January 4, 2002
State came within kilowatt of signing lopsided PG&E deal
By David Lazarus
During the darkest days of the energy crisis, California came within just a few pen strokes of accepting a complex and costly deal to buy PG&E’s power lines, pay off the utility’s billions of dollars in debt and all but eliminate state oversight of PG&E’s activities.
If consummated, the secret agreement with Pacific Gas and Electric Co. would have handed the utility almost everything it was asking for, when California was at its most vulnerable.
The deal, details of which have been kept under wraps until now, also would have saddled the public with skyrocketing costs and maintenance of California’s largest electricity grid. These are just some of the observations about the energy crunch stemming from an interview with Joseph Fichera, chief executive of New York’s Saber Partners and one of Gov. Gray Davis’ key advisers through the worst of the energy mess.
His contract with California ended last month. Fichera is now advising Texas power authorities on how to avoid a California-style meltdown of their own electricity market.
The PG&E accord, negotiated between the utility and the governor’s office in February 2001, unraveled only after a team of high-priced consultants, including Fichera, were brought in by Davis to examine the fine print of the deal.
When it became clear that the consultants wanted to revisit some of the terms of the lopsided pact, PG&E walked away from the negotiating table and gave the governor a slap in the face by rapidly filing for bankruptcy protection.
“We had an agreement in principle” with PG&E, Steve Maviglio, a spokesman for the governor, said yesterday. “It was pretty close.”
He called Fichera “one of the most well-connected energy consultants on Wall Street,” and added that until Fichera and his crew arrived, “the state was outflanked” by lawyers representing PG&E and Southern California Edison.
But Ron Low, a PG&E spokesman, dismissed Fichera‘s comments as “nothing more than grumblings from a disappointed consultant who was not able to cash in on the state’s energy crisis.” He said Fichera‘s recollections “should be seen as nothing more than an angry tirade.”
Actually, Fichera and his consulting team didn’t exactly walk away poor from the energy crisis. For their trouble, they made $275,000 a month, or about $2.5 million in all.
Fichera ended up being the point man in dealing with numerous aspects of the energy fiasco, from the bankruptcy of PG&E and bailout of Edison to coaxing Wall Street to help pay the multibillion-dollar tab.
“All this could not have been prevented,” he said. “But it could have cost hundreds of millions of dollars less. It didn’t have to be a crisis.”
Fichera and his people were hired by Davis on March 1 last year, when it became clear that state officials were getting in over their heads negotiating with PG&E and Edison.
One particularly bad sign: PG&E and Edison both told the state not to worry about drawing up the agreements; their attorneys would handle everything.
“Whoever controls the documents controls the deal,” Fichera said. “This just wasn’t going to happen.”
Although a final price was never reached, he said PG&E had agreed to sell its power lines to the state in return for paying off billions of dollars in debt racked up as a result of soaring wholesale power costs.
Moreover, the utility demanded that the California Public Utilities Commission have less regulatory authority over PG&E’s activities. PG&E is now pursuing a similar change in bankruptcy court.
“It was pretty clear what PG&E wanted,” Fichera said. “They wanted to be made (financially) whole and not be under the control of the PUC.”
He and his colleagues, including the governor’s chief legal adviser, Barry Goode, responded by focusing public attention instead on a pending bailout agreement with Edison.
They told PG&E that they needed more time to review the terms of the separate deal reached with the Northern California utility.
This placed PG&E in a quandary. If it was forced to negotiate anew with the more experienced consultants, it was a fairly safe bet that the resulting agreement would be less favorable to PG&E and its San Francisco parent company, PG&E Corp.
Meanwhile, if Edison publicly accepted its own deal with the governor, which was looking increasingly likely with each passing day, PG&E would seem like a spoiler if it did not follow suit.
“They decided that they had to get out (of negotiations) fast and get into bankruptcy,” Fichera said. “They wanted a venue that would shield them from everyone else.”
So PG&E filed for Chapter 11 protection, timing the move to provide Davis with maximum embarrassment — just hours after the governor laid out plans in a televised speech for how he would resolve California’s power woes.
The utility’s chairman, Robert Glynn, said after the filing that PG&E officials had listened to the governor’s speech, “and this decision is the result.” The collapse of negotiations with Davis’ office earlier would suggest otherwise, Fichera said.
Aside from PG&E’s bankruptcy, he said California’s energy problems were to a great extent exacerbated by the many, many players involved — each with his or her own plan for fixing things — and the inability of the various actors to unite in addressing the state’s troubles.
Fichera had especially harsh words for the PUC and its leader, Loretta Lynch. He all but charged California’s energy regulators with fiddling as the state’s power market went up in flames.
“They did not provide leadership necessary at the time,” he said. By the time the PUC raised electricity rates in March, he noted, the problem had already grown to unmanageable proportions.
“It was already too late,” Fichera said. “They needed to start managing this thing by the previous fall.” Raising electricity rates before the utilities’ debt burden spun out of control would have been an important first step, he said.
In retrospect, Fichera feels as if he was asked to fight a forest fire with a glass of water. “It all became politics in the end,” he said.
Things should be a good deal easier during his new consulting gig in Texas, which embarked on its own experiment with deregulation this week.
Fichera is negotiating on behalf of Texas officials to prevent ratepayers there from being taken to the cleaners by the energy behemoths that reached deep into the pockets of Californians.
“There are a lot of things Texas learned from California,” he said. Not least, bring in some hired guns before things go bad.