$4.6B Claim Against PG&E Revived

A case alleging that PG&E Corp. fraudulently took $4.6 billion from Pacific Gas & Electric and failed to bail out its subsidiary utility prior to its bankruptcy filing is back in action. The Ninth Circuit Court of Appeals ruled January 10 that the attorney general's and San Francisco's restitution claims against PG&E Corp. should be decided by a state court. The "upstreaming" claim was originally raised in early 2002 but had languished in the federal appellate court since 2004. The plaintiffs also seek civil penalties and injunctive relief for unidirectional transfers of money in violation of California's Business and Professions Code. The restitution claim "is where the real money is," said Theresa Mueller, San Francisco deputy attorney. "It is an important decision and not just theoretical." PG&E Corp. spokesperson Brian Hertzog insisted that the claims are without merit. The transfer of money, which involved shareholder - not ratepayer - funds, was no more than a "routine transaction" approved by state and federal regulators, he said. PG&E Corp. will appeal and seeks a rehearing before a full panel of Ninth Circuit judges. The Ninth Circuit held that the charges at issue "constitute police or regulatory power actions that cannot be removed to bankruptcy court." Since the three-judge appellate court panel's 2-1 ruling, all the state claims originally brought together are now before the San Francisco Superior Court. The change of venue increases the attorney general's and San Francisco's odds. The state court is "less biased" than financially limited bankruptcy courts that seek to build up their caseload, noted Lynn LoPucki, bankruptcy law professor at the University of California, Los Angeles. If San Francisco Superior Court judge Robert Kramer agrees with Attorney General Bill Lockyer and San Francisco that up to $4.6 billion in restitution is owed, he will have the discretion to decide who gets the money - the utility or its ratepayers - Mueller said. A big unknown, however, is just where the money would come from. Possible sources include ratepayers, a bond issuance, a stock sale, or even a divestiture by PG&E Corp. of the utility. PG&E Corp. contends that any claim "would be precluded" because the utility agreed to release the parent from any energy crisis claims, according to the parent's Securities and Exchange Commission 8K filing this week. In October 2003, federal district court judge Vaughn Walker said the property dispensation at issue was a federal matter because PG&E Corp.'s assets were tied up in federal bankruptcy court. The attorney general, who was a party to the Chapter 11 proceeding, alleged that the utility's parent company violated an agreement with the California Public Utilities Commission. Under the commission's agreement, according to the state, the holding company was to give "first priority" to the utility's capital needs. San Francisco alleged that PG&E Corp. soaked up $4.6 billion from the utility between 1997 and 2000, leaving the utility bereft of funds and forcing it to seek rate increases and, ultimately, bankruptcy protection (Circuit, Oct. 17, 2003). Some worry that if the state and San Francisco were to prevail, the funds would be shifted out of one ratepayer pot into another, causing no real gain for utility customers. "The money would obviously have to come from the utility," according to LoPucki. "It is really hard to see what [the decision] accomplishes," he added. Since PG&E Corp. subsidiary National Energy Group filed its own bankruptcy petition in 2002, the utility virtually represents the sole asset of parent PG&E Corp. The holding company was formed in 1997. PG&E Corp. protected itself financially through ring-fencing and invested profits in its unregulated arm, the now dissolved National Energy Group. The Federal Energy Regulatory Commission allowed the ring-fencing that kept one subsidiary from being able to reach the assets of the other through the parent. PG&E Corp. took the utility's precrisis profits and "pissed it all away," said one energy economist, who asked not to be named. One possible avenue that could benefit ratepayers if the superior court agreed with the attorney general and San Francisco would be requiring the parent "to disgorge the profit over time," instead of all at once, according to the economist. He added that any borrowing needed to pay claims should not be allowed to affect PG&E's debt-to-equity ratio, which would raise ratepayers' costs. (Case #03-16976)

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$4.6B Claim Against PG&E Revived

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