CA Gov. Claims Near Deal to Buy SoCal Ed's Lines for $2.76 Billion

The hoped-for agreement among California's three investor-owned utilities and the California's political establishment was still out of reach last Friday, but feeling the need to announce some progress in preparation for his political trip to Washington, DC, and Wall Street early this week. Gov. Gray Davis said the state is closest to a deal to pay $2.76 billion for the transmission lines of Southern California Edison.

Davis said he hopes to have the details worked out with Edison and Sempra Energy's San Diego Gas and Electric at the end of this week. While saying "some progress" has been made with PG&E Corp., Davis said he is still farthest from a deal with the San Francisco-based utility. Negotiations are ongoing separately with each of three major private-sector utilities to buy their transmission 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 to the people of this state," said the governor, noting that over the past 15 years under regulation and deregulation, private investment has not come forward to eliminate system bottlenecks. He implied, but did not specify, that the state will now take care of the needed enhancements, which some people estimate as several billion dollars of capital improvements.

"We're going to acquire the transmission lines because doing so will have the effect of building two new power plants totaling 1,000 MW," he said.

Citing his usual admonition that everything will be done without rate increases, Davis briefly characterized the informal agreement with Edison as "a complicated transaction with very cheap rates" in which not only would the utility and its holding company sell its transmission assets at about 2.3 times their book value, but they also agreed to sell the state power from its utility plants and one Edison Mission Energy merchant power plant for 10 years on a cost-plus basis.

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

On a conference call with its bondholders Friday, Edison said it is the desire of all parties to "conclude these negotiations as quickly as possible" and reach a formal agreement that can be signed. Edison characterized the current agreement as a "conceptual framework." The utility's executives said that the utility was "active discussions and some progress is being made," but they would not verify the governor's claim that part of the agreement involves the utility foregoing all outstanding rate increase applications and lawsuits, along with accepting $2.76 billion for its transmission assets. In the past, Edison said it thought the market 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," Davis said. "We will not be asking any more of the consumers. I have worked very hard to find a solution that does not ask anymore of the ratepayers. This is not their fault; they didn't ask for deregulation.

"We made very substantial progress with Southern California Edison, so that is why I made this announcement today. Within a week, I hope to be able to tell you that we have a final deal with Edison. We also have made good progress with Sempra. We are making some progress with PG&E, but not to the point where I feel comfortable 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 the very careful wording in the response of PG&E Corp.'s CEO, it appeared Friday that talks are still tenuous and a final deal remains illusive.

"Yesterday's discussions were an important milestone in the resolution of California's energy crisis," said PG&E's Robert Glynn in a press release. We look forward to continued discussions with the Governor to resolve outstanding issues relating to PG&E. Our meeting (Thursday) provided an important opportunity to clarify our comprehensive proposal. Each utility's issues and opportunities in this crisis are different, and we believe that PG&E has proposed a detailed solution that balances ratepayer and shareholder interests."

PG&E did add in its formal statement that it feels a resolution is possible, although none of the utilities will verify whether "a final deal" will require that all three are on board.

Sempra Energy, has been on record as being willing to sell its transmission assets "if it helps solve the crisis."

Before Friday's announcement by the governor, Edison and PG&E had been less willing to accept the state's offers. Edison International CEO John Bryson reportedly was considering the relative merits of taking less than what he thinks the transmission assets are worth or submitting to bankruptcy for the utility. PG&E so far has publicly expressed reluctance to sell at any price.

With creditors and unpaid suppliers waiting in line, California's program to sign significant long-term power supply contracts has been slow to develop. Nevertheless, Williams became the second supplier to announce a long-term deal when it inked a 10-year pact last Thursday for modest volumes of peaking supplies. And on Friday a one-month deal for 750 MW was announced by Mirant Corp. (formerly Southern Energy).

"We became more confident in our ability to enter such a contract after we received full payment from the state DWR for a bill due Feb. 20," said Randy Harrison, CEO of Mirant's western U.S. operations.

The Williams deal, which would start April 1, calls for at least 175 MW of peaking power, increasing to 350 MW by June 1and at least 900 MW by 2006, is the second long-term pact announced. Calpine announced one earlier in the month, which does not kick in until this fall, after the peak summer demand.

With the new momentum toward more signed power deals, including Reliant Energy's agreement to provide 30 days of spot emergency supplies 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 for power by the state's ISO and/or utilities.

Principally the availability of more than 5,000 MW of imported power from the Pacific Northwest and a sharp drop in peak demand allowed the state-chartered transmission operator to the lift its last remaining Stage One alert. It saw the amounts of real-time emergency power that it had to purchase drop to about 10% of the state's demand, the lowest it has been in months. Generation capacity out of service for planned or unplanned reasons stayed about the same (8,000 MW).

"This is a really huge, huge improvement in managing the state's reliability," said Cal-ISO spokesperson Stephanie McCorkle, adding that for the past week DWR has been able to push more of its power purchases out of the spot market, easing the planning pressure on the grid operator.

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

But lawsuits over non-payment to generators and the patience of creditors were wearing thin last week. "As the (our) Feb 7 letter (to Davis) says, we will not sign long-term deals until past dues are 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 stealing from a store --- the store owner is aware of it --- and then wanting to open up a charge account. No business would ever operate this way. Not in California, not anywhere."

While saying late last Friday that he thought the governor was getting down "close to closing a deal," Jan Smutny-Jones, executive director of California's independent power producers (IEP) said he was getting concerned about time running out on the governor and the state. There have been "a number of pushes and shoves going different directions. A lot of statements made subject to no rate increase; statements made with respect to no bailouts. And they actually limit the ability of political leaders to maneuver. The primary reason state ownership of the transmission grid is being pushed is to provide a perception that in fact that the bonds floated are for transmission assets not for paying for past energy."

Last Wednesday the governor released a report identifying 32 potential sites for temporary electric generation peaking plants that theoretically could be available to supply power during this summer's expected severe peak-demand crunch, if a special 21-day expedited processing scheme ordered under new state law by the governor Tuesday has its intended results. The California Energy Commission completed the report identifying the sites and said it would administer the fast-track processing for the temporary facilities.

"I am determined to get as much power online as humanly possible by this summer," said Davis in a prepared statement. "I commend the energy commission for its swift action in developing this report."ÿThe energy commission report identifies what are described as "an initial round of sites that have a 95% or better probability of being licensed under the state's emergency siting process." All of the sites are large enough to accommodate plants of 50-MW or larger in size.

The potential sites are all reportedly near transmission and natural gas supply lines and in areas where there are available air emission offset credits. The energy commission's next step will be to work with local governments in the designated areas to make sure there are "no overriding land-use restrictions that would prevent the temporary power plant operations.

As of the end of last week, the California Department of Finance estimated the state's power bill was about $1.7 billion since the water resources department (DWR) began buying electricity for the state's consumers in mid-January. This includes about $300 million of real-time emergency purchases by the state-chartered grid operator, Cal-ISO.

Richard Nemec, Los Angeles

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