For Edison International, it's been a long hot summer in more ways than one.
Last month's record-breaking heat wave strained the Rosemead-based energy giant's operations, exposing vulnerabilities in both the power grid of utility subsidiary Southern California Edison and its overall power supplies.
Now Edison is bracing for a storm of consumer backlash as the bills come in for the record power usage during the heat wave. The bills were high even before the heat struck, as Edison had implemented a 15 percent rate hike to offset the rising cost of natural gas. In an attempt to forestall further outrage, the company successfully postponed another rate increase from August to November.
The company is also watching intently in Sacramento as politicians negotiate the fate of a greenhouse gas emission reduction bill that could hit the company hard. Environmental pressure and regulations have already prompted Edison to junk its investment in a major coal-fired power plant in Nevada and ramp up its supplies of power from renewable resources.
Meanwhile, Edison subsidiary Mission Energy is grappling with problems of its own, including unplanned shutdowns of a major power plant in Pennsylvania. And all this comes amid a Public Utilities Commission investigation into the falsification of customer service records that could force Edison to pay a $100 million fine.
Through it all, Edison's financial and market performance has been lackluster, with second quarter earnings coming in slightly below expectations and a stock price that has yet to recover to its January highs.
Edison last week reported net income of $177 million (54 cents per share) in the second quarter, down 12 percent from $201 million (61 cents) in the second quarter of 2005. About $56 million in losses from the Edison Mission Group subsidiary were largely to blame. Mission is based in Irvine but operates plants all over.
However, Edison executives in the second quarter had warned of bumpy times, so analysts were not caught off guard by the drop in earnings from second quarter 2005.
Edison's stock price had already been in steady decline from a high of $47 a share in January, bottoming out at $38 in July. It has since rebounded to $42 as investors are convinced that the company's financial performance should improve in the second half of 2006.
"There are some signs that things are trending better for Edison than their original guidance," especially power prices, said Douglas Fischer, equity research analyst at A.G. Edwards & Sons Inc. in St. Louis.
Indeed, last month's heat wave could have one silver lining for Edison: power grid operators in other parts of the country are hungry for more power supplies, which could help Mission Energy recover from losses earlier this year.
Closer to home, though, the situation is more urgent.
In an earnings conference call with investors last week, Edison chairman and chief executive John Bryson said that during what he termed the recent "heat storm," customer power use peaked at 4 percent higher than 2005's record and 10 percent higher than 2004.
He said the heat wave was only one factor. Edison's fastest customer growth is occurring in inland regions that tend to have high power usage. What's more, residential customer usage has jumped thanks to all those power-hungry big-screen televisions and larger homes that take more energy to cool. (The standard measure of energy use had to be recalibrated: five years ago, one megawatt was enough to power 1,000 average-sized homes, but now it powers only about 650 homes.)
"In just two years, peak demand has grown by close to the total generating capacity of our largest generating station at the San Onofre nuclear plant. So for planning purposes, we're facing a challenging situation," Bryson said.
As a result, Edison intends to ramp up additional power generation capacity, including two natural gas-fueled plants in the Southern California area that add electricity to the grid during peak usage periods. And earlier this month, the California Public Utilities Commission approved Edison's request to buy up to 1,500 megawatts of additional power supplies over the next 10 years.
The heat wave also knocked out aging transformers, plunging thousands of Edison customers into darkness with no air conditioning. Of course, not only Edison transformers blew; virtually every electric utility in the state including the Los Angeles Department of Water & Power had transformer problems.
Bryson tried to put the problem in perspective, noting that only 0.2 percent of Southern California Edison's 700,000 transformers failed. He also noted that Edison is spending $2 billion per year to upgrade its power infrastructure, including scheduling the replacement of 12,000 transformers in 2006. Southern California Edison serves most of Los Angeles County outside of the city of L.A., in addition to surrounding areas.
Of course, all this additional maintenance, combined with higher natural gas prices, means Edison has sought more money from ratepayers to cover its costs. Late last year, Edison won PUC approval for a 15 percent rate hike, which took effect Jan. 1. This spring, Edison sought and won approval for another 2 percent rate hike to take effect on Aug. 1.
