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California and the West

Pact With PG&E Eluding Governor

Power: Davis says obstacles include a debt that is double Edison's. Others cite an aggressive corporate culture as an impediment to state purchase of grid.


WASHINGTON — As he attempts to finalize a settlement with Southern California Edison, Gov. Gray Davis said Monday that his effort to rescue a more recalcitrant Pacific Gas & Electric has been short-circuited by issues far more difficult than those raised by the state's other two ailing utilities.

PG&E's debt could be as much as $8 billion, Davis indicated--twice the red ink of Edison, which Friday reached a preliminary agreement to sell its transmission lines to the state for $2.76 billion to pay off some of its staggering debt. Davis acknowledged that the Edison deal would mean nothing unless he was able to reach a twin pact with PG&E.

Seasoned utility watchers see PG&E's stubborn negotiating posture as partly a bargaining ploy and partly the result of underlying business issues at the San Francisco company.

Some cite a more aggressive corporate culture at PG&E than at Edison that has left PG&E alone on a precarious pinnacle, with bankruptcy on one side and partial dismembering by the state on the other.

Brian Youngberg, senior utility analyst with the Edward Jones investment firm in St. Louis, said PG&E "has historically pushed the envelope more in certain situations and that probably reflects their corporate culture. They're just sticking to their guns."

While Edison appears to have rejected bankruptcy law protection as an option, PG&E has not.

Although Davis did not specify the size of PG&E's debt, he said it is "more than twice the size of Southern California Edison's." As part of the deal between Davis and Edison, both sides agreed that the utility's debt is about $4 billion, sources close to the talks have said.

"We are making progress" with PG&E, said Davis, attending the annual National Governors Assn. conference in Washington, D.C. "I want people to understand it is a far more complicated transaction. . . . It is just going to take a little longer."

Officials at PG&E and its parent, PG&E Corp., declined to publicly discuss the company's stance, citing the sensitivity of the negotiations. Company spokesman Ron Low said only that "we expect to meet again this week. There was no time or date set yet."

San Francisco lawyer Michael Kahn, one of Davis' energy advisors, said the parties "had contact over the weekend" but he declined to elaborate.

"We in the governor's office would very much like to reach arrangements with them and don't want to say anything in public that spoils the negotiations," he said.

PG&E's hard-nosed bargaining stance is no surprise to Wall Street analysts and consumer advocates who have watched the utility's aggressive moves to shed its hydroelectric system, now blocked by state law, and to recoup past electricity and other costs.

"It could be a negotiating tactic," said Lori Woodland, an analyst with Fitch Inc., the credit-rating firm that was the first to drop PG&E and Edison's debt to junk bond status.

"PG&E has the largest piece of the pie" in terms of uncollected electricity costs, Woodland said. "It could also be just the thought of having to sacrifice their assets to pay for what ended up being flawed public policy."

Consumer advocate Michael Shames contends that PG&E might believe that a bankruptcy judge would allow the utility to sell some assets and restructure its debt in ways that would be preferable to anything the state is offering.

"On the other hand, if Edison and [San Diego Gas & Electric] do sign on, then PG&E almost has to or risk the wrath of the governor and the Public Utilities Commission for the next seven years," said Shames, executive director of the Utility Consumers' Action Network in San Diego.

Edison is more comfortable in the role of regulated utility than is PG&E, said Mike Florio, a lawyer with the Utility Reform Network in San Francisco.

"PG&E really seems to hate PUC regulation and wants to get as far away from it as it can, even if it means taking the company into the tank," said Florio, who is on the governing board of the California Independent System Operator, which runs the transmission grid owned by the three utilities.

The utilities have amassed more than $12 billion in debt as they paid record sums for wholesale power last year, but were barred by state regulators from passing those costs on to California consumers of electricity.

The level of debt is a fundamental part of the negotiations between the Davis administration and the three private utilities. At least part of that debt ultimately will be passed on to consumers. While Davis says he opposes rate hikes, his plan would restructure the rate system by propping up rates in the coming years, even as electricity costs may fall.

Davis on Friday announced the outlines of an accord in which the state would buy Edison's share of the transmission grid for $2.76 billion. He said he hopes to make the deal final by week's end with Edison and Sempra, the parent company of San Diego Gas & Electric.

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