STATE WOULD PAY $2.76 BILLION FOR GRID AND GUARANTEE BAILOUT BONDS. BUT THE PACT IS MET WITH MUCH SKEPTICISM AND PG&E IS BALKING AT A SIMILAR DEAL
Los Angeles Times
Gov. Gray Davis announced a major breakthrough Friday in the struggle to bring stability to California’s reeling electricity network: an agreement on the basic framework of a deal with Southern California Edison that includes the sale of its transmission grid to the state.
But the governor’s announcement, delivered at a brief news conference in his Los Angeles office, left critical questions unanswered–and was met with skepticism, at best, by consumer advocates, legislators, power generators and Edison creditors. Davis acknowledged that the deal would be meaningless unless he was able to strike a similar pact with the state’s largest utility, Pacific Gas & Electric, which has so far proved to be resistant to his entreaties.
Davis said the pact with Edison would require the state to pay $ 2.76 billion for the utility’s share of the statewide electrical transmission grid. The state would then pay the utilities to operate the system. The state also would guarantee bonds to be issued by the utility to pay off its substantial debts.
The governor said the plan offers “real bread and butter benefits” for consumers, although some consumer advocates criticized it as half-baked.
“The only folks who are going to benefit from today’s proposal are the energy companies, their executives and their shareholders,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica and the governor’s most fiery critic throughout the months-long energy crisis.
Davis said he expects to announce a final deal with Edison within a week. He also said he believes Sempra, the parent of San Diego Gas & Electric, will agree to sell its share of the transmission system next week. As for PG&E, no further talks have been scheduled.
“This is an agreement that provides value to both sides,” Davis said . “The utility gets the financial wherewithal to go back in business and keep our lights on. We get commensurate value and specific benefits which provide us long-term power at very cheap rates.”
Still, major work remains to be done, and any deal must be approved by the company’s board of directors and the Legislature.
“I have to see the details,” said Senate President Pro Tem John Burton (D-San Francisco). “It may be the framework, but the devil will be in the details. When it is fleshed out, we’ll see.”
Edison executives had been weighing the possibility that it might have fared better in bankruptcy court. But the utility apparently concluded Friday that the governor’s proposal offered its best chance to restructure its multibillion debt.
“It is tough, and a hard swallow,” said a top Edison executive, speaking on the condition of anonymity. “But at this point, we are firmly of the belief that this is in the best interest of ratepayers, shareholders and creditors.”
On the record, Edison would only confirm in a formal statement that it had reached a preliminary agreement with the governor “to resolve a key aspect of the California energy crisis.”
“It is important that together we get on with the work of restoring normalcy to California’s electricity situation,” said John E. Bryson, chairman and chief executive of the utility’s parent company, Edison International.
The utility’s executives were nearly as circumspect with their own debt holders, who were brought together Friday afternoon in a previously scheduled conference call.
Edison International Chief Financial Officer Ted Craver characterized discussions with the governor as “active, generally constructive and we feel some progress has been made,” but he declined to go further despite repeated questioning by debt holders.
Debt holders grew increasingly testy during the call as news headlines generated by the governor’s news conference flashed across electronic terminals that most of the investment professionals have on their desks. Craver apologized with each non-answer he gave, explaining that Edison had set a policy of not discussing the negotiations as they progressed.
“What’s fact and what’s fiction here?” demanded one investment manager after reciting aloud some of the points that Davis had unveiled for reporters.
“You should attribute as much significance to that as you would to any statement made by the governor,” Craver replied cryptically. The executive did give the debt holders a tidbit of good news: All of Edison‘s banks have agreed to give the utility an extension until March 14 to pay its bills.
In his announcement, Davis said he had agreed to pay $ 2.76 billion for Edison‘s share of the electrical transmission system, about 12,000 miles of the total 32,000-mile system.
That sum amounts to 2.3 times the so-called book value of Edison‘s share of the system. If the state pays a like sum for the remainder of the statewide system, the price tag would approach $ 7.3 billion.
The deal seeks to ensure that Edison will receive enough cash to restructure its debt, and that the state will receive benefits of roughly equal value. However, the size of the grid’s price-tag came under immediate attack.
“I don’t see how you do that without a rate increase,” Assembly Republican leader Bill Campbell said in Sacramento.
