Bailout Update: Federal Appeals Court Appears Likely to Strike Down Edison Bailout
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Mar 05, 2002

Bailout Update: Federal Appeals Court Appears Likely to Strike Down Edison Bailout

by Harvey Rosenfield - FTCR President
March 5, 2002-- Southern California Edison reaped the benefits of the 1996 deregulation law it sponsored -- more than $10 billion in surcharges from ratepayers -- but when the energy crisis hit, Edison didn't want to bear any of the losses. So it stopped buying electricity in January, 2001 forcing the state into the power business and got Gov. Gray Davis to agree to a $4 billion bailout from ratepayers. After a firestorm of public opposition, the Legislature rejected the bailout, so Davis's puppets on the Public Utilities Commission stepped in. Violating numerous state laws, the PUC cut a deal in secret to order ratepayers to bail out the company.

The PUC and Edison got a federal district court judge to approve the bailout. PUC President Loretta Lynch thought that that was a clever way to enable her state agency to evade the California Constitution as well as the deregulation law itself, which forbids such bailouts. At a legislative hearing on the bailout deal, Lynch blurted out, "Well, actually the Commission is prevented under state law from allowing that recovery, and what we did with the Edison settlement was essentially agree to a settlement that federal law trumped state law, but the Commission on its own could not trump state law. The Commission must follow state law." (So much for Lynch's sworn oath to uphold our laws).

Edison at the time boasted that by getting a federal court sign-off, the deal couldn't be challenged by anybody "even state officials" and couldn't be reversed by the voters through a ballot initiative.

Representing ratepayers, The Utility Reform Network (TURN) challenged the deal, and the United States Court of Appeal for the 9th Circuit heard the case yesterday (Monday, March 4). As a public interest lawyer who has been at many a court hearing, my bet is the 9th Circuit throws out the Edison deal lock, stock and barrel.

The three judge panel clearly didn't buy the argument by Edison and PUC lawyers that the deal can be squared with explicit provisions of California law. They also seemed convinced that the PUC, a state agency, can't simply rewrite state law, especially since California's Constitution says it can't. Finally, even Edison's $400 an hour barristers couldn't seriously argue that a courthouse settlement can be imposed over the objection of one of the parties, which is how the dirty deed was done.

Bottom line: if ratepayers win in the Court of Appeal, the deal is history. Edison's only hope then is to win in the lower federal court on its other legal argument: that the deregulation law itself is unconstitutional, and thus the company must be allowed to recoup its deregulation losses. (That Edison executives wrote the law and profited from it doesn't discourage them from now saying it's invalid; people who have no shame usually lack a sense of irony). Edison also insists that federal law requires local ratepayers to pay its debts, an argument that one judge on the panel seemed to scoff at.

Meanwhile, just one day before the court hearing, Edison went ahead and spent $4.8 billion of ratepayers' money paying off its back debts. So winning in court means that Edison will have to come up with the money to repay its customers, with interest. How quickly will be a key question. Whatever the answer, Edison's investors are likely to do poorly until the debt to the ratepayers is repaid.

Given the import of this hearing, it was surprising that there was little coverage by the business press. Wall Street analysts seem to be unaware of the court hearing and its import. Maybe they're just waiting for the official decision. But if I were an investor, I'd want to know right now. As the Enron debacle shows, when Wall Street analysts sit back and wait for official word of bad news, it's already too late for investors.

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