If Costs Rise, Merger Dies,Edison Warns : Utilities: Also complicating the picture is a decision by the new state attorney general to consider reversing a ruling that opposed the merger as anti-competitive.

Southern California Edison Co. said Thursday that it might drop its proposed $2.6-billion merger with San Diego Gas & Electric Co. if the state Public Utilities Commission acts on a recommendation to impose millions of dollars in new costs and force the sale of certain operations.

Meanwhile, in what could further complicate the unprecedented case, state Atty. Gen. Dan Lungren said his office wants to “reassess”--and possibly reverse--an opinion by his predecessor opposing the Edison-SDG&E; merger as anti-competitive.

Although the Republican attorney general stressed that he still needs to study the matter further, he indicated he may offer a “broader” interpretation of a new state law that would open the door for a recommendation from his office that the merger be approved.

Edison’s statement was the first time that the company has said it would reconsider a deal that was initiated in 1988 and has already cost shareholders more than $60 million.

Opponents of the merger saw the move as a sign of desperation by the company, which has faced several setbacks in its efforts to win regulatory approval for the merger. The combination would create the largest investor-owned utility in the nation.

Edison’s statement came in response to an opinion issued earlier this month by two state administrative law judges, who recommended against the merger, despite evidence that it could save ratepayers more than $1 billion by the year 2000.

The decision was based in part on an analysis by Lungren’s predecessor, Democrat John Van de Kamp, who said the merger would be anti-competitive.

That ruling cheered opponents of the merger, but chagrined Edison officials, who say the law judges should have taken a more balanced approach and favored the merger.

The final battle will take place before a newly reconstituted PUC, including two members appointed earlier this month by Gov. Pete Wilson. On Thursday, the PUC postponed by two weeks, until March 20, a hearing on the merger. Its final decision is expected later this year.

In Sacramento Thursday, Lungren said his office will formally request that the PUC allow it to file a “supplemental brief” to an advisory opinion issued last year by Van de Kamp.

“I don’t think we ought to adopt the notion that bigness is per se badness as the essential rule of antitrust or competition-based law in California,” Lungren said. “I don’t find that in the law. I think that notion has been rejected by many antitrust scholars and practitioners over the years.”

In their filing with the PUC on Thursday, the companies said the decision would impose an additional $150 million in transaction-related costs on Edison and SDG&E; shareholders through the end of the decade. That includes $20 million per year for four years that would result from a reduction in the companies’ authorized return on equity.

If the PUC adopts the law judges’ recommendations to place additional costs on shareholders and require divestiture of SCECorp.’s Mission Energy operations, Edison said it would walk away from the merger.

“Even if authorized to merge by the Commission, (Edison and SDG&E;) cannot go forward under conditions where their shareholders would be required to bear all of the transaction costs necessary to achieve ratepayer benefits,” the companies wrote.

San Diego Mayor Maureen O’Connor saw Edison’s admission as a confirmation of the city’s argument that Edison never really intended for its shareholders to pick up all the costs of the merger.

“All along, they’ve been saying the shareholders will bear the costs, not the ratepayers, but now it’s coming to the light of day that they had no intention of them bearing the costs,” she said.

Other merger opponents saw Edison’s threat as a ploy to put pressure on the PUC.

“It sounds like what they’re trying to do is establish a record whereby the shareholders will be appeased when they’re told they’ve spent $60 million to $70 million for naught,” said Michael Shames, executive director of San Diego-based Utility Action Network or UCAN, a consumer group opposing the merger.

Lungren, who assumed office in January, said Thursday he didn’t intend to get involved in the politically sensitive merger until two weeks ago, when Edison officials contacted him and requested a meeting.

At that point, Lungren said he decided to review the advisory opinion, which was required under a 1989 law that says such utility mergers could only be approved if they “not adversely affect competition.”

After looking at the opinion, Lungren said he was bothered by the belief that his predecessor interpreted the phrase too “narrowly” by applying federal antitrust tests against the proposed merger.

“When I read the opinion, some alarm bells went off,” said Lungren, adding that he wanted to make sure any attorney general’s opinion used in the PUC proceedings gave broad interpretation to the legislative intent of the law.

“To take the words competition , and suggest they mean antitrust , and then to suggest it means a narrow interpretation of antitrust law. . . . I don’t know how you arrive at that,” he said.

But Sen. Herschel Rosenthal (D-Los Angeles), a merger watcher who authored the law, said Thursday that the old ruling was exactly what he had in mind, adding that any change by Lungren in favor of Edison could be abandoning protection of ratepayers and employees.

“I hope those fears won’t be realized,” Rosenthal said.

Lungren acknowledged Thursday that, in reviewing the opinion, his office contacted Edison for “factual information” but added that he never met personally with utility officials.

He also said the fact that the company’s employees have contributed to his past political campaigns--including $4,500 to his attorney general’s race last year--had no bearing on his decision to revisit the advisory opinion.

A spokesman for Edison declined to speculate how Lungren’s move to amend the advisory opinion would affect the merger proceedings, but an opponent said it could hurt their efforts to derail the corporate combination.

“It could seriously complicate what otherwise should be a straightforward rejection of the merger,” said Shames of UCAN. “I would no longer be confident that the merger would be rejected.”