Edison International Warns of Potential 'Significant' Power Cuts in California

(12/22/00 4:55:53 PM PT)

ROSEMEAD, Calif. -- Edison International warned that it will 'significantly reduce service to customers' if necessary to remain solvent.

That contingency was announced late Friday as part of the company's decision to not pay a fourth-quarter dividend and for unit Southern California Edison cutting $100 million in 2001 electric-system operations and maintenance investments, affecting 400 jobs.

If more cost-cutting is necessary, Edison International said it has developed a contingency plan that includes the warned service reduction and 'additional substantial' job cuts.

Edison International said the dividend customarily would have been paid to about 85,000 individual shareholders on Jan. 31. In March, the company boosted its quarterly dividend to 28 cents a share from 27 cents a share.

The company noted it took steps last month to cut costs by freezing hiring and new construction, suspending equipment purchases, service contracts and charitable and community contributions, eliminating discretionary travel and slashing administrative expenses. It also warned that further actions might be needed at that time.

As the troubles mount for Edison International and PG&E Corp. -- holding companies for California's two largest utilities -- some observers now believe the firms will get some relief at the start of the new year after state regulators at least opened the door to electricity-rate increases the two utilities said they need to stay in business.

Many expect the California Public Utility Commission to authorize a rate increase at a scheduled Jan. 4 meeting. ABN Amro Inc. analyst Daniel Ford was so optimistic he upgraded Edison shares to 'buy' from 'hold.'

Shares of the two companies again hit 52-week lows Friday, but rallied by the end of the trading day. At 4 p.m. EST on the New York Stock Exchange, PG&E (PCG), which owns Pacific Gas & Electric, was up $1.81, or 9.9%, to $20.06, while Edison International (EIX) was up $1.31, or 8.8%, to $16.25.

On Thursday, the PUC tried to reassure jittery credit markets that they won't let the state's big utilities go broke. Still they stopped short of ordering the kind of immediate relief utilities and their lenders want: rate increases big enough to cover exploding wholesale power costs in the state's deregulated energy market.

Instead, the PUC ordered audits of utility records and scheduled hearings for next week, needed to provide a legal basis for eliminating a rate freeze that has protected most consumers from spiraling wholesale power costs.

Soaring power costs in supply-short California have produced a political crisis in the state, which four years ago led the nation in deregulating its power industry. Wholesale electricity for delivery Sunday and Monday in the West sold for $200 to $400 a megawatt-hour Thursday, about 10 times its year-ago level.

SoCal Edison and Pacific Gas and Electric have said they are more than $8 billion in debt as a result of the price they must pay for electricity and the inability to pass on the higher costs to consumers because of a state-mandated freeze. Between one-third and one-half of that figure is offset by profits from power plants the utilities still own in the state, but the net losses are substantial and mounting.

Both utilities have said they soon will become unable to continue buying power for their customers if the situation persists. Earlier this week, ratings agency Standard & Poor's warned that both utilities face imminent default and a downgrading of their debt ratings to junk-bond status unless California officials acted immediately to raise rates and restore the utilities to liquidity.

The utilities' deteriorating credit situation has left some generators reluctant to supply power to California without guarantees they'll be paid. The Department of Energy has issued an emergency order requiring power suppliers in the West to sell uncommitted electricity to California on demand until Dec. 28.

Consumer groups, which say the utilities are overstating their financial woes, decried the PUC decision.

According to Mr. Ford, the utility's fate now rests in the hands of the Standard & Poor's. He expects S&P to downgrade Edison's utility debt by 'a notch or two to keep politicians honest,' but stop short of giving the companies junk bond ratings.

Another ratings concern, Moody's Investors Service, said it doesn't expect to reduce the debt ratings of the two utilities below investment grade status before regulators meet on Jan. 4. Moody's said it might cut the ratings next week to a level short of speculative status, and set strict terms for what it would consider a favorable ruling by regulators.

Copyright (c) 2000 Dow Jones & Company, Inc.

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-- Martin Thompson (mthom1927@aol.com), December 22, 2000