San Jose Mercury News

LOS ANGELES _ After weeks of anticipation, Gov. Gray Davis emerged from high-stakes talks aimed at rescuing the state’s two largest utilities with half a solution: a tentative agreement to buy power lines from Southern California Edison.

The state has agreed to buy Edison‘s lines for $2.7 billion _ twice their book value _ but has been unable to work out a similar deal with Pacific Gas & Electric, whose participation is crucial.

With pressure mounting to stabilize California’s electricity markets, Edison‘s agreement could turn up the heat on PG&E to put aside its misgivings.

The ongoing talks are aimed at helping the two troubled regain their financial footing and ensure that California can muddle its way out of the energy morass that is starting to slow the state economy.

Before flying off to Washington for a meeting with the nation’s other governors, Davis called the agreement with Edison a “fair and balanced” compromise he said would not lead to higher rates for its millions of customers.

“I’ve worked very hard to find a solution which will not ask more of the ratepayers,” Davis said at his Los Angeles office.

Along with sale of the transmission lines, Davis said, Edison has agreed to protect 20,000 acres of wild lands, use $420 million from its parent company to pay off its debts and drop a federal lawsuit that could have led to higher energy bills for millions of Californians.

In return, Edison is being allowed to sell billions in bonds that it will be allowed to repay with customer money, a deal that some critics say will lead to a rate increase.

Talks with PG&E and San Diego Gas and Electric are expected to continue next week and Davis expressed hope that more progress would be announced next week.

Pacific Gas and Electric has been the biggest stumbling block so far. The company has the largest debts of the three utilities and remains closest to financial ruin. But its executives have so far showed little interest in selling off their transmission lines.

Bob Glynn, chairman of Pacific Gas and Electric Co., did not comment on the Edison deal. But he called PG&E‘s talks with Davis “an important milestone in the resolution of California’s energy crisis,” and said he was confident that further talks could lead to an agreement.

“Each utility’s issues are opportunities in this crisis are different, and we believe that PG&E has proposed a detailed solution that balances ratepayer and shareholder interests,” said Glynn.

Davis and his aides have been talking with the three utilities for weeks in an effort to rescue the companies and round up enough power to prevent more of the rolling blackouts that have threatened the state economy.

The announcement of the Edison deal was greeted with measured praise from lawmakers who must support the plan, mixed reactions from Wall Street analysts who evaluate California’s financial health, skepticism from power generators that provide the state with energy, and outrage from consumer activists who threatened to ask voters next year to derail the agreement.

“I wouldn’t call it a negotiation,” said Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights. “I would call it a capitulation, a total surrender to Edison.”

Under the deal, California would pay Edison $2.76 billion for about 12,000 miles of transmission lines used to shuttle power around the state.

If the other two companies agree to a similar deal, the state would pay about $7.1 million for 26,000 miles of the high-voltage lines owned by all three utilities.

In addition, Edison has also agreed to:

_Protect 20,000 acres of watershed lands its owns for 99 years.

_Drop a federal lawsuit that could result in the lifting of a rate cap that has kept customer rates from dramatically rising.

_Transfer $420 million in overpaid taxes from the parent company back to the utility to help it pay off its multibillion dollar debt.

_Ensure that it will continue for 10 years to produce power at its dams and sell it for the cheapest rates available in the state. In addition, Edison has agreed to sell cheap energy from the remaining power plants it owns.

In return, the company would be allowed to sell bonds to pay off its debts and rebuild its financial credibility.

When Davis went into the talks with the utilities, he told lawmakers that he was willing to let the companies set aside a portion of customer energy bills to pay for the bonds.

Davis has said that the companies should be able to pay off their debts without raising rates, but some lawmakers and consumer groups are extremely skeptical of that contention.

The utility has said that it has about $5 billion in debts because the state’s deregulation law prohibits them from passing on the skyrocketing cost of wholesale power to their retail customers.

Consumer groups and some lawmakers contend that the utility made billions in profits under the first years of deregulation that should now be used to help pay off the utilities’ debts. Paul Patterson, a utility analyst with Credit Suisse First Boston, said there were too few details to really evaluate the plan. Patterson said he still wants more information about how rates will be structured so the utilities can pay off their debts and the state can buy power.

“We just don’t know enough,” said Patterson, whose company has been advising the Legislature during the energy crisis. “I’ve been disappointed in the past with statements made by the state’s leaders.”

Power generators also criticized the plan for doing nothing to address fundamental problems.

“We are very concerned with the direction this deal seems to be taking,” said Jan Smutny-Jones of the Independent Energy Producers Association, which represents a number of large and small power producers. “The question is what will this do to stabilize prices, increase supply or decrease demand. So far we don’t see a lot of clarity on any of these points.”

Democratic lawmakers who must agree to the plan generally praised Davis for making progress.

“It is a very, very important and positive step,” said Assemblyman Fred Keeley, D-Santa Cruz, who has been a key legislative negotiator during the energy crisis. “It hopefully will provide the precedent necessary to conclude negotiations with the two other investor owned utilities.”