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Los Angeles Times

Proclaiming that efforts to rescue the state’s utilities are reaching a new level, Gov. Gray Davis said Friday that two of the three companies are willing to negotiate the sale of one of their most prized assets: their transmission lines.

After presenting his long-awaited proposal to executives of Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric, Davis said he was optimistic that “we will have some results by early next week.”

Davis, unveiling his plan publicly at an afternoon news conference, confirmed his call for a state takeover of the utilities’ 32,000-mile electricity grid. That step, he said, would give the utilities billions in cash and help them pay debts they estimate at $ 13 billion–the result of runaway wholesale electricity costs they are unable to pass to customers, whose rates were frozen under the state’s landmark 1996 deregulation law.

But even as he spoke, PG&E, the state’s largest utility and the one most hesitant to part with its share of the transmission system, issued a decidedly downbeat statement: “Any solution must be fair both to shareholders and ratepayers. The governor’s framework does not yet meet this objective.”

A top executive of one of the utilities, who attended Friday’s talks, was highly critical of the proposal.

“There wasn’t a single piece of paper,” the executive said, noting that Davis’ aides, not the governor, were in the room where the plan was set forth. “There wasn’t a single number put on the table. There was not a negotiation.”

Indeed, though Davis confirmed the broad outlines of his plan, he released virtually no details. He didn’t say how much the state is willing to pay for the transmission system. He would not identify which of the three utilities was balking at the grid proposal. He didn’t give an estimate of what he believes the utilities’ debts to be. And he declined to answer several questions, saying many matters remained the subject of negotiations.

The state would raise money for the grid purchase by selling revenue bonds, which would be paid off as utility customers pay their bills. Davis sidestepped the question of the price tag for the transmission system, except to say that the book value is about $ 3.1 billion. Others place the number somewhat higher or lower. State officials believe the state would need to spend about $ 1 billion in upgrades.

Davis proposed that the utilities could restructure their debts by selling bonds once they can restore their credit-worthiness. To solidify the utilities’ position, the state would permit the companies to pay the bond debt by earmarking a portion of their customers’ bills. He did not disclose the amount or term of the bonds.

However, the governor insisted that his plan to allow the companies to receive a “dedicated rate component” to pay off the bonds did not constitute a rate increase–despite consumer advocates’ angry assertions to the contrary.

What’s more, Davis said, consumers might not even see a separate charge on their bills showing how much they would be paying to retire the debt.

Davis acknowledged that consumers will be paying as much as 19% more by early next year than they were paying two months ago. He said a recently enacted temporary 9% rate increase would become permanent. Further, in March 2002, a previous 10% rollback in rates would expire.

“It is my plan that all this can be done within the existing rate structure,” he said. “It is my hope and expectation that we will not have to ask any more of consumers beyond what the existing rate structure requires.”

“This is a balanced business transaction,” Davis said. ” . . . We want the utilities back in business because they know better than anyone how to keep the lights on and power our economy.”

Edison executives declined to comment on the meeting, which lasted about two hours. PG&E, which has balked at selling its portion of the transmission system, said in its statement: “We are asking the state simply to follow the law, which allows us to recover wholesale power costs incurred for our customers, and which recognizes that our rate freeze should have ended last summer.”

Davis’ negotiators, including former Southern California Edison President Michael Peevey, hoped to talk again with the executives as early as Monday.

“My hope from the outset has been to avoid bankruptcy,” Davis said. ” . . . I hope and believe this will take bankruptcy off the table.”

On Wall Street, Davis’ proposal received muted praise. But as the utilities’ unpaid bills pile up, some analysts fretted about the time needed to implement the pieces. Edison and PG&E have said they do not want to file for bankruptcy law protection, although creditors could force them into bankruptcy court.

Independent electricity generators and others owed money by Edison and PG&E are growing increasingly irritated with the slow progress toward a solution.

At his news conference, Davis said the amount that generators will recoup is being negotiated: “That is a matter that is the subject of continuing discussion. That’s the only way I can respond to it.”

In another development, U.S. District Judge Frank C. Damrell Jr. of Sacramento extended until Wednesday an order requiring that four of the generators continue selling electricity to California, even though they say they are uncertain they will be paid in full for providing the power.

The Democratic governor had not briefed Republican lawmakers about the plan. Most Republicans–and perhaps all of them–oppose the state’s purchase of the transmission grid.

“I don’t think there are many, if any, Senate Republican votes to take over the transmission lines,” Senate Republican leader Jim Brulte of Rancho Cucamonga said.

Given Democratic majorities in the Senate and Assembly, Democrats can approve the plan without Republican votes.

Assembly Speaker Bob Hertzberg (D-Sherman Oaks) was contemplating using parliamentary maneuvers to ensure that bills approved in extraordinary sessions by simple majority votes become law in 90 days.

“They’re looking to block things. They’re saying no,” Hertzberg said of Republicans. “We are looking to keep the lights on. I’d love to have Republicans on board. But if not, we’ll pass a 41-vote bill.”

Senate President Pro Tem John Burton (D-San Francisco) is the Legislature’s leading proponent of taking over the transmission grid. But he withheld an endorsement of Davis’ proposal, saying he continues to review it.

“There has to be an equal tangible benefit back to the ratepayers,” Burton said.

Hertzberg said the provisions in Davis’ plan that would permit the utilities to receive a dedicated part of monthly bills to pay off their debts would come at a cost. The parent companies of Edison and PG&E, he said, would make financial contributions to the utilities, starting with hundreds of millions of dollars in federal tax refunds the parent firms expect to collect for last year.

“The structure is right,” said Mike Florio of the consumer group the Utility Reform Network. “But the devil is in the details–and in this case, there are billions of dollars in the details.”

Other consumer advocates took a far harsher view.

Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, said Davis “needs a pocket calculator” if he truly believes his plan won’t lead to rate hikes.

“There’s not enough room on the utility bill for all the charges they want to put on the ratepayers,” Rosenfield said.

Davis, however, remains steadfast that rates won’t rise further.

“Believe me, if I wanted to raise rates, I could have solved this problem in 20 minutes,” he said. “But I am not going to ask that ratepayers accept a disproportionate burden.”

On Wall Street, Davis found a somewhat friendlier, if still wary, audience.

He announced his plan after East Coast financial markets had closed. In regular trading, the stocks of parent companies Edison International and PG&E Corp. each closed at $ 13 per share on the New York Stock Exchange, Edison having gained 69 cents and PG&E 16 cents.

Merrill Lynch utility analyst Steven Fleishman called the proposal “more comprehensive and potentially workable than we expected.” He also cautioned that creditors may balk at the time it would take for the plan to become final.

“People’s patience is wearing thin,” said A.J. Sabatelle, an analyst with Moody’s Investors Service, a major credit-rating firm. “The way creditors are viewing this is if this is a proposal that allows them to resolve these issues in a shorter time frame then a bankruptcy might, then there is reason to sit tight.”

One example of growing impatience is the formation of at least three so-called creditor committees–the latest a group of eight renewable energy producers seeking $ 210 million in payments for electricity they have supplied to Edison.

“We are the ones who have been generating all this time, supplying power and not getting paid,” said Carol Clawson, a spokeswoman for Florida Power & Light, which generates electricity in California from renewable and fossil fuel plants.

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