Filing’s Aftershocks Likely to Spread
From utility line men to big-money financiers, from Los Angeles city taxpayers to investors around the country, the ripple effect from Pacific Gas & Electric’s bankruptcy filing will have a direct impact on millions of lives in both subtle and unpredictable ways.
Even those who live hundreds of miles from the massive swaths of the state served by PG&E; will feel the impact of the bankruptcy in myriad ways. Experts suggested scenarios ranging from lost taxes to lost jobs, and from bond market jitters to fears that the power grid will be further weakened.
The question is how much. And because California on Friday entered uncharted waters--with the biggest utility bankruptcy filing in history and the possibility that it could also pitch Southern California Edison into insolvency--that question cannot be answered yet.
“We’re all very interested bystanders,” said Jack Kyser, chief economist with the Los Angeles Economic Development Corp. “Actual impact: None so far. Potential impact: We’re still waiting to see.”
The bankruptcy filing took an immediate toll on Wall Street, driving down energy stocks and dropping the value of bonds issued by PG&E--traditionally; safe investments known as “widows and orphans” securities--by 20%.
Some economists say it’s only a matter of time before the damage on Wall Street hits Main Street.
Peter Navarro, an associate professor of economics at UC Irvine, spun what he acknowledged was a “doomsday” scenario: Bankruptcy makes power suppliers less willing to sell to California, and even sends smaller generators into insolvency because they cannot pay their bills. This tightens supply and kicks electricity prices even higher, sparking a recession in California which brings down the national economy.
“I view it like a boulder in a pond, and there are going to be a lot of ripples and waves coming out of it,” Navarro said.
The severity of the impact depends on the bankruptcy judge’s decisions on key issues, such as forcing rate hikes or auctioning off power plants.
But even before the judge holds his first hearing, the filing has complicated matters for California government--which complicates the lives of many Californians.
Take residents of the counties in which PG&E; owns property. Those counties were expecting to receive $80 million in tax installments from the utility Tuesday. Bankruptcy law generally requires the debtor to pay taxes and government obligations before dealing with other creditors. But this is little comfort to officials in the mostly Northern California counties.
Hardest hit by a PG&E; tax default would be San Luis Obispo County, where the utility’s big Diablo Canyon nuclear facility accounts for about 15% of the county’s $210 million in tax collections.
“We are going to be all right for the short run because we have some reserves,” said county Auditor-Controller Gere Sibbach, “but we will be looking at some modest cutbacks for next year.”
If Edison were to join PG&E; in bankruptcy, the 19 counties served by that utility would stand to lose $104 million in property taxes, including $36 million for Los Angeles County, $18 million for San Diego County and $14 million for Orange County.
The city of Los Angeles will take a hit as well, because the Department of Water and Power is one of PG&E;’s creditors for the millions of dollars’ worth of electricity it sold the utility this year.
Residents of the Pacific Northwest who get their electricity from the network of federal dams called the Bonneville Power Authority are also on the hook. BPA is owed $50 million by PG&E; and needs the money because it faces financial problems of its own, spokesman Ed Mosey said. “If we cannot bring our loads down through conservation and load reduction,” he said, “we’re looking at wholesale rate increases of 200% to 400%, and the impact on retail customers could be to double their rates.”
The filing also ensures that leaders in Sacramento will be even more absorbed by the energy crisis and face a possible multibillion-dollar budget gap. Other pressing issues such as roads, health care and housing are likely to take a back seat, and could see budget cuts.
“What PG&E; has done is they’ve sort of drawn a line in the sand, and it’s going to take a lot more to work out the problem now that they’re in Bankruptcy Court,” said Mark Savage, an attorney at Public Advocate in San Francisco, which handles poverty issues. “I’m hearing from people in Sacramento that the money [for housing or health care] is going to have to be trimmed.”
Local governments like Los Angeles County that depend on state funds to keep public hospitals open or police on the streets also fear they will be neglected.
“Every legislator I’ve spoken to says don’t expect to get the same help from the state we got last year on transportation” and other issues, said Los Angeles County Supervisor Zev Yaroslavsky. “It’s been a situation filled with uncertainties, and it’s just gotten more uncertain.”
