Late in the week, Gov. Gray Davis met with the state legislative leaders who on both sides of the aisle were churning out new proposals for salvaging the state energy operations and keeping Southern California Edison Co. out of bankruptcy court. Consumer advocates and the state’s largest businesses are keeping a wary eye. Speculation is high that generators and the governor are going to have to give something, too.

Legislative leaders are drafting a new rescue plan for Edison that would put the utility back on its feet financially at the expense of its biggest customers. The plan would leave manufacturers, refineries and other big industrial customers with the burden of paying nearly all the utility’s $3.5 billion back debt through a dedicated charge. Residential and small commercial users would be on the hook for only a fraction of the back debt. Edison’s parent, Edison International, would kick in about $450 million.

Big users say it is unfair to saddle them with all of Edison’s debt, but supporters of the plan say it’s these users that wanted deregulation and should shoulder the costs it created.

Assembly Speaker Robert Hertzberg and his second-in-command Fred Keeley are working on a framework that protects the residential and small business (core) customers and permits–as they did under restructuring–large industrial users “to use their influence to rein in prices” by cutting individual power deals.

Although the plan is an alternative to the governor’s proposed deal to put Edison back on its feet financially, it could be used as a model to help restore Pacific Gas and Electric Co. to solvency, too, its backers point out. Democrats say the plan contains some elements desired by Republicans, but GOP lawmakers object to saddling large business users with Edison’s debt.

Republican state legislators are convinced that a bipartisan, wide-ranging deal is still possible without state transmission grid ownership or another utility bankruptcy, and with discounts by generators on past-due bills amounting to billions of dollars. Ultimately, a key adviser to the Republicans said last week, all civil suits against the merchant generators would have to be dropped, something Davis has adamantly resisted publicly.

In essence, this feeling that a political solution is still ultimately viable is what underlies the Republicans’ alternative plan released last week. Meanwhile, many Democrats, who control both houses of the state legislature, have indicated clearly that proposals to implement Davis’s Edison deal are not viable at this point, and some think bankruptcy by the utility may be the best outcome.

Conversely, a Texas-based generator would not comment on the Republican alternative because state Democratic legislative leaders had already designated it as “DOA,” a Houston-based spokesperson for the generator said.

Both lawmakers and the governor’s office have told the Republicans that they “are not wedded to the idea of the state taking the grid,” the Republican adviser said. “We can’t find anyone who is really championing the grid in any real serious way.”

Last Friday Edison defaulted on $200 million in six-year notes that were due June 1. So far Edison has defaulted on more than $490 million of commercial paper this year and on $200 million of give-year notes that came due Jan. 16.

The original deal with the governor announced April 9 would have the state buy Edison’s transmission assets for $2.76 billion in exchange Edison and its nonutility affiliates contracting with the state for 10 years to provide power at cost-plus below-market rates. A dedicated part of Edison’s existing rates would go toward paying off the billions of dollars in public sector bonds that the state would sell.

Edison officials initially said they like the proposed plan, but would have to see more of it. Large California business associations such as the California Manufacturers and Technology Association called it “pure politics,” and the consumer advocate Harvey Rosenfield who is threatening to launch another electricity statewide ballot initiative called the whole new proposal “a trick.”

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