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Davis Signals Utility's Grid Could Be Seized

Power: Governor says eminent domain is a possible last resort against PG&E, which is balking in state sales negotiations.


On the eve of a new round of rescue negotiations with a reluctant Pacific Gas & Electric Co., Gov. Gray Davis suggested Wednesday that as a last resort the state could seize the utility's prized electrical transmission system through eminent domain.

That saber-rattling cut against the grain of some rare good news in the state's continuing electricity crisis. The energy supply crunch eased slightly as grid operators pumped up the cushion between supply and demand, and for the first time in more than five weeks the statewide power grid was operating under a relatively mild Stage 1 emergency.

Negotiations with the state's two other big utilities--Southern California Edison and San Diego Gas & Electric--were described by a Davis aide as going "very well."

But the governor, responding to a reporter's question, would not rule out the idea of taking over transmission assets through eminent domain, a legal proceeding by which government can take over private property, at a price determined by a court. His aides downplayed the possibility, and Davis said he intends to continue talking with utility executives in an effort to resolve the weighty questions.

"My strong preference is to do this through [a] cooperative negotiation process rather than just seize it," Davis said at a brief news conference at an elementary school south of Sacramento.

Davis is insisting that the utilities give up control of the massive system of high-voltage transmission lines in exchange for an infusion of state money that would allow Southern California Edison and Pacific Gas & Electric to restructure their multibillion-dollar debts.

While Edison and San Diego Gas & Electric executives have said they are willing to discuss the sale of their portion of the 32,000-mile statewide grid, PG&E, the state's largest utility, is balking.

"The governor would like to solve this thing in one fell swoop, but if PG&E is sitting up there being obdurate, then this thing is severable," Davis political advisor Garry South said in Los Angeles.

The utilities need the state's help to buy electricity, as wholesale prices have soared since May and supplies have been stretched to the limit. Under the state's limited deregulation plan, the companies were forced to buy wholesale power at market prices but were not allowed to pass along increased costs to customers.

Internal administration documents circulated in the Capitol last week show that the state was considering paying 2.3 times the grid's "book value," or about $7.3 billion, for the grid serving all three companies.

A top utility source, requesting anonymity, said the figure was in the "ballpark" of what was being discussed.

Talks will continue today with all three utilities. Davis had not decided whether he would join the talks directly, or leave that task to his aides, San Francisco attorney Michael Kahn and former Southern California Edison executive Michael Peevey.

"We're still hopeful for an announcement by Friday," Davis spokesman Steve Maviglio said Wednesday night.

Transmission Grid the Key

Davis insisted that the transmission grid is key to any deal. The utilities would use cash from the purchase to restructure debt and the state would use its ability to raise money through bond sales to revamp the aging system, which is said to need $1 billion in improvements.

"That will be part of the solution," Davis said. "I will not sign off on a resolution of this [without the transmission grid]."

South, the governor's chief political advisor, acknowledged that PG&E is in more difficult financial straits than Edison, largely because the PG&E electricity rate structure set by the Public Utilities Commission is lower.

But he added that Edison has shown more good faith and interest coming into the negotiations, which began Tuesday in San Francisco.

"Edison's been coming into these meetings with 50-page binder books with various specific proposals," South said. "PG&E comes in with a handwritten piece of paper and a big huff of arrogance. They act like they are in control when they are in serious soup."

A spokesman for PG&E declined to comment on South's remarks. The utility has maintained a policy of not discussing the negotiations.

PG&E's parent company, PG&E Corp., announced Wednesday that it would not be paying its regular dividend of 30 cents per share on common stock for the first quarter of 2001. PG&E said it would not resume paying common stock dividends until it "determines that the financial health of the company will support such action."

The company has come under intense criticism that it is maintaining a business-as-usual approach while its utility subsidiary was teetering toward bankruptcy.

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