Lawsuit by PG&E; Complicates Sale of Energy Bonds

Pacific Gas & Electric Co. has complicated the imminent sale of $11.9 billion in energy bonds with a lawsuit that accuses the state of imposing billions of dollars of charges on the utility’s customers without adequate public review.

The lawsuit, filed Thursday in Sacramento County Superior Court, was not unexpected. But it comes just one week before state Treasurer Phil Angelides is scheduled to sell the first batch of bonds in what would be the largest municipal borrowing in U.S. history. The long-awaited sale would raise cash to pay back California taxpayers for electricity purchases in 2001.

Even if it is resolved quickly, PG&E;’s lawsuit could raise investor concerns and thus the interest rates on the bonds. A higher interest rate could cost California utility customers millions of extra dollars over the 20-year life of the bonds.

“Investors could say the risk just got bigger,” said Claire Cohen, vice chairwoman at Fitch, a Wall Street credit-rating agency. “Last week you said it was possible that there’s litigation, now you’ve got it.”

The 27 million people served by PG&E;, Southern California Edison and San Diego Gas & Electric are obligated to pay back the bonds through a monthly charge on their bills estimated at $3.50 for the average homeowner.

PG&E; officials insist that they are not trying to block the bond sale. Instead, they want the state to prove that the billions of dollars its customers are expected to pay back are reasonable costs. PG&E; also argues that the state’s power-buying arm, the Department of Water Resources, violated rules that require public hearings before such charges can be imposed.

The costs under contention include $37 billion worth of long-term energy contracts, some of which the state itself calls “unjust and unreasonable.” The state has petitioned the Federal Energy Regulatory Commission to void the contracts because they were signed in the spring of 2001 as prices in California’s dysfunctional power market soared.

“The state cannot have it both ways,” wrote PG&E; President Gordon R. Smith in a letter Thursday to Angelides. “It cannot foist these costs on our customers as ‘just and reasonable’ while arguing fervently at FERC that they are not.”

PG&E; spokesman John Nelson said the lawsuit was filed after DWR refused on Oct. 8 to reconsider how much money it expects PG&E; to pass on from its customers.

“If there’s a wrench to be thrown, it was in DWR’s hands, and they did the throwing,” Nelson said.

Wall Street analysts said they expected a PG&E; lawsuit. Credit-rating agencies took it into account when they gave mixed scores to the bonds last month and insisted that the bond carry multibillion-dollar reserves. The official bond documents released by the treasurer’s office on Oct. 3 spell out the risk of litigation.

Dan Solender, principal and portfolio manager for mutual fund giant Vanguard Group, called the lawsuit a “cloud” over the bond sale.

He said that state officials need to respond quickly to the lawsuit to reassure investors.

“There has to be a lot more information before investors can be comfortable buying the deal,” Solender said. “If it gets resolved sufficiently, it shouldn’t have any major impact, but it’s really hard to specify what the impact will be at this point.”

Angelides released a short statement Friday, calling the lawsuit “not unexpected.”

“We currently intend to proceed forward as originally anticipated, with the sale of the first bonds next week,” he said.