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SAN FRANCISCO — State power regulators on Tuesday settled a suit by Southern California Edison, allowing the utility to pay its estimated $3 billion debt in part by retaining record rate hikes levied on customers this spring. 

The agreement comes a week before the state Legislature was scheduled to reconvene under orders from Gov. Gray Davis to construct a rescue plan to help Edison pay its debts and avoid following Pacific Gas and Electric Co. into bankruptcy. 

Davis canceled the special session Tuesday afternoon. 

“Their settlement has protected the public interest and will allow the state’s second-largest utility to return to financial health,” Davis said in a written release. 

Consumer groups called the agreement a “bailout” and said the state Public Utilities Commission had failed Californians by conducting negotiations in secret rather than allowing lawmakers to publicly hash out how Californians would be affected. 

“They just bailed out Edison. These unelected officials appointed by Gray Davis did what the Legislature refused to do, and in secret agreed to order the ratepayers to bail out the company that brought us deregulation,” said Harvey Rosenfield, president of the San Diego-based Foundation for Taxpayer and Consumer Rights. “Now we have to pay off Edison’s losses to protect its shareholders.” 

The PUC countered that by helping Edison pay its debts, the utility will be able to restore its good credit rating and once again buy electricity, helping the state begin pulling away from its role of power-buyer. 

“Until we can get the Federal Energy Regulatory Commission or the courts to say that the debts are unreasonable, we need to pay the debt to keep Edison out of bankruptcy,” said PUC President Loretta Lynch. “I think that this is a balanced compromise, but clearly it does allow ratepayers to pay off some of the back debt.” 

Under the settlement, Edison will release the PUC from all claims in its suit, and will withdraw any challenges to other commission decisions related to the energy crisis. 

Tuesday’s settlement requires Edison to: 

— Use its available cash and incoming revenue to pay roughly $3 billion in debt. 

— Not pay dividends on its common stock through 2003, or earlier if it pays its debts in full. The PUC can determine whether to prevent it from paying its 2004 dividend. Edison can resume paying dividends in 2005. Edison shareholders will forego at least $1.2 billion in dividends, the PUC estimates. 

— Spend 100 percent of any refunds issued by FERC, or money obtained from suits against power sellers, on paying its debts. 

Ron Olson, an attorney for Edison, urged U.S. District Judge Ronald S.W. Lew to quickly approve the settlement, saying creditors are trying to force the utility into involuntary bankruptcy. He also said the settlement would be fair to the company’s shareholders. 

The settlement stems from a suit filed by Edison against the PUC in Los Angeles federal court in November 2000, in which Edison claimed the PUC’s refusal to raise electric rates in light of soaring power costs violated federal law and was an unconstitutional taking of property. 

Los Angeles County, which is Edison’s second-largest customer base, and San Francisco-based consumer advocate The Utility Reform Network both are parties to the suit, and Lew gave them until 4:30 p.m. Wednesday to file any objections. 

Edison and the PUC then would have to reply to their arguments by Thursday morning, Lew said. 

“It’s a $3.3 billion bailout they negotiated in secret and approved without public notice, which suggests they are ashamed, as they should be,” said Michael Strumwasser, an attorney representing TURN. 

Since January, the state has spent nearly $9 billion buying power on behalf of Edison, PG&E and San Diego Gas and Electric customers after high power costs they were unable to collect from customers due to a rate freeze pushed them into debt. Their credit ratings plummeted, rendering them unable to buy their own power.