Message-ID: <17405752.1075849619581.JavaMail.evans@thyme> Date: Tue, 31 Jul 2001 06:06:00 -0700 (PDT) From: jeff.dasovich@enron.com To: sgovenar@govadv.com, hgovenar@govadv.com, bhansen@lhom.com, ken@kdscommunications.com Subject: Energy Issues Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Jeff Dasovich X-To: Scott Govenar , hgovenar@govadv.com, "Bev Hansen" , "Ken Smith" X-cc: X-bcc: X-Folder: \Jeff_Dasovich_Oct2001\Notes Folders\Sent X-Origin: DASOVICH-J X-FileName: jdasovic.nsf FYI: Very interesting set of clips today that I thought you folks might be=20 interested in. Bad day for Davis; bad day for Calpine. Best, Jeff Please see the following articles: Sac Bee, Tues, 7/31: Davis spokesman under fire for stock=20 Sac Bee, Tues, 7/31: Davis energy aide leaves -- without pay=20 Sac Bee, Tues, 7/31: Power delivery efficiency questioned: Output at low-co= st=20 generating plants has been cut while costlier ones continue to operate Sac Bee, Tues, 7/31: Davis: FERC excluding $5 billion of owed refunds=20 Sac Bee, Tues, 7/31: Bill would streamline the path to local power: More=20 cities, including Davis, are taking a look at creating municipal utility=20 districts SD Union, Tues, 7/31: SDG&E denies it deceived ratepayers about debt=20 SD Union, Tues, 7/31: Sempra set to unveil plans for new plant, business pa= rk SD Union, Tues, 7/31: Davis press secretary confirms buying energy company= =20 stock LA Times, Tues, 7/31: Davis' Energy Advisors Draw SEC Attention SF Chron, Tues, 7/31: California governor's press secretary confirms buying= =20 energy company stock=20 SF Chron, Tues, 7/31: PG&E's $500,000,000 second-quarter surprise=20 SF Chron, Tues, 7/31: Power and 'juice'=20 SF Chron, Tues, 7/31: S.F. to vote on electric power to the people=20 Measures would start public utility districts=20 Mercury News, Tues, 7/31: Davis' advisers probed by SEC=20 OC Register, Tues, 7/31: Ethics issue in stock buy?=20 OC Register, Tues, 7/31: Aide denies stock deal was improper=20 OC Register, Tues, 7/31: Power firms amp up lobbying=20 OC Register, Tues, 7/31: Gouger Gray Davis (Commentary) Energy Insight, Tues, 7/31: Turning coal into a tradable commodity WSJ, Tues, 7/31: Debt Pitch: California's Next Test In Electricity Crisis: Selling Power Bonds LA Times, Tues, 7/31: California ; Op Ed Desk=20 Commentary The State Will Pay for Davis' Panic WSJ, Tues, 7/31: Electrical Switch: Now, Cheaper Power Is Causing Hefty Losses for California=20 ---------------------------------------------------------------------------= --- ------------------------------------------------------------- Davis spokesman under fire for stock=20 By Amy Chance and Dale Kasler Bee Staff Writers (Published July 31, 2001)=20 Davis administration spokesman Steve Maviglio acknowledged Monday that he= =20 bought stock in Calpine Corp. in June, at a time when the company was=20 announcing a breakthrough in its bid to build a controversial San Jose powe= r=20 plant.=20 His disclosure came several days after Gov. Gray Davis dismissed five state= =20 power purchasers for owning stock in the company and drew new complaints th= at=20 Davis administration officials may have improperly mixed their private=20 finances and their public roles.=20 Maviglio, now acting as interim communications director for the=20 administration, said he put in an "open" order for Calpine stock May 31,=20 agreeing to buy 300 shares once the stock hit a certain price.=20 He said that threshold was met June 20, the day after an action by the=20 Federal Energy Regulatory Commission brought down "all energy stock prices= =20 across the board."=20 Maviglio said he bought the stock for his individual retirement account, an= d=20 it has since declined in value. Under terms of the open order, he said, he= =20 had no control over the exact date of purchase.=20 Maviglio touted the company in his role as spokesman to the governor in a= =20 story published June 27 in The Bee. He said Monday that he was simply=20 responding to a reporter's question about the company's positive reputation= .=20 "They have made a clear commitment to invest in California's future,"=20 Maviglio said at the time. "Their pricing has been far more reasonable than= =20 any other generator."=20 In the interview, Maviglio also contrasted Calpine and Texas-based=20 generators. He said Calpine "took a different tack from the Joe Bobs of the= =20 world," an apparent reference to Joe Bob Perkins, a senior executive with= =20 Reliant Energy Inc. of Houston.=20 Maviglio acknowledged the stock ownership several days after the=20 administration ended its relationship with several energy consultants who= =20 held stock in energy companies, including Calpine.=20 Under pressure from Secretary of State Bill Jones, a Republican who hopes t= o=20 challenge Davis for governor next year, the Davis administration has spent= =20 several weeks scrambling to answer questions about the stock holdings and= =20 potential conflicts of its consultants and energy traders.=20 Jones said Monday that Maviglio should be fired.=20 "These actions are unethical, unconscionable, unacceptable, and heads shoul= d=20 roll," he said in a statement. He said the Democratic governor should direc= t=20 all of his staff to immediately file updated conflict-of-interest statement= s=20 to reflect current holdings.=20 Jones, who last week asked the Securities and Exchange Commission to=20 investigate administration consultants for insider trading, also said the= =20 probe should be expanded "to include all of the governor's staff."=20 Federal law and SEC regulations forbid anyone from trading stocks while=20 possessing "insider information" -- relevant facts not available to the=20 public, according to the SEC. Violations can bring lawsuits and criminal=20 prosecution.=20 Michael Prozan, a Menlo Park lawyer and expert on insider trading, said the= =20 prohibition against it originally focused on halting company executives fro= m=20 profiting from news before it was disclosed publicly.=20 But the laws have been broadened to include others besides company employee= s.=20 Investment bankers, lawyers and journalists have been snared by=20 insider-trading crackdowns.=20 Davis' office was instrumental earlier this year in paving the way for=20 removing barriers to construction of a Calpine plant in San Jose. On May 30= ,=20 after opposing the project for years, San Jose Mayor Ron Gonzales announced= =20 he had negotiated an agreement addressing his concerns and agreed to suppor= t=20 construction.=20 His action came after Davis in April endorsed the plant's construction and = as=20 the state Energy Commission threatened to approve it over local objections.= =20 On June 20, the company announced it had won tentative state approval to=20 build the plant.=20 Maviglio said he buys many stocks and that Enron Corp. and Calpine are the= =20 only energy generators among them. He owns 100 shares of Enron stock, which= =20 he purchased in 1996.=20 "I deal with hundreds of California companies just about every day, and thi= s=20 was one that I saw that looked like a good investment based on public=20 knowledge," he said. "I read six newspapers a day or more, and I know what'= s=20 going on in the world. If there's a standard that I can't invest in somethi= ng=20 that I have general public knowledge of, then I wouldn't have any stocks at= =20 all."=20 Maviglio said that the "open" order he placed meant that he could not have= =20 used inside information to make his stock purchase.=20 "Had I had specific knowledge about a contract being signed or what actuall= y=20 happened in the office of the mayor of San Jose ... that would have been=20 unrelated," Maviglio said. "There was no timing-based sequence to it."=20 Calpine stock, despite the company's considerable success, has slipped in= =20 recent weeks because of general investor anxiety about the California energ= y=20 crisis.=20 The stock, which trades on the New York Stock Exchange, closed at $49.30 on= =20 May 31, the day Maviglio says he placed the purchase order. The order was= =20 executed as the stock dipped below $40 on June 20, closing that day at=20 $39.85.=20 The day before, the Federal Energy Regulatory Commission announced a=20 price-control plan that investors believed was damaging to generators'=20 profits. On Monday, the stock closed at $37.13.=20 Last week, the Davis administration stopped doing business with five energy= =20 traders under contract with the administration after Maviglio said=20 administration lawyers "came to the determination that there are possible= =20 violations of the law or close to it."=20 "It's not a crime to own energy stock," Maviglio said Monday. "The differen= ce=20 with these traders is they're making governmental decisions. They're=20 committing the state's resources by spending money to buy power."=20 Jim Knox, director of California Common Cause, said he believes the=20 Governor's Office made critical errors while hiring staff to purchase energ= y=20 for the state.=20 "Had the Governor's Office gone to the trouble to have these people fill=20 statements of economic interest, as they were required to do by law, they= =20 should have known this before they were hired and they shouldn't have been= =20 hired," Knox said.=20 The Bee's Amy Chance can be reached at (916) 326-5535 or achance@sacbee.com= =20 .=20 Emily Bazar of The Bee Capitol Bureau contributed to this report. Davis energy aide leaves -- without pay=20 By Emily Bazar Bee Capitol Bureau (Published July 31, 2001)=20 A high-paid consultant to Gov. Gray Davis who came under fire for his=20 dealings with a California utility has cut ties with the administration and= =20 won't be paid for work already completed.=20 Under terms of a settlement made final Monday, former Clinton damage contro= l=20 specialist Chris Lehane will no longer help shape Davis' public response to= =20 the energy crisis.=20 Neither Lehane nor partner Mark Fabiani -- who were hired by Davis in May o= n=20 a six-month, $30,000-a-month contract -- will receive any money for their= =20 services. Fabiani left last month.=20 Because Lehane and Fabiani each received at least $10,000 under contract wi= th=20 Southern California Edison in the past year, Lewis Uhler, president of the= =20 National Tax Limitation Committee, filed a lawsuit alleging that conflict o= f=20 interest laws had been violated.=20 But Davis spokesman Steve Maviglio said Lehane and Fabiani were instrumenta= l=20 in persuading the Federal Energy Regulatory Commission to limit the wholesa= le=20 cost of power in the state.=20 "Chris Lehane provided an invaluable service to the people of California in= =20 helping us get action after a yearlong wait from FERC," he said. "It's a=20 shame that politics gets in the way of public service."=20 Uhler, however, said he believes Lehane and Fabiani represent a larger=20 problem in the Davis administration, and he pointed to the recent dismissal= =20 of energy traders who held stock in energy companies.=20 "Doesn't anybody in the Governor's Office understand conflict of interest?"= =20 Uhler asked.=20 "This is really sending a signal that the Governor's Office thinks that it = is=20 somehow above the law."=20 The Bee's Emily Bazar can be reached at (916) 326-5540 or ebazar@sacbee.com= =20 . Power delivery efficiency questioned: Output at low-cost generating plants= =20 has been cut while costlier ones continue to operate. By Carrie Peyton Bee Staff Writer (Published July 31, 2001)=20 California is sometimes deliberately cutting output from low-cost power=20 plants while running more expensive ones, utility and grid officials say.= =20 The sporadic episodes haven't cost much yet, but they illustrate a=20 potentially troubling disconnect in the system that has quickly grown betwe= en=20 two agencies that help deliver electricity to a power-strapped state.=20 "We seem to be building this inefficiency into the system, and it doesn't= =20 seem to be getting better," said Mike Florio, a consumer advocate who sits = on=20 the governing board of the Independent System Operator.=20 The trouble is that the ISO, created in 1996 to manage the power grid in a= =20 deregulated electric market, tries to run the grid by auctions that -- in= =20 theory -- provide the cheapest electricity for the state's consumers.=20 Meanwhile, the state Department of Water Resources, which in January steppe= d=20 in to buy power on behalf of cash-strapped utilities, isn't bidding at some= =20 auctions because it believes it can provide cheaper power if it doesn't.=20 "We have an inefficient market and an inept government entity. It's sort of= =20 the worst of both worlds," Florio said, criticizing his agency and the DWR.= =20 ISO staffers decline to discuss the situation in detail, saying it involves= =20 confidential bidding behavior.=20 But Pete Garris, chief of operations for the power-buying arm of the=20 Department of Water Resources, confirmed that the ISO has been asking his= =20 agency to take part in more auctions, but the state has declined.=20 The state's role is to buy electricity for customers of utilities whose=20 credit was no longer good enough to buy on their own, he said.=20 "We're not in it to do those kinds of marketing functions," he said. "It's= =20 not necessarily a good fit."=20 Some of the ISO auctions are used to lessen congestion on transmission line= s.=20 Others are used to stabilize the grid by slightly increasing or decreasing= =20 output when demand doesn't match forecasts.=20 Generally, the highest-cost power plants should be the ones cutting back, a= =20 process the industry calls "decking."=20 But since May, on ISO orders, Southern California Edison has repeatedly=20 throttled back on the Mohave Generating Station, which produces some of the= =20 cheapest power available to California today, costing as little as $10 to $= 20=20 a megawatt-hour.