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Davis Signals Utility's Grid Could Be Seized

Power: Governor says eminent domain is a possible last resort against PG&E, which is balking in state sales negotiations.

By DAN MORAIN and NANCY RIVERA BROOKS, Times Staff Writers

On the eve of a new round of rescue negotiations with a reluctant Pacific Gas & Electric Co., Gov. Gray Davis suggested Wednesday that as a last resort the state could seize the utility's prized electrical transmission system through eminent domain.

That saber-rattling cut against the grain of some rare good news in the state's continuing electricity crisis. The energy supply crunch eased slightly as grid operators pumped up the cushion between supply and demand, and for the first time in more than five weeks the statewide power grid was operating under a relatively mild Stage 1 emergency.

Negotiations with the state's two other big utilities--Southern California Edison and San Diego Gas & Electric--were described by a Davis aide as going "very well." But the governor, responding to a reporter's question, would not rule out the idea of taking over transmission assets through eminent domain, a legal proceeding by which government can take over private property, at a price determined by a court. His aides downplayed the possibility, and Davis said he intends to continue talking with utility executives in an effort to resolve the weighty questions.

"My strong preference is to do this through [a] cooperative negotiation process rather than just seize it," Davis said at a brief news conference at an elementary school south of Sacramento. Davis is insisting that the utilities give up control of the massive system of high-voltage transmission lines in exchange for an infusion of state money that would allow Southern California Edison and Pacific Gas & Electric to restructure their multibillion-dollar debts.

While Edison and San Diego Gas & Electric executives have said they are willing to discuss the sale of their portion of the 32,000-mile statewide grid, PG&E, the state's largest utility, is balking.

"The governor would like to solve this thing in one fell swoop, but if PG&E is sitting up there being obdurate, then this thing is severable," Davis political advisor Garry South said in Los Angeles.

The utilities need the state's help to buy electricity, as wholesale prices have soared since May and supplies have been stretched to the limit. Under the state's limited deregulation plan, the companies were forced to buy wholesale power at market prices but were not allowed to pass along increased costs to customers. Internal administration documents circulated in the Capitol last week show that the state was considering paying 2.3 times the grid's "book value," or about $7.3 billion, for the grid serving all three companies. A top utility source, requesting anonymity, said the figure was in the "ballpark" of what was being discussed.

Talks will continue today with all three utilities. Davis had not decided whether he would join the talks directly, or leave that task to his aides, San Francisco attorney Michael Kahn and former Southern California Edison executive Michael Peevey. "We're still hopeful for an announcement by Friday," Davis spokesman Steve Maviglio said Wednesday night.

Transmission Grid the Key Davis insisted that the transmission grid is key to any deal. The utilities would use cash from the purchase to restructure debt and the state would use its ability to raise money through bond sales to revamp the aging system, which is said to need $1 billion in improvements.

"That will be part of the solution," Davis said. "I will not sign off on a resolution of this [without the transmission grid]." South, the governor's chief political advisor, acknowledged that PG&E is in more difficult financial straits than Edison, largely because the PG&E electricity rate structure set by the Public Utilities Commission is lower. But he added that Edison has shown more good faith and interest coming into the negotiations, which began Tuesday in San Francisco. "Edison's been coming into these meetings with 50-page binder books with various specific proposals," South said. "PG&E comes in with a handwritten piece of paper and a big huff of arrogance. They act like they are in control when they are in serious soup." A spokesman for PG&E declined to comment on South's remarks. The utility has maintained a policy of not discussing the negotiations. PG&E's parent company, PG&E Corp., announced Wednesday that it would not be paying its regular dividend of 30 cents per share on common stock for the first quarter of 2001. PG&E said it would not resume paying common stock dividends until it "determines that the financial health of the company will support such action." The company has come under intense criticism that it is maintaining a business-as-usual approach while its utility subsidiary was teetering toward bankruptcy.

While the negotiations with PG&E threatened to prolong the political crisis, the state was emerging from 39 straight days of moderate-to-critical power supply emergencies, having been lifted into the relative calm of a low-level alert by warmer weather, improved electricity reserves and a decrease in the number of power plant shutdowns. "We should probably be making a big deal about this, but we just don't have time," said Stephanie McCorkle, a spokeswoman for the California Independent System Operator, which balances supply and demand on the electricity grid serving about 75% of the state. The grid controllers have been operating in full crisis mode for months now, using everything short of the Energizer bunny to keep electricity flowing while state leaders looked for solutions to the power market meltdown.

Economic Uncertainty For more than a month, the state's transmission grid has been operating under either a Stage 2 or Stage 3 emergency, indicating extremely tight reserves. At noon Wednesday, the grid bumped down to Stage 1--indicating that the state was maintaining reserves at a relatively cushy 7%. That is still below what grid operators consider prudent, but no one was complaining.

The full effect of the electricity crisis on the state's economy is not yet clear, and independent Legislative Analyst Elizabeth Hill urged state lawmakers Wednesday to take a "wait-and-see" approach as they craft a new budget.

Still, she left no doubt that she believes the power problems could seriously crimp California's economic outlook. Hill said she believes it is safe to assume that electricity costs will rise because of the gap between wholesale prices and regulated rates. If wholesale prices were to stay as high as they are now, she estimated, the state's wholesale electricity costs would climb to $40 billion this year, up from $25 billion in 1999. Hill made no prediction about whether that would happen. Indeed, Brad Williams, a senior economist in Hill's office, said he thought it likely that prices would decline and that legislation would shield consumers from the full effect of the inflated electricity market.

30-Day Supply Agreement Also Wednesday, Reliant Energy of Houston, which has balked at being forced to provide electricity to California when payment for that power is uncertain, said it had reached a 30-day agreement with the state under which the company will continue to provide emergency electricity supplies.

As a result, a federal judge in Sacramento delayed ruling on a lawsuit filed by state grid operators against Reliant. Instead, U.S. District Judge Frank C. Damrell Jr. extended until Friday afternoon an order forcing Reliant and several other energy suppliers to keep selling to the California grid operators. In Huntington Beach, city officials delivered a blow to Davis' plan to accelerate power plant projects, filing an appeal with the California Energy Commission to fight the speedy reactivation of two old gas-fired generators. If they exhaust that process without stopping the plan, they promised to go to court.

Regardless of whether the appeals succeed, they are likely to tie up the approval process, and in that sense strike against the heart of the governor's plan to expedite power plant projects to meet the energy shortfall expected this summer. The AES units--with a combined output of 450 megawatts, enough to serve 450,000 typical homes--represent about 10% of the 5,000 megawatts that Davis assured power-starved Californians would be available in time for the summer peak.

--- Times staff writers Mitchell Landsberg in Los Angeles, Richard Simon in Washington, Julie Tamaki and Rone Tempest in Sacramento and Christine Hanley in Orange County contributed to this story.

Copyright 2000 Los Angeles Times

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-- Martin Thompson (mthom1927@aol.com), February 22, 2001