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Former PG&E Merchant Unit Criticized for Bad Market Decisions

While characterizing the Pacific Gas and Electric Co. three-year Chapter 11 bankruptcy process as a "political choice" made by a solvent company, a PG&E Corp. executive last Monday chastised the former PG&E merchant energy unit for making a lot of bad market decisions.

The former National Energy Group (NEG) has since also gone into Chapter 11, changed its name and been broken up and basically sold off, but Dan Richard, PG&E senior vice president for public affairs, used the merchant unit to point to the remaining company's stability at an energy industry conference Monday in Santa Monica, CA.

"Unlike the utility that went bankrupt because of the complete failure of the state's regulatory and legal framework, [NEG] made a lot of bad market choices and they got out of whack with the market," Richard told a Law Seminars International conference, "Energy Strategies for Cities and Counties."

"They went long when they should have gone short, and they did a couple of other things, and $5 billion of shareholder equity went out the window when that division collapsed and we lost our stake in it."

Richard said today PG&E has only one major business unit -- the utility -- in which he is also a senior officer. "I have learned that many different parts of this market can go sideways and upside down faster than you can imagine."

During a 12-year part of Richard's work history -- while an energy consultant and eventually an executive at PG&E -- he was an elected member of the board of directors for the Bay Area Rapid Transit District (BART), the public transit system serving the greater San Francisco Bay area, and he watched (having recused himself) the transit agency secure a contract for electricity from the Bonneville Power Administration (BPA) when direct access became available in California in the late 1990s.

"Electricity is a big deal when you're running an electric train system," Richard said. "What happened? For three years it was great, then the market went sideways and BART's contract went sideways."

From his BART and PG&E utility experiences, Richard said he realized that credit ratings are extremely important. That is why it was crucial when the giant utility came out of Chapter 11 a year ago with a court-approved reorganization and settlement that it was boosted to the lower rung of investment-grade credit. PG&E Corp. and the utility were ring-fenced from any fallout from the failure of NEG, and, in fact, the parent company reaped some lucrative federal income tax savings during the merchant firm's last years of negative financial results.

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