Southern California Edison boss Stephen Frank, at the center of the state’s energy problems, defends the utility’s handling of the crisis, laments deregulation

For Stephen E. Frank, the last seven months have been a whirlwind some might say a nightmare. As chairman, chief executive and president Southern California Edison, the utility subsidiary of Edison International, Frank has been at the center of the state’s electric power meltdown.

SCE has teetered on the edge of bankruptcy for two months now, as it has been unable to pass on high wholesale power rates to customers. In a crash cost-cutting effort, Frank has had to implement 1,850 layoffs. He has also had to slash overtime and curtail responses to customer complaints on evenings and weekends.

All the while, consumer advocates and politicians have sharply criticized Edison and the other utilities, saying the utilities’ greed drove the deregulation process that has gone so awry.

On Feb. 23, Edison and Gov. Gray Davis reached a tentative deal to have the state buy Edison’s transmission system for $2.76 billion, which would be applied to Edison’s debt. Details of the agreement were still being worked out late last week and the whole deal could still be scuttled if Pacific Gas & Electric refuses to agree to a similar arrangement.

Question: Very few executives have ever gone through a six-month stretch like you just have. What’s that been like for you?

Answer: It has been the most intense business experience I’ve ever had, one that has required unidimensional focus of all the senior management team here. Very long days, very long weeks and weekends, absolutely no vacations. The human toll has been difficult. The level of sacrifice among our employees has been absolutely incredible.

On a broader note, though, there is a high degree of frustration at the moment among our entire employee base. Our employees have a long tradition of customer service, deeply ingrained in the corporate culture here. When their ability to serve customers is impacted as it has been, it is very frustrating. There is also a feeling among our employees that most of this crisis could have been resolved with earlier and more decisive action.

Q: On whose part?

A: The Public Utilities Commission and the Governor, quite honestly.

Q: Does this deal you reached with Gov. Davis get Edison out of the woods?

A: Let’s keep in mind that last week was the announcement of a framework of a deal. It was a constructive step, but it was a milestone along the way, not an ending in and of itself. There is still a need to put details around the basic pieces of the framework.

Clearly, from a financial standpoint, the crisis has not changed. Our credit ratings are still in the tank. Our stock is still way below what it was prior to the onset of this situation. We are still not in a position to make payments to our creditors. And we still don’t have definition around how we will recover these huge power procurement costs that have accumulated over a six-to-eight-month period.

Q: There are those who argue that SCE and PG & E; should have gone to state officials six months ago, when the under-collections started. That would have forced the state to resolve the crisis when the debts were still small. Why didn’t you do that?

A: First of all, it was done to a certain extent. We had those conversations with the governor, with the Legislature and the PUC. This ultimately resulted in some filings we made with the PUC in September and October. You must remember, though, that this crisis came upon us very quickly. It took a couple months for us to realize that this might be a long-term problem that would extend beyond the traditional peak demand of the summer months.

Furthermore, we could not under the deregulation law unilaterally declare that we would not procure the power, even if we couldn’t pay for it. That simply was not an option.

Q: So what was the PUC’s response?

A: I have to tell you that it was our expectation when we made those filings with the PUC that we would be treated fairly and that normal costs of operations, which this is, would in fact be recoverable under the rates we charge our customers. But the PUC responded differently in this case than it had in the past, essentially denying us the ability to pass our costs on to our customers. Charging our customers more is not something we like to do, but it’s a reflection of what the price in the marketplace is. As you know, we filed suit against the PUC to overturn this decision and allow us to recover our costs from our customers. We had a favorable initial ruling, but it will take several months to resolve.

Q: For the last two months, we’ve been hearing about how close SCE and PG & E; are to bankruptcy. Is bankruptcy a viable option?

A: I think bankruptcy is a highly undesirable alternative. I say that from the vantage point of our customers and the state, not merely as an executive with the entity that would be in the middle of the bankruptcy proceedings. From the standpoint of what it says about the business climate the desirability of the state as a place to do business and the ability to attract new businesses and jobs to the state having the utilities in bankruptcy sends a very poor message.

Q: But other utilities, like the Washington Public Power Supply Co., have been forced into bankruptcy and their business climate didn’t suffer irreparable harm.

A: Agreed. But in the Washington case, that was a bad investment in a nuclear program, not an ongoing inability of the state to ensure electricity supplies. A bankruptcy here would mean an inability to attract a sizable amount of funding for new investment in power supplies in the state for a long period of time, and that’s not a position the state wants to be in.

Q: What about the issue of transferring profits from SCE that accrued from 1996 through 1999 to the parent company, Edison International? Why shouldn’t the parent company now be forced to pay SCE’s debts?

A: That’s a bogus argument. We were required at the time of deregulation to make this company smaller, to shrink it. We were required to divest ourselves of assets with the assumption that our investors would get a return on their investment. The deal at the time was clearly that the funds generated from the shrinking of the company were to go to shrink the capital base of the company. As we sold those assets off, we received money for them. Once our shareholders received the full return on their investments in those assets, any extra funds were used to repay our debts that had been incurred over time, the so-called stranded costs you’ve heard so much about.

Q: Some are also saying the utilities created deregulation out of greed, and now that the risk has gone bad, are trying to stick consumers with the tab. What is your response?

A: We hear this every day. First of all, it’s a very revisionist look at history. You don’t just start with 1996 when the deregulation law was passed. You have to go back to 1993 and 1994, when the PUC was deliberating the issue of deregulation. Consistently throughout this process the utilities said, “You should not deregulate this industry.” At the time, we were accused of being monopolies unwilling to give up power, and to some extent, those critics were right. No utility would want to give up a significant part of our business, a significant part of our ability to generate revenue for our shareholders.

In fact, the greed factor would have argued in the other direction: Don’t break us up, don’t deregulate. Keep things just the way they are.

I think a good portion of this belief that we initially wanted deregulation came from the position we took after 1994, when the details of deregulation were being worked out in the Legislature. We took an active role in shaping that system, which is what any responsible player would do. Our role was no more active than the business customer groups, the environmentalists, the independent energy producers and even the consumer activists themselves.

Q: And consumer activists’ assertion that Edison shareholders reaped huge profits at the expense of ratepayers?

A: Nothing could be further from the truth. All you have to do is look at what happened in 1994 when the PUC came out with its initial “blue book” to deregulate the industry. Edison shares plunged more than 60 percent. We spent years rebuilding our market value to a reasonable level in the mid-$20 range, only to see it all wiped out again late last year as our share price went as low as $6.25. One of the things I find most offensive about the rhetoric of the consumer activists is that they continually harp on all the benefits Edison shareholders have received. There has been no benefit to the shareholders since deregulation began; in fact, they have lost a significant amount of value. The company that had not missed a dividend payment for more than 100 years has now had to suspend those payments.