PG&E, Edison and S&Ls Share a Similar Dilemma.

FIRST there was a surge in market rates. Then companies found themselves unable to cover their costs. Billions of dollars in losses quickly followed.

This scenario largely describes the savings-and-loan debacle of the 1980s, S&Ls ran aground financially after interest rates on deposits rose far higher than the rates they charged on fixed-rate mortgages made years earlier.

It also helps explain why PG&E Corp. and Edison International were the only companies in the Standard & Poor's Utility Index to drop during the third quarter, when the indicator had its biggest gain in more than 13 years.

The owners of California's two largest utilities have recorded more than $4.2 billion in losses since May because they couldn't charge enough to pay for the electricity they purchased at wholesale prices.

As a summer heat wave hit California, power costs for the utilities -- Pacific Gas & Electric Co. and Southern California Edison Co., respectively -- rose as much as sixfold from a year earlier. They far exceeded rate limits established when the state deregulated the utility industry in 1996.

PG&E and Edison might need a multibillion-dollar public bailout if the losses continue, the Wall Street Journal reported last week. That's what the S&Ls received in the end, and it cost taxpayers tens of billions of dollars.

"California consumers have a legitimate need for California's utilities to remain solvent, and the state must be committed toward that end," Edison quoted Gov. Gray Davis as saying in a statement.

The statement didn't make reference to any bailout, though. Instead, the company expressed support for the governor's efforts to revamp what its top executive, John E. Bryson, called a "badly flawed" wholesale market.

Edison was the third quarter's worst performer in the S&P utility index. Shares of the Rosemead-based company lost 5.7 percent in the quarter. PG&E, based in San Francisco, fell 1.7 percent.

The declines contrasted with the index's 31-percent surge, stemming largely from gains among shares of power producers and natural-gas distributors. The index hadn't risen that much in a quarter since at least the fourth quarter of 1987.

Even Sempra Energy, the owner of San Diego Gas & Electric, managed to rise. The stock gained about 22 percent even though the state's utility regulators set limits on electricity rates for the utility's customers through next year.

Falling again

PPL Corp. gained more than 90 percent to lead the index's advance. Shares of seven other utilities rose at least 50 percent: Reliant Energy Inc., ONEOK Inc., Constellation Energy Group, Duke Energy Corp., PECO Energy Co., Pinnacle West Capital Corp. and AES Corp.

For many of these companies, rising electricity prices meant higher earnings from power sales. Reliant, for example, said last week that net income for the third quarter would exceed analysts' estimates by 25 percent to 30 percent.

Others benefited from higher prices for natural gas, used by many plants to produce electricity. Gas futures more than doubled this year on the New York Mercantile Exchange.

Edison, by contrast, delivered bad news about earnings in March. The company said this year's profit would fail short of estimates because of a drop in U.K. electricity prices. Edison Mission Energy, a power-plant unit, bought two U.K. plants last year from PowerGen Plc for $2 billion.

The company's shares tumbled 30 percent on the day of the warning. While the stock erased that loss in the next six months, it fell anew as the effects of higher power prices came to light.

"The company still has much to prove in terms of regaining investor confidence," Edward Tirello, an analyst at Deutsche Banc Alex. Brown, wrote last week when he lowered his investment rating to "market perform" from "buy."

Tirello already had a "market perform" rating on PG&E.

California utilities purchase wholesale power from two statewide organizations, the California Power Exchange and the California Independent System Operator. The prices they charged rose at the same time as futures prices and the increases took a toll on the finances of Edison and PG&E.

Losses mounted even though the operator, which runs the state's power grid, put limits on wholesale prices. The cap was set at the equivalent of 75 cents per kilowatt-hour, and lowered to 50 cents on June 28 and to 25 cents on Aug. 1. The operator is seeking approval from the Federal Energy Regulatory Commission to extend its authority to impose the cap.

In a Securities and Exchange Commission filing last week, Edison said Southern California Edison collected $1.97 billion less than it spent to buy electricity between May and August. The company expected the shortfall to widen in September, and said it may have to take a charge for any costs it can't recover.

Southern California Edison paid an average of 17 cents per kilowatt-hour during August, said Jim Scilacci, the unit's chief financial officer. That's about six times the normal price of 3 cents per hour, he said. Under the rate freeze, it can't charge more than 10.1 cents on average.

Outlays surpassing collections

Pacific Gas & Electric paid even more: An average of 18.7 cents per kilowatt-hour, according to an SEC filing by PG&E last month. The price was more than four times the 4.1-cent figure for August 1999.

The utility could only charge 5.4 cents per hour to cover these costs because of the freeze, the filing said. Outlays for power surpassed collections by $2.2 billion as of Aug. 31. The filing also cited the possibility of a charge if it can't pass along the costs eventually.

"This could just be one restructuring," said Al Polit, an analyst at Brandes Investment Partners LP, one of PG&E' s largest institutional investors.

David Wilson is a columnist for Bloomberg News.