San Jose Mercury News
SAN JOSE, Calif. _ Pacific Gas & Electric Co. filed for bankruptcy Friday, rejecting the governor’s desperate attempts to stabilize California’s power supply and throwing the contentious issue of electricity rates into the hands of a little-known federal judge.
The landmark move _ the third-largest bankruptcy filing in U.S. history _ propels California’s energy crisis into a new and unpredictable phase. By shifting debate to the judicial arena, it ensures that there will be no quick fix for the fragile power system and raises the risk that consumers could see steep rate increases on top of those just approved.
But at least in the near term, it will not affect service to PG&E‘s 13 million customers in Northern California, utility officials insisted.
In an extraordinary rebuke to the state’s political leadership, PG&E filed its case in U.S. Bankruptcy Court the day after California Gov. Gray Davis went on television statewide to announce his plan for rate increases to solve the problem. The company said it had amassed $9 billion in debt to energy generators since June because it was caught between its soaring costs for power and deregulation-imposed caps on the rates it could charge.
The collapse of four months of tense negotiations sparked finger-pointing and angry rhetoric as all sides sought to pin blame on the other.
“The regulatory and political processes have failed us, and now we are turning to the court,” said Robert Glynn, chairman of PG&E Corp, the parent company of the utility.
The move infuriated Davis. “I believe PG&E has dishonored itself,” he said, saying the utility was not pushed by creditors into bankruptcy. “They’ve acted in a selfish manner and from a very narrow perspective and do not have the interest of the people of this state at heart.”
Proceedings in the case begin Monday in the San Francisco courtroom of Judge Dennis Montali.
Loretta Lynch, president of the Public Utilities Commission, blasted PG&E in a statement for a decision that “cut off serious negotiations.” She also pointed the finger at the Federal Energy Regulatory Commission for failing to cap skyrocketing electricity prices in California’s wholesale markets.
PG&E filed for Chapter 11 bankruptcy protection, becoming by far the largest utility bankruptcy in history and the third largest U.S. case since the Bankruptcy Reform Act of 1978. Under that chapter, it can reorganize under the supervision of a federal judge while it is protected from creditors.
Bankruptcies among utilities are rare and this one is so large that the judge and attorneys will essentially be creating their own rules, said Samuel Gerdano, executive director of the American Bankruptcy Institute. Gerdano likened the upcoming spectacle as “one big kind of negotiating mosh pit.”
Only two other large investor-owned electricity utilities _ Public Service Company of New Hampshire and El Paso Electric Co. _ have filed bankruptcies. Nonetheless, these bankruptcies and other utility cases offer some clues about what could happen, according to Peter Bradford, a former chairman of utility commissions in New York and Maine:
- Consumers are largely unaffected on a day to day basis;
- The state remains in substantial control of rates;
- A small number of lawyers and consultants get very rich;
- The companies could emerge stronger;
- And the process will drag on for years.
News of the bankruptcy provoked mixed reactions.
Consumer groups expressed outrage that the utility voluntarily filed for protection in order to get the bailout it wants.
Harvey Rosenfield, head of the Foundation for Taxpayer and Consumer Rights, accused the utility’s parent company of siphoning off billions of dollars from the once-prosperous utility, then shielding itself from the utility as though it is a “gangrenous appendage.”
But the critics also acknowledged that having negotiations in a courtroom rather than the Capitol will force them into the open and could lead to a fairer resolution.
Some power generators welcomed the move, saying it will provide a more manageable way of dealing with the payments owed to them that the utility has defaulted on.
“Puget Sound Energy views the action as a positive move, when considering the fact that there has been no meaningful movement to address past debts owed to suppliers,” said Dorothy Bracken, a spokeswoman.
California companies, including PG&E, owe Puget Sound Energy about $40 million.
Investors dumped the stocks of both PG&E Corp. and Edison International, parent of Southern California Edison, which is continuing to negotiate with the Davis administration.
Trading in PG&E was halted temporarily Friday, then resumed. The stock closed at $7.20 per share, down $4.18. Edison International closed at $8.25, down $4.39.
Industry analysts said they were having a hard time assessing PG&E‘s financial position because it has delayed filing its annual financial report. But several agreed that it was unlikely the utility’s would be able to write off any of its debt.
In a sign that the financial problems of the power debacle could spread, both Moody’s and Standard & Poor’s revised their outlook for California’s credit-worthiness.
“The risk that was on the utilities is now on the state,” said Shannon Bass, senior vice president and portfolio manager at the Pacific Investment Management Co., a large institutional fixed-income investor.
The twists and turns that culminated Friday began last Tuesday when the Public Utilities Commission passed the 36 percent rate hike.
From PG&E‘s perspective, the rate hike was far from good news.
First, the additional money paid by consumers would flow directly to the state and the alternative power suppliers that PG&E was not paying. Second, the PUC re-wrote rules set up under deregulation and effectively ordered the utilities to use billions of dollars in profits they made from selling their own power over the past three years to reduce the amount they were owed by consumers.
“On Tuesday of last week, I called Governor Davis and told him that my finger was right next to the bankruptcy button because of actions that were being taken by his California Public Utilities Commission,” Glynn told the financial news network CNBC.
But Davis spokesman Steven Maviglio said PG&E had been saying the same thing for months.
“They’ve been telling us and reporters and everyone under the sun that they’ve been under the gun and about to file for bankruptcy since September,” Maviglio said. “There’s a credibility gap here.”
On Friday, three days after the PUC acted, PG&E held a conference call with debtors. Its chief financial officer said the company was “weighing the relative merits of bankruptcy on a day by day basis,” a source at PG&E said. That same day PG&E informed the federal Securities and Exchange Commission that it might have to write off $6.9 billion in debt because there was no reasonable chance of recovering that money.
This week, the governor’s staff attempted to re-start moribund negotiations by sending a new proposed settlement to the PG&E negotiating team. When the proposal arrived last Tuesday, the PG&E source said the state had backed off several areas of previous agreement. “After three weeks of going nowhere, now we were going backwards,” the source said.
After that meeting Tuesday, Glynn decided that bankruptcy was the best option and ordered the company’s bankruptcy attorneys to draw up the final documents.
The final decision to file wasn’t made until Thursday night after the governor’s speech.
Glynn called the governor Friday morning.
PG&E has 180 days to file a reorganization plan on which creditors will vote, but the court can extend that deadline.
It’s unclear how the utility’s parent company, PG&E Corp., will fare in the bankruptcy.
The parent company has taken great pains to rejigger its corporate structure so that it and its other main subsidiary, National Energy Group, are shielded from the financial problems of the utility. National Energy Group, which had assets of about $10 billion as of last fall, runs dozens of power plants across the country.
The PUC is looking into whether the parent company may have improperly shifted assets from its utility.
Until last summer, the bankrupt utility generated more than 85 percent of the parent company’s profits. Without those profits, the parent company may be less attractive to investors, struggle to pay dividends and generate less cash to continue to expand its new energy businesses outside California.