Utility Could Be on Its Feet in 6 Months

The settlement announced Tuesday by state officials and Southern California Edison could allow the utility to rapidly become credit-worthy again, perhaps in as little as six months, according to Public Utilities Commission President Loretta Lynch.

Having an investment-grade credit rating would allow the utility to once again purchase electricity for resale to its customers. That, in turn, would allow the California Department of Water Resources to start getting out of the power-buying business. It now purchases about a third of what Edison distributes.

Additionally, an investment-grade rating would give the company breathing room to refinance its debt, borrow money and go about its corporate business.

Until now, analysts thought that making Edison credit-worthy would require a massive bond issue financed by consumer bills and mandated by the state Legislature.

Two things have changed to allow a rescue plan that bypasses the bond idea.

First, large declines in the price of natural gas--a major component of the cost of generating electricity--mean that Edison is now able to hold onto a much larger share of each dollar its customers pay for electricity. Under the settlement proposal, Edison would be allowed to use that money to pay off its debts.

Second, the likelihood that a federal judge would approve the plan means that Wall Street can be assured that the PUC could not change its mind in the future, putting the utility back into financial quicksand.

Though Wall Street analysts said it remains too early to judge when Edison would resume power purchases, the major credit-rating agencies have given the plan a conditional thumbs-up.

The proposal comes in the form of an agreement to settle a federal lawsuit over what is called the “filed rate doctrine,” a legal concept that says a utility has the right to recover the cost of procuring power through contracts and rates approved by the Federal Energy Regulatory Commission.

Edison sued the state Nov. 15 after the PUC declined to raise rates to cover the cost of its electricity purchases when wholesale energy prices spiked.

The settlement proposal now goes to U.S. District Judge Ronald S.W. Lew in Los Angeles for a ruling on whether to end the lawsuit.

“We believe that settlement gives more immunity to the agreement than just an agreement with the PUC alone,” said Richard Cortwright, an analyst with the Standard & Poor’s corporate credit-rating agency.

A series of rate increases combined with declining energy costs have dramatically improved Edison’s cash flow, allowing enough revenue to pay off its $3.9 billion in energy debt, said Ellen Lapson, a managing director of Fitch Global Power Group, another rating agency.

Natural gas has recently been trading for slightly more than $2 per million British thermal units, and prices on futures markets remain below $3.50 through January 2003. That compares with a peak of $10 nationally and $60 in California last December.

Moreover, under the settlement agreement, Edison and many of its suppliers will use the futures market to lock in the comparatively lower prices now, guarding against future price shocks.

Still, Lapson said, the credit implications for Edison will depend upon several additional factors that will govern its cash flow.

Lapson said how the Department of Water Resources eventually allocates the cost of its power purchases among the customers of Edison, Pacific Gas & Electric and San Diego Gas & Electric could lower Edison’s cash flow. Already, PG&E; is arguing that the state plans to make the San Francisco utility shoulder more than its fair share of that burden.

Other factors include whether a Department of Water Resources review of its projected costs will account for lower natural gas prices and whether the state also intends to use the futures market to hedge gas purchases.

“If these factors are resolved in a way that makes it probable that all or most of SCE’s obligations can be paid down with excess cash flows between now and the end of 2003, the outlook for SCE’s credit would be very favorable,” Lapson said.

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Times staff writer Nancy Vogel in Sacramento contributed to this story.