Contra Costa Times

SAN FRANCISCO _ In a memorable Tuesday, the California Public Utilities Commission defied Gov. Gray Davis and reaffirmed its power to set electricity rates. Then, after lunch, it bailed out the state’s second largest utility.

The PUC incurred the wrath of the governor by rejecting his plan to finance a proposed $12.5 billion bond issue slated to repay $6 billion borrowed from taxpayers to buy electricity and to fund future power buys.

Then, stepping in where the Legislature had feared to tread, the PUC unveiled an agreement with Southern California Edison to raise $3 billion from ratepayers to help the utility pay off a deficit it ran up buying expensive wholesale electricity.

By dusk, the PUC had rewritten Davis’ prescription for restoring the financial health of the state’s electric utilities, but Davis and Loretta Lynch, the PUC president he appointed in March 2000, remained at odds.

Those differences were highlighted Tuesday morning when the PUC rejected Davis’ plan to finance its power-buying. Commissioners appeared strained as they prepared for a vote that pitted their authority to ensure fair electricity rates against the state’s financial and economic health.

But in a 4-1 vote, the PUC rejected Davis’ bid for sweeping new powers he said he needs to sell bonds to investors. The agreement would have allowed state officials to bypass regulators to hike electricity rates and forced utilities to buy power from the state.

Later, when a reporter asked if she expected retribution from Davis, Lynch acknowledged rumors of uncertainty about her status as PUC president. Davis could tap any commissioner to serve as president, she noted.

Richard Bilas, one of two Republican commissioners, said he couldn’t “in good conscience” support the Davis plan but was “troubled because what is at stake is the fiscal integrity of the state.”

Davis called the PUC‘s action “irresponsible.” State Treasurer Phil Angelides said there is now no plan in place to replenish state coffers.

The governor’s sole supporter on the commission Tuesday was Geoffrey Brown, who warned of dire budgetary fallout. “It is altogether possible the state of California, because we defer, will reach a cash crunch,” he said. “Investor confidence in California will be lost.”

The PUC sought to force Davis to retreat from his threat to veto an alternative plan by Senate President Pro Tem John Burton, D-San Francisco. But later an aide to the governor said the veto promise still stood, “probably more than ever.”

Burton’s plan would use electricity rate payments to repay bond investors, thereby bypassing a key objection to the Davis plan _ that the bonds offered a backdoor guarantee to energy firms that signed electricity contracts with the state.

Burton said his plan, which has been approved by the Legislature and is awaiting action by the governor, would allow the state to sell its bonds. Angelides has said Burton’s plan would not satisfy investors.

The day’s biggest surprise came in the afternoon, with the announcement of a deal between Edison and the PUC to settle a lawsuit the company filed last year seeking to pass along to ratepayers wholesale costs that exceeded retail rates set by the commission. The resulting deficit prompted power suppliers to stop selling to the utility for fear that they would never get paid.

“Edison and the PUC have signed a truce,” Lynch said later. That set the stage for the agency and the company “to fight together against the sellers” of wholesale power, she added.

To enable Edison to pay off its $6.4 billion deficit, the PUC agreed to tap ratepayers for $3 billion by the end of 2005, and the company agreed to pony up $1.2 billion by foregoing dividend payments to holders of its common stock through 2003, kick in more than $2 billion in cash and shave $300 million off its claim.

The Foundation for Taxpayer and Consumer Rights, an advocacy group, denounced the settlement as “a major blow to consumers.”

But Davis applauded the settlement, and rescinded his call for the Legislature to return to Sacramento for the year’s third special session on electricity. The session was intended to revive efforts to craft a politically palatable plan for Edison.

The legislative battle has dragged on for six months. A recent poll indicated most Californians objected to anything labeled a “bailout.”

But the appointed PUC, made up of three Democrats and two Republicans, took up the challenge that spooked legislators and stymied the governor, who said a rescue plan for Edison was his top legislative priority. The settlement saved Davis the embarrassment of facing a hostile Legislature, where support for Edison has dwindled.

Legislators voiced relief but some qualms. “Although I wish that the PUC‘s proposal would have more closely resembled legislation passed by the Assembly keeping a second major California utility out of bankruptcy is a victory for every California resident,” said Assembly Speaker Bob Hertzberg, D-Van Nuys.

Burton said the deal didn’t appear to provide enough protection for small businesses and residential ratepayers. but was “definitely preferable to the Assembly bill.” Many senators said the Assembly plan was too generous to Edison.

Lynch said talks with Edison began about 10 days ago. An aide to Davis said he was informed of the talks Sept. 25.

John Bryson, Edison‘s chief executive — himself a former PUC president — welcomed the deal as “a workable way for Edison to become creditworthy (and) to remove the state from the power business.”

Although the settlement removed one lawsuit from the array of legal and regulatory disputes plaguing the state’s electricity industry, Lynch said that more courtroom battles seem likely. Those could include efforts to trim the price of $43 billion worth of long-term power contracts held by the state, she said.

But an aide to the governor said that a challenge to the deals — which have an average cost of 7 cents per kilowatt hour, more than double the current spot-market price — was “not something we’re actively pursuing.”