Davis Signals Utility's Grid Could Be Seized ,
 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.
alan.comnes@enron.com, angela.schwarz@enron.com, beverly.aden@enron.com, 