July 1, 2004 - From the July, 2001 issue

Does So. California Edison Deserve To Be Saved? Or, Like PG&E, Should the State Let It Go Bankrupt?

Last week, KCRW's Which Way, LA? featured a discussion between two key State legislators and a consumer advocate regarding the fate of cash-strapped utility Southern California Edison. In the following excerpt, host Warren Olney guides the debate between Assemblyman Fred Keeley (D-Monterey), who is cosponsoring one of the rescue bills being debated, State Senator Michael Machado (D-Linden), who wonders what's so bad about bankruptcy, and Matt Freedman, a staff attorney for The Utility Reform Network, the largest utility advocacy group in California.


Asm. Fred Keeley

Warren Olney

Reeling from the State's misguided deregulation scheme, Northern

California's Pacific Gas & Electric declared bankruptcy on its own. But Southern California Edison signed a Memorandum of Understanding (MOU) with Governor Davis, claiming the MOU would stabilize California's chaotic energy picture and provide a responsible way out of the energy crisis, which is costing the State tens of millions of dollars each day. Consumer groups call the agreement a "bailout" and have threatened to put an initiative on the ballot. In the Legislature, that made the plan a political hot potato, and not a single member of the State Legislature will sponsor it, even as the MOU's impending deadline draws near.

It's a complex matter to discuss in a short amount of time. Put simply, the utilities ran up billions of dollars in debt because they had to buy electricity at wholesale prices that were higher than what they could pass on to consumers because of the deregulation law that put a cap on retail prices. Both the Governor's MOU with Edison and the alternative plans that are now being introduced would allow for the State to buy the transmission lines, which would help Edison pay off some but not all of its debt. The differences come in how they pay off the rest of the debt. Assemblymember Keeley, is that correct?

Assemblyman Fred Keeley (D-Monterey)

Speaker Pro Tem, California State Assembly

That's true, as far as it goes. There are many other features that we're trying to include in order to have a proposal that really takes care of ratepayers and consumers. Our secondary consideration is whether or not it's good for Edison.

Warren Olney

So how do the plans-the Governor's and the principle alternative being considered in the Assembly-differ?

Asm. Fred Keeley

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They differ in four ways. 1) [The Assembly bill has us] paying hundreds of millions of dollars less for the transmission system. 2) The Governor's proposal does not include any mechanism for reducing the claims of electricity generators, [whereas] we put a mechanism in the bill to reduce by 30% the amount of money that generators are going to get paid. 3) We're going to make sure that if there is any surplus money in this system as time goes on (the Governor says there will be in as little as two years), it accrues directly to the benefit of ratepayers by way of a mandatory rate reduction. 4) We're going to make sure that any benefit of any settlements with the Federal Energy Regulatory Commission (FERC) or any settlements of lawsuits against the generators go directly to reducing the rates of ratepayers or the burden that ratepayers have for this debt. We're [basically] taking the MOU, making it less expensive, and making it much more consumer-friendly .

Warren Olney

So if you're paying less for the transmission lines, reducing by 30% the claims of the generators (which means the debt would then be reduced as well), directing any surplus to a mandatory rate reduction and any settlement with the FERC directly to reducing rates and not to paying off the debt by Edison, why then would Edison agree to that deal?

Asm. Fred Keeley

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[B]ecause it still leaves them with a company that is whole. [T]he debts that they legitimately owe for power bought for consumers and used by consumers will be paid for. We do, however, make sure that there will be no overcharging by the generators.

What Edison cares about is whether they have a company when this is all over. Have they gotten their debt reduced? Do they have a way to work forward over the next couple of years to have a utility company when all is said and done? We think that their conclusion will be, Yes.

The Governor did a good job of negotiating the MOU, and we have made it better by putting these very pro-consumer, pro-ratepayer elements into his proposal.

Warren Olney

The alternative, of course, is bankruptcy for Southern California Edison, just like the PG&E. Senator Mike Machado, as I understand it, your solution to this is: Let them go bankrupt.

Senator Michael Machado (D- Linden)

California State Senate

I have a hard time trying to figure out why bankruptcy is any worse than what is being proposed. What's being proposed tends to saddle the non-core users with the obligation to pay for the debt that's been incurred. There's no assurance under these proposals that in two to three years SoCal Edison is going to have the capacity to purchase electricity under the net-short that the State is now responsible for. And it hasn't been demonstrated that the current rate structure will actually cover all the obligations out there.

