FYI. Looks like Brown might not be getting the presidency right away....

Best,
Jeff

****************************************************
PUC Chief's Iron Resolve Evident in Edison Deal
Politics: Insisting on her agency's independence, Loretta Lynch repeatedly stood up to the governor who appointed her.
SACRAMENTO -- Once again last week, California Public Utilities Commission President Loretta Lynch gave Gov. Gray Davis help that he badly needed--but left him upstaged.

With the governor unable to broker a deal to save Southern California Edison from bankruptcy, Lynch and commission lawyers secretly negotiated a $3.3-billion settlement that was ratified by a federal judge in Los Angeles on Friday.

Although Davis appointed Lynch as PUC president, she and administration officials say she informed the administration of the talks only after they were well underway. "I will take responsibility," Lynch said.

Even as she took the lead in forging an Edison deal, Lynch defied the governor Tuesday. She led the PUC in rejecting a measure that Davis and Treasurer Phil Angelides deem necessary for repaying the state for billions of dollars in power purchases this year. Davis condemned the vote as "an irresponsible act."

Davis repeatedly has said he wants people he appoints to think and act as he would act. Lynch, however, is not easily controlled. She has moved ahead without the governor's approval several times. Most notably, last spring, she pushed the largest electricity rate increase in state history through the PUC while Davis was publicly opposed to a rate hike.

Such actions have made her perhaps Davis' least favorite appointee.

And yet, Lynch holds the key to resolving what now is Davis' single most pressing issue: how to reimburse the state for the billions spent on electricity since January.

For months, those power purchases have been eating a huge hole in the state treasury. Unless a way is found to close it, Davis may have to make deep cuts in public services next year just as he prepares to run for reelection. He has proposed reimbursing the treasury with a $12.5-billion bond issue that would be paid off by electricity consumers.

Davis would not discuss Lynch for this article. But his aides say there is so much tension between the two that the governor and Lynch talk only through intermediaries. A top aide, speaking on the condition of anonymity, described the governor's relationship with Lynch, who once served on Davis' staff, as "nonexistent."

But floating the bond deal requires action by the PUC, and Davis aides admit that figuring out a way to do that means dealing with Lynch, whose term does not expire until 2005 and whose influence is now stronger than ever, according to fellow commissioners and others familiar with the agency.

Davis could demote Lynch from PUC president to just commissioner, but "he can't remove commissioners," said the Davis aide who described the tension between the two. "We are in a position where we're going to have to negotiate."

A Yale-educated attorney who practiced in San Francisco before joining the administration, Lynch worked on Davis' 1998 campaign, helping him raise money. He rewarded her loyalty by making her head of the Office of Research and Planning, then placing her on the PUC in late 1999.

Lynch has taken seriously the idea, enshrined in the early 20th century laws that created the PUC, that the commission is supposed to be independent.

She recalls spending Christmas 1999 reading the Public Utilities Code, written 90 years ago, and concluding that Progressive Gov. Hiram Johnson envisioned "an independent agency, independent from the Legislature as well as from the governor, [that] would allow regulators in a highly technical field to do essentially the right thing."

"Before, I was on [Davis'] staff, and as staff, you are supposed to follow the lead absolutely of your boss," Lynch said. "Now, I was appointed to an independent constitutional body. While I feel I've built bridges to the governor and the Legislature, I take very seriously the PUC's constitutional independence."

Critics, including many in the Davis administration and some in the Legislature, call Lynch unbending. She is particularly adamant on the commission's independence.

Insisting on Independence

Accounts of how the Edison deal was reached underline Lynch's insistence on preserving the PUC's independent authority. The events also show how strong a position she holds as the PUC and the administration negotiate over the bond deal.

Starting in April, when he unveiled his proposed rescue of Edison, Davis and his aides lobbied hard to win support in the Legislature. Davis had no Republican support, and faced skepticism from fellow Democrats.

Lynch was another skeptic; Davis' proposal would have weakened the PUC's authority to regulate Edison. Her criticism of the proposal strengthened the hand of Senate Leader John Burton (D-San Francisco), an ally of Lynch's and the most influential critic of the governor's proposal.

Davis did win approval of a modified version of his plan in the Assembly. But late on Sept. 14, the Senate adjourned for the year without agreeing to any Edison bill.

The governor said he would order lawmakers to return to Sacramento in early October for a special session to consider it again.

