Taxes Increase PG&E Bonds; Bankruptcy Consultants Win

Pacific Gas & Electric's $2.2 billion bankruptcy debt regulatory asset turned into a financing order request to the California Public Utilities Commission for $3 billion en route to becoming a dedicated rate bond. Was the extra $800 million a result of foul play? Not unless you consider federal taxes foul-which many do. "Every dollar that is paid is taxable income," said Bill Marcus, an economist with JBS Energy. "Arnold [Schwarzenegger] takes his cut, and [President George] Bush takes his." The money to cover the taxes would arrive before the taxes are due. According to PG&E spokesperson Ron Low, the state and federal taxes are estimated at about $1.5 billion on the $2.21 phantom regulatory asset principal. PG&E sought authority from regulators at the end of July to float $3 billion in two issues-one year apart. The utility noted at the end of last week that the amount was to "provide certainty on the tax treatment." The exact amount of the taxes on the refinancing will be determined by the Internal Revenue Service and CPUC rulings. PG&E told commission executive director Steven Larson on August 6 that it does not expect a formal response from the federal agency on the question of whether taxes on the issued bonds will be due in a lump sum or over "several months." Mike Florio, The Utility Reform Network senior attorney, added that the commission decision on the financing application and the IRS ruling "are 'critical path' issues, so whichever one takes the longest will hold up the bonds." Florio expects the cost of the regulatory asset to drop to $1.9 billion by the time the bonds are sold. The decrease is due to consumers' payments this year, as well as money due from the Federal Energy Regulatory Commission and attorney general settlements with private generators for refunds connected with alleged market manipulation. Any reduction in taxes owed will be trued up at a later date. Claims submitted to the bankruptcy court to pay for accountants, attorneys, tax consultants and financial advisers hired by PG&E and other Chapter 11 litigants amounted to about $450 million. According to Florio, ratepayers are not necessarily on the hook for those costs. "Rates will remain the same unless and until they ask to change them to include some of these costs," Florio said. "Given that the regulatory asset was so generous, they ought to be able to absorb this and still come out in great shape financially." Northern District Bankruptcy Court judge Dennis Montali will decide whether to approve the utility's consultant fee at a September 15 hearing.

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Taxes Increase PG&E Bonds; Bankruptcy Consultants Win

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