PG&E's Solvency Plan Has Sparks Flying
California's simmering electricity crisis got what seemed like a jolt of good news on Sept. 20, when PG&E (PCG ), the nation's largest electricity and gas provider, announced a plan to get its utility business out of bankruptcy in record time -- and without any government bailout. Creditors would be paid in full. And consumer electric rates wouldn't have to rise any further than they already have. PG&E hopes to be solvent again by December, 2002, just 20 months after it first sought bankruptcy-court protection. "That's blazing speed in the bankruptcy business," says company Chairman Robert D. Glynn Jr.
So what's not to like? Plenty, if you're a California pol, regulator, or consumer advocate. Most think Glynn is using the bankruptcy court to run around state authority. Golden State Governor Gray Davis says he's troubled that the plan might exempt the utility from state regulation. Loretta Lynch, president of California's Public Utility Commission, says her organization will almost certainly object. Consumer watchdogs are howling. "They are trying to reorganize their way out of the California regulatory system," says Doug Heller, an advocate with the Foundation for Taxpayer & Consumer Rights. "That will not stand. It's PG&E's impossible dream."
PG&E's plan has some very attractive points. Most bankruptcies end with shareholders getting wiped out and creditors accepting less than what they are owed. PG&E is aiming to avoid those two unpleasant events by simply borrowing all of what the company needs on the strength of its assets, which include more than 30 power plants in 10 states and transmission lines that blanket Northern California.
Under PG&E's proposal, the company's $13.2 billion in debt will be divided between two entities. PG&E Corp. will own the company's natural-gas pipelines, long-distance electricity transmission lines, and power plants in California and other states. Pacific Gas & Electric Co. will retain the traditional utility business, its customer accounts, transformers, and utility poles. Shares of the two companies would trade separately, if the plan is approved.
The controversy comes with PG&E's desire to transfer its transmission lines and power plants within California to the separate entity called PG&E Corp. The catch: That outfit wouldn't be subject to the jurisdiction of state regulators. Glynn says that structure is necessary because regulated entities are prohibited from borrowing as much as PG&E needs. Balance sheets of utilities are traditionally structured with 50% debt and 50% equity. PG&E's proposal will take that debt level as high as 70%.
Consumer activists claim that once PG&E's power plants are separated from the utility, the new company will be able to charge its California customers whatever it wants. PG&E Corp. has promised to sell the electricity from its California plants to the utility for 12 years at 5 cents per kilowatt hour. That's above the company's cost but below the price the state is presently paying for electricity in contracts with other parties. When those 12 years are up, PG&E would be free to charge whatever it wants for the output of those plants. "They want to jump in on the profiteering," says consumer advocate Heller.
Middle ground could be found. PG&E could refinance itself in a way that leaves its California transmission lines and power plants in a regulated entity -- but one with a lot more debt than previously allowed. "They can borrow the money on their existing assets without evading state regulation," says state utility commission President Lynch. A company spokesperson says PG&E has considered that but doesn't believe Wall Street has the stomach to lend that much money to a regulated entity in a state where regulation has long been a roller coaster.
Don't expect a compromise any time soon. PG&E's Glynn told Businessweek Online he's confident that federal bankruptcy court rulings take precedent over state opinions and that with the support of the company's creditors he can convince U.S. Bankruptcy Court Judge Dennis Montali that this proposal is best for all parties. Like most aspects of California's electricity mess, PG&E's reorganization promises to be a long, drawn-out, power struggle.
By Christopher Palmeri in Los Angeles
Edited by Douglas Harbrecht
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