Talks with Davis collapse after PG&E, Edison refuse to accept rate increase, sources say

San Francisco Chronicle

A secret deal brokered by Gov. Gray Davis to bail out California’s two biggest utilities fell apart yesterday as both sides reached an impasse over the size of a proposed rate increase, sources said.

The talks were abandoned after Davis failed to persuade the heads of PG&E Corp. and Edison International to accept a compromise over how much of a combined $8 billion in debt the two companies would swallow and how much would be passed along to consumers.

“There is no deal,” a source said.

In turn, there is also no easy way to ensure that California’s utilities have enough cash on hand to purchase electricity for their millions of customers.

The collapse of the negotiations left the president of the Public Utilities Commission, Loretta Lynch, scrambling to come up with an alternative plan ahead of today’s commission meeting in San Francisco.

Although the PUC is scheduled to take up the matter of lifting a rate freeze affecting PG&E and Edison — a required step in any deal involving a rate increase — sources said Lynch instead planned to ask the utilities to produce additional documentation related to the matter.

This would allow the PUC to address the rate freeze at a later date and would buy additional time for an agreement to be reached among the various players, the sources said.

“It would also send a signal to the banks that we’re getting closer to a solution,” one source said, referring to the growing reluctance among financial institutions to lend money to California’s cash-strapped utilities.

The deal fell through as power officials again called a Stage 2 emergency, meaning that power reserves had dropped below 5 percent of capacity.

The governor met late Tuesday with the chairman of PG&E Corp., Robert Glynn, and the chairman of Edison International, John Bryson. The talks, Davis’ first direct contact with the two utilities, were intended to set the stage for a final accord on a rate increase.

Sources said Glynn and Bryson argued that their respective utilities faced financial ruin if forced to swallow billions of dollars in outstanding debt. They want consumers to pay off most if not all of the expenses.

Davis countered that the utilities must share in the burden for him to secure backing for a rate increase among legislators and consumer groups, the sources said.

“It went round and round,” one source observed. “Politics finally started coming into play, and no action came out of the talks.”

Lower-level negotiations between Davis’ representatives and officials at the two utilities subsequently were canceled yesterday.

Meanwhile, California’s power shortage became even more severe when Arizona’s New West Energy, which was providing 600 megawatts of power to California, said it was cutting off service in part because of fears that PG&E and Edison would not be able to pay their bills.

A megawatt is the energy necessary to power 1,000 homes.

“We’re taking immediate steps to mitigate this risk and to remain a viable energy service provider,” said Robert Nichols, New West’s managing director. “The prudent thing to do is to temporarily step back and let the market evolve. ”

However, New West and other out-of-state generators may still be forced to offer at least some of their juice in California under the federal order issued by the energy secretary. The order requires generators to make excess power available to the state after meeting other customers’ needs.

The Independent System Operator, which oversees California’s power network, invoked the order for the first time Tuesday to ensure a steady supply of electricity.

The order was issued by U.S. Energy Secretary Bill Richardson last week after dozens of power companies balked at making electricity available to the state’s cash-strapped utilities.

Richardson, acting on the request of President Clinton, extended the order for another week yesterday at a meeting of Western governors in Denver. He also urged the governors to support a regional cap on wholesale electricity prices.

California’s Davis did not attend the meeting. He remained in Sacramento, where an aide said he had briefed Wall Street analysts on the failed deal to bail out PG&E and Edison.

“The markets are watching what’s going on in California,” said Steve Maviglio, a spokesman for the governor. “He’s telling Wall Street that consumers are going to bear some of the brunt of deregulation and that the PUC is looking at raising rates.”

Sources close to the talks between Davis’ office and the utilities said the negotiations had fallen apart over the scope of a rate increase. Davis was pushing for a 10 percent rate hike, while the utilities were seeking increases of at least 20 percent.

The utilities had their case strengthened when rating agency Standard & Poor’s said both companies faced bankruptcy and would see their bonds reduced to “junk” status if they did not receive bail-out assistance by today.

“The ratings are expected to drop deeply into speculative grade to reflect the likelihood of imminent default,” said Richard Cortright, an S&P analyst.

“To be frank,” said Ron Barone, who heads S&P’s utility group, “we are amazed that events have been permitted to reach anywhere near this critical stage. It truly is unfathomable. We really do need some emergency actions taken now.”

Consumer groups strongly disagreed.

“It’s an absolute atrocity,” said Nettie Hoge, executive director of The Utility Reform Network in San Francisco. “What we need to do is stop the gouging, not pass the gouging onto consumers.”

“The utility companies are only out to protect their shareholders,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “All they care about is profits.”

Rosenfield is planning a ballot initiative to scrap California’s deregulation scheme and transform it into a state-run system.

“There will be a ratepayer revolt,” he said.