Creditors Can Vote To Split Utility, Keep It Under State Control, Or Both
San Jose Mercury News
This week, more than 70,000 creditors of Pacific Gas & Electric will receive a 600-page packet as gripping as a phone book to help them decide the fate of PG&E by choosing between two rival plans to bring the utility out of bankruptcy.
It won’t be the battle royal of the Hewlett-Packard/Compaq Computer merger, but the vote marks a significant milestone in California’s failed experiment with electricity deregulation. It affects how more than $13 billion in debt gets paid and could determine whether PG&E is further deregulated in an effort to save it.
“It’s really sort of a referendum on deregulation,” said Gary Cohen, general counsel for the California Public Utilities Commission.
More precisely, as economist Severin Borenstein at the University of California Energy Institute put it, “It’s more a referendum on how PG&E is going to be treated under deregulation.”
Or, as one creditor’s attorney said, it’s “a double whammy which is coming in the context of a six-pound paper bag.”
Actually, it’s more like two pounds. It will land on the doorsteps and desks of everyone from New York megabanks to Davey Tree Expert Company, which trims vegetation around power lines. The votes, due by Aug. 12, will provide strong guidance to U.S. Bankruptcy Judge Dennis Montali, who who must confirm either decision.
The question is whether to break PG&E into four companies outside state control — as the company advocates — or keep it under state control. There are myriad details to consider, with little guidance for creditors in the 600-page document they will receive.
And the official committee of unsecured creditors is including a letter recommending a vote for both plans. Punt to the judge, they say.
Rival plans
PG&E and the PUC agree that Pacific Gas & Electric Co., the utility, owes creditors about $13.5 billion. The biggest difference is that PG&E wants to break the utility into four parts and shift most of its power plants and transmission and hydroelectric systems outside state control. The utilities commission plan would keep PG&E in one piece, under its regulatory authority.
The two parties have locked horns in bankruptcy court over the plans for months. Now the question goes out to 74,000 creditors, each of whom is owed at least $5,000.
Most of the smallest creditors will already have been paid off by the end of July. In addition, many other creditors sold their debts to third parties for pennies on the dollar. PG&E already cut a deal with Calpine, for instance, to pay the $265 million it owed the San Jose-base power company. Calpine has since sold the remaining debt to a third party.
That leaves an array of mortgage-bond holders, 1,290 people in lawsuits related to chromium contamination (think “Erin Brockovich”), energy companies such as Enron (itself bankrupt and claiming PG&E owes about $600 million) and banks and other institutional investors such as the State Teachers Retirement System of Ohio. In addition, 31,000 holders of preferred stock in the utility will receive voting packets, although it’s not certain their votes will be counted. PG&E questions whether such holders are qualified to participate.
It’s one vote per creditor. But the vote of someone owed $1 billion carries much more weight than someone owed $200,000. That’s because, to win, a plan must receive more than half the number of votes in a class and get two-thirds of the dollar value of the claims. There are 11 classes of creditors. At least one class must vote for a plan for the judge to consider confirming it.
Heavy-hitter creditors include the Bank of New York, which represents bond holders who together are owed $2.21 billion; Bankers Trust New York, which represents investors owed $1.3 billion; various energy suppliers who contend they are owed about $1.13 billion; and the California Independent System Operator, manager of the state’s electricity grid, which is owed more than $100 million. Those reached wouldn’t say how they planned to vote.
Both sides will begin lobbying — utility-style. Bankruptcy experts say the vote probably won’t generate the unending stream of propaganda material generated by the HP-Compaq merger. Neither side is discussing details, but both are plotting strategies for lobbying creditors in each class.
“We intend to contact creditors to let them know about the benefits of our plan and answer any questions they may have,” PG&E spokesman Ron Low said.
Brian Herman, an attorney at Paul, Weiss, Rifkind, Wharton & Garrison, which is representing the PUC, said it will most likely meet with big creditors. Herman said the PUC hasn’t decided whether to conduct a telephone campaign.
“We’re sort of late to the game,” Herman said. “We’re just both trying to explain any misconceptions people have about our plan and see if we can get support for it.”
Concerns over lobbying
The idea of closed-door lobbying by a public regulatory agency outrages some consumer advocates. The Foundation For Taxpayer and Consumer Rights has filed a lawsuit arguing that California law forbids the PUC from raising rates or leaving them artificially high to pay off PG&E‘s losses, and also forbids them from holding closed-door meetings on a rate matter.
“We’re very concerned that the PUC is negotiating a rate structure in private with the creditors committee to get creditors to agree to the PUC plan,” Heller said.
Cohen acknowledged that the PUC has met with the creditors committee and that members asked the commission to “lock in rates for some time.” Cohen said they declined.
“We said we weren’t going to do anything that would limit or impede our regulatory authority,” Cohen said. Cohen said the commission might ask creditors to help raise the money for its bailout plan.
David Adante, an active member of the official creditors committee, said the process has been moving faster than he anticipated, probably because the utility is making good money.
“I’ve heard of bankruptcies lasting four or five years,” said Adante, chief financial officer of Davey Tree Expert Company in Ohio.
The company continues to work for PG&E trimming trees and clearing power lines, but the utility still owes it $13,325,950.
Although the official creditors committee represents about one in seven of voting creditors, its letter saying “vote for both” will carry a lot of weight, observers say. Creditors committees typically include those with the most money on the line. Also, creditors who haven’t followed the bankruptcy are likely to use the committee’s letter as a guide.
Nettie Hoge, executive director of the Utility Reform Network and one of PG&E‘s most vocal critics, said she’s tempted to vote against both plans because they rely too heavily on profits from high electricity rates to pay off the company’s debts. PG&E owes her group “a few hundred thousand dollars” in legal fees for its failed effort to get ratepayers represented in the bankruptcy proceedings.
“I think the bankruptcy court is being used as corporate welfare and the real issues aren’t being addressed,” Hoge said. “Our rates are inflated way, way above the cost of service.”
Contact Jennifer Bjorhus at [email protected]
or (408) 920-5660.
