Group Warns Legislature on Plan

Lawmakers planning a $10 billion bailout of Edison and PG&E are drafting legislation to prevent California voters from overturning the bailout at the ballot box next year. In a letter today to lawmakers, citizen advocates with the Foundation for Taxpayer and Consumer Rights (FTCR) today warned members of the Legislature that such “trickery” would “fuel an extraordinary public backlash.”

The group also urged lawmakers to “de-link” the issue of solving the energy crisis from the quest to solve the utilities’ financial problems.

Bid to “Voter Proof” Bailout Assailed

One version of the so-called “voter proofing” plan would fold the bailout legislation into the settlement of a federal lawsuit that the utilities filed against the state. This tactic, which would be challenged in court, is based on the argument that a federal court settlement cannot be overturned by a state initiative. A second version involves the state facilitating a bond sale by the utilities, which would then argue that taxpayers will be responsible if the bailout bonds are cancelled. FTCR said that the effort to foreclose a ballot measure “deprives the voters of California of their right to protect themselves at the ballot box. The public will not stand for legislative trickery that disengages a fundamental tool of California’s democracy.”

“The only acceptable way for elected officials to make legislation ‘voter proof’ is to enact laws that serve the public interest,” said FTCR.

No “Linkage” Between Transmission Buy-Out, Proposed Bailout

FTCR stated that while “a publicly owned transmission company would be the crown jewel of a publicly controlled California Power Authority,” the purchase of the grid should be de-linked from the issue of bailout out the utilities, which the group said is unwarranted. “Without de-linkage, California will likely find itself overpaying for assets such as the power grid and thereby merely cloaking a bailout in a buyout.” It said: “determining what the state might pay to purchase the grid should not be based on the inflated price the utilities want for it. With the utilities in a distress sale position, the state can and should insist upon a cut-rate price.”

The text of the letter follows:

February 13, 2001

Members of the California Legislature

State Capitol

Sacramento, California

Dear Members of the California Legislature:

When Governor Davis signed AB 1X, and the state took over the responsibility of buying the net shortfall of electricity on the wholesale market, the utilities’ financial bleeding stopped. Since then, we have learned much about the financial conditions of PG&E and Edison and the companies’ management decisions during the deregulation years. We know that the utilities not only can bail themselves out, but, according to PUC decisions from 1988 and 1996, they must. The inescapable conclusion from the lessons of the last few weeks is that the public should not bail out the utilities.

We propose that you de-link the state’s energy crisis from the financial crisis of the utilities and their parent corporations. The two crises have been inexorably joined since Edison and PG&E first threatened bankruptcy in the last weeks of 2000. However, it is now clear that we can discuss one without the other; we can protect consumers without bankrolling the utilities. Therefore, the focus of the remainder of the “Extraordinary Session” should be on putting in place a method to stop the devastating losses to our state budget surplus in the short term and toward developing a sound post-deregulation energy policy for the long term.

As you consider moving forward with a solution to the energy crisis we offer the following points as justification for de-linking these proposals from the corporate financial crisis:

o Audits show that utility holding companies plundered ratepayer-serving utilities

When the California PUC made public audits of Edison and PG&E — conducted by KPMG Peat Marwick and Barrington Wellesley Group — it became clear that the utilities could bail themselves out from within their own corporate family. In addition to accumulating billions of dollars in deregulation-derived overcharges (approximately $20 billion in total), the companies have overstated their so-called “under-collection,” by $3 billion.

The audits point out that after the passage of AB 1890 in 1996, the utilities became virtual cash conduits, passing billions in ratepayer dollars to the parent holding companies for re-distribution among corporate affiliates and shareholders. Between 1997 and the third quarter of 2000, PG&E transferred $4.63 billion to its parent corporation. Southern California Edison has transferred $4.8 billion up to Edison International since 1995. During that period Edison International contributed $2.5 billion to its Edison Mission Group affiliates. Ironically, in support of the creation of a parent company structure in 1988 (see below), Edison claimed that the parent company would be advantageous to ratepayers because it “minimizes the possibility of inadvertent subsidies between regulated and unregulated businesses,” (PUC Dec. 88-01-063, p. 6).

o Companies abuse tax laws at the expense of utilities

PG&E Corp. consolidated the utility’s losses with corporate earnings, resulting in a $500 Million to $1 billion tax refund to PG&E Corp., but the parent company will not necessarily remit to Pacific Gas & Electric the portion of the refund that is attributable to the utility. Edison International disclosed last week that in recent years it overcharged Southern California Edison $1.4 billion for taxes that were never due and used the money to fund worldwide acquisitions made by affiliate companies. In similar fashion, PG&E overpaid taxes to the parent company by $663 million, which PG&E was able “to apply to other activities,” according to the audit.

o Holding company decisions expose parent companies’ liability

For months, the parent companies of Pacific Gas & Electric and Southern California Edison denied any corporate responsibility for the fate of their subsidiary utilities. In fact, the PUC decisions authorizing the creation of these “parent” holding companies set conditions that simply do not allow the kind of negligent conduct demonstrated by PG&E and Edison in the midst of the deregulation crisis. Both holding companies are obliged, under the decisions, to make “[t]he capital requirements of the utility’necessary to meet its obligation to serve,” the holding companies’ “first priority.”

