Edison could get big breaks If state buys utility’s grid, deal includes financial gains, curb of investigation.

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Sacramento Bee

From the start, some consumer groups and lawmakers had doubts about shoring up shaky utility finances through a state purchase of their high-voltage lines.

But the bargain struck last week by Gov. Gray Davis and Southern California Edison Co. does much more than that.

It funnels billions of dollars from consumers to the state’s second-largest utility, probably for the next 15 years.

It prevents regulators from cutting some utility profits for nearly a decade.

It curbs a state probe and sharply limits any fines that could result.

And it leaves the door open to further rate increases.

Edison has taken the governor to the cleaners,” said Matt Freedman, an attorney for The Utility Reform Network (TURN), though Davis called the pact “a good, balanced deal” for Edison and consumers.

The governor hopes it could be coming soon to a utility near you.

Davis indicated he would gladly offer similar terms for the power lines of Pacific Gas and Electric Co. The state’s largest utility, serving 13 million Northern Californians, filed for bankruptcy protection April 6.

Elements of the Edison agreement could become part of a negotiated solution that leads PG&E quickly out of Chapter 11, PG&E Chief Executive Gordon Smith said Friday, although he declined to speculate on any specifics.

“We’re looking at the Edison deal as we speak, from top to bottom” he said in an interview.

The 38-page memorandum of understanding reached Monday between Davis and Edison can’t go into effect without approval from the Legislature, where its survival is far from certain.

Legislators privately are bashing the deal as too easy on Edison, and believe it was rushed through by a panicked Davis after PG&E filed for bankruptcy protection.

PG&E‘s Smith said he, too, believes his utility’s bankruptcy filing sweetened the Edison deal, although Davis’ staff and others close to the talks deny that.

At its heart, the agreement cuts through a debate that has embroiled consumer advocates and regulators: Should California’s utilities get to keep the profits from the early years of deregulation without absorbing any of the losses that began piling up last summer?

The Edison pact says yes.

Under its terms, the $4.8 billion that Edison passed along to its parent company, Edison International, since 1997 would be virtually untouched. The main exception is a $400 million tax refund, triggered by utility losses, which the parent company would give back to the utility.

Instead of tapping parent company resources further, the utility would be given the right to collect $3.5 billion more in electric rates, some of it to be stretched out for years so customers’ bills don’t shoot up too far too fast.

That alone was enough to earn the deal instant scorn as a “bailout” from the Foundation for Taxpayer and Consumer Rights, the most strident of consumer groups that monitor utility issues.

But there are potential pluses for the state.

Perhaps the biggest – the opportunity to take over the high-voltage electric grid and use it as a springboard for public power – has had other consumer activists wondering if they should support some version of a transmission pact.

“At some point, maybe we do end up in a room saying ‘OK, is this good enough?'” Mike Florio, a TURN attorney, said ruefully to Michael Shames, head of the Utility Consumers Action Network, at a strategy session in Sacramento on Thursday.

The memorandum of understanding gives Edison the option of voiding the deal if the Legislature doesn’t act by Aug. 15 and if the state Public Utilities Commission doesn’t make a long series of decisions to implement it within 60 days. It specifically directs Davis to submit the proposed legislation to lawmakers only after it is reviewed by Edison officials.

Some pieces of that proposed law could provide Edison with hundreds of millions of dollars.

One of the biggest potential gold mines, according to the PUC‘s Office of Ratepayer Advocates, is a condition that virtually guarantees Edison higher profits than PG&E or San Diego Gas & Electric Co. now are granted.

“It’s a major amount of money, and the key thing is that it’s being locked down for such a long time,” said Jan Reid, one of the office’s regulatory analysts.

The issue hearkens back to tensions that underlie the whole clash between regulation and deregulation – how does government ensure utilities make a fair profit on their business without taking too much money from consumers? One way is by regularly setting parameters on how big a return a company can earn on its investments and operations.

The Edison deal guarantees the utility an 11.6 percent return on its equity – mostly things like buildings, poles and wires – until 2010. Today’s rate for PG&E is 11.2 percent, and for San Diego it’s 10.6 percent.

A movement of a single percentage point means roughly $150 million more in profits each year for Edison, said Reid.

In the past, the PUC adjusted returns on equity every couple of years depending on interest rates and other factors, and it was considering annual reviews.

The agreement with Davis would end all such reviews for Edison for nearly a decade, entitling the utility to charge rates that provided its shareholders with about $1.4 billion annually in profits, Reid calculated.

And there’s more.

Edison‘s vow to make $3 billion in improvements to its neighborhood networks of poles, wires and more – something Davis touted as a plus – would boost its future profits significantly.

Because Edison is entitled to get a return on every investment, the $3 billion would translate into a $350 million annual return on its investment, said TURN lawyer Freedman.

Edison top executive Stephen Frank initially indicated that the $3 billion investment could trigger another rate hike, but other company executives later said they hope to avoid that, although there are no guarantees.

“It’s all speculative,” said Brian Bennett, an Edison vice president of external affairs. “Right now, we’re under the expectation that we won’t … ask for a rate increase.”

Edison and Davis have said they believe the deal can be paid for by already outlined rate increases. The PUC has granted Edison two rate hikes since January, totaling an average of 4 cents per kilowatt-hour. Davis has asked the commission to consider lowering that to a total of 3.3 cents.

Those charges would include roughly a half-penny on every kilowatt-hour sold by Edison for the next 15 years to gradually pay off the huge wholesale energy costs that were run up in less than a year, according to Frank.

The agreement also requires Edison‘s customers to shoulder ongoing wholesale power costs, even if they go high enough to later trigger more rate hikes.

To put the pact into effect, the PUC would have to reverse or revise several past decisions. Among them are an accounting change that reduced the size of utility debts and a ruling that opened an investigation into whether utility parent companies broke PUC rules when they failed to aid their subsidiaries.

The Edison memorandum of understanding spells out that the newly launched probe will not apply to “working capital,” which covers a broad range of everyday expenses. Instead, it restricts the probe to much narrower financial dealings between parent and child firms.

“This is an end run around any further questioning into the practices of the parent corporation,” said TURN’s Freedman.

“It’s a terrible precedent. This sends the message to PG&E that if they want to tie the PUC‘s hands, they only need to sit down and negotiate and the PUC‘s reviews will be toothless.”

PG&E shares almost the same view. Top executive Smith and Vice President Dan Richard said they felt the utility accounting change and the PUC probe were ordered only to force them to give ground at the negotiating table. Now, after seeing the Edison deal, Richard said PG&E could seek the same concessions.

Smith predicted if the PUC reverses its stands for Edison, his utility is likely to argue it would be unfair to do any less for PG&E.

Wall Street has been guardedly optimistic about Edison‘s future.

The parent company’s stock dipped the day after PG&E‘s bankruptcy filing but then rebounded after details of the pact were released. The stock closed Thursday, when the market was last open, at $12 a share, well off its 52-week high of $26.63 but nearly twice its low of $6.25.

“This should stabilize Southern California Edison‘s financial position … if they can get over all the hurdles,” said Steve Fetter of Fitch Investors Service. Those hurdles, he said, include the Legislature, the PUC and the voters, who could try to overturn parts of the deal at the ballot box.

Davis is expected to have an easier time with the PUC than the Legislature. The commission is headed by a five-member board now dominated by three Davis appointees.

Edison officials told investors Friday they expected a quick PUC review, and were already assembling a list of the decisions they want the PUC to re-evaluate.

Consumer Watchdog
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