Every resident in the state is also on the hook in the bankruptcy, because in January California entered the power game and started spending billions on buying electricity for PG&E.;
“It jeopardizes the balance sheet of the state,” said state Controller Kathleen Connell, a candidate for Los Angeles mayor and critic of the state’s response to the power crisis. “The state’s cash flow exposure has significantly worsened.”
Connell said she predicts a deficit by June, and that she will have to borrow from other accounts to pay the bills until the state is repaid for its power purchases.
Among them are the traffic congestion relief fund, the harbors and watercraft revolving fund, the cigarette and tobacco health education account, the child care facility revolving account, the school facility account, the oil spill response fund, and the trial court fund.
Wall Street was clearly concerned about the state’s credit-worthiness. Moody’s Investors Service did not change California’s bond rating Friday, but it did signal that the climate had taken a turn for the worse.
Moody’s changed its outlook on California’s general obligation bonds to “negative” from “stable,” which is a warning but is a step or two short of actually downgrading the bonds, according to Susan Abbott, managing director of the Moody’s power group.
Although Moody’s may have flashed a yellow light on California bonds, Zane B. Mann, publisher of the California Municipal Bond Adviser, said some still trade at a premium because there remains a powerful appetite for the securities.
Anxiety is also high in corporate boardrooms, where financial institutions have already been battered by Friday’s filing.
More than $6 billion in bonds issued by PG&E; were downgraded to “default” status Friday by the Chicago-based Fitch Inc. credit-rating agency. About $4.5 billion worth of the bonds are well secured by PG&E; assets, and chances are that the bondholders will get at least 90% of their money back, said Steven Fetter, managing director of Fitch’s global power group.
Holders of other, unsecured bonds face likely losses, as do lending banks and other PG&E; creditors. Stock prices of banks that are major PG&E; lenders--including Bank of America Corp., J.P. Morgan Chase & Co. and Bank One Corp.--also fell sharply Friday.
Other ripples from the bankruptcy filing will wash over firms that do business with PG&E;, said Fitch analyst Lori Woodland.
Many smaller companies that supply equipment or uniforms or lease vehicles to PG&E; count the utility as their largest--in some cases their sole--customer, Woodland said.
For such firms, she said, the bankruptcy will be at best disruptive and at worst disastrous.
Nevertheless, several analysts Friday said they were not too worried about the ultimate impact on the state economy. Ted Gibson, chief economist at the State Department of Finance said that if further price increases result from the bankruptcy, the economy will be affected, but not brought to its knees.
“From a macro standpoint, the rise in energy prices, both gas and electricity, are not devastating to the state’s economy because of the fact we are so energy-efficient and because we have been growing so rapidly,” he said.
But others such as the Assembly’s point man on the energy crisis, Assemblyman Fred Keeley (D-Boulder Creek), were alarmed because they feared bankruptcy could expose that economy to what state officials say is the unjustified record-high prices of electricity. Those have increased sometimes more than 10 times since a year ago.
“The question for me is, can the state’s economy survive 24 to 36 months of a wholesale market that is wildly out of control?” Keeley said. “The path we are on now is incrementally taking the retail [rates] up to the wholesale prices. That’s where the whole thing is going, that is what the bankruptcy is about.”
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Times Sacramento Bureau Chief Rone Tempest and staff writer Nancy Vogel contributed to this story.
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Biggest Chapter 11 Filings
Today’s bankruptcy filing by PG&E; Corp.’s Pacific Gas & Electric unit was the third-largest in U.S. history, according to Boston-based Bankruptcydata.com. The 10 biggest Chapter 11 filings ranked by pre-filing assets:
Rank Company Date Assets (in billions) 1. Texaco Inc. April 12, 1987 $35.89 2. Financial Corp. of America Sept. 9, 1988 $33.86 3. Pacific Gas & Electric April 6, 2001 $24.18 4. MCorp March 31, 1989 $20.22 5. First Executive Corp. May 13, 1991 $15.19 6. Gibraltar Financial Corp. Feb. 8, 1990 $15.01 7. Finova Group Inc. March 7, 2001 $14.05 8. HomeFed Corp. Oct. 22, 1992 $13.88 9. Southeast Banking Corp. Sept. 20, 1991 $13.39 10. Imperial Corp. of America Feb. 28, 1990 $12.26 Source: Bloomberg News
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This story has been edited to reflect a correction to the original published text. Financial Corp. of America filed for bankruptcy in 1988, not 1998.
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