Secret plan shows utility demanded less regulation

The San Francisco Chronicle

PG&E‘s bailout talks with Gov. Gray Davis fell apart after the utility demanded unprecedented freedom from regulatory oversight and the ability to pass along huge rate increases to consumers, The Chronicle has learned.

Pacific Gas and Electric Co. claimed that its decision this month to file for bankruptcy protection in San Francisco resulted from the governor’s unwillingness to negotiate a fair deal.

But a confidential proposal submitted by PG&E during the talks shows that the utility was the more ambitious and stubborn negotiator and that the deal sought by the company was doomed to fail from the outset.

“It’s like the Japanese insisting that we surrender Hawaii after we beat them in World War II,” said Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

He described PG&E‘s demands as “breathtaking in their level of self-delusion.”

A copy of the eight-page, single-spaced proposal was obtained by The Chronicle.

“PG&E was arrogant and defiant, and acted like we owed them something,” said Steve Maviglio, a spokesman for the governor.

“That’s not how you enter into a negotiation.”

UTILITY MAKES DEMANDS

Among the utility’s demands:

— PG&E insisted that it be cleared of any wrongdoing when it transferred millions of dollars to its parent company.

— In a sale of its power grid to the state, PG&E still wanted to retain possession of valuable assets, including the right to profit from any telecommunications lines or antennas linked to the system.

— PG&E required that it be given first right of refusal if the state ever chose to sell off the power lines, allowing the utility to buy back the system without competitive offers.

“It is ludicrous to suggest that this document caused the negotiations to break down,” said Ron Low, a PG&E spokesman. “There were negotiations that occurred later and other documents that followed.”

The company’s proposal is dated Feb. 28. Sources familiar with the negotiations said PG&E did not significantly depart from its initial offer during follow-up meetings.

Robert Glynn, chairman of the utility’s parent company, PG&E Corp., said that when the bankruptcy filing was made April 6, no substantive talks had been held for at least three weeks.

This would have made PG&E‘s proposal only about two weeks old when the negotiations unraveled.

AT AN IMPASSE

Sources said the utility refused to budge during that interval and that the impasse centered primarily on PG&E‘s insistence that it be subject to less oversight by the California Public Utilities Commission.

“They took a position on regulatory matters that was out of touch with reality,” said Maviglio, the governor’s spokesman.

Indeed, the single most striking aspect of PG&E‘s proposal is its repeated references to a reduction in the state PUC‘s regulatory authority.

For example, the utility argues that it is entitled to recoup from consumers about $9 billion in costs accrued because of runaway wholesale power prices.

The proposal says this money “will be fully recovered in retail rates without further CPUC review for prudence or any other purpose.”

PG&E also insisted that virtually all official restrictions on its activities based on the 1996 legislation that deregulated California’s electricity market be overturned.

“The CPUC will terminate or modify the scope of existing commission proceedings and will not initiate new proceedings related to implementation of (the legislation) or issues pertaining to the reasonableness and recovery of costs,” the proposal stipulates.

This would include a current investigation by the state PUC into whether PG&E violated state law by transferring millions of dollars from the utility to its parent company before filing for bankruptcy.

PG&E‘s proposal maintains that the state “will waive and release all claims arising out of the dispute,” including the money transfer and a restructuring of the parent company that protected it from the utility’s financial woes.

Furthermore, it instructs that the state PUC “will issue an order finding that PG&E and PG&E Corp. have fully complied with state laws and CPUC orders . . . and that their conduct and transactions did not contravene public policy.”

“It’s Bob Glynn thinking he’s god of the universe,” said Nettie Hoge, executive director The Utility Reform Network in San Francisco. “PG&E doesn’t think they’re beholden to state law. They think they’re a law unto themselves.”

Shawn Cooper, a spokesman for PG&E‘s parent company, declined to discuss the contents of the proposal. “That document is confidential,” he said.

THE EDISON DEAL

No language concerning compliance with state laws was included in the accord reached last week between the governor and Southern California Edison.

That agreement, which still requires final approval from lawmakers, would restore the utility to creditworthiness in return for acquisition of its power lines and other concessions.

Sources said the deal reached with Edison is “very close” to terms offered by the state to PG&E.

Yet, while PG&E‘s proposal seeks to diminish the regulatory role of the PUC, the Edison accord bends over backward to stress the PUC‘s authority over the utility.

“It is expressly understood that there is no intention to change (Edison) continuing to be a public utility that is subject to the jurisdiction of the California Public Utilities Commission,” it states on the first page.

Maviglio said he did not sit in on the talks with either utility, but he learned from negotiators that both PG&E and Edison had misgivings about the PUC‘s role as a consumer watchdog.

“Edison had some mistrust of the PUC, but they understood that they had to live with the regulators,” he said.

PG&E, on the other hand, harbored a deeper grudge, which Maviglio said was “very emotional” for the utility. He speculated that PG&E desired retribution for a past regulatory setback.

“Perhaps we misjudged their primary concern,” he said. “It wasn’t resolving their credit issue. It was extracting vengeance on the PUC.”

TALKS GROUND TO HALT

Maviglio said the talks quickly hit a brick wall after PG&E submitted its deal terms. While state negotiators were prepared to discuss many of the points, he said, they could not yield on matters of regulatory oversight.

“We were willing to negotiate the terms of the deal but not constitutional controls,” Maviglio said. “They were attempting not just to set the course of the future but also to right the wrongs of the past.”

The first sign of trouble emerged when PG&E officials told The Chronicle in late March that it appeared the negotiations had collapsed. The governor’s office, perhaps optimistically, maintained that all was well.

Around this time, however, PG&E‘s Glynn made the fateful decision to abandon the talks and to instead file for bankruptcy protection. The company gave no indication of its move to the governor.

April 5 would prove to be a pivotal date in California’s energy saga.

While PG&E was preparing to file for bankruptcy the next morning and was handing out last-minute bonuses and raises to thousands of employees, Davis was putting the final touches on a televised speech in which he would all but assure the utilities they would recover their costs through rate increases.

Sources said the governor’s negotiators called PG&E to brief the company’s chief financial officer, Peter Darbee, on what Davis was about to say.

They had to pull Darbee from a meeting of PG&E‘s board of directors, where, presumably, the official vote was being taken to file for Chapter 11. Darbee was informed about the intended speech but said little in response.

The next day, after making the bombshell bankruptcy announcement, PG&E‘s Glynn laid blame for the collapse of bailout talks entirely on Davis.

“We listened carefully to the (governor’s) statement and the commentary that followed, and this decision is the result,” he said.

“The negotiations we have been involved in since last November have gone nowhere,” Glynn added. “Over the last month, the kindest thing to say is progress has dramatically slowed.”

“There was no room for negotiation,” countered Maviglio. “It was their way or the highway.”

Rosenfield of the Foundation for Taxpayer and Consumer Rights seldom sees eye to eye with the governor. But in this case, he finds himself defending Davis.

“The document absolves the governor of responsibility for PG&E‘s bankruptcy,” Rosenfield said. “It’s good to know there are limits beyond which even Davis wouldn’t go.”

The governor’s negotiators remain hopeful that a deal still can be reached with PG&E comparable to the state’s accord with Edison.

Maviglio said PG&E has several months in which to file a Chapter 11 reorganization plan. He said state officials are prepared to work with PG&E to produce a plan that meets both sides’ goals.

“It would be the smart thing for them to do,” Maviglio noted. “When they come out of bankruptcy, they’ll still be subject to regulation.”