Re: Edison Bailout
Dear Member of the California Legislature:
We are writing to explain why a bailout of Southern California Edison is unaffordable, unfair, unnecessary and likely unlawful.
California simply can’t afford a bailout or any rate hike. The two rate increases ordered by the PUC since January will increase the average consumer’s bill by 49%. And this is just the beginning. As you well know, the wholesale energy generators are now charging ten to one hundred times year-ago prices, and one day two weeks ago the price hit $1900/mWh; this is the equivalent of a $950/month residential utility bill. Yet, the Governor’s energy “plan” depends upon summer spot prices not exceeding an average of $195/mWh1. If they do exceed that estimate — and they are apparently well above that already — the proceeds of the recently approved $13.4 billion in bonds will be spent and exhausted even before the bonds are floated in August. Then there will be another raid on the General Fund, and when that becomes impossible, additional rate increases. It doesn’t make a difference how the tab is apportioned between residential, small and big business users. Unless the energy companies suddenly become philanthropic, the Governor moves to seize plants, or Bush-Cheney blink, we are facing an economic catastrophe in this state. There is simply no more money available to make a multi-billion dollar gift to Edison, even if we wanted to. The state’s solvency, and the personal solvency of the people of California, must come before Edison.
Bailing out Edison will do nothing to address the fundamental crisis that the state of California confronts today. Edison‘s crisis is an internal financial crisis; California’s crisis is that we find ourselves at the mercy of an organized cartel composed of energy wholesalers that have gained control of our supply of electricity, and are manipulating it to maximize their profits.
Governor Davis has said that a bailout is necessary in order for Edison to continue to sell its native generation to ratepayers at regulated rates because, under AB 1890, rates for that power were scheduled for “deregulation” in 2002. That argument is an insult to the people of California. The people of California built those plants and, since January, their money has been used to buy electricity on behalf of the utilities. The promised rate reductions of deregulation have become massive regulated increases. The utilities are required by law to sell us the power they generate at a regulated price, and should be required to do so in perpetuity.
Some lawmakers are arguing that if we can only get Edison and PG&E “back on their feet” and buying electricity once again, our problems will be solved. This is simply false. The plain fact is that unless the generators are forced to reduce prices, either ratepayers will have to continue to borrow money to pay for electricity on the installment plan, or rates will have to increase by hundreds of percent to cover the current prices. Assuming we thought it worth a couple of billion dollars to get them back in the business of purchasing energy from the wholesalers, they’d simply be in the same position the state’s now in: confronted with cartel prices and forced to borrow to pay for electricity or else raise rates. What have we accomplished by substituting the utilities for DWR? Nothing. As far as which entity is borrowing, the only difference between the state borrowing money or the utility company borrowing money is that the state can borrow more cheaply. In either case, we are borrowing from our future. It makes no sense to pay an additional $3 to $5 billion to rescue the utility companies so they end up borrowing money at higher interest rates, which of course, will be passed through to ratepayers. And it is quite conceivable that if prices continue their stratospheric rise, the utilities will once again be unable to borrow sufficient funds. This strategy might well be called “the re-bankruptcy plan,” because the utilities may once again come hat in hand to the taxpayers, demanding yet another bailout.
In any event, 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.”2 However, some suggest that the energy companies and their creditors won’t sell power to the utilities until the utilities pay for their pre-January power purchases. In other words, the energy companies will refuse to sell power to Edison and PG&E not because the utilities are not credit-worthy, but because the generators and their allies want to leverage a ratepayer bailout of the utility companies. In bankruptcy, the generators correctly fear, these debts may be reduced or, worse yet, scrutinized. This has nothing to do with credit-worthiness; this is extortion. These are debts that are under investigation by a variety of state and federal agencies; they are the subject of litigation; and they include an ISO-estimated $6.3 billion in overcharges by these same generators and traders. (In addition to being paid back all, or perhaps most, of what they are owed, the generators will no doubt insist on a settlement freeing them of liability for their conduct as a precondition of resuming sales to the utilities).
The state has already surrendered enough money and sovereignty to the energy wholesalers. If they will not sell to the utilities, the state should take punitive action. There is a range of options, including seizure of the power plants. Or, the state could choose to employ the same tactic: refuse to do business with the many banks and investment firms that do business with the energy wholesalers. Quite a few of the firms that stand to gain hundreds of millions of dollars in fees from the sale of the California power bonds also trade energy contracts and maintain close business relationships with the wholesalers. If the suppliers and their colleagues want to boycott California, we should boycott them. That is a game of chicken we will win every time. We cannot buy our way out of this game.
