Four Magic Words That May Slay a Giant Merger : Utilities: ‘Not adversely affect competition’: That phrase could become the key to the Edison-SDG&E; proposal.
For partisans rooting against the biggest electric utility merger in history, they have become known as “those four magic words.”
Not adversely affect competition --The phrase hangs conspicuously in one of the only bills to address the proposed Southern California Edison-San Diego Gas & Electric merger and survive the Legislature. But when it passed in 1989 and became encrypted in the public utilities code, few regarded the words as anything more than a gnat buzzing in the ears of a mighty corporate giant.
Earlier this month, those words suddenly transmogrified themselves into a regulatory troll that could ambush Edison as it marches toward a merger that would create the nation’s largest investor-owned electric utility.
In a surprising decision, two state administrative law judges on Feb. 1 relied heavily on that little-regarded phrase to recommend that the state Public Utilities Commission reject the merger because it could hurt municipally owned electric companies that must rely on Edison’s power grid. The judges made that determination despite other evidence that the merger could save ratepayers a hefty $1 billion by the year 2000.
Now, the decision has those studying the merger wondering whether Edison--which possesses one of Sacramento’s most effective lobbying forces--goofed. Was it too busy gunning down other hostile bills at the time to notice the sleeping phrase? Or did it simply underestimate the perils of those four words?
“I think they may have overlooked it,” said state Sen. Herschel Rosenthal (D-Los Angeles), who wrote the words in question.
Added Michael Shames, executive director of Utility Consumers Action Network, a San Diego-based consumer group opposing the merger: “My sense is that Edison was fairly well diverted by a dozen or so merger-related pieces of legislation.”
An Edison spokesman disputed the idea, saying the company didn’t lobby to kill the four words because it believed the phrase was not an absolute, but allowed the PUC to “balance” any merger-related savings against any impact of decreased competition.
“We believe that there are $1.7 billion in benefits and that any anti-competitive impacts that do exist can be readily mitigated,” said Edison spokesman Lewis Phelps said. “We believed that at the time this bill was introduced and we still believe that.”
Yet a Rosenthal aide who nursed the bill through the legislative process said that, privately, the utility is engaged in its own form of Monday-morning quarterbacking over the four magic words.
“There are concerns among lobbyists of ‘How did this happen? Who scrutinized the language?’ ” said Michael Shapiro, the aide.
Documents and interviews this week show that Edison once targeted the anti-competition provision for a fight and had several opportunities to water it down, as it did with other portions of the Rosenthal bill. But the utility never followed through, leaving the phrase intact.
It was perhaps the only oversight in an otherwise thorough Edison lobbying campaign that moved to aggressively kill or weaken more than 10 merger-related bills in Sacramento during 1989.
State Sen. Lucy Killea (D-San Diego), who saw one of her own anti-merger measures perish, said the company’s efforts were “all powerful,” outmatching its opponents “not only in quantity, but in the quality” of the lobbyists it employed.
The company began to use its influence in late 1988, shortly after SDG&E;’s board of directors approved the $2.5-billion stock swap merger. One key measure of the merger’s importance to utility executives is that Edison and SDG&E; have spent $87 million in shareholders’ funds to win regulatory and legislative approvals.
When it became apparent that some San Diegans--notably, Mayor Maureen O’Connor and San Diego Union Publisher Helen K. Copley--were dead-set against turning the local utility over to a company from Rosemead, Edison turned to some influential friends.
According to the California Journal, Howard Allen, then Edison’s chairman, prevailed upon former President Richard M. Nixon to contact Copley and ask her to keep an open mind on the merger.
And when O’Connor initially rebuffed Allen’s request for a private meeting at City Hall, Allen turned to longtime friend U.S. Sen. Alan Cranston, a Democrat who also happens to be a friend of O’Connor, another Democrat.
