Foster Natural Gas Report
The U.S. Bankruptcy Court in San Francisco, with jurisdiction over the Chapter 11 bankruptcy procedure and reorganization of Pacific Gas & Electric Co., has before it two contradictory reorganization proposals from PG&E and the California Public Utility Commission (CPUC).
The court established June 17 as the target date for the beginning of simultaneous solicitation of creditors’ votes for the PG&E reorganization plan and the CPUC’s alternative plan for PG&E‘s reorganization.
Bankruptcy Judge Dennis Montali made it plain, however, that the date is a target, not an absolute deadline. There are several procedural steps that must first be taken, including approval of the ballot form and other solicitation materials.
In addition, the court established May 3 as the deadline for objections to the CPUC’s disclosure statement and set May 9 for a hearing on that disclosure statement. On 4/30/02, PG&E filed copies of the court’s orders with FERC.
At the same time, the CPUC has proposed hearings on the potential rate impact of PG&Es eventual reorganization. Thus, implementation of the proposed reorganization of PG&E is occurring in at least three venues: the federal Bankruptcy Court, the FERC and the CPUC.
On or about 2/13/02 the CPUC had filed with the Bankruptcy Court the principal terms of its alternative Chapter 11 reorganization plan for PG&E. That first version of the alternative, and subsequent revision, would not separate the utility into four separate companies, as proposed by PG&E, with all but one unit removed from state jurisdiction.
Instead, it would preserve PG&E intact, thereby supposedly saving ratepayers up to $ 8.6 billion in electricity costs that would be incurred if the utility were allowed to spin off its generation and buy back power over a 12-year period. PG&E could resume buying power for its customers under the CPUC alternative by January 2003, the commission said.
On 4/24/02, PG&E told the Bankruptcy Court it questions whether the CPUC has the authority to submit and agree to be bound by its alternative plan in which the commission told the court that it does have such authority. In a separate public statement on April 24, PG&E complained that the CPUC is contradicting itself.
First, in an April 11 response to a legal challenge by the Foundation for Taxpayers and Consumer Rights (FTCR) alleging that the commission does not have authority to propose an alternative for PG&E, the CPUC announced it would open a new proceeding to consider the rate impacts of its plan of reorganization. And although the CPUC then asked the California Supreme Court to dismiss the FTCR allegation, on 4/22/02 it nevertheless opened the proceeding to hold a public hearing. PG&E told the Bankruptcy Court that “these inconsistencies need to be resolved before the CPUC’s alternative plan can be allowed to move forward.
CPUC’s Reorganization Plan: On 4/15/02 the CPUC filed the revised alternative plan of reorganization, with various clarifications and modifications of the original, for PG&E with the court. The proposal continues to contrast with PG&E‘s own plan (a major part of which is before the FERC). The CPUC made clear to FERC last December that it would vigorously protest PG&E‘s plan (See FNGR No. 2367, pp. 21-23) and, as noted above, on 2/13/02 when it outlined the principal terms of its own proposal to reorganize PG&E (See FNGR No. 2375, pp. 22-24).
Since PG&E filed for Chapter 11 protection on 4/6/01 (See FNGR No. 2330, pp. 1-4), there has been a furious debate over the jurisdictional implications between the two parties and among others. While PG&E seeks to continue its market-based rates and to reorganize into four business units, putting three of them under FERC jurisdiction and thus subject to federal laws, regulations and guidance, the CPUC is determined to keep PG&E entirely under state jurisdiction. The CPUC plan contemplates continuing cost-of-service rates, leaving a substantial financial burden on PG&E shareholders, PG&E complained, and as a result employees with PG&E stock in their retirement plans will be harmed.
Under the CPUC proposal, funding of the restructuring in part will be through the sale of $ 1.75 billion in PG&E stock, thereby diluting PG&E Corp.’s ownership 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 for use to repay creditor claims.
Overall, the state agency said creditor claims totaling $ 13.5 billion will be paid in full through a combination of PG&E‘s projected cash at emergence from Chapter 11 ($ 3.6 billion), cash from the sale of new debt ($ 3.9 billion), cash from the sale of common stock ($1.75 billion), and reinstatement of long-term debt ($ 4.3 billion).
The CPUC said that under its proposal, all creditors would receive payment of their claims in full, with interest, and PG&E would be restored to investment grade upon emergence from Chapter 11.
The CPUC also insisted that under its plan there would be no rate increase; PG&E would remain subject to all applicable state laws, thus avoiding complex litigation in the Bankruptcy Court and elsewhere; PG&E Corp., the utility’s parent company, would make a significant contribution to PG&E‘s emergence from bankruptcy; the utility would be returned to stable, cost-of-service ratemaking; and PG&E‘s rates should decrease following its Chapter 11 case. The CPUC conceded, PG&E‘s shareholders will bear a significant portion of the burden of returning PG&E to financial health.
A comparison of the two plans, the CPUC said, shows California ratepayers would pay $ 4.7 billion with the CPUC approach versus more than $ 16.2 billion under PG&E‘s plan. The $ 4.7 billion would include $ 2.7 billion in current rates in excess of costs plus another $ 2 billion borrowing costs.
Compared with zero costs overall under the CPUC plan, the PG&E restructuring concept would cost $ 8.6 billion for higher generation rates and $ 4.9 billion for losses from the transfer of assets. The state agency also said PG&Es scheme would cause substantial and irreparable harm to environmental concerns from the proposed transfer of assets and substantial harm to the economy and the well-being of Californians due to the potential disruption to safety and reliability of service from disaggregated operation.