=20 Edison, which owns a majority share of Mohave, has cut its output by 5,660= =20 megawatt-hours between May and July, about one-half of 1 percent, at the=20 ISO's behest, according to data Edison provided to The Bee.=20 The ISO could probably have saved the state's consumers $370,000 at one pla= nt=20 if it had asked a higher-cost gas-burning plant to cut back instead of=20 Mohave, a coal-burning workhorse in Laughlin, Nev., Florio said.=20 The amount sounds like "small potatoes," but in some ways it is more alarmi= ng=20 than the $14 million the state lost recently by selling excess power for le= ss=20 than it paid, he said.=20 Industry experts agree that such below-cost sales are common in a business= =20 where power needs fluctuate dramatically based on the weather.=20 By contrast, "this is a dead weight loss. Higher costs are being incurred f= or=20 no good reason," Florio said.=20 "The question is, why is the ISO calling on Mohave and not (cheaper) gas=20 plants? The answer is, the gas plants aren't bidding ... probably because= =20 they're contracted with DWR," he said.=20 Four Corners, another low-cost coal plant partly owned by Edison, has also= =20 been throttled back at ISO request, Edison officials said.=20 In addition, so few bidders have shown up at ISO auctions to ease stress on= =20 transmission lines that the system has fallen into disarray, with the ISO= =20 instead ordering across-the-board power production cuts that are boosting= =20 costs, Florio said.=20 For its part, the ISO will say only that "we are making the most economical= =20 decisions we can based on the bids available," said spokeswoman Stephanie= =20 McCorkle.=20 DWR's Garris said the state and the ISO have been meeting repeatedly on=20 bidding and other coordination issues, and he hopes to have a=20 smoother-running system in place by next summer.=20 The Bee's Carrie Peyton can be reached at (916) 321-1086 or=20 cpeyton@sacbee.com . Davis: FERC excluding $5 billion of owed refunds=20 By Jim Sanders Bee Capitol Bureau (Published July 31, 2001)=20 A ruling by the Federal Energy Regulatory Commission last week could cost= =20 Californians $5 billion in energy refunds, according to Gov. Gray Davis, wh= o=20 filed a formal request Monday for a rehearing in the case.=20 Although the commission's order suggested that California is owed refunds= =20 because of exorbitant electricity prices during the recent energy crisis, t= he=20 order's fine print placed severe limits on such refunds, Davis said.=20 "FERC is up to its old tricks again," he said. "They talk about refunds for= =20 California. But in this case, talk really is cheap: The details of its late= st=20 order show it has no intention of making California whole."=20 Tamara Young-Allen, a FERC spokeswoman, declined comment Monday and said th= e=20 agency does not discuss pending cases.=20 California is seeking $8.9 billion in alleged overcharges for electricity= =20 purchased from May 2000 to June 19, when FERC imposed new rules to prevent= =20 price gouging.=20 On Wednesday, FERC ordered hearings to determine precisely how much money= =20 electricity generators would have to pay in refunds to California.=20 At the time, Davis applauded FERC's ruling, saying it validates California'= s=20 claim that "significant refunds are due" and that the agency's action "gets= =20 us closer to realizing that refund."=20 But after poring over details of the 40-page order, state officials said=20 Monday that it excludes from consideration more than half the amount sought= =20 by the state -- leaving $3.9 billion in dispute.=20 Attorney Barry Goode and Nancy McFadden, key members of Davis' energy team,= =20 said the FERC order would not allow refunds:=20 For about $2 billion in alleged overcharges stemming from electricity=20 purchased by Californians between May and October of last year.=20 For electricity bought by the state Department of Water Resources from=20 private companies this year. The state says it is owed about $3 billion fro= m=20 such purchases.=20 The FERC ruling means that only DWR's purchases through the state's=20 now-defunct Power Exchange or through the operator of a statewide electrici= ty=20 transmission grid will be considered for refunds, officials said.=20 Such limitations by the regulatory agency are impractical because the marke= t=20 was dysfunctional, leaving DWR with few options, when the state began buyin= g=20 electricity for debt-strapped private utilities in January, Goode said.=20 "Now FERC says Californians are not entitled to refunds even though they=20 determined the prices were excessively high," Davis said. "It's time for FE= RC=20 to decide who they are working for: the greedy out-of-state generators or t= he=20 people of California."=20 The motion filed Monday sets the stage for a possible lawsuit.=20 "We are calling on FERC to change its order," Davis said. "If it doesn't, w= e=20 will be in court."=20 The Bee's Jim Sanders can be reached at (916) 326-5538 or jsanders@sacbee.c= om=20 . Bill would streamline the path to local power: More cities, including Davis= ,=20 are taking a look at creating municipal utility districts.=20 By Ed Fletcher Bee Capitol Bureau (Published July 31, 2001)=20 With the future of California's investor-owned utilities clouded by the=20 state's energy crisis, more and more cities, including Davis, are looking t= o=20 control their own power destinies.=20 Cities, public-power advocates and state Sen. Nell Soto, D-Pomona, are=20 pushing a bill through the state Legislature that would make it easier to= =20 create municipal utility districts.=20 "My solution to the power crisis is to reassert our interests and declare o= ur=20 independence from out-of-state gougers and in-state irresponsible utility= =20 companies," said Soto, who is carrying the bill, SB 23xx.=20 The Senate approved the bill earlier this month. The Assembly is expected t= o=20 take it up when the Legislature reconvenes in mid-August. The state's three= =20 investor-owned utilities are fighting the proposal.=20 Davis and other cities look longingly at the Sacramento Municipal Utility= =20 District's success in sheltering ratepayers from the brunt of rate increase= s.=20 Given the cloudy financial future of Davis' power provider, Pacific Gas and= =20 Electric Co., public power supporters say it's easy to understand why citie= s=20 want local control. If run well, public power can be cheaper and more stabl= e=20 than that supplied by investor-owned utility companies, they say.=20 "You get to choose the type of energy you want. ... I can't think of a bad= =20 reason" to have public power, said Robert Milbrodt, a Davis resident active= =20 in the drive.=20 After Yolo County officials last year denied an effort to form a public pow= er=20 authority in Davis, the city is ready to take a fresh look. The city, which= =20 did not formally support last year's attempt, this week is expected to name= =20 members to a public power task force. It is also hiring a consultant to hel= p=20 evaluate the pros and cons of a Davis version of SMUD.=20 Soto's bill would create a path to public power that takes county local=20 agency formation commissions out of the process. Under the bill, if all the= =20 cities and counties affected by the proposed municipal utility district sig= n=20 on, the plan bypasses the local LAFCO, goes directly to the California Pubi= c=20 Utilities Commission for analysis and then to the voters of the affected=20 areas.=20 It was the Yolo County Local Agency Formation Commission that turned down t= he=20 Davis request a year ago, saying critical issues were unresolved. Davis=20 public power activists said their plan would have put the basic formation= =20 question before the voters, leaving the details to be worked out later.=20 Public power boosters said lobbying by PG&E doomed their plans.=20 SB 23xx also simplifies the approval process, allowing a simple majority of= =20 voters in the proposed district to create the new power district.=20 Seizing transformers, power lines and other utility company infrastructure= =20 through eminent domain would become much easier for agencies starting=20 municipal utility districts under the bill. A utility company would not be= =20 able to challenge the taking of property based on the merits, but could onl= y=20 fight over price.=20 The utility companies say the provision would take away a key protection=20 against abuse.=20 Surveys show Californians like the idea of local officials controlling thei= r=20 power, in part because they blame investor-owned utilities for the state's= =20 electricity mess.=20 Nearly two-thirds say local governments taking the place of investor-owned= =20 utilities would be a good thing, according to a poll released earlier this= =20 month by the Public Policy Institute of California.=20 There are those that warn, however, that pubic power is not without risk.= =20 "This bill does not address generation," said Dale Hunter, a PG&E lobbyist,= =20 and municipal utility districts that can't generate their own power will be= =20 "exposing ratepayers to the volatility of the (power purchasing) market."= =20 In Los Angeles, the Department of Water and Power has been highly successfu= l=20 because it has surplus power to sell, Hunter said. SMUD has only recently= =20 been forced to raise its rates largely because it generates some of its=20 power, Hunter said.=20 By creating a way around LAFCOs, shifting the Public Utilities Commission t= o=20 an advisory role and stripping the right of utility companies to fight in= =20 court, the bill would be removing important public safeguards, Hunter said.= =20 The Bee's Ed Fletcher can be reached at (916) 326-5548 or=20 efletcher@sacbee.com . SDG&E denies it deceived ratepayers about debt =20 \ objattph=20 Company calls gain on sales, debts 'separate transactions' By Craig D. Rose= =20 UNION-TRIBUNE STAFF WRITER July 31, 2001 San Diego Gas & Electric yesterd= ay=20 denied allegations that it systematically lied about the debt it racked up= =20 during the power crisis, despite revelations that the company earned hundre= ds=20 of millions from some power sales. SDG&E and its parent company, Sempra=20 Energy, acknowledged making profits from selling electricity but insisted= =20 those gains have no bearing on the $750 million debt the utility claims to = be=20 owed by customers for power purchases during the energy crisis. "Those are= =20 completely separate transactions," said Ed Van Herik, a spokesman for SDG&E= .=20 The company's effort to seal a deal with the state to clear the $750 millio= n=20 debt has come under attack by the Utility Consumers' Action Network. The Sa= n=20 Diego-based consumer group says SDG&E's claimed debt is the result of=20 selective bookkeeping, bordering on fraud. The bottom line, says UCAN, is= =20 that SDG&E engaged in deception and probably owes its customers money. =20 SDG&E, which claimed to have sold customers electricity without markups,=20 actually "was buying electricity at a low price and selling it at a higher= =20 price to us," said Shames. "SDG&E customers have been systematically lied t= o=20 over the past year about this balancing account." UCAN says that SDG&E=20 earned an estimated $450 million from its power sales to the state, while= =20 publicly declaring that it was posting only losses from buying power. Sham= es=20 said much of the information leading to UCAN's conclusion came from a=20 detailed analysis of documents made available in recent weeks. The state= =20 Office of Ratepayer Advocates, meanwhile, yesterday said a new filing by=20 SDG&E that claims its power-sales profits belong to stockholders, not=20 consumers, is "specious" and "without merit." Van Herik insisted the compa= ny=20 had not been misleading. The spokesman noted that the company earlier was= =20 required to buy electricity from the Power Exchange, a now-defunct=20 marketplace established by the state as part of its deregulation plan. "Wh= at=20 we said is that we were buying electricity for our customers and passing=20 along the cost without markup," said Van Herik. What SDG&E failed to=20 publicly announce was that it was simultaneously selling electricity to the= =20 Power Exchange for an apparently healthy profit. Under certain contracts,= =20 SDG&E had locked in electricity at prices substantially below going rates= =20 during the ongoing power crisis. The company declined yesterday to reveal= =20 terms of the contracts. But UCAN estimates the contracts provided electrici= ty=20 to the utility at no more than 5 cents per kilowatt-hour. SDG&E then sold= =20 that relatively cheap power to the Power Exchange for a higher price and=20 pocketed the profit, which it also declined to disclose. As it profited fr= om=20 the power sales, SDG&E bought power at higher prices from the exchange and= =20 billed customers for what it paid. Whenever SDG&E's costs to buy electrici= ty=20 exceeded what state regulators would allow the utility to charge customers,= =20 it recorded the amounts in balancing accounts. That account grew to $750=20 million. But SDG&E never offset its losses from electricity purchases with= =20 its profit from sales. Van Herik said the practice was appropriate because= =20 the lucrative contracts for cheap power were owned by the company's=20 shareholders, not its customers. The practice of keeping profits and losses= =20 entirely separate, he said, was endorsed by a California Public Utilities= =20 Commission audit. But the first formal ruling on that matter came in June,= =20 when the full commission ruled that all profits from SDG&E's contractual=20 power deals belong to its customers. SDG&E went to court to overturn the= =20 commission's ruling, but put the legal effort on hold shortly before Sempra= =20 reached a tentative agreement with the state to clear the $750 million debt= .