In a letter to O’Connor, Cranston wrote that Allen “simply wanted me to tell you that he is an OK guy--and I am glad to do so. I’ve known Howard for about 40 years. . . . He is a fine person, honest, not a reactionary utility type, and I am confident (he) will do his best to treat San Diego consumers fairly.”
Audrie Krause, executive director of Toward Utility Rate Normalization, a San Francisco-based consumer group, said Edison has worked hard to cultivate ties with politicians and business leaders throughout its territory in Southern California.
“Edison, since its inception, has been out schmoozing these people,” she said. “They’ve been doing good deeds . . . taking them to lunch . . . and all of that ultimately builds up trust . . . which is very difficult to get around.”
Such has been the case in Sacramento, where Edison’s largess extends even to legislative secretaries and staff members. Even in 1990, when most of the urgent merger bills were long gone, the utility spent nearly $270,000 for a cadre of lobbyists to watch 89 bills and appear before the PUC, state records show.
The company frequently treats legislators and staff members to Sacramento Kings basketball games, and it has paid the golfing fees for lawmakers such as Rep. Steve Peace (D-Chula Vista). Last August, it paid $2,263 to treat 16 legislators--including Rosenthal and Assembly Speaker Willie Brown (D-San Francisco)--to dinner at Sacramento’s most exclusive Italian restaurant.
Aside from lobbying expenses, the company and a separate political action committee representing its employees contributed heavily to state and local political campaigns in 1990. Last year, they gave more than $690,000 to legislative campaigns and state ballot measures, including $150,000 to defeat the so-called “Big Green” initiative sponsored by environmentalists. Edison also contributed $5,000 for an unsuccessful June ballot measure to create 10 council districts in San Diego.
Even in Washington, Edison has donated hundreds of thousands of dollars over the years to officeholders from California to New Hampshire, including at least $250 to a Texas Congressman named George Bush.
Cranston, who intervened on Edison’s behalf, has received $27,500 from its employees over the last 11 years, federal records show. Gov. Pete Wilson, who declined Edison contributions during the gubernatorial campaign because of the pending merger, took $15,000 from its employees while serving as a U.S. senator.
And former Rep. Norman D. Shumway, who will now deliberate over the merger as one of Wilson’s appointees to the PUC, has taken $3,400 from the Edison workers over the years, records show. Shumway’s San Joaquin District is far removed from Edison’s Southern California service area.
That is the kind of political activism, say consumer advocates, that Edison was able to convert into political power during 1989, when it faced a crop of bills aimed at crippling the utility union before it even got to the PUC.
Edison killed a bill by former state Sen. Larry Stirling (R-San Diego) that required an advisory vote of the people on the merger. It defeated another Stirling measure paving the way for local officials to take over SDG&E; as a public utility. It scuttled a bill by Sen. Wadie P. Deddeh (D-Bonita) requiring a costly, time-consuming environmental study of the merger.
“Yes, there were a lot of bills at the time,” Edison’s Phelps said. “But they didn’t go anywhere because the Legislature recognized them as narrow, special-interest bills that were not appropriate for legislation.”
The utility was less aggressive with Rosenthal’s bill, however. Although the Los Angeles Democrat has been an outspoken critic of the merger, he is also chairman of the Senate Committee on Energy and Public Utilities--a committee where it is essential for Edison to maintain goodwill.
And although Rosenthal’s bill was inspired by the merger, it addressed the sensitive matter only indirectly by concentrating on the PUC approval process required for any massive corporate merger involving a state-regulated industry.
Before Rosenthal’s bill, the PUC was left pretty much on its own to determine whether a merger would benefit utility customers. When it was introduced in December, 1988, Rosenthal’s measure proposed changing PUC discretion by requiring a formula of 10 mandatory tests for any utility “mega-merger.”
Initially, the 10 tests included proof that any merger would be fair to the affected communities and would be fair to utility workers. They also required mergers to maintain or improve service; guarantee short- and long-term benefits to ratepayers; and prove that it would not harm competition among utilities that would remain after a merger.