[B]ankruptcy under Chapter 11 provides for the reorganization of a company so it can come out as a whole. You basically draw a line between past debts and the current on-going nature of the business. You hold past debts in abeyance, and then stabilize the day-to-day aspects of the business to be able to go forward. Once that's done, you can address past obligations.

Most importantly, you do this within an objective environment overlooked by the judicial process, involving creditors, the company, and a judge to work out a situation that not only allows the company to go on, but also serves the needs of the ratepayers and deals with past obligations.

Warren Olney

And is that the process that we're seeing now with the voluntary bankruptcy of PG&E?

Sen. Mike Machado

Yes-PG&E has been able to continue to provide service, and they're in the process of restructuring. Having been a party to other bankruptcy situations where things have worked themselves out, I do not see where that is a significant problem.

[Notably,] it takes a lot of politics out of the solution.

Warren Olney

On the other hand, how are they paying off their debt? That hasn't been addressed yet.

Sen. Mike Machado

That's part of the workout that needs to happen. Remember, the reason the debt exists is that rates weren't able to rise to meet costs. Now, there is a legitimate question as to the validity of those costs, as well as whether or not manipulation [and gouging] took place in the marketplace. But that's being addressed both through the FERC process and very vigorously by the Governor. There are lawsuits; there are legislative committee hearings . And anything that comes from that is a plus to any solution.

In the meantime, though, PG&E is not going to be able to address its long-term viability and debt unless we [recognize] the necessity of having rates responsive to the marketplace. That's what was lacking in AB 1890-we deregulated the wholesale, but didn't deregulate the consumer side. And we didn't make sure there was a competitive foundation in the marketplace either. We need to address the economic principles that come into play and provide the infrastructure necessary for a competitive marketplace.

Warren Olney

Back to Assembly Speaker Pro Tem Fred Keeley, what about this? Bankruptcy puts this in the hands of a Federal judge, who in concert with the creditors and the company itself then decides how to work things out in a supposedly very orderly manner.

Asm. Fred Keeley

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I have a pretty big concern about whose hands we're putting this in. First of all, we're not getting a lot of help from the Federal government these days; the Federal Energy Regulatory Commission has done virtually nothing to help California through this crisis.

Second, the sole responsibility of a Federal bankruptcy judge is to take care of the needs of the creditors, which in this case are the very people who have driven wholesale prices through the roof in the State of California. I'm just not very comfortable putting the fate of Californians' energy future in their hands for three, five, ten years while these companies go through a bankruptcy process.

We are much better off hammering out a deal that protects consumers, reduces the debt, [ensures the possibility of] rate reductions, and makes sure that [any] settlements go to the ratepayers and customers of California. In Federal bankruptcy court, the beneficiaries are going to be the creditors .

Warren Olney

Senator Machado, back to you on the question of the allegiance of the bankruptcy courts being the creditors, the very people who caused the problem.

Sen. Mike Machado

That's a correct observation, but we have to look at what makes up the creditors. In addition to the major generators, it's also a lot of qualified facilities, which are the smaller electricity generators-wind turbine, geothermal, biomass, etc. It's the people that provide bearings and grease and fuel to these plants, and it's a much broader class than what we tend to see when we talk about the utilities that created the high rate increase.

What I also want to point out is that the PUC still retains oversight over the rates that come out of any settlement. So there is State involvement that can provide protection to the consumer .

[Bankruptcy] is just a different avenue to address the creditor needs-because all the alternative workouts being discussed take care of the creditors [too]. When you consider putting a dedicated rate component on non-core users, you're talking about big users, and just about every farmer up and down the Central Valley will have a dedicated service charge that goes to paying off the debt. There has to be an equity question there.

For example, if somebody is saddled with a dedicated rate component, that will add a substantial amount to operating costs. They'll then have the ability to choose between manufacturing the product in California or purchasing it offshore and eliminating the jobs here, and they may, for cost avoidance, go to an offshore supplier. Or, if Boeing down in Long Beach is going to be faced with a $10-million dedicated rate component and higher electrical costs-and could move out of State, avoid that dedicated rate component, and likely come into a lower base for ongoing electric costs-the incentive will be: Leave California.

Warren Olney

There are many other components in all of this. We asked Edison to come on our program; we asked the Governor's Office-neither was able to do it. However, we do want to turn to a consumer voice. Attorney Matt Freedman is concerned about the individual residential ratepayers and how much of this they get saddled with. Why don't we start right there?