=20 The proposal with the state would reverse the utilities commission ruling a= nd=20 award the company's shareholders ownership of the profits SDG&E made from= =20 selling power. Van Herik said yesterday that the state made the concession= =20 because it recognized that SDG&E had a strong legal case. But Shames says= =20 the state had a strong case and noted that the Office of Ratepayer Advocate= s=20 agreed. He is asking the utilities commission to reject the deal. State Se= n.=20 Steve Peace, D-El Cajon, said he believes that consumer objections to the= =20 balancing account deal are aimed at getting ratepayers a better deal -- and= =20 that's something he supports. "If Michael Shames can improve on the=20 balancing account deal I'm in full support as long as we don't lose any of= =20 the gains we've already gotten," he said. A spokesman for Gov. Gray Davis= =20 did not return a telephone call seeking reaction to the UCAN allegations. = =20 Outside UCAN's office in Little Italy yesterday, a group of trade unionists= =20 demonstrated in support of SDG&E's position. Dave Moore, a business manager= =20 for the International Brotherhood of Electrical Workers Local 465, said SDG= &E=20 has handled its power purchases in accordance with utilities commission=20 rulings. But Shames said the company sought to shield its actions from the= =20 scrutiny of consumer groups and the public. "They consistently said they= =20 were not making money from this," said the consumer advocate. "For them to= =20 split hairs and say, 'We didn't make money from purchases, we made it from= =20 sales,' is disingenuous." Staff writer Bill Ainsworth contributed to this= =20 report.=20 Sempra set to unveil plans for new plant, business park =20 \ objattph=20 By Jonathan Heller UNION-TRIBUNE STAFF WRITER July 31, 2001 ESCONDIDO --= =20 City officials are expecting to get their first look today at long-awaited= =20 plans to build the largest power plant in North County since the Encina pla= nt=20 came on line more than 30 years ago. Sempra Energy Resources will file a= =20 200-page application with the city Planning Department for a 550-megawatt,= =20 natural gas-fired power plant and roughly 100-acre business park in southwe= st=20 Escondido, Sempra spokesman Tom Murnane said. "It (the application) is ver= y=20 detailed," Murnane said. "We have not done an application of this sort=20 before. This is the first time Sempra Energy Resources has been involved in= =20 the development of a business park." Sempra is building the project in=20 partnership with JRM Real Estate, a Carlsbad-based developer. The Californ= ia=20 Energy Commission will have final say on the power plant, which could take= =20 three to four years to get on line. The City Council will decide on the=20 industrial park. City officials have awaited Sempra's bid ever since the= =20 idea was broached in January. The project addresses two needs: The power=20 plant would provide enough energy to power almost a half-million homes, and= =20 the business park would bring higher-paying jobs to a city with the lowest= =20 median income in North County. "I'm awaiting with great anticipation to se= e=20 what they have planned," said City Councilwoman June Rady. "I have met with= =20 Sempra officials several times in the past and what they have shared with m= e=20 I've been very excited about." Sempra has promised that its proposed plant= =20 would have lower emission levels than any plant now in the state. The compa= ny=20 also has said the plant would not have a tall smokestack, or a visible vapo= r=20 plume such as the one produced by the city's Iceoplex generating plant. Th= e=20 plant and park are slated for Quail Hills, the last large parcel of vacant= =20 industrial land in the city. Several previous plans by other developers hav= e=20 failed after they discovered the high costs involved with building on the= =20 hilly terrain. Neighbors near the area have voiced concerns about noise,= =20 traffic and dust associated with rock crushing, which would be needed to=20 create level foundations for the project. Davis press secretary confirms buying energy company stock =20 \ objattph=20 ASSOCIATED PRESS July 31, 2001 SACRAMENTO =01) Gov. Gray Davis' press=20 secretary recently purchased the same energy stock as five consultants the= =20 governor fired last week, he disclosed Monday. Steve Maviglio confirmed th= at=20 on June 20, he bought 300 shares of stock in Calpine Corp., a San Jose-base= d=20 power generator that has received about $13 billion in state contracts to= =20 supply electricity for up to 20 years. Maviglio's disclosure comes after= =20 Davis' office hastily ended the contracts of five consultants who helped=20 negotiate state power contracts and held stock in energy companies. In a= =20 related development, an anonymous source told the Los Angeles Times on Mond= ay=20 that the Securities and Exchange Commission has launched a preliminary=20 inquiry into whether the consultants used inside information to trade the= =20 energy stocks. About two dozen Davis energy consultants were required to= =20 fill out financial disclosure statements after complaints of conflict of=20 interest by Republicans and consumer groups. "When we reviewed them, we=20 found possible violations of the law and took swift action," Maviglio said= =20 Monday before Secretary of State Bill Jones issued a press release calling= =20 for his termination. Jones, a Republican, is a candidate for the GOP=20 nomination to challenge Davis in November 2002. Maviglio defended his=20 purchase, saying that he "owns several stocks in companies in all fields th= at=20 are growing and are based in California." Maviglio said Monday that he=20 requested on May 31 to purchase the stock if it dipped to $40 a share, whic= h=20 it did two days after a June 18 ruling by federal energy regulators=20 restricting wholesale electricity prices in California and 10 other states.= =20 Maviglio served as Davis' chief spokesman urging the Federal Energy=20 Regulatory Commission to impose price ceilings on electricity wholesalers. = =20 He also said he owns between $10,000 and $100,000 stock in Houston-based=20 Enron Corp. He said he purchased the stock in 1997 and has reported it on= =20 financial disclosure forms. He said that it is "closer to $10,000." =20 Meanwhile, two energy consultants to Davis have agreed to forgo more than= =20 $50,000 in work they did for the state. Chris Lehane and Mark Fabiani will= =20 forgo the payments as part of a settlement with a Sacramento-area resident= =20 who filed a lawsuit objecting to their hiring, calling it a conflict of=20 interest. Fabiani could not be reached for comment Monday. In the=20 settlement, they admitted no wrongdoing. Lehane issued a statement through= =20 the governor's office, calling it "simply not worth the bother to challenge= =20 the controller in court." Davis has come under fire for his May hiring of= =20 Lehane, former press secretary for Vice President Al Gore, and Fabiani, a= =20 deputy campaign manager for Gore's presidential run. They were hired to he= lp=20 shape Davis' response to the energy crisis, and helped craft Davis'=20 aggressive attack on Texas-based energy companies and President Bush. Both= =20 also have advised Southern California Edison, which is negotiating for stat= e=20 help in avoiding bankruptcy. Financial disclosure forms showed they have ea= ch=20 received at least $10,000 from Edison in the past year. Davis announced at= =20 the end of June that Fabiani terminated his contract, and Davis scaled back= =20 Lehane's role with the state. State Controller Kathleen Connell then said= =20 she would not pay Lehane and Fabiani for any of their work and now the two= =20 have agreed they will not fight her decision, Maviglio said. Lewis K. Uhle= r,=20 the Placer County man who filed the lawsuit, said the settlement=20 "accomplished our objectives." "We wanted to block the egregious use of=20 taxpayer funds for essentially political spinmeisters," he said. Uhler is= =20 president of the Roseville-based National Tax Limitation Committee. Mavigl= io=20 said that Fabiani and Lehane "did good work for the state" and helped the= =20 state win victories with federal regulators.=20 THE STATE Davis' Energy Advisors Draw SEC Attention Probe: Under review is the possible use of inside information to buy power= =20 company stocks. GOP rival of governor requested the inquiry. By WALTER HAMILTON JEFFERY L. RABIN and DARYL KELLEY TIMES STAFF WRITERS July 31 2001 The Securities and Exchange Commission has launched a preliminary inquiry= =20 into whether energy consultants advising Gov. Gray Davis used inside=20 information to trade stocks of power companies doing business with the stat= e,=20 a source with knowledge of the matter said Monday. The federal agency began its review late last week, the source said, in=20 response to a request from California Secretary of State Bill Jones. A=20 Republican rival of Davis, Jones charged that stock trading by consultants= =20 may have violated federal laws barring buying and selling based on=20 information not available to the public. On Friday, top aides to the governor disclosed that five consultants had be= en=20 fired for possible conflicts of interest between their official positions a= nd=20 their personal finances. As news of the SEC inquiry spread through the=20 capital Monday, Davis officials were confronted by a flurry of questions=20 about who in the administration owns energy stocks. Financial disclosure records filed by the governor's spokesman, Steve=20 Maviglio, show that he owns between $10,000 and $100,000 in a Texas company= =20 he and his boss have accused of making "obscene" profits while California h= as=20 been "on its knees." Maviglio said he bought the shares in Houston-based=20 Enron Corp. in 1996. "It's not a crime to own energy stock," Maviglio said. He also owns 300 shares of San Jose-based Calpine Corp., which has the=20 largest share of the $43 billion in long-term state power contracts. Maviglio placed the order for the stock on May 31, one day after San Jose's= =20 mayor dropped his opposition to a controversial Calpine plant favored by th= e=20 governor and others. Under the terms of Maviglio's purchase, the transactio= n=20 was completed about three weeks later when the stock reached $40 a share, a= =20 value of $12,000. It has since fallen in value. "I viewed it as a good long-term investment," Maviglio said, adding that he= =20 purchased the shares for his retirement account based on publicly available= =20 information. The Davis administration has spared Calpine the kind of fierce criticisms= =20 that it has leveled at other electricity suppliers, such as Enron. But=20 California's grid operator has identified the company as one of many energy= =20 merchants to overcharge the state millions of dollars. The fired consultants also owned shares in Calpine, ranging in value from= =20 several thousand dollars to more than $100,000, records show. Another top Davis administration official, legal affairs secretary Barry=20 Goode, disclosed in his economic interest statement that he recently held= =20 between $100,000 and $1 million in another out-of-state company accused of= =20 multimillion-dollar price gouging. In a statement, Goode said he sold his stock in Williams Co's. a month afte= r=20 he began working for the governor in February. Goode said the shares were= =20 supposed to be sold before he went on the state payroll, but his broker=20 failed to do so. In light of the recent disclosures, Secretary of State Jones said the=20 governor must do more to ensure the public that its interest comes first. "The governor should direct all of his staff to immediately file updated=20 conflict of interest statements that reflect current holdings and any=20 activity since their last statement of economic interest was filed," said= =20 Jones, who is seeking the GOP nomination for governor. Word of the SEC's entry into California's energy problems comes as the=20 governor faces harsh criticism from lawmakers and others for the quick and= =20 broad hiring of highly paid private consultants to guide him through the=20 crisis. In his written request to the SEC, Jones said that recently filed disclosur= e=20 documents showed that at least one consultant bought and sold shares of two= =20 energy companies within the same month, raising "a red flag" about the=20 possibility of insider trading. State law prohibits officials from participating in decisions involving the= ir=20 personal financial interests. The five consultants fired last week were among 11 named in Jones' letter,= =20 delivered to the San Francisco office of the SEC last Wednesday. It was not= =20 clear which individuals are the focus of the SEC's inquiry, or whether the= =20 agency's review would result in any charges. Two of the former traders said Monday that they had not been contacted by= =20 federal investigators and knew nothing of an inquiry into possible insider= =20 trading. But William Mead, fired Thursday, said it is no mystery why so many of his= =20 colleagues owned Calpine stock. Mead said he bought it 2 1/2 years ago and made so much money he recommende= d=20 it to his colleagues last year, while they all still worked for the=20 now-defunct California Power Exchange in Alhambra. Calpine power was not=20 traded on that exchange, so there was no conflict of interest, he said. Mead and three other energy traders--hired by the state in February and=20 March--were terminated by the Davis administration for allegedly buying pow= er=20 for the state from Calpine while owning the company's stock. Fired traders= =20 Herman Leung, Peggy Cheng and Constantine Louie did not list the date of=20 their Calpine purchases on financial statements that the state required to = be=20 filed only two weeks ago. "But I'm sure they bought it while they were still at the power exchange,= =20 because that's when we discussed it," Mead said. "It was kind of like a=20 hobby. I'm sure it wasn't done with the intent to manipulate." Former trader Elaine Griffin, who also owned Calpine stock and resigned two= =20 weeks ago to take another job, said she didn't know she owned energy=20 securities until she checked with her financial advisor July 13, just befor= e=20 leaving her state job. Griffin said she and her husband own about $10,000 worth of Calpine stock i= n=20 individual retirement accounts managed by their advisor, who bought the sto= ck=20 Feb. 1 without their knowledge, she said, after research found it to be a= =20 good investment. "I kind of feel like we've been used for political reasons," Griffin said.