By Kathleen Davis, Associate Editor
It’s as if Southern California Edison (SCE) has cheated death, if a mere financial one.
On October 5-with a firing squad of creditors closing in-federal judge Ronald Lew ruled on a proposed settlement in the lawsuit SCE filed against state regulators, pulling the company back from the brink of forced bankruptcy. (The settlement allows SCE to recover more than $3 billion through customer rate charges.)
Since mid-September there have been serious rumblings from nearly a dozen SCE creditors about pushing the insolvent utility into bankruptcy. In fact, Mirant Corp. and Reliant Energy Inc. were visibly shopping around for the third unsecured creditor they needed to call SCE to the carpet, according to sources in the financial community.
Reliant and Mirant did jointly file to intervene before the ruling, contending that the settlement lacks details on just how SCE plans to repay debts. (SCE owes the two companies approximately $260 million for previous purchases.) Los Angeles County and San Francisco-based consumer advocacy group The Utility Reform Network (TURN) also filed to oppose the settlement. In the end, however, Lew approved the settlement, calling it “fair, adequate and reasonable to the parties, the shareholders and to the public.”
He also stated that the settlement “is not a bailout by any means.”
Under the agreement, SCE can leave electricity rates at existing levels (around 10.3 cents per kWh) through 2005. Edison International chief financial officer Ted Craver said the utility should have enough cash in hand to pay off its power procurement debts by the first quarter of next year. (The language of the settlement itself calls for the utility to pay off all debt by 2003.)
“We’re looking for a ‘big bang’ in terms of paying everyone,” Craver stated. “We should be able to make that first quarter schedule work. That’s the amount of time it takes to accumulate enough cash through the mechanisms of this agreement with the [CPUC] and get sufficient bridge financing.”
To accomplish this goal, Edison will not pay any dividends on its common stock through 2003 (or until the debt is repaid). According to the CPUC, Edison’s annual dividend is typically about $400 million, so that shareholders will have foregone at least $1.2 billion in dividends (possibly more) by the time the debt is repaid.
Other provisions of the settlement call for SCE to join the state in seeking refunds from generators who have allegedly overcharged for power purchases. Any refunds that SCE does receive will go to paying the debt as well.
Edison may make up to $900 million in capital expenditures annually under the settlement.
“This settlement embodies a fair and judicious way for Edison to become solvent and get back in the business of buying power,” said Loretta Lynch, president of the CPUC. “[It] also ensures that all of the benefits of any refunds arising through litigation against power generators and marketers that profited from unjust and unreasonable energy prices will benefit ratepayers.”
California’s other insolvent utility, PG&E, congratulated SCE on reaching a settlement, but had a few bones to pick about the process. In a statement released the day of the settlement, PG&E claimed that the settlement plan was “remarkably similar” to the rate stabilization plan that PG&E and Edison proposed to the CPUC last November.
“Since that time, the CPUC has been saying that it could not possibly do exactly what it agreed to do [Oct. 5]. In the meantime, California’s two largest utilities have been stripped of their credit ratings, the state began buying power at inflated prices, millions of customers suffered days of power outages, and the state’s economy has been damaged,” the company said.
“The relative ease with which this agreement appears to have been reached in the past few days suggests that the upheaval and damage of the past year might have been avoided,” the statement concluded.
Outcry from the QFs
Whether or not this crisis could have been resolved a year ago, SCE remains buried under a $6.35 billion debt. It hopes this settlement will be the tool the company needs to dig itself out, but such escape may require more concessions than some creditors would like. While SCE has pledged to honor contracts, the QFs (smaller generators known as “qualifying facilities”) are unsure of their standing after the ruling.
The QFs signed five-year, fixed-price contracts with SCE back in June, locking in 5.37 cents per kWh. The status of those contracts didn’t become an issue until a recent conference call where SCE parent company Edison International’s CEO John Bryson said the contracts would be subject to renegotiations. QFs-owed nearly $1.2 billion in past due payments from SCE and producing nearly 4,000 MW under contract to the company-reacted unhappily to the statement that those contracts would be tampered with.
“Edison already benefited from the 5.37-cent agreement through the forbearance and the ‘standstill’ of various pending and potential litigation,” stated Jan Smutny-Jones, executive director of the Independent Energy Producers, a trade association for generators in California. “We are not interested in renegotiating the agreement.”
SCE spokesman Gil Alexander, however, confirmed that SCE CEO Stephen Frank was already in discussions with QFs about the contracts.
“Edison intends to stand by the power purchase portion of those contracts,” he stated. “Other portions of the agreements as signed by 155 QFs concern timing for repayment of past due payments. That language is all on the table.”