Edison, PG&E; Agree to Unload 15% of State’s Electric Capacity

In what would be the largest divestiture of U.S. power plants ever, California’s two largest electric utilities said Tuesday that they have agreed to sell or spin off about half of their 19 fossil fuel plants--about 15% of the state’s electricity-generating capacity.

Southern California Edison, with 12 such plants, and Pacific Gas & Electric, with seven, were responding to a December request by the California Public Utilities Commission as part of the proposed deregulation of the state’s $20-billion electric utility industry.

The goal of the divestitures is to reduce the utilities’ stranglehold on power generation in the state, setting the stage for a reduction in electricity rates that are now 50% higher than the national average.

Experts said it is too soon to determine the impact of the divestiture, but “it could be a good thing for consumers,” said Robert Finkelstein, staff attorney with the San Francisco-based consumer group Toward Utility Rate Normalization.

Without it, California would have “one 600-pound gorilla sitting there” controlling the industry’s power plants once a competitive market gears up, Finkelstein said, referring to Edison, the state’s biggest generator of electricity.

The two utilities agreed to divest the equivalent of half their electricity-generating capacity, not counting their nuclear, hydroelectric and certain other plants. The affected Edison and PG&E; plants now account for about 30% of California’s power capacity.

The sale or spinoff would mark a major shift in the ownership of electric power production here, with potential buyers including out-of-state utilities and independent producers. And it would serve as a road map for other states.

“In the long run, many parts of the country are headed towards an actual legal separation of generating companies from transmission and distribution businesses,” said Douglas Fischer, an electric utilities analyst at A.G. Edwards in St. Louis.

Under California’s deregulation, the existing public utilities will continue as regulated monopoly distributors of power. But they will have to compete with others in making and selling the power.

As an incentive to the utilities to divest themselves of their power plants, thus slashing their revenues, the PUC would allow the utilities a higher rate of return on equity.

Several hurdles must be overcome before the plants are sold, including regulatory approvals and dealing with outstanding bond debt.

Edison currently owns 12 plants that burn natural gas or other fossil fuels in Central and Southern California. The plants employ roughly 1,000 people and generate 9,560 megawatts of power, or enough for 8 million customers a year.

The plants account for 25% of Edison’s total generating capacity and 18.5% of the state’s total capacity, and they have a book value of roughly $700 million.

Adding nuclear, hydroelectric and other plants, Edison controls 27% of the state’s total electricity production, the PUC said.

“We are reluctant to divest ourselves of power plants that have served consumers in this region so well,” Edison Chairman John E. Bryson said in a statement. “However . . . we have concluded that this voluntary divestiture is the best way to ensure that the commission’s restructuring decision is implemented.”

PG&E; operates seven fossil fuel plants in Northern and Central California that employ about 600 people and generate about 6,300 megawatts of power, enough for 6 million people. The plants account for 18% of PG&E;’s total generating capacity and 12.2% of the state’s total capacity. They have a book value of less than $1 billion.

“We believe that as the generation of electricity becomes a more competitive business, it makes sense for us to reduce our ownership of power plants,” PG&E; Chairman Stanley T. Skinner said in a statement.

Edison has said it would proceed with divestiture of its plants by Jan. 1, 1998, the proposed effective date of the PUC’s restructuring proposal.

Similarly, PG&E; said it would aim for 2003, the year in which all electricity generation must be priced at market value under the PUC’s proposal.

Neither Edison nor PG&E; has decided which plants would be offered for sale. Some outside power companies said they would consider bidding on the plants, even though analysts point out that the state already has more power-generating capacity than it needs.

“It’s certainly something we would consider,” said Kelly Farr, spokesman for CMS Energy Corp., a Dearborn, Mich.-based energy company. CMS already has interests in two small power plants in California.

Similarly, a spokesman for Duke Power Co. of Charlotte, N.C., said the utility’s unregulated power-generation subsidiary would be “keenly interested.”

Analysts said other potential buyers for the plants might include AES Corp. of Arlington, Va.; Entergy Corp. of New Orleans; and Destec Energy of Houston.

The proceeds from the sale of the plants would be used to pay off outstanding bond obligations and other costs associated with the initial investments in the plants.

If the market value of the plants turns out to be less than the book value, which is likely, then the difference will be added to the so-called transition costs payable to the utilities as part of the industry restructuring.

Such transition costs are paid by ratepayers as a special charge on electric bills.

If the market value exceeded the book value, the excess would be used to offset other transition costs, such as the requirement that utilities continue buying expensive power from alternate energy producers for several more years.

If no buyers can be arranged, the utilities will be allowed to spin off the power plants as separate companies, much as the Baby Bell telephone companies were spun off from AT&T; during the company’s breakup in the 1980s.

The divestiture would not apply to any nuclear power plants, such as Edison’s installation at San Onofre or PG&E;’s Diablo Canyon plant near San Luis Obispo.

Tuesday was the deadline for the utilities to respond to a request made by the PUC when it issued its deregulation proposal Dec. 20.

PG&E; said it has retained the investment banking firm of Goldman, Sachs & Co. to help it evaluate the marketplace for the plants. Edison said it has not selected a banker yet.