By Hillel Aron
By Joseph Tsidulko
By Patrick Range McDonald
By David Futch
By Hillel Aron
By Dennis Romero
By Jill Stewart
By Dennis Romero
In fact, the imbalance was only a distorted glimpse at the bottom line of a single item on the IOUs’ complex ledger books. “It’s like picking out one line item on the balance sheet, and saying this is all that matters,” SCE’s chief financial officer, Ted Carver, told Dow Jones News Service last October.
Totting up the recent “undercollected” energy expenditures against the incomes of PG&E and SCE revealed that, contrary to their assertions, deregulation was nothing less than a moneymaking machine for the utilities. Under the deregulation scheme devised by the utilities and passed unanimously in 1996 by the state Legislature, PG&E and SCE have amassed approximately $21.8 billion. Much of it — $13 billion, according to an estimate by The Utility Reform Network (TURN) — was extracted from consumers forced to pay off an earlier round of bad debts the utilities incurred by investing billions in nuclear-power plants. Those megawatt megablunders are the “stranded assets” so often spoken of in the formal argot of deregulation, and those losses have been recuperated, until last month, by taking advantage of the gap between an artificially high electricity rate and the real cost of delivering power. The IOUs accumulated the rest of the staggering sums by selling some of their power plants, by making unprecedented profits on the generating capacity they hadn’t sold off, and by a one-time $5.4 billion cash infusion granted by the Legislature in return for providing residential customers a 10 percent “rate reduction.”
The IOUs, in other words, have been awash in cash. A hefty portion of that money has moved seamlessly from the regulated utilities to their unregulated parent holding companies, and from there just as seamlessly to shareholders, in the form of dividends and stock repurchases. KPMG, the accounting firm tapped by the PUC to conduct the audit of SCE, revealed that SCE’s holding company, Edison International (EIX), “does not have any revenue-generating operations. EIX is dependent upon dividends from its subsidiaries . . . Of the approximately $5 billion in dividends and transfers received from subsidiaries for the 4-year, 11-month period ended November 30, 2000, approximately $4.75 billion was attributable to SCE.” Meanwhile, during that same span of time, “no significant funds flowed from EIX to SCE.” PG&E Corp., the parent of PG&E, enjoyed a similarly extractive relationship with its subsidiary. “Since the holding company was formed [in 1997], PG&E Corp. has not provided cash, credit or other financial assistance or support to PG&E,” Barrington-Wellesley Group, a management-consultant firm, found in its audit. Between 1997 and 1999, PG&E gave $4 billion to its parent, which in turn spent $2.7 billion to buy back stock and another $1.5 billion to pay dividends. BWG revealed, “In the first nine months of 2000, PG&E generated $1.8 billion in cash, of which $632 million was transferred to PG&E Corp. for common-stock repurchases and dividends.”
The holding companies also charged their subsidiaries for an extra $2 billion in taxes, according to the BWG audit and testimony last Friday before the state Legislature by Edison chief John Bryson. The parent corporations calculated what the regulated utilities owed as “stand-alone” companies, but when they paid the IRS, they filed consolidated returns for all their businesses. Conveniently, the actual tax due on a consolidated basis was less than the amount transferred up the corporate ladder. The holding companies pocketed the difference. From 1998 to 2000, SCE paid its parent slightly more than $1 billion for taxes. The total corporate taxes the parent paid were just $3 million. Edison spread the surplus among its deregulated businesses, including the cash-rich Edison Mission Energy.
“It was absolutely in compliance with the tax laws ä and the PUC rules,” Bryson told the Assembly energy-oversight committee.
Where the regulated utilities’ profits once gave the conglomerates huge tax benefits, their recent “losses” will now translate into equally large tax refunds. PG&E Corp. is expecting between $500 million and $1 billion from the IRS, and Edison is counting on a refund check of roughly $500 million.
These whopping sums flowing from the ratepayer-financed regulated utilities to the unregulated shareholder-owned parent companies are, the IOUs have argued to the Federal Energy Regulatory Commission, virtually untouchable. True or not, the upward flow has fueled unprecedented profits. Combined, since deregulation began, the two holding companies have posted $6 billion in after-tax profits.
As Senate President Pro Tem John Burton (D–San Francisco) put it, “Basically, they took the money and ran. Had they not done that, they would not be in the financial problem they’re in.”
So, are the IOUs broke? Not exactly, says TURN attorney Matt Freedman. To begin, the $12 billion in cumulative “losses” on electricity purchases, Freedman argues, must be compared with the $21.8 billion in “stranded costs” the utilities have received. This would be the normal accounting procedure SCE CFO Carver would expect. Through December of last year, Edison had $4.5 billion in electricity costs that it had been unable to pass on to customers. But on the plus side of its ledger, in the stranded-assets account, the company still retained nearly $3.4 billion. The balance, Freedman says, is $1.02 billion, roughly 75 percent less than Edison claims. The figures for PG&E, available through December, indicate a net “undercollection” of $3.76 billion, not the $6.7 billion claimed.