Davis Takes One Jolt After Another as Crisis Intensifies

From the beginning, Gov. Gray Davis focused on two immediate goals as he worked to solve California’s energy crisis: avoiding consumer rate hikes and keeping California’s financially hobbled utilities out of bankruptcy.

On Thursday night, the Democratic governor gave a statewide television address in which he proposed what amounts to a 37% electricity rate increase. Fifteen hours later, Pacific Gas & Electric, the state’s largest utility, hand-delivered its petition to Bankruptcy Court in San Francisco.

Davis apparently hoped the speech would show all of California his command of the energy crisis. Aides proclaimed that he had proved his leadership. But with the utility’s bankruptcy filing Friday, there were new questions about the governor’s credibility and his ability to handle the state’s worst financial crisis since the recession of the 1990s.

“It is not a slight problem now,” said Dan Scotto, a bond analyst who has been monitoring the energy situation from his Wall Street firm, PNB Paribas. “It is way out of control. It is certainly a black mark. If Davis was toast before this, he is burnt toast today.”

No one had watched Davis’ speech more closely than Bob Glynn, chairman of PG&E; Corp., the utility’s parent. In the speech, the governor once again talked about how his plan would help restore the crippled utilities to stability. But details were lacking, and Glynn was disappointed.

“Frankly,” he said Friday, “we’ve heard a lot of words from the Sacramento sources that simply have not come to fruition.”

Glynn informed Davis of the bankruptcy filing about the same time the petition was delivered to the court.

“We took this action independently and affirmatively choosing the venue that we did,” Glynn said. “We didn’t use it as a negotiating lever with anyone.”

Davis had flown to San Diego after his television speech Thursday evening and attended a fund-raiser at a donor’s La Jolla home. On Friday, the governor showed no signs of strain as he went about his political business.

He appeared at a media event at Rock Springs Elementary School in Escondido, chatting with giggling students and thanking them for instituting a conservation program by giving them the “Governor’s Conservation Hero” award.

“I think their timing could have been better,” Davis said, grinning, about PG&E;’s decision to file for bankruptcy hours after his speech.

In Public Appearances, Davis Can Bash PG&E;

His credibility may be damaged by the utility’s action, but he remains a powerful figure. His comments late Friday provide a look at how he may handle the impact of PG&E;’s decision. Utilities are not popular entities, and Davis, accustomed to campaigning, can use his public appearances to bash the company.

“I believe PG&E; has dishonored itself and has created undue alarm among 34 million residents,” Davis said, appearing grimmer at a late afternoon bill-signing event in San Diego. “. . . They have acted selfishly and with a very narrow perspective.”

As the energy crisis has spread across the state, Davis has said repeatedly that bankruptcy was not a good option for the utilities.

In his State of the State speech in January, he laid out his view on the issue: “Our fate is tied to their fate. Bankruptcy would mean that millions of Californians would be subject to electricity blackouts. Public safety would be jeopardized. Businesses would close. . . . And our economy would suffer a devastating blow.”

On Friday, however, Davis described bankruptcy in much less dire terms. It “is not our preference,” he said, “but we will be working with the Bankruptcy Court to keep the lights on.” PG&E;’s filing could pose practical problems for Davis as he redoubles his efforts to strike deals with Southern California Edison and San Diego Gas & Electric. The governor has said the state must control the entire power grid in order to operate it for the public benefit. But now a bankruptcy judge will take control of PG&E;’s affairs, deciding whether the utility should sell assets, such as the transmission lines.

And such a judge, who doesn’t stand for election, can take actions that political officeholders might shun.

A month ago, there were signs that the outcome would be far different.

After meeting with Davis’ negotiators in Burbank, PG&E; executives thought a deal that would avert bankruptcy was close. The company would sell its transmission system to the state and use the cash--more than $3 billion--to restructure its debt.

The negotiators shook hands, agreeing that they had the framework of a plan. But shortly afterward, Davis brought in a new team of negotiators. And for the next three weeks, there was no contact.

Glynn gave a warning to Davis last week. On that Tuesday, the California Public Utilities Commission, the majority of whose members are Davis appointees, was approving a rate hike--but earmarking the proceeds for the state instead of the utilities, and taking other actions that the utility viewed as both damaging and illegal. In a phone conversation, Glynn told Davis that the PUC’s actions were bringing the utility closer than it had ever been to bankruptcy.

Last Monday, Davis’ aides asked that PG&E; executives come to Sacramento the following day. In that session, the utility’s negotiators concluded that the governor was backtracking on elements of their agreement.

No future meeting had been scheduled. On Thursday afternoon, PG&E; lawyers sent a letter to Davis’ aides outlining details that fell short of what the utility believed were part of the deal reached in Burbank.

Also on Thursday, before Davis’ speech, one of his negotiators called a PG&E; executive to explain the governor’s plan. In the end, however, PG&E; concluded that it would fare better in Bankruptcy Court.

“We’ve been negotiating in good faith,” Glynn said. “We’ve reached agreements that have not been upheld, and over the last month the kindest thing to say is: Progress has dramatically slowed.”

Legislators and some powerful lobbying groups are critical of Davis. But for the most part, the sniping occurs privately. The governor retains the ability to veto or sign any bill, and can use his line-item veto authority to pare back any spending request.

State Senate President Pro Tem John Burton (D-San Francisco) said the bankruptcy filing does not bode well for Davis’ effort to reach a negotiated solution with Edison. But Burton did not blame Davis for failing to close a deal with PG&E.;

“If talks weren’t going anywhere with the governor,” Burton said, “it’s probably because they [PG&E;] wanted too much. Many of us thought the governor was being too generous. . . . There’s no way he can be faulted for not giving them the keys to the bank.”

Still, the governor’s credibility took a hit Friday.

“We have fallen off the cliff after months of an agonizing drama,” said Democratic consultant Darry Sragow, who advises Reliant Energy, an independent power producer and one of the utilities’ creditors. “In the end, we wound up with a result we could have had months ago. . . . There are not going to be any winners.”

Said Jack Stewart, head of the California Manufacturers and Technology Assn., “Hopefully, this is a wake-up and a reevaluation of where the governor’s program is going. We view the next couple months as critical, and believe it is vital to fix the utilities’ financial problems.”

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Morain reported from Sacramento, Perry from San Diego.

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Pacific Gas & Electric Co.

A subsidiary of PG&E; Corp., which was formed as a holding company in 1997, it is one of the largest natural gas and electric utilities in the United States.

Chairman: Robert D. Glynn

Headquarters: San Francisco

Employees: 22,000

Customers: 13 million

Service area: 70,000 square miles in Northern and Central California,

stretching from Eureka in the north to Bakersfield in the south and from the Pacific Ocean to the Sierra Nevada.

Operates the largest privately owned hydroelectric power network in North America, built along 16 river basins that span nearly 500 miles from Redding to Bakersfield. It can generate up to 3,896 megawatts, enough to power nearly 3 million homes.

Total assets: $24.18 billion

Sources: Pacific Gas & Electric; Hoovers Business Profiles; Bloomberg News

Researched by NONA YATES / Los Angeles Times *

DAMAGE ON WALL ST.

The stocks of Pacific Gas & Electric’s lenders and suppliers were hammered, C1

FALLOUT FEARS

PG&E;’s action raises the risk for Southern California Edison and other utilities, C1