Edison OKs Sale of Grid to State
Announcing a significant advance in the struggle to bring stability to California’s reeling electricity network, Gov. Gray Davis on Friday unveiled the basic framework of a deal with Southern California Edison that includes the sale of its transmission grid to the state.
But the agreement, made public at a brief news conference in Davis’ Los Angeles office, left critical questions unanswered--and was met with skepticism, at best, by consumer advocates, legislators, power generators and Edison creditors.
Davis acknowledged that the deal will be meaningless unless he is able to strike a similar pact with the state’s largest utility, Pacific Gas & Electric Co., which has so far resisted his entreaties.
Davis said the pact with Edison would require the state to pay $2.76 billion for the utility’s share of the statewide electrical transmission grid. The state would then pay the utility to operate the system. The state also would guarantee bonds to be issued by the firm to pay off its substantial debts.
The governor said the plan offers “real bread-and-butter benefits” for consumers, though some consumer advocates criticized it as half-baked.
“The only folks who are going to benefit from today’s proposal are the energy companies, their executives and their shareholders,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica and the governor’s most fiery critic throughout the months-long energy crisis.
Davis said he expects to announce a final deal with Edison within a week. He also said he believes Sempra, the parent of San Diego Gas & Electric, will agree to sell its share of the transmission system next week. As for PG&E;, no further talks have been scheduled.
“This is an agreement that provides value to both sides,” Davis said. “The utility gets the financial wherewithal to go back in business and keep our lights on. We get commensurate value and specific benefits which provide us long-term power at very cheap rates.”
Still, major work remains to be done, and any deal must be approved by the company’s board of directors and the Legislature.
“I have to see the details,” said Senate President Pro Tem John Burton (D-San Francisco). “It may be the framework, but the devil will be in the details. When it is fleshed out, we’ll see.”
Edison executives had been weighing the possibility that the firm might have fared better in bankruptcy court. But the utility apparently concluded Friday that the governor’s proposal offered its best chance to restructure its multibillion-dollar debt.
“It is tough, and a hard swallow,” said a top Edison executive, speaking on condition of anonymity. “But at this point, we are firmly of the belief that this is in the best interest of ratepayers, shareholders and creditors.”
Edison Is Coy About Details
On the record, Edison would confirm in a formal statement only that it had reached a preliminary agreement with the governor “to resolve a key aspect of the California energy crisis.”
“It is important that together we get on with the work of restoring normalcy to California’s electricity situation,” said John E. Bryson, chairman and chief executive of the utility’s parent company, Edison International.
The utility’s executives were nearly as circumspect with their own debt holders, who were brought together Friday afternoon in a previously scheduled conference call.
Ted Craver, Edison International’s chief financial officer, said discussions with the governor were “active, generally constructive, and we feel some progress has been made,” but he declined to go further despite repeated questioning by debt holders.
Those holding Edison’s debts grew increasingly testy during the call as headlines generated by the governor’s news conference flashed across the electronic terminals that most of the investment professionals have on their desks. Craver apologized with each non-answer he gave, explaining that Edison had a policy of not discussing the negotiations as they progressed.
“What’s fact and what’s fiction here?” demanded one investment manager after reciting aloud some of the points that Davis had unveiled for reporters.
“You should attribute as much significance to that as you would to any statement made by the governor,” Craver replied cryptically. The executive did give the debt- holders a tidbit of good news: All of Edison’s banks have agreed to give the utility an extension until March 14 to pay its bills.
Full Grid Could Cost State $7.3 Billion
In his announcement, Davis said he had agreed to pay $2.76 billion for Edison’s share of the electrical transmission grid, about 12,000 miles of the total 32,000-mile system.
That sum amounts to 2.3 times the so-called book value of Edison’s share of the system. If the state pays a like sum for the remainder of the statewide system, the price tag would approach $7.3 billion.
The deal seeks to ensure that Edison will receive enough cash to restructure its debt, and that the state will receive benefits of roughly equal value. However, the size of the grid’s price tag came under immediate attack.
“I don’t see how you do that without a rate increase,” Assembly Republican leader Bill Campbell said in Sacramento.
Campbell said he was disappointed that Davis had not reached final agreements with the utilities. At the same time, he stressed that Republicans still oppose Davis’ plan, and he questioned whether it would really help restore the financial health of the utilities.
State Public Utilities Commission member Richard A. Bilas questioned whether buying transmission lines from Edison, price aside, makes sense for the state. The deal would “give money that the utility needs,” he said, “but I also ask myself: Why sell transmission lines to the state? Why not sell it to a private company?”
Bilas, an appointee of former Gov. Pete Wilson, said he is not surprised that PG&E; has not agreed to sell its portion of the grid, noting: “I think PG&E; is waiting to find out what Edison is doing. This is a high-stakes poker game.”