Lynch seized an opportunity. She wanted to escape a $5.5-billion federal lawsuit that Edison had filed against the PUC. She also figured there might be a way to restructure Edison's debt without the bells and whistles proposed by Davis and other lawmakers.

It was a good time to talk. Wholesale electricity prices were down significantly, interest rates were falling, and the rate increase she had pushed through earlier in the year had made more money available to the utility.

"When we looked at the numbers fresh, we realized that the numbers had changed," enough that Edison might avoid bankruptcy without a complex legislative bailout, Lynch said.

At her direction, PUC General Counsel Gary Cohen made the initial call to Edison.

Edison, PUC Started Secret Talks

Edison executives had their doubts that the PUC could resolve the utility's problems. In their view, past inaction by the commission had helped bring the firm to the brink of bankruptcy.

But with prospects uncertain in the Legislature, both sides met Sept. 19 in the San Francisco offices of the utility's private counsel, Munger, Tolles & Olson. Talks went on for 12 days.

The PUC had three conditions. "One, we would try to see if we could assure them enough in rates to pay back down their debt over a certain period," Cohen said. "Second, there would have to be a sharing of pain by shareholders. And third, there could be no terms that would limit or restrict the commission's regulatory authority."

Lynch and the PUC staff kept negotiations secret. Word of the talks could stampede creditors into forcing the utility into bankruptcy, they feared. Another concern was that the talks could jeopardize a legislative solution to Edison's problem.

Lynch did notify her fellow commissioners, whose support she would need to pull off a settlement. PUC Commissioner Jeff Brown, one of three Davis appointees on the five-member board, said Lynch told him Sept. 21 "in the strictest confidence" about the negotiations with Edison.

"If it became public, it could blow up," Brown said. "There would be too much hullabaloo."

For several days, however, Lynch did not inform Davis. Meanwhile, the governor's aides continued to hold talks in hopes of putting together a legislative compromise.

On Sept. 25, some of Davis' top aides met with key legislative staffers in a daylong session. By the end of the meeting, both sides realized a major gulf remained.

That same day, Lynch called Sacramento to pass word to Davis that the talks were underway. A few lawmakers also were told. Two days later, the governor announced that he was postponing by a week his call for the Legislature to return for a special session. One reason for the delay was to see whether the PUC could seal a deal.

Over the next several days, the commission and utility lawyers hammered out the details of the $3.3-billion rescue plan, finalizing a deal about 11 p.m. Sept. 30.

"It would not have gotten over the finish line without her," said attorney Ron Olson, an Edison board member who helped represent the utility in the talks.

While those negotiations were going on, Davis was going to extraordinary lengths to persuade the PUC to approve the other major item on the commission's plate: his proposal for the bond deal.

The issue is complex. But at its root, Lynch said, the proposal pushed by Davis and Angelides to pay off the bonds would have the effect of locking in multiyear power contracts that the Davis administration struck with independent power producers.

Lynch and several lawmakers contend that the administration is committing the state to buy too much electricity at excessive prices and seeking to limit the PUC's authority.

The PUC under Lynch has challenged aspects of the administration's power contracts in proceedings before the Federal Energy Regulatory Commission.

Knowing that Lynch opposed the proposal, the governor tried to create a majority that would bypass her. He did not call Lynch, but did call Republican commissioners Richard Bilas and Henry Duque.

The governor's lobbying changed no votes; his proposal lost 4 to 1 with only Brown siding with him.

But his efforts appear to have enhanced Lynch's standing among her fellow commissioners, including the two Republicans, who are appointees of former Gov. Pete Wilson.

Commissioners Praise Lynch

In Bilas' view, the call from the governor showed that Lynch had the mettle to vote against the administration proposal, even if it might cost her her job as PUC president.

"There are only two kinds of people who can serve: a yes man, or a person who believes that the commission was set up to be independent, and she is of the second type," Bilas said.

Brown, the only commissioner to vote for the administration's bond proposal, credits Lynch as well.

"She stood up for the authority of the PUC," Brown said. Brown--a cousin of Davis' onetime boss, former Gov. Jerry Brown--is a potential successor to Lynch as president if Davis decides to demote her. He has not been offered the post and does not want it, Brown said.

"I hope they don't remove her as president," Brown said. "She is a feisty, independent individual, but she is capable of enormous good work. If you appoint her, you have to take her on days you agree with her and days you disagree with her. She is not going to be a sycophant, and that is to her credit."