BCD News and Comment

Since the Pacific Gas & Electric Co. filed for bankruptcy in April 2001, creditors have been critical of both reorganization plans offered up by either PG&E or the California Public Utilities Commission. But in a big change, the CPUC has enlisted the utility’s unsecured creditors’ committee, a move that doesn’t bode well for PG&E‘s plan.

Bankruptcy Judge Dennis J. Montali (N.D. Calif.) has extended the period for creditors to vote on the plan. The creditors’ votes, once tabulated, will be a recommendation to Montali, who must approve a final plan. It would be a stunning move for Montali to ignore the votes of the creditors and approve PG&E‘s plan.

Meanwhile, a federal judge has ruled that PG&E can preempt California state law as it seeks to reorganize, a setback for the CPUC.

U.S. District Judge Vaughn Walker (N.D. Calif.), said PG&E could move ahead with plans to spin off three new companies without obtaining state approval or conducting environmental reviews,

overruling Judge Montali’s decision not to allow such action. Representatives of the CPUC plan to appeal, saying the decision allows companies to file for bankruptcy and then flout the law.

All in all it has been an up and down summer for both PG&E and the CPUC.

For months, California regulators’ plan to lift from bankruptcy suffered setbacks in court and skepticism among creditors. But the CPUC persuaded the official unsecured creditors’ committee in late August, to back its plan, which calls for PG&E to repay its debt through a combination of new equity, new debt and cash. It also keeps PG&E under state control after bankruptcy.

Until this move, the committee, which represents banks, power generators, service providers and cities owed about 13.5 billion by the state’s largest utility, had not thrown its support behind either the CPUC plan or the one put forth by PG&E.

Concessions by the CPUC lured creditors to their side, lending the CPUC’s plan considerable weight in bankruptcy court.

Creditors said they decided to support the CPUC’s plan once alterations were granted. The CPUC gave assurances that its plan would allow PG&E to charge rates sufficient to cover expenses and repay its debt; it also called for PG&E to issue preferred, rather than common, stock.

The changes eased creditor concerns that PG&E would have trouble generating enough income to pay off its debt, as well as worries that the CPUC plan would dilute PG&E common stock, which has declined almost 30 percent in the last year.

Critics of the plan

But the plan isn’t popular with a California watchdog group, the Foundation for Taxpayers and Consumer Rights. The FTCR has repeatedly objected to CPUC’s involvement in the case and is now objecting that the CPUC plan will result in higher rates for the residents.

The CPUC plan had significant obstacles to overcome after it was unveiled in April. Creditors initially questioned the feasibility of selling new stock and debt in PG&E. In fact, when CPUC officials detailed their plan in April, they had not yet lined up investment bankers needed to arrange the financing.

The CPUC hired bankers from UBS Warburg, but Judge Montali rejected a request to have PG&E foot the bill for UBS’ fees.

Funding

The CPUC’s plan is funded in part through the sale of 1.75 billion in PG&E stock, thereby diluting PG&E‘s ownership interest in the utility. In addition, 1.6 billion of earnings, which would have been received by PG&E Corp. from the utility during 2001, 2002 and January 2003, will remain with PG&E and be used to repay creditor claims.

PG&E issued a statement saying it continues to believe its plan is the “fastest, fairest and most feasible solution” to the company’s Chapter 11 case.

PG&E‘s plan calls for the utility to transfer transmission lines, power plants and other assets to three new companies that would fall under federal, not state, regulation. That shift, PG&E said, would allow the utility to repay creditors by borrowing more money to repay its debts, since it would escape state control over how much it can charge for electricity.

Judge Montali has scheduled hearings to start in November on the rival plans.