Edison Parent Kept $1.4 Billion in Tax Overpayments
Edison International collected $1.4 billion in excess corporate tax payments from its Southern California Edison utility arm and used the money to help fuel aggressive acquisitions by its other companies, the firm’s chief executive acknowledged Friday.
The disclosure before a legislative committee was the first public accounting by utility executives from Edison and Pacific Gas & Electric on a question that has buzzed through the Capitol and around the state in recent weeks: Where did all the money go?
Edison International Chairman John Bryson and other company executives said the excess tax payments from the utility during the last five years were spread to Edison’s other, newer companies and helped fund purchases of power plants around the world.
Bryson characterized the payments as appropriate. But Assemblyman Juan Vargas (D-San Diego), who raised the question of the payments, said Edison International should now return the money to Southern California Edison, which is billions in debt and on the brink of bankruptcy.
“They tried to keep both sides separate, but the reality is the holding company benefited from the utilities. It was a huge benefit,” Vargas said during a break in the proceedings. “Now is the time to give that back. This should not be a one-way street.”
The parent firms were established under Public Utilities Commission rules mandating that the capital needs of the utilities would be the firms’ top priority.
Southern California Edison’s tax overpayment, made public for the first time Friday, was the most remarkable development in a third day of hearings by the Assembly’s Electrical Energy Oversight Committee examining the causes of the energy crisis.
Also Friday, three companies that own power plants in California--and are owed hundreds of millions by the two utilities for electricity purchased this winter--took a step toward pushing Southern California Edison and Pacific Gas & Electric into bankruptcy court by forming a creditors committee.
Reliant Energy, Dynegy Inc. and Mirant, formerly known as Southern Energy, said they are alarmed by the slow progress toward a solution to California’s electricity crisis. The three own power plants with the capacity to generate one-fifth of the power California needs on its days of highest demand.
In a joint statement, the companies said they are “troubled over the pace of progress toward a comprehensive solution.”
“As publicly held companies,” they said, “we have a responsibility to our respective shareholders and must now examine our alternatives.”
Reliant and Dynegy are based in Houston, and Mirant is based in Atlanta.
Gary Ackerman, executive director of the Western Power Trading Forum, said a major concern of the companies is a lack of written assurance that the state will financially back all purchases of electricity.
The California Department of Water Resources has spent nearly $1 billion of taxpayer money in recent weeks to buy electricity on behalf of Edison and PG&E;, to whom banks are no longer willing to lend money.
Water department employees buying power through the California Independent System Operator, the agency that balances supply and demand on the grid serving 75% of the state, have resisted backing all purchases, arguing that some bids are priced higher than what they deem reasonable. A federal judge Thursday ordered Reliant, Dynegy and two other electricity suppliers to continue to sell to the Independent System Operator, which purchases last-minute emergency power for the state, until a hearing Friday.
“The confusion is: Who’s the buyer?” said Ackerman, whose trade group includes the three firms that have formed a creditors committee. “They’re looking for written assurance.”
The recent PUC-commissioned audits were a key topic of Friday’s Assembly hearings.
The audits confirmed that both Southern California Edison and PG&E; had transferred billions to their holding companies, money that fueled the other subsidiary businesses and represented almost all the parent companies’ net income in recent years. Much of the money represented gains from selling power plants, as the utilities were required to do under deregulation.
The audit of PG&E; disclosed that the utility had made tax payments to its parent company from 1997 through 1999 that exceeded what it paid in state and federal taxes by $663 million. But the audit of Southern California Edison failed to disclose a similar overpayment by that utility--an oversight that angered consumer groups.
“It is another example of the ability of the utility to transfer, by stealth, funds up to the parent company,” said Matthew Freedman of the Utility Reform Network in San Francisco. “This is effectively an undeclared transfer.”
According to information Southern California Edison provided the Assembly committee, the utility paid hundreds of millions every year to Edison International to cover its share of the parent company’s consolidated tax filings for all Edison companies.
But the payments were often dramatically more than Edison International eventually paid the state and federal governments, because other companies under the Edison corporate umbrella were in substantial tax-loss positions.
In 1998, for example, Southern California Edison paid its parent $431 million for taxes. The actual corporate taxes paid by the parent company that year were just $1 million, leaving a $430-million surplus that was distributed among Edison Mission Energy and other out-of-state, unregulated Edison companies.
“It was absolutely in compliance with the tax laws and the PUC rules,” Bryson said.
California is currently purchasing power at the rate of $45 million a day in taxpayer money because the state’s debt-strapped utilities can no longer do so, and is considering legislation to rescue the utilities from their financial straits. Together, Southern California Edison and PG&E; say they have amassed more than $12 billion in wholesale electricity costs they are unable to pass to consumers because of frozen retail rates.
Edison and PG&E; executives Friday again defended the propriety of the transfers of funds from the utilities to their parent companies. They also disputed assertions by some lawmakers that the companies should be able to get out from under their debts on their own at this point.
Assemblyman John Campbell (R-Irvine) said they should “stop all this talk of bankruptcy” now that California has taken over the burden of buying power for them on the expensive spot market.
The state’s new power purchasing law “plugged the hole in the boat,” said PG&E; Corp.’s chief executive, Robert Glynn Jr., “but we owe creditors billions in dollars that we are not able to get.”
