Firm may write off $4 billion in debt

The San Francisco Chronicle

California’s energy problems grew even thornier yesterday as PG&E Corp. said its bailout talks with the governor have collapsed and that the company may write off more than $4 billion in debt.

PG&E‘s gloomy assessment of the talks — its first comment on the course of the negotiations — contrasts with much more optimistic pronouncements from Gov. Gray Davis and his staff.

“We have very good talks with them every day,” said Steve Maviglio, a spokesman for the governor. “Nothing has broken down.”

He speculated that PG&E executives may feel slighted because Davis’ negotiating team has given more attention in recent weeks to a pending deal with Southern California Edison.

However, PG&E did not come across yesterday as suffering merely from neglect.

“We haven’t made substantial progress closing in on a deal,” Peter Darbee, PG&E‘s chief financial officer, said during a conference call with financial analysts. “Time is growing short.”

The unexpected remark followed months of PG&E refusing to comment on any aspect of the negotiations. PG&E spokesman Greg Pruett subsequently elaborated on Darbee’s observation.

“The talks are nonexistent,” he said. “We have done everything humanly possible to seek a resolution. Regrettably, a resolution does not seem to be forthcoming.”

Pruett would not discuss where the negotiations broke down or any other details of a possible bailout package.

“There have been a lot of things that need to be hammered out,” he said. “At this point, we haven’t been able to do it.”

The talks have grown increasingly complex since their inception. At first, Davis’ team was seeking acquisition of PG&E‘s power lines in return for billions of dollars in financial assistance.

The utility is saddled with nearly $7 billion in debt and is no longer creditworthy enough to purchase power for customers. The state now must buy electricity on PG&E‘s behalf.

It subsequently was learned that portions of PG&E‘s vast land holdings also were on the negotiating table, including miles of spectacular coastal property near the Diablo Canyon nuclear power plant.

Sources told The Chronicle that an end to the current rate freeze also had entered the picture.

PG&E‘s failed talks with the governor contrasted with Davis’ more successful haggling with Edison, which tentatively has agreed to sell off its transmission lines for almost $3 billion.

Analysts said Edison‘s parent company, Edison International, is eager to get out of the utility business, while PG&E Corp. still sees itself as an energy distributor.

Consumer advocates saw a direct link between the bailout talks and PG&E‘s announcement yesterday that a $4 billion writeoff may be in the cards.

“This says definitively that the bailout is off,” said Doug Heller, assistant organizing director for the Foundation for Taxpayer and Consumer Rights in Santa Monica (Los Angeles County).

“They’re saying they had losses, and that they can write them off and move forward,” he said. “They’re showing that the company can survive without a bailout.”

But PG&E‘s Pruett noted that a writeoff may be necessary purely for accounting purposes. It would not affect the company’s belief that it is still entitled to recoup the full $7 billion in costs accrued as a result of runaway wholesale power prices.

Nevertheless, any writeoff, essentially a huge quarterly loss, would make PG&E‘s creditors even more nervous about being repaid and could lead them to push the utility into bankruptcy.

“The prospect of bankruptcy has increased quite a bit,” said Paul Patterson, an energy-industry analyst at Credit Suisse First Boston in New York.

He added that if PG&E goes bankrupt, Edison almost certainly would go under as well.

Edison said yesterday that it will delay release of its annual report until April 17. As with PG&E, the company was scheduled to issue its report on Monday.

Both utilities are still trying to digest the repercussions of a series of rulings this week from the state Public Utilities Commission. Among the measures was an average 40 percent electricity rate increase.

But what has PG&E and Edison most concerned is a change in accounting rules that effectively reduces the amount of debt that can be recovered from customers’ rates.