Accord Jolts Edison Clear of Insolvency

Wall Street gave broad support Wednesday to an agreement between state regulators and Southern California Edison to rescue the insolvent utility, even as consumer activists and some creditors raised objections.

Here is a look at how the SCE rescue plan would work and what issues must still be resolved:

Question: How much does SCE owe, and where did the debt come from?

Answer: According to the agreement announced Tuesday by the California Public Utilities Commission, SCE owes $3.3 billion in energy debts: $2.7 billion to power providers and $600 million in defaulted notes.

The debt arose when wholesale energy prices spiked last year and the PUC stuck to a rate freeze that prevented SCE from recouping what it spent to buy and deliver electricity to its 4.3 million residential and business customers. SCE also has $3 billion in bank loans and bonds, most of which come due this month.

Question: How does all that debt get paid off?

Answer: The PUC later raised electrical rates by about 40%. At the same time the cost of power declined. The current spread between what SCE pays for power and what it collects from customers generates a huge cash flow. For example, as of July 31, the utility said it had $1.7 billion in cash. At the end of September, it had nearly $2.5 billion. SCE projects that to grow to $3.8 billion by February. It would use that cash and a mix of bonds and other borrowing to pay its creditors.

Question: Would rates increase again?

Answer: Probably not. The PUC says current rates generate enough money for SCE to pay the debts. The utility agrees, saying it should be able to pay everything by the end of 2003. But if energy prices rise, slowing down SCE’s cash flow, the PUC would reset rates to pay any debt that is left.

Question: How long would the current rates remain in place?

Answer: SCE’s component of rates would remain steady at least through the end of 2003. Rates, however, could change based upon what the state needs to pay for its power contracts. The state buys about a third of the electricity distributed by the big investor-owned utilities.

Question: Who approves this agreement?

Answer: The agreement constitutes a settlement of a federal lawsuit SCE filed in November against the PUC for not raising rates to cover the utility’s power purchasing expense. The settlement requires the approval of U.S. District Judge Ronald S.W. Lew.

Question: What would happen if the judge disallows the settlement?

Answer: Chaos. The state Legislature, which debated previous rescue attempts, no longer plans to meet on the issue. Creditors are about out of patience. Executives of Edison International, the utility’s parent company, say they would reopen talks with the PUC. A bankruptcy filing would be the most likely result.

Question: Could there be a bankruptcy filing regardless?

Answer: Yes, but it’s unlikely. Any three creditors with a combined $10,775 in unpaid claims can petition a federal court to put SCE into bankruptcy, and several generators have threatened such action. But bankruptcy experts believe that a judge receiving the petition would decline or defer the case, saying the settlement agreement provides a framework for resolving SCE’s debts. The judge would ask the parties to negotiate or litigate any disputes over the amount of money owed before considering such a petition.

Question: Who might object to the agreement?

Answer: Consumer groups are filing federal court briefs in opposition to the settlement, and Los Angeles County, one of Edison’s largest customers, asked Judge Lew for two weeks to review the complex deal. The groups and the county say Edison and the PUC violated the rights of utility customers to a full public hearing before the commission on matters that affect what customers pay.

Companies that provide renewable energy to SCE are protesting as well. The utility had an agreement to pay them above-market rates for power, as long as they agreed not to push the company into bankruptcy, through Dec. 31. In comments Wednesday, SCE said the deal is off and that it would negotiate a debt-payment plan and new supply contracts with these generators.

Question: What about the big generators?

Answer: The large generators also question how--and how much--they would be paid. The state has accused the companies of price gouging and has asked the Federal Energy Regulatory Commission to rule on the issue. The commission’s ruling could change what SCE owes the generators.

Further, the agreement with the state allows the utility to join litigation against the generators, which is one reason Mirant Corp. of Atlanta threatened Wednesday, in a filing with the Securities and Exchange Commission, to lodge an involuntary-bankruptcy petition against the company.

Edison International Chief Executive John Bryson acknowledged the dispute, saying that “tough negotiations” lay ahead.

Question: Would this get the state out of buying power for SCE?

Answer: The state, through its Department of Water Resources, purchases about a third of the power SCE supplies its customers. The agency began buying power in January when the utility could not pay its bills. The plan at the time was for SCE to resume purchasing this power when it recovered enough to have an investment-grade credit rating.

But since then, the state has signed a series of long-term contracts to purchase power. Edison CEO Bryson said the utility would not assume the contracts. Instead, SCE would act as a billing agent, passing through the cost of the contracts to customers. With the state locking in such a large portion of the state’s power needs, it is unclear how much more power the utility would need to satisfy demand in its distribution area.

Question: How is Wall Street reacting?

Answer: Investors generally liked the agreement, as shares of Edison International rose $1.95, or 14%, to $15.70 Wednesday on the New York Stock Exchange.

Corporate credit-rating services also expressed support. One service, Fitch Inc., revised its credit outlook on SCE to “positive” from “negative.” A second, Standard & Poor’s, said it is too early to judge when SCE’s credit would be restored to investment grade but added that the company would be in line for an upgrade when it pays off its debt. That is expected to happen in February.