The hoped-for agreement among California’s three investor-ownedutilities and the California’s political establishment was stillout of reach last Friday, but feeling the need to announce someprogress in preparation for his political trip to Washington, DC,and Wall Street early this week. Gov. Gray Davis said the state isclosest to a deal to pay $2.76 billion for the transmission linesof Southern California Edison.

Davis said he hopes to have the details worked out with Edisonand Sempra Energy’s San Diego Gas and Electric at the end of thisweek. While saying “some progress” has been made with PG&ECorp., Davis said he is still farthest from a deal with the SanFrancisco-based utility. Negotiations are ongoing separately witheach of three major private-sector utilities to buy theirtransmission assets, which roughly represent 60% of the state grid,the part now operated by Cal-ISO, but still owned by the utilities.

“Those transmission lines represent a very important asset tothe people of this state,” said the governor, noting that over thepast 15 years under regulation and deregulation, private investmenthas not come forward to eliminate system bottlenecks. He implied,but did not specify, that the state will now take care of theneeded enhancements, which some people estimate as several billiondollars of capital improvements.

“We’re going to acquire the transmission lines because doing sowill have the effect of building two new power plants totaling1,000 MW,” he said.

Citing his usual admonition that everything will be done withoutrate increases, Davis briefly characterized the informal agreementwith Edison as “a complicated transaction with very cheap rates” inwhich not only would the utility and its holding company sell itstransmission assets at about 2.3 times their book value, but theyalso agreed to sell the state power from its utility plants and oneEdison Mission Energy merchant power plant for 10 years on acost-plus basis.

The deal would also call for the utility parent company, EdisonInternational,ÿreturning $420 million to the utility to help it getout of debt, and giving the state 99-year easement to 20,000 acresof watershed tied to Edison’s hydro-electric generation system.

On a conference call with its bondholders Friday, Edison said itis the desire of all parties to “conclude these negotiations asquickly as possible” and reach a formal agreement that can besigned. Edison characterized the current agreement as a “conceptualframework.” The utility’s executives said that the utility was”active discussions and some progress is being made,” but theywould not verify the governor’s claim that part of the agreementinvolves the utility foregoing all outstanding rate increaseapplications and lawsuits, along with accepting $2.76 billion forits transmission assets. In the past, Edison said it thought themarket value of its transmission system alone was worth $6 billion.

“This entire transaction, which I feel is fair and balanced,will be accomplished within the present rate structure,” Davissaid. “We will not be asking any more of the consumers. I haveworked very hard to find a solution that does not ask anymore ofthe ratepayers. This is not their fault; they didn’t ask forderegulation.

“We made very substantial progress with Southern CaliforniaEdison, so that is why I made this announcement today. Within aweek, I hope to be able to tell you that we have a final deal withEdison. We also have made good progress with Sempra. We are makingsome progress with PG&E, but not to the point where I feelcomfortable representing that progress will be made.”

Based on the extreme disorganization in the governor’s camp,starting the press announcement more than an hour late, and thevery careful wording in the response of PG&E Corp.’s CEO, itappeared Friday that talks are still tenuous and a final dealremains illusive.

“Yesterday’s discussions were an important milestone in theresolution of California’s energy crisis,” said PG&E’s RobertGlynn in a press release. We look forward to continued discussionswith the Governor to resolve outstanding issues relating toPG&E. Our meeting (Thursday) provided an important opportunityto clarify our comprehensive proposal. Each utility’s issues andopportunities in this crisis are different, and we believe thatPG&E has proposed a detailed solution that balances ratepayerand shareholder interests.”

PG&E did add in its formal statement that it feels aresolution is possible, although none of the utilities will verifywhether “a final deal” will require that all three are on board.

Sempra Energy, has been on record as being willing to sell itstransmission assets “if it helps solve the crisis.”

Before Friday’s announcement by the governor, Edison andPG&E had been less willing to accept the state’s offers. EdisonInternational CEO John Bryson reportedly was considering therelative merits of taking less than what he thinks the transmissionassets are worth or submitting to bankruptcy for the utility.PG&E so far has publicly expressed reluctance to sell at anyprice.