Campbell added that he was disappointed that Davis had not reached final agreement with the utilities. At the same time, he stressed that Republicans continue to oppose Davis’ plan, and he questioned whether it would really help restore the financial health of the utilities.
Although Davis did not disclose it during his press conference, the governor and Edison have agreed that the utility has amassed a debt of $ 4.1 billion in recent months as the utility paid record prices for wholesale power, but was precluded by state regulators from passing on the full cost to consumers.
The level of debt is important, lawmakers and consumer advocates say, because it ultimately will be passed on to consumers.
The state Public Utilities Commission raised rates on residential users by 9% last month. Another 10% increase will take effect early next year, when a rate reduction ordered by the Legislature in 1996 expires.
Davis has said he hopes there will be no additional rate increases.
Experts differ on the transmission grid’s true value. But most believe the 32,000 miles of high voltage wires that make up the system is worth significantly more than its book value.
Bryson had suggested a $ 6 billion sale price for his company’s share of the grid. PG&E Chairman Robert Glynn has balked at parting with its portion, likening such a divestiture to telling a supermarket that it can no longer sell milk.
In another key part of Davis’ plan, the administration and Edison agreed that the utility would hold on to its remaining power plants for 10 years, and sell the power to Californians during that time at cost, rather than market rates.
“This is a real benefit, getting 10 years of cheap power,” Davis said. He also announced that Edison International, the parent of the utility, had agreed to return $ 420 million in federal tax overpayments to the utility.
Again, the governor’s critics were unimpressed.
Nettie Hoge of the Utility Reform Network in San Francisco said the cheap power amounted to “counterfeit currency,” since Edison already supplies cheap power from its hydroelectric and nuclear facilities. And she said the $ 420 million its parent company will return represents overpayments on taxes that the state auditor has already said the company should repay to the utility.
In other provisions announced by the governor, Edison would:
* Commit to sell power starting in August from a new power plant in the Central Valley to consumers at below-market rates for the next 10 years. Davis estimates the value to consumers will be $ 500 million a year.
* Drop a federal lawsuit seeking to compel the state to permit it to raise rates to recoup its debt. The value placed on that agreement is roughly $ 1 billion, documents show.
* Grant the state a 99-year easement to 20,000 acres of watershed in the Southern and Eastern Sierra, ensuring that there will be no development. The acreage is in the vicinity of June, Shaver and Edison lakes.
But none of that may matter if Davis cannot coax an agreement out of PG&E, which serves customers in Central and Northern California. Glynn issued a statement Friday in which he said, in part: “Each utility’s issues and opportunities in this crisis are different, and we believe that PG&E has proposed a detailed solution that balances ratepayer and shareholder interests.”
Glynn insisted that he was “confident that continued discussions can achieve a resolution for our company.” However, as of late Friday, no date had been set for continuing the talks between PG&E officials and Davis’ negotiators.
There was some speculation that the governor orchestrated the Edison announcement to pressure PG&E to fall into line.
“There was a little bit of Kabuki going on today. The subtext was to get PG&E to the table,” said Peter Navarro, utility finance expert and an economics professor at UC Irvine.
Davis left after his press conference on a five-day trip to Washington, D.C., and New York. He planned to attend the National Governors Assn. conference in the nation’s capital, meet with U.S. Energy Secretary Spencer Abraham and appear at a Democratic Governors Assn. fund-raising dinner.
Davis is going to New York next week to confer with Wall Street analysts “to let them know we’re making progress.”
Analyst Douglas Christopher of Crowell, Weedon & Co. said Friday that the agreement is “definitely a positive from a financial point of view. For investors and creditors, it takes away some of the uncertainty.”
Unloading the transmission lines would bring in cash for Edison and save the company the money it now spends maintaining the lines, Christopher said.
However, Paul Patterson, a utility analyst with Credit Suisse First Boston Corp., said too little is known about the agreement to fully assess it.
“We’ll have to wait and see what actually happens next week,” Patterson said. “I’m cautious and slightly optimistic.”
Consumer advocate Michael Shames of the Utility Consumers’ Action Network in San Diego similarly said he was “not in a position to judge this plan until we see the numbers.” But unlike some other consumer advocates, he was not immediately dismissive. “Conceptually he’s still in the ballpark, but the numbers may turn out to be untenable.”
That said, Shames added: “Everything we’ve discussed may be moot. Because if PG&E doesn’t come to the table, deal’s off and we’re in bankruptcy.”
