Fact Sheet – Analysis of the Arguments FOR a Bailout

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Shockingly few arguments have been made in favor of the Edison bailout legislation — a sure sign, by itself, that a bailout is mistaken. But we’ve assembled every argument we have heard in favor of the bailout and provide our analysis: in bankruptcy, creditors, investors and management pay the price. In a bailout, the innocent ratepayers pay.

Argument: “If Edison declares bankruptcy, the lights will go off.”

Response: Wrong. Contrary to the utility propaganda — repeated by Gov. Davis — a utility in bankruptcy continues to operate as usual. PG&E is in bankruptcy; its lights remain on.

Argument: “Ratepayers will end up paying under bankruptcy anyhow.”

Response: Wrong. The bankruptcy court does not have the power to order rate increases to pay off creditors, as the court in the PG&E bankruptcy has already recognized. It’s the creditors and investors of a company who end up footing the bill in a bankruptcy; often, management is discharged as well. By contrast, a bailout holds ratepayers responsible for the debts Edison accrued as a result of the deregulation debacle.

The purpose of bankruptcy is to allow a financially-distressed company to adjust, reduce, or even wipe out the debts it owes to its creditors, enabling it to get a “fresh start.” In this case, Edison‘s creditors are the eight out-of-state energy companies to which Edison sold its power plants several years ago. A bailout of Edison thus means bailing out the very companies that manipulated power supplies in California to maximize their profits. Other creditors include other power providers and various vendors and suppliers. The impact to them may be significant; but that is the risk they took in doing business with a financially distressed company. In some bankruptcies, the company pays creditors some percentage for every dollar they owe, which Edison could certainly do, since it has a guaranteed stream of revenue from its own power sales.

The only other people affected by an Edison bankruptcy are its investors and executives. Investors benefited enormously in recent years from their investments in the company — and will benefit once again in the future as Edison reorganizes itself after a bankruptcy. Edison‘s management backed deregulation, which brought the company to its present state, and they will no doubt face severe consequences if it goes into bankruptcy. Last year, Edison International CEO received an $8 million compensation package. No wonder he and other Edison executives are spending millions of dollars to get a bailout and protect their own jobs.

Argument: “We need to make Edison credit-worthy again so it can buy power and get the state out of the power business.”

Response: Even a triple-AAA rated Edison could not get the state out of the power business, because, as a result of the long-term contracts signed by the Department of Water Resources, there is virtually no power to be bought by Edison or the state for at least a few years. The state is locked in to the power buying business for years to come. SB 78xx, for example, does not require Edison to take over the power procurement task until 2003, and even then, with the contracts such as they are and the direct access provisions contained in the bill, there will be little need for Edison to buy power.

In any case, both Edison and PG&E are already technically credit-worthy — able to buy power, or borrow money to do so. The PUC made these entities “credit-worthy” on March 27th with the adoption of the largest rate increase in California history. It was an explicit purpose of ordering the rate hikes, according to the PUC. Indeed, the first finding of the decision is: “Edison and PG&E seek additional rate increases to improve cash flow and pay for future costs of power for their customers.”

Additionally, with the very real prospect of further gouging by energy generators in the long-term, a restoration of Edison‘s credit-worthiness will only float the utility for a short period of time until they are again in need of a bailout. We need to return to a fully regulated energy system in California.

Finally, with regards to the call “to get the state out of the power business,” the serious conflicts of interest and inflated contracts negotiated by DWR occurred because DWR did not operate under the public scrutiny and regulatory oversight that the PUC provides. Legislation by Sen. Burton (SB18xx) will resolve these matters.

Argument: “Edison bought the power and deserves to be paid for it.”

Response: Wrong. The deregulation law — the law Edison wrote — froze rates at high prices, allowing Edison to collect $10 billion in above-market surcharges from the ratepayers through June, 2000. Most of it was pure profit, which the company up-streamed to its $37 billion parent. Edison never expected wholesale prices to exceed the frozen rate, but they did. Edison reaped the rewards of the deregulation law — but wants to change the law in order to avoid the losses.

Argument: “An Edison bankruptcy would be bad for California’s reputation and business climate.”

Response: Nonsense. California is the Golden State because of its combination of natural resources, climate, dynamic population and thriving economy. (Nobody decides to do business in California on the basis of the possibility that if they run into financial trouble, they will get a bailout from Sacramento). The best way to preserve our attractiveness is to restore a stable, reliable and affordable electricity system. Bailing out Edison doesn’t do that (see above). Indeed, adding $4.1 billion in bailout charges to the price of electricity is not the solution, it’s a major part of the problem we now face as a result of the deregulation debacle.

More important, in our concern about the “business climate,” let’s not forget about the impact to existing small businesses and residential ratepayers who have already experienced average rate increases of 45%. Additional surcharges to pay Edison‘s debts will harm our economy as they are passed through to consumers in the form of higher prices for goods and services. This in turn will pose a severe burden on the poor, seniors and others who live on fixed incomes. Who is going to bail them out?

Argument: “A ratepayer bailout of Edison is better for consumers than an Edison bankruptcy, because it settles a lawsuit Edison has brought against the state that could cause rates to rise.”

Response: Edison‘s lawsuit — arguing that the rate freeze it wrote into the 1996 deregulation law is unconstitutional — is frivolous and worthless. Edison has no constitutional right to stay out of bankruptcy. The case has already been thrown out by one court. But even if Edison were to win that suit, and prevail after the years of legal appeals, the amount ratepayers would ultimately be forced to pay Edison is less than what they would be forced to pay under the bailout legislation.

Argument: “If Edison goes into bankruptcy, they will break up the company and sell off its assets to pay its debts — just like PG&E wants to do.”

Response: False. California law — enacted this year to protect the state’s energy infrastructure — prohibits a sale of utility assets. Section 377 of the Public Utilities Code states: : “notwithstanding any other provision of law, no facility for the generation of electricity owned by a public utility may be disposed of prior to January 1, 2006.” To approve PG&E‘s plan, the bankruptcy judge would have to override not only California law but the California Constitution itself, which subjects all power plants to state control. (Article XII, §3). Federal bankruptcy law specifically forbids such disregard for state authority. (See 11 US Code §1129). California state officials have stated publicly that PG&E‘s recent reorganization plan, which would transfer ownership of regulated power plants to the unregulated parent company, violates the law and will not be approved.

Argument: “A bailout is the best of a lot of bad choices.”

Response: No. Edison and its creditors sponsored deregulation and wrote the deregulation law. Edison and its $37 billion parent company reaped the rewards of deregulation — over $10 billion between 1996 and 2000 alone. They, not the innocent residential and small business ratepayers, must bear the consequences. For Edison, that may mean bankruptcy, unless the parent company chooses to save its subsidiary.

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Consumer Watchdog
Consumer Watchdoghttps://consumerwatchdog.org
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