In no uncertain terms, the PUC anticipated corporate greed and mismanagement on the part of the parent companies and put in place rules to protect against it. Specifically, the PUC holds the parent corporation responsible for the well being of the utility.

It is now time to hold the utilities and their parents accountable. For the reasons above, in conjunction with the belief that the innocent victims of deregulation — the average residential and small business consumers — should be protected in the wake of this market failure and public policy debacle, it must be acknowledged that a public bailout of these companies is unwarranted.

De-linkage will allow us to properly determine the costs and benefits of acquiring the California transmission system or any other asset

As you develop the long-range plan for California’s energy system it is essential that our energy policy not be based on solving the financial troubles of the utilities. Without de-linkage, California will likely find itself overpaying for assets such as the power grid and thereby merely cloaking a bailout in a buyout.

It is our belief that Californians would benefit by owning the power grid that serves the customers of PG&E, Edison and San Diego Gas & Electric. Experts throughout the country agree that a publicly owned transmission company would be the crown jewel of a publicly owned California Power Authority. In addition to freeing the grid (largely, though not completely) from Federal jurisdiction, where regulatory protections are anathema, state ownership would allow us to more effectively control the flow and cost of electricity, upgrade our system and decrease electricity rates by removing the transmission profit that consumers must pay to the utilities.

However, determining what the state might pay to purchase the grid should not be based on whatever price the utilities want for it. It is highly unlikely that we would even be discussing the purchase of the grid at all if the state had never deregulated, or if deregulation met any, let alone all, of its expectations. We only consider such a purchase because the utilities suggest that they may need to sell off assets to get their own businesses in order. In that case, with the utilities in a distress sale position, the state should not consider a transmission system purchase unless the utilities offer it at a cut-rate price.

We should wait until the utilities make that offer. Edison and PG&E are more desperate for money than the state is desperate for their assets. If the offer comes, and the utilities are ready to sell the transmission lines below book value, it is worth serious consideration. Otherwise, the transmission system as well as other assets such as the hydroelectric plants, should be off the table and your focus should be on plans for re-regulation, the creation of a public power authority and a strong conservation, efficiency and renewable energy plan.

Stock warrants cannot make the ratepayer whole

One other idea that has been discussed would have the state buying stock warrants from the utilities in order to provide the companies with immediate cash. Stock warrants will never provide the public with an equitable return on a forced investment in these companies. There is simply not enough stock in the companies available to cover the amount of money the companies seek. Stock warrants should be considered, at most, as a supplementary interest payment to the public for coming to the rescue of the utilities in this distress situation.

No legislation should be “voter proof”

We have learned that efforts are underway to prevent California voters from challenging a bailout through the initiative process. We urge you to resist the Wall Street/energy industry push to write “initiative proof” legislation. The public will not stand for legislative trickery that disengages a fundamental tool of California’s democracy.

Under one scheme, a utility bailout would be negotiated in the context of a settlement of the federal lawsuits brought by Edison and PG&E against the state. The utilities believe a federal court settlement order, which includes a legislated bailout, cannot be overturned by the voters. Such a settlement, however, would face a legal challenge, as would any legislation that provided a bailout and sought to use the federal court as a shield from the public.

A second scheme would allow the utilities to sell bonds that are backed not by the state, but by the ratepayers of the state through a dedicated rate component on electricity bills for years, perhaps decades, to come. The legislation would include language assuring investors that the state will not take any future actions to invalidate the bond sale or remove the ratepayers’ obligation to pay the bond. This language, which would also be challenged in court, would seem to bar the public from stepping in and reversing the bailout.

During the 1998 utility campaign against our deregulation reform initiative, Proposition 9, this scheme reared its head. The law that created the so-called “rate reduction” bonds associated with deregulation had the same problem for the public: although the state did not back the utility-issued bonds with its full faith and credit, opponents of Prop. 9 said that the state would be on the hook for the bonds, nevertheless: “Vote No on Proposition 9 because it would hit taxpayers with liability for over $6 billion in bond payments,” read the official argument against Prop. 9. According to one utility fact sheet from 1998:

“Although it is true that the privately sold bonds are not backed by the ‘full faith and credit of’ of the State, that particular reference is not legally applicable here because they are not state bonds. Through legislation, the State did create the bonding mechanism and did affirmatively pledge ‘to take no action to impair the bonds, unless it made adequate provision for the bondholders’The utilities will not be on the hook to repay the bonds–taxpayers will. This is contrary to what proponents would like voters to believe.”

The utilities, with the concurrence of many public agencies, made the argument that the bond scheme put the taxpayers on the hook in 1998 in the face of an initiative, and they will make it again if you pass such a law.

The prospect of the Legislature and Governor attempting to muzzle the voters would fuel an extraordinary and appropriate public backlash. You should make legislation “voter proof” by enacting laws that serve the public interest.

Over the last three months the argument against a bailout has steadily become more compelling, yet the momentum in Sacramento for a public bailout has not equally decreased. We hope that is changing, and we look forward to working with the Legislature to make laws that protect the public from an unwarranted bailout of the utilities and create a sound energy policy that will pull California out of this draining (in more ways than one) electricity deregulation fiasco.

Please contact us — (310) 392-0522 — if you would like more information on our proposals for resolving the state’s energy crisis or need copies of any of the documents described in this letter. You can also visit our website http://www.consumerwatchdog.org.

Sincerely,

Harvey Rosenfield Douglas Heller