Time and money drove parties to last week’s precedent-setting proposed Chapter 11 bankruptcy settlement between Pacific Gas and Electric Co. and state regulators because of the prospects of costly, time-consuming seemingly endless litigation. Nevertheless, many hurdles for the proposed deal emerged in the immediate aftermath last Friday, not the least of which were critical comments from regulators and the state’s governor.

Wall Street, however, reacted favorably, as the stock of the utility’s parent, PG&E Corp., shot up to a near 52-week high of $21.27/share on Friday before falling to close at $20.91, up $1.51, or 7.8%.

The proposed agreement was hammered out among the staff of the California Public Utilities Commission (CPUC), PG&E’s utility management and the bankruptcy court’s official unsecured creditors’ committee, but an arduous parallel set of proceedings now must be undertaken by the CPUC and the federal bankruptcy court with the hope that the state regulators’ approval and confirmation by U.S. Bankruptcy Judge Dennis Montali in San Francisco can happen by Dec. 31, 2003. After that date, any party can abandon the proposed settlement if those approvals have not be obtained.

A previously scheduled status conference was held last Friday before Montali and a new settlement plan is expected to be filed this week. A solicitation process on it will begin later in the summer with a culmination in the fall, PG&E senior officials said in a conference call with the financial analysts.

In addition, for the settlement to be implemented, the PG&E utility has to receive investment-grade credit ratings from both Standard & Poor’s and Moody’s rating agencies for the utility and all of the related financial offerings tied to the settlement, which will total close to $8 billion.

The settlement was reached on Thursday after 90 days of federal court-supervised negotiations. Even before the press briefing on deal was concluded on Thursday, the boo-birds were out in force in California, issuing prepared statements laying big doubts about the life span of the proposed agreement, which would lift the PG&E utility out of its Chapter 11 bankruptcy quagmire.

Less than a day later, regulators, elected officials, consumer advocates and even the utility, itself, were giving the all-encompassing deal a relatively cool reception.

Gov. Gray Davis about 15 minutes before the press conference had concluded called the proposal “too expensive,” offering that PG&E Corp.’s shareholders must assume a larger share of the cost of the settlement that would pay off the utility’s $13 billion in debts. “I will oppose any deal that does not provide greater rate reductions for PG&E’s ratepayers,” Davis said.

“This isn’t a settlement; it’s a sell-out,” said Nettie Hoge, executive director of the statewide utility watchdog group, TURN (The Utility Reform Network), promising that her organization would be providing updated information on the proposed deal as it becomes available. TURN argued that the PG&E utility is already under-stating by several billion dollars the true impact on consumers in terms of what they will have to absorb.

“TURN estimates that the deal will cost customers at least $8.87 billion,” Hoge said in a prepared statement.

Still subject to various approvals, the proposed deal calls for PG&E’s utility to withdraw its reorganization plan, accept a $350 million annual power rate reduction starting Jan. 1, 2004, and cease litigation with state regulators, including the filed rate doctrine case PG&E still has pending in a federal district court.

Calling it a “workable solution,” PG&E Corp. CEO Robert Glynn emphasized to the financial community Friday that the company abandoned its previous reorganization plan because the settlement offers the “quickest” way for it to meet its long-standing three goals of investment-grade credit status, paying off all valid creditor claims and avoiding any utility retail rate increase. “It removes uncertainty and provides a more predictable, stable regulatory structure,” Glynn said.

While CPUC President Michael Peevey complimented the federal bankruptcy judge supervising the settlement talks for “bringing the parties together” and stopping the break-up of the PG&E utility, he said the regulatory panel now must give the proposed settlement “rigorous review” in a public hearing process that “will begin as soon as possible.”

While it is still up to the CPUC to determine how the settlement plays out from a ratemaking standpoint, the settlement specifically addresses: (a) ratepayer protections, (b) regulatory stability, (c) restrictions on when future dividends can be paid to utility shareholders (not before July 1, 2004), (d) environmental protections by requiring the utility to turn over its vast, 140,000-acre hydro-related watershed for public use under a new nonprofit corporation funded by PG&E, and (e) ultimate treatment of creditors in the two-year-old Chapter 11 bankruptcy case.

PG&E was confronted by the prospect of up to two more years of bankruptcy proceedings and very destructive, longer-term court appeals. State regulators and consumers would have been saddled with untold added costs, according to the judge. The official unsecured creditors’ committee attorney said the creditors are “very pleased” with the settlement, and they will work in the remaining bankruptcy process and outside of it in the public hearing arena to see it becomes a reality.

The proposed agreement by the staffs of the utility and regulatory commission is subject to a lot more public scrutiny by the court, utility directors and state regulators. “No one is fully satisfied with the agreement, and that is a sure sign it is the best settlement possible,” said federal bankruptcy Judge Randall Newsome, who supervised the negotiations, all of which the judge said would remain confidential.

The proposed settlement offers a compromise in revamping the PG&E utility and paying off $13 billion to creditors, allowing flexibility but not breaking off the utility’s wholesale electricity and natural gas operations into new separate merchant energy units as the utility initially proposed. The new agreement among the significant parties now will be taken back before Montali and to the CPUC where each of the five commissioners will take their shots at it in public sessions.

The newest CPUC commissioner and one most closely in step with Peevey in her voting pattern, Susan Kennedy, issued a prepared statement calling the proposed agreement “an extremely important victory for California citizens,” keeping PG&E’s utility together as a state-regulated entity, but she said that no matter how important the victory, “I can’t support any bankruptcy plan that does not give substantial relief to ratepayers.” She echoed the belief the CPUC now has the power to do that.

“The judge’s settlement gives this commission one last chance to resolve this critical piece of California’s energy future with the ratepayers at the table,” Kennedy said. “Today’s settlement moves the responsibility back to this commission and back into the public arena — where it belongs.”

PG&E’s utility in a separate prepared statement avoided any value judgment on the proposed agreement. It did say the proposed settlement would resolve the Chapter 11 proceeding “on acceptable terms,” meeting the utility’s basic goals of bankruptcy reorganization — regaining an investment-grade credit rating, paying all valid creditor claims, and avoiding raising retail customer rates.

CPUC Commissioner Loretta Lynch said in her prepared statement that she was “concerned about the apparent increased costs to ratepayers,” but she was also “heartened” that the CPUC now will review all aspects of any settlement in public hearings.

Saying the ongoing court-imposed gag order on the settlement discussion themselves restricts what she can say, Lynch said that as she considered the proposal, “I will have foremost in my mind the solution that will lead to the greatest rate decreases for all consumers, consistent with restoring the utility to financial health and preserving this commission’s ability to protect California consumers and the environment.”

Current estimates are for the utility to be able to emerge from Chapter 11 by early next year if all approvals are gained by the end of this year. A separate federal judge, Newsome, guided the settlement talks from a separate federal court in Oakland across the San Francisco Bay.

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