Although Davis did not disclose it during his news conference, the governor and Edison have agreed that the utility has amassed a debt of $4.1 billion in recent months as the firm paid record prices for wholesale power but was precluded by state regulators from passing on the full cost to consumers.
The level of debt is important, lawmakers and consumer advocates say, because it ultimately will be passed on to consumers.
The PUC raised rates for residential users by 9% last month. Another 10% increase will take effect early next year, when a rate reduction ordered by the Legislature in 1996 expires.
Davis has said he hopes there will be no additional rate increases.
Experts differ on the transmission grid’s true value. But most believe the 32,000 miles of high-voltage wires that make up the system are worth significantly more than the book value.
Edison International’s Bryson had suggested a $6-billion sale price for his company’s share of the grid. PG&E; Corp. Chairman Robert Glynn has balked at parting with its portion, likening such a divestiture to telling a supermarket that it can no longer sell milk.
In another key part of Davis’ plan, the administration and Edison agreed that the utility would hold on to its remaining power plants for 10 years, and sell the power to Californians during that time at cost rather than at market rates.
“This is a real benefit, getting 10 years of cheap power,” Davis said. He also announced that Edison International had agreed to return $420 million in federal tax overpayments to the utility.
Again, the governor’s critics were unimpressed.
Nettie Hoge of the Utility Reform Network in San Francisco said the cheap power amounted to “counterfeit currency,” because Edison already supplies cheap power from its hydroelectric and nuclear facilities.
And she said the $420 million its parent company will return represents overpayments on taxes that the state auditor has said the company should repay to the utility.
In other provisions announced by the governor, Edison would:
* Commit to selling power from a new plant in the Central Valley to consumers at below-market rates for 10 years, starting in August. Davis estimates the value to consumers at $500 million a year.
* Drop a federal suit seeking to compel the state to permit it to raise rates to recoup its debt. The value placed on that agreement is about $1 billion, documents show.
* Grant the state a 99-year easement to 20,000 acres of watershed in the southern and eastern Sierra, ensuring that there will be no development. The acreage is in the vicinity of June, Shaver and Edison lakes.
But none of that may matter if Davis cannot coax an agreement out of PG&E;, which serves customers in Central and Northern California. Chairman Glynn issued a statement Friday in which he said, in part: “Each utility’s issues and opportunities in this crisis are different, and we believe that PG&E; has proposed a detailed solution that balances ratepayer and shareholder interests.”
Glynn insisted that he was “confident that continued discussions can achieve a resolution for our company.” However, as of late Friday, no date had been set for continuing the talks between PG&E; officials and Davis’ negotiators.
There was some speculation that the governor orchestrated the Edison announcement to pressure PG&E; to fall into line.
“There was a little bit of Kabuki going on today. The subtext was to get PG&E; to the table,” said Peter Navarro, a utility finance expert and an economics professor at UC Irvine.
Davis Heads to East Coast
Davis left after his news conference on a five-day trip to Washington, D.C., and New York. He planned to attend the National Governors Assn. conference in the nation’s capital, meet with U.S. Energy Secretary Spencer Abraham, appear on at least one Sunday TV talk show, and attend a Democratic Governors Assn. fund-raising dinner expected to raise more than $5 million.
Davis is going to New York next week to confer with Wall Street analysts “to let them know we’re making progress,” a message he can underscore by talking about the Edison agreement. He also has two reelection campaign fund-raisers scheduled in Manhattan.
Analyst Douglas Christopher of Crowell, Weedon & Co. said Friday that the agreement is “definitely a positive from a financial point of view. For investors and creditors, it takes away some of the uncertainty.”
Unloading the transmission lines would bring in cash for Edison and save the company the money it now spends to maintain the lines, Christopher said.
However, Paul Patterson, a utility analyst with Credit Suisse First Boston Corp., said too little is known about the agreement to fully assess it.
“We’ll have to wait and see what actually happens next week,” Patterson said. “It looks like they’re getting closer to some sort of an agreement. . . . I’m cautious and slightly optimistic.”
Consumer advocate Michael Shames of San Diego’s Utility Consumers Action Network similarly said he was “not in a position to judge this plan until we see the numbers.” But unlike some other consumer advocates, he was not immediately dismissive. “Conceptually he’s still in the ballpark, but the numbers may turn out to be untenable,” he said.
That said, Shames added: “Everything we’ve discussed may be moot. Because if PG&E; doesn’t come to the table, the deal’s off and we’re in bankruptcy.”
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Times staff writers Nicholas Riccardi in Los Angeles, Miguel Bustillo, Carl Ingram and Julie Tamaki in Sacramento and Tim Reiterman in San Francisco contributed to this story.
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More Inside
Higher Profile: Davis stays in the spotlight to show he can steer the state through the power crisis, A22
Business Outlook: Four out of 10 small firms say the power crisis has dimmed their view of California, C1