Matt Freedman

Attorney

The Utility Reform Network (TURN)

It's important to understand this is a problem that Southern California Edison has. It's the debts of the company, and it's asking the State to help it resolve its problem. The way we look at this, we want to make sure that any deal is going to make the consumers better off than they otherwise would be. So the utilities' interests really are not paramount in considering what kind of deal would make sense. That's the reason that we have a lot of problems with the Governor's original agreement, which we thought was really a worst-case scenario for California consumers-forcing all of the costs onto ratepayers while ensuring that Edison would be made whole for all of its past debts.

Now, as we look at this deal coming out of the Assembly, we have a couple of concerns. One of the things that Assemblymem-ber Keeley did not mention is that this deal would allow large customers in California, those who would be paying that dedicated surcharge, to leave the utility in the years to come and be able to buy from other competitive suppliers. The problem with this is that the State of California has just entered into a substantial amount of long-term power purchase contracts on behalf of all consumers here in the State. This involves a commitment that is in the tens of billions of dollars, and the legislation doesn't really deal with the issue of what happens if customers leave and the State has bought too much power for the customers that remain. This is one of the most important issues from the small consumer's perspective because if these costs are not passed on to the customers who leave the system, they're going to be left for all of us who remain, and we will be holding the bag for all of these costs, the magnitude of which could dwarf Edison's debt.

The other issue is what percent of the debts will Edison itself be responsible for? The legislation proposed in the Assembly doesn't even specify [an] amount . At this point, it's a zero-dollar figure, so Edison would be made whole without paying even a dollar towards its own debt.

This is an unresolved issue, and without these kinds of details being addressed, I don't think that consumers can feel comfortable that this deal is in their interest.

Warren Olney

What about bankruptcy, the solution that Senator Machado says would be better than either of these?

Matt Freedman

Bankruptcy is not a desired option.

It's really a matter of: in comparison to what? In comparison to the Governor's agreement, bankruptcy is preferable. Compared to this agreement, we just don't know.

What we do know about bankruptcy is that the judge in the PG&E case has already said that he is not going to raise rates. Let's remember that when the utilities waved around the idea of bankruptcy, they started out by saying that when they went to bankruptcy court, they would be able to persuade the judge to raise California consumers' rates immediately. And they were flat wrong. So a lot of the concerns that have been raised about bankruptcy don't seem to be all that valid .

Warren Olney

Assemblymember Keeley, what about this point of Matt Freedman's that under your plan, the big users, which would otherwise have to be paying the surcharges, could in fact shop around for better deals and leave the State taxpayers holding the bag for these long-term contracts?

Asm. Fred Keeley

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If we were doing that kind of thing, we should be run out of town on a rail. [T]he bill does not do that.

What the bill says is that at a point in the future, if it can be certified that a direct access market would not leave any of the rest of the customers with a new stranded cost to pay for, then people could exit the system. [L]et's say you have a manufacturing plant and you think you could get electricity cheaper from Enron than you could Southern California Edison. We would say, "That's fine; go buy your electricity from them." But you'd need to pay an exit fee equal to your obligation for the remainder of the Department of Water Resources contract. If you can make a deal so good that the exit fee plus what you're going to get with the new deal is still in your benefit, go do it. But we are not going to create a class of new stranded costs for the rest of the ratepayers to deal with.

Let me say one other thing. It's been said by the Senator and by the gentleman from TURN that somehow the dedicated rate component is going to raise rates. You described it as a "surcharge." It is absolutely not true to characterize it that way. "Dedicated rate component" means taking a slice of the existing rates and using it to pay the legitimate claims and debts, not to pay the energy gougers or profiteering. And it is within the existing rates. There is no rate increase associated with this whatsoever.

Warren Olney

Bringing this to a close, Matt Freedman, do you think it's possible for all of this to be worked out without some further rate increase for individual consumers, regardless of the plan that ultimately takes place, including bankruptcy?

Matt Freedman

Let's remember that California consumers are now experiencing the largest rate increases in the State's history, approved recently by the PUC. To the extent that some portion of those rates can be used to pay for Edison's debt, people shouldn't be confused into thinking that's somehow free money. It's like saying we're going to have a new obligation for you to pay, but we're going to take it out of your existing salary so you don't have to worry about it. People are going to be paying these rates.

The question is: Where's the money going to go? Will it go toward paying the State back for the purchases it's made? Toward paying back Edison's debt? Or could it be used for future rate discounts? It's important to understand that there's no way to get free money just because it's part of the existing rate structure.

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