PG&E Bankruptcy a '10 on the Richter Scale'
California's political, regulatory and economic landscape was altered last week by the financial earthquake from Pacific Gas and Electric Co.'s bankruptcy filing on Friday in San Francisco. The bankruptcy adds a whole new dimension to the state's continuing energy crisis, putting ever-more dire economic consequences on the electricity supply/price crunch that gripped the state since last summer.
The bankruptcy of one of California's largest investor-owned utilities "should be a loud and clear wake-up call to Californians, the Congress and the Bush Administration that this crisis has reached seismic proportions," said Rep. Bob Filner, (D-CA). "It's a 10 on the Richter scale of the state's economy."
PG&E officials attributed the action directly to the failure of the state's political and regulatory processes, which have been led in high-profile fashion by the governor. The company said it is taking this action in light of its "unreimbursed energy costs that 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."
Neither PG&E Corporation nor any of its other subsidiaries, including its National Energy Group, filed for Chapter 11 reorganization or are affected by the utility's filing.
"We chose to file for Chapter 11 reorganization affirmatively because we expect the court will provide the venue needed to reach a solution, which thus far the state and the state's regulators have been unable to achieve," said Robert D. Glynn Jr., chairman of the utility. "The regulatory and political processes have failed us, and now we are turning to the court."
Glynn added that the company's objective is to move through the reorganization process as quickly as possible, "without disruption to our operations or inconvenience to our customers."
Glynn detailed the reasons for the bankruptcy filing as follows:
- failure by the state to assume the full procurement responsibility for the utility's "net open position," which had the result of increasing financial exposure to unreimbursed wholesale energy procurement costs;
- the impact of actions by the California Public Utilities Commission (CPUC) on March 27 and April 3 of this year that created new payment obligations for the company and undermined its ability to return to financial viability;
- lack of progress in negotiations with the state to provide recovery of $9 billion in wholesale power purchases made by the utility since June 2000, which have not been recoverable in frozen rates; and
- the adoption by the CPUC of an illegal and retroactive accounting change that would appear to eliminate our true uncollected wholesale costs.
"In addition, despite Pacific Gas & Electric's best efforts to work with the state of California to reach a consensual, responsible, fair and comprehensive solution to California's energy crisis, no agreement has been reached with the governor, and the governor's representatives have dramatically slowed the pace and the progress of discussions over the past month. Furthermore since last fall, we have filed comprehensive plans for resolving this matter with the CPUC, but they have not acted affirmatively on them," said Glynn.
On Oct. 4, 2000, the utility sought emergency rate action by the CPUC and in November 2000, it filed a rate stabilization plan, which, if adopted, would have increased electric prices by an initial 25%, compared with the 46% recently adopted by the CPUC, the company noted.
"Neither request was acted upon. Had the state acted at that time: Pacific Gas and Electric would have been kept creditworthy; Pacific Gas and Electric would have been able to enter into long-term power purchase contracts at prices lower than those announced by the state; the state would not have had to almost exhaust the state's budget surplus by spending billions of dollars to purchase power for the utility's customers; the state would not now need to issue billions of dollars in bonds to cover these power purchases; and the state would not now be advancing a proposal to spend billions of dollars to purchase the state's three investor-owned utility's electric transmission systems.
"This year, the state has spent more than $3 billion on power purchases and, with the CPUC, has arranged to be reimbursed for these expenses," noted Glynn. "In contrast, since June Pacific Gas and Electric Company has spent $9 billion in excess of revenues to pay for power for its customers and exhausted its ability to continue borrowing, but there has been no progress on a plan to reimburse it for those expenditures as provided by law. Statements by the Governor and other public officials since last September gave us reason to believe that a solution could be reached outside the context of Chapter 11 that would restore the utility's financial viability and enable it to meet its financial obligations equitably. However, these statements have not been followed up by constructive actions, and a reorganization in Chapter 11 is now the most feasible means of resolution."
Glynn said the utility will utilize existing resources to continue operating its business during bankruptcy, including paying vendors and suppliers in full for goods and services received after the filing. The utility will pay electric commodity suppliers as provided by law. The utility also intends to continue normal electric and gas transmission and distribution functions during the Chapter 11 process. Employees will continue to be paid. Health care plans and other benefits for employees and most retirees will continue. The utility's qualified retirement plans for retirees and vested employees are fully funded and protected by federal law.
Immediately following the action, some of the unanswered questions were: Will all the past debts be paid? Will the CPUC-proposed rate increases be implemented or will the court be asked to set rates? And will negotiations continue with the governor's representatives?
