California regulators approved a plan Thursday to pull Pacific Gas & Electric Co. out of bankruptcy, leaving ratepayers to foot most of the bill for the state’s ill-fated experiment with power deregulation and drawing the curtain on one of the darkest episodes of the energy crisis.
PG&E; jolted financial markets when it sought bankruptcy protection in April 2001, becoming the largest utility to do so up to that time. It also drew the wrath of then-Gov. Gray Davis, who had gone on statewide television the night before to reassure the public that he had the energy crisis in hand. “They have dishonored themselves” by moving into U.S. Bankruptcy Court, Davis declared.
Company predictions of a speedy exit from bankruptcy proceedings proved elusive as the utility and the Public Utilities Commission fell into a bitter legal battle, each devising its own plan for the company to pay its debts. In the end, both sides made many compromises.
“This decision is the beginning of the end of a very difficult period of time for California, this commission and PG&E;,” PUC President Michael R. Peevey told a standing-room-only crowd at the agency’s headquarters here Thursday. “Today we have improved the business climate of the state and assured affordable electricity for millions.”
By a 3-2 vote, utility commissioners decided that PG&E;'s ratepayers -- and not shareholders of parent company PG&E; Corp. -- would shoulder the bulk of the utility’s financial burden from skyrocketing power costs. Those were triggered, in large part, when Enron Corp. and other energy wholesalers manipulated the market.
The total cost of the nine-year reorganization plan, based on a settlement crafted by PG&E; lawyers and PUC staff, was pegged at $7.2 billion by proponents. Detractors said the tab could top $9 billion.
The reorganization plan, which still must be approved by the Bankruptcy Court, would pay PG&E;'s creditors all of the $12 billion they are owed -- an unusual outcome in the world of large corporate bankruptcies. Typically, creditors aren’t made whole. Much of the money that PG&E; owes is for power purchases.
The plan relies on $8 billion in new debt financing and $4 billion in cash that the utility already has collected, thanks to big rate increases granted during the energy crisis.
In addition, some maintained, the settlement would hand the utility several financial windfalls to be paid by customers. These payouts, critics noted, would far exceed anything won by Southern California Edison in the rescue package it hammered out with the PUC in 2001.
PUC Commissioner Loretta M. Lynch, who voted against PG&E;'s reorganization plan, said the company had cut a particularly lucrative deal for itself by making sure more than $1 billion in once-disputed costs would be covered. These include more than $400 million in “unreasonable” power purchases, Lynch said, and a nearly $100-million contract to protect the utility’s parent against fluctuations in natural gas prices.
“We just gave PG&E; 10 early Christmas gifts ... all financed on the ratepayers’ credit card,” said Lynch, who predicted legal challenges to the settlement.
Although the reorganization’s overall cost to ratepayers promises to be hefty, they are likely to see lower electricity bills in the years ahead. That’s because rates shot up to unprecedented levels -- twice the national average -- during the 2000-01 energy debacle. Energy experts noted that ratepayers would have been in for even more savings if PG&E; hadn’t elected to file for bankruptcy protection and hadn’t won so many concessions from the PUC.
“Rates will be lower, but they could be lower still,” said Debra Bowen, the Marina del Rey Democrat who chairs the state Senate committee overseeing energy issues.
PG&E; Corp. Chief Executive Robert D. Glynn Jr. said the plan would provide a rate reduction early next year of at least $670 million for the utility’s 4.8 million customers in Northern and Central California and would resolve uncertainty for investors, who have given up nearly $2 billion in dividends. It’s unclear just how the rate relief is to be divvied up among households and businesses.
“After Pacific Gas & Electric Co. emerges from Chapter 11, it can return to the traditional roles it has played in California’s economy, roles that have been interrupted by the challenges of the energy crisis,” Glynn said. Under Chapter 11 of the U.S. Bankruptcy Code, a company is allowed to continue operating under existing management while it works out a plan to repay creditors.
The plan would let PG&E; exit bankruptcy protection early next year with an investment-grade rating on its debt, which currently is considered speculative “junk” by Wall Street credit raters. An investment-grade rating would allow the company to raise money more cheaply, enhancing its ability to buy electricity and natural gas and to upgrade its equipment.
The agreement also would provide environmental benefits, including the protection of 140,000 acres of sensitive land surrounding PG&E;'s hydroelectric power plants, Glynn said.
Critics of the deal abounded, but a key consumer activist group -- the Utility Reform Network -- agreed not to oppose the settlement, saying it was probably the best that could be expected. TURN, as the group is known, reached a compromise with PG&E; on Monday that sliced $1 billion off the cost of the plan by refinancing part of the debt necessary to pay off creditors. That provision still needs approval from the Legislature.
Thursday’s PUC vote invited comparison between PG&E;'s settlement and the course taken by Southern California Edison, which teetered on the verge of bankruptcy during the energy crisis but worked with regulators to avoid Chapter 11. Edison’s accord with the PUC allowed it to use high rates to pay off its debt.
Three years later, industry analysts and consumer groups say the verdict is clear: Edison’s ratepayers got the better deal.
“We’re going to way overcompensate PG&E; to make this bankruptcy go away” -- mostly at the expense of customers, said Truman Burns, an analyst with the Office of Ratepayer Advocates, the PUC’s independent consumer advocacy arm, which opposed the PG&E; plan. “It’s a much fatter deal than Edison got.”
For its part, Southern California Edison applauded the PUC vote. Strong utilities are “essential to the well-being of California consumers and businesses, and therefore the progress being made to restore PG&E; to full financial health is good news for our state,” the company said.
Lynch noted that there were some costs PG&E; ratepayers would have to absorb that were never even contemplated with Edison: more than $400 million in bankruptcy fees.
Peevey, the PUC president, defended the reorganization plan, saying it actually would bring PG&E;'s rates below those of Edison. However, critics of the settlement said Peevey’s projections were overly optimistic.
He also took issue with the notion that the PUC was handing PG&E; a windfall. “We are not rewarding them,” Peevey said. “PG&E; will always have the stain” of bankruptcy.
Rivera Brooks reported from Los Angeles, Reiterman from San Francisco.