The first independent audit of one of California’s twonear-insolvent investor-owned utilities, Southern California EdisonCo., confirmed Monday that the multi-billion-dollar company wouldhave been forced into bankruptcy Thursday (Feb. 1) without acombination of cost-containment and stopping payments of its debts.It can now hold out at least through March, and itsunder-collections are overstated by about $2 billion when revenuesfrom its own generation over the past eight months are counted.

These are some of the highlights released late Monday by theCalifornia Public Utilities Commission in a 166-page report fromthe accounting firm, KPMG, LLP. A similar audit of Pacific Gas& Electric Co. by Barrington-Wellesley Group is due to bereleased shortly.

The initial response from SoCal Edison was the audit “containsno surprises.”

Given the cost of power on the wholesale market and itsexhaustion of its lines of credit and downgrading of itscreditworthiness below investment grade, KPMG confirmed thatEdison’s cash would have run out Feb. 1, but with the cost-controland the putting off of payments its cash resources have balloonedto $1.2 billion from an estimated $51.8 million in a matter of afew weeks.

Without specifically doing so, the auditors appeared to supporta contention by a utility consumer watchdog group, TURN (TheUtility Reform Network) that some offsetting revenues available tothe utility could be applied against the wholesale power costs, andit was silent on the utility’s claim that its rate freeze shouldend retroactive to last August under provisions of the state’s 1996electricity restructuring law.

In the past five years, the audit confirmed that the Edisonutility generated net income of $2.7 billion and a positive cashflow of $7 billion, of which $4.8 billion was distributed to itsparent holding company, Edison International. The parent in turnused most of the proceeds to pay shareholder dividends ($1.6billion) and repurchase outstanding common shares of stock ($2.7billion).

“The transfer of ($4.8 billion) from the utility to our parentcompany should not come as a surprise,” the Edison utility noted ina written response. “These transfers, made over the past fouryears, were publicly disclosed as well in CPUC proceedings and inquarterly Securities Exchange Commission filings.”

Edison said that the funds are not “profits,” but ratherone-time proceeds from the sale of rate reduction bonds and thesale of power plants as mandated by the ’96 state law. The fundswere used to pay dividends that are simply a way to reimburseshareholders for their investments in the plants that were built toserve utility customers.

Under the CPUC accounting system, the Edison utility has keptrelevant revenues and costs in three separate balancing accounts:(1) a transition cost account in which proceeds from the sale orvaluation of generation assets over book were collected (about $500million as of Dec. 31, 2000); (2) wholesale power costunder-collections ($4.5 billion as of Dec. 31, 2000); and (3)revenue from its remaining hydro and nuclear generation ($1.5billion as of Dec. 31, 2000).

KMPG noted that the under-collections are overstated by at least$1.5 billion because the utility generation revenues have not beenapplied to offset at least part of the current under-collections.TURN’s proposal is to not only do that, but also go backhistorically and use the $4.8 billion that the utility has providedto the parent corporation primarily for shareholder dividends andcount it against the unpaid power costs. In essence, the consumergroup wants shareholders — not utility ratepayers — to pay offthe utilities’ mounting debts.

In the meantime, separate federal court filings by Edison andthe PG&E utility have been consolidated in Edison’s pendingsuit in a Los Angeles federal district court. A hearing isscheduled for Feb. 12, State legislators are monitoring thesituation closely to determine what a favorable court ruling forthe utilities would mean in light of pending new state laws to helpbail out the companies.

The utilities, of course, are urging the lawmakers to actquickly to come up with a legislative solution avoid the prospectof the court ordering the CPUC to raise the utilities’ rates 30% orgreater to cover the added wholesale power costs and pay off theircreditors.

©Copyright 2001 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.