Commentary: Time to Cut This Utility's Cord?

By Christopher Palmeri

The speech was classic John E. Bryson. Speaking to a civic group in Los Angeles on June 19, Edison International's (EIX ) chairman delivered a thoughtful explanation of why taxpayers should support a deal he and Governor Gray Davis crafted to save his financially troubled utility. "To fail to act will impose massive costs on Californians. It would indelibly stamp California as a state that is unable to overcome partisan differences and work for the common good," Bryson said. As often before, the environmentalist and former regulator was seeking compromise and consensus-building to solve a vexing problem.

As head of the second-largest U.S. utility, Bryson has proved a master at crafting political solutions to his company's troubles. They've brought Edison some short-term victories--but often have backfired later. This time, the risks loom larger than ever: If Bryson fails, the company's Southern California Edison subsidiary probably will follow in the steps of the state's largest utility, PG&E (PCG ), which declared bankruptcy in April.

EDISON UNPLUGGED? The problem is that, as Bryson has demonstrated time and again, he's pushing for immediate relief without considering the long-term consequences. This crisis, however, might be the time to rethink that strategy. It may be time for Edison to bite the bullet, file for Chapter 11, and let the courts take over, instead of relying on the political and regulatory mechanisms that have failed California consumers so spectacularly.

Bryson's management approach is partly a product of his unusual background. A Yale-educated lawyer and co-founder of the Natural Resources Defense Council, a prominent environmental group, he served as president of California's Public Utilities Commission before joining Edison in 1984. That training--as activist, regulator, and corporate executive--has tended to reinforce a sunny "let's-make-a-deal" attitude. Says his longtime friend Mary D. Nichols, the head of the California Resources Agency: "He sincerely believes in smart regulation."

Edison's crisis began with California's 1996 deregulation law, which capped the company's retail rates but allowed competition at the wholesale level for power generation. When wholesale prices began to soar last year, Edison found itself paying five and six times more for electricity than it received from its 4.3 million customers. The state began buying power for California's three biggest utilities this January. But Edison claims customers still owe it $3.5 billion for last year's purchases. The result: a $1.9 billion loss in 2000.

Yet Edison played a major role in crafting the 1996 deregulation law. Encouraged by industrial customers who were unhappy with California's high rates, regulators unveiled their first deregulation proposal in 1994. Edison initially fought deregulation but ultimately put together a coalition to push the legislation through. Edison subsequently spent more than $31 million on campaign contributions and lobbying, much of it aimed at enacting and defending the law that has now nearly drained the company. "It was a political compromise," says Vikram S. Budhraja, an Edison executive at the time and now a private consultant. "It was nobody's idea of a preferred solution."

To escape, Bryson hammered out a deal with Governor Davis early this year. Among its major provisions, the agreement would allow Edison to recover the entire $3.5 billion over time from customers while the state buys Edison's transmission lines for $2.8 billion. But consumer groups charge that the transmission-line price is too generous, that Edison has already made $1.2 billion from selling some plants, and $2.4 billion from a special bond offering being paid off by rate payers. And as for that uncollectible $3.5 billion? That's just too bad, say consumer activists. "We need to get together and find a means to have a healthy utility now," counters Bryson. Without a deal, he says, the state could be left buying Edison's power indefinitely.

RESISTANCE. Legislators have been debating the proposal for weeks, with a vote likely by midsummer. "We have the framework," says Robert M. Hertzberg, the speaker of the California State Assembly. "I'm very hopeful that we'll craft a solution." Still, it's almost certain that the best Bryson can come away with is a partial victory. State Democratic leaders either oppose the plan or want to modify it, while the GOP has its own proposal.

So why is Bryson pressing his case among legislators and regulators again? Good question. Edison's history suggests that the public advocacy route doesn't serve anyone very well. In the early 1990s, the company argued that it should not have to give preferential treatment to new independent power plants over new facilities of its own. Edison won before federal regulators, but its new capacity never got built, a factor contributing to the present shortages. And just last year, Edison argued aggressively for wholesale caps on power prices. Authorities approved, only to see independent producers sell their power out of state.

You have to wonder if everyone wouldn't be better off this time if Edison lost. A bankruptcy would allow a nonpolitical settlement of the company's immediate crisis by letting a judge take charge. More important, it would also give the industry and the state breathing room to come up with the one thing everybody wants: a viable long-term solution that won't soak the customers or the taxpayers. Three times in the past decade, Bryson has mustered his considerable political skills to further the aims of Edison. Three times he has come away with Pyrrhic victories. It's time to try something different.

Correspondent Palmeri covers energy issues from Los Angeles.

    Before it's here, it's on the Bloomberg Terminal.