State, Edison OK Deal to Let Utility Avoid Bankruptcy

State officials on Tuesday announced a deal that would save Southern California Edison from bankruptcy, but deadlocked again over how to rescue the treasury from the huge drain caused by buying electricity for California.

The Edison deal would allow the utility to pay off about $3.3 billion in debt and eventually resume normal operations. It does not require a further rate hike, but would keep current high rates in place for several years.

The deal must be approved by a federal judge, but does not require legislative action and is largely immune to attack at the ballot box.

The utility and its shareholders are expected to pay a little less than half the cost of retiring the debt. Edison’s customers would pay the rest.

The deal, approved by the California Public Utilities Commission on a 5-0 vote, was negotiated in secret over the last several weeks. It was structured as a settlement of a lawsuit that Edison filed against the PUC over the state’s refusal to allow it to pass along to customers the full cost of power.

Because it is a settlement of a lawsuit, the deal, if it receives the expected approval by a judge, would be all but immune to challenge by state initiative and could not be reversed by the PUC or the state Legislature in the future.

Lawyers for the PUC and Edison presented the deal to federal District Judge Ronald S.W. Lew in Los Angeles on Tuesday afternoon. The judge said he would review the matter and rule as early as Thursday.

Lost Dividends of $1.2 Billion

The deal is expected to cost Edison’s shareholders about $1.2 billion in the form of cancellation of dividends. No dividends will be paid through 2003. If the debt is not fully repaid sooner, the suspension of dividends could last until 2005. The utility would also be required to absorb an additional $300 million in debt.

The company’s 4.3 million consumers would see rates, which were raised earlier this year by as much as 40% for some customers, stay high despite falling electricity prices. Rates would not come down until Edison had paid off the debt that has hobbled it for most of the year.

The utility accumulated the debt, which threatened to push it into bankruptcy, during the depths of the state’s power crisis because the electricity it bought cost far more than it could charge its customers under a rate freeze mandated by state law. Gov. Gray Davis praised the Edison deal, saying it “protected the public interest and will allow the state’s second-largest utility to return to financial health.”

Edison also hailed the settlement, saying it will permit the company to regain financial stability.

The deal is “a workable way for Edison to become credit-worthy, to remove the state from the power business, and to allow Edison to return to its core mission of delivering reliable electricity service,” said Edison International Chairman John Bryson.

“Particularly at this time of national crisis and a fragile California economy,” Bryson said in a statement, “it is vital to avoid the great uncertainty of potential bankruptcy and lawsuits. By guaranteeing rate stability and making Edison credit-worthy, this federal court settlement is in the best interest of California consumers.”

Consumer advocates, however, blasted the deal as a bailout and an end run around the Legislature. Representatives of one advocacy group, the Utility Reform Network, said they would try to challenge the deal in court. The group’s general counsel, Mike Florio, said he knew nothing of the talks and sharply criticized the closed-door process and the substance of the agreement.

“This gives Edison what they were trying to get in the Legislature: a bailout by ratepayers,” Florio said. “At least in the Legislature, we had a chance to participate. They settled it behind our backs.”

Though apparently resolving Edison’s fortunes, earlier in the day the PUC by a 4-1 vote stymied Davis and Treasurer Phil Angelides by refusing to approve a complex agreement that the governor contends is necessary to replenish the state treasury.

The refusal sent Davis aides scurrying to come up with a fallback plan. By late Tuesday, they did not have one.

Since March, when Edison, Pacific Gas & Electric and San Diego Gas & Electric lost their credit-worthiness, the state has been buying electricity for the utilities to resell to customers. So far, the state has spent about $9 billion in tax funds doing that.

To repay the treasury and pay for future power purchases, the state plans to sell up to $13.4 billion in bonds. Without the agreement, Davis and Angelides say, California could end this year billions of dollars in the red.

Before those bonds can be floated, Davis and Angelides have said, the PUC needs to approve a rate agreement that would guarantee that a certain percentage of all utility bills would go toward bond repayment.

Noting that the slowing economy already has resulted in a $1.1-billion drop in state tax collections, Davis denounced the PUC’s refusal to approve the bond agreement as “an irresponsible act.”

“It creates uncertainty about our ability to sell the bonds necessary to repay the general fund when California can least afford additional fiscal uncertainty,” Davis said in a statement.

PUC Balked at Long-Term Pacts

PUC President Loretta M. Lynch joined with fellow Davis appointee Carl Wood and two commissioners appointed by former Gov. Pete Wilson, Richard Bilas and Henry Duque, to block Davis’ plan. Geoffrey Brown, the panel’s third Davis appointee, was the only commissioner to vote for the plan.

The majority contended that Davis’ plan would lock the state into expensive long-term power contracts agreed to by the administration earlier this year. Those contracts are so costly, opponents of the plan said, that paying for them could require the PUC to raise electricity rates yet again at a time when wholesale electricity prices have plummeted.

