Pacific Gas & Electric (PG&E) now has the dubious distinction of being only the third electric utility in American history to declare bankruptcy, and they’re the first official casualty of California’s floundering deregulation process.
The filing came less than 24 hours after Gov. Gray Davis addressed the Golden State about the energy crisis, labeling it “the most difficult issue facing California.” In that speech, he stated that he had a plan to financially restore the utilities, if they would agree to his conditions: to provide power on a 10-year, regulated plan, to agree to sell their transmission lines, and to drop the lawsuits to increase consumer rates.
But that plan will never see the light of day-at least not with PG&E.
On April 6, PG&E, the utility unit of PG&E Corp., filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The company stated the action was necessary in light of its energy costs, which they now estimate at more than $300 million per month. PG&E also cited decisions by the California Public Utilities Commission (CPUC) which “economically disadvantage the company” and the dissolution of negotiations with Gov. Davis as factors for their filing.
“We chose to file for Chapter 11 reorganization affirmatively because we expect the court will provide the venue needed to reach a solution, which thus far the state and the state’s regulators have been unable to achieve,” said Robert Glynn, Jr., chairman of PG&E.
“The regulatory and political processes have failed us, and now we are turning to the court,” he added.
John Hansen, a lawyer specializing in business litigation, bankruptcy and corporate reorganization with Nossaman, Guthner, Knox & Elliott in San Francisco, told EL&P that PG&E’s vision of regulatory and political failure is one of the main reasons the company declared bankruptcy.
“I think very high on their list of strategies here is an attempt to get out from under the CPUC,” he stated. “They want to shift the jurisdiction over to the court.
“They would like to convince the judge that he has the authority to let PG&E raise rates to a level that compensates them,” he added.
Officially, PG&E gave four specific reasons for their April 6 action:
- PG&E claimed the state failed to assume the full procurement responsibility for PG&E’s “net open position,” resulting in the company’s exposure to skyrocketing wholesale energy costs.
- PG&E claimed that the impact of actions by the CPUC on March 27 and April 3 created new payment obligations for the company and undermined its finances.
- PG&E claimed that negotiations with the state to recover $9 billion in wholesale power purchases are at a standstill.
- PG&E claimed that the CPUC has adopted an “illegal and retroactive” accounting change that they see resulting in the elimination of uncollected wholesale costs.
A spokesman labeled Gov. Davis’ reaction to the bankruptcy announcement as “surprised.” In a later statement, Davis lambasted PG&E for their filing.
“Pacific Gas & Electric Company has dishonored itself,” he said. “This action was unnecessary. They’ve caused undue alarm.”
“This is a sad day for California,” stated John Bryson, chairman, president and CEO of Edison International, Southern California Edison’s parent company. “PG&E has had a proud history of service to our state for more than a century.”
Seemingly well aware that all eyes are now focused on Southern California Edison’s attempts to remain solvent, Bryson added that the company was continuing to work out a “comprehensive solution” with the state and Gov. Davis that would keep them from following in PG&E’s path.
Terry Winter, CEO of the California Independent System Operator, said PG&E’s filing could cloud issues circling the transmission system in the state.
“We—literally—are in uncharted waters,” he told the California House Committee on Government Reform in April. “Will the bankruptcy court, with its traditional focus on maximizing the value of the debtor’s estate, recognize the criticality of allowing investments [in the transmission system] to go forward?”
Wenonah Hauter, director of critical mass energy and environmental program with consumer advocacy group Public Citizen, views PG&E’s bankruptcy from a different point of view: She sees the company getting away scot free.
“PG&E has had its way with California elected officials throughout deregulation’s failure,” she said. “PG&E claims that bankruptcy is its only option because it cannot pass the exorbitant costs of wholesale electricity on to its customers due to the retail rate free. The rate freeze, however, was a crucial compromise supported by PG&E in the 1996 deregulation legislation. Since consumers would be overpaying for electricity to cover these stranded costs, PG&E agreed to a rate freeze. In exchange, PG&E willingly agreed to accept market risk.”
And now that market risk has turned on PG&E, Hauter has only one suggestion: Take it on the chin, PG&E.
“California must demand that PG&E shareholders assume the costs for the utility’s mistakes-not taxpayers,” she added.
That assumption of cost that Hauter so desires may not be flowing upstream to PG&E Corp., however, unless the details warrant. While Hansen admits there is a gray area for the judge to work within, he doubts that the court will fault PG&E Corp. for the sins of its utility.
“Will they be responsible for paying off the utility’s debt? Probably not,” Hansen stated. “Not unless there is some reason to hold the company liable outside of the context of bankruptcy.”