= =20 "We would have disclosed anything right at first, but they never asked." As a trader, Griffin said she occasionally bought Calpine power for the=20 state, but only at market prices. Meanwhile, two Democratic political consultants, who helped Davis polish hi= s=20 image after the ongoing energy crisis caused his poll numbers to plummet,= =20 have agreed to accept no payment for their work as part of an out-of-court= =20 settlement of a taxpayer lawsuit. Tom Hiltachk, a lawyer for conservative anti-tax activist Lewis Uhler, said= =20 the settlement was reached last Friday after negotiations with lawyers for= =20 communications consultants Mark Fabiani and Chris Lehane. "Now they will not receive one red cent," said Hiltachk. "Very simply Mr.= =20 Fabiani and Mr. Lehane have agreed to cease all activities for the governor= ,=20 to accept no payments for their services and to basically get out of the=20 consulting business with the governor." As his part of the agreement, Hiltachk said, Uhler withdrew his lawsuit=20 Monday morning. Uhler had filed a lawsuit against the two consultants and Controller Kathle= en=20 Connell in June contending that they should not receive any payments becaus= e=20 of a conflict of interest. The two men also did consulting work for=20 financially troubled Southern California Edison, which was seeking help fro= m=20 Davis and the Legislature. Connell, a former Los Angeles mayoral candidate who has been at odds with= =20 Davis since he endorsed an opponent, had held up the payments pending the= =20 outcome of the lawsuit. Under an agreement with Davis, the men were to have been paid $30,000 a mon= th=20 for six months. Fabiani and Lehane could not be reached for comment. * Times staff writers Nancy Vogel and Virginia Ellis in Sacramento and Robert= =20 J. Lopez in Los Angeles contributed to this story.=20 Copyright 2001, Los Angeles Times =20 California governor's press secretary confirms buying energy company stock= =20 ALEXA HAUSSLER, Associated Press Writer Tuesday, July 31, 2001=20 ,2001 Associated Press=20 URL: < http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2001/07/31/n= ation al1023EDT0543.DTL> (07-31) 07:23 PDT SACRAMENTO, Calif. (AP) --=20 Gov. Gray Davis' press secretary says he owns stock in the same energy=20 company as five state consultants who were fired because of possible confli= ct=20 of interest.=20 Steve Maviglio confirmed Monday that on June 20 he bought 300 shares of sto= ck=20 in Calpine Corp., a San Jose-based power generator that has received about= =20 $13 billion in state contracts to supply electricity for up to 20 years.=20 Secretary of State Bill Jones called for Maviglio's termination. Jones is a= =20 candidate for the GOP nomination to challenge Davis in November 2002.=20 The five energy consultants were fired last week because they owned shares = in=20 Calpine and also had helped the state buy electricity from the company. "We= =20 did not want them making governmental decisions and holding these stocks,"= =20 said Barry Goode, the governor's legal affairs secretary.=20 An anonymous source told the Los Angeles Times on Monday that the Securitie= s=20 and Exchange Commission has launched a preliminary inquiry into whether the= =20 consultants used inside information to trade energy stocks.=20 Maviglio defended his investment, saying that he "owns several stocks in=20 companies in all fields that are growing and are based in California."=20 He said he had arranged to buy Calpine stock if it dipped to $40 a share,= =20 which it did two days after a June 18 ruling by federal energy regulators= =20 restricting wholesale electricity prices in California and 10 other states.= =20 Calpine stock closed Monday at $37.13.=20 Maviglio had served as Davis' chief spokesman urging the Federal Energy=20 Regulatory Commission to impose price ceilings on electricity wholesalers.= =20 He also said he owns stock worth $10,000 to $100,000 in Houston-based Enron= =20 Corp., the nation's largest power wholesaler. He said he bought the stock i= n=20 1997 and has reported it on financial disclosure forms. He said his holding= =20 is "closer to $10,000."=20 ,2001 Associated Press=20 PG&E's $500,000,000 second-quarter surprise=20 Verne Kopytoff, Chronicle Staff Writer Tuesday, July 31, 2001=20 ,2001 San Francisco Chronicle =20 URL: < http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2001/07= /31/B U213760.DTL> PG&E Corp. said yesterday that it will earn $500 million to $600 million mo= re=20 than anticipated in the second quarter because its bankrupt utility was abl= e=20 to buy cheaper electricity in March as wholesale prices dropped.=20 As a consequence, PG&E reduced the amount of money it says the utility,=20 Pacific Gas and Electric Co., lost during California's energy crisis from= =20 $5.2 billion to between $4.6 billion and $4.7 billion.=20 "Its a good thing for PG&E," said Paul Fremont, an energy industry analyst= =20 with Jefferies & Co., an investment bank in New York. "But it clearly does= =20 not get them to the level where they are able to emerge from bankruptcy and= =20 make all of their creditors whole."=20 The disclosure by PG&E Corp. yesterday adds a modest boost to its quarterly= =20 earnings report, set for tomorrow morning. The company is expected to repor= t=20 an operating profit of 71 cents per share, according to analysts polled by= =20 Thomson Financial/First Call, an investment research firm.=20 PG&E Corp. is the owner of Pacific Gas & Electric Co., which filed for=20 Chapter 11 bankruptcy protection in April after electricity prices soared= =20 this year. The utility had previously estimated that it lost $1.1 billion i= n=20 the first quarter and $4.1 billion in the fourth because it was prohibited = by=20 the state Public Utilities Commission from passing higher costs on to=20 consumers.=20 PG&E Corp. also includes a energy producing unit, which generally makes=20 money, and a venture capital arm. Neither of those divisions is affected by= =20 the utility's bankruptcy.=20 The utility said it got a small break in March as the price it was paying t= o=20 the California Independent System Operator for energy declined sharply. The= =20 unanticipated drop was attributed to declining demand because of energy=20 conservation, low tempera-=20 tures and the opening of new power plants in the state.=20 The utility also benefited from the cancellation of power contracts by=20 companies that did not want to do business with a bankrupt partner. Those= =20 contracts were for selling power at below cost.=20 What is the utility's gain, though, may be a negative for PG&E's power-=20 producing division. The lower prices could mean the energy-producing group= =20 will make less money from its sales, analysts said.=20 E-mail Verne Kopytoff at vkopytoff@sfchronicle.com=20 .=20 ,2001 San Francisco Chronicle Page E - 1=20 Power and 'juice'=20 Tuesday, July 31, 2001=20 ,2001 San Francisco Chronicle =20 URL: < http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2001/07= /31/E D133454.DTL> GOV. GRAY DAVIS seems to have an ethical blind spot when it comes to the=20 hiring of outsiders to help manage California's energy crisis.=20 Throughout the crisis, Davis has been intolerably slow in responding to=20 questions about whether certain members of his inner circle -- drawing big= =20 checks off the public payroll -- might have possible financial conflicts.= =20 As of yesterday, the governor's office still has not required 16 contractor= s=20 to file public disclosure documents that would reveal whether they have any= =20 financial stake in companies affected by policies they help develop.=20 Steve Maviglio, the governor's press secretary, said 42 energy "consultants= "=20 have filed their economic disclosure statements. But he said the other 16= =20 were "contractors" -- without actual decisionmaking authority -- and were= =20 thus not required to fill out the forms.=20 Maviglio's "contractor versus consultant" distinctions are technical and=20 semantic. His spin simply doesn't wash.=20 The bottom line is that "contractors" who are making big decisions involvin= g=20 big dollars for the state are not playing by the same rules as others in th= e=20 public trust.=20 For example, Davis has exempted two Wall Street executives, Joseph Fichera= =20 and Michael Hoffman, who are putting together a rescue plan that involves a= =20 $12.5 billion bond issue. They are getting $275,000 a month for their advic= e.=20 Yet they have not been required to fill out disclosure forms, which would= =20 allow the governor -- and any other Californian -- to assess whether a=20 potential conflict exists.=20 "They told us they don't have any conflicts," said Maviglio, who,=20 incidentally, confirmed yesterday that in June he bought $12,000 worth of= =20 stock in the Calpine Corp., the generating company with the largest chunk o= f=20 state power contracts. On July 2, Davis publicly praised Calpine as "the mo= st=20 responsible of the generators."=20 Davis should have finally learned his lesson last week after having to fire= =20 five consultants -- all involved in energy trading -- when their belatedly= =20 filed disclosure forms showed serious potential conflicts. A sixth consulta= nt=20 quit. Four of those traders owned Calpine shares.=20 A week earlier, the Davis administration was forced to order a group of=20 consultants to hastily unload their power-company holdings or lose their=20 contracts.=20 The governor's office also has been stung by revelations that political=20 consultants Chris Lehane and Mark Fabiani, hired at $30,000 a month to=20 develop energy-related "communications strategies," also had a contract wit= h=20 Southern California Edison.=20 Moreover, some of the disclosure forms that have been filed to date have be= en=20 less than complete, especially regarding the timing of the buying and selli= ng=20 of energy stocks.=20 How many scandals will it take for Davis to insist on full disclosure -- an= d=20 the highest ethical standards -- of everyone who is working for him on the= =20 energy crisis?=20 ,2001 San Francisco Chronicle Page A - 16=20 S.F. to vote on electric power to the people=20 Measures would start public utility districts=20 Rachel Gordon, Chronicle Staff Writer Tuesday, July 31, 2001=20 ,2001 San Francisco Chronicle =20 URL: < http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2001/07= /31/M NW145417.DTL> San Francisco -- After decades of trying to persuade San Francisco to take= =20 control of its electrical system, advocates of public power now have the=20 issue before city voters.=20 "The timing couldn't be better," said consumer advocate Medea Benjamin, co-= =20 director of San Francisco's Global Exchange.=20 "It's not just the threat of blackouts or the highest rate hikes in history= .=20 It's the fact that PG&E is in bankruptcy. It's the depletion of the state= =20 budget," she said. "This is a hell of an opportunity."=20 The opportunity she is talking about centers on two November ballot measure= s=20 that would pave the way for creating a public power system and taking Pacif= ic=20 Gas and Electric Co. out of the city's electricity market.=20 Under the proposed measures, an elected board of directors would set the=20 rates and have control over everything from the terms for buying electricit= y=20 to whether to use more renewable energy sources, such as wind, hydroelectri= c=20 and solar power.=20 Public power would base policies "on a more localized basis, where the valu= es=20 of an individual community can be put into practice," said Ed Smeloff, a=20 longtime public power advocate who was recently hired as an assistant gener= al=20 manager at the San Francisco Public Utilities Commission.=20 One proposal, an initiative placed on the ballot by residents, calls for=20 setting up a municipal utility district in San Francisco and neighboring=20 Brisbane. The district would be governed by an elected board of directors.= =20 The other measure, placed on the ballot last week by the Board of=20 Supervisors, would create a municipal water and power agency and would affe= ct=20 only San Francisco.=20 PG&E has mounted a campaign to defeat the measures, so far pumping more tha= n=20 $200,000 into the effort.=20 "We think the (ballot proposals) are a bad idea," said Frank Gallagher,=20 spokesman for the Coalition for Affordable Public Services, the PG&E-financ= ed=20 group fighting the measures. "They're confusing and do nothing to address t= he=20 problem."=20 The company has a history of opposing public power proposals, derailing a= =20 plan in Davis in the 1990s and using a legal challenge to stall the start o= f=20 Sacramento's Municipal Utility District for two decades.=20 For years, private utilities have enjoyed a powerful hold on state and loca= l=20 politicians. But the energy crisis has caused widespread public anger and= =20 concern, forcing city and state officials to take another look at public=20 power.