Speaking from experience: Bankruptcy-don’t do it

Issue 2 and Volume 79.

By David H. Wiggs, Lido Capital

As the former chairman and CEO of El Paso Electric Co., I personally directed the company through its Chapter 11 bankruptcy and have the dubious distinction of being only the second utility executive in the country to have accomplished that feat since the Great Depression. If nothing else, this should give me credibility to offer some hard-earned advise to all of the parties involved in the current electric utility crisis in California-DO NOT, UNDER ANY CIRCUMSTANCES, ALLOW OR FORCE ANY OF YOUR ELECTRIC UTILITIES INTO BANKRUPTCY!

Bankruptcy is absolutely the wrong way to solve the crisis. No one, and I mean no one, from the governor to the state and federal regulators to the state’s electric customers to the company and its employees will benefit from or enjoy the process. Well, maybe that is an overstatement, since there are professionals such as attorneys, accountants and investment bankers who do benefit. We paid approximately $100 million in fees and expenses to all the professionals, ours as well as the creditors and shareholders, to get through the bankruptcy process, and El Paso Electric was a significantly smaller utility than either Edison, PG&E or Sempra. The costs of a bankruptcy for any of these three utilities would be staggering. Moreover, while we did solve El Paso Electric’s problems and the company is doing well now, I am absolutely convinced the solution was achieved in spite of the bankruptcy process and not as a result of the process.

Like the current situation in California, El Paso’s electric rates did not cover all of the cost of providing electricity. In El Paso’s case, the problem was the Palo Verde Nuclear Plant instead of an unexpected increase in purchase power costs. The cost of producing power at Palo Verde was much greater than originally forecast and during the period of its construction the cost of competing sources of power declined substantially as opposed to the expected rise and shortage of fossil fuels.

In Texas then and in California now, the utility companies are running out of cash and credit and will default on their obligations if a solution is not quickly found. As in California today, polemics led to a game of chicken with the regulators and politicians believing that the banks, creditors and suppliers would continue to fund the company, and the banks, creditors and suppliers believing the politicians and regulators would never allow the utility company to go into bankruptcy and would therefore grant the necessary rate relief. In El Paso, we could not get these parties to compromise and the company did run out of cash and was forced into bankruptcy. This occurred even though, as in California today, no one really believed it would happen-in spite of our warnings of what would happen if we ran out of cash and that the event was imminent. The high stakes game of chicken wound up with a head-on collision as El Paso was forced to file for Chapter 11 protection in January 1992. Four years and $100 million in fees later, El Paso emerged from bankruptcy based on a rate plan negotiated with the politicians, Texas regulators and creditors and a $1.2 billion public financing of new equity and debt. Unfortunately, and I believe everyone involved in the process would agree, the rate plan implementing a long-term increase in electric rates that was the basis of the final plan of reorganization approved by the judge was remarkably similar to the original compromise plan we were negotiating prior to the default and bankruptcy. In other words, the bankruptcy process added nothing but complication, time and huge expense. Hopefully, everyone involved in the current California utility crisis can learn from the El Paso experience and not repeat El Paso’s mistakes.

The overriding practical and legal problem with bankruptcy for an electric utility is the complete loss of control of the process to the federal bankruptcy court. Literally, California would be turning over the total control of its major electric utilities to a federal bankruptcy judge whose primary duty is to protect creditors. The judge has fairly complete and unfettered authority and the governor, the assembly, state and federal regulators, customers, utility shareholders and creditors are simply parties to the proceeding-but not equal parties since the creditors are by far the most important and influential parties in the case. It is a creditor-approved plan of reorganization that allows a company to emerge from bankruptcy. Regulators, politicians and customers don’t even have a vote. In fact, the judge has no responsibility to consider either California electric customers or utility company employees in overseeing the bankruptcy.

The final plan could include anything from a disposition of non-utility related assets and subsidiaries, an outright sale of the utility to the highest bidder including out-of-state companies, or severe rate increases that would probably be litigated up to the U. S. Supreme Court. For example, bankruptcy law is far from clear as to whom has jurisdiction over electric rates during the pendency of the bankruptcy proceedings. As a result, a significant portion of the El Paso case time and cost for the Texas Commission and state was dedicated to fighting various jurisdictional battles that were never resolved. The point being that once you are in bankruptcy, you have ceded total control to the bankruptcy court and may have very little influence over the outcome.

One problem that California faces that we did not have to deal with in El Paso is the severe shortage of power. In El Paso, our problem was excess generating capacity at too high a price. In California the problem is too little owned and controlled power, too few long-term commitments to deliver the necessary power and extraordinarily high recent prices for purchased power. No one argues that this is not a difficult problem, but it is a problem no bankruptcy judge is equipped to solve. There is no way, at least to my knowledge, that a bankruptcy judge can reduce the price or require the delivery of power from third-party suppliers. A bankruptcy judge could, however, in the interests of preserving the estate and protecting creditors order the utility to stop spending money it does not have to purchase power, even if this causes power shortages. Clearly, regulators, politicians and company executives are far better equipped to deal with this serious issue.

So I say again to everyone involved – don’t be swayed by extremists who advocate “punishing” the utilities by putting them into bankruptcy. And don’t avoid making hard compromises on the belief that this is not your fault or that someone else will give in. Take it from someone who has been there. The process punishes everyone, not just the utility and its shareholders, and for no good purpose. Furthermore, don’t procrastinate to the point where a default occurs that could allow a creditor to pull the trigger. At that point, it will be too late for all concerned.

I am certain everyone involved is sincerely trying to find a solution and I am certain that the solution will involve concessions from everyone and will be difficult and complicated as it was in El Paso. But I also know a solution can be crafted and I know with absolute certainty that the solution should not include bankruptcy. I encourage everyone to stop the rhetoric and find a solution now. If not, all parties will lose control of the process and find themselves in a very expensive, complicated, ineffective and wholly unpredictable place-federal bankruptcy court.

Wiggs, a managing director of Lido Capital, 19800 MacArthur Blvd., Suite 500, Irvine, Calif., 92612, was appointed in January to act as senior adviser to the newly created California Assembly Energy Committee. He may be contacted via telephone at 949-724-4576 or e-mail [email protected]