SoCal, governor move a step closer on transmission buyout deal

Southern California Edison Co.'s board approved a memorandum of understanding with California Gov. Gray Davis, confirming earlier negotiations and setting a Dec. 31 'drop dead' date to get a definitive deal signed under which the state proposed to buy the company's transmission system for $2.76 billion. Both sides acknowledged completion still rests on the cooperation of the California Public Utilities Commission, the legislature, and the Federal Energy Regulatory Commission, among others.


By Kate Thomas
OGJ Online

HOUSTON, Apr. 9--Southern California Edison Co.'s board Monday approved a memorandum of understanding with California Gov. Gray Davis, confirming earlier negotiations and setting a Dec. 31 "drop dead" date to get a definitive deal signed under which the state proposed to buy the company's transmission system for $2.76 billion.

Prompted by Pacific Gas & Electric Co.'s decision to seek bankruptcy reorganization, John E. Bryson, chairman of SCE parent Edison International, said a negotiated resolution is "preferable for our company and our employees and for our customers than is going into bankruptcy."

Davis and SCE executives at news conferences said many details have been worked out since the deal was first announced Feb. 23. But both sides acknowledged completion still rests on the cooperation of the California Public Utilities Commission (PUC), the legislature, and the Federal Energy Regulatory Commission, among others.

"Implementation is key," Bryson said. He called for prompt action by the PUC and the legislature. Other SCE executives noted PUC representatives participated in the round-the-clock weekend talks and were knowledgeable about the deal's provisions. SCE may terminate the deal if the PUC has not adopted provisions for which it is responsible within 60 days.

The deal comes just 3 days after California's largest utility, Pacific Gas & Electric, a unit of PG&E Corp. rejected the governor's efforts to reach a similar agreement and filed for Chapter 11 bankruptcy protection from creditors.

The agreement "proves you can get good things done if you stay at the table," Davis said. "PG&E acted arrogantly and selfishly. They walked away from the bargaining table."

SCE and Pacific Gas & Electric say they have lost more than $13 billion since June because of skyrocketing wholesale power prices. They cannot pass on their costs to customers under the state's 1996 deregulation law.

Major terms of the agreement include:

� The state will receive SCE's 12,000-mile transmission system. SCE employees will operate and maintain the system through a contractual arrangement with the state. The provision will have to be approved by the legislature and FERC. Transmission costs will be charged to SCE customers by the California Department of Water Resources. Executives said the net gain to the company on the sale will be about $1.5 billion which will be used to pay off debt.

� Proceeds of an estimated $2 billion in bond sales will also be used to repay the $3.5 billion in debt the company incurred buying power for its customers during the current rate freeze. SCE is relying on the legislature to direct the PUC to establish a dedicated rate component to repay the bonds and recover its full net undercollected amount, less the gain on the sale of the transmission system.

� If the transmission deal doesn't close within 24 months of a definitive agreement, SCE will offer its hydro assets and post 2010 retained generation output to the state.

� Edison International and SCE committed to spending at least $3 billion to upgrade the distribution system during the next 5 years.

�For the next 10 years, SCE will sell the output from its power plants under cost-based, rather than market-based, pricing. For the next 10 years, Edison Mission Energy's unregulated 500 Mw Sunrise power plant also will sell its output exclusively to California under cost-based pricing. Edison pledged to try to have the plant operating by the end of the summer.

� SCE agreed to forego development of 20,000 acres of its Big Creek and Eastern Sierra hydroelectric properties and grants conservation easements in perpetuity to the state for land and habitat preservation on these properties. The property will be conveyed to the state after the transmission system sale is closed.

� Edison International agreed to transfer $400 million in tax benefits to SCE.

� The state via the California Department of Water Resources agreed to assume full responsibility for purchasing all the electricity needed to serve SCE's customers over and above what it generates or has contracted for through Dec. 31, 2001. SCE will assume responsibility for the net short position after 2002, subject to certain actions being taken by the PUC.

� Upon implementation of the agreement by the legislature and PUC, SCE will drop its federal lawsuit against state regulators. The company claims it is entitled to full recovery of its net undercollections under the "filed rate doctrine" and the takings clause of the US Constitution. The court has set a July trial date.

Davis predicted by 2003 California will have a power surplus, including the "15% minimum reserve margin" Federal Reserve Board Chairman Alan Greenspan told him was necessary to operate a system. Presently, the state is facing a 20% deficit.

When "nobody built a plant for 12 years and the state population grew by six million, you have a lot of catching up to do," he said. Davis said he is continuing to negotiate a transmission deal with San Diego Gas & Electric Co, a unit of Sempra Energy.

Contact kthomas@pennnet.com

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