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The Bailout From Hell
Gray Davis plan makes a bad situation worse

By Senator Tom McClintock

The twin pillars of Gray Davis' energy policy have been first, to keep electricity rates frozen regardless of the actual price of electricity, and second, to prevent the state's utilities from declaring bankruptcy as a direct result of his first policy.

Last year, in the face of rapidly escalating prices for electricity, the Davis administration forced the utilities to purchase power at losses of 500 percent and more.

It only took a few months of this policy to plunge the utilities to the brink of bankruptcy. By January their assets and credit had been destroyed, and generators were no longer willing to sell them power.

At this juncture, the utilities could have declared bankruptcy, and the federal courts could then have stepped in to reorganize their finances and restore them to financial stability. Their assets including billions of dollars they had transferred to their parent companies - could have been put back on the table and sorted out, their creditors satisfied, their credit restored, and the lights would have stayed on.

But Gov. Davis rejected this path, in large part for fear that a federal bankruptcy judge might have ordered rate increases to reflect the actual cost of electricity. To Davis, this was politically unthinkable.

And so, he chose a different path. To replace the ruined credit of the utilities, he placed state taxpayers on the same downward fiscal spiral. Since January, Gov. Davis has lost some $7.8 billion in this manner. This hasn't protected ratepayers from the high cost of power it just shifts the cost from their electricity bill (where they can see it) to their tax bill (where they can't). The Governor's plan to recover these losses is to raise electricity rates on consumers for years to come - sometime after the 2002 election. Last week, he signed a bond measure to cover his losses that, with interest, will add $2,000 to the average ratepayer's bill over the course of the bond.

Ironically, after spending $7.8 billion to prevent overt rate hikes and utility bankruptcies, California now has suffered the biggest rate hike and biggest utility bankruptcy in its history anyway.

Pacific Gas and Electric announced its plan to reorganize under bankruptcy law the day after Davis' statewide address on energy, handing him a stinging rebuke of no confidence. This began a frenzied scramble in the Governor's office to avoid similar embarrassment with Southern California Edison. The result is a memorandum of understanding that will restore SCE's credit (something that federal bankruptcy courts do for free), by draining ratepayers of yet billions of dollars more.

This agreement is now before the legislature, and SCE is spending a reported $4 million in ads to pressure legislators to hand them your ATM card.

Under the arrangement, ratepayers will pay 2.3 times the book value for Edison's transmission lines. But having paid for those lines, the ratepayers won't even end up owning shares in them; the plan is for ratepayers to buy them and hand them over to the state. The state will then hire SCE to do what SCE was doing anyway: maintain and operate the same lines, all at ratepayer expense, of course.

But that's just the beginning. SCE is guaranteed a total of $3.5 billion -- or $833 per ratepayer -- something euphemistically called "securitization" because the real word for what is happening, "larceny," doesn't read well in press releases.

Finally, SCE is guaranteed a profit of 11.6 percent of its capital investments, all at ratepayer expense. (Ask your bank how much it is willing to pay you on the money you invest with it.)

So here's what your family ends up paying for: grossly inflated prices for transmission lines that are then to be turned over to the state; maintenance and operation of those lines; $3.5 billion to bail out SCE's past mistakes (about $830 per ratepayer), an 11.6 percent guaranteed rate of return for SCE's investments. And the sad thing is, it doesn't add an inch to the transmission lines or a watt to the generating capacity of the state.

For ratepayers, it's a deal from hell, or more precisely, from the Governor's office, a nearby suburb.

Senator McClintock represents the 19th State Senate district in the California Legislature. His website address is

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