Lynch advocates a stripped-down method of paying off the bond debt, embodied in legislation by state Senate leader John Burton (D-San Francisco).

The legislation has passed both houses of the state Legislature, but Davis on Tuesday reiterated his determination to veto it. Angelides says Wall Street investors who would buy the bonds oppose Burton’s measure as too risky. Wall Street analysts have said the agreement rejected by the PUC would offer the security required to sell the bonds.

At the start of the year, Angelides had predicted that the bonds could be sold by April or May. But the state has encountered so many hurdles along the way that the bonds may not be sold until next year.

In a terse statement, Angelides said: “As previously indicated, this office cannot move forward to market and sell the state’s energy bonds until the PUC takes the actions required to implement the law. The PUC’s refusal to take action means that there is no schedule for the bond issuance and no plan in effect as of today to repay the State’s General Fund.”

Angelides warned that although the state can pay its bills this year, “failure to repay the general fund will leave the state facing a projected budget deficit of over $9 billion in fiscal year 2002-2003--jeopardizing essential programs such as education, health care and law enforcement.” The state’s annual budget is roughly $103 billion.

Though the PUC’s actions leave officials with a major problem involving the state treasury, Tuesday’s moves eliminated the need for lawmakers to return to Sacramento next week for a special session. When the state Senate adjourned for the year without approving a rescue package backed by Davis and Edison, Davis demanded that lawmakers convene next week for a special session. The governor rescinded his call for the session on Tuesday.

State Senate leader Burton reacted by saying the “good news” is that the settlement eliminates the need for a special session next week. But the “bad news” is the deal does not provide “any protection for residential ratepayers and small businesses.”

It also relieves lawmakers of having to struggle with an issue that has dogged them for more than a year.

“It’s like living with a boil on your tongue so long,” Burton said. “You kind of miss it when it is gone.”

At least one consumer advocate, however, threatened to punish lawmakers at the ballot box for the Edison deal. Santa Monica consumer advocate Harvey Rosenfield, one of the most outspoken critics of Davis’ energy policies, called the Edison settlement “a devastating sellout by the state regulators who have increased our rates 45% this year alone.”

“The politicians and appointed officials who did this to us have to be removed from office,” Rosenfield said. “We’re making a list.”

Rosenfield has been contemplating an initiative aimed at the electricity system. But he noted that because the Edison agreement is cast as a settlement of a lawsuit, “it will be very difficult to undo.”

PUC commissioners defended the deal against such criticism. Lynch said the arrangement caps rates, and will help the state get out of the business of buying electricity, a task it took on when Edison and PG&E; fell so deeply into debt that they no longer were credit-worthy.

Brown called the settlement “a marvel of simplicity.” The deal “allows Edison to serve its customers,” he said.

The agreement drew praise from the investment community.

“This is a huge opportunity for the company to prove itself,” said Douglas Christopher, a utility analyst at Crowell, Weedon & Co. in Los Angeles. “If Edison can get this debt taken care of by the end of 2003, it protects consumers from more rate increases and it restores the dividend for its shareholders.”

“This is exactly where we should have been last November,” said Gary Ackerman, executive director of the Western Power Trading Forum, which represents independent power generators and marketers.

Many experts say the energy crisis could have been averted if Davis and the PUC had simply permitted the utilities to raise rates a year ago to the level that will now prevail. In a statement, the state’s largest utility, PG&E;, repeated that sentiment.

“The relative ease with which this agreement appears to have been reached in the past few days suggests that the upheaval and damage of the past year might have been avoided,” the company said. PG&E; is currently in bankruptcy but has proposed a reorganization plan under which it would pay back its debts, in large part by moving its nuclear and hydroelectric plants out from under state regulation.

The Edison deal will allow the utility to repay independent power producers who sold it electricity last year and earlier this year. Some of those generators had been threatening to force Edison into bankruptcy.

But some generators assume that Edison soon will file lawsuits challenging the size of its debts to the large generators as a preemptive strike against an involuntary bankruptcy petition. The lawsuit would place what the utility owes in dispute, a factor that makes winning an involuntary bankruptcy petition difficult.

Under the deal, if Edison succeeds in reducing some of its debt by suing the generators, that money will go to paying other debts. After all the back debt is satisfied, 90% of any further recovery would be refunded to ratepayers, Lynch said.

“Edison is reserving the right to determine if there was gouging. That is only fair and it protects ratepayers and taxpayers,” said Orange County Treasurer John Moorlach. Orange County holds $1 million in defaulted Edison bonds in a retirement fund. Moorlach said the settlement is workable as long as wholesale energy prices don’t spike again.

Negotiations to reach the agreement began after it became clear that state lawmakers wouldn’t approve the solution the utility wanted. PUC General Counsel Gary M. Cohen called one of Edison’s litigators and suggested a compromise. The outlines of the plan came together quickly, Cohen said. “There was a remarkable consensus.”

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Times staff writers Joseph Menn, Jerry Hirsch, Miguel Bustillo and Carl Ingram contributed to this report.