Staff Reporter

Edison International has essentially abandoned the newly deregulated power market, choosing instead to focus on selling ancillary services like security systems and appliance warranties.

Edison said its decision to drop out of the race to sign up new electric power customers, less than a year into deregulation, is based on too-thin profit margins.

"We do not define our business as providing electricity until the end of time," said Janine Ames, executive director of marketing for Edison Enterprises, the unregulated marketing division of Edison. "Rather, we are looking at a whole range of products and services that add value to our customers."

Edison's pullback stands in sharp contrast with its two major in-state rivals: San Diego-based Sempra Energy (comprised of the San Diego Gas & Electric utility and Southern California Gas Co.) and San Francisco-based PG & E; Corp. (the holding company for the Pacific Gas & Electric utility).

Both those companies have pursued a strategy of signing up major commercial and institutional customers, from Fortune 500 companies to school districts.

Regardless of strategy, most utility customers in the state are staying on the sidelines, opting to remain with their current providers. Only about 1 percent of the state's 10 million customers had switched providers as of Dec. 31, according to the state Public Utilities Commission.

The most movement is taking place among major industrial power users. About 18 percent of such companies statewide had switched providers as of Dec. 31, accounting for about 27 percent of the total power used by this category of companies.

Several of those companies have been signed up by PG & E; Energy Services, including Atlantic Richfield Co., Nestle Corp.'s Glendale facility, Safeway and Vons stores and Carl's Jr. restaurants.

By contrast, Edison Source, the Edison arm set up to pursue commercial and residential power customers, has only one deal to provide "green power": Toyota Motor Corp.'s U.S. headquarters facility in Torrance.

Rosemead-based Edison has not totally withdrawn from the power market. It continues to sell alternative or "green" power to residential customers. It also sells power to pre-existing customers and distributes power through its local grid. But it is has abandoned signing up new customers.

"We have limited investment dollars and we need to prioritize where those dollars are best spent," said Ames.

The decision makes Edison vulnerable to losing its existing customer base, as companies like PG & E; Energy Services and Los Angeles-based New Energy Ventures sign up new accounts in Edison's service territory.

While the defection of Edison's customers has been only a trickle so far, industry observers say it could become a flood once full deregulation hits in 2002.

"Edison is definitely lagging behind," said Arthur O'Donnell, editor and associate publisher of the San Francisco-based California Energy Markets newsletter. "They have been all over the map, trying out various strategies. First it was going after power customers, then it was these ancillary services and now it's green power. They have been behaving like dilettantes."

Edison's decision to withdraw from the power market has emerged gradually over the last several months as company executives figured that the electricity marketplace was not going to produce sufficient returns for the required up-front investments.

But industry observers suggest that's only part of the picture. They say that unlike Sempra and PG & E;, Edison never developed a coherent strategy to go after major power users and lacked a wholesale electricity-trading arm to bolster its competitive position.

In addition, both Sempra and PG & E; have acquired energy-trading companies in the last two years, a move seen as crucial to being competitive in the deregulated market.

Such companies allow utilities to buy wholesale energy in various out-of-state markets and for periods extending far into the future. By doing that, they protect themselves against regional energy price spikes and gain the ability to transfer low-cost energy to areas where regional energy prices are high.

Having those abilities is crucial to snagging Fortune 500-sized accounts, said Scott Gebhardt, president and chief executive of PG & E; Energy Services.

"A trading company is absolutely crucial," Gebhardt said. "It gives you access to large volumes of power to serve giant companies and to have risk management," he said. "Without that ability, major customers will question the reliability of your power supply."

By choosing not to acquire an energy-trading company and not signing up new commercial customers, Edison may save money in the short run, O'Donnell said, but it runs the risk of not being able to compete effectively once full deregulation takes effect in 2002.

"There is still a lot of opportunity out there and a lot of time," O'Donnell said. "Remember, 10 years after Ma Bell was deregulated, it still held two-thirds of the telecom market. Only in recent years has that significantly eroded as new players have come in."

At Edison, the focus has been elsewhere. On the consumer products side, the company has started selling residential and commercial alarm systems, home wiring warranty services and a line of appliance warranties, she said.

On the energy management side, Edison goes through a customer's facility and looks for ways to save energy. As a regulated utility, Edison for the past 25 years has provided such "energy audits" free of charge, and it continues to do so for existing power customers. But it is signing up new customers just for energy management services.

Edison does have one major success story among its unregulated businesses: Edison Mission Energy, which builds and operates power plants around the globe. Since the mid-'90s, Mission Energy has consistently been the fastest growing part of Edison International's revenue stream.

That, along with a major stock repurchase program, has kept Edison's per-share earnings on an upward track over the last year, at a time when per-share earnings at utilities nationwide have dropped between 6 percent and 7 percent.

Under the state's deregulation scheme that took effect last March 31, the three investor-owned electric utilities Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric were given four years to assess charges on ratepayers and thereby recoup their investments in nuclear power plants and state-mandated energy contracts. This so-called "transition charge" appears on every customer's bill and typically accounts for about one-fourth to one-third of the total bill.

That transition charge, because it reduces the discretionary portion of a bill that can be discounted, is effectively narrowing profit margins. And that's a major reason out-of-state providers have withdrawn from the California market.

"These companies are not being allowed to act like truly deregulated entities," said Douglas Christopher, an analyst with Crowell Weedon & Co. in Los Angeles.

Once the transition charge is lifted on Jan. 1, 2002, the utilities are, in theory, supposed to have paid off these debts and be on equal footing with other power providers, opening up the way to unfettered competition.

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