BAILOUT WATCH: Keeping an eye on the energy industry and the politicians
Bailout Watch #14 – Feb 27, 2001
Public subsidies to cover power grid purchase?
According to the Wall Street Journal, some energy experts believe that California is on the path to vastly overpaying for the state’s electricity transmission grid. "[T]he price [of the grid] — 2.3 times the system’s current book value of $1.2 billion — is so high, especially given the modest profits earned by transmission assets, that some observers wonder whether the state is overpaying and will need public subsidies in the future, rather than getting a value ‘commensurate’ with the price as the governor has promised," 2/26/01, p. B4.
The State of California is no "industry buyer."
Governor Davis is not acting like a smart buyer by offering such a windfall to the utilities for the grid. That point is made, in the aforementioned article, by the head of a Michigan electric utility that is trying to sell its grid. The utility has received offers for its transmission system at "around book value," and the utility exec points out that "[N]o industry buyer would pay twice times book value for transmission assets."
Just sending signals to Wall Street.
Do you ever get the feeling that Governor Davis makes announcements just to calm Wall Street’s nerves? We do. The governor often makes pro-utility announcements around the time that the utilities are required to submit certain filings to the Securities and Exchange Commission. (He or his appointees did just this at the end of the third quarter, 2000 and at the end of the fourth quarter, 2000.) Regardless of whether or not the pronouncements hold up in the long run, they allow the utilities to bring good news to their investors. This time, Davis, who headed for Washington and New York after announcing his tentative transmission deal with Edison, wanted some good news that he could bring with him to Wall Street. And, doubtless, the Fundraiser-in Chief wanted to give his political investors some confidence that things out west are moving right along. (Governor Davis was expected to raise over $1 million in conjunction with a Democratic Governors Association fundraiser as part of his East Coast swing.)
Cutting a deal feels great, until you have to live with the deal.
After signing contracts with power generators to build small "peaker" plants that would be available by summer 2001, state officials have noticed a problem: the terms of the contracts are bad for consumers. Last autumn, fearful of summer energy shortages, the state Independent System Operator signed contracts for 29 plants to provide power on an emergency basis. According to the Los Angeles Times, state officials are now holding up the building of these plants to revise the contracts, which "gave too much to the plant builders." These contracts probably should be revised. But the state should also take a lesson from this mini-debacle. When you operate out of fear, you are likely to miss the long-term problems associated with your short-term solutions. Governor Davis and Legislators should ponder this "peaker" plant problem, before they sign any final transmission deal, long term energy contracts or other "solutions" that involve giving lots of public money to private corporations.
