Power Firms Have Motive to Deal With Davis

For a year now, Gov. Gray Davis and large power generators have pounded one another, lobbing accusations of greed and incompetence over the causes and handling of California’s energy crisis.

Now the governor’s representatives and officials of the industry are eye to eye in a federal office building next to the railroad tracks here, trying to see if they can settle the most contentious issues between them. They have been talking for two weeks. The clock will run out at midnight Monday.

At stake are billions of dollars in potential electricity refunds to California; lawsuits and investigations over alleged price gouging that could drag on for years; political and corporate reputations; even the course of power deregulation, on which a whole industry has bet its future.

So far, nobody has blinked.

But with time running out, observers say it appears that the power companies have more to gain than Davis does by seeking a peace treaty. The governor appears to be more dug in. The motivation for the companies to seek a deal comes down to the long-term health of their businesses.

“Frankly, the continuance of a viable competitive business model is at risk,” said Jim Hoecker, immediate past chairman of the Federal Energy Regulatory Commission, which ordered the closed-door settlement talks. “This is something the companies have a tremendous stake in. I imagine they would not only want a fair settlement, but some assurance about what the future is going to look like.”

FERC’s board set three issues for discussion in the talks: refunds of overcharges, long-term power contracts, and debts owed to generators. The companies also want to head off lawsuits and investigations by the state, and the governor wants to renegotiate pricey long-term power contracts that have opened him to political criticism.

On Saturday, the talks were “moving very slowly,” said FERC Chief Judge Curtis L. Wagner Jr., who is acting as mediator. An afternoon session was scheduled for today to once again go over how California has calculated its refund demand.

“I’m trying to break them loose,” Wagner said. “I’m trying to wheel and deal and see if I can’t broker something out of this.”

Davis, whose hand has been strengthened in Washington even as his standing in California public opinion polls has languished, is emerging as the player to be wooed, even though he is not physically present at the talks.

“If he gets a $5-billion rebate, he looks like King Kong,” said a top Democratic official in California, speaking on condition that he not be identified.

Others are urging the Democratic governor to stand fast for the $8.9 billion the state has claimed it is owed.

“The advice is, ‘Don’t settle,’ ” said state Sen. Steve Peace (D-El Cajon). “They broke the law. We’ll win the lawsuits. . . . I wouldn’t settle for a penny less than $9 billion.”

Davis’ only concession so far has been to say he is willing to take some of the $8.9 billion in other “currencies,” such as discounts on long-term power contracts the state has already negotiated, future power deliveries at below-market rates or forgiveness of debts that the generators say are owed by California utilities.

“If we can settle this matter to the satisfaction of all parties . . . terrific,” the governor said at a news conference Friday. “If we can’t, FERC still has the full burden to enforce the law and to ensure that we get the rebates we’re entitled to.”

Yet people within the industry and in the federal government have questioned the accuracy of the $8.9-billion figure, saying it represents an inflated estimate of what FERC could legally order refunded. California representatives are just as adamant that the number is valid.

Industry representatives have avoided public comment on the negotiations, citing a gag order imposed by Judge Wagner.

Privately, however, they have complained bitterly about Davis and questioned whether he is bargaining in good faith.

“There is no downside at this point to his hanging tough,” said one industry official, who asked not to be identified.

The official said politics appear to be the governor’s main motivation at this point. “He has nothing to lose by continuing to do battle with the enemy,” the official said. “The public perception is that he is leading the fight, and whether he gets the full amount or not won’t change that.”

For the industry, a settlement involves balancing short-term pain with the potential for long-term relief.

“My sense is that FERC intends there to be some major-league refunds if there is not a settlement,” said Kit Konolige, an industry analyst at Morgan Stanley in New York.

“The smaller the refund, the happier the markets will be, and the bigger, the more unhappy,” added Konolige. “But it’s not just the amount of money. What people like even less is the sense that the rules can change and nobody knows how they will come out. The uncertainty has been killing people.”

If the parties cannot come to an agreement voluntarily, the FERC board will impose its own settlement. That mandate could be challenged in court, and agency officials say they would not be surprised if the litigation dragged on for a decade. Also hanging over the industry are the investigations that California’s attorney general is pursuing.

“They are looking at endless litigation,” said Ed Kahn, a San Francisco economist who studied California’s power markets and concluded that abusive prices were charged. “At a certain point, there is a political element for them to consider. Reputation is also a business asset.”

Kahn added: “If the generators really would like it to end, it all comes down to price. How much do they want it to end?”

Sources close to the California delegation at the talks say the figures proffered by generators last week come nowhere close to what the state wants.

In Sacramento, Republicans share the industry’s skepticism about Davis’ motives.

As they see it, he is winning political points by pursuing the $8.9-billion refund and continuing to berate generators, the Bush administration and FERC regulators.

“He needs to divert attention from himself,” said state Sen. Bill Morrow (R-Oceanside). “He needs a punching bag.”

Although a Times poll last month found that nearly half of Californians disapproved of Davis’ handling of the energy crisis, the governor’s stock has risen in Washington. The Democratic takeover of the U.S. Senate, a turn toward more activist regulation at FERC and Bush’s low marks for his handling of energy issues have all helped Davis.

Davis spokesman Steve Maviglio dismissed the notion that the governor wants to continue the fight simply for political advantage.

“He is fighting for the 34 million Californians who are owed $8.9 billion,” the aide said, “and it’s FERC’s job to refund that money. The governor is open to ways to get to that figure. It’s the generators who have come to the table kicking and screaming, not the California delegation.”

$8.9 Billion Called ‘a Low Number’

Michael Kahn, the San Francisco lawyer representing Davis in the talks, defended the $8.9-billion number.

“We have run the numbers. We ran them two different ways. We did not feel that we could accept less than $8.9 billion,” Kahn said.

That figure represents a fraction of the $44 billion in electricity sales in California between May 2000 and May 2001. It is not, said Kahn, the full amount the state has been overcharged.

“The $8.9 billion is not the number . . . at the end of a lawsuit,” Kahn said. “It’s a low number.”

In a lawsuit, the state would gain access to data on the companies’ actual cost of producing power, which so far has been denied. Kahn hypothesized that with such information a refund on the order of $20 billion might be awarded.

This isn’t the first time that the federal government has tried to broker a deal between Davis and the power companies. In the closing days of the Clinton administration, the secretaries of treasury and energy and the president’s economic advisor tried to find a compromise between rate increases and long-term contracts for power.

But Davis refused to deal. “The governor didn’t budge once during the whole process,” said a former Clinton administration official who was involved. “The whole process was very frustrating. We were really trying to make a good-faith effort, but at the time the governor was not prepared to raise rates.” He has since had to accept rate increases.

Another ex-Clinton administration official, former Energy Secretary Bill Richardson, declined to comment on the previous talks but said he hopes the current negotiations succeed.

“I would disagree that a do-nothing strategy is best politically for the governor,” he said. “A one-two punch of getting the [FERC] price caps [last month] and now concluding a deal with all interested parties serves him best politically, because it defuses the issue and allows the governor to get back to developing supply and increasing conservation. I think stability is best for California.”

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Alonso-Zaldivar reported from Washington and Morain from Sacramento.