Bankruptcy Hammer Hangs over Heads of PG&E, Everyone Else

Pacific Gas & Electric does not want to get hammered by credit-rating agencies, the California Public Utilities Commission, or the bankruptcy court, which will soon decide whether to confirm or deny the PG&E?CPUC staff and the official creditors? committee deal. The CPUC, which is set to cast its vote December 18, doesn?t want to get hammered by the utility. Industrial, agricultural, business, and residential customers and unsecured creditors also don?t want to get nailed. And no one wants to keep getting hammered by high-priced lawyers and consultants. The drawn-out dispute over PG&E?s fate and that of its shareholders, ratepayers, and creditors?along with the state?is reminiscent of the folk song ?I?d rather be a hammer than a nail.? One can almost hear each of the above parties in their arguments for how PG&E should exit bankruptcy singing to the tune of Condor Pasa, ?I?d rather . . . Yes I would, I surely would. If I only could.? Just how big the tab will be to get PG&E out of bankruptcy and who gets hit with it?ratepayers and/or shareholders?was the crux of the final debate December 2 before the commission. The economic question turned, in this case, on whether the CPUC should support or reject, in whole or in part, the joint settlement negotiated in secret between CPUC staff and utility brass. ?The price tag will not be cheap,? said Paul Clanon, CPUC Energy Division director. He warned that changing the proposed settlement would constitute a counteroffer and insisted the commission adopt the staff-PG&E deal in its unadulterated form. Otherwise, the CPUC would be responsible for higher rates. This would be due, he said, to more uncertainty and a rise in PG&E?s costs for borrowing nearly $13 billion to pay creditors and related bankruptcy fees. Consumers Union attorney Mark Savage estimated the pending joint settlement would cost the utility?s 4.6 million ratepayers an average $2,000 over the nine years. Clanon?s prosettlement stance did not sit well with commissioner Loretta Lynch. ?Are you saying we are prohibited from voting on an alternative?? she asked. The commission has a duty to decide which plan will allow PG&E to become creditworthy while protecting ratepayers, she noted. She issued an alternate decision two days later that rejected the three alternates before the CPUC. ?I have difficulty with the take-it-or-leave-it approach,? said commissioner Jeff Brown, who is considered the crucial swing vote on the deal. Brown did not have trouble so much with the $2.21 billion regulatory asset that the deal seeks to create as with allowing PG&E to collect interest on the phantom asset for nine years, instead of for a shorter time frame. ?Are we suppressing rates so we can pay more cumulatively?? he asked. Under the deal, rates would be lowered by $0.05/kWh at the beginning of the year, after being raised by the CPUC 40 percent during the energy crisis. Brown noted his vote depended upon just how much the regulatory asset?s mortgage-like payment would cost. Two days later, Brown and commissioner Carl Wood also issued alternate proposals, bringing the total number of commission alternates to six. Brown proposed reducing the payback period on the regulatory asset to five years. In addition to CPUC president Mike Peevey?s proposal on the table that would keep the settlement intact, another, also by Peevey, would make a major change and keep the CPUC from guaranteeing dividends. A third, by administrative law judge Robert Barnett, would rewrite the deal to keep the CPUC?s more traditional ratemaking and ratepayer protections. The multibillion-dollar question is if the tentative settlement is changed by the CPUC, at what point does the adjustment become ?substantial??that is, when does it jeopardize PG&E?s investment-grade status? ?There is no good answer to that question,? said Dan Richard, PG&E vice president. He noted that the utility would not waive the investment-rating condition. Ratings agencies base their ratings on quantitative and qualitative?numbers and risk level?determinations. At the commission?s December 4 meeting, prior to the release of the alternatives by Brown, Lynch, and Wood, more than 50 people representing citizens and business, employee, and environmental groups made brief presentations. Many came out in support of the proposed settlement backed by Peevey, particularly business and minority representatives. Others took positions as varied as those of the individual commissioners. Many consider a recent Ninth Circuit Court of Appeals decision to have shifted the goal posts. ?It has changed the landscape,? Brown said. The Ninth Circuit decision requires PG&E to prove that a state law protecting the environment, health, or safety interferes with its achieving solid financial well-being. Robert Glynn, head of PG&E Corp., in a December 3 conference call with financial analysts, disputed that the federal appeals court decision alters the landscape. ?The ruling does not have a single bit of impact on the proceedings and the potential decision,? he claimed. As it was last week before federal bankruptcy court, the biggest sticking point was an accounting device called a ?regulatory asset.? The utility, CPUC staff, and the creditors? committee are pushing for the creation of a $2.2 billion regulatory asset that would pay an 11.22 percent return over nine years?estimated to cost about $5 billion in the end. Ratepayer advocates want that replaced with a $2.2 billion dedicated rate component (DRC). A DRC is debt secured by an earmarked revenue stream from rates and comes with significantly lower costs for ratepayers. The latter was rejected by all the CPUC alternatives on the table. Replacing a regulatory asset with a dedicated rate component, according to The Utility Reform Network, could save ratepayers between $600 million and $2.8 billion over nine years. The catch, however, is that some commissioners believe legislation would be required to authorize it. ?It?s dead,? said commissioner Susan Kennedy, adding that it would take six months to a year to get a bill passed in Sacramento. A totally separate pitch would involve the issuance of stock of around $1.5 billion to move the utility beyond bankruptcy. PG&E?s Richard said that creating more common stock did not stand a chance. That strategy has been applied to help insolvent businesses emerge from bankruptcy. PG&E, however, is a solvent debtor, and issuing stock ?would be an unfair dilution of equity,? Richard said. An early reorganization proposal by the creditors? committee and the CPUC proposed issuing preferred stock to raise PG&E?s financial ranking but was rejected by the utility. Another proposal would replace all of the commission alternatives and allow PG&E to continue collecting headroom. That would involve allowing PG&E to continue accumulating profits made on collecting rates above its costs?said to be $4 billion?for another year. Peevey balked at the last proposal, noting the disparity in rates between PG&E and Southern California Edison. Lynch?s alternate released December 4 embraces this proposal. PG&E chief executive officer Gordon Smith asked the CPUC to approve the joint deal. ?Will you resolve or prolong PG&E?s bankruptcy? Will you resolve or prolong the role PG&E will be playing in the future?? he asked. Although the utility has been in the bankruptcy court for two and a half years, Smith said time is of the essence. Currently, interest rates are very low, and PG&E will be able to take advantage of them only if it gets the credit-rating agencies? stamp of approval. Bob Cagen, Office of Ratepayer Advocates attorney, pleaded with the commission to maintain its jurisdiction over PG&E and adopt Barnett?s decision because of the deal?s high costs. ?PG&E will earn beyond what it earned before the crisis,? Cagen said. He was asked for specifics on numbers and alternative proposals but said he could provide neither because the parameters set by Barnett, who held the hearings on the tentative settlement, precluded alternative analyses. The rise in gains to shareholders, who have not received dividends since late 2001, would not be caused by the regulatory asset payback, according to some financial analysts. It is attributed to PG&E?s return on its expected cumulative $1.5 billion to $1.9 billion capital expenditure on deferred infrastructure, in particular much-needed transmission. This investment would increase its rate base, which generates a set return said to boost its bottom line down the road.

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Bankruptcy Hammer Hangs over Heads of PG&E, Everyone Else

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