Edison dealt setback as merger plan dies: PUC vote against plan signals accent on competition.

Edison dealt setback as merger plan dies

PUC vote against plan signals accent on competition

California regulators last week spurned the proposed merger of the two utilities that serve Los Angeles and San Diego for several reasons. One was fear of creating a super-competitor -- a bully utility -- and that motive may speak the most about the companies' futures.

Southern California Edison Co. and San Diego Gas & Electric Co. lost out in their $2.9 billion plan to combine. The utilities could ask for a rehearing or appeal to the state Supreme Court, but success is considered a long shot.

More likely, they must continue to compete with each other and other utilities -- and that's good, according to the five Public Utilities Commission members who voted unanimously to kill the planned combination.

The utilities "failed to prove, by a preponderance of the evidence, that the merger will not adversely affect competition," said Commission President Patricia Eckert.

This was poo-pooed by several security analysts last week after the vote. They said the commission misjudged and customers will lose out: the utilities had promised cost savings and rate reductions, largely from cutting overhead and staff expenses. Some analysts said the vote does not even weaken the stock of Edison's parent company, SCEcorp, despite the $100 million that SCEcorp shareholders won't recover in merger expenses.

SCEcorp shares rose $1 to $39.75 in the two days after the vote, ostensibly because the market figured its shares won't suffer dilution now that the proposed buyout is spiked.

To prepare for their ruling, commissioners held 13 public hearings, listened to 116 witnesses and received 3,000 pages of briefs over two and a half years.

Commissioners are powerful regulators. Their landmark decision heralds future policy they may lay on Edison, which is based in the Los Angeles suburb of Rosemead and serves 4 million customers in Southern and Central California.

Commissioners named a number of markets at which Edison and San Diego must continue to compete.

A key one is control over valuable transmission facilities, which can "bottleneck" resources and be exploited to "manipulate the market to the disadvantage of competitors or consumers," according to the ruling. Anaheim and Riverside would have lost a firm transmission path to SDG&E and would have been forced to go through the merged company, the ruling said.

For a number of years, the PUC has encouraged rivalry among utilities and has encouraged independent power producers to sell into the transmission grids once monopolized by utilities.

Moving electricity to the buyer is a growth segment of California utilities, as juice generated by independents looms larger. Since 1986 independents have built more than half of the new generating capacity nationwide.

"Success in the '90s depends on transmission access and control," said analyst Patrick Keenan of Tucker, Anthony, a Princeton, N.J.-based brokerage. He likened transmitting electricity to "trying to move a whole bunch of water through a straw." Access to the straw, or owning it, is crucial.

A second market is "bulk power" -- the surplus electricity utilities sell among themselves -- which could be skewed by excess "buyer market power."

"That's bunk," said Edward Tirello, analyst with stock brokerage Smith Barney. "Together they would have squeezed prices more than separately."

Another stock analyst, Paul Wayne, downplayed that concern: "Bulk sales have a very thin profit margin anyway. The bigger profit margins are in the retail," said Wayne of stock brokerage Crowell Weedon in Los Angeles.

He said the commission is a powerful regulator, so its fear of creating a bully utility is illogical. "The PUC is still not going to let them gain excess profits," said Wayne.

Tirello predicted $41 a share for SCEcorp stock within six months, as did analyst Keenan.

"Edison's a big company. I don't think anything's going to happen to their competitive advantage," concluded Wayne.

Perhaps the clearest loss to Edison concerns selling to San Diego's 1.1 million customers. San Diego anticipates demand for electricity growing at a 2.2 percent annual rate, more than double Edison's forecast. In fact, San Diego estimates 32 percent growth in electricity demand by the year 2000. The new sales will come largely from population growth.

Edison spokesman Lewis M. Phelps declined to comment on whether losing that market would prompt policy changes. "We can't say anything until we see the decision," said Phelps, who had not received a copy at press time last Thursday.

He had previously said the mega-merger would have surprisingly micro effects to most of its 513,000 business customers.

"The outside world probably won't notice a ripple of a difference, except for their electric bills being a little lower ...," said Phelps. Lower overhead would have translated to a drop of 85 cents on a $50-a-month electric bill, Edison estimated.

However, the utility failed to convince most commissioners that rates would ease much beyond the year 2000.

There were opinions that differed with the majority ruling, prepared by the president. Commissioner G. Mitchell Wilk sided with Edison on long-term savings to customers. He also was more temperate on anti-competitive fears. "The loss of rivalry is a negative, but not one of the magnitude implied by the decision's balancing results," wrote Wilk.

A changing marketplace is evident on many fronts.

Edison officials have sponsored new electric technologies in "one of the most important priorities for us in 1990." Electric cars, motors and other low-pollution devices are hot developments in smoggy Los Angeles, an outlaw city by federal clean-air standards.

Last month, Edison and Texas Instruments officials announced joint development of an advanced solar cell. It could produce energy at only about 20 percent of the cost of competing solar technology sold today, they said.

Last year the PUC set up a regime that allows Edison to earn a profit when it uses cost-effective measures that encourage conservation.