State, Edison Discussed Pact to Pay Off Firm’s Huge Debt

SACRAMENTO —  A draft agreement between the Davis administration and Southern California Edison would seek to return the utility to financial stability by committing ratepayers to help pay off its multibillion-dollar debt in future years even if the state’s proposed purchase of Edison’s transmission system falls through.

The proposal, which could translate into yet another electricity rate hike on top of the record increase approved last week, contains provisions that would assure investors and creditors of Edison’s ability to dodge bankruptcy. Yet those elements appear certain, if they remain in the final version, to anger some consumer advocates and lawmakers.

As negotiations continue between Edison and the administration, a spokesman for the governor cautioned that the draft, dated last Tuesday and obtained by The Times, has been updated and changed significantly.

Nevertheless, the 40-page memorandum of understanding lays out the most detailed framework yet of the administration’s attempt to avert the utility’s bankruptcy. Gov. Gray Davis has made a state rescue of debt-ridden Edison and Pacific Gas & Electric Co. a key part of efforts to tame California’s energy crisis. Negotiations with PG&E; have lagged, but officials believe a deal with Edison could set the stage for similar agreements with the other utilities.

“This draft is ancient history,” Davis spokesman Steve Maviglio said Sunday of the document dated six days ago. “We have moved beyond that, and continue to make progress and hope to be able to make an announcement shortly.”

Executives of Rosemead-based Edison could not be reached for comment.

There is at least one more recent draft, officials said. But the document from Tuesday reflects the direction of negotiations. Internal memos dating back weeks describe similar elements in the discussions.

The talks have been going on behind closed doors for almost two months. Even legislative leaders, including Davis’ fellow Democrats, have learned little about details of the talks--to their dismay.

“I have no idea what’s in the memorandum of understanding,” Senate President Pro Tem John Burton (D-San Francisco) said Sunday. “But the Legislature is going to hold very comprehensive public hearings, so we know what we’re getting into. . . . Whatever the deals are, we’re going to have very full and open hearings: What is it we’re getting? What is it we’re giving? And what is the price?”

The draft shows, as previously announced, that Davis is offering to buy Edison’s portion of the 32,000-mile-long statewide system of high-voltage transmission lines for $2.76 billion, or 2.3 times its listed book value. For the transaction to work, Davis hopes as well to buy the portions of the grid owned by PG&E; and San Diego Gas & Electric Co., for a total price of about $7 billion.

The document says the state would buy the transmission grid “as is, where is, and with all faults” and would contract with Edison to operate its portion at a price to be negotiated. If the state decides to sell the grid at some later date, Edison, like other businesses, would have the right to bid to buy it back.

Edison would use cash from the purchase to help pay off its massive debt--the gap between skyrocketing wholesale electricity prices and what the utility was allowed to charge ratepayers. In federal filings, Edison has estimated that debt at $5.5 billion; barring regulatory or legislative relief, the utility’s parent company said in its most recent filing, it may take a $2.7-billion charge against earnings for the fourth quarter of 2000.

But the state takeover could fail for a variety of reasons; the Federal Energy Regulatory Commission could, for example, block the state effort.

The document gives no specifics about a backup plan for the state to acquire other assets if it fails in its efforts to take over the entire transmission system. However, the draft does contain provisions that would allow Edison to again become financially viable.

In particular, the draft agreement says consumers could be obligated to pay a so-called dedicated rate component to help the utility restructure its debt, even if the grid sale is not completed. The memorandum further states that the charge would not appear in rates for two years, and that the debt would be repaid over 12 years.

The charge, at an amount not specified in the draft agreement, presumably would be on top of electricity rate hikes approved last week that could be as high as 46% for some users. As such, the charge would face certain opposition from Republican lawmakers, who have criticized the rate hikes, and from some Democratic legislators, who are increasingly skeptical about Davis’ handling of the crisis.

Consumer advocate Mike Florio of the Utility Reform Network explained the provision by saying it may simply authorize Edison to begin restructuring its debt, pending final approval of the highly complex transmission grid sale, which could take a year or more to consummate.

“This is a huge transaction,” Florio said. “They can’t wait until the deal is signed, sealed and delivered.”

But V. John White, of the Center for Energy Efficiency and Renewable Technology, among the first lobbyists to float the idea of a state takeover of the utilities’ transmission systems, said some terms outlined in the tentative agreement are causing him to rethink his position.

“I don’t see where the public benefits are,” White said of the overall deal. “The price of the transmission sale is a complete capitulation to Edison.”

The tentative agreement contemplates that the California Public Utilities Commission, which has the responsibility to regulate the state’s investor-owned utilities, would lose the ability to make at least some decisions.

The agreement says, for example, that Edison’s credit-worthiness and ability to finance improvements to its remaining holdings would require “greater certainty in respect of [Edison’s] ability to earn a fair return on invested capital.”

Toward that end, the tentative agreement would limit the PUC’s ability to pare back the utility’s current 11.6% authorized rate of return on investment, the document says.

“Nothing like this has ever been done anywhere in the country,” White said. “This would be a regulatory jailbreak.”

Among other provisions, the memorandum says Edison would drop its lawsuit against the PUC seeking the right to pass on its wholesale electricity costs to consumers.

The draft is dated the same day that the PUC approved a rate hike of about 40% to cover the state’s costs of buying electricity from independent power producers. The state started buying electricity, at an average daily cost of more than $50 million, after Edison and PG&E; fell so deeply into debt that they no longer were credit-worthy.

Executives at PG&E;, the state’s largest electric utility, have agreed to consider parting with its portion of the transmission grid. But details remain to be decided. PG&E; spokesman John Nelson said Sunday that talks between Davis and his company await the outcome of the Edison deal.

“It’s not because there is any breakdown,” Nelson said. “It is just that they’ve concentrated their efforts on Edison.”