=20 A poll conducted this month by the Public Policy Institute of California, a= =20 nonpartisan think tank in San Francisco, found that nearly two-thirds of=20 Californians support the replacement of private electric companies with=20 municipal power authorities formed by local governments.=20 San Francisco already owns a power system, Hetch Hetchy, which provides pow= er=20 for city departments. PG&E provides power to residents and businesses.=20 The San Francisco Charter amendment placed on the ballot by the supervisors= =20 calls for abolishing the city's existing Public Utilities Commission, which= =20 is run by commissioners and a director appointed by the mayor. The proposed= =20 public power board would have seven elected directors, but the agency still= =20 would retain some ties to City Hall.=20 The supervisors' plan is intended to be used as a backup to the municipal= =20 utility district -- commonly known as a MUD -- which is considered to be mo= re=20 vulnerable to the expected legal challenges from PG&E.=20 "It's a great marriage, and will ensure that we get public power in San=20 Francisco," said Board of Supervisors President Tom Ammiano, chief sponsor = of=20 the board's measure.=20 San Francisco is not alone in looking at public power. San Diego, the first= =20 city to feel the hard pinch of the energy crisis, wants to establish a=20 regional public power system in an attempt to pool resources and bring down= =20 energy costs.=20 The East Bay Municipal Utility District, which provides water and sewer=20 service, is considering expanding its reach to power. In the Bay Area, the= =20 cities of Alameda and Palo Alto already have public power. The two largest= =20 public power agencies in the state serve Los Angeles and Sacramento.=20 In San Francisco, the pro-public power forces are going to tout the promise= d=20 virtues of turning the electric utility over to a public authority that by= =20 law cannot turn a profit. That, they contend, means lower rates.=20 "It's an expectation, but it's also tried and true," said Ross Mirkarimi,= =20 campaign director of MUD Now, the group sponsoring the ballot initiative.= =20 On average, consumers pay 18 percent less for power from public utilities, = he=20 said.=20 Gallagher, spokesman for the opposition campaign, said ratepayers shouldn't= =20 assume that public power means lower energy bills. "There's no way the rate= s=20 are going down," he said.=20 He blamed the energy crisis not on deregulation but on a shortage of=20 electricity, which jacked up prices and undercut reliability.=20 "The measures do nothing about supply," Gallagher said. "All this will do i= s=20 cost people money. You can't just take PG&E's assets. You have to pay for= =20 them."=20 E-mail Rachel Gordon at rgordon@sfchronicle.com=20 .=20 ,2001 San Francisco Chronicle Page A - 11=20 Davis' advisers probed by SEC=20 Published Tuesday, July 31, 2001, in the San Jose Mercury News=20 BY WALTER HAMILTON, JEFFERY L. RABIN AND DARYL KELLEY=20 Los Angeles Times=20 The Securities and Exchange Commission has launched a preliminary inquiry= =20 into whether energy consultants advising California Gov. Gray Davis used=20 inside information to trade stocks of power companies doing business with t= he=20 state, a source with knowledge of the matter said Monday.=20 The federal agency began its review late last week, the source said, in=20 response to a request from California Secretary of State Bill Jones, who is= =20 seeking the GOP nomination for governor. Jones charged that stock trading b= y=20 consultants may have violated federal laws barring buying and selling based= =20 on information not available to the public.=20 On Friday, top aides to the governor disclosed that five consultants had be= en=20 fired for possible conflicts of interest between their official positions a= nd=20 their personal finances.=20 In addition, financial disclosure records filed by the governor's spokesman= ,=20 Steve Maviglio, show that he owns between $10,000 and $100,000 in a Texas= =20 company he and his boss have accused of making ``obscene'' profits while=20 California has been ``on its knees.'' Maviglio said he bought the shares in= =20 Houston-based Enron Corp. in 1996.=20 ``It's not a crime to own energy stock,'' Maviglio said.=20 Calpine purchase=20 He also owns 300 shares of San Jose-based Calpine Corp., which has the=20 largest share of the $43 billion in long-term state power contracts.=20 Maviglio placed an order for the stock with an electronic broker May 31, on= e=20 day after San Jose Mayor Ron Gonzales dropped his opposition to a=20 controversial Calpine plant under pressure from the governor and others.=20 Under the terms of Maviglio's instructions, the stock was automatically=20 purchased on his behalf when Calpine fell to $40 a share, according Hilary= =20 McLean, a spokeswoman for the governor. It has since fallen in value.=20 ``I viewed it as a good long-term investment,'' Maviglio said, adding that = he=20 purchased the shares for his retirement account based on publicly available= =20 information.=20 The Davis administration has spared Calpine the kind of fierce criticisms i= t=20 has leveled at other electricity suppliers, such as Enron. But California's= =20 grid operator has identified the company as one of many energy merchants to= =20 overcharge the state millions of dollars.=20 The fired consultants also owned shares in Calpine, ranging in value from= =20 several thousand dollars to more than $100,000, records show.=20 Another top Davis administration official, legal affairs secretary Barry=20 Goode, disclosed in his economic interest statement that he recently held= =20 between $100,000 and $1 million in another out-of-state company accused of= =20 multimillion-dollar price gouging.=20 In a statement, Goode said he sold his stock in Williams Co's. a month afte= r=20 he began working for the governor in February. Goode said the shares were= =20 supposed to be sold before he went on the state payroll but his broker fail= ed=20 to do so.=20 In light of the recent disclosures, the secretary of state said the governo= r=20 must do more to assure the public that its interest comes first.=20 ``The governor should direct all of his staff to immediately file updated= =20 conflict of interest statements that reflect current holdings and any=20 activity since their last statement of economic interest was filed,'' Jones= =20 said.=20 Word of the SEC's entry into California's energy problems comes as the=20 governor faces harsh criticism from lawmakers and others for the quick and= =20 broad hiring of highly paid private consultants to guide him through the=20 crisis.=20 In his written request to the SEC, Jones said that recently filed disclosur= e=20 documents showed that at least one consultant bought and sold shares of two= =20 energy companies within the same month, raising ``a red flag'' about the=20 possibility of insider trading.=20 State law prohibits officials from participating in decisions involving the= ir=20 personal financial interests.=20 The five consultants fired last week were among 11 named in Jones' letter,= =20 delivered to the San Francisco office of the SEC last Wednesday. It was not= =20 clear which individuals are the focus of the SEC's inquiry, or whether the= =20 agency's review would result in any charges.=20 Two of the former traders said Monday that they had not been contacted by= =20 federal investigators and knew nothing of an inquiry into possible insider= =20 trading.=20 But William Mead, fired Thursday, said it's no mystery why so many of his= =20 colleagues owned Calpine stock.=20 Mead said he bought it 2 1/2 years ago and made so much money he recommende= d=20 it to his colleagues last year, while they all still worked for the=20 now-defunct California Power Exchange in Alhambra. Calpine was not traded o= n=20 that exchange, so there was no conflict of interest, he said.=20 Traders fired=20 Mead and three other energy traders -- hired by the state in February and= =20 March -- were terminated by the Davis administration for allegedly buying= =20 power from Calpine while owning the company's stock. Fired traders Herman= =20 Leung, Peggy Cheng and Constantine Louie did not list the date of their=20 Calpine purchases on financial statements that the state required to be fil= ed=20 only two weeks ago.=20 ``But I'm sure they bought it while they were still at the power exchange,= =20 because that's when we discussed it,'' Mead said. ``It was kind of like a= =20 hobby. I'm sure it wasn't done with the intent to manipulate.'' Mercury News Staff Writer Noam Levey contributed to this report.=20 Ethics issue in stock buy?=20 A top Davis aide bought shares in a power company dealing with the state.= =20 July 31, 2001=20 By JOHN HOWARD The Orange County Register=20 SACRAMENTO A top aide to Gov. Gray Davis bought stock in a power company th= at=20 received a long-term contract with the state, the latest in a series of=20 energy investments that have cast an ethical cloud over the state's=20 electricity purchases.=20 Steven Maviglio, Davis' press secretary and acting communications director,= =20 ordered through his broker 300 shares of San Jose-based Calpine Corp. stock= =20 May 31, to take effect when it dropped to $40 per share. It dropped below= =20 that June 20 and Maviglio purchased $12,000 worth, he said.=20 Two days earlier, federal regulators had placed a cap on what Calpine and= =20 other energy producers could charge for energy -- a cap Maviglio had touted= =20 on behalf of Davis.=20 Monday's disclosure of Maviglio's transaction comes just days after Davis= =20 fired five consultants who were purchasing energy for the state from a=20 company whose stock they owned. At the time, Maviglio said it "appeared to = us=20 there was a possible violation of the law, or very close to it."=20 He said his own situation was different, "because they (the five) were=20 committing state resources and timing their purchases." The disclosure of h= is=20 transaction, he said, was "clearly a political smear by a desperate=20 candidate," referring to Secretary of State Bill Jones, a Republican=20 gubernatorial hopeful and rival of Davis.=20 Jones said Maviglio "should be fired immediately" and that Davis should ord= er=20 all of his staff to immediately file updated conflict-of-interest statement= s=20 to reflect current holdings.=20 Maviglio said he would sell the Calpine stock - which closed at $37.13 a=20 share Monday - if requested by Davis' legal staff. He said he spoke with=20 those lawyers Monday and they had not made that request, nor had he been=20 asked to resign.=20 A Davis aide, Hilary McLean, said, "Absolutely, the governor has confidence= =20 in Steve." Aide denies stock deal was improper=20 Maviglio says the June 20 purchase, submitted online, was in the hands of= =20 others.=20 July 31, 2001=20 By JOHN HOWARD The Orange County Register=20 SACRAMENTO The governor's chief spokesman denies he committed any improprie= ty=20 by buying Calpine Corp. stock June 20, saying the purchase was actually in= =20 the hands of others.=20 Steven Maviglio said he submitted on May 31 a purchase order through his=20 online brokerage to buy 300 shares of Calpine, a San Jose-based power=20 generator that has a long-term energy contract with the state.=20 "It could have happened an hour after later (after the purchase order), a= =20 month later or five years later," he said. "Or never."=20 But Sherry Bebitch Jeffe, a political scientist at Clare mont Graduate=20 University, questioned the wisdom of Maviglio's stock transaction.=20 "What I find puzzling is that he moved to change the dynamic of his stock i= n=20 the middle of this energy problem, in the middle of the governor's attacks= =20 and the governor's negotiations," she said. "There ought to have been an=20 understanding that even if not illegal, there should have been a perception= =20 that he shouldn't be involved in playing with stocks."=20 The disclosure of the transaction couldn't have come at a worse time for th= e=20 administration, or Maviglio: On Friday, five state energy consultants with= =20 stock-firm stock were summarily fired and a state lawyer was reassigned to= =20 another job. Another consultant with similar investments quit July 14 to ta= ke=20 a private job.=20 All were involved in the energy-purchasing program that was launched under = an=20 emergency order Jan. 17, in which the state began buying power on behalf of= =20 the strapped utilities, which did not credit to purchase power on their own= .=20 Dozens of people were directly involved in the energy purchases.=20 Earlier in the day Monday, in a separate issue, the governor's office=20 disclosed that two key consultants who had been hired to help Davis with hi= s=20 public relations had decided to forgo $50,000 in contract fees as part of a= =20 legal settlement with Davis' critics.=20 The two consultants, Chris Lehane and Mark Fabiani, both veterans of the=20 Clinton-Gore White House and political campaigns, had been hired in May und= er=20 a $30,000-a month state contract.=20 Republicans complained that Davis was using state money to finance politica= l=20 operatives. Fabiani left the payroll earlier under pressure; Lehane left th= is=20 month. Power firms amp up lobbying=20 Politics: Edison spends $5.5 million to gain support for bailout to prevent= =20 bankruptcy.=20 July 31, 2001=20 By KIMBERLY KINDY and HANH KIM QUACH The Orange County Register=20 SACRAMENTO Edison International has spent more than $5.5 million this year = to=20 enlist residents and stockholders to lobby the Legislature to bail out its= =20 subsidiary Southern California Edison and save it from bankruptcy, reports= =20 released Monday show.