Shifting Action to Neutral Arena May Be Bankruptcy Filing’s Upside
By forcing almost all the deadlocked parties in California’s energy crisis to meet in a neutral public forum, the bankruptcy filing by Pacific Gas & Electric Co. on Friday may actually help clear the path to a solution, some experts say.
But along that path lie numerous uncertainties, including questions about the powers of the Bankruptcy Court that have never been resolved in practice. Among the most serious booby-traps confronting PG&E; is that its financial books will be placed under a microscope.
“When you initiate a bankruptcy,” said Daniel J. Bussel, a bankruptcy specialist at UCLA School of Law, “you don’t have compete control over what happens.”
The bankruptcy filing removes many of the thorniest questions revolving around the energy crisis from an arena that has been hard-pressed to deal with them: the political. Because utility policy is important to so many constituencies--including taxpayers, ratepayers, consumer activists, regulators, and legislators--solving the crisis in a way that is not only equitable but meets everyone’s political goals has been a daunting task.
That is especially so because the crisis actually encompasses two separate problems. One is how to restructure the state’s energy program so that deregulation can be made to work and costs and rates can be brought into line; the second is what to do about the billions in debt PG&E; and Southern California Edison accrued last year from the purchase of wholesale power at prices higher than they were permitted to pass on to customers.
The attempt to settle both issues in concert has confounded the state’s leaders--especially since the question of whether the state should bail the utilities out of their debts at all is itself a contentious one.
“I’ve thought for quite some time that our primary focus ought to be on how you solve the [long-term] problem, as opposed to how you adjudicate a dispute between the utilities and the generators,” said state Treasurer Phil Angelides in an interview. “Too much time in Sacramento is being spent trying to figure out how to ransom the generators’ bill. In some ways, the [bankruptcy] filing takes those past debts off the table.”
Angelides said the court might represent a forum where the state, the utility and its creditors could examine and challenge those generators’ bills. That is something that federal regulators, who have jurisdiction over wholesale power rates, have been loath to do, despite complaints from PG&E; and Edison that they have been overcharged billions by profiteering power plant owners.
There is no question that the filing does complicate matters for many participants in the drama over California’s energy supply.
PG&E;’s filing, in which it sought protection from creditors under Chapter 11 of the federal Bankruptcy Code, could place more pressure on Southern California Edison, the state’s second cash-strapped utility, to enter bankruptcy as well. That’s because electricity generators will be more assured of getting paid for their post-bankruptcy sales to PG&E;, for which all pre-bankruptcy debts are temporarily in abeyance. By contrast, Edison creditors have no guarantees that the utility will be able to pay them. Edison executives said Friday they had no plans to file for bankruptcy protection.
On the other hand, it might also inspire Gov. Gray Davis to rapidly reach a bailout agreement with Edison, as though to prove that PG&E;’s move was unnecessary or premature. Davis has been saying that a deal is near. The state would buy Edison’s electric transmission grid, providing the utility with desperately needed cash, but there have been few public signs of progress. Talks with PG&E; had slowed down.
Among the most serious perils of the bankruptcy filing are those facing PG&E; itself. Although company executives clearly hope to limit the Bankruptcy Court’s jurisdiction to the utility alone, that may not be possible, experts say. It is likely that the utility’s creditors will insist on examining its controversial relationship with its holding company, PG&E; Corp.--a scrutiny that might drive that company into bankruptcy too.
Although PG&E; had long threatened to resort to bankruptcy, the abruptness of the utility’s filing at 9:04 a.m. Friday took aback many involved with the energy crisis, coming as it did less than 15 hours after Davis delivered a statewide television and radio address proposing a program to bring rates into line with wholesale energy costs.
Even some normally well-connected professionals were caught short. The research department of the investment bank Goldman Sachs told clients Friday morning that PG&E; and Edison were on the way to a “return . . . to financial health” and hinted their parent companies’ shares were poised to more than double in price. The research report was released Friday by Davis’ office.
Instead, PG&E; filed for bankruptcy. By the end of the day both companies had lost more than 35% of their value.
By giving PG&E;’s creditors legal standing to directly scrutinize its finances, the filing leaves the utility’s recent business decisions open to challenge.
Chief among these is the utility’s record of “upstreaming” to its parent revenues it received from ratepayers in the first two and a half years of deregulation. Critics have argued that those payments left the utility starved for cash when wholesale rates soared beginning in May 2000.
In announcing the bankruptcy filing Friday, PG&E; Chairman Robert Glynn laid nearly all the blame for his company’s perilous condition at the feet of the Public Utilities Commission, the governor and other state officials.
The company had been “raising the crisis flag [about high wholesale power prices] since last summer,” he said.
Yet an independent audit of PG&E; commissioned by the PUC and released in January documented that the utility did not implement any cash conservation measures until December. The utility even paid a cash dividend to its parent company for the third quarter of 2000, covering the months of July through September, of more than $200 million.
In all, PUC documents show, Pacific Gas & Electric disbursed $9.6 billion to PG&E; Corp. from January 1998 through September 2000. That money benefited shareholders, from whom some $2.8 billion in shares were repurchased and who received another $1.5 billion in dividends; and bondholders, for whom $2.8 billion in debt was paid off.
Glynn insisted Friday that the company has “assiduously complied” with PUC rules governing the relationship between the utility and the holding company. But creditors are sure to give the transactions another look.
“Those transactions will now certainly be scrutinized,” said Bussel. Bankruptcy court represents “a forum to bring a lawsuit to unwind those transactions and get a full airing of circumstances of the transfers.”
Filing Could Threaten Parent Company
While PG&E; executives took pains to note that the holding company and its unregulated subsidiaries are not subject to the bankruptcy filing, experts say that could change if Bankruptcy Judge Dennis Montali is persuaded that the transactions were improper and the money should be returned to the utility.
“There will be a lot of sophisticated lawyers looking at this,” Bussel said. “If distributions to the parent are deemed fraudulent transfers and are voidable, the holding company would have a huge liability and would probably have to file” for bankruptcy.
A broader threat to PG&E; and the state’s energy future is that state regulators and Montali might be unable to agree on the rates to be charged by the utility. A provision of the bankruptcy law requires that any rates that are part of a recovery plan for a regulated utility must be approved by that utility’s regulators.
Although that provision would leave rate-setting authority in the hands of the California PUC, in practice the the commission will have to negotiate with the judge. Any failure of those negotiations would raise issues that have never been resolved by higher courts.
“The judge doesn’t have the power to set rates [unilaterally],” said Kenneth Klee, a prominent Los Angeles bankruptcy lawyer, “but there are only a handful of cases on this.”
