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Davis Arranges to Buy Edison's Share of Grid
Power: State would pay $2.76 billion and let the company recover from some of its debt.
By DAN MORAIN and ROBIN FIELDS, Times Staff Writers
SACRAMENTO--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 4½ 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 5½ 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."
--- 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.
-- PHO (firstname.lastname@example.org), April 10, 2001
Tuesday, April 10, 2001 Edison deal met with skepticism
Small energy producers who haven't been paid by the utility complain they were not consulted.
BY LESLIE BERKMAN THE PRESS-ENTERPRISE
The proposed state deal to rescue Southern California Edison was greeted with sharp skepticism by small generators who could still force the utility into federal bankruptcy court if they are not convinced they will be paid soon.
"Time works against it (the deal) and logic works against it and I believe the creditors will not be patient," said Gary Ackerman of the Western Power Trading Forum, which represents power generators and suppliers.
Ackerman said he expects that Edison, like Pacific Gas & Electric Corp., will end up in bankruptcy court. And he said it is questionable whether the agreement between Gov. Davis and Edison would hold up in that court.
Ackerman and other spokesman for generators said they anticipate plenty of opposition in the state Legislature, which must take action for the deal to take place.
The groups of small generators, whom Edison has not paid since November, said they believe lawmakers will question the state paying 2.3 times book value for Edison's transmission lines, especially since it is uncertain whether the bankruptcy court would permit the state to buy PG&E's grid.
Also, the so-called "qualifying facilities," co-generators and alternative-source generators that represent about a third of Edison's power supply, say they were not consulted in the drafting of the workout agreement. They say the accord does not assure that Edison's past debt to them will be paid or that they will be paid a fair price for their power in the future.
"With respect to the QF issues, we have not had any conversations with anybody about how to fix this problem and yet there is all this activity to stabilize the QF community. It has not given us a warm and fuzzy feeling," said Jan Smutny-Jones of the Independent Energy Producers Association.
Smutny-Jones said he thinks the industry has been very patient in avoiding the bankruptcy option, "wanting to be sure the market isn't disrupted." But he also said that a bankruptcy court "would bring . . . some clarity if the people would get paid going forward."
Jerry Bloom, a lawyer with the Los Angeles office of White Case who is representing the Co-Generation Council, said about 68 percent of that group's members, who operate gas-fired power plants, have shut down because they can no longer afford to produce power without payment. The group also contends that the rate the PUC proposes to pay them in the future is too low because it does not cover the surging cost of natural gas.
Edison officials said Monday that they intend to pay the QFs for power already delivered. Utility officials said the money Edison would receive from the transmission-line sale, together with revenue from state bonds, would be enough to cover all of Edison's $3.5 billion shortfall without any rate increase beyond what the PUC has announced.
But the QFs are doubting Thomases. "I think we will have to take a Trumanesque show-me approach," Smutny-Jones said.
Leslie Berkman can be reached by e-mail at email@example.com, by phone at (909) 737-1366, or by fax at (909) 734-2518.
-- Martin Thompson (firstname.lastname@example.org), April 10, 2001.
California Legislators Say Buying Power Lines Doesn't Do Enough to Ease Crisis
Source: The Orange County Register Publication date: 2001-04-10
Apr. 10--SACRAMENTO, Calif.--Gov. Gray Davis' $2.76 billion agreement to acquire Southern California Edison's transmission lines faces hard times in the Legislature, where some lawmakers fear that it bails out the debt-riddled utility but does little to ease California's energy crisis. The governor's proposal entails the purchase of Edison's transmission network and gives the state control over 20,000 acres of Edison-owned land. It requires the utility to provide the state with a decade's worth of low-cost power, obliges Edison's corporate parent to refund $420 million it took from the utility, and whittles down the company's debt over time with money set aside from increased consumer rates.
It also includes Edison's commitment to invest $3 billion in capital improvements over five years, financed with money from rates, and continues for 10 years a guaranteed return on equity of 11.6 percent for the utility. It does not call for new power-plant construction.
"It's too rich, there's too much money, too many dollars," said Nettie Hoge, a consumer activist with The Utility Reform Network. "It's like a fun-house mirror. You look closer, and it's a total distortion."
The plan must be approved by the Public Utilities Commission and the Legislature.
"My guess is there isn't a single vote in my caucus for the purchase of the grid," said Assemblyman Dave Cox, R-Fair Oaks, the Assembly's GOP leader. "And I'd be surprised if the governor can find the people on the Democratic side of the aisle to vote for this. We certainly agree the utilities should be made creditworthy, but we don't think they should be bailed out."
Sen. John Burton, D-San Francisco, the leader of the Senate, said using higher rates to help cover Edison's $5.4 billion power-buying debt would prove a major sticking point, because the debt "may have been built up fraudulently through price-gouging (by generators) or mismanagement.
"There is a question of whether ratepayers should have to gargle that," Burton said.
PUC President Loretta Lynch said she was encouraged by the deal, and suggested that it stood a good chance of winning PUC approval. She said the plan allowed "utilities to recover their reasonable costs and to earn reasonable profits."
Davis said the agreement with Edison paves the way for a similar arrangement with San Diego Gas & Electric Co. Negotiations with SDG&E will begin in earnest today and could be wrapped up soon, he said.
Pacific Gas & Electric Co., which has $8.9 billion in power-buying debts, spurned negotiations with Davis and sought protection Friday under federal bankruptcy laws. Unlike Edison, PG&E has been reluctant to relinquish its transmission lines. "All along, we've always felt that they never really wanted to sell them," Sen. Debra Bowen, the chairwoman of the Senate energy committee.
Davis has opposed bankruptcy for the utilities, saying it gives the courts excessive control over electricity distribution and hamstrings the state's ability to resolve the crisis.
One key lawmaker said PG&E's bankruptcy makes the Legislature's decision more difficult.
"In light of PG&E's bankruptcy, there is a very large question of whether purchasing less than a third of the state's transmission lines makes any sense, other than to provide an infusion of cash to the utility," said Sen. Joe Dunn, D-Santa Ana, who heads a committee examining electricity market practices.
State officials have said a purchase of the transmission lines would only make sense if all three investor-owned utilities were to sell. Otherwise, the state wouldn't enjoy the bargaining leverage with generating companies that would come from owning a majority of the grid.
"We need to review the nitty-gritty details, and it (passage) is questionable," Dunn said. "We need to know why this is beneficial to the people of the state of California, and I'm not sure that case has been made yet."
Michael Shames, of the San Diego-based United Consumer Action Network, said purchasing just part of the grid could prove to be of only marginal value.
"The benefits that accrue for owning the grid do not become available if you only own a third or two-thirds of the grid. All three legs of the stool have to be there," he said.
By John Howard and Kate Berry
-- Martin Thompson (email@example.com), April 10, 2001.