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October 4, 2001 


Southern California Edison Averts Bankruptcy 



By Bob Bellemare
Vice President 


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[News item from Reuters] The California Public Utilities Commission (CPUC) and Southern California Edison (SCE), the utility unit of Edison International (NYSE: EIX), said they have reached an agreement that will enable the utility to "pay off its creditors and prevent another utility bankruptcy in California." The CPUC also rejected the state's plan to issue a record $12.5-billion bond to fund some of California's power purchases. 

Analysis: In a striking move, SCE has reached agreement with the CPUC on a plan to keep the company out of bankruptcy. SCE accumulated a $3.9-billion debt buying electricity on the wholesale market at prices far greater than it was allowed to recover under a rate freeze imposed by deregulation. 

The key elements of the plan include a rate freeze and an agreement by SCE to not pay shareholders a dividend until the debt is paid off. SCE's rates were raised by approximately 42 percent earlier this year and will remain frozen through 2003 unless its pays off its debts sooner. In exchange, SCE agreed it will: use cash on hand and any revenue beyond what it needs to cover operating expenses to pay off its old debts; pay no dividends on its common stock through 2003 or until its back debts are fully paid; and drop a lawsuit against state regulators claiming the CPUC had violated federal law by failing to raise retail rates to reflect the underlying cost of wholesale power. 

Wall Street was quick to react favorably to the plan, as SCE's parent company stock (NYSE: EIX) rallied to its highest level in 10 months. Edison's stock rose $1.95 to close at $15.70, and shares of California's largest electric utility, Pacific Gas & Electric parent PG&E Corp. (NYSE: PCG), advanced $2.54 to $17.59. PG&E, who chose to declare bankruptcy earlier this year, said in a statement: "Anything that would return utilities to financial health is a positive step in bringing stability to the state's year-long energy crisis." However, it pointed out that the framework of the settlement appears to "be remarkably similar to the rate stabilization plan that it and Edison proposed to the CPUC nearly a year ago." "The relative ease with which this agreement appears to have been reached in the past few days suggests that the upheaval and damage of the past year might have been avoided." 

Shares in energy merchant firms selling power in the California market also rose sharply Wednesday as investors gained confidence that these firms will now get paid for their prior electricity sales to SCE. Gainers included Mirant Corp. (NYSE:MIR), which was up 11.98 percent or $2.72 to $25.42; Enron Corp. (NYSE:ENE), up 7.9 percent or $2.42 to $33.03; and Calpine Corp. (NYSE:CPN), up 11.19 percent or $2.94 to $27.72. 

Consumer groups blasted the settlement, calling it a bailout that froze SCE's electric prices at artificially high levels. Mike Florio, senior attorney for the consumer group Utility Reform Network, argued that the settlement actually has "unhealthy implications for consumers." While the state legislature "refused to force consumers to pay for the bailout they were considering, the CPUC is insisting that small customers bear the brunt of Edison's problems," he said, noting that consumers will pay inflated rates indefinitely. 

Gov. Gray Davis was also supportive of the agreement stating it "protected the public interest and will allow the state's second-largest utility to return to financial health," adding that he welcomed the CPUC's assurance this could be accomplished without raising electric rates. The governor canceled a special Oct. 9 legislative session he had called to solve SCE's financial problems. 

The governor, however, had harsh words concerning an earlier vote by the CPUC that rejected the state's bond plan to finance electricity purchases made by the state's Department of Water Resources on behalf of utilities. California's bond plan, was defeated in a 4-1 vote, driven by concerns that the plan was too costly and would surrender the commission's authority to regulate power prices. The agreement would have allowed the state's Department of Water Resources to decide the "reasonableness" of power rates, traditionally a CPUC responsibility. Commissioner Henry Duque said this would "set a dangerous precedent" and lead to the "dismantling of the CPUC." "The Department of Water Resources was not meant to be a bloated power bureaucracy" and the rate agreement would do this, said Commissioner Richard Bilas. 

The state of California must now go back to the drawing board to find a way to sell the record $12.5-billion bond. State Treasurer Phil Angelides said he cannot sell the power bonds until the CPUC "takes the actions required to implement the law. The CPUC's refusal to take action means there is no schedule for the bond issuance and no plan in effect as of today to repay the state's general fund." Angelides warned that the state faces a budget deficit of over $9 billion in the 2002-2003 fiscal year if the bonds are not sold before July 2002. Gov. Davis said the vote "was an irresponsible act. It creates uncertainty about our ability to sell the bonds necessary to repay the general fund when California can least afford additional fiscal uncertainty." 

The four commissioners voting against the bond plan all favor a bill that was authored by state Senate Leader John Burton, a San Francisco Democrat, on grounds that it is more flexible and less costly. But the bill, already passed by the legislature, is opposed by Gov. Davis, who has vowed to veto it when it lands on his desk. 

True to its word, Southern California Edison has found a way to avert bankruptcy. This is a major milestone in the restoration of California's power business. But challenges remain for the state. PG&E remains in bankruptcy, the state is saddled with a $12.5-billion debt that it must find a way to finance, and wholesale electricity prices continue to lower making the state's decision to enter into very long-term contracts for electricity supply very questionable. Ironically, California began its deregulation efforts on the hopes of lowering electricity costs, which at the time were some of the highest in the nation. Now, the state is locked into even higher prices, as SCE's interim-rate increases averaging 4 cents/kWh are permanent for the foreseeable future. 


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