Should California Buy All of Edison?


As Gov. Gray Davis forges ahead with his plan to rescue ailing Southern California Edison by spending nearly $2.8 billion to buy its transmission lines, analysts and lawmakers are starting to wonder: Why not spend a bit more money and buy all of SCE and its parent company?

Wall Street values Edison International at about $3.5 billion. That includes valuable power plants and other assets in California and around the country that by many estimates are worth far more than the transmission lines.

Taking ownership of SCE's parent could give the state a huge head start in its efforts to set up a statewide power authority, ultimately capable of generating and delivering electricity to millions of California residents and businesses.

"It would seem like if you are doing all of this anyway, you might as well buy the company," said Senate leader John Burton (D-San Francisco).

To be sure, Davis' plan to buy Edison's transmission lines is stalled in the Legislature, though the utility is still pushing for the plan and has even run recent television ads to drum up public support. Many in Sacramento acknowledge the need for some kind of bailout and some lawmakers are mulling over the logic of a complete buyout, among other alternatives.

No one is suggesting that having the state purchase Edison would be a trouble-free solution to the state's energy crisis. But the very idea that Edison might be bought for slightly more than the cost of Davis' plan proves that the state risks overspending for just a portion of the utility--one with an uncertain future payoff, some contend.

"It seems ridiculous to pay more than two-thirds of the market value of the company for maybe one-fifth of the assets," said Mike Florio, senior attorney for TURN, a utility consumer advocacy group.

At a minimum, the state should evaluate what a deal to buy the whole company might look like, said state Sen. Debra Bowen (D-Marina del Rey), who chairs the Senate Energy, Utilities and Communications Committee.

Edison doesn't want to sell.

"This company is not for sale. I can't state that more emphatically," said Brian Bennett, a spokesman for the Rosemead company.

Edison's reluctance to put itself up for sale would leave the state attempting to negotiate with Edison's board of directors or appealing directly to Edison shareholders, who have seen the value of their shares decline nearly 60% from a 52-week high of $26.63 on Sept. 13.

Buying Edison would give the state the transmission lines and billions of dollars more in other assets, including:

* a hydroelectric generating system valued at $1 billion.

* a 75% stake in the 2240-megawatt San Onofre nuclear generating station worth about $750 million at current market prices.

* a roughly $300-million stake in the Palo Verde nuclear plant in Arizona.

* power generator Edison Mission Energy, the company's profitable, unregulated subsidiary that a Merrill Lynch analyst estimates is worth $2 billion.

Moreover, a similar deal for PG&E; Corp.--which has a stock market value of $4.4 billion--would allow the state to combine the two utilities into one operation under a state power authority.

California could retain the option of selling the combined operation in a stock offering at a later date--after the finances of generating and distributing power in California have stabilized.

Such a complicated series of transactions would face huge obstacles starting with the objections by the power companies.

Management of both would argue that the companies are worth far more than their current market valuation, said Paul Patterson, an analyst with Credit Suisse First Boston in New York. They would say that the state "put them in this mess" by not agreeing to rate increases early enough last year to cover the cost of purchasing and generating power.

PG&E; traded at high of $31.81 as recently as last September. On Thursday it closed at $11.40 on the New York Stock Exchange. (Last month, PG&E;'s utility company, Pacific Gas & Electric, filed for bankruptcy court protection.)

Shareholders would demand a premium over the stock's current price before giving up their shares, Patterson said. Premiums in these types of transactions could increase the deal's price by as much as a third.

"There is little doubt that this is intriguing," said Edward Kahn, a San Francisco-based energy consultant with Analysis Group/Economics. "But it would require an extraordinary political will to do it, and even then, the record of public sector management of power is mixed."

"I can see why people would say that if you are going to buy the transmission lines for that price, you might as well buy the whole kit and caboodle," said Ed Muller, the former chief executive of Edison Mission Energy. "But it would be a mistake. The state would commit a lot of money and you will have the same politicians trying to figure out how to run it all."

Though a buyout plan might be feasible, it would probably get bogged down in a political quagmire.

"There is nothing wrong with the logic of this financially. The problem is politics," said Robert Michaels, a Cal State Fullerton economics professor and power industry consultant. "You are talking about the state doing something absolutely unprecedented in the history of the power industry."

Assemblyman Fred Keeley (D-Boulder Creek) has instructed his staff to analyze whether the state could purchase Southern California Edison if it filed for bankruptcy, an idea he describes as a "contingency" rather than a proposal.

Although they have plenty of valuable assets, both Edison and PG&E; also have massive debts. Southern California Edison, for example, owes power generators $3.5 billion, a debt that grew when state regulators refused to pass on the expense of purchasing electricity to ratepayers over the last year.

Under the Davis plan, that "undercollection" would be retired through a bond sale that would be repaid via a charge to consumers of less than one-half-cent per kilowatt-hour. Additionally, Edison has defaulted on about $931 million in notes and debt this year.

In order to pay for the transmission grid, the state would issue $2.8 billion in bonds backed by the fees that would ultimately be passed on to ratepayers.

The Davis agreement also would let the utility issue $3.5 billion in bonds to repay the "undercollections" secured by ratepayers through a one-half cent surcharge per kilowatt-hour over 15 years.

Although there are significant obstacles, Bowen and others say a state-managed buyout of one or both of the power companies is worth investigating because of how the numbers pencil out.

Shareholders could obtain some premium over the depressed stocks' trading price, the holders of the utilities' defaulted bonds would get their money, and creditors might see improved collections.

Proponents of such a plan point out that the state, with its tax advantages, could engineer turnarounds at the two power providers at a lower cost than the private sector. That could be a significant factor in paying off creditors more quickly and reducing the heft of any required rate increases.

That's because the state pays lower interest rates on borrowings and doesn't pay income taxes. So it requires less revenue than a private corporation to repay the same level of debt. And because the state would finance the purchase with bonds, it would not have to issue dividends to shareholders or pay state and federal taxes.

Such a transaction would require the state to act as a "leveraged buyout firm," a type of investor that purchases a company and uses the assets and revenue stream of the business to pay off the debt.

Some analysts suggest that the state could even bring in such a private firm as a partner in the venture on the proviso that it put up some percentage of the purchase price and manage the business.

Another possibility would be to acquire the utilities, but keep the companies' management teams in place to run the venture.

Advisors to the creditors, who know little about any plan to buy the utilities, say they would need much more information about how the state would go about purchasing the companies and satisfying creditors before they would begin to consider such a proposal.

"The creditors are open to listening and understanding a wide range of options that may available," said Jonathan Rosenthal, a partner at Saybrook Capital, a Santa Monica investment bank advising creditors in the PG&E; bankruptcy. "We have to be creative in thinking about lots of alternatives."


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