Glynn told the legislative panel that a prospective refund on 2000 income taxes of between $500 million and $1 billion may be returned to the utility. He said it was unknown how big the refund would be, but he expects that “all or virtually all” of the money will be spent to pay bills.
“We owe people billions of dollars that we don’t have, never mind that we’ve got lots of debt that we don’t have any way to pay back yet,” Glynn said.
Bryson said Edison International is due a 2000 tax refund that will be close to $500 million and that most would go to the utility.
Politics continued to play a part in the hearings. Republicans, continuing a line of questioning pointing directly to Democratic Gov. Gray Davis, asked the utility executives time and again whether Davis had responded to their calls for help last year as their losses began to mount and the PUC, in their opinion, failed to act.
Bryson said Edison “sounded alarm bells,” but his continued calls for an audience with the governor were rejected. Davis, who had subordinates meet with Bryson, said through them that he considered direct communication improper because Edison had business before the PUC, Bryson said.
“I strongly believe the governor and the governor’s PUC had the ability to solve this problem last summer,” Assemblyman Keith Richman (R-Northridge) said after Bryson’s testimony.
“Because they did not, the utilities were not able to enter into long-term contracts to stabilize power. They are essentially bankrupt, and we are forced as a state to get into the power business. None of this was necessary.”
Another challenge lies ahead as California begins crafting what will be the largest municipal bond issue in U.S. history.
California faces a difficult marketing task in selling its proposed $10 billion in bonds to buy power, state Treasurer Phil Angelides predicted, because “it is one of the most complex--the largest bond issue in American history.” With interest, the bonds will cost up to $17.5 billion over their 15-year life, he said.
Because the bonds will be taxable--and will not be backed by the full credit of the state but rather by utility ratepayers--the state will have to pay investors about 8% interest, rather than 5% as on tax-exempt bonds, he estimated.
Exactly how investors will react and what conditions will be like when the bonds are sold is impossible to predict because so much is still unknown about the structure of the bond deal, said Michael Dow, senior vice president of Pacific Investment Management Co., a large Newport Beach-based bond fund manager. The huge size alone will tend to drive up the payoff that investors will demand.
“Size does matter,” Dow said. “The bigger the deal, the higher the yield.”
In other developments Friday:
* The White House said Davis’ request that President Bush ease federal environmental rules to speed the building of power plants is under review.
“The administration is very well aware of the need to move promptly to help California,” White House Press Secretary Ari Fleischer said. Bush last month said: “If there’s any environmental regulations that’s preventing California from having a 100% max output at their plants--as I understand there may be--then we need to relax those regulations.”
* The electricity grid serving 75% of the state remained mired in a Stage 3 electricity emergency for the 25th straight day. Some power plants will return to operation next week, but cold weather could keep supplies dangerously thin, said a spokeswoman for the Independent System Operator.
* California’s frantic efforts to build more power plants and mount massive conservation programs will come too late for this summer, when electricity supplies will be so scant that rotating blackouts will be a certainty, according to a report to be released Monday by Cambridge Energy Research Associates, a respected energy consulting firm.
The Western United States can expect 200 hours of electricity shortages, including at least 20 hours of rolling blackouts this summer, the Massachusetts company said.
* The city of Long Beach, which sells power to Southern California Edison, sued the utility, alleging that Edison has not paid its $4.9-million electricity bill for November and December. Long Beach claims in Los Angeles Superior Court that Edison has violated a long-term contract signed in 1984 to purchase power from the municipality’s generating stations.
* A federal judge in Los Angeles froze $36.5 million in collateral that Enron Corp. posted to trade on the California Power Exchange, the nonprofit market through which the state’s utilities once bought most of their electricity.
Acting on an emergency petition by Enron’s lawyers, U.S. District Judge Carlos R. Moreno ordered the exchange to place the funds in an escrow account pending a hearing next Thursday. Enron’s lawyer said the $36.5 million was an overpayment to the exchange. He expressed fear that it could fall into the hands of creditors if Southern California Edison and PG&E; are forced into bankruptcy.
* Dan Richards, a PG&E; vice president, warned that a Davis administration proposal to help restore the utilities’ credit rating--but only to “triple B” status--was seriously flawed. The rating is so marginal that the company would have to pay a premium rate to borrow money, which would be passed on to ratepayers, Richards said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Tax Overpayments
Overpayment of state and federal taxes by Southern California Edison to its parent company, Edison International, has totaled more than $1.4 billion since 1996. In millions of dollars:
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Edison’s tax Actual corporate Overpayment payments to taxes paid by by Edison parent corp. parent corp. to parent corp. 1996 $489 $412 $77 1997 $372 $153 $219 1998 $431 $1 $430 1999 $401 $2 $399 2000 $291 $0 $291 Total $1,984 $568 $1,416
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Source: Southern California Edison
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Bustillo and Ingram reported from Sacramento, Rivera Brooks from Los Angeles. Times staff writers Dan Morain, Rone Tempest and Nancy Vogel in Sacramento, Mitchell Landsberg and David Rosenzweig in Los Angeles, Dan Weikel in Long Beach and Richard Simon in Washington contributed to this story.