But late last month, Edison sought PUC permission to postpone the rate hike. "We concluded that putting (the increase) into place on August 1 would not be as good for our customers as deferring it into the fall. So we asked for the deferral," which was granted, Bryson said.
Maintenance is not the only issue Edison is confronting in California. There's increasing pressure for the utility to "go green," and obtain as much power as possible from non-fossil fuel sources.
Back in 2003, California passed a law requiring the three major investor owned utilities to have 20 percent of their power supplies from wind, geothermal, hydro and other non-fossil fuels by 2017. That deadline has been moved up by Gov. Arnold Schwarzenegger to 2010.
As a result, Edison has greatly boosted its investments in alternative fueled power sources, which now account for nearly 17 percent of the utility's portfolio.
Among the projects is a landmark deal with BP Plc at its Carson refinery to turn petroleum coke into hydrogen that can then be used to power a turbine for a 500-megawatt power plant. Southern California Edison also inked a deal one year ago with Phoenix-based Stirling Energy Systems to develop a 500 megawatt to 850 megawatt solar power project in the Mojave Desert.
And Edison has made a big push into wind power, building and buying wind turbines both in California and across the nation. "Wind is where most of the action is in alternative power these days, because it's the one that has the most viability," said Fischer, the analyst.
Edison also moved to end its investment in a coal-fired power plant in Laughlin, Nev., despite the fact that it was one of the cheapest sources of electricity for the utility.
But Edison may have to dramatically increase its pursuit of alternative fuels if legislation to curb carbon emissions from industry passes in Sacramento. As the Legislature returned from its summer recess last week, negotiations stepped up between Assembly Speaker Fabian Nu & #324;ez, who is carrying the legislation, and Gov. Schwarzenegger. At issue is what flexibility companies should have in implementing carbon emission reductions.
Last month, Edison publicly pledged to work with the two sides to developer a "workable climate change policy" that would not harm the California economy.
Another big issue Edison is facing is its Mission Energy subsidiary, the unregulated power development arm of Edison. Most of the trouble centers on a string of outages at the Homer City power plant Mission owns and operates in Pennsylvania. An extended outage caused by a transformer failure at one of the Homer City units earlier this year crimped earnings from the traditionally profitable plant. The unit came back on line May 5, only to go down again this month. The outages not only reduced power sales, but also led to increased insurance and tax costs.
The latest outages unnerved some analysts; during the earnings conference call, Edison executives sought to assuage concern by saying things would be back to normal within a day or two. Of greater impact to Mission's bottom line was the decision to refinance bonds before interest rates climbed too high. That led to a one-time, $88 million tax charge during the second quarter.
Key Milestones Ahead
In the near term, analysts have their eyes on a planned power auction next month in Illinois. Edison's Mission subsidiary is expected to be a major bidder and could reap substantial contracts that would help offset the unit's weak second quarter performance.
Closer to home, Southern California Edison officials have moved up by one year the planned launch date for a controversial initiative to install so-called advanced meters that would allow the utility to sell power by the hour to customers. The aim is to charge more for power used during peak periods, thereby encouraging conservation.
"It will assist both our customers and overall system reliability," Bryson said.
But that would mean that on the hottest days, customers would face even higher bills unless they turned off their air conditioners, and some have expressed concern that cost-conscious elderly customers would do just that and put themselves at risk for heat stroke or even death.
Edison had initially planned to start installing these meters in 2009, but now that rival utility Pacific Gas & Electric has begun installing them, Bryson announced to investors last week that Edison was seeking to move up the meter installation to early 2008.
How well it will go over with customers is questionable, especially given that PUC investigation into allegations that Edison employees doctored customer service reports to make them look better than they actually were. Those allegations first surfaced two years ago when Edison revealed the results of an internal investigation.
Since then, according to Edison spokesman Gil Alexander, Edison has disciplined 36 employees, named an ethics officer and is putting each of the utility's 16,000 employees through extensive training.
But that's apparently not enough for state regulators. In a preliminary report last June, Public Utilities Commission staff recommended that Southern California Edison pay more than $100 million in fines and penalties for what the PUC termed pervasive fraud and manipulation, possibly extending into management circles. Alexander said Edison officials are cooperating fully with the PUC investigation.
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