Davis Arranges to Buy Edison’s Share of Grid
Gov. Gray Davis announced a deal Monday to buy Southern California Edison’s transmission lines for $2.76 billion, and to allow Edison to recoup part of its multibillion-dollar debt from consumers.
With Edison International Chairman John Bryson at his side, Davis announced what he called a historic agreement with the near-bankrupt utility, and vowed to press ahead with negotiations to buy San Diego Gas & Electric’s share of the transmission system.
Coming on the first business day after Pacific Gas & Electric filed for bankruptcy, the deal’s significance was clouded by the difficulty of extending its provision to the state’s largest utility, whose finances will now be untangled in court. Without acquiring PG&E;’s share of the transmission grid, experts said the purchase would be of little practical value to the state. Still, the deal represented a victory for Davis and Edison in their efforts to avoid another bankruptcy, and the troubled utility’s stock jumped as much as 40% on the news.
Davis renewed his attack on PG&E; as the bankruptcy proceeding officially opened, saying it acted “arrogantly and selfishly” by filing for bankruptcy.
He went out of his way to praise Edison: “We have come to terms with a utility that was on the verge of bankruptcy, because they are people of goodwill and are concerned about the fate of the consumers they serve, and they stayed at the bargaining table.”
Calling the deal preferable to bankruptcy, Bryson said: “It serves the state, it serves our consumers, it serves our employees and our companies to achieve a practical resolution.”
The deal is far from done. The Legislature and the California Public Utilities Commission must approve major parts of it. Senate President Pro Tem John Burton (D-San Francisco) said he intends to hold “complete hearings, and then some.”
“We have to take a very thorough, careful, detailed look at it,” Burton said Monday.
Assembly Speaker Bob Hertzberg (D-Sherman Oaks) said in a statement that he had not seen any details, “including the costs to the state.” Lawmakers will begin work promptly on legislation to implement the deal, he said.
Consumer advocates were not enamored of the deal.
“It’s hard to imagine that PG&E; would walk away from a deal like this because it seems to give Edison everything they want,” said attorney Mike Florio of the Utility Reform Network, a consumer group in San Francisco.
In what probably will be the most controversial element, Davis agreed to allow Edison to recover at least part of its debt--$3.5 billion--from consumers. The company would use part of ratepayers’ money to back the sale of bonds to investors, taking the proceeds to refinance its debt.
To sell bonds, the utility must be able to assure investors that it has a dedicated source of revenue from ratepayers’ bills earmarked to repay the principal and interest on the bonds.
Davis was not specific about whether the so-called dedicated rate component would require a rate hike beyond what amounts to the 37% increase the governor is advocating, or the roughly 40% boost that the PUC approved last month.
However, the Legislature would have to approve the provision, and Burton said it could result in a rate hike. Burton added that he opposes a dedicated rate component, noting that Edison’s debt might have occurred because of illegal actions by independent generators that have been charging record wholesale prices for electricity.
“This deal by our panic-stricken governor is going to raise rates enormously,” said Santa Monica consumer advocate Harvey Rosenfield, who is expected to promote an initiative to block the agreement. “He acted to protect his political career at the public’s expense. It is a desperate attempt by the governor to redeem his credibility with Wall Street.”
Davis, clearly stung by PG&E;’s decision to file for bankruptcy, told his negotiators to jump-start talks with Edison and to work through the weekend to resolve differences.
Davis and Bryson met for 4 1/2 hours Friday, and teams of lawyers worked through the weekend until 5 a.m. Monday to craft the deal, Davis said. Edison’s board of directors ground through the fine print for 5 1/2 hours Monday before giving its stamp of approval.
Also as part of the deal, Edison’s parent company agreed to pay back approximately $420 million to the utility. Also, Edison will withdraw all pending lawsuits seeking to recoup losses by the imposition of higher rates.
Bryson appeared hollow-eyed with fatigue as Monday’s deal was announced, reflecting strain of negotiations.
In the centerpiece of the deal, Davis agreed to buy Edison’s transmission lines for $2.76 billion. Edison would use proceeds from the sale to refinance its debt, which it estimates to be $5.5 billion.
Additionally, the state would receive conservation easements to roughly 20,000 acres of Edison land in the Sierra, assuring that the wilderness areas would not be developed.
Edison also agreed to sell power at cost from its plants in California for 10 years, including electricity from a plant called Sunrise being built in Kern County.
