Pact With PG&E; Eluding Governor
As he attempts to finalize a settlement with Southern California Edison, Gov. Gray Davis said Monday that his effort to rescue a more recalcitrant Pacific Gas & Electric has been short-circuited by issues far more difficult than those raised by the state’s other two ailing utilities.
PG&E;’s debt could be as much as $8 billion, Davis indicated--twice the red ink of Edison, which Friday reached a preliminary agreement to sell its transmission lines to the state for $2.76 billion to pay off some of its staggering debt. Davis acknowledged that the Edison deal would mean nothing unless he was able to reach a twin pact with PG&E.;
Seasoned utility watchers see PG&E;’s stubborn negotiating posture as partly a bargaining ploy and partly the result of underlying business issues at the San Francisco company.
Some cite a more aggressive corporate culture at PG&E; than at Edison that has left PG&E; alone on a precarious pinnacle, with bankruptcy on one side and partial dismembering by the state on the other.
Brian Youngberg, senior utility analyst with the Edward Jones investment firm in St. Louis, said PG&E; “has historically pushed the envelope more in certain situations and that probably reflects their corporate culture. They’re just sticking to their guns.”
While Edison appears to have rejected bankruptcy law protection as an option, PG&E; has not.
Although Davis did not specify the size of PG&E;’s debt, he said it is “more than twice the size of Southern California Edison’s.” As part of the deal between Davis and Edison, both sides agreed that the utility’s debt is about $4 billion, sources close to the talks have said.
“We are making progress” with PG&E;, said Davis, attending the annual National Governors Assn. conference in Washington, D.C. “I want people to understand it is a far more complicated transaction. . . . It is just going to take a little longer.”
Officials at PG&E; and its parent, PG&E; Corp., declined to publicly discuss the company’s stance, citing the sensitivity of the negotiations. Company spokesman Ron Low said only that “we expect to meet again this week. There was no time or date set yet.”
San Francisco lawyer Michael Kahn, one of Davis’ energy advisors, said the parties “had contact over the weekend” but he declined to elaborate.
“We in the governor’s office would very much like to reach arrangements with them and don’t want to say anything in public that spoils the negotiations,” he said.
PG&E;’s hard-nosed bargaining stance is no surprise to Wall Street analysts and consumer advocates who have watched the utility’s aggressive moves to shed its hydroelectric system, now blocked by state law, and to recoup past electricity and other costs.
“It could be a negotiating tactic,” said Lori Woodland, an analyst with Fitch Inc., the credit-rating firm that was the first to drop PG&E; and Edison’s debt to junk bond status.
“PG&E; has the largest piece of the pie” in terms of uncollected electricity costs, Woodland said. “It could also be just the thought of having to sacrifice their assets to pay for what ended up being flawed public policy.”
Consumer advocate Michael Shames contends that PG&E; might believe that a bankruptcy judge would allow the utility to sell some assets and restructure its debt in ways that would be preferable to anything the state is offering.
“On the other hand, if Edison and [San Diego Gas & Electric] do sign on, then PG&E; almost has to or risk the wrath of the governor and the Public Utilities Commission for the next seven years,” said Shames, executive director of the Utility Consumers’ Action Network in San Diego.
Edison is more comfortable in the role of regulated utility than is PG&E;, said Mike Florio, a lawyer with the Utility Reform Network in San Francisco.
“PG&E; really seems to hate PUC regulation and wants to get as far away from it as it can, even if it means taking the company into the tank,” said Florio, who is on the governing board of the California Independent System Operator, which runs the transmission grid owned by the three utilities.
The utilities have amassed more than $12 billion in debt as they paid record sums for wholesale power last year, but were barred by state regulators from passing those costs on to California consumers of electricity.
The level of debt is a fundamental part of the negotiations between the Davis administration and the three private utilities. At least part of that debt ultimately will be passed on to consumers. While Davis says he opposes rate hikes, his plan would restructure the rate system by propping up rates in the coming years, even as electricity costs may fall.
Davis on Friday announced the outlines of an accord in which the state would buy Edison’s share of the transmission grid for $2.76 billion. He said he hopes to make the deal final by week’s end with Edison and Sempra, the parent company of San Diego Gas & Electric.
Davis, meanwhile, is scheduled to meet today with U.S. Energy Secretary Spencer Abraham to outline his plan to take over the transmission grid. The Federal Energy Regulatory Commission must approve the state takeover of the grid, and FERC Chairman Kurt Hebert has been quoted recently as being skeptical of the plan.
“Some people in Washington see this as more of an ideological statement,” Davis said. “As a governor, I see it as a practical solution. . . . Clearly, we have to persuade lots of people in Washington that what we’re doing is the right thing.”
Davis expressed optimism that the Bush administration would approve the transfer. Davis and other governors attending the conference met with the president for about 45 minutes at the White House on Monday.
In his opening remarks, Bush repeated his desire to give the states more authority, saying “real change comes from the states up.”
Davis noted that he and other Western governors are hoping for federal aid to overhaul the transmission and distribution systems for electricity and natural gas system.
“If we’re going to have a strong economy,” Davis said, “we have to have the electricity to power it.”
Davis, chairman of the Democratic Governors Assn., was scheduled to attend a $5.5-million fund-raiser Monday night for the Democratic governors in Washington. He will then leave for New York, where he will hold personal fund-raisers and confer with Wall Street analysts Wednesday about the state’s energy situation.
Meanwhile, Duke Energy North America on Monday suspended a lawsuit it had filed against Davis. The company said it reached an “interim settlement” to sell power to the state at the same below-market prices that it originally had agreed to supply to Edison and PG&E; under long-term contracts.
Duke sued the governor after he used emergency authority to seize the Duke contracts and similar contracts signed by other energy companies with the two utilities. Davis’ action prevented the Power Exchange, the state’s now defunct electricity market, from liquidating the contracts after Edison and PG&E; defaulted on multimillion-dollar payments.
The agreement reached Monday between Duke and the state expires April 30, a Duke spokesman said, which should give the parties enough time to reach a more formal settlement.
Power Exchange officials, however, are pressing ahead with their $1-billion claim against the state. Under California law, the state must pay reasonable value for private property seized under the governor’s emergency authority.
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Morain reported from Washington, Rivera Brooks from Los Angeles. Times staff writers Tim Reiterman in San Francisco and Nancy Vogel in Sacramento contributed to this story.
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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.
Daily Developments
Gov. Gray Davis continued difficult negotiations with a recalcitrant Pacific Gas & Electric on a rescue plan.
The governor said that PG&E;’s debt is “more than twice the size of Southern California Edison’s.” Edison owes about $4 billion.
U.S. Energy Secretary Spencer Abraham will meet today with Davis, who will outline his proposed takeover of the utilities’ transmission grid. A federal commission must approve the plan.
Verbatim
“Some people in Washington see this as more of an ideological statement. As a governor, I see it as a practical solution.” -- Gov. Gray Davis
Complete package and updates at www.latimes.com/power