To reiterate, the people of California cannot afford the luxury of rescuing Edison. The utilities’ initially won the deregulation game, but ultimately lost. Game over. Meanwhile, the state of California is fighting for its survival. State lawmakers should be focused on protecting the ratepayers, not the utility companies, and making sure that, in the long term, this can never happen again.
Californians have already bailed out the utility companies once in the last five years. Under AB 1890, ratepayers were required to pay off the utilities’ bad debts and mismanagement; In exchange for that, ratepayers were promised a 20% rate reduction by 2002. For the record, Edison CEO Bryson told the LA Times that deregulation was: “the best, soundest way to move to a desirable competitive market that will benefit all customers, large and small…Southern California Edison…is committed to a 25% rate reduction effective Jan 1, 2000. As near as we’re able to tell, this is consistent with our goal.” 3
Now, after ratepayers forked over more than $20 billion in bailout charges between 1996 and last June, the promised 20% reduction has become a 49% rate increase. In the end, this first utility bailout proved to be nothing more than a cash advance to Edison and PG&E for their efforts to capitalize their unregulated subsidiaries. The utilities’ share value, national and international acquisitions, executive compensation and dividends all increased because of the AB 1890 bailout.
The utilities wrote and promoted AB 1890, including the rate freeze. According to Robert Glynn, who heads PG&E, AB 1890 created “clarity” about deregulation. “The bill moved us from debating deregulation to actually implementing it.” 4 The utilities and their shareholders and executives got the rewards. But they also explicitly took the risk that market forces might turn against them — especially, that during the rate freeze, wholesale prices would rise above the frozen rate. The utilities wrote the law, demanded the market, benefited from it for awhile. Why shouldn’t the market now be allowed to dictate the solution?
The utilities don’t need a bailout at all: they can bail themselves out. 5 The parent companies — established by law under the condition that their first priority would be the solvency of the utility subsidiaries6— are $30 billion-plus enterprises, profiting directly from the energy crisis in other parts of the country and, in some instances, right here in California7. They can, under law, and should, be forced to sell off non-essential assets and cut expenses to the bone and borrow more money from the marketplace to cover their needs (as the parents have had no trouble doing recently8). If the parents do not want to bail out their subsidiaries, why should ratepayers? PG&E chose to put the utility in bankruptcy. Edison can make the same choice if it wishes. Bankruptcy is the “market solution” for most companies in the United States today.
Beyond being merely unnecessary, a bailout would set a dangerous precedent regarding the pass-through of future unjust and unreasonable prices. The proposed utility bailout would effectively back-bill ratepayers for power they have already purchased. It would thus affirm the right of utilities to recover all wholesale costs notwithstanding the rate freeze they wrote into law in 1996. That rate freeze has become the last defense for consumers against the profiteering by the energy industry. A bailout would be the statutory surrender to the utilities’ demand to have the rate freeze retroactively lifted as of August 2000. The bailout contradicts the freeze (without acknowledging that the utilities earned an extra $20 billion when energy prices were below the freeze). And by forcing the ratepayer to pay these past debts, you set the precedent for the full pass-through of wholesale power costs going forward. That means another San Diego Summer throughout the state and “on a going forward basis.”
The structure of the MOU and the various “Bailout Lite” proposals now floating around Sacramento presume the sale of bonds that rely upon a legislated “Dedicated Rate Component” (DRC). DRC is a euphemism for a “securitized” rate increase, in which the legislature orders ratepayers to pay an irrevocable rate hike for 10-15 years. The DRC is the security for the bonds. A form of bailout in itself, securitization was first utilized in California to fund repayment of the so-called “rate reduction bonds.” As the bond disclosures at that time recognized, securitization is a new and controversial procedure that raises significant legal questions.
The 1996 legislation specified that the bonds were not backed by the full faith and credit of the state — if they had been, voter approval would have been required under Article XVI of the California Constitution. However, the Legislature sought to evade that constitutional requirement while at the same time obligating the state to guarantee repayment by including language that improperly barred future legislatures from taking any action that would impair the bonds9. It is clear that the utilities intend to avail themselves of the same evasion this time around as well. We consider this a constitutional violation. Indeed, we believe there are serious statutory and constitutional questions surrounding bond legislation as enacted and proposed this year. Implicated are Article XVI, Section 3 (prohibition on appropriations for purpose or benefit of private corporation or institution not under the exclusive control of the State); Article XVI, Section 6 (prohibition on lending the credit of the state in aid of, or making a gift to, any private corporation); Article XVI, Section 17 (prohibition on state investing in private corporations); Article IV, Section 17 (prohibition on extra compensation to state contractor after service has been rendered).