But, no matter who assumes the direct cost of PG&E’s bankruptcy, the financial tremors have already moved beyond mere company shareholders. As expected, PG&E’s bonds (which were already floundering at junk level) fell after the filing. However, merchant generators’ shares were also hammered after the announcement, with Calpine taking the hardest hit. Calpine’s shares slumped 7.6 percent or $3.86 per share to close at $46.80 on 11.5 million shares traded. Dynegy followed a close second, closing down 5.83 percent. Duke Energy stock slide 5.42 percent that same Friday.
Fitch lowered its ratings for PG&E senior secured and preferred securities into the default category, and also changed Southern California Edison’s senior secured debt ratings to “evolving” from “negative” in light of the announcement and the possibility that PG&E’s bankruptcy could complicate Southern California Edison’s sale of its transmission assets to the state.
Standard & Poor’s also lowered PG&E’s rating, putting its senior unsecured debt issued to D from double C. However, they believe that the bankruptcy should have no immediate credit implications for municipal utilities.
And, of course, the stock market wasn’t the only casualty of the filing: PG&E’s bankruptcy will also affect vendors and suppliers that do business with the utility. Linda Chinn, vice president of general services for PG&E has already posted an open letter to vendors on PG&E’s Web site assuring them that PG&E has $2.5 billion cash on hand to continue doing business. Of course, this covers only those services required to keep the utility running; debts that pre-date the filing are subject to review by the bankruptcy judge and the appointed creditors’ committee, leading to a plan of reorganization. With the normal bankruptcy process in mind, it could take years for those debts to be paid.
According to the U.S. Bankruptcy Court, Northern District of California, the Honorable Dennis Montali has a full calendar of PG&E related issues through mid-May. In late April (after press time) he’s scheduled to hear PG&E’s application for a temporary restraining order against CPUC president Loretta Lynch.
So far-whether PG&E wants it or not-the CPUC is still in the game, but finding the line that the commission cannot cross may become a major issue. “We’re moving toward the possibility of a head-on clash between the court and the CPUC over jurisdiction with this case,” Hansen stated.
He added, “The relationship established between the bankruptcy court and the regulatory agency will certainly set a precedent in this case.”
Later hearings will cover motions authorizing interim use of cash collateral, authority to refund mainline extension deposits and one that weighs to what extent PG&E has to live up to power agreements.
Usually, the court’s appointed creditors committee for this legal process involves only seven creditors (almost always the ones owed the most money). However, in this case, the court has chosen 11: Jim Hinrichs, representing KES Kingsburg LP; Grant Kolling, representing the City of Palo Alto; Michael Tribolet, representing Enron Corp. and its affiliates; Tom Milne, representing the state of Tennessee; John C. Herbert, representing Dynegy Power Marketing Inc.; David Adante, representing the Davey Tree Co.; Duane Nelson, representing GWF Power Systems; Keith Marshall, representing U.S. Bank; Michael Lurie, representing Merrill Lynch; Gary Bush, representing the Bank of New York; and Clara Strand, representing Bank of America.
While some of the chosen are indeed in the top 20 (Bank of New York remains the top creditor with a claim of just over $2 billion), a number of companies represented haven’t cracked the $20 million mark (the approximate amount of the number 20 creditor, Sierra Pacific Industries).
According to Hansen, negotiation with the creditors committee is the next step for PG&E, working through contracts and debt payments piece by piece. Then comes negotiation for the plan of reorganization, which will include talks with secured lenders (primarily the bondholders) and the creditors committee.
“Sometimes the unsecured creditors are adversarial with the secured creditors, as well as the debtor. And here, you’ll also have a third party at the table, the CPUC, as well as the looming state and political components and, of course, the consumer interest,” Hansen said.
“This case is so unprecedented in many respects, from the utility side of it to its sheer size,” he added. “It’s one of the largest, in terms of debt, that has ever been filed in this country.
“It will certainly be a case to watch.”
Hansen can be reached via e-mail at firstname.lastname@example.org. More details on the PG&E bankruptcy case can be found at the U.S. Bankruptcy Court’s Web site for the Northern District of California: www.canb.uscourts.gov.
Editor’s Note: The first two electric utility bankruptcies (Public Service Company of New Hampshire and El Paso Electric Co.) were victims of expensive nuclear issues: in the late 1980s, New Hampshire was blindsided by the price tag of building the Seabrook nuclear plant; El Paso saw rising costs associated with the Palo Verde nuclear plant hit home in 1992.