=20 The latest financial disclosure statements show that energy companies=20 continue to spend millions of dollars to influence the Legislature. Meals,= =20 campaign contributions and tickets to sporting events continue to flow to= =20 lawmakers and their staffs.=20 Overall, the amount spent on direct lobbying of the Legislature rose slight= ly=20 over last quarter, but gifts and contributions to candidates continued to= =20 fall. The deadline for statements is today, but many companies and candidat= es=20 filed early.=20 Edison's $5.5 million is so far the largest expenditure directed toward an= =20 orchestrated campaign to influence Capitol politicians. Spokesman Brian=20 Bennett said Edison spent the money on television commercials to reach all= =20 Californians and on a telephone appeal directly to stockholders.=20 "This was to educate the public about the dangers of bankruptcy to the=20 state's economy and to solicit their support in conveying a message to the= =20 Legislature that bankruptcy is not an option for the Edison company," Benne= tt=20 said.=20 The telephone work involved telling stockholders that the company's value= =20 would drop if lawmakers did not support a bill to save Edison. Then they=20 offered to directly connect the stockholders to lawmakers' offices, asking= =20 that they tell the lawmakers directly to support the bailout.=20 Consumer advocate Doug Heller said Edison's spending - which totaled $5.7= =20 million for the three-month reporting period and jumped from $318,802 from= =20 the prior quarter - is out of line.=20 "It's amazing that a company teetering on the edge of bankruptcy has millio= ns=20 of dollars to throw around to politicians and to create phony grass-roots= =20 campaigns to influence legislators," said Heller, of the Foundation for=20 Taxpayer and Consumer Rights.=20 Edison said no contributions were made directly to anyone running for offic= e=20 or re-election for this quarter.=20 In all, lawmakers sitting on energy committees and who had reported by Mond= ay=20 night accepted nearly $61,000 from energy-related companies.=20 As of late Monday, Assemblyman Dean Florez, D-Shafter, who sits on the=20 Assembly Energy Committee, had received the largest contribution from energ= y=20 companies this quarter, $21,000.=20 Seven of the largest power producers that sell electricity to the state spe= nt=20 a total of $546,488 on lobbying and other efforts to influence the=20 Legislature.=20 Topping the list was Calpine Corp., which spent $141,204. Duke Energy came = in=20 second at $99,735.44 - a $20,000 leap over the prior quarter. Most of Duke'= s=20 money was spent on consultants who worked overtime building a defense for t= he=20 company against accusations of price gouging made by former employees.=20 "Overall, our consultants spent more time setting the record straight again= st=20 some blatantly false and misleading statements, regarding our rates and pla= nt=20 operations, which the state's own documents proved were false," said Duke= =20 spokesman Pat Mullen. Some lawmakers and energy experts say the state=20 documents do not clear Duke of wrongdoing, and the accusations are still=20 being investigated by a Senate committee. Gouger Gray Davis=20 California's petulant governor ignores reality as he overpays for electrici= ty LANCE T. IZUMI Mr. Izumi is a senior fellow in California Studies at the Sa= n=20 Francisco- based Pacific Research Institute. On the surface, things seem to be going pretty good for Gov. Gray Davis wit= h=20 regard to California's electricity crisis. The governor has scored some nic= e=20 publicity by switching on some new power plants. The weather has been=20 unseasonably cool. His poll numbers are edging back up. Yet beneath this=20 optimistic picture lie troubling problems. For example, Davis's argument th= at=20 out-of-state power generators are responsible for the electricity crisis ha= s=20 been falling apart. For months, Davis has been claiming that private=20 generators have overcharged California by $8.9 billion and demanded that th= is=20 amount be refunded to the state. However, after a two-week mediation betwee= n=20 state officials and the generators, Curtis Wagner, the federal government's= =20 chief energy regulatory judge, rebuked Davis's claim saying that such a hug= e=20 overcharge "has not and cannot be substantiated." Further, while the=20 generators may be liable to refund a much smaller amount to the state,=20 perhaps $1 billion, Wagner said that generators are owed more money by the= =20 state than they owe the state in refunds: "Can a cash refund be required=20 where a much larger amount is due the seller? The chief judge thinks not."= =20 Davis reacted to the judge's ruling by calling it a "raw deal" and by urgin= g=20 the Federal Energy Regulatory Commission to ignore the lack of evidence and= =20 the judge's conclusions and to "step up and provide the refunds we've asked= =20 for." Davis's position, as usual, is motivated purely by politics. Indeed,= =20 Dan Walters of the Sacramento Bee says that Davis is operating in a=20 "melodramatic virtual world" de-linked from reality.=20 Davis's blame-the-generators argument took another body blow when newly=20 released documents showed that, on average, major out-of-state power=20 companies such as Enron, Duke, Dynergy and Mirant charged less than the=20 average prices paid by the state during the first three months of the year.= =20 California government utilities, on the other hand, such as the Los Angeles= =20 Department of Water and Power and the Sacramento Municipal Utility District= =20 (SMUD), charged the state much more for electricity than the out-of-state= =20 generators. For example, while Texas-based Enron, a favorite Davis whipping= =20 boy, charged an average $181 per megawatt hour, SMUD charged an average $33= 0=20 per megawatt hour.=20 Davis responded to this revelation in typical political fashion. A Davis=20 spokesman said that the governor had expressed his anger at "the generators= =20 who wear cowboy hats" and that "just because there are other entities that= =20 are charging us more doesn't change the fact that we are getting ripped off= =20 by companies from Houston, Tulsa, Atlanta or Charlotte."=20 Yet, for all Davis' feigned indignation about consumers being ripped off, i= t=20 turns out that he and his regulators are poised to ensure that business=20 consumers are ripped off by state government. Davis has signed $43 billion = in=20 ill-advised long-term purchase contracts at rates above-market-price. The= =20 state must, therefore, ensure that enough business customers remain in the= =20 current state-controlled distribution system to pay for high-priced state= =20 power purchases. This is especially important to Davis since the high price= s=20 are borne disproportionately by business. Thus, Davis' regulators are set t= o=20 eliminate "direct access," which allows businesses to shop for cheaper powe= r.=20 Who's the real gouger? No matter how much Davis points the finger,=20 Californians are paying dearly for his political opportunism and bad=20 policies.=20 Turning Coal into a tradable commodity By Rick Stouffer rstouffer@ftenergy.com With the California power debacle offering a neck-snapping jolt, a number o= f=20 states have determined they must offer more than lip service to ensure that= =20 residents and businesses have enough power to function. While deregulation's brakes may have been applied in some locales, it doesn= 't=20 mean that development incentives likewise have been scaled back.=20 "There is no question that California was the wake-up call for these states= ,"=20 said Craig Goodman, president of the National Energy Marketers Association.= =20 Midwest a hotbed for incentives Many of the states that have already passed legislation to entice new plant= =20 development are located in the Midwest, an area that, while not yet sufferi= ng=20 from a lack of power, slowly, inexorably is heading in that direction.=20 "Iowa, Illinois and Ohio are located in ECAR (the East Central Area of the= =20 North American Electric Reliability Council, or NERC), which is not yet in = a=20 crisis situation when it comes to sufficient power, but is only a year or t= wo=20 away from that crisis," said Robert Burns, senior research associate with t= he=20 National Regulatory Research Institute at Ohio State University in Columbus= ,=20 Ohio.=20 In its latest self-assessment presented as part of NERC's most recent 10-ye= ar=20 projection, 2000-2009, ECAR said that if 10,400 MW of new capacity is not= =20 added within ECAR as planned, capacity margins within the region will go=20 negative in 2005.=20 PPAs a no-no in Iowa No plant of any significant size has been built in Iowa since 1983, but=20 legislators, during a one-day special session in June, put in place what th= ey=20 hope will spur additional development.=20 The Iowa measure allows utilities to see how their costs will be incorporat= ed=20 into rates prior to plant investment, and also permits municipal systems to= =20 band together to finance new facilities.=20 One item the Iowa legislature could not get past a veto that Gov. Tom Vilsa= ck=20 promised was allowing utilities to purchase power via power purchase=20 contracts from unregulated affiliates.=20 The governor said such a measure would lock in profits for utilities and=20 preclude potential rate cuts. Proponents say the governor effectively locke= d=20 out millions of dollars of investment in Iowa by Madison, Wis.-based Allian= t=20 Energy Corp., which reportedly wanted to build as much as 1,200 MW of=20 capacity in Iowa.=20 Wisconsin Energy likes the tune Northeast of Iowa, Wisconsin appears to be heading off a problem nearly all= =20 power plant developers have these days: a bad case of "not in my backyard."= =20 "Even if a state approves a new power supply, you still have to deal with= =20 local siting officials and NIMBYism," said Goodman.=20 One Wisconsin proposal given serious consideration is to double the impact= =20 plants have on shared revenue payments, to $250 million from $125 million.= =20 Changing shared revenue payments to provide additional compensation to loca= l=20 governments that favor plant construction on existing plant sites also has= =20 been introduced in Wisconsin.=20 Wisconsin Gov. Scott McCallum also has proposed lowering the state's gross= =20 receipts tax on wholesale power to 1.59% from the current 3.19%. Many of the proposals floating around the Badger State are music to the ear= s=20 of Wisconsin Energy, which is looking to spend some $7 billion over the nex= t=20 decade to construct five new power plants.=20 Not everyone likes the look of incentive legislation in Iowa, Wisconsin and= =20 other states. Many of the new laws are geared toward assisting incumbent=20 utilities=01*effectively snubbing independent power producers, the IPPs say= .=20 "I would not call many of these incentive packages incentives for merchant= =20 power producers," said Samantha Slater, manager of state and regional affai= rs=20 for the Electric Power Supply Association. "Utilities only building new=20 plants definitely is not the way to go."=20 Big doings in Illinois Perhaps the biggest, most all-encompassing incentive package passed by a=20 state in recent memory isn't specifically about promoting plant development= .=20 Illinois Gov. George H. Ryan in late June signed legislation that provides = up=20 to $3.5 billion in incentives designed, industry watchers say, to preserve= =20 and promote the state's $1 billion coal industry=01*and keep 25,000 coal-re= lated=20 jobs intact. "Illinois in part wanted to protects its coal jobs with this legislation,"= =20 said Paul Cetevich, director of energy services at the Utility Research=20 Center at the University of Florida's Warrington College of Business in=20 Gainesville. "Illinois has been trying to do similar things for a number of= =20 years."=20 The Illinois plan includes sales (6.5%) and utility tax exemptions, along= =20 with an investment tax credit, millions for a financial assistance program= =20 for coal-fired facilities, bond funds set aside to be used for transmission= =20 upgrades and to finance renewable energy projects, even a review by the sta= te=20 Environmental Protection Agency to determine if new regulations concerning= =20 older coal-fired plant emissions are warranted. Highlights of Illinois energy incentive legislation Designates new baseloa= d=20 plants, the mines that fuel them or firms that construct new or upgrade=20 existing transmission lines as so-called high-impact businesses. These=20 businesses are provided sales tax exemptions on building materials and=20 equipment, utility tax exemptions and investment tax credits. (Natural=20 gas-fired plants are only eligible for sales tax exemption.) Creates a $50= 0=20 million financial assistance program for coal-fired plants equal to the=20 amount of general obligation bond funding that can be repaid by coal tax=20 revenues gained on new Illinois coal purchases. Provides up to $1.7 billio= n=20 in revenue bond authorization to provide financing for electric plants=20 generating Illinois coal mining jobs, including mine-mouth plants and plant= s=20 that use clean-coal technology, repayable by the developers. Provides up t= o=20 $300 million in revenue bond authorization designed to spur upgrades to the= =20 transmission grid in Illinois, repayable by the wires' owner. Provides up = to=20 $500 million in revenue bond authorization to finance renewable energy=20 projects, and $500 million for existing coal-fired plants to add scrubbers,= =20 both repayable by the developers. Mandates a review by the Illinois=20 Environmental Protection Agency of the need for new state regulations=20 governing emissions by older coal-fired plants not subject to stricter air= =20 quality restrictions imposed on new units. Creation of additional local=20 options for property tax abatement. In addition, Illinois Gov. George H.