PG&E to Spin Off Utility in Proposed Reorganization Plan

A local utility company spin-off and creation of three new separate federally regulated electric and natural gas businesses are central elements of a reorganization plan filed Thursday by Pacific Gas and Electric Co. in its Chapter 11 proceedings in federal bankruptcy court. The plan calls for all creditors to be paid in full without any added retail utility rate increases or a so-called "bailout" from state lawmakers. The utility, a major part of PG&E Corp., said the official creditors' committee supports the plan, which the company expects to have fully implemented by the end of 2002.

At the heart of the plan is a splitting off of the utility's natural gas/electric distribution business from generation and transmission. The latter operations for both gas and electricity will be moved into the corporation as three separate businesses, all of which will be under the jurisdiction of the Federal Energy Regulatory Commission and other federal regulators.

Pacific Gas and Electric will remain the name of the local utility; the three new businesses for an interim period will be known as Gen (for the utility nuclear and hydroelectric assets); E-Trans (electric transmission system); and G-Trans (for the California natural gas transmission/storage system).

Saying that retail utility customers can "take to the bank" the assurance that service will continue unchanged without any rate increases, PG&E Corp. CEO Robert Glynn called the reorganization "big (one of the biggest ever), but simple and straightforward," noting that it follows a bankruptcy boilerplate for first outlining a reorganization and then using that new organizational structure to refinance and pay off creditors.

Glynn said the plan meets the company's stated objectives when it filed in bankruptcy court April 6 -- namely, "providing a means to pay all valid claims and get out of bankruptcy with a solid foundation" in place to move forward in restoring financial viability. All of the utility and new non-utility businesses will be investment-grade in their credit rating when the plan is completed, he said.

In total, PG&E said the plan would provide creditors with about $9.1 billion in cash and $4.1 billion in notes. The vast majority of creditors -- those with allowed claims of $100,000 or less -- will receive cash payments for the full amount of their allowed claims on the effective date of the plan.

"Most secured creditors will also receive 100% of their allowed claims in cash," PG&E said in its prepared statement. Finally, unsecured creditors with allowed claims in excess of the $100,000 threshold will be paid 60% in cash and 40% in notes.

"This plan is an achievable solution that will enable Pacific Gas and Electric Co. to move out of Chapter 11 as a financially strong business positioned to continue safe, reliable and responsive delivery of gas and electricity to its customers, pay all valid creditor claims in full, and do so without asking for a rate increase or a state bailout," said Glynn, who is chairman of the PG&E utility along with being chairman-CEO-president of PG&E Corp. "And, the plan will enable us to provide long-term growth prospects to shareholders."

The plan reorganizes Pacific Gas and Electric Co. and PG&E Corp. into two separate, stand-alone companies no longer affiliated with one another. The reorganized utility will continue to own and operate the existing retail electric and natural gas distribution system, which represents about 70% of the current utility assets and 16,000 employees. The electric generation, electric transmission, and natural gas transmission operations currently under the utility will be part of PG&E Corp. The common shares of the reorganized Pacific Gas and Electric Co. will be distributed to the holding company shareholders.

Separately, new power sales and natural gas/electric transmission/storage contracts will have to be worked out between the distribution utility and individual new companies under PG&E Corp. The plan ultimately will allow the state to exit the power-buying function, Glynn said.

Overall, Glynn said the workforce will remain stable in each of the new entities. Each of the new companies and the revised utility distribution company will be able to issue debt and it will be combined with new financing at the utility to help pay creditors' claims.

"The plan also restructures certain existing debt and uses $3.3 billion in cash on hand to satisfy creditor claims," Glynn said.

After conferring with PG&E Corp.'s CEO last Thursday, California Gov. Gray Davis reacted mostly negatively toward the reorganization plan, which essentially proposes to move everything but the local natural gas/electricity distribution business from state to federal regulation. Davis and his chief spokesperson, Steve Maviglio, indicated some of the proposal may be an attempted end-run around a state law that binds existing investor-owned utility generation and transmission assets to stay under California regulatory jurisdiction.

The Utility Reform Network (TURN), a state utility watchdog group, labeled the plan "a cover for robbery," alleging the utility is proposing illegally taking generation and transmission assets away from the utility ratepayers who theoretically helped pay for them.

The response from the California Independent Energy Producers (IEP), including a number of merchant generators of all sizes, was somewhat less extreme. IEP Executive Director Jan Smutny-Jones cautioned that he was still studying the plan, but at first look, "it appears to be a creative, credible and responsible approach to paying power generators -- large and small -- what they are owed." He said after its review, IEP would make a recommendation to the bankruptcy court.

It was not immediately clear what the plan and the perceived ease with which the PG&E utility is negotiating bankruptcy will do to the political campaign by the governor to have the state legislature provide a rescue plan for the state's second largest investor-owned utility, Southern California Edison Co., to prevent it from slipping into bankruptcy.

"This is not a plan that has anyone's approval -- it's still PG&E's wish list, and to assume that it's a done-deal would be way too premature," said Maviglio. He said the plan to move assets under the Federal Energy Regulatory Commission actually would help stimulate some state lawmakers to vote for an Edison legislative package when the governor calls a third special session of the legislature this year "in the next couple of days." Maviglio said it is still the Davis Administration's intention to sew up enough votes among state legislators in the next 7 to 10 days, to have a bill that can win approval when the lawmakers return to Sacramento, probably on Oct. 2.

Davis said he takes the need to keep Edison creditworthy "very seriously. At this time, all officials, elected and appointed, ought to take measures to minimize economic insecurity -- not add to economic insecurity." He added that Edison going bankrupt would be "bad news for everyone."

While the governor said he was pleased that the PG&E plan envisions no layoffs or rate increases, he is "troubled" by the proposal to take utility generation, electric transmission and natural gas storage/transmission operations and move them into a nonutility, FERC-regulated status.

"FERC over the last 18 months has proven to be no friend of the ratepayer," and "by-and-large (has) treated California ratepayers shabbily," Davis said at a late afternoon press conference last Thursday in Los Angeles. The governor and his staff are raising the fear that longer term, if the PG&E generation operations are under FERC jurisdiction, there may not be an obligation to sell to the California market.

"PG&E is asserting that a bankruptcy judge can, in effect, nullify a state law," said Davis, adding that he signed a law earlier in the year requiring all utility assets to be made available to California ratepayers on a cost-of-service basis for five years. "This bankruptcy scheme takes those assets out from under a regulated umbrella and puts them under an unregulated umbrella. That will obviously be challenged in court." Davis said California will argue that the state law has to stand and should not be abrogated.

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