Panel Charges Edison With Favoritism in Buying Power

Southern California Edison Co. gave preferential treatment to a sister company in a pattern of “self-dealing” that has cost its customers at least $124 million in excessive costs for electricity, a division of the California Public Utilities Commission charged Monday.

In what could prove to be a major embarrassment to Edison and its parent firm, SCEcorp, the PUC’s Division of Ratepayer Advocates urged that Edison be forced to refund the money and called on the utility to get out of the business of selling power to itself.

SCEcorp flatly denied the allegations and reiterated that its longstanding policy has been for its Mission Energy subsidiary to sell power for less than Edison would have to pay from another independent producer.

“We’re not going to jeopardize our reputation (to save) a few hundred thousand bucks on a contract with one of our subsidiaries, particularly when we live in a glass house,” said Howard P. Allen, chairman and chief executive of SCEcorp. “We are very sensitive to this self-dealing potential, and we have bent over backward to avoid it.”

The PUC division’s recommendations are not binding on the five-member PUC, and it was unclear whether the state regulatory body has authority to make SCEcorp divest itself of unregulated subsidiaries.

Independent Production

The report focuses on SCEcorp’s venture into independent power production through its Mission Energy unit, which operates several major cogeneration facilities and has become the largest independent power producer in the nation.

The report immediately raised questions about its possible effect on the planned $2.4-billion merger of SCEcorp and San Diego Gas & Electric. At a minimum, it is sure to focus close attention by regulators reviewing the merger on SCEcorp’s general corporate strategy.

However, Allen said he did not think the report would affect the merger “one way or the other.”

The report by the Division of Ratepayer Advocates, whose job is to represent the interests of utility customers, focuses on Mission Energy, an unregulated arm of the utility formed to compete in the burgeoning market for independent production of electricity.

Under federal laws aimed at fostering an alternative-energy industry, public utilities are required to buy power from any independent businesses that can provide it. California has led the nation in development of such businesses, ranging from wind and solar projects to big cogeneration plants that produce electricity as a side product of other industrial activity.

Jumping Into Market

The law permits utilities themselves to become independent producers of power, and Edison and Pacific Gas & Electric of San Francisco have jumped into the market in a big way. Mission Energy is a partner in projects supplying about 60% of all the independent power Edison buys.

SCEcorp said Mission Energy and other unregulated units of the company generated $108 million in revenue and $41 million in income or 6% of SCEcorp’s profits last year.

Independent energy producers have complained bitterly about having to compete with the utilities to sell them power, both because of the utilities’ superior financial resources and the potential for favoritism. Meanwhile, the long-term contracts between utilities and producers have proven to be far more expensive than electricity bought at today’s lower market prices.

SCEcorp’s Allen has loudly criticized the laws that required Edison to buy the costly independent power and said it amounted to a “rip-off” that is costing consumers up to $300 million a year in higher electric rates.

At the same time, his own company has sewn up many of the contracts he has objected to. But he contends that the utility’s contracts with Mission Energy are, by design, 2% cheaper than comparable contracts with independent producers.

David Morse, who headed the PUC staff study, said its review of 52 contracts between Edison and independent producers signed between 1985 to 1987 showed “serious problems” with 18 of them, and that those contracts with Mission Energy were more expensive, not less.

“We don’t think it is cheaper,” Morse said. “When you look at the contract as a whole, it is more expensive. The terms of the contract were exceedingly favorable to (Mission), and there were problems with Edison employees negotiating both sides of the contract.”

There were repeated examples in which Mission Energy’s contracts had more generous terms, relaxed performance requirements or other advantages compared to contracts with independent producers, he said.

The biggest problem stemmed from a Kern River cogeneration project between Edison and Texaco. The PUC staff recommended that Edison refund $33 million to ratepayers because of that deal alone.

The dispute appeared to center in part on the fact that Edison signed numerous such contracts before clear standards for the contracts had been established. Allen said there might have been cases at that time in which “we were talking to ourselves,” rather than negotiating at arms length with subsidiaries. But with the possible exception of a small 10-megawatt geothermal project in Nevada, all the contracts were cheaper than could have been signed with independent producers, he said.

Edison’s sharpest critics for its practice of buying power from itself include independent power producers, whose trade group withheld comment Monday until it has seen the full report.

Staff writer Greg Johnson contributed to this story.