California’s largest utility files for bankruptcy

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Contra Costa Times

WALNUT CREEK, Calif. _ California’s 11-month-old electricity crisis took a dramatic turn Friday when the venerable Pacific Gas & Electric Co. unexpectedly filed for bankruptcy, stunning state officials, consumers and investors.

The move will not have an immediate effect on electricity bills or change the bleak forecast for blackouts this summer, experts said. “Outages are virtually inevitable,” said Gordon Smith, the utility’s chief executive.

However, the third largest bankruptcy in U.S. history did throw the state’s cascading energy crisis into a period of deeper uncertainty. A Southern California Edison executive said the move raised the risk of bankruptcy at his company. SoCal Edison shares fell 35 percent on Friday, nearly matching the 37 percent drop in PG&E stock.

PG&E‘s decision to pull the plug came the morning after Gov. Gray Davis, following months of resistance, used a rare statewide television address to announce his support for a rate hike. Davis also promised that if the utilities met certain conditions, he would back $8 billion in bond financing to help them recover losses incurred since last summer.

But just 15 hours later, PG&E walked away from the governor’s outstretched hand and consigned its future to a federal bankruptcy judge. The company said a series of orders from state regulators during the last two weeks worsened company finances, and that negotiations with Davis were stalled.

“The regulatory and political processes have failed us, and now we are turning to the court,” said Robert D. Glynn Jr., chief executive of PG&E Corp., the utility’s parent company. “We expect the court will provide the venue needed to reach a solution. That’s why we made the choice.”

Utility executives said they expect to continue distributing electricity and natural gas, but stressed that it is up to the state to figure out how to find and pay for enough power to keep the lights on.

Word of the utility’s financial capitulation reverberated throughout Northern California, where the giant utility has been a central part of the state’s political and economic fabric for more than a century. The bankruptcy marked the latest economic setback in a region that only a year ago was an emblem of national prosperity.

Davis expressed disappointment. “Pacific Gas & Electric Co. has dishonored itself,” he said in a written statement. “This action was unnecessary. They’ve caused undue alarm.

PG&E was not pushed into bankruptcy, but plunged themselves into bankruptcy for their own strategic advantage_not the best interests of the people of California,” Davis added.

Loretta Lynch, president of the Public Utilities Commission, called PG&E‘s move, which came 10 days after the PUC approved a 42 percent rate hike, a calculated business decision. “The company was hoarding cash to the tune of $2.3 billion to execute their bankruptcy strategy,” she said.

Although the possibility that the utility could be forced into bankruptcy had been discussed for months, the move was startling.

“The passing of an individual you know is going to pass is still really shocking,” said Richard Cortright, an analyst for Standard & Poor’s, the New York credit rating firm.

PG&E executives emphasized that the utility’s bankruptcy would not affect the financial health of PG&E Corp., the holding company, or related affiliates. That claim is likely to be challenged by creditors.

Some saw the move as a step toward resolution of the state’s energy crisis. “I’m relieved,” said Gary Ackerman, director of the Western Power Trading Forum, a group of energy generators and marketers. “We’re moving on to the next phase, which will be more structured, more ordered, and definitely more lawful.”

One state official also saw the move as positive.

“It allows us to spend our time figuring out how to keep the lights on, as opposed to figuring out how to pay the generators,” said Treasurer Philip Angelides. “Frankly, from where we’ve been, it’s a step up.”

Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights, said PG&E was a victim of a flawed deregulation plan that the company designed and accepted. But he mostly blamed energy generation companies and marketers. “They’ve brought PG&E to its knees in deregulation, now they are gunning for the rest of the state,” Rosenfield said.

Friday’s filing culminated a financial tumble that began in mid-2000, about two years after the company started selling off its in-state generating facilities and buying power wholesale from the new owners. Retail rates were frozen above expected costs in order to provide a windfall to PG&E, but the utility instead hemorrhaged money when wholesale prices shot up. PG&E said it incurred $8.9 billion in wholesale electricity costs since last May, which it has been unable to bill to customers.

Utility executives said that talks with the governor on a bailout began last November. They said they reached three separate agreements with negotiators but each deal fell apart.

Steve Maviglio, Davis’ spokesman, said there were agreements but they were dropped after due diligence_a review of the details_showed that they were bad deals.

“We were not willing to roll over . . . for the utility,” he said.

In January the utility defaulted on terms of some of its loans but analysts warned that money would be more quickly forthcoming from a political solution than a bankruptcy proceeding. Creditors opted against forcing the company into involuntary bankruptcy.

An analyst said that problem remains. “This bankruptcy is likely to drag on for many, many years,” said Cortright, of Standard & Poor’s.

One avenue of relief for the utility could be its lawsuit in federal court seeking to force state regulators to allow the company to recover the $8.9 billion in losses by billing ratepayers. Those lawsuits are still pending. Davis had insisted that those suits be dropped as a condition of any bailout.

But short of a federal court win, utility executives and analysts said that bankruptcy makes the best of a bad situation, at least for the utility and its creditors. Chapter 11, which allows a debtor under a judge’s supervision to work out a deal with creditors, moved the utility’s finances from “total disarray” into an “orderly process,” said Susan Abbott, a managing director at Moody’s Investor Services, a New York credit rating firm. Many of PG&E‘s creditors may come out the other end with most of the money they put in, she said.

Still, stock prices of PG&E‘s creditors, including large banks and generators, slipped Friday.

PG&E executives said that they sought refuge in bankruptcy only after weighing the lack of progress in negotiations, onerous financial rulings by the PUC and the danger that they might be liable for more than $300 million a month in wholesale electricity purchases by the operator of the transmission grid.

But Smith, the utility CEO, acknowledged that the move carried risks. “A reorganization filing is by nature a fluid and uncertain one,” he said.

Much of the risk falls to owners of the utility’s common stock, who go to the end of the line among those with claims on the company’s assets. For those shareholders “there’s not going to be much left at the end of the day,” Cortright said.

Consumer Watchdog
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