End to Price Cap Front and Center in IOUs' Negotiations with Gov. ,
 Utilities' Demand Blocks Bailout 
NEGOTIATIONS HIT SNAG: PG&E, Edison want end to price freeze if they sell 
transmission lines to state David Lazarus, Chronicle Staff Writer
Wednesday, March 21, 2001 
,2001 San Francisco Chronicle 
URL: 
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/21/M
N114450.DTL 
California's near-bankrupt utilities are demanding that higher electric rates 
be a part of any deal to sell the state their power lines, The Chronicle has 
learned. 
A rate increase -- perhaps of more than 50 percent, according to earlier 
industry estimates -- would certainly draw a firestorm of protest from 
consumer groups and force Gov. Gray Davis to backtrack from earlier pledges 
that rates would remain unchanged. 
Nevertheless, sources close to negotiations on the deal said Pacific Gas and 
Electric Co. and Southern California Edison are attempting to make higher 
rates a condition for agreeing to a bailout scheme in which they would sell 
the state their transmission systems and some land. 
The sources said the talks hit a new snag this week when state officials 
realized that fine print sought by the companies could require the Public 
Utilities Commission to pass along all of the utilities' costs to ratepayers. 
The sources said this would end a rate freeze that shields consumers from 
runaway wholesale electricity prices. 
The inclusion of potential rate increases in the talks reflects the growing 
complexity of a deal originally intended by Davis to stabilize the finances 
of PG&E and Edison so banks would resume loans to the cash-strapped 
utilities. 
The negotiations subsequently have expanded to involve a state purchase of 
the utilities' transmission networks and acquisition of utility-owned land, 
including spectacular coastal property near PG&E's Diablo Canyon nuclear 
power plant. 
Now they also have embraced further deregulation of California's 
dysfunctional electricity market. 
"Clearly, one of the terms being discussed is the regulatory environment," 
said Joseph Fichera, head of Saber Partners, a New York investment bank that 
is advising Davis in the talks. 
"The past situation has not worked well," he added. "The utilities want some 
certainty about their future." 
TENTATIVE DEAL WITH EDISON
To date, the governor has announced a tentative agreement with Edison for the 
state to buy the utility's power lines for almost $3 billion. Discussions 
with PG&E for a similar accord have dragged on for weeks. 
An Edison official, asking that his name be withheld, acknowledged yesterday 
that an end to the rate freeze is an expected result of the power- line sale. 
"Once the details of the pact are complete, dominoes will fall," the official 
said. "One of the dominoes is the rate freeze." 
A PG&E spokesman declined to comment. 
In fact, both Edison and PG&E have been aggressively seeking an end to the 
rate freeze for months. 
The two utilities have a lawsuit pending in federal court demanding that the 
PUC immediately raise rates so the utilities can recover almost $13 billion 
in debt accrued as a result of the freeze. 
"They have been trying a lot of things to get the rate freeze ended in 
various forms," said Carl Wood, who sits on the PUC. "Adding it to the 
present talks is consistent with past behavior." 
Wall Street has taken note that the negotiations no longer appear to be 
making progress. 
Paul Patterson, an energy industry analyst at Credit Suisse First Boston, 
told clients on Monday that the discussions "may have lost some momentum in 
recent days." He did not give a reason. 
For his part, the governor sounded unusually cautious about the course of the 
talks when asked late last week if a breakthrough was imminent. 
SECRET STICKING POINTS
"We are going to take the transmission systems and the land that's deeded, 
and we will work out an agreement," Davis said at an appearance in San Jose. 
"But there are a number of sticking points in the talks with PG&E that I'm 
not going to reveal." 
One of those sticking points apparently is an insistence that the sale of 
utility assets include a long-sought lifting of the rate freeze. 
Sources said lawyers from both PG&E and Edison had inserted the related terms 
into draft accords affecting each utility, and that the full impact of the 
additions was not realized by state officials until this week. 
One source said the language was just convoluted enough to slip beneath the 
radar screen of state negotiators. But the upshot, once the words had been 
parsed, was that the PUC effectively would lose control over power rates. 
CREDITWORTHINESS ON THE TABLE
In Edison's case, the terms of the tentative deal include the governor asking 
the PUC "to support the creditworthiness" of the utility. 
"This would ensure that future investments in both utility distribution and 
utility generation plants are provided fair returns of and on capital, 
consistent with current authorized returns and capital structure provisions," 
it says. 
Sources said the provision could be interpreted as a guarantee from the state 
that Edison would be permitted to recoup all outstanding costs from 
ratepayers. 
"There may be some assumptions about this language that the rate freeze ends 
if it is adopted," the Edison official said, adding that he saw no reason to 
disagree with such assumptions. 
But Fichera, Davis' adviser in the talks, insisted that nothing is set in 
stone, and that the negotiations are proceeding without a hitch. 
"This is a very complex transaction," he said. "God and the devil are in the 
details." 
E-mail David Lazarus at dlazarus@sfchronicle.com. 
,2001 San Francisco Chronicle ? Page?A - 1
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