The governor’s announcement raised many questions--not the least of which is the wisdom of owning only a part of the 32,000-mile transmission system. Davis himself said Feb. 23 that it makes little sense for the state to buy only Edison’s share of the grid.
With PG&E; in bankruptcy court, chances are slim that the state will be able to take over its share of the transmission grid. Without the entire grid, the public benefits are questionable.
“It’s like buying a car with three wheels,” Rosenfield said.
Davis said his negotiators will turn their attention to striking a deal with San Diego Gas & Electric. San Diego’s situation is far different from Edison’s or PG&E;’s. The utility’s debt is about $680 million--far less than the combined debt of more than $13 billion claimed by PG&E; and Edison.
“We have been negotiating on good faith with the governor for several weeks now, and we will continue that process,” said Art Larson, spokesman for Sempra Energy, parent of San Diego Gas & Electric.
Davis said that after he has deals with Edison and San Diego, he hopes to ask the Bankruptcy Court to allow the state to buy PG&E;’s portion of the grid. He also held out hope that PG&E; might agree to negotiate with the state--even though PG&E; executives say that one of the reasons they filed for bankruptcy was that the state had gone three weeks without meeting with them.
“Even though PG&E; acted arrogantly and selfishly--they walked away from the bargaining table--if they come back, we are certainly willing to submit this offer to them as well,” Davis said.
PG&E; spokesman John Nelson replied: “We are proceeding under the direction of a federal bankruptcy judge.”
Davis says that after the state owns the transmission lines, itwill improve the long-neglected system to make the distribution of power more efficient. The cost of overhauling the system has been placed at $1 billion.
The state also may be able to exercise some control over prices for electricity charged by generators--though the Federal Energy Regulatory Commission, which must approve the sale, likely would oppose such state action.
Investors cheered Edison’s deal with the state on grounds that it would pull the utility further from the precipice of bankruptcy--whether filed voluntarily or by creditors unwilling to trust a bureaucratic solution.
“This absolutely helps Southern California Edison prevent an involuntary bankruptcy,” said Paul Fremont, an analyst with Jefferies & Co. in New York. “Depending on the details, it makes them viable.”
Edison’s stock, which gained 67 cents to $8.92 a share in regular trading Monday, soared another 40% after hours to a high of $12.50 a share after the deal was announced. PG&E;’s stock, meanwhile, fell 30 cents to $6.90 a share.
Most analysts deemed the purchase of Edison’s transmission system more valuable for the state strategically than practically; without PG&E;’s holdings, the state cannot achieve the control over delivery it had sought, they agreed.
But the deal means Davis and California lawmakers will retain a role in resolving the power crisis, rather than being preempted by court proceedings.
“If both of them had said it’s futile, we can’t deal with the state; we’d rather go to court, it would speak loudly,” said Douglas Christopher, an analyst at Crowell, Weedon & Co. “The governor had to come back, and with the kind of details that were missing from his speech.”
Edison’s agreement to the deal does not necessarily mean it will avoid bankruptcy. Gary Ackerman, who represents power producers and marketers as the executive director of the Western Power Trading Forum, said creditors still could force Edison into bankruptcy.
“Creditors will be motivated to push Edison into bankruptcy sooner,” Ackerman predicted. “We don’t see this as being 100 cents on the dollar, because the amount of money for the transmission system is not enough to pay for Edison’s debt.”
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Morain reported from Sacramento and Fields from Los Angeles. Times staff writers Miguel Bustillo, Nancy Vogel and Julie Tamaki in Sacramento and Nancy Cleeland in Los Angeles contributed to this story.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Power Points
Background
The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.
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Daily Developments
* The governor announced a deal to buy Southern California Edison’s transmission lines for $2.76 billion and vowed to continue trying to buy San Diego Gas & Electric’s share of the power grid.
* Edison would be allowed to use ratepayer money to back the sale of bonds to investors, taking the proceeds to refinance its debt.
* The largest utility bankruptcy case in U.S. history opened with dozens of attorneys for gas suppliers telling they judge they fear that Pacific Gas & Electric won’t pay their clients.
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Verbatim
“We have great faith in you. Please don’t let us down.”
--Medea Benjamin of the Coalition for Public Power Now to the PG&E; bankruptcy judge
Complete package and updates at www.latimes.com/power
