Plan also included buying Edison firm
The San Francisco Chronicle
State lawmakers quietly circulated a proposal last month that California’s government buy Pacific Gas and Electric Co. and Southern California Edison for more than $3 billion.
Backers of the plan sought support from large trade and consumer groups and were said to have approached representatives of PG&E‘s creditors in bankruptcy court. It was part of a strategy laying out possible state government solutions should PG&E be joined in bankruptcy by Southern California Edison, which is teetering on the brink.
The idea was held up by state Assembly leadership while last-ditch efforts are made to keep Edison from entering bankruptcy as well, according to senators, Assembly members and members of the legislative staff.
The prospect of Edison‘s bankruptcy was given more credence by Raymond James analyst Frederick Schultz, who said in a research report this week that it becomes “more likely” every day a solution is not reached.
A three-page term sheet obtained by The Chronicle, prepared May 14 by the office of Assemblyman Fred Keeley, D-Boulder Creek, laid out a scenario in which the state would participate in a leveraged buyout of the utilities, assuming their debt, taking over their assets and financing the entire plan — at an estimated cost of up to $3.5 billion — with bonds to be paid off from power sales to users.
COSTS OF ACQUISITION
According to the memorandum, the acquisition costs would be relatively low because the “effective net equity of PG&E Company is close to, or less than, zero” and the equity of Edison was perhaps $1 billion to $2 billion.
Keeley, through his chief consultant, Guy Phillips, declined to comment on the proposal. A number of legislators and interest groups said both men were advocating the proposal before it was supplanted by a newer version of the Edison bailout plan.
State Sen. John Burton, D-San Francisco, said the proposal was going around last month, although discussion of it has been superseded by a new plan to rescue Edison before it files for bankruptcy. Still, he said, he’d be willing to consider it.
“If it penciled out, I’d be for it,” Burton said. “It doesn’t offend me.”
In a sense, the idea is just one amid a sea of others that have surfaced in recent months as lawmakers have struggled to find a way to fix the state’s energy mess. It apparently grows out of the increasing belief that publicly controlled power service is one of the few ways to prevent California energy consumers from being gouged, given the example of government-run municipal power authorities that have largely been exempt from the state’s heartaches.
The proposal also comes in reaction to the deal proposed by Gov. Gray Davis to buy Edison‘s transmission lines for $2.7 billion as a means of infusing the company with cash and restoring it to operation. For that kind of money, the thinking goes, why not get the entire companies, rather than limited assets?
PLENTY OF HURDLES
Still, such a deal would face significant hurdles, including questions about the legality of state acquisition of stock, and probable opposition from both utilities. There was concern that having the state step forward as a white knight for PG&E would encourage Edison‘s creditors of pushing that company over the edge into bankruptcy in the hopes of getting the same deal. And some consumer advocates say the deal would not solve the central problem plaguing California’s electricity market — the high wholesale electricity prices being charged by generating and power marketing companies.
“PG&E and Edison have demonstrated they are unfit to serve Californians,” said Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights. “But we are being taken to the cleaners by Enron, Reliant and Duke.”
The proposal, which was subtitled “State Ownership of the Natural Monopoly Utility Companies,” said the utilities’ creditors would be asked to take a 10 percent “haircut,” or reduction, in the amount of money they are owed on the utilities’ debts. The utilities would be placed under the fold of California’s newly created Public Power Authority and be run under contract by an operations and maintenance services company.
The memorandum said the state would then have increased leverage to negotiate with power providers for lower-cost long-term contracts.
The idea was handed out to the offices of at least three key state senators, including those of Burton, Debra Bowen, D-Marina Del Rey, and Byron Sher, D-Redwood City. And a source familiar with the proposal said legislative staff communicated with representatives for PG&E‘s creditors.