Utilities' cash shifts please markets, anger customers

The financial juggling act, documented in state-ordered audits of the utilities, has reinforced the perception that Southern California Edison and Pacific Gas and Electric wouldn't be so destitute if they had hoarded the cash that they accumulated between 1996 and 1999.

Instead, the corporate parents used the money to pay shareholder dividends, prop up their share prices with stock buybacks, and finance promising out-of-state businesses that probably won't be disrupted even if their poor corporate cousins go bankrupt.

"It's quite clear that the parent companies vacuumed out the utilities and siphoned out all the wealth so they could put it where they thought it would be safe," said Nettie Hoge, who heads The Utility Reform Network, a harsh critic of the utilities' accounting.

Concerned that Edison and PG&E may have outfoxed regulators, the California Public Utilities Commission may open an investigation into how the holding companies shifted around their assets.

The PUC also told the utilities the burden would be on them to show they didn't violate decades-old rules that allowed them to set up the holding companies only if it didn't hurt customer service.

Commissioners decided Thursday to wait another week before deciding whether an investigation is warranted, and put off most of its other power crisis related actions at the request of state lawmakers who are pursuing their own remedies.

PUC Commissioner Carl Wood suspects the inquiry will lead to the conclusion that Edison and PG&E executives behaved like opportunistic capitalists taking advantage of a newly deregulated market.

"It's easy to understand why everyone seems to get outraged and wonders who was watching the store while all this went on," Wood said. "But what people are forgetting is that the store wasn't being watched by design."

The holding companies maintain they simply followed the rules spelled out in the deregulation law. They say they did nothing more than give shareholders a fair investment return and characterize the complaints as misinformed grandstanding.

"We have absolutely nothing to be concerned about," said Tom Higgins, an Edison International senior vice president. "(The PUC) has looked at this issue time and again and found nothing wrong each time, so let them look again."

The PUC's examination likely will focus on the firewalls that Edison and PG&E built to insulate their thriving unregulated businesses from the financial meltdown of the utilities.

Hoping to inoculate their unregulated businesses from the utilities' financial misery, both Edison and PG&E separated the companies into distinct entities using a complicated technique known as "ringfencing." The technique makes it difficult to seize their assets or profits to pay the bills of affiliated companies.

Edison's main unregulated business is the Mission Group, which owns 57 power projects around the world, as well as a marketing division that buys and sells power. PG&E's main unregulated arm is the National Energy Group, which is engaged in a range of power-related businesses, mostly outside California.

The corporate parents have coddled these unregulated businesses in recent years because they can freely expand into other markets and don't face the same limitations governing utilities, said Standard & Poor's analyst Peter Rigby.

From 1997 through 1999, PG&E invested $838 million in its unregulated subsidiaries and provided nothing to the utility, according an audit by the Barrington-Wellesley Group.

During that same time, PG&E's utility paid its holding company $4 billion, the audit said. The utility sent another $632 million to PG&E during the first nine months of 2000, according to the audit.

Consumer activists believe the money taken from the utilities and spent on the unregulated businesses should be factored into a proposed ratepayer-backed bailout under consideration in the Legislature.

"Ratepayers should not be asked to dig into their pockets when the companies aren't willing to dig into theirs," Hoge said.<