A year into bankruptcy: Did PG&E choose wisely?

By Karen Gaudette The Associated Press
Friday April 05, 2002

SAN FRANCISCO — It was April 5, 2001, and Gov. Gray Davis was assuring millions of Californians watching the evening news that the state was coming to grips with its energy crisis. 

The next morning, Pacific Gas and Electric Co. filed for bankruptcy, rejecting the governor’s closed-door efforts to use state money to keep the lights on while paying off the ballooning debts of California’s largest utilities. 

PG&E preferred the shelter of bankruptcy court, where it has asked a federal judge to approve a corporate restructuring that would free it from the state oversight it blames for reducing the 97-year-old utility’s credit to junk status. 

Southern California Edison announced a different path to solvency days later — a deal secretly negotiated with the Davis administration that ultimately passed its billions in debts on to ratepayers and shareholders. 

A year later, it’s still not clear which utility’s choice was wiser when it comes to their long-term health. In the short term, both utilities remain months away from regaining good credit, but their parent companies seem healthy — Edison International earned $1 billion in 2001 and PG&E Corp. reported earnings of $1.1 billion, bouncing back from major losses the year before. 

But Wall Street analysts say PG&E’s strategy still makes good business sense, given California’s continuing confusion over how to emerge from its failed experiment in energy deregulation, which plunged the state into rolling blackouts and left a $6.1 billion hole in the state’s general fund. 

California lawmakers and regulators have made so many missteps that Standard & Poor’s said the farther PG&E can get from state oversight, the speedier it will regain its good credit, said Richard Cortright, a utility analyst with the credit rating agency. 

Although SoCal Edison paid most of its creditors in February and is on course to regain its good credit, its future remains tied to what Cortright calls the state’s “harsh” regulatory environment. 

And though Edison International’s stock price has recovered from a low of near $7 to more than $16, PG&E has fared better on Wall Street — PG&E Corp. shares were trading at $22 Thursday, up from a low of $6 the day it filed for bankruptcy. 

PG&E has asked U.S. Bankruptcy Judge Dennis Montali to let it redesign the entire structure of its operation, a process described in a reorganization plan the size of a phone book and defended by a team of $475-an-hour attorneys. 

The utility wants to shift most of its California operations into three new companies regulated only by federal agencies, which have been far less aggressive when it comes to protecting consumers. Pipelines and power lines would move under the umbrella of its parent company, PG&E Corp., along with the Diablo Canyon nuclear plant, dozens of hydroelectric dams and surrounding land in the Sierra Nevada. 

Under federal regulation, the company could more easily charge market rates for its services, borrow more money to pay its $13.5 billion in debts, and resume buying electricity directly for its customers — all, it claims, without a rate increase. 

The Utility Reform Network, a consumer watchdog group, counters that PG&E’s plan actually would cost consumers a total of $20 billion more for electricity over the next 12 years, or about $100 more a year for a typical residential customer. 

First, PG&E must convince an already skeptical Montali that federal bankruptcy code allows it to disregard dozens of state laws and regulations, including a California law that bars the sale or transfer of power plants until 2006. 

“We continue to believe that we have the only feasible solution,” said Ron Low, PG&E spokesman, adding that the California Chamber of Commerce and California Taxpayer Association both back the utility’s reorganization plan. 

Like Edison, PG&E would settle its debts. Unlike Edison, it no longer would have to wrangle with state regulators over how much it can earn from the electricity it churns at its power plants, and its parent company would gain more freedom to parlay assets into billions of dollars in cash. 

Most large creditors have supported PG&E’s plan in court, while opponents include consumer groups, state officials and the Public Utilities Commission, which will soon offer its own reorganization plan that would maintain state oversight. 

Montali hasn’t ruled out PG&E’s approach, but he put the burden on the utility to prove that public health and safety won’t be harmed if it disregards state laws. After all, he noted, a bankrupt liquor store could not expect the court to let it sell liquor to minors to escape debt. 

If the judge settles on some other way of paying off PG&E’s debts, the utility will have spent $150 million on lawyers and be stuck with the stigma of having been the fifth-largest bankruptcy in U.S. history. 

Severin Borenstein, an energy expert at the University of California, Berkeley, doubts Montali, who has had to rapidly absorb the scope of California’s energy woes while deftly juggling the bankruptcy case, will approve PG&E’s entire wish list. 

“Whether it’s good public policy or not, I think the bankruptcy judge is going to be more inclined to take smaller steps than going to something that could be a fairly major change,” Borenstein said. 

Whatever the resolution, ratepayers have the least to gain. Montali’s first duty is to ensure creditors get paid, not worry about higher power bills for Californians. 

“They shot for the moon and anything they get short of that will make them pretty happy,” said Nettie Hoge, TURN’s executive director. “It’s just so discouraging ... Deregulation has just been a failure on so many levels.” 


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