After three years of haggling, Southern California Edison paid Chevron $350 million on Wednesday to settle a $1.3-billion suit filed by Chevron over Edison's early termination of a 10-year oil supply contract.
In addition, Edison and Chevron signed a new oil supply contract under which Chevron will supply Edison with oil on short notice at market price. Under the contract, the Rosemead-based utility will pay Chevron $9 million a year for 10 years, said Richard H. Bridenbecker, Edison vice president for fuel supply. That sum will be offset by savings in inventory costs, he said.
Edison will ask the California Public Utilities Commission to include the costs of the settlement and the oil supply agreement in customer rates, Bridenbecker said.
The size of any increase in customers' bills will depend on how much the PUC decides to include in the rates and over how many months the temporary increase is spread, he said. Edison collects more than $4 billion a year in revenue from its customers, so "this is a small fraction of that when allocated over time," he said.
"The agreement is beneficial to Edison customers and is fair to Chevron," Southern California Edison Chief Executive Howard P. Allen said in a statement.
"If we had not terminated the contract, our customers would have paid in excess of $1.3 billion more for electricity," he said. "With this settlement, our customers come out $950 million better than otherwise would have been the case."
Russ Johnson, an attorney representing Chevron in the case, said the settlement "is reasonable and it gets the two companies back doing business. . . . It's nice to see it concluded."
Chevron said the settlement will boost earnings but by less than $350 million. A portion of that sum already has been included in company revenue because a settlement was anticipated. There also will be "a substantial income tax bite," a spokesman said. Chevron's first-quarter earnings totaled $354 million.
Bridenbecker said that Edison felt that it could defend its reasons for terminating the contract but was unwilling to risk placing the complex case into a jury's hands when $1.3 billion in damages was at stake.
Chevron was Edison's primary oil supplier in the 1970s, and Edison was one of the largest oil consumers in the nation.
The 10-year contract over which Chevron sued was to run from mid-1976 to mid-1986. Chevron built a refinery in Rosemead to provide Edison with 40 million barrels a year of low-sulfur oil at a formula price.
Gas Less Expensive
But in the early 1980s, natural gas became plentiful and therefore less expensive, while the cost of oil began to rise, Bridenbecker said.
In 1976, the formula price under the contract was about $12.50 a barrel and was about the same as the open market price. During the first five years of the contract, the formula price remained below the market price and Edison saved nearly $135 million.
However, the formula price rose to roughly $42 a barrel by 1982, while the open market price was about $37 a barrel, Bridenbecker said. "But the primary reason we stopped buying (the oil) was because we didn't need it," he added.
Edison canceled the contract in early 1982 and Chevron sued for breach of contract.
Chevron and Pacific Gas & Electric Co. settled a similar suit last year for $122 million. The PG&E contract was about one-third the size of the Edison contract, Johnson said.
Edison will continue to buy natural gas to generate electricity as well as excess power from other utilities, but the abundance of natural gas supplies will disappear in the next few years, Bridenbecker said. "We need to have access to oil" to avoid electric power shortages, he said.