In The News
April 7, 2001
California's Largest Utility Files for Bankruptcy
By LAURA M. HOLSON
Los Angeles, April 6, 2001 (New York Times) - The Pacific Gas and Electric Company, California's largest investor-owned utility, filed for bankruptcy protection today, declaring that politicians and regulators had not moved quickly enough to resolve an energy crisis that has caused periodic rolling blackouts and is costing the state billions of dollars.
The filing, which seeks reorganization under Chapter 11 of the bankruptcy code, shifts decision-making about crucial aspects of the California energy debacle from officials in Sacramento, the state capital, to a federal bankruptcy court in San Francisco, where Pacific Gas and Electric has its headquarters.
The utility hopes to have more success in court in trying to win relief from $9 billion in wholesale energy debt it says it has incurred since prices began soaring last May. Legislators and regulators have been loath to bail out Pacific Gas and Electric or the No. 2 utility, Southern California Edison, whose billions in debt to wholesalers and marketers stem from flawed state deregulation that did not allow the utilities to pass on rising costs to consumers.
The filing came as a surprise to many, particularly Gov. Gray Davis, who in a televised speech only Thursday night reversed his stand against electricity rate increases, acknowledging that consumers would have to pay more.
For months, the two utilities had complained that they were running out of cash and had demanded that rates be increased to cover their costs, but they had not made good on any threat to file for bankruptcy. The reason, in part, was that the governor's office, in trying to forestall a greater sense of uncertainty surrounding the energy crisis, was negotiating to keep the utilities solvent by buying their transmission lines.
On Tuesday, executives from Pacific Gas and Electric met for four hours with the governor's negotiators. On Thursday, Wall Street analysts said they had been told by the governor's representatives that there were hopes some resolution could be reached. That night the governor proposed a plan, with rate increases a centerpiece, that he said would help pay off the utilities' debts.
In the end, none of this was enough for Pacific Gas and Electric. In a conference call with reporters today, Robert D. Glynn Jr., chairman of the utility and of its parent company, the PG&E Corporation, said the governor was not moving fast enough, having delayed a face-to-face meeting for weeks.
"We've heard a lot of the words that have been involved, but we have not seen a lot of actions," Mr. Glynn said. "The regulatory and political processes have failed us, and now we are turning to the court."
Mr. Glynn said the bankruptcy filing would not affect customer service. And, he said, it involves only Pacific Gas and Electric, which operates in Northern and Central California, and not the parent company itself or its other units.
Southern California Edison, meanwhile, said today that it would continue to try to reach an agreement with the governor.
Responding to the announcement by Pacific Gas and Electric, Governor Davis said the company had "dishonored itself."
"This action was unnecessary," he said. "They've caused undue alarm. PG&E was not pushed into bankruptcy, but plunged themselves into bankruptcy for their own strategic advantage - not the best interests of the people of California."
A few months ago, in a move widely criticized by consumer groups and legislators, the PG&E Corporation took steps to ensure that the assets of its other subsidiaries would not be seized in case of a Pacific Gas bankruptcy. Just this week the State Public Utilities Commission said it would investigate whether Pacific Gas and Electric, Southern California Edison and the state's No. 3 investor-owned utility, San Diego Gas and Electric, had engaged in any financial misconduct by funneling billions to their parent companies to pay dividends and repurchase stock.
Trading in PG&E stock was halted briefly today. When it resumed, the price quickly fell by nearly 40 percent. By day's end, the stock of Edison International, parent of Southern California Edison, had also dropped sharply, by 35 percent.
That Pacific Gas and Electric, which helped design the deregulation that brought on the California power crisis, would now take so drastic a step both concerned and puzzled analysts. "It doesn't make sense, because the governor endorsed the rate increase the utilities had been asking for," said Susan Abbott, head of the power group at Moody's Investors Service in New York.
But Ms. Abbott also noted that the rate increases - varying from 10 percent to 37 percent, on top of a 9 percent surcharge adopted by the state this winter - would not entirely eliminate the debt accumulated by the utilities as a result of deregulation. "There were a lot of people who said, `Great, the utilities' problems are over,' " she said. "But they are not."
The bankruptcy petition filed by Pacific Gas and Electric reported assets of $24 billion and debts of $18 billion. In his talk with reporters, Mr. Glynn said the company was still incurring $300 million in monthly wholesale energy costs that it had no way of paying. But his biggest concern, aside from the stalled negotiations with the governor, is the Public Utilities Commission.
For instance, Mr. Glynn complained about the commission's recent change to the utilities' accounting practices, a step he said would make it even more difficult for Pacific Gas to recoup any losses. The commission has also said it is the state, which has had to step in as a middleman buying power for the utilities because many suppliers have cut off their credit, that will be the first to be paid money flowing from the rise in consumer rates.
In any event, moving into the bankruptcy court the debate over debt that has already been incurred should resolve a question that the parties to the issue have been unable to settle: who indeed will get paid first? Analysts say the bankruptcy judge, Dennis Montali, will have to consider several issues, in particular that electricity is a vital necessity.
That being the case, it is likely that the power generators, which have been called price gougers and pirates but have supplied the state with enough energy to keep the lights on, will have priority among the creditors. That is good news for many of the state's smaller generators, many of which were forced to shut their doors when Pacific Gas and Electric made only partial payments to them. After that, analysts say, bondholders will most likely be next in line, although all this will await a judgment by the court, which among other things must also decide what priority the state enjoys.
"It's going to help focus in a very specific, objective order the manner in which their financial situation gets sorted out," said Jan Smutny-Jones, executive director of the Independent Energy Producers Association, which represents power generators in the state. "The thing to do when you get in a hole is stop digging. They did that today."