How many times must we learn the same lesson? First, there was the 1996 deregulation law, AB 1890, a bill virtually no lawmakers understood, yet rushed through with little public scrutiny — a public policy disaster fueled by campaign contributions that represents the California Legislature at its worst. Another costly mistake was made again last January when lawmakers rushed through an initial $400 million appropriation to buy power in order to avert blackouts, without foreseeing the consequences of that unprecedented action. “No one should believe that there is any appetite in the Assembly for coming in here every day and opening up the checkbook of the state and acting like that’s problem solving because it isn’t,” said Assembly Member Fred Keeley, five months and $7.7 billion ago. Now we have another campaign to force consumers and taxpayers to spend billions to rescue Edison — a juggernaut lubricated by lobbyists for the utility and its creditors — principally the energy generators. This time, we urge you to listen to your constituents: the taxpayers and consumers of California who vote, and who ultimately pay the bills for the Legislature’s actions.
Edison can either choose to rescue itself, or pursue bankruptcy as the forum for disposing of its prior debts. To pursue a legislative remedy to Edison‘s financial problems is to ignore the fact that forcing ratepayers to invest in Edison, and coaxing PG&E out of bankruptcy with the promise of a similar bailout, does not address California’s energy crisis.
Moreover, such a course of action will further jeopardize the state’s solvency, as the General Fund is raided anew to cover future costs incurred by the utilities. Indeed, the California Legislature ought to focus on protecting the General Fund by rewriting SB 31X to require that:
1. All the money collected through that bond sale goes directly to repay the General Fund; and,
2. The Governor is barred from using General Fund money, without legislation, to pay for power procurement once the amount of the bond sale has been reached.
Electricity deregulation was the handiwork of lawmakers who were told it would reduce rates. Many of those lawmakers are no longer among you. So while you may not be responsible for passing deregulation, and the $20 billion in surcharges it imposed upon ratepayers, the full fury of its collapse has occurred on your watch, and it is your responsibility to protect Californians from it. Benjamin Franklin put it this way in describing a new Parliament’s role in failing to reverse a series of Intolerable Acts put upon the American colonies by a previous Parliament:
“Though I might excuse [the previous Parliament] which made the acts as being surprised and misled into the measure, I know not how to excuse this, which under the fullest conviction of its being a wrong one, resolves to continue it.”
Harvey Rosenfield Jamie Court Douglas Heller
1. Supplemental Financial Information: Benefit-Cost Analysis of the Memorandum of Understanding with Southern California Edison Table 3, “Summary of Forecasted Net Short Purchases,” page 25.
2. CPUC Decision 01-03-082 March 27, 2001
3. Los Angeles Times 12/21/95, p. D1.
4. San Jose Mercury News by Rebecca Smith, 6/8/97
5. We can provide you with a list of the assets purchased by Edison using ratepayer money since deregulation began.
6. “The capital requirements of the utility, as is determined to be necessary to meet its obligation to serve, shall be given first priority by the Board of Directors of Edison‘s parent holding company and Edison,” CPUC Decision 88-01-063 January 28, 1988. The same language is contained in PG&E‘s holding company decision (D96-11-017 November 6, 1996).
7. Rather than providing its unregulated power generation on a cost-plus basis (or simply cost-basis as most businesses would be required to do to keep a subsidiary afloat) to it’s utility subsidiary SDG&E, Sempra recently signed a hefty $7 billion long-term contract with the state. (San Diego Union Tribune May 6, 2001)
8. On Friday, March 2, 2001, for example, PG&E Corp. acknowledged it had borrowed $1 billion to cover expenses including the payment of a $116 million stock dividend. (San Jose Mercury News March 3, 2001)
9. With regards to the DRC and associated bonds from the original deregulation bill, the utilities, in their 1998 opposition to Proposition 9, argued, with the support of virtually all lawmakers, that: “[a]lthough it is true that the privately sold bonds are not backed by the ‘full faith and credit’ of the State, that particular reference is not legally applicable here because they are not state bonds.” They argued that if Prop. 9 or any law removed the DRC and required the utilities to pay the principal and interest on the corporate bonds issued under the Rate Reduction moniker, then “[t]he state of California — and ultimately taxpayers– will be liable to repay $6 billion to bondholders. The utilities will not be on the hook to repay bonds — taxpayers will.” (from utilities’ No on Prop. 9 campaign literature)