Davis Consultants Due Millions if Deal Passes

Two Wall Street firms that have been key financial advisors to Gov. Gray Davis stand to make more than $14 million if the Legislature approves rescue plans for Southern California Edison and other utilities, the consultants’ contract released Wednesday shows.

The contract shows that the firms of Blackstone Group and Saber Partners, which have taken the lead in Davis’ efforts to rescue Edison and other utilities, are assured of receiving $275,000 per month, with a cap of $1.1 million.

The consultants could receive an additional $14.58 million, if the Legislature approves deals negotiated by the consultants to buy the electricity transmission system from the state’s three privately owned utilities--or otherwise rescue them from their financial woes. The money would be paid by ratepayers of the three utilities.

Administration officials and one of the lead consultants defended the arrangement, noting that the bonus amounts to 19 one-hundredths of a percent of the potential $7.67-billion value of the deals.

“They are the lowest fees paid in a comparable utility acquisition ever in history . . . and they are contingent,” said Michael Hoffman, of the Blackstone Group. “We’re doing a lot more work than the advisory work on the transmission purchase.”

Lawmakers and consumer advocates, however, blasted the arrangement. Senate Republican leader Jim Brulte said the contract creates a “perverse incentive” for the consultants to inflate the value of the utility rescue plans.

“This is so far outside the box,” said Brulte of Rancho Cucamonga. “What are these people thinking--$275,000 a month isn’t enough?”

Republican legislators, Brulte included, and many Democrats oppose Gov. Gray Davis’ proposal to buy the transmission system for 2.3 times the grid’s so-called book value. The contract is sure to add to arguments against the deal.

“This is part of the governor’s attempt to shovel money out of the taxpayers’ pocket as fast as he can,” said Harry Snyder of Consumers Union. “[Davis] gets taken to the cleaners every time he turns around--and unfortunately we have to pay the cleaning bill.”

Senate Energy Committee chairwoman Debra Bowen (D-Marina del Rey) said the contract raises broader issues of “who has oversight, who has accountability.”

“No question, when you’re in a crisis, you’re going to have unusual expenses,” Bowen said. “But there has to be a look at what we’re spending.”

Saber and Blackstone are not the state’s highest-priced consultants in the energy crisis. Bankers led by J.P. Morgan and others underwriting a $13.4-billion bond sale to finance the state’s power purchases are expected to receive more than $100 million.

Hoffman and Joseph Fichera of Saber Partners took leading roles on Davis’ behalf in negotiating deals with Edison and San Diego Gas & Electric. They had been working on a similar deal with Pacific Gas & Electric before the Northern California utility filed for bankruptcy in April.

Hoffman noted that the administration set the value of the deals in February, a month before he and Fichera became advisors.

Hoffman said the financial advisors have 15 people working on solving the state’s energy woes.

“We’re living here,” Hoffman said. “It is as much a round-the-clock exercise as I’ve ever been involved with.”

Tim Gage, Davis’ director of the Department of Finance, and one of the officials who signed the contract, noted that fees in deals this big ordinarily would be far larger.

“This is at the bottom end of the range for this type of transaction,” Gage said.

The Davis administration signed the contract on June 6. But despite repeated requests from news organizations including The Times, the governor’s office did not release it.

Instead, Controller Kathleen Connell demanded a copy before she would pay the consultants. She promptly released the contract.