= =20 Ryan amended an earlier executive order creating the Governor's Energy=20 Cabinet. Under the revised order, the Energy Cabinet will have responsibili= ty=20 for siting new generation, overseeing implementation of environmental=20 regulations on new plant developers and streamlining the state's permitting= =20 process for new generation.=20 "When the legislative session began in January, you had all the publicity= =20 about California, the price of natural gas had spiked, there was talk of $3= a=20 gallon gasoline, so there were probably three or four versions of coal=20 legislation floating around at one time," said Brian Reardon, a spokesman f= or=20 the Illinois Department of Commerce and Community Affairs.=20 Ryan convened a coal summit in March, took ideas from all invited and put= =20 together what became the state's $3.5 billion incentive package.=20 "I'm very impressed with what Illinois has put in place," the energy=20 marketers' Goodman said. "I'm not aware of any other state with as=20 comprehensive a package."=20 A newly created Governor's Energy Cabinet in Illinois would seem to put=20 NIMBYism to bed, if not totally to rest, by assuming responsibility for=20 siting new generation, overseeing environmental regulation implementation a= nd=20 streamlining state permitting.=20 "We were able to develop a comprehensive strategy that addresses our state'= s=20 energy needs while providing for a long overdue boost to our coal industry,= "=20 Gov. Ryan said in a statement.=20 Looking at the broader picture Illinois is preserving the coal industry, but also looking at the broader= =20 picture, according to the University of Florida's Cetevich. Illinois, and= =20 many other states, have determined that natural gas-fired plants may not be= =20 the saviors the country should rely upon.=20 "I believe the No. 1 overriding factor, while some states are putting=20 incentive packages together, is that the states and public utility=20 commissions have realized that with the numerous natural gas price spikes,= =20 coal is not such a bad option after all."=20 "Having all our eggs in the natural gas basket could be a bad thing," agree= d=20 the National Regulatory Research Institute's Burns. "It cannot have good=20 implications."=20 Debt Pitch: California's Next Test In Electricity Crisis: Selling Power Bonds --- The $12.5 Billion Offering, Crucial to State Finances, Faces Skeptical Investors --- The Risk of Big Budget Cuts=20 By Mitchel Benson and Gregory Zuckerman=20 07/31/2001=20 The Wall Street Journal=20 Page A1=20 (Copyright (c) 2001, Dow Jones & Company, Inc.)=20 SACRAMENTO, Calif. -- For the past seven months, Gov. Gray Davis has begged= ,=20 cajoled and even threatened legislators and regulators, to lay the groundwo= rk=20 for a $12.5 billion bond issue California needs to cover the cost of keepin= g=20 its lights on.=20 Now comes the tough part: persuading investors that the bond is an attracti= ve=20 investment. On that score, Mr. Davis's team, whose credibility has been=20 battered by California's months-long electricity crisis, is hoping to bounc= e=20 back from a rocky start.=20 This week, a delegation headed by state Treasurer Philip Angelides is=20 scheduled to visit Wall Street to pitch the municipal debt offering, which= =20 would be the largest in U.S. history by a factor of nearly four. To succeed= ,=20 Mr. Angelides will have to allay investors' fears of the kind of political= =20 infighting that already has delayed the issue several times. He will have t= o=20 satisfy bond-rating agencies that the bond is safe enough to merit a top-ti= er=20 investment-grade rating. And he'll have to make investors want to buy it=20 without demanding costly inducements that would give California financial= =20 headaches for decades to come.=20 "This isn't building the Panama Canal. It's not Apollo 11," says Mr.=20 Angelides. But, he concedes, the bond sale will be "uniquely challenging."= =20 That is because this giant bond issue won't be backed by the full faith and= =20 credit of the state or by tax dollars -- the types of guarantees public-deb= t=20 investors often prefer. Instead, the bonds, which will have maturities of a= s=20 long as 15 years, are to be paid off by the state's electricity ratepayers= =20 from their monthly bills, which some view as a riskier source of cash flow.= =20 Moreover, there is still a question as to whether the issue's proceeds will= =20 be adequate to repay the bonds, restore the state's financially troubled=20 private utilities to health and finance future electricity purchases.=20 Despite these hurdles, many analysts predict California will eventually=20 succeed in pulling off the bond deal, though at a cost far higher than=20 originally anticipated. In fact, the apparent easing of the state's energy= =20 crunch may make its marketing job a bit less difficult. A recent drop in th= e=20 price of natural gas, which fuels many California power plants, a mild summ= er=20 in the West and a June decision by the Federal Energy Regulatory Commission= =20 to impose electricity price caps in the region have helped avert the rollin= g=20 blackouts that roiled the state earlier this year.=20 Still, the specter of history overhangs the bond offering. Rating agencies= =20 are haunted by having failed to warn investors of such public-finance=20 disasters as the 1983 default of the Washington Public Power Supply System= =20 and the 1994 bankruptcy of Orange County, Calif. Moreover, Moody's Investor= s=20 Service and Standard & Poor's assigned investment-grade ratings as recently= =20 as early January to debt issued by Pacific Gas & Electric Co., just three= =20 months before the California utility sought Chapter 11 bankruptcy-court=20 protection.=20 By the time California hopes to sell its bonds, in October or early Novembe= r,=20 the state's electrical-power purchases are expected to leave it owing a tot= al=20 of about $10 billion to its lenders and its own general fund. If the bond= =20 issue is delayed beyond that, or canceled, or if the offering flops,=20 California could be forced to make billions of dollars in spending cuts,=20 raise taxes or increase electricity rates for the third time in the past ye= ar=20 to pay back what it owes.=20 If the bond sale fails "the state of California will be in deep trouble,"= =20 says Mr. Angelides. "The state general fund must be repaid so money for=20 education, health care and children's services can be safe."=20 California's need for the bonds -- like most of the state's energy woes --= =20 stems from its troubled 1996 electricity-deregulation plan. Under the plan,= =20 the state's investor-owned utilities were obliged to sell many of their pow= er=20 plants to other companies and purchase electricity through a state-sponsore= d=20 power auction. Consumer rates were frozen, but wholesale rates weren't.=20 The system worked fairly well until May 2000, when wholesale rates began=20 soaring amid tight electricity supplies and stronger-than-expected demand.= =20 Last year, the state's cost of wholesale power climbed to $27 billion from = $7=20 billion in 1999. In the first six months of this year, that sum hit $20=20 billion.=20 With retail rates frozen, Pacific Gas & Electric, a unit of PG&E Corp., and= =20 Edison International's Southern California Edison racked up billions of=20 dollars of debts. In January, after power generators stopped doing business= =20 with the utilities, the state began buying power on their behalf. It borrow= ed=20 the money from its general fund, normally used to pay for everything from= =20 public safety and environmental programs to social services and education, = at=20 a pace of more than $1 billion a month.=20 In February, Mr. Davis's allies in the state Legislature helped him pass a= =20 bill authorizing the state to sell bonds to replenish the fund and to=20 continue making power purchases. But legislators cautiously capped the size= =20 of the borrowing, using a complex formula. Under the new law, the formula= =20 would allow only for a bond sale of less than $1 billion.=20 Realizing that wasn't sufficient, the governor and the assembly drafted=20 another bill that scrapped the formula and allowed the state to sell up to= =20 $13.4 billion of bonds. But, in a setback for Mr. Davis, Republican lawmake= rs=20 banded together to deny him the two-thirds majority needed for the bill to= =20 immediately become law. As a result, the law won't take effect until=20 mid-August, when the public-finance market is all but moribund.=20 In the meantime, Mr. Angelides moved to hire underwriters. After receiving= =20 four dozen bids from Wall Street investment bankers in February, he retaine= d=20 a team led by J.P. Morgan Chase & Co. But under pressure to get the financi= ng=20 moving, the treasurer didn't negotiate firm underwriting fees on the deal.= =20 At the time, Mr. Angelides said he expected the underwriters to "skinny dow= n"=20 their fees given the enormous size of the offering. But Morgan, representin= g=20 a team of underwriters that includes Lehman Brothers Holdings Inc., Citgrou= p=20 Inc.'s Salomon Smith Barney unit and Bear, Stearns & Co., says it expects t= o=20 charge standard fees, given the significant challenges presented by the=20 issue's size. In the case of a $12.5 billion sale, that amounts to around $= 56=20 million. J.P. Morgan and the California treasurer's office now say the fees= =20 won't be decided until they determine the bond issue's final size and=20 structure.=20 From the start, relations between California officials and Wall Street seem= ed=20 fraught with miscommunication. In February, Mr. Davis called a meeting to= =20 explain to institutional investors, analysts and rating-agency executives h= is=20 blueprint for getting a grip on California's energy crisis. The session, hi= s=20 only face-to-face meeting with investors to date, was held at Manhattan's= =20 Cornell Club. Attendees say the governor kept them waiting for 20 minutes= =20 before breezing into the room and giving them only a general overview of th= e=20 state's energy plan, which left investors grumbling.=20 During the discussion, Mr. Davis, a Bronx, N.Y., native, made light of a=20 conversation he had had with Richard Cortright Jr., a Standard & Poor's=20 director. "I told him: `You're from Indiana, that explains why you're not= =20 getting it,'" the governor said, according to several people present.=20 "It was intended as a joke, but no one was laughing," says A.J. Sabatelle, = a=20 Moody's vice president. A spokesman for Mr. Davis says the governor doesn't= =20 recall the exchange; Mr. Davis is frequently late for public engagements. A= =20 spokesman for Mr. Cortright wouldn't comment.=20 Then, in March, the governor's office set up a conference call to update=20 investors. Figuring they wouldn't get a big turnout, they used an open-mike= =20 system that allowed each investor's comments to be heard by everyone else.= =20 But with around 100 investors taking part, the presentation by Joseph=20 Fichera, a paid consultant who is one of Mr. Davis's top financial advisers= ,=20 turned into a free-for-all, with one caller cursing Mr. Fichera in response= =20 to one of his answers.=20 Infighting among California politicians hasn't helped. Earlier this year, f= or=20 example, state Controller Kathleen Connell criticized the way her fellow=20 Democrats, Messrs. Davis and Angelides, were handling the bond sale. Unless= =20 it was far bigger, she warned, the state would face a "cash-flow crunch" by= =20 February or March of 2002. The governor's office fired back, calling her=20 claims "completely" political.=20 California policy makers have "spent most of the year bickering and finger= =20 pointing," Standard & Poor's director Peter Rigby said in a recent report,= =20 "and that will raise some uncertainty among lenders." Moreover, investors= =20 know the state needs the money, and so "it's a buyer's market," Mr. Rigby= =20 added.=20 Aware that it needed a financial pro to make its case to Wall Street, the= =20 Davis Administration pushed Mr. Fichera to the forefront. Since May, the=20 former Prudential Securities investment banker has spent hours on conferenc= e=20 calls with Wall Street explaining the state's strategy. That and a sense th= at=20 California has gotten a better grip on its electricity woes indicates that= =20 "the governor's staff is far higher on the learning curve than just a few= =20 months ago," says Paul Patterson, an electric-power analyst at ABN Amro Inc= .=20 Critical barriers remain. The state's Public Utilities Commission has yet t= o=20 make key decisions intended to ensure that there's enough ratepayer revenue= =20 set aside to guarantee that bondholders get paid. On Aug. 23, for example,= =20 the PUC is expected to take up a rate agreement giving the state's power=20 purchaser, the Department of Water Resources, unprecedented authority to=20 raise rates without a public hearing. The commission also is expected to=20 decide how to divvy up current ratepayer revenue among state and private=20 utilities and to take up a measure that would prohibit large industrial=20 consumers from, in effect, bypassing the utilities and buying their juice= =20 directly from generators or traders.=20 But opponents of those controversial measures are expected to put up a figh= t.=20 Businesses and consumer groups are particularly upset that the state might= =20 get carte blanche to raise rates and are threatening to sue to block the PU= C=20 decision before the state Supreme Court.=20 California already has some of the highest electricity rates in the nation.