Idea of Edison Bankruptcy Gains Currency

As state lawmakers enter what looks to be the final round of debate on a rescue plan for insolvent Southern California Edison Co., consumer advocates and even some business groups are asking whether the utility’s 4.3 million customers might be better off if SCE filed for bankruptcy.

Support for a legislative deal for SCE, which is backed by Gov. Gray Davis and the utility, is difficult to gauge, in part because the April bankruptcy filing of California’s largest utility--Pacific Gas & Electric Co.--has proved less disruptive to customers than first thought.

Many lawmakers, analysts and others believe Bankruptcy Court might be a better forum for SCE to settle its financial problems than the political arena.

If SCE and its nearly $4 billion in power debt land in Bankruptcy Court, the logic goes, the company, its creditors and its lenders probably would have to make more concessions than would ratepayers to return the company to fiscal health.

That would be a far different formula than the rescue plan passed by a key Assembly committee last week. That plan would require the utility’s largest 180,000 customers--primarily businesses--to pay for as much as $2.9 billion in bonds to cover much of SCE’s debt through higher rates. SCE would finance or negotiate away the remainder of its debt.

Edison International, the utility’s Rosemead-based parent company, has spent virtually the entire year fighting off bankruptcy, arguing that it could cost as much as $1 billion in legal and administrative fees and could lead to employee layoffs and higher rates for customers.

To emerge from bankruptcy, the company maintains, it might have to sell some of its assets or curtail investment in its electrical grid.

The utility sank into insolvency after piling up billions of dollars in energy-related debt under California’s deregulation laws. It was forced to buy power for more than what it could charge customers when prices spiked over the last year.

The accumulation of similar debt pushed San Francisco-based PG&E; to file for protection from creditors in U.S. Bankruptcy Court in April.

Southern California Edison has been following a different path, agreeing to a rescue deal negotiated with Davis. The final version of that plan continues to be debated in the Assembly this week.

One reason for the tenuous nature of the deal’s support is that PG&E;’s bankruptcy thus far has had no disastrous effects. Another reason is that bankruptcy experts say the tab will run into the hundreds of millions of dollars, not the $1 billion Edison projects for a major utility bankruptcy. And by not approving an SCE rescue bill, politicians would be able to say that they did not vote in favor of raising electricity rates.

“Clearly it is in [ratepayers’] best interests for there to be a Southern California Edison bankruptcy,” said Kenneth Klee, a bankruptcy expert at UCLA law school. “The advantage of bankruptcy is that creditors and Edison would share in the pain too. That would give ratepayers some cushioning.”

Even with bankruptcy, Klee said, ratepayers probably would have some exposure. “There is no free lunch,” he said.

Klee’s views are shared by consumer advocates, who have mounted a spirited but so far unsuccessful lobbying campaign against a legislative rescue of Edison. They argue that a variety of Edison missteps and its acquiescence to deregulation make it, rather than rate payers, responsible for huge debts.

“Ratepayers are unlikely to be any worse off in a bankruptcy than in an absolute bailout of the utility,” said Bob Finkelstein, an attorney with the Utility Reform Network, a consumer advocacy group.

“But from what we have seen in the PG&E; case, a bankruptcy would probably be more fair for ratepayers,” Finkelstein said. “So far, the judge has left rate matters with the Public Utilities Commission.”

In June, U.S. Bankruptcy Court Judge Dennis Montali denied a Pacific Gas & Electric challenge of state regulators’ authority to set its electricity rates. He said he wanted to avoid “jurisdictional chaos” and added that “the public interest is better served by deference to the regulatory scheme and leaving the entire regulatory function to the regulator.”

But Finkelstein acknowledged that there isn’t enough of a track record with utility bankruptcies to know for sure.

“This is all uncharted territory,” he said.

Indeed, one factor that could make a bankruptcy filing the least attractive option is an Edison lawsuit against the state that argues that regulatory law gives it the right to recover from customers what it paid for power under federally approved rates. Edison has said it would drop the lawsuit if it can work out a legislative settlement.

Barring that, the lawsuit could end up costing ratepayers more than they would pay under a state rescue plan, said Allan Zaramberg, president of the California Chamber of Commerce, who supports the Assembly bill.

Legal experts are divided over whether Edison would win its case.

The version of the rescue bill that the Assembly Committee on Energy Costs and Availability approved Wednesday night would allow the utility to issue ratepayer-supported bonds to pay most of its debt, but says it must find other ways to deal with the nearly $1 billion it owes independent power producers.

“Bankruptcy is better than the political football game that is being played now,” said Gary Ackerman, executive director of the Western Power Assn., a Menlo Park, Calif., trade group that represents many of the large power producers and traders to which SCE is in debt and which would be barred from a share of the bond money under the current plan. “It brings order to an otherwise chaotic process.”

Bankruptcy also is where the utility is likely to wind up regardless of whether the Legislature passes the rescue plan, said Benjamin Zycher, of the San Francisco-based Pacific Research Institute.

Lawmakers have left the big power producers out of the rescue bill because the state has accused the independent generators of price gouging. The problem, Zycher said, is that those companies still have claims. If they don’t get their money, they could push SCE into involuntary bankruptcy by pressing their claims in federal court.

The downside to such a tactic, Ackerman said, is that bankruptcy proceedings take time and cost money. Moreover, he said, he understands that members of his trade group could end up collecting less than 100% of what they are owed by Edison.

Others say any advantages of a bankruptcy are outweighed by unique problems that would arise from putting the state’s second-largest electric utility through the process.

“I don’t think it is clear-cut,” said state Sen. Debra Bowen (D-Marina del Rey), who chairs the Senate Energy, Utilities and Communications Committee. “I think it is better to avoid a bankruptcy, but it also wouldn’t be the end of the world either.”

Bowen sees a multitude of unknown outcomes as the biggest risks in a bankruptcy. A judge who tries aggressively to protect creditors might attempt to impose rate increases. Such a move could be supported by the utility, which would see its debt reduced through the rates customers pay, Bowen said.

A bankruptcy also could sever the interests of the utility from the state’s policy agenda, she said.

PG&E; has become a wild card in the state’s policymaking on energy, and many lawmakers are fearful that Edison would be too if it took the bankruptcy route. Since filing for bankruptcy, PG&E; has raised objections to rate making and revenue projections by state agencies, which could delay a $12.5-billion bond offering to cover the state government’s power purchases on behalf of the insolvent utilities.

Some lawmakers believe that, as the beneficiary of a state rescue, Edison would be more cooperative than the Northern California utility.

Though ratepayers might fare better in a bankruptcy in a narrow financial sense, Zycher said, damage to the state’s image would undermine any financial gain.

“A world in which government can pass a misguided policy that imposes such costs on private companies and then leaves it all to Bankruptcy Court to settle out is dangerous to the investment environment in California,” he said.

Thomas Walper, an attorney advising Southern California Edison on bankruptcy issues, said the utility wants to reach an “acceptable legislative solution” that allows it to become solvent so the company has more control over its future and so the state can exit the power business sooner.

Though a bankruptcy certainly raises all of these issues, many analysts outside SCE point to the case of PG&E.; To date, they say, the actions of Bankruptcy Judge Montali have not disrupted service or been pro-creditor at the expense of ratepayers.

“We have seen it work orderly in the PG&E; case,” Ackerman said.

But the state still is in the early stages of the process, Bowen said. The real test will come when a judge approves PG&E;’s still-undetermined plan for reorganization. Then questions about who is responsible for the huge energy debts run up by the utilities will be answered.

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Times staff writer Miguel Bustillo in Sacramento contributed to this report.