In the wake of California’s major regulatory move to get Pacific Gas and Electric Co. out of Chapter 11 bankruptcy, the legal fallout from the western energy crisis of three years ago will not stop. Lawsuits will go on. The attorneys will continue to keep the meters running even though the utility and regulators have called a truce.

The regulators and utilities may want to put the 2000-2001 crisis behind them, but various attorneys — some representing the state — won’t let go of ongoing legal actions even though Michael Peevey, president of the California Public Utilities Commission, and Robert Glynn, CEO of the utility parent company, PG&E Corp., both characterized Thursday’s action in San Francisco as the “start of the healing process” and the end of “much of the uncertainty” surrounding the power industry in the state.

Within a few hours of the CPUC action, California’s Attorney General Bill Lockyer issued a statement verifying that his pending lawsuits will go forward, particularly the one seeking reimbursement for utility ratepayers of what he alleged to be $4 billion of PG&E utility assets that were transferred to the holding company while the utility was running up unpaid wholesale power bills totaling $9 billion in the late 2000-early 2001 period prior to the utility’s April 6, 2001 Chapter 11 filing.

“The upstreaming of this money may have helped the parent company’s investors, but it inflicted substantial harm on PG&E’s customers,” Lockyer said. “From a legal perspective, the transfers violated state law, as well as CPUC rules that allowed PG&E to form a holding company in the first place.”

He noted that the CPUC decision specifically does “not stop us from pursuing justice for ratepayers.” The City Attorney for San Francisco similarly stressed that the local government’s legal actions against PG&E will move forward. Lockyer said that U. S. Bankruptcy Judge Dennis Montali, who earlier indicated he will confirm a modified version of the settlement, already has said that court approval of the settlement does not bar “lawsuits brought by the state and other third parties against non-debtors, including the parent company and its directors.”

Further, a federal district judge in northern California, Vaughn Walker, earlier ruled that the state’s remedies for civil penalties and injunctive relief can be decided in state court, Lockyer said. “But (Walker) ruled the restitution remedy, in effect, belonged to the utility, and could not be brought in state court,” causing the California AG to appeal to the U. S. Ninth Circuit Court of Appeals, he said. If the appeals court reverses Judge Walker on that point, Lockyer said he will proceed with his case fully in tact in a California Superior Court in San Francisco.

In the meantime, with fellow private-sector utility, Southern California Edison Co. applauding the CPUC action because “financially sound utilities are essential to the well-being of California consumers and businesses,” the CPUC’s Peevey called Thursday’s action “the beginning of the end of a very difficult period of time for California, this commission, and PG&E. Today, we have improved the business climate and assured affordable electricity for millions of Northern Californians.”

Although his dissenting colleagues on the regulatory panel disputed it, Peevey claimed that the modified settlement offers the largest overall rate decrease for PG&E’s retail electric utility customers of eventually more than 2 cents/kW when the full effect of a return to investment-grade credit rates and other factors kick in for the utility financially.

Offering strong support and open concern about alternatives causing even more protracted litigation, Commissioner Geoff Brown said it was a “stark truth that there is no easy way to pay the enormous debt racked up by PG&E during the energy crisis.” He said the CPUC’s action was in the public interest because anything else would have been more costly for ratepayers.

Ultimately, what the CPUC chose was the TURN (The Utility Reform Network) compromise and Commissioner Brown’s strong suggestions for prohibiting the PG&E Corp. holding company bankruptcy expenses of more than $100 million from being paid by utility ratepayers. PG&E-TURN agreed to allow a securitized financing backed by a “dedicated rate component (DRC)” to be used to refinance the several-billion-dollar regulatory asset proposed in the original CPUC staff-PG&E settlement that will fund the initial emergence by the utility from Chapter 11.

Assuming that authorizing state legislation is satisfactory to the CPUC, TURN and PG&E, the refinancing with securitized bonds that will be repaid with a dedicated utility revenue stream will move forward later in 2004.

The modified settlement agreement with the expected bankruptcy court backing should allow the utility to emerge from Chapter 11, paying off $12 billion to its creditors and regaining an investment-grade credit rating. Legal and regulatory appeals are sure to follow, but the action most immediately will allow the PG&E utility early next year to emerge from Chapter 11 and for retail electric utility rates to be lowered by $670 million.

Based on the CPUC’s most optimistic projections, the initial decrease can be followed up by additional reductions that could total more than $1.2 billion before the end of next year, dropping the average PG&E retail utility rate from 13.9 cents/kW now in effect to 11.7 cents/kW.

Opposing CPUC commissioners criticized the deal for costing consumers too much and for possibly being illegal because of the utility oversight powers given to the court for the next nine years.

Before the vote on the issue, Peevey said the TURN-CPUC compromise fully met the requirements of a state Senate Resolution (SR 30) sponsored by Sen. Bowen in the waning hours of the legislative session last September, requiring the CPUC to seriously consider the DRC component that TURN was promoting in its own alternate settlement deal.

“The DRC could not adversely affect the PG&E utility’s investment grade credit ratings after emerging from Chapter 11, and PG&E would be permitted to re-balance its capital structure after receiving the proceeds of the securitization,” PG&E said in a prepared statement announcing the agreement with TURN.

The federal bankruptcy judge in the PG&E utility case ruled Dec.12 that he was prepared to okay a utility-CPUC staff proposed settlement if the state regulators okay an acceptable solution. Subsequently, the CPUC legal staff concluded the settlement as originally signed could not be approved because it violated state law in some aspects, according to Peevey.

Commissioner Loretta Lynch, an attorney, was adamant in her opposition, saying that the settlement “trampled the public interest” in both the process used by the CPUC to arrive at a decision and in the substance of the agreement that she alleged unlawfully binds future state regulators by forcing them to assure the utility future investment-grade credit and rate coverage to support a minimum 11.22% return on equity.

The other dissenting commissioner, Carl Wood, stressed he wanted to get the utility out of bankruptcy, but to do it at “the lowest possible cost to ratepayers,” and that is what he claimed his alternate decision accomplished. He wanted a much smaller regulatory asset to help pay off creditors, noting that the utility has more cash on hand than is being acknowledged based on its retail rates continuing to be considerably above the cost of the power it is selling.

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