Noting that a bankruptcy process is "uncertain and fluid," PG&E senior executives said they expect eventually to recover all of the uncovered costs that exceed $9 billion and to pay in full all of the creditors and debtholders. While the court proceedings continue, the utility operations will go on as usual, and although blackouts this summer are inevitable, the bankruptcy filing will actually help protect the utility's ability to provide safe and reliable electricity and gas service, the executives said.
"This largely is a financial and regulatory crisis, not an operating crisis," said Gordon Smith, CEO of the PG&E utility, during a conference call. The investor-owned combination utility's action comes on the heels of another week of heightened expectations from the state's political leaders but little or no progress in resolving the situation. It also was taken less than 24 hours after an unprecedented, five-minute statewide address by Gov. Gray Davis Thursday night on the electricity crisis in which the governor offered very little in terms of progress in ongoing negotiations with the major investor-owned utilities or in signing more firm contracts for power. The governor's address seemed at first glance to disappoint nearly all the major stakeholders, offering a slightly different application of a recently approved retail electricity rate hike and support for a state public power authority, but mostly just a rehash of past speeches and news media announcements.
What the formal bankruptcy means to the state's efforts to acquire the private-sector utilities' transmission assets, create a state power authority and other moves was not immediately clear, although both PG&E and the state's other near-bankrupt private utility, Southern California Edison Co., held conference calls with the financial community in which they added some clarification.
Edison said it is at a very critical stage in its negotiations with the state and has to come to an agreement within in days. While Edison is stressing it wants to avoid bankruptcy, it would not completely rule out the possibility of it occurring.
"This is a political and regulatory problem and it needs a political and regulatory solution," said Edison's Ted Craver, senior vice president and CFO. "Our discussions continue with the governor and it is fair to say they are in the advance stage."
The governor and Edison International CEO John Bryson were scheduled to meet Friday evening, according to Craver, offering it as an example of the "advanced stages" in which the negotiations are now. Craver said Edison is getting indications from the governor that the utility will be able to cover all of its past debts and its net short position for wholesale spot power buying going forward.
He said progress was being made on the utility's "core principles."
"We certainly do not believe that bankruptcy protection is necessary or preferable to getting this situation resolved. It actually would slow down the process and is an expensive proposition. Legal costs go up dramatically and you cannot make interest payments to creditors. There is also less operating flexibility and some potential risk to our operation. We worry whether it would make service and safety reliability more uncertain."
Duke Energy's California-based spokesperson said his company "regrets" the PG&E action and noted that Duke has taken a number of steps to protect its own financial standing in the wake of bankruptcies by one or more of the California utilities.
The bankruptcy "puts things on a more commercial footing," said Frederick Pickel, Ph.D., a California-based vice president with energy consultants, Tabors, Caramanis & Associates in Cambridge, MA, who thinks the ultimate solution requires real retail price signals so end-users can begin significantly cutting back their usage
"Conservation involves investment and changes in business operations, and that won't occur until businesses see the price changes and the economic incentives," Pickel said. "Thursday's prices in the West ranged from 12.5 cents per kilowatt-hour to 30 cents per kilowatt-hour. Many users, including many major users, are only paying 5.5 cents per kilowatt-hour for this energy. Why should they make conservation investments when they can get a subsidized ride?"
San Diego-based Sempra Energy used the response to PG&E's bankruptcy to "reaffirm" their companies "strong financial position and the significant regulatory and legislative differences between its utility, San Diego Gas and Electric Co., and PG&E's utility. SDG&E has assurances for covering all of its wholesale power costs eventually, subject to regulatory review, through special legislation passed last summer to buffer the retail electric rate shock its customers experienced because its rates had been unfrozen.
Several financial observers commented that ratepayers were likely to feel more pain under a court settlement, since a bankruptcy judge is more likely than elected officials to order large rate hikes.
Rep. Billy Tauzin (R-LA) said the bankruptcy was "as predictable as night following day and should serve as a warning to those who want to manipulate the marketplace through price controls. It simply doesn't work." He said Congress is committed to helping California through this energy crisis but "phony politically driven solutions are not the answer."
PG&E Corp.'s common stock price ended the day down nearly 37% at $7.20. Its downward spiral was closely followed by Edison International, parent of Southern California Edison, which plunged nearly 34% to close at $8.35. The common stock prices of power producers that are creditors of PG&E and its utility subsidiary also took a hit Friday. Stock of Calpine, which has a heavy exposure in California, lost the most ground, dropping by more than 8%. Dynegy's stock was down more than 6% and Reliant Energy and Duke Energy both were down about 5%.