By the time Rosenthal’s bill came up for its first committee hearing in April, 1989, Edison had announced its opposition to the measure and proposed several amendments to weaken its provisions, according to legislative files. It asked to limit the state’s study of any antitrust questions. Yet the most sweeping proposal was its amendment to make all 10 tests something the PUC need only “consider,” but not require, in making merger decisions--an overture Rosenthal flatly rejected.
But Edison managed to knock six of the tests out of the formula before the bill even left the Senate in May. And in the Assembly, it successfully whittled the mandatory tests down to two: guaranteed benefits to utility customers and proof that a merger “not adversely affect competition.”
Officially, Edison dropped its public opposition to the bill. But it wasn’t satisfied until it convinced Rosenthal to remove the word “guaranteed” from the mandatory test about rates, said Shapiro.
Meanwhile, the phrase about competition went through unscathed and became part of the PUC code when then-Gov. George Deukmejian allowed the bill to become law without his signature on Sept. 15, 1989.
The four words remained intact at the end, as did a subsequent line that required the state attorney general to review proposed mergers for anti-competitive effects.
“There was no change in the context of the words,” Shames said. “I expected that bill to encounter tremendously rough sailing . . . I was rather shocked that Edison chose not to put it on its hit list.”
In fact, Shames said, Edison’s lobbying effort on the bill may have backfired on the giant utility. Left standing when other tests were modified, the antitrust language was given “separate status, which made it more stringent,” he said.
Yet Art Carter, a Sacramento-based lobbyist who represents electrical workers, said he thinks Edison laid off the antitrust test for the sake of political appearances, fearing complete emasculation of the Rosenthal measure would “further contribute to their image of being too monolithic.”
“But it turns out that’s the phrase that’s causing the most problems,” said Carter. “I now suspect Edison would have done something different.”
Edison, while officially mum on how it will proceed in Sacramento and San Francisco, has initiated “heavy-duty lobbying (in Sacramento) on the lamented four words,” Shames said.
Shames suggested that Edison is unlikely to win a legislative fix that would remove the obtrusive language. But he expects Edison to hit hard in upcoming PUC filings with “the argument that the judges construed the statute wrong, that they misinterpreted it.”
Observers believe that Edison will muster substantial firepower as it makes its case in upcoming PUC filings and during public testimony slated for March 6 at the PUC’s San Francisco headquarters building.
“I’m sure that they (Edison) still believe that they can show (commissioners) that the merger is not anti-competitive,” said Jerry Jordon, executive director of the Sacramento-based California Municipal Utilities Assn., which wants the PUC to force Edison to share its impressive electric transmission grid if the merger is completed. “And there’s a lot of room for disagreement on what anti-competitive means.”
That view was echoed in a recent Sacramento Bee editorial which urged the PUC to think carefully before adopting the narrow meaning that the law judges relied upon. Under the law judges’ reading, the newspaper editorialized, it might be impossible for any company to ever complete a merger.
“It’s going to be fascinating no matter how this turns out,” said Jan Smutny-Jones, executive director of Independent Energy Producers, a Sacramento-based industry association that is opposing the merger. “There is a national audience watching this. I imagine it will continue to the (U.S.) Supreme Court no matter how it turns out.”
Debate over the key phrase’s meaning will be furious.
“It’s four words, but of course, the three words “We the people” have kept lawyers and scholars busy for a couple of centuries,” Shames said.
Peter Arth, the PUC’s legislative liaison, recalls that the “four magic words . . . were not controversial . . . as the bill went from inception to final passage. It was simply telling the commission that it had to look at the anti-competitive effects of the merger, which is something that we had proposed to do anyway.” “
But the phrase’s importance was not lost upon other observers. “We always thought that those were the key four words in the bill,” Jordan said. “I don’t know how you create the largest utility in the world and not create some anti-competitive problems.”
