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It'll be a big battle in uncharted (bankruptcy) waters ....

PG&E restructuring bid draws state ire 
By Dale Kasler and Carrie Peyton
Bee Staff Writers 
(Published Sept. 21, 2001)

In a controversial attempt to dig its way out of bankruptcy, Pacific Gas and Electric Co. proposed a radical restructuring Thursday that would pay off its debts but end state regulation of the utility's valuable hydroelectric and nuclear plants.
To make the plan work, PG&E asked a U.S. bankruptcy judge to override state laws and regulations governing power-plant ownership -- a request that triggered immediate opposition from California officials.

PG&E said the plan, a complicated blend of asset transfers, debt refinancing and corporate spinoffs, would restore the utility's financial health and creditworthiness without requiring additional rate hikes or a state "bailout." Divorcing the utility from its parent company, the plan would pay off the entire $13.2 billion of debt PG&E accumulated during California's poorly executed era of deregulation.

The plan, filed in U.S. Bankruptcy Court in San Francisco, had the support of a key block of creditors, including independent energy generators, whose approval is necessary to any reorganization plan.

But it ran into immediate opposition from Gov. Gray Davis and other state officials, setting up a potentially fierce battle. Despite PG&E's claims to the contrary, they warned the plan could trigger more hikes because PG&E could charge nearly double the amount it currently charges for electricity from the hydro and nuclear plants. The proposal would have the state Public Utilities Commission relinquish control over those plants to the Federal Energy Regulatory Commission.

FERC "has proven over the last 18 months to be ... no friend of the ratepayer," Davis told reporters Thursday. "The PUC, while far from perfect, has been a stronger advocate for ratepayers than the Federal Energy Regulatory Commission. ... I'm very wary of PG&E's proposal to transfer all of its generating capacity from a regulated environment to a non-regulated environment."

Proposed PG&E reorganization
PG&E wants to:

 Split the parent company, PG&E Corp., and a scaled-down utility into two unrelated companies.

 Override state law in order to transfer state-regulated power plants to the unregulated PG&E Corp.

 Sell power from those plants to the regulated utility for 12 years for well over currently permitted rates. After 12 years, have the ability to charge market rates.

 Give shareholders of PG&E Corp. stock in the utility company.

PG&E pledges it would:

 Repay all its debts -- about $13.2 billion.

 Retain all employees.

 Get out of bankruptcy by December 2002.

 Avoid rate increases.

 

The PUC vowed to fight the plan in court. "I don't think the judge is going to do it," said PUC President Loretta Lynch.

Consumer advocates noted that PG&E has been pushing for years to end state regulation of its hydro plants. "It's complete piracy," said Nettie Hoge, head of The Utility Reform Network of San Francisco. "It's the most audacious thing I've ever seen."

Filed six months after the utility sought bankruptcy protection, the plan calls for PG&E to be spun off from PG&E Corp., but the utility would transfer its hydro and nuclear plants and some other assets to the parent.

That would violate a state law, passed as a response to the energy crisis, prohibiting utilities from selling any of their generating plants before 2006. The law was intended to keep electricity in California hands at a time when out-of-state generators were charging ultra-high prices to PG&E and Southern California Edison.

PG&E acknowledged the conflict with state law but said it will ask the bankruptcy court -- a federal entity -- to override the state law. Legal experts said it's not clear whether a bankruptcy judge would ignore state law, and in prior rulings U.S. Bankruptcy Judge Dennis Montali has sided with state officials.

"Any federal court would be very reluctant to go in and override state laws," said influential state Sen. Debra Bowen, D-Marina del Rey, chair of the Senate Energy Committee.

Robert D. Glynn Jr., PG&E's chairman, called the transfer a good deal for customers. He said the electricity from those plants would be sold back to the utility at about $50 a megawatt hour -- "the lower end" of current rates -- under a 12-year contract.

But that's almost double the existing rates for those plants, critics said.

And Gary Cohen, the PUC's general counsel, said the company would be free to charge market rates when the contract runs out, putting utility customers at the mercy of an independent, unregulated generator.

"This is more of what got us into this mess to begin with," Cohen said.

Despite the friction between PG&E and the state, the plan requires assurance from the PUC that the utility will be allowed to collect its wholesale power costs in the future from ratepayers, regardless of how high they go. Such assurance will make the utility creditworthy again and able to borrow money to fund the reorganization, PG&E said.

The plan also requires approval from federal officials and a "yes" vote from a majority of PG&E's creditors, along with Montali.

Glynn said the plan could be completed by December 2002, enabling the utility to resume buying electricity. The state has been buying power for PG&E since January, when it became insolvent.

While the PUC raised rates an average of 40 percent this year, the reorganization plan doesn't require another rate hike, Glynn insisted. "From the customers' view, this transaction will be seamless," he said. The same should be true for most employees, he said.

The PG&E chairman, whose company has feuded with Davis for months, also boasted that PG&E isn't "asking the state for a bailout or a rescue" -- a jab at Davis' as-yet-unsuccessful effort to sell the Legislature on a multibillion-dollar rescue for Edison.

It's unclear what impact PG&E's proposal would have on Edison's attempt to avoid bankruptcy. Edison's creditors, already angered that the Legislature adjourned without passing the Davis-backed plan, might conclude that Edison is better off in bankruptcy and could push the Southern California utility into court, analysts said.

The PG&E proposal involves a complicated series of property transfers and bond offerings that would leave the current PG&E Corp. split into two separate, publicly-traded companies.

The utility company, Pacific Gas and Electric, would become strictly a retailer and would sell other assets -- including its hydro and nuclear plants, transmission wires and gas pipelines -- to PG&E Corp. for $4.06 billion in cash and IOUs. PG&E Corp. shareholders would receive stock in the slimmed-down utility, although the details of the stock transaction haven't been worked out.

The bankruptcy proposal represents the fourth time in three years that PG&E has tried to remove its hydro plants from state control. The PUC and Legislature have resisted because of potential impacts on costs and the environment.

Despite the criticism, PG&E said removing those assets from regulators' oversight is essential to making the plan work. Why? Because PUC rules limit how much money the utility can borrow against those assets, said utility spokesman Ron Low. If the assets became property of PG&E Corp., the corporation could borrow a lot more money and use the proceeds to pay its debts. Glynn said he's had "in-depth discussions" with investment bankers about issuing new bonds.

Also, by removing the generating plants from PUC oversight, the plan can produce more cash for debt repayment, said credit analyst David Bodek of Standard & Poor's Corp. in New York.

If state officials fight the plan, "the question arises, 'How do you discharge these (debts)?' " Bodek said. "Here's a plan that does that."

The plan would pay creditors $9.1 billion in cash and $4.1 billion in bonds. Creditors with debts of more than $100,000 would get 60 percent in cash and 40 percent in bonds, which will be paid in 10 or more years, said Paul Aronzon, attorney for a committee of unsecured creditors.

"There's some credibility here, and it works," Aronzon said of the plan.

Gary Ackerman, a spokesman for independent generators, said his group would probably accept the plan, even if it means they have to wait years to get some of their money.

Shareholders also endorsed the plan. PG&E Corp.'s stock jumped $1.22, to $15.72, on a day when the markets took another bad fall.