PG&E Challenges the CPUC’s Proposal: On April 15, the day that the CPUC released its plan, PG&E criticized the state agency. The CPUC’s second attempt to develop an alternative bankruptcy plan is no more practical or confirmable than their first plan, said PG&E in a statement. Admitting that their first effort fell $ 4.5 billion short, their second attempt seeks to close that gap by issuing billions in new debt and through a scheme to issue stock in the utility to raise cash. We believe the CPUC’s plan could not be confirmed or implemented.
Earlier, a PG&E challenge to the CPUC on jurisdictional grounds had been thwarted by the Bankruptcy Court. On 2/7/02, Judge Dennis Montali rejected at the time the utility’s arguments that federal bankruptcy law allows a preemption of any state laws that interfere with a reorganization plan. In passing the Bankruptcy Code, Montali ruled that Congress simply did not intend to obliterate a whole area of jurisdiction and authority traditionally left to state law. Montali criticized PG&E‘s across-the-board, take-no-prisoners strategy. While PG&E‘s blanket preemption argument was declared wrong, the judge left the window open, allowing the utility to file a revised plan explaining how the various state laws and regulations frustrate Congressional purposes and objectives and are therefore rightfully subject to federal preemption.
More than a year late, continued PG&E, the CPUC finally recognizes the need to have investment grade utility companies so that the state can exit the procurement business. Yet their plan makes none of the fundamental regulatory commitments needed to achieve or assure investment grade status. The CPUC’s plan to eliminate any return on equity violates federal and state law and would prompt substantial litigation. The proposed equity sale violates the rights of shareholders. It also would greatly harm tens of thousands of our employees and retirees whose 401(k) accounts and retirement plans include significant amounts of PG&E stock. They and thousands of small shareholders, many on fixed incomes, have seen their investments decimated by the actions of the CPUC over the past two years.
PG&Es Plan: PG&Es bankruptcy in April 2001 cited a combination of un-reimbursed energy costs that had reached more than $ 300 million per month, unfavorable decisions by state regulators, and futile negotiations with California Governor Davis (D) and his representatives. In a reorganization plan filed with the court on 9/20/01, PG&E proposed to restructure itself and parent PG&E Corp. as two stand-alone, unaffiliated companies. PG&E would continue to own and operate its existing retail electric and natural gas distribution system, and its retail rates and services would continue to be regulated by the CPUC. However, its current natural gas transmission and storage businesses and electric transmission and hydroelectric and nuclear generation businesses would be transferred to three separate companies to be taken over by PG&E Corp. and operated subject to FERC jurisdiction.
On 9/26/01 Robert Glynn Jr., chairman, CEO and president of parent PG&E Corp., discussed the rationale for the PG&E version in a press conference in Washington, D.C. (See FNGR No. 2355, pp. 9-11) Glynn said the reorganization was deliberately conceived within the venue of the bankruptcy forum because of existing rules that customarily govern bankruptcies. A paramount consideration in the decision to propose a plan in this manner, first, was the fact that the value of PG&E‘s market assets is significantly greater than its debts. A consequence would be that all creditors would get paid (100 on the dollar and mostly cash), he said. Second, the Bankruptcy Court, applying laws and rules specifically intended to help debtors pay off creditors, has a lot of authority to help the company get re-organized so the claims against it are paid off.
The financial underpinning of PG&E‘s reorganization plan and of a calculated 5/kwh retail electric rate proposed in the plan, according to Glynn, is a three-prong valuation that anticipates (1) no rate increase to consumers, (2) investment grade credit rating for the new entities, and (3) enough debt-carrying capacity to generate sufficient funds to pay off creditors. Glynn described the new rate as market-based, using benchmarks as the basis for the rate the most recent set of DWR contracts (about 6.6/kwh) and the most recently reset qualifying facility (QF) prices that were established by the CPUC at about 7.9/kwh. We are not being aggressive in that range or asking to split the difference, said Glynn. We picked a nickel per kwh. The nickle rate assumes a target rate of return 10%-11%, according to Glynn, who added that the nickel rate is common sense, just and reasonable, and enough to pay off debt.
The CPUC opposed the arrangement offered by PG&E, primarily due to transfer of significant assets and operations from state to federal jurisdiction. It holds that the Bankruptcy Code provides no basis for PG&E‘s attempted use of Chapter 11 as a legislative device to displace entire regulatory schemes. To the contrary, numerous Bankruptcy Code provisions evince Congressional respect for state and local laws and regulations.
Pending before FERC, meanwhile, is the proposal of PG&E (CP02-39 et al.1) to extend its intrastate gas transmission system to a proposed market center at Malin, Oregon, and to integrate the gas transmission and storage systems into the interstate grid, subject to FERC’s jurisdiction. Initial comments were filed January 29.
The CPUC blasted the plan as fatally flawed because PG&E is not a natural gas company under the NGA and FERC lacks jurisdiction to grant certification or abandonment. In any case, the applications do not establish the public convenience and necessity of granting certificates, abandonments or waivers.
Further, the state commission along with other California parties alleged there are numerous material issues of fact that should be addressed in an evidentiary hearing. (See FNGR No. 2374, pp. 6-15)