With creditors and unpaid suppliers waiting in line,California’s program to sign significant long-term power supplycontracts has been slow to develop. Nevertheless, Williams becamethe second supplier to announce a long-term deal when it inked a10-year pact last Thursday for modest volumes of peaking supplies.And on Friday a one-month deal for 750 MW was announced by MirantCorp. (formerly Southern Energy).

“We became more confident in our ability to enter such acontract after we received full payment from the state DWR for abill due Feb. 20,” said Randy Harrison, CEO of Mirant’s westernU.S. operations.

The Williams deal, which would start April 1, calls for at least175 MW of peaking power, increasing to 350 MW by June 1and at least900 MW by 2006, is the second long-term pact announced. Calpineannounced one earlier in the month, which does not kick in untilthis fall, after the peak summer demand.

With the new momentum toward more signed power deals, includingReliant Energy’s agreement to provide 30 days of spot emergencysupplies and have them handled by DWR, the grid operator, Cal-ISO,for the first time in 40 days lifted all power alerts Thursday.Reliant made the move despite being owed more than $300 million forpower by the state’s ISO and/or utilities.

Principally the availability of more than 5,000 MW of importedpower from the Pacific Northwest and a sharp drop in peak demandallowed the state-chartered transmission operator to the lift itslast remaining Stage One alert. It saw the amounts of real-timeemergency power that it had to purchase drop to about 10% of thestate’s demand, the lowest it has been in months. Generationcapacity out of service for planned or unplanned reasons stayedabout the same (8,000 MW).

“This is a really huge, huge improvement in managing the state’sreliability,” said Cal-ISO spokesperson Stephanie McCorkle, addingthat for the past week DWR has been able to push more of its powerpurchases out of the spot market, easing the planning pressure onthe grid operator.

Anticipating a bailout agreement, the state has moved to have J.P. Morgan Chase & Co. underwrite what is shaping up as thelargest municipal bond sale in the nation’s history — about $10billion to buy-out the transmission lines and fund improvements.

But lawsuits over non-payment to generators and the patience ofcreditors were wearing thin last week. “As the (our) Feb 7 letter(to Davis) says, we will not sign long-term deals until past duesare taken care of and there is some resolution to the governor”seizing” our PX contracts,” said Duke’s California spokesperson,Tom Williams. “This state’s behavior is similar to someone stealingfrom a store — the store owner is aware of it — and thenwanting to open up a charge account. No business would ever operatethis way. Not in California, not anywhere.”

While saying late last Friday that he thought the governor wasgetting down “close to closing a deal,” Jan Smutny-Jones, executivedirector of California’s independent power producers (IEP) said hewas getting concerned about time running out on the governor andthe state. There have been “a number of pushes and shoves goingdifferent directions. A lot of statements made subject to no rateincrease; statements made with respect to no bailouts. And theyactually limit the ability of political leaders to maneuver. Theprimary reason state ownership of the transmission grid is beingpushed is to provide a perception that in fact that the bondsfloated are for transmission assets not for paying for pastenergy.”

Last Wednesday the governor released a report identifying 32potential sites for temporary electric generation peaking plantsthat theoretically could be available to supply power during thissummer’s expected severe peak-demand crunch, if a special 21-dayexpedited processing scheme ordered under new state law by thegovernor Tuesday has its intended results. The California EnergyCommission completed the report identifying the sites and said itwould administer the fast-track processing for the temporaryfacilities.

“I am determined to get as much power online as humanly possibleby this summer,” said Davis in a prepared statement. “I commend theenergy commission for its swift action in developing thisreport.”ÿThe energy commission report identifies what are describedas “an initial round of sites that have a 95% or better probabilityof being licensed under the state’s emergency siting process.” Allof the sites are large enough to accommodate plants of 50-MW orlarger in size.

The potential sites are all reportedly near transmission andnatural gas supply lines and in areas where there are available airemission offset credits. The energy commission’s next step will beto work with local governments in the designated areas to make surethere are “no overriding land-use restrictions that would preventthe temporary power plant operations.

As of the end of last week, the California Department of Financeestimated the state’s power bill was about $1.7 billion since thewater resources department (DWR) began buying electricity for thestate’s consumers in mid-January. This includes about $300 millionof real-time emergency purchases by the state-chartered gridoperator, Cal-ISO.

Richard Nemec, Los Angeles

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