California?s governor and the state?s largest investor-owned utility are both big and powerful. They both also like to fix things?and fix things their way. Indeed, neither appears to have qualms about circumventing the normal process to get what they want. While Governor Schwarzenegger threatens to go around the Legislature if it doesn?t meet his demands, Pacific Gas & Electric attempts to free its assets from state regulation. The two also share something else in common. The governor faces a current budget deficit of $8 billion. That is the size of PG&E?s cash crunch during the energy crisis. So as I listened to the governor talk about restoring the financial health of the state in the January 5 ?State of the State? address, I thought he could learn a thing or two from PG&E. He could also learn something from PG&E?s neighbor, Southern California Edison?particularly if he compared the two and their strategies for restoring their creditworthy status postcrisis. Determining which company pursued the wiser choice depends on the bottom line, and whether what matters is just the bottom line or whether social impacts and public relations are an issue. You may recall that in order to freeze billions of dollars in debt racked up during the 2000-01 energy crisis, PG&E sought relief in federal bankruptcy court and crafted an unprecedented and controversial reorganization plan. Edison, on the other hand, reached a less pricey backroom deal with state regulators to pay off its crisis-related debts that consumer groups were none too happy with. In January 2001, Edison defaulted on its debt obligations after suing the state in federal court for not lifting the rate freeze imposed by the deregulation law. In October of that year, Edison reached a secret deal with the California Public Utilities Commission that allowed it to collect $3.6 billion in rate surcharges well beyond the sunset date under the deregulation law, and put an end to the associated litigation. The agreement also allowed the utility to avoid a long-drawn-out fight in bankruptcy court. Consumer advocates attacked the secret deal for raising retail rates without the requisite public hearings, violating the state?s open-meetings and deregulation laws. But their challenge failed, and the agreement went into effect. Prior to 2000, the CPUC had wrestled for decades with utilities over their level of profits for providing an essential service to large and small ratepayers. The crisis resulted in regulators doing an about-face. It put regulators in the position of doing all they could to get the utilities financially healthy, and shifting the balance of power in the companies? favor. In April 2001, PG&E sought refuge in the federal bankruptcy court to stave off creditors, but more significantly to free its hydroelectric and nuclear power plants, worth billions of dollars, from state regulation. The CPUC vigorously fought PG&E?s efforts to free itself from state regulation. In addition, the California attorney general sued the utility in state court, claiming it fraudulently transferred $5 billion to its parent between 1997 and 2000 while the parent company refused to bail out the utility. After months of stalemate, the bankruptcy judge ordered the parties to reach a negotiated settlement behind closed doors, noting the growing mountain of legal bills. At the end of 2003, a last-minute reworked reorganization plan was approved. It included the creation of a hefty $2.2 billion fictitious ?regulatory asset.? The settlement did not remove state control over the utility?s assets and left the state suit over the $5 billion transfer from utility to parent intact. By the end of 2003, both utilities? ratings were restored to a respectable level. Stock prices that had fallen from their pre-crisis $30-plus\/share price to all-time lows?$8.80\/share for Edison and $9.25\/share for PG&E in October 2002?then rose significantly. If you compare the strategies from purely a financial point of view, which many do, then PG&E came out ahead. Because it was allowed to create a fictitious regulatory asset, PG&E got a $2.2 billion boost. But if it is only a numbers game, then why would PG&E and other companies, as well as politicians, spend so much capital on PR spin machines and crafting their image? And PG&E suffered a lot of bad PR because of its long fight and the huge hit on ratepayers. ?Bankruptcy is today a strategic weapon in business, powerful and commonly used, but the question is whether it was used effectively,? said Lynn LoPucki, a University of California, Los Angeles, School of Law bankruptcy professor. He questioned the soundness of PG&E?s tactics, noting it ?has changed the public image of PG&E.? In addition, PG&E failed to eliminate state control over its valuable hydropower plants and nuclear power facility. And the paying out of millions in bonuses sure didn?t help. ?Edison worked with the cards it was dealt,? said Bill Marcus, a principal energy economist with JBS Energy. In contrast, he asserted, PG&E?s entry into Chapter 11 was little more than ?an opportunity to cash in.? If you are a PG&E shareholder, you too may wonder about the outcome because you have not seen a dividend since the end of 2000. In addition, PG&E racked up around $475 million in legal and other professional fees. In contrast, the deal Edison reached with the CPUC outside the public arena allowed the utility to fill in its multibillion-dollar balance sheet from rates. The company spent far less on legal fees?though the amount was not publicly available?and reinstituted dividends in early 2004. It also did not get hit with as much bad press, though its ratepayers also suffered the brunt of the crisis. The ever-popular governor could learn a multibillion-dollar lesson from the state?s enormous and enormously powerful utilities. Strong-arming and end-running institutions comes with a price, and it is about more than the bottom line. There is the PR fallout from cutting essential services instead of raising taxes to suit special Republican interests. But it is about more than publicity: jeopardizing the health and welfare of many, particularly the most vulnerable, comes with hefty social and economic justice costs.