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April 9, 2001

Pacific Gas & Electric Co. Declares Bankruptcy

by Will McNamara 
Director, Electric Industry Analysis

Pacific Gas & Electric Co. (NYSE: PCG), the utility unit of PGOCorp., on 
Friday filed for reorganization under Chapter 11 Bankruptcy Code in the U.S. 
Bankruptcy Court for the Northern District of California in San Francisco. 
The company said it is taking this action in light of its uncollected energy 
costs, which are now increasing by more than $300 million per month; 
continuing CPUC decisions that economically disadvantage the company; and the 
now unmistakable fact that negotiations with Gov. Gray Davis and his 
representatives are going nowhere. Pacific Gas & Electric Co. reportedly has 
more than $9 billion in uncollected costs for wholesale power purchases. 
Neither PGOCorp. nor any of its other subsidiaries, including its National 
Energy Group, have filed for Chapter 11 reorganization or are affected by the 
utility's filing.  

Analysis: Despite the fact that Pacific Gas & Electric Co.'s bankruptcy 
filing has been in the making for several months, and that its financial 
insolvency appeared inevitable, the actual filing for Chapter 11 protection 
on Friday caught many by surprise, including California's top officials. 
Ironically, the utility's 13 million customers may end up being the least 
impacted by the bankruptcy, as Pacific Gas & Electric Co. will remain in the 
business of providing power while it works its way through bankruptcy court. 
However, there is little doubt that the bankruptcy filing of California's 
largest utility will spark many reverberations throughout the state and 
across the country, the full impact of which is not presently known.  

There naturally is a great deal of industry press surrounding this major 
news, so I won't waste time regurgitating information that is being widely 
disseminated. Rather, I will focus on what I believe to be some of the key 
elements of this story. 

1. The bankruptcy was announced the day after it became clear to PGOthat the 
state of California would not be purchasing its transmission assets at a 
price that PGObelieves the assets to be worth. In addition, a new rate 
increase approved by the governor could not be used to repay any of Pacific 
Gas & Electric Co.'s  existing debts. The night before the bankruptcy filing, 
Gov. Davis delivered a televised address to the state in which he indicated 
that the rate increases would be contingent on PGOselling the transmission 
assets to the state. In other words, if PGOagreed to the state's price for 
the transmission assets, a portion of the rate increase would be used to 
alleviate the utility's subsequent debts. The inside word is that Pacific Gas 
& Electric Co. was finally driven to its bankruptcy decision due to 
disagreements with Gov. Davis regarding the price of the transmission assets, 
which could be anywhere from $3 billion to $9 billion. Officially, Pacific 
Gas & Electric Co. said that its negotiations with the state "were going 
nowhere." The CPUC had previously approved rate increases of up to 46 percent 
for the customers of SCE and Pacific Gas & Electric Co., but clearly 
stipulated that none of this added revenue could be used to pay off existing 
debt. In his statewide address on the eve of the bankruptcy, Gov. Davis 
reluctantly announced an additional rate increase for non-residential 
customers that would average about 26.5 percent. Davis had fiercely resisted 
any form of a rate increase to accommodate Pacific Gas & Electric Co.'s debt. 
The official PGOresponse to both increases was that they were insufficient to 
pay off existing debts of the utility operation. 

2. PGOCorp. and other non-utility subsidiaries are not impacted by the 
bankruptcy measure (at least for now). Due to a shrewd financial 
restructuring that was approved by FERC a few months ago (see 1/12/01 Issue
Alert for more information), high-profit subsidiaries such as National Energy 
Group and PGOGas Transmission Northwest Corp. were placed into a 
special-purpose, bankruptcy remote entity known as GTN Holdings LLC. 
Consequently, these non-regulated subsidiaries (along with the parent 
corporation) may not be impacted by the utility's bankruptcy filing. The U.S. 
federal bankruptcy judge ultimately may take a closer look at how profits 
were divided among the parent operation and other non-regulated subsidiaries, 
but for the time being only Pacific Gas & Electric Co. has declared 
bankruptcy. 

3. Power suppliers still owed money by PGOcould likely never get paid. Much 
of Pacific Gas & Electric Co.'s $9 billion debt is owed to power suppliers 
that sold power to the utility over the last year or so. With the onset of 
lengthy legal proceedings, it becomes more unlikely that these power 
suppliers will be paid what they are owed any time soon. Consequently, power 
suppliers owed more than $100 million by Pacific Gas & Electric Co. also saw 
their stocks drop as a reaction to the bankruptcy announcement. According to 
a report in Reuters, Duke Energy (NYSE: DUK) was down $2.65 or 6.25 percent 
at $30.75; Dynegy Corp. (NYSE: DYN) was off $2.58 or 5.07 percent at $48.34; 
Williams Companies (NYSE: WMB) was $2.26 or 5.4 percent lower at $39.60; and 
Reliant Energy (NYSE: REI) lost $2.70 or 5.95 percent to $42.65. In addition, 
there is the real question of whether or not such power suppliers will be 
willing to provide power used by a bankrupt company (even if the state of 
California remains involved as the buying intermediary). For its part, 
PGOCorp. Chairman Bob Glynn said that the utility subsidiary intends to 
eventually "pay all our debt" in full but he did not report a specific 
figure. In addition to the power suppliers, banks that have provided loans to 
Pacific Gas & Electric Co. (such as Bank of America, Wells Fargo and J.P. 
Morgan Chase) could all be impacted by the bankruptcy. Pacific Gas & Electric 
Co.'s preliminary bankruptcy filing lists its top creditor as Bank of New 
York, to which it owes more than $2.2 billion. Although some payments may be 
made after years of litigation, such lenders and bondholders may be forced to 
write off billions of dollars that were previously advanced to Pacific Gas & 
Electric Co. as losses.  

