The decision moves the utility closer to bankruptcy. Some analysts see the move as a bargaining ploy.
The Orange County Register
California’s power crisis lurched into troubling new terrain Tuesday when Southern California Edison, the utility that serves most of Orange County, defaulted on more than half a billion dollars in debt while millions of state residents woke up to new threats of blackouts.
It was a day of fast-moving events that began before daybreak, when Edison International and its subsidiary Southern California Edison informed regulators that they had temporarily suspended payment” to creditors collectively owed $596 million.
Edison said it took the extraordinary move to conserve its remaining $1.2 billion of cash so that it can continue to buy power for customers while state officials work to bring it and Pacific Gas & Electric, the state’s biggest utility, back from the brink of bankruptcy.
The Power Exchange, the state’s market where electricity is bought and sold, was one of the creditors that Edison failed to pay Tuesday. Edison will now have to post collateral to buy power on the exchange or make last-minute cash purchases through the state’s grid operator, where prices tend to be the highest.
If Edison doesn’t make a $215 million payment to the Power Exchange by Thursday, the generating companies that are ultimately owed the money could band together and force Edison into bankruptcy. But three generating companies — Reliant Energy Inc., Duke Energe Corp. and Dynegy Inc. — said they would wait a few days to give the Legislature time to act, according to Bloomberg News.
Gov. Gray Davis has proposed having the state buy power under long-term contracts and resell it to the utilities as a way of overcoming the utilities’ inability to buy on credit. But generators have said they can’t make a profit at the price the governor wants to pay.
The news that Edison, California’s second-biggest utility, was unable — or unwilling — to pay its bills prompted a swift and unequivocal reaction on Wall Street.
All three major credit-rating companies responded to the default by downgrading the utility’s debt to junk-bond status. Investors sent the parent company’s shares tumbling.
For Edison to make this decision (to default), their confidence at the negotiating table has to be waning,” said Richard Cortright, an analyst at the debt-rating firm Standard & Poor’s, referring to talks among the utilities, generating companies and state officials.
Analysts said the default was also a bargaining ploy by Edison, which has lost billions paying more for wholesale electricity than it can charge its customers and desperately wants reluctant state officials to bail it out.
This has become a game of chicken that is just astounding,” said Lori Woodland, an analyst at Fitch, another debt-rating agency.
In Sacramento, lawmakers scrambled to deal with this latest crisis in the state’s 3-year- old experiment with deregulation, which has collapsed over the past nine months as wholesale power costs have soared amid a shortage of supply.
The default and credit downgrades appeared to increase the likelihood that Edison may have to seek protection from its creditors in bankruptcy court — a move that some consumer advocates say shouldn’t worry ratepayers.
I think it’s a feint intended to pressure lawmakers into passing the bailout legislation,” said Harvey Rosenfield at the Foundation for Taxpayer and Consumer Rights. Ratepayers would be better off if the company goes bankrupt rather than paying a $10 billion bailout with no end in sight.
But analysts cautioned that bankruptcy would complicate efforts by officials in Sacramento to repair the state’s badly broken energy market — and could sock consumers with even higher rates.
In a bankruptcy, the big risk is that the state loses control,” said Brian Youngberg, who follows Edison for securities firm Edward Jones. A bankruptcy judge can potentially do whatever he wants — double rates, triple rates, who knows? He’s going to do what’s in the best interest of the company and its creditors.”
Separately Tuesday, surging demand for power within the state once again threatened to overtake the available supply, prompting the California Independent System Operator to declare a Stage 3 emergency at 7:20 a.m.
The ISO, which operates the state’s overtaxed grid, said it declared the emergency — the third Stage 3 in the state’s history — so it could get 600 additional megawatts of electricity from the state Department of Water Resources and avoid rolling blackouts.
Demand is likely to continue to be heavy in Southern California over the next few days. The National Weather Service posted frost warnings for Wednesday night in the Inland Empire, all the way to the Orange County border.
In its regulatory filing Tuesday, Edison International also said it was postponing the release of its fourth-quarter earnings. The company also said it was working to isolate” its profitable Mission Energy unit in the event of a bankruptcy by erecting additional corporate fire walls between the troubled utility and Mission Energy, which owns generating plants outside California.
Meanwhile, Edison‘s cost- cutting measures were particularly felt by 11 customers in Newport Beach. They spent Tuesday night without power because the utility was waiting until this morning to respond to the outage, which was caused by a transformer failure, Edison said.
If it’s not a matter of public safety, then we would get to that work in the next business day,” said Steve Conroy, an Edison spokesman.
Register staff writers Gary Robbins and Hanh Kim Quach and Bloomberg News contributed to this report.