= =20 Residential consumers in San Francisco, for instance, pay around 14 cents p= er=20 kilowatt hour for power, up from about 10 cents in December. That compares= =20 with around seven cents per kilowatt hour in Atlanta and 10 cents in Chicag= o,=20 but it is still lower than the nearly 23 cents charged in New York City.=20 High costs are a big reason businesses think they ought to be free to buy= =20 electricity directly. It's not "in the best interest of consumers to=20 eliminate direct access in order to market bonds that will keep the price o= f=20 electricity in California higher than necessary for at least 10 years," say= s=20 Allan Zaremberg, president of the California Chamber of Commerce.=20 The state's three largest investor-owned utilities, PG&E, SoCalEd and Sempr= a=20 Energy's San Diego Gas & Electric Co., are expected to demand the largest= =20 possible share of the revenues they collect from ratepayers. PG&E, for=20 example, has already asked for a public hearing to examine the state's clai= m=20 that it needs so much money. The pressure to allocate more cash to the=20 utilities could also rise if a state-sponsored bailout plan for SoCalEd fai= ls=20 and the utility joins PG&E in bankruptcy proceedings.=20 Sorting all these issues out before the PUC may lead to legal challenges th= at=20 could delay the bond issuance for months. And potential investors face=20 another nagging concern: Under a $43 billion series of long-term power=20 contracts signed by the state, electricity generators and traders involved= =20 get first call on revenue from ratepayers. Only then would bondholders, who= =20 are accustomed to being first in line, get paid.=20 In fact, some investors who were initially enthusiastic about a bond that i= s=20 expected to pay more than half a percentage point above other municipal=20 issues in the market are starting to have doubts. Marilyn Cohen, president = of=20 Envision Capital in Los Angeles, a firm that manages bond portfolios for=20 individual investors, says she spent several months setting aside money to= =20 participate in the deal. Now, she says, she is starting to look elsewhere. = "I=20 don't have confidence that it will get done," she adds.=20 Many investors are concerned the state hasn't proved it can overcome its=20 energy crisis. "These are the same guys who told us energy prices were goin= g=20 south five years ago, they're trying to gloss over the potential problems,"= =20 says Kelly Mainelli, a portfolio manager at Montgomery Asset Management in= =20 San Francisco, who is considering investing in the bonds. He says he also= =20 worries about a spike in natural gas prices ahead of the offering.=20 To reassure potential investors, the state now is offering to amass a $3=20 billion reserve -- from bond proceeds and ratepayer revenues -- to ensure= =20 that bondholders would get paid in the event of any unforeseen developments= =20 in the power market. In addition, California lawmakers are moving a bill=20 through the Legislature that would set aside a specific portion of revenues= =20 from ratepayers solely to pay bondholders. Such an approach could help the= =20 bond issue "to get a higher rating," says David Hitchcock, director of=20 Standard & Poor's state and local government group.=20 It might not, however. It isn't clear whether bankruptcy courts can overrul= e=20 state government. So, some investors worry that PG&E's bankruptcy judge cou= ld=20 rule that money collected by the utility should go to the company's=20 creditors, and not to paying investors in the coming bond deal, throwing a= =20 wrench into the offering. The same would be true in the case of SoCalEd if = it=20 ended up filing for Chapter 11 protection.=20 Underwriters are moving to broaden the appeal of the planned issue by=20 chopping it into small slices aimed at different types of investors. There= =20 will be taxable, tax-free, variable-interest, fixed-interest, short-term an= d=20 long-term bonds. State Finance Director Tim Gage says the state is assuming= a=20 rating "in the range of single-A" on the power bonds and thus expects to pa= y=20 an average annual interest rate of 5.77% on the tax-exempt issue and 7.77% = on=20 the taxable bonds.=20 Investors and analysts "may think we're crazy," says Guy Phillips, one of t= he=20 state's top legislative aides on energy matters, "But in the end, the=20 decision for them is: `Do we see a path to get our money.'"=20 ---=20 Journal Link: Would you purchase California bonds that are backed by utilit= y=20 payments? Participate in the Question of the Day, in the online Journal at= =20 WSJ.com/Question.=20 (Graph) California ; Op Ed Desk=20 Commentary The State Will Pay for Davis' Panic KATHLEEN CONNELL; PETER NAVARRO 07/31/2001=20 Los Angeles Times=20 Home Edition=20 Page B-13=20 Copyright 2001 / The Times Mirror Company=20 The five-to-20-year power contracts signed in a panic by the Davis=20 administration have saddled California with billions of dollars of "strande= d=20 costs" that will burden our economy and state budget for years to come.=20 Now, Gov. Gray Davis' spin doctors want us to believe that these $43-billio= n=20 long-term contracts were both necessary and the impetus for a moderating=20 energy market. Here's the real story:=20 Last summer, under a flawed deregulation, a handful of large out-of-state= =20 generators effectively cornered California 's wholesale electricity market.= =20 This "sellers cartel" first drained our electric utilities dry. In November= ,=20 it became the taxpayers' turn to be victimized, when the Davis administrati= on=20 gave carte blanche authority to the Department of Water Resources for energ= y=20 purchases. Between November and July, the department burned through $8=20 billion in short-term energy purchases, devouring almost the entire state= =20 budget surplus. This required the state Public Utilities Commission to pass= =20 the largest rate hike in California history and will require the state to= =20 issue $12.4 billion in bonds this fall to service this debt.=20 In February, with spot market prices at all-time highs and rolling blackout= s=20 rippling through the state, the governor's representatives began to negotia= te=20 long-term contracts with the sellers cartel. This was an ill-advised=20 long-term strategy to fight a short-run crisis. To understand why, look at= =20 the negotiating chessboard from the electricity cartel's perspective. The= =20 cartel's negotiators knew that within 18 to 24 months, there would be a hug= e=20 glut of power on the market as many power plants were already under=20 construction in California and throughout the West. Once the new energy=20 resources were available, the cartel would no longer be able to manipulate= =20 the market. This supply glut would drive prices back to the 1999 range of= =20 three to five cents per kilowatt-hour, far lower than the prices now set in= =20 the long-term energy contracts.=20 To the cartel members, this looming power glut was a recipe for heavy losse= s.=20 Locking the state into long-term contracts at lucrative rates was their=20 redemption. The Davis administration walked into this market inferno,=20 bargaining from extreme weakness at the top of the market, signing contract= s=20 that were too expensive. The administration also capitulated on two highly= =20 objectionable clauses. The first requires the state to absorb all costs of= =20 environmental protection for many of the generators. The second holds the= =20 generators "harmless" for any increase in taxes imposed on the generators b= y=20 the state. This provision essentially freezes taxes on the generators over= =20 the next several years, requiring taxpayers to pick up the tab.=20 Notwithstanding the administration's spin, the current improvement in our= =20 energy situation may be traced to at least four other factors: This summer= =20 has been unusually cool, Californians have increased their conservation,=20 recessionary forces have reduced demand and, most important, the Federal=20 Energy Regulatory Commission finally imposed price caps on the sellers=20 cartel, dampening market manipulation.=20 The bottom line is this: Long after the rolling blackouts stop, California= =20 still will be saddled with billions of dollars of unnecessary electricity= =20 costs and high bond debt. These higher costs will hurt consumers and=20 businesses, put heavy pressure on the state budget for years and inhibit th= e=20 state's economic growth.=20 There are two lessons from this multibillion-dollar mistake. The first is t= o=20 have full public review of major energy decisions. Equally important, the= =20 Public Utilities Commission must be allowed to retain its rate-making=20 authority so that problems are not hidden in a state bureaucracy. Electrical Switch: Now, Cheaper Power Is Causing Hefty Losses for California=20 By Rebecca Smith 07/31/2001=20 The Wall Street Journal=20 Page A3=20 (Copyright (c) 2001, Dow Jones & Company, Inc.)=20 Mild weather means that California is escaping blackouts, but it also means= =20 that the state is amassing power-trading losses that are adding to the cost= =20 of an energy mess now in its 15th month.=20 Internal documents show that so far in July, California has resold the=20 equivalent of 8% of the power it bought under short-term and long-term=20 contracts that were designed to reduce the state's reliance on the volatile= =20 and costly spot market. The problem is, the state has had a surfeit of powe= r,=20 and it has been selling the juice into the market at a fraction of the pric= e=20 it paid, leading to losses from July 1 through Thursday of about $30 millio= n=20 to $35 million.=20 The losses illustrate the difficulties dogging the state's new energy czar,= =20 the California Department of Water Resources, despite a softening of=20 electricity prices and demand. The department got into the power-purchasing= =20 business in a big way in January, when the state's biggest investor-owned= =20 utilities quit buying power because they were no longer creditworthy. Since= =20 then, the state has signed $43 billion worth of contracts, one for as much = as=20 20 years, in a bid to tamp down high spot-market prices. Critics now say it= =20 was a mistake to lock in so much power at such a high cost.=20 Power officials say the state has been in the odd position since last month= =20 of having too much power contracted for off-peak hours. "It's something you= 'd=20 expect when you first get into a new business and you'd hope to reduce it,"= =20 said Pete Garris, chief of operations for the power-purchasing agency.=20 Internal numbers from the DWR, which the agency has confirmed, show that on= =20 average the state paid, from July 1 to Thursday, $123 per megawatt hour for= =20 some 1.8 million megawatts of power purchased under long-term contracts, an= d=20 $148 per megawatt hour for some 2.2 million megawatt hours of power purchas= ed=20 under short-term contracts. In the same period, the records show it sold=20 excess power amounting to 320,000 megawatt hours at an average price of $27= =20 per megawatt hour, less than what it costs to fuel many plants. At times, t= he=20 DWR sold the juice for as little as $2 per megawatt hour.=20 This, ironically, has offered an opportunity to power traders that the stat= e=20 was seeking to hem in through its contract program. They have been able at= =20 times to substitute cheap power they buy from the state for the more costly= =20 power they otherwise would have to generate to meet their contract=20 obligations.=20 Despite the agency's power-trading losses, total market costs still are dow= n=20 substantially from previous months, partly due to price limits set June 19 = by=20 the Federal Energy Regulatory Commission. Slacker demand also has been a=20 factor. In June, Southern California Edison, a unit of Edison International= ,=20 sold 11.8% less electricity to its customers than in June 2000, reflecting= =20 energy conservation and reduced demand for air conditioning.=20 Since January the state has spent $9.5 billion buying power at an average= =20 cost of $237 per megawatt hour, according to internal DWR documents. That i= s=20 more than double the price of wholesale electricity last year, when prices= =20 averaged $114. The state's cash-strapped utilities have reimbursed the agen= cy=20 $1.53 billion of the $9.5 billion it has spent so far. As a result of the= =20 huge shortfall, the state has tapped California 's general fund and now is= =20 pursuing a plan to sell $12.5 billion worth of revenue bonds to replenish i= ts=20 coffers.=20 The state signed dozens of long-term power contracts after January, pushed = by=20 federal energy regulators to protect itself against spot-market volatility.= =20 So far this year, it has spent $851 million under long-term contracts, $2.3= 6=20 billion under short-term arrangements and $5.54 billion on spot-market=20 purchases, according to the DWR documents.=20 But the state's "long" position in July, in which it had too much power, ha= s=20 at times given power-trading companies an arbitrage opportunity. Last=20 Wednesday, for example, the state sold electricity for as little as $2 per= =20 megawatt hour on the same day that it was paying $22 to $75 on the spot=20 market, presumably because its advance purchases did not exactly match the= =20 actual shape of demand.=20 John Stout, senior vice president for Houston-based Reliant Energy Inc., a= =20 big energy supplier to California , said a trader can double or triple his= =20 company's profit by substituting cheap market power from the water-resource= s=20 agency for power the company otherwise would generate. It is also free to= =20 resell the natural gas it might have used to fuel its plants. "That's what= =20 the trader is there to do and not leave money on the table," said Mr. Stout= .=20 (Chart)