4. The blame game is in full force. Davis and state regulators have 
repeatedly blamed out-of-state generators for price gouging and federal 
regulators for failing to impose wholesale rate caps on electricity prices. 
Also, Gov. Davis has issued harsh words against PG&E. Over the weekend, Davis 
appeared on two nationally televised news programs to berate PGOfor awarding 
an estimated $50 million in bonuses and raises to about 6,000 midlevel 
managers and support staff on the eve of the utility's bankruptcy filing. 
"Management at PGOis just focused upon padding their own pockets, not in 
discharging their duty to serve their many customers in California," Davis 
reportedly said. Earlier, Davis had previously issued a statement saying 
PGO"management is suffering from two afflictions: denial and greed." In 
addition, California regulators have criticized FERC for not implementing 
wholesale price caps in the Western region, which they believe would help to 
stabilize the market in California. U.S. Sen. Dianne Feinstein said that, "it 
is inexcusable that FERC has refused to intervene and provide temporary 
stability and reliability [through the use of wholesale price caps]." 
Feinstein vowed to introduce legislation to force federally mandated price 
caps for the entire Western region. For its part, FERC refused to take 
responsibility for the California crisis, saying instead that Pacific Gas & 
Electric Co.'s bankruptcy filing was "the unfortunate result of a massive 
failure by policymakers at all levels." PGOblames decisions made by the CPUC 
and Gov. Davis that it believes "undermined" its ability to return to 
financial viability and recover its uncollected costs. Specifically, 
PGOblames the California government for not allowing it to recover prior 
wholesale power costs through recent rate increases, which essentially has 
kept the utility in a debt situation. PGOalso believed that the governor was 
not moving quickly enough to reach an agreement regarding the sale of PG&E's 
transmission system to the state.  Consumer groups continue to lambaste the 
utility and its parent company, which they claim has $30 billion in available 
capital that could have been used to pull its subsidiary out of debt.  

5. Could the bankruptcy filing of SCE be far behind? The second-largest 
utility in California continues to maintain that it intends to avoid 
bankruptcy and it believes it can work out a "comprehensive solution to our 
current crisis." However, because the two utilities have been so closely 
linked through the state's energy crisis, PG&E's decision to declare 
bankruptcy certainly raises the odds that SCE will eventually follow suit. In 
fact, Moody's Investors Service is reporting that Pacific Gas and Electric 
Co.'s bankruptcy increases the possibility of an SCE bankruptcy filing. 
Further, Moody's is reporting that numerous creditor groups, particularly the 
small generators, have become impatient with the time that it has taken to 
advance settlement discussions with the state of California, thereby 
increasing the prospects for an involuntary petition by a group of creditors. 
On April 6, the day of Pacific Gas & Electric Co.'s bankruptcy filing, shares 
of SCE tumbled $4.29, or nearly 34 percent, to finish trading at $8.35. 
Surprisingly, SCE shares jumped about $2.00 by mid-morning on April 9, to 
trade at about $10.00. The reason for the increase is not fully known, 
although SCE continues to remain involved in negotiations with Gov. Davis 
regarding its own outstanding debt. 

6. This is just the start of a long, drawn out legal process. The electric 
utilities that previously declared bankruptcy (including El Paso Electric, 
Public Service Company of New Hampshire and El Paso Electric) all found 
themselves embroiled in legal proceedings for several years. Thus, although 
we may not know the ultimate outcome for Pacific Gas & Electric Co.'s 
bankruptcy proceedings, we do know that the company will be essentially 
consumed with litigation and a thorough investigation of its financial 
records for the foreseeable future. Federal Bankruptcy Judge Dennis Montali 
of San Francisco has been assigned the PGOcase. Montali will have the 
ultimate power to approve or reject any plan for how PGOreorganizes or 
arranges to repay its debt. Several positive elements of the process that 
might work to PG&E's advantage is that the utility will now be held 
accountable to only one individual, Judge Montali. Pacific Gas & Electric Co. 
will no longer have to appease several regulatory entities across state and 
federal lines. Second, by the time that the bankruptcy proceedings are 
completed, market dynamics hopefully will have improved and California's 
supply problem should be resolved. Consequently, Pacific Gas & Electric Co. 
could eventually rise again, like the phoenix out of its ashes, and emerge as 
a much stronger company than it is today.  

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