State Seeks Coastal Land in PG&E Deal

Energy: Davis wants beach, watershed along rivers and other assets besides the power grid in exchange for aid. But talks are far from over.

By DAN MORAIN and NANCY VOGEL, Times Staff Writers

SACRAMENTO--In exchange for helping Pacific Gas & Electric recoup part of its multibillion-dollar debt, the Davis administration is seeking a package of assets that includes its transmission system, power from a large generator under construction and beach and watershed near the Diablo Canyon nuclear power plant.

After completing several days of intensive negotiations in Sacramento this week, representatives of the state's largest utility and of the administration said progress had been made--even as PG&E remains a reluctant participant.

Although one administration source said Thursday that a conceptual agreement could be reached as early as next week, significant work remains. "There is no deal," Gov. Gray Davis spokesman Steve Maviglio said. "We're continuing to make progress, but things are still very fluid."

A PG&E source also said numbers and conditions in the negotiations are changing. But based on interviews with utility, administration and other sources, some points of the talks with PG&E are emerging. Most importantly, the state is considering acknowledging that PG&E amassed roughly $6.5 billion in debt buying electricity at record wholesale prices which could not be passed on to ratepayers, an administration source said, speaking on condition of anonymity.

PG&E executives had been taking a hard line with the administration, even as Davis two weeks ago reached the framework for a similar agreement with the state's other financially hobbled utility, Southern California Edison.

One reason for the hesitancy to deal is that PG&E executives, like those at Edison, are convinced that the Davis administration's failure last summer to permit the company to raise rates and enter into long-term contracts to buy wholesale power at relatively low prices forced it to the brink of bankruptcy.

They also are convinced that independent generators gouged them. "These are big-shot guys," Assemblywoman Carole Migden (D-San Francisco) said, describing PG&E executives and their reluctance to enter into a deal. "They're not used to being pushed around. Why would they want to give up their transmission?"

What's more, Migden said, PG&E views itself as "mightier" than other utilities. "It's more exclusive." Like Edison, PG&E has been weighing whether it might fare better in Bankruptcy Court. Mike Florio, senior attorney with the Utility Reform Network in San Francisco, said PG&E executives have not ruled out declaring bankruptcy: "They have two numbers: What they think it's going to cost them in bankruptcy, and what they think it's going to cost them to make a deal with the governor. And they check them every two days."

For now, however, the company is contemplating parting with its transmission system--and the state is considering offering about $3 billion. The state offered to buy Edison's transmission system for $2.76 billion.

The state also wants power from PG&E's La Paloma power plant under construction near McKittrick, 40 miles west of Bakersfield. The plant, approved in 1998 during Gov. Pete Wilson's administration, is designed to generate 1,048 megawatts, enough for a million households. It is scheduled to be completed by November.

Davis' conceptual agreement with Edison includes a provision that it sell the electricity from a power plant it is building in Kern County, at its cost of That plant, the Sunrise Power Project, has about a third of the capacity of La Paloma. Davis had estimated the value to consumers of that provision in the Edison deal at $500 million.

Additionally, the Davis administration seeks 130,000 acres, worth about $370 million, including timber land worth more than $100 million, from PG&E. The land includes San Francisco Bay wetlands in Santa Clara and San Mateo counties and watershed along many of California's major rivers, including the Eel, Yuba, Feather, Merced, Stanislaus and Kern.

If PG&E agrees, the administration would put the land into a trust, giving officials time to decide how best to manage it. The land could be added to state, federal and local park and wilderness systems, or it could be sold as long as it is not heavily developed. At least some of the land, sources said, could be deeded to Indian tribes.

The administration's list of property includes beach and watershed property surrounding Diablo Canyon nuclear power plant. The beach property is south of Montana Del Oro State Park, between Pismo Beach and Morro Bay. If PG&E agrees to the transfer, the utility would retain a security buffer around the nuclear power plant.

Davis' tentative agreement with Edison included a provision that the utility would preserve 20,000 acres along its hydroelectric projects in the Sierra for the next 99 years. Environmental Defense, a group based in Oakland, has been urging Davis to include 16 square miles of coast near San Luis Obispo as part of any deal, as well as a 28-square-mile ranch along the Sacramento River near Sacramento.

The land along the Sacramento River, called Conaway Ranch, boasts generous water rights, abundant ground water and rich wildlife habitat that floods seasonally. In 1996, a PG&E subsidiary offered to sell the land for $68.5 million, and at one point the state Resources Agency investigated a purchase.

Negotiations with PG&E have been far more protracted than those with Edison. At the most basic level, PG&E's problem is $2.8 billion bigger than Edison's. By the end of January, PG&E had spent $8.2 billion more buying electricity than it had collected from customers. Edison, in comparison, lost $5.4 billion.

PG&E also has more to lose than Edison by selling its transmission grid. Roughly 14% of PG&E's annual profits and asset base comes from its transmission system, compared to 11% for Edison, according to the San Diego-based watchdog group, Utility Consumers' Action Network.

PG&E collected $390 million in revenue for its transmission system in 1999, compared to Edison's $250 million. Although PG&E and Edison are among the top 10 investor-owned utilities in the nation and both share a proud, 100-year-old history of lighting the Golden State, they've handled their recent financial troubles differently.

Edison executives in December called on California to abandon deregulation, saying "it is time to break decisively from this failed policy." PG&E officials, who embraced deregulation in the mid-1990s more quickly and enthusiastically than Edison's, have not gone so far, even as deregulation pushed the utility nearly to bankruptcy.

"You talk to the two companies, and the difference is striking," said Florio. "Everybody has their gripes with how deregulation has been over time, but Edison is comfortable with being regulated, and PG&E has this deep and abiding belief that they've been treated unfairly and they will be treated unfairly in the future."

Copyright 2001 Los Angeles Times

-- Swissrose (cellier3@mindspring.com), March 09, 2001