Tucson Power Sues Edison for Losses in Derailed Merger

Financially ailing Tucson Electric Power filed a multimillion-dollar lawsuit Wednesday against Southern California Edison in connection with Edison’s 1988 proposed merger with San Diego Gas & Electric, a move that eventually derailed Tucson Electric’s previously proposed merger with SDG&E.;

The suit seeks damages, interest payments and attorneys’ fees that could total “hundreds of millions of dollars,” Tucson Electric spokesman Roger Yohem said. Although Tucson Electric is seeking mone tary damages, the suit that was filed in San Diego Superior Court does not attempt to block Edison’s pending merger with SDG&E;, Yohem said.

“The suit is totally groundless and without merit,” Edison spokesman Lew Phelps said. “Tucson Electric Power at the time that it agreed to terminate its merger agreement with SDG&E; indicated that it wasn’t damaged as a consequence of the termination of the (Tucson-San Diego) merger.”

“TEP by its own admission is in dire financial health, and they’re apparently grasping at straws” with the lawsuit, Phelps said.

However, utility-industry observers said the unexpected suit could further complicate the already complex and controversial $2.4-billion stock swap merger between SDG&E; and Edison that is being reviewed by federal and state regulators. If completed, the Edison-SDG&E; merger would create the nation’s largest investor-owned utility, with 4.8 million customers.

The lawsuit alleges that the Tucson utility was weakened financially after SCEcorp, Edison’s Rosemead-based parent company, proposed merging Edison with SDG&E.; Edison’s intervention dashed Tucson Electric’s hope of spreading its excess power generation among the broadened customer base that a merger with SDG&E; would have created.

“The plot thickens with this lawsuit,” said Michael Shames, executive director of Utility Consumers Action Network, a San Diego-based consumer group that is opposing Edison’s proposed merger with SDG&E.; “If the (Tucson Electric-SDG&E;) merger had gone through, Tucson would be in a lot better position than it is now. . . . The damages could be substantial. The ‘hundreds of millions’ figure is probably not an exaggeration.”

As part of its initial merger agreement with Tucson Electric, SDG&E; agreed to pay the Arizona utility $25 million if the merger were not completed. Tucson Electric still expects to collect that $25 million, which is not connected to the Wednesday lawsuit.

Tucson Electric’s claim that Edison’s uninvited bid for SDG&E; weakened the Arizona utility financially “is accurate to a degree,” according to Doug Brooks, director of the Arizona Corporate Commission’s Residential Utility Consumers Office, which represents Arizonans in utility matters before the commission.

However, “a lot has gone on with Tucson Electric Power other than the failure of the merger agreement,” Brooks said.

The Tucson-based utility “took some significant hits last October” when the Arizona Corporations Commission ordered the utility’s shareholders to absorb a significant portion of costs associated with new coal-fired electrical generating units, Brooks said. With the new units now on line, Tucson Electric has a surplus of relatively high-priced electricity.

Largely because of those expensive and under-utilized power plants, Tucson Electric reported a $87.4-million net loss and $233 million in revenue for the six-month period that ended June 30. The utility reported a $41.4-million net profit and $260 million in revenue for the corresponding period the previous year.

Tucson Electric’s stock, which closed at $53 a share July 26, 1988, the day that Edison unveiled its uninvited stock swap merger with SDG&E;, has traded in recent weeks at about $10 a share, Yohem said Wednesday.

The suit “seeks . . . (damages) for what’s been lost to the company and its shareholders,” since Edison made its bid for SDG&E;, Yohem said. “If the merger had been completed as originally planned, there would have been initial benefits to shareholders, but the company’s ratepayers would also have benefitted down the line” through economies of scale that would have produced lower-priced electricity, Yohem said.

The suit filed in San Diego Wednesday afternoon charges that Edison and SCE engaged in “malicious, outrageous and oppressive” conduct and “willful, wanton, reckless and conscious disregard of the rights and interests of TEP” when it interfered with Tucson Electric’s now-abandoned merger bid with SDG&E.;

Edison’s intervention caused TEP to suffer a “loss of substantial economic benefits and other damages,” Yohem said.

Wednesday’s lawsuit was the latest chapter in an already lengthy story involving Tucson Electric, SDG&E; and Edison.

The saga began on June 13, 1988, when SDG&E; and Tucson Electric announced a planned merger valued at $1.9 billion that would have produced a utility company with excess electrical generating capacity and an extensive electrical transmission grid. The utility, which was to have been headquartered in San Diego, would have had $5.6 billion in assets, 3.8 million customers and 5,681 employees.

But that merger fell apart on Nov. 3, 1988, just months after Edison made its uninvited bid for SDG&E.; Tucson Electricd’s board of directors abandoned the merger rather than join SDG&E; in what the Tucson company believed would be a lengthy, costly and unsuccessful attempt to fight off Edison’s merger offer.