Utility Environment Report

While Pacific Gas and Electric’s chief executive says the utility’s plan to reorganize as part of its bankruptcy recovery plan will assure customers of stable rates and allow the company to emerge from bankruptcy without a state bailout, California Gov. Gray Davis and consumer groups see the plan as an evasion of state regulatory control, and they are worried about it.

The plan, filed with the U.S. Bankruptcy Court in San Francisco last week, would put the utility and its parent company, PG&E Corp., into two non-affiliated companies. The reorganized PG&E would continue to own and operate its existing retail electricity and natural gas distribution systems, while its generation and gas and power transmission holdings would become part of the parent corporation and would be operated as three distinct businesses.

PG&E Corp. President and CEO Robert Glynn told reporters in Washington Wednesday that the plan ”meets the needs of all key constituencies better than any of the alternatives” that were considered. Not only does it stabilize rates and avoid a bailout, he said, it also provides a path that would allow the utility to take back power-purchasing responsibility from the state and assures creditors that they will receive full payment, plus interest. ”I understand that parts won’t appeal to everyone, but taken as a whole, this plan does it better than any of the alternatives,” he said.

Time is critical to the plan’s success, and the company is hoping to emerge from bankruptcy sometime toward the end of 2002. If that occurs, Glynn said the utility should be able to resume its power purchasing responsibilities ”shortly thereafter.”

Parts of the plan that call for spinning off the generation and transmission units into three new businesses under the parent company have drawn criticism from Davis and state consumer advocates.

Davis welcomed provisions that promise no reductions in the company’s work force and no rate increases, but criticized language that would seek to remove state regulators from the approval process. ”There are some bad things about the plan — which is that the control has shifted from the [Public Utilities Commission] to the Federal Energy Regulatory Commission. [FERC] has proven over the last 18 months to be, in most cases, no friend of the ratepayer. Their universe is generators and utilities. The last thing that comes to their mind in most cases is the ratepayer. The PUC, while far from perfect, has been a stronger advocate for ratepayers than [FERC]…I’m very wary of PG&E‘s proposal to transfer all of it’s generating capacity from a regulated environment to a non-regulated environment, which shifts oversight from the PUC to [FERC].”

Davis highlighted the fact that over the past year, FERC has been unwilling to meet his demand for $ 6.9-billion in refunds from wholesale power suppliers and was reluctant to control skyrocketing wholesale power prices. PG&E filed for bankruptcy in April because it owed wholesale suppliers some $ 9-billion that it could not recover through retail rates.

Glynn said he has held discussions with Davis and told the governor that the spin-offs are necessary to ensure the business units can borrow enough money. He said he also told the governor that although the state would not regulate the generation company, the company would sell all its power to the utility for roughly 5 cents/kWh over a 12-year period.

State consumers group, meanwhile, claimed the bankruptcy plan is illegal because of its power plant-transfer provision. ”PG&E‘s plan is designed to enrich the parent company at the public’s expense,” said Doug Heller, consumer advocate with the Foundation for Taxpayer and Consumer Rights. ”The parent company bails out the utility with cash, just as we have said it could and should, but in exchange tries to steal the power plants to enable the parent company to rip off the people of California once more.” FTCR said any attempt to evade state law would be challenged by state authorities and would face a protracted legal battle.

The U.S. trustee assigned to the Pacific Gas and Electric bankruptcy protection case is another concerned party, believing the asset transfers without PUC approval would be illegal.

”We’re looking carefully to see if the plan complies with the law,” said U.S. Trustee Linda Stanley. Further, her office will review the assets’ market value, if and when the company decides to sell them to ensure any sale will help pay PG&E‘s $ 9-billion wholesale power debt. Her office also will review the parent company’s new role to determine if it can help bail out its utility arm, she said. The trustee is charged with administering the case as well as forming a creditors committee that must approve the utility’s proposals to return to financial solvency.

Separately, Attorney General Lockyer Monday filed the state’s first claims against PG&E in the bankruptcy court. The state is seeking $ 179.42-million for energy purchases made by the Dept. of Water Resources on behalf of the utility’s customers.

Lockyer said other state agency claims against PG&E for such things as pollution clean-up costs and unpaid taxes would be filed by the Oct. 3 deadline. He said those claims are projected at more than $ 230-million. ”In seeking to recover money owed by PG&E, the state of California is limiting its waiver of sovereign immunity as to these claims only, and will fight efforts by the utility to use the federal bankruptcy court to raid the pockets of taxpayers,” Lockyer said.

”We also are looking closely at the PG&E reorganization plan because of serious concerns that the utility is seeking to evade further scrutiny by the [PUC] and is seeking to avoid state laws that apply to their transfer of assets,” he said.