Just three days after Pacific Gas and Electric Co. filed for bankruptcy protection and cut off negotiations with the state, Gov. Gray Davis on Monday announced an agreement with Southern California Edison to buy the utility’s transmission lines in exchange for helping it pay off billions of dollars in debt.
Under provisions of the agreement, the Democratic governor said the state will pay Edison $2.76 billion for its transmission lines, and will dedicate a portion of consumers’ electricity rates to paying off the utility’s debt, estimated at more than $5 billion.
Davis praised Edison for its persistence in negotiations, but upbraided PG&E for filing Chapter 11. He added, however, that the state remains willing to offer PG&E a comparable deal if it wishes to resume talks.
“It was hard, arduous work, but the result was positive for every consumer in this state,” Davis said at a press conference in Los Angeles. “It proves you can solve problems of the state if you stay at the table, if you’re responsible and (if) you’re resolute.”
The deal came 47 days after Davis announced an “agreement in principle” with Edison. Monday’s announcement was received coolly by the governor’s fellow Democrats in the Legislature and blasted as a giveaway by consumer advocates.
Harvey Rosenfield of the Foundation for Taxpayers and Consumer Rights branded it a “massive ratepayer bailout” that protects only the utility’s shareholders and executives.
“I’d call this a desperate deal by a panic-stricken governor,” Rosenfield said. The deal is “designed to appease Wall Street and to redeem the governor in the eyes of the energy and utility industry.”
Rosenfield said he will fight the agreement, which must be approved by the state Public Utilities Commission, the state Legislature and the federal government before it becomes final.
The process could take as long as two years.
Rosenfield said he’s prepared to put an initiative before voters in November 2002 that would undo the agreement if necessary.
The deal would require the state to pay $2.76 billion for Edison‘s transmission lines, or 2.3 times book value.
Edison is expected to profit by $1.5 billion from the purchase, and will use that money to pay off some of its debt. Edison‘s parent company will refund $400 million its subsidiary, which will also go toward paying off the utility’s debt.
The utility will pay off the remainder of its debt through corporate bonds, which will be repaid by consumers through a portion of their electricity rates. Before PG&E‘s bankruptcy announcement on Friday, Davis came out in support of an average 26 percent rate increase.
The deal also allows Edison to continue receiving its current 11.6 percent rate of return for the next 10 years.
In exchange, the utility has agreed to provide low-cost power to the state for 10 years from both regulated and non-regulated power plants, and to dismiss lawsuits seeking higher electricity rates.
It also will grant perpetual conservation easements on more than 21,000 acres of forestland.
In addition, Edison has pledged to do work on its lower-voltage distribution grid that will trigger a second, unspecified rate hike, to take effect in 2003, said Stephen Frank, chief executive of Southern California Edison.
The entire agreement requires legislative approval, which likely won’t come without a fight.
The bill that will contain the deal’s provisions is expected to require only a simple majority for passage, which means 41 votes in the Assembly and 21 in the Senate.
Though it could eke through without Republican votes, it’s not clear whether all Democrats support the plan.
Assembly Speaker Robert Hertzberg, D-Sherman Oaks, reserved judgment on the plan until he can see details for himself.
“I am most anxious to review the protections the plan provides to California residential and business consumers,” he said.
Senate leader John Burton, D-San Francisco, was more blunt. Burton said he’s concerned about dedicating a portion of consumers’ rates to pay off Edison‘s debt.
“I have always had a concern about a dedicated rate component that would have ratepayers picking up utilities’ back debt that may have been built up fraudulently through price gouging or mismanagement,” he said. “There is a question of whether ratepayers should have to gargle that.”
Sen. Debra Bowen, D-Marina Del Rey, suggested that power generators must also share the burden for the debt.
“It sounds like the plan puts ratepayers on the hook for 100 percent of the rates charged by the power generators – rates that even (the Federal Energy Regulatory Commission) found to be unjust and unreasonable.”
Frank, who heads Edison International’s regulated utility, argued that the utility is entitled to collect the funds, and estimated that Edison ratepayers will be paying off about $2 billion of the disputed “undercollection” for the next 15 years.
“We do expect to recover all of our costs on this, but we also are contributing a great deal to the overall deal” Frank added, including giving up ownership of transmission lines.
Davis said that he expects to hammer out a deal with San Diego Gas and Electric soon. The governor added that he still hopes to reach an agreement with PG&E, despite its filing for Chapter 11 last week.
But in a statement, PG&E officials said they aren’t planning on returning to the negotiating table unless they are directed by the judge handling their case.
“Given our set of facts, we continue to believe that Chapter 11 reorganization is the most feasible means to reach a solution,” the statement said. “We will proceed at the direction of the bankruptcy court.”