By HOWARD FINE

Staff Reporter

After being in the doghouse for several years, California's three investor-owned utilities have regained some respectability from Wall Street despite the dawning of deregulation and its inherent uncertainties.

Edison International, Enova Corp. and Pacific Gas & Electric Co., which all started to dive in 1994, posted double-digit percentage gains last year in their stock prices.

Credit for the rebound goes largely to the state Legislature, analysts say, which crafted the 1996 deregulation law to cushion the impact of open market competition on the big utilities.

"The legislation removed a major amount of uncertainty," said Danielle Seitz, an analyst with UBS Securities in New York. "That was a signal to investors that it's safe to invest in these companies again."

Four years ago, the threat of deregulation forced stocks downward. Investors were particularly concerned about nearly $30 billion in "stranded costs" investments in costly out-of-state power contracts, nuclear plants and other alternative energy projects that the investor-owned utilities had saddled themselves with in the 1970s and 1980s in response to government policies to lessen their dependency on oil.

But the deregulation law signed by Gov. Pete Wilson in late 1996 gave the utilities a four-year breathing period to recover their stranded costs by allowing them to levy a "transition charge" on all their customers. The compromise was approved even though it drew fire from some consumer advocacy groups as a ratepayer "bailout" of the utilities.

The state Public Utilities Commission, citing estimates from the three utilities themselves, expects the transition charge to generate between $25 billion and $28 billion cumulatively for all three utilities over its four-year duration.

The utilities' stock prices have also been propelled by the sale of power generating plants, traditionally the part of the utility business posing the most risk.

Rosemead-based Edison sold off its fossil-fuel power plants last fall; PG & E; has gone through one of two rounds of selling its fossil-fuel plants; and Enova has announced its intention to sell its fossil-fueled power plants as well as its 20 percent stake in the San Onofre Nuclear Generating Station.

"These sell-offs will leave the utilities primarily in the distribution and transmission business, which is a much lower risk for shareholders than the generation side," said A.J. Sabatalle, an analyst with Moody's Investor Service in New York.

But these moves have only put the three California utilities back into the middle of the nationwide utility pack in terms of stock performance, Seitz said.

In recent weeks, stock prices of the three have leveled off. Analysts say investors still have some concerns about the ability to turn a profit in the upcoming deregulated marketplace.

One issue centers on a December state Public Utilities Commission ruling that the utilities' unregulated retailing arms PG & E; Energy Services, Edison Source and Energy Pacific can only tap into their parent companies' billing and computer resources if they pay market rates for those services.

The ruling was designed to create a level playing field with competitors. But there is concern that the pendulum has swung too far the other way, and that the power retailing affiliates could now be at a disadvantage against well-capitalized national players like Houston-based Enron Corp., whose California operations do not have to pay market prices to use their parent companies' resources.

"This decision ties the hands of the utility affiliates in that it locks them into a higher cost structure than competitors like Enron will face," said Douglas Christopher, an analyst with Crowell Weedon & Co. in Los Angeles. "This would be of concern to investors, since it would impact earnings potential for these three units."

The other concern is longer term and holds much more risk for investors: how are the utilities going to reinvest their proceeds from the transition charge and from the sale of their power-generating assets?

All three California utilities have made several new investments in recent years in anticipation of deregulation.

Edison, through its Irvine-based Mission Energy subsidiary, has been investing billions of dollars in overseas power projects.

Through most of last year, that effort seemed to be paying off: Mission's earnings had been the biggest positive contributor to Edison's bottom line.

But if the financial crisis in Asia drags on, it could delay work on some of Mission's biggest projects, including the multibillion-dollar Paiton power facility in Indonesia. While this project is 75 percent completed and is being funded in dollars and not in Indonesian currency, investors have expressed concern about whether there will be enough money to complete the work.

PG & E; is casting its dice on the domestic market. Last fall, San Francisco-based PG & E; announced it was buying the non-nuclear generating plants of New England Electric System for about $1.6 billion.

Meanwhile, San Diego-based Enova is planning to merge with Los Angeles-based Pacific Enterprises, the parent of the Southern California Gas Co. If approved, the merged entity, to be called Sempra Energy and be headquartered in San Diego, would have the largest customer base in the state.

Enova and Pacific Enterprises have formed an energy services unit in Los Angeles called Energy Pacific, which has already made investments in natural gas infrastructure in Mexico.

With the exception of Edison's Mission Energy unit, most of these investments have yet to pan out, Seitz said.

Nonetheless, she said, California utilities are in a relatively good position compared to those in some other states now moving toward deregulation, such as Illinois and Pennsylvania.

"In those states, there is a lot of confusion and wrangling right now over just how much of the stranded costs the utilities will have to bear," she said. "It appears that they will have to absorb at least some of the costs, and the utilities are preparing writeoffs."

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