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 it is in “activediscussions and some progress is being made,” but it would notverify the governor’s claim that part of the agreement involves theutility foregoing all outstanding rate increase applications andlawsuits, along with accepting $2.76 billion for its transmissionassets. In the past, Edison said it thought the market value of itstransmission 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 dies bit ask anymore ofthe ratepayers. This is not there 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 a long line of creditors and unpaid suppliers waiting inline, California’s program to sign significant long-term powersupply contracts has been slow to develop. Nevertheless, Williamsbecame the second supplier to announce a long-term deal when itinked a 10-year pact last Thursday for modest volumes of peakingsupplies. And on Friday a one-month deal for 750 MW was announcedby Mariant Corp. (formerly Southern Energy).

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