Impact of Edison Deal Hard to Assess
A major agreement reached this week between Gov. Gray Davis and Southern California Edison, which could result in more consumer rate increases, raises questions about whether California’s energy crisis is significantly closer to an end, some financial and other experts said Tuesday.
Though the deal gives Edison hope that it can regain financial stability, the 38-page agreement between Davis and Edison is so complex that it gave many experts pause. What’s more, it’s not certain that the agreement will win final approval.
Edison described the agreement as “comprehensive” and said it “is expected to help restore [Edison’s] credit-worthiness and liquidity.”
A high-ranking Edison executive said in an interview that the deal could allow rate increases. But the company also pointed to uncertainties surrounding the deal. In a statement filed Tuesday with the Securities and Exchange Commission, Edison noted that major elements of the agreement require approval by the state Legislature and Public Utilities Commission.
Legislation to implement the deal could be introduced as early as next week, when lawmakers return to Sacramento from their spring recess. But Edison acknowledged that it can offer no assurances that lawmakers and the PUC will ratify the pact.
Additionally, Edison’s filing, required by federal law, says Pacific Gas & Electric’s filing for bankruptcy casts doubt on whether the deal can work. Edison noted that its creditors still could force Edison into bankruptcy, which would add to California’s uncertain energy future.
And then, there is a wild card: the initiative.
“A California voter initiative or referendum previously has been threatened against any measures that would raise consumer rates or aid California’s investor-owned utilities,” Edison said in its disclosure.
The deal aims to rescue the near-bankrupt Edison by infusing the utility with enough cash to pay down its debt to creditors, including banks, bondholders and independent power generators that sold the company electricity at record wholesale prices.
“It seems like there is a lot to be done,” said Steven M. Fetter, of the credit rating firm Fitch Inc. “I want to see final details. These are attractive details, but we want to see it play out.”
The centerpiece involves the state’s purchase of Edison’s 12,000-miles of transmission lines for $2.76 billion, or $1.5 billion more than its depreciated value. The company would use the money to refinance its debt, estimated at more than $5 billion.
Additionally, Edison would sell revenue bonds to raise another $2 billion. The bonds would be paid back over the next 15 years with money Edison collects each month from its 4.3 million customers.
One of the key issues for consumers is whether rates would go up. The agreement does not say outright there would be increases, beyond the roughly 42% approved by the PUC last month for Edison customers.
But the agreement says regulators would be required to raise rates if the utility’s investment grade credit rating became jeopardized. Edison’s credit-worthiness would be threatened if it were to begin accumulating debt again.
Edison Vice President Stephen E. Pickett said in an interview that Edison and state negotiators are confident existing rates are sufficient. However, if already high wholesale electricity prices continue to rise, Pickett said, the agreement requires the PUC to raise rates to cover Edison’s power costs.
“There’s clearly a belief by the people at the state and here that there’s enough revenue in the system,” Pickett said. “But if these wholesale prices continue out of control, rates will have to go up.”
The agreement says Davis must present the Legislature with a bill embodying the deal. If the Legislature does not act within 120 days, Edison can terminate the deal.
Republican lawmakers have said they oppose a state takeover of the transmission grid. Key Democratic lawmakers expressed skepticism despite the fact that many had pushed for a state takeover of the transmission lines.
Senate President Pro Tem John Burton (D-San Francisco) said Tuesday the Senate will hold extensive hearings.
“If it’s an all-or-nothing, that makes the decision much easier,” Burton said, suggesting that the upper house will balk at the deal as presented.
Senate Energy Committee Chairwoman Debra Bowen (D-Marina del Rey) said the deal will require “some serious homework to do before the state goes forward.”
“I have no doubt that Edison worked hard to stay out of bankruptcy,” Bowen said. “The state has to work hard to do what is best for ratepayers and taxpayers. That is not necessarily the same as what is good for Edison.”
Adding to Davis’ and Edison’s task, lobbyists representing environmentalists and consumers groups criticized the deal.
“If this is a take-it-or-leave-it,” said environmental lobbyist V. John White, “there will be a lot of folks who will think bankruptcy is a better option.”
Edison and PG&E; racked up billions in debt paying more for power in the state’s wholesale market than they were permitted to collect from customers, whose rates were frozen by 1996 legislation.
Edison and PG&E; filed federal lawsuits arguing that they have the right to recoup all of their power costs from customers. Under the deal, Edison agreed to suspend its lawsuit immediately, and abandon it when the deal is finalized.
In one of its bigger concessions, Edison’s parent company agreed to refund at least $400 million to the utility.
Additionally, Edison must sell power from its coal, hydroelectric and nuclear plants at rates tied to the cost of producing the power, and dedicate power from a new plant being built in Kern County to the state for the next decade.
In exchange, Edison expects to receive several concessions from the PUC. The deal gives the PUC 60 days to take several major actions, including repealing some significant recent decisions.
On March 27, for example, the PUC issued a ruling requiring a major accounting change that would have resulted in wiping out most if not all of the debt claimed by Edison and PG&E.;
Under the order, the utilities would have to balance the money they made in past years in the deregulated energy market, against the debt they accumulated last year when wholesale prices of electricity skyrocketed.
If the PUC order is not changed, Edison executives said, the company would have to write off $2.5 billion in losses.
In a teleconference with Edison’s unsecured creditors Tuesday, Edison executives cautioned that even with the agreement, the utility might need months to regain its financial health.
“I’m a firm believer in momentum,” said Ted Craver, chief financial officer of Edison International. But he said the utility, state regulators and the Legislature cannot promise that their deal will work.
“We all need to prove it to investors” before Edison can hope to again raise cash in the financial markets to bolster its debt-laden balance sheet, Craver said.
Craver said Edison roughly estimated that, “it will be somewhere in the fall” before the “dedicated” payments from consumers and other ratepayers to Edison would be available to the utility.
Edison’s stock finished regular trading Tuesday at $11.38 a share, up $2.46 from Monday’s regular close. PG&E;’s stock also rose Tuesday, gaining $1.60 to $8.50 a share on the New York Stock Exchange.
Some Wall Street analysts, however, were skeptical.
After reading the agreement and Edison’s SEC filing, Dan Scotto, an analyst with PBN Paribas, cited the “incredible complexity, the number of moving parts, the number of parts that have to come together.”
“Conceptually, you can see where its foundation is,” Scotto said. “But implementation is very ambitious, and riddled with uncertainty. . . . I ask myself, ‘What has really been solved?’ and I’m coming up a little short with an answer.”
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Times staff writers James Peltz in Los Angeles and Carl Ingram in Sacramento contributed to this story.
Highlights
The tentative deal reached this week between Gov. Gray Davis and Southern California Edison would:
* Allow Edison to recover the full $3.5 billion it says it is owed by its customers for power purchased between June 2000 and January 2001.
* Sell Edison’s 12,000 miles of transmission grid to the state for $2.76 billion, or $1.5 billion more than the depreciated value.
* Force Edison’s parent company to refund at least $400 million to the utility.
* Require Edison to sell power from its coal, hydroelectric and nuclear plants at rates tied to the cost of producing the power.
* Dedicate a portion of existing electricity rates to pay for bonds that will allow Edison to raise cash to pay off creditors.
* Require state regulators to raise Edison electricity rates if necessary to cover Edison’s bond payments.
* Put Edison back in the business of buying electricity for its customers by January 2003.
* Require an Edison subsidiary to sell the power from a plant under construction in Kern County to the state for the next 10 years at cost-based rates.
* Permanently protect from development about 21,000 acres of Edison-owned land in the southern and eastern Sierra.
Source: Southern California Edison
