This is the second part of Chris Edmonds' column on the Edison deal. Be sure to read Part 1 if you haven't already.
The details are a
if. For the plan to be implemented, financial portions must be authorized by the California legislature, and changes in current rate structures will have to be approved by the
California Public Utilities Commission
, or CPUC. And, the sale of the transmission grid will have to be approved by the
Federal Energy Regulatory Commission
, or FERC.
Recently, relations between Gov. Davis, the legislature and the CPUC have been strained by diverse and often conflicting opinions regarding the current crisis. "This gives us a clear path to financial stability, but many challenges remain," said Edison's Frank. "It does require further action by both the legislature and the
CPUC. The governor joins us in urging both of those bodies to take swift action because time is of the essence."
The risks of failure are high. Frank warned that the inability to execute this agreement will likely result in Edison following PG&E into bankruptcy. "The governor is well aware that we have been on the brink of bankruptcy for some time, and it is a likely alternative for inability to complete this deal," he said.
Still, Edison's attempt to avoid bankruptcy through negotiation provides at least a perceptual advantage and, quite possibly, a pragmatic benefit. "From public relations and stock market perception, Edison will look like they struck the better deal," says Dietert. "A year from now, Edison may very well have recovered past liabilities and could be collecting a rate of return they can live with while PG&E is still in bankruptcy."
Assuming everything clicks. If not, PG&E may well have company in Judge Dennis Montali's courtroom.
From Lawsuit to Sale: We Got What We Wanted
One major stumbling block in the negotiations between Edison and Davis was the governor's demand that Edison's federal lawsuit against the CPUC be dropped. As we've
discussed, many legal scholars believe the utilities have a compelling argument to collect prior wholesale power costs.
And, while Edison was initially reluctant to foreclose its legal options, the utility ultimately agreed to drop the suit once the deal is complete. "It is our belief we are going down the right path with this agreement," said Edison's Frank. "Assuming we can put it in place, we believe
the agreement is preferable. It will deliver what we believe to be the likely outcome of the federal suit anyway."
Edison appears to gain significant ground under the proposed deal. The company is getting more than two times book value for its transmission assets and now gets paid to operate them for the state. In addition, California assumes a large portion of the costs required to maintain the grid.
Also under the agreement, the CPUC will be prohibited from reducing Edison's return on equity for a decade. "New legislation will provide that Southern California Edison's authorized return on equity may not be reduced by the CPUC below its current 11.6% before Dec. 31, 2010," notes the agreement between Edison and the state. According to utility experts, that is a solid return for a regulated utility.
And, clearly, the return to financial health will benefit Edison. The outline of the agreement states, "One of the goals of the agreement is for Southern California Edison to be an investment-grade credit."
Pretty good work for a utility that just yesterday was on the razor's edge of bankruptcy.
Pacific Gas & Electric: No Thanks!
Now that a deal with Edison is done, Gov. Davis has his sights set on PG&E. At the press conference announcing the Edison agreement, Davis said PG&E is welcome to negotiate a similar deal.
The utility's response? See you in court.
"Given our set of facts, we continue to believe that a Chapter 11 reorganization is the most feasible means to reach a solution," Pacific Gas & Electric responded in a statement.
However, the Edison deal may push PG&E back to the political bargaining table. "This will put pressure on PG&E to strike a deal with the governor as well," opines Dietert. "However, it's uncertain how such a deal would work with bankruptcy in the background."
California remains a live wire.
Go back to Part 1 if you want to read more.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to