lots of opinions about what the cost of power might be or should be.”

Some lawmakers also differed with the governor. Sen. Jim Battin (R-La Quinta) called the governor’s target price “mystical.”

“It’s an article of faith,” said Assemblyman Fred Keeley (D-Boulder Creek), the author of the power-purchasing bill. “But it is also an article of fantasy.”

Nonetheless, lawmakers reiterated that they saw no alternative to the road they had embarked on when they approved the stopgap, $400-million measure.

“I don’t think that’s too desirable. We could try to seize the generation plants or the power itself,” said Senate leader John Burton, (D-San Francisco). “That may be desirable, but I don’t think it’s foreseeable in the current political setup.”

Some complained that power providers were not in a position to take the state to the cleaners. “What we’ve done is open the state coffers to the same kind of raiding that has been done to the utilities’ coffers,” said Michael Shames of the Utility Consumers Action Network in San Diego.

In addition to Standard & Poor’s warning about the state’s credit rating, some economics experts also expressed gloomy opinions on the state’s fiscal health.

“I would have a lot more confidence in California if this was a technical problem, but this is a man-made problem and that makes it more difficult to solve,” said Sung Won Sohn, chief economist of Wells Fargo & Co.

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Times staff writers Nancy Rivera Brooks, Jerry Hirsch, Nicholas Riccardi and Terence Monmaney and Times researcher Patti Williams contributed to this story.