PG&E files for bankruptcy protection

Move could amplify turmoil on Wall Street, across West

This story appeared in the Antelope Valley Press April 7, 2001.

By MICHAEL LIEDTKE
AP Business Writer

SAN FRANCISCO - Pacific Gas & Electric became the largest power utility in U.S. history to file for federal bankruptcy protection, betting Friday it will fare better with a judge than with California politicians struggling to alleviate the state's energy crisis.

PG&E's move in itself won't turn out the lights of the 13 million Californians it serves, but could increase the political and financial turmoil on Wall Street and across the West for years to come.

Southern California Edison, the state's second-largest utility, would not say whether it would follow PG&E's lead but issued a statement suggesting it has no immediate plans to seek bankruptcy protection.

"We at Southern California Edison continue to believe that working out a comprehensive solution to our current crisis is a preferable course to take," the statement said. "PG&E's decision today does not change our position."

In seeking Chapter 11 protection from its creditors, PG&E said efforts by Gov. Gray Davis and other state officials to ease the crisis had gone nowhere.

"The regulatory and political processes have failed us, and now we are turning to the court," said Robert D. Glynn Jr., chairman of corporate parent PG&E Corp. "We expect the court will provide the venue needed to reach a solution."

It's only the third time a U.S. power utility has gone bankrupt since the Depression, and PG&E's case is far larger than those filed by the Public Service Co. of New Hampshire in 1988 and Texas' El Paso Electric in 1992.

Davis called the bankruptcy filing "a slap in the face for Californians."

"They acted in a selfish way and from a very narrow perspective," Davis said before signing a bill in San Diego capping electricity rates for businesses there. "They did not have the best interest of the people at heart and dishonored themselves by their action today."

PG&E and other California utilities profited handsomely from the first two years of energy deregulation in the state, but then a combination of weather, economic growth and skyrocketing wholesale costs turned the tables.

PG&E, the state's largest utility, says it ran up an $8.9 billion deficit buying electricity from June through Feb. 28. The growing debt caused the utility to start defaulting on its bills in January.

The utility, which supplies power to more than one of every three Californians, had $2.6 billion in cash and outstanding bills of $4.4 billion as of March 29.

Shares of PG&E Corp. fell more than 37% Friday when trading resumed after a halt of more than two hours. The shares closed at $7.20, down $4.18, on the New York Stock Exchange.

Shareholders, including many elderly people who assumed PG&E was a safe investment, have lost a combined $10 billion on paper since PG&E's stock reached its 52-week high of $32.50 last summer.

Attorney James Lopes, who is handling the case for the utility, said PG&E has no immediate plans to try to use the bankruptcy courts to push through rate increases beyond what state regulators already have approved.

"I think it's a farce," said Charles Davis, a retired truck driver who was cleaning his clothes at the Wash & Dry laun-dromat in West Sacramento. "Our energy (bills) will definitely go up now, but I guess you have to roll with the punches. It's up to the people we elected to do something about this."

PG&E Corp. said its subsidiary was forced into bankruptcy because of "unreimbursed energy costs, which are now increasing by more than $300 million per month," state regulatory decisions hurting the company and "the now unmistakable fact that negotiations with Gov. Gray Davis and his representatives are going nowhere."

The bankruptcy filing came the morning after Davis, in a statewide address, proposed relieving utilities' debts by giving them a share of a record rate increase approved last week by state regulators and by continuing to negotiate state acquisition of their transmission lines.

"I was very disappointed," the governor said Friday after a visit to a San Diego school. "I want to stress this one fact: PG&E put itself into bankruptcy. No creditor pushed them. They decided on their own initiative to go in. We have been working for weeks and weeks on negotiations that we thought were fair to the consumers and fair to PG&E."

PG&E executives said they had been making daily evaluations since December of whether the utility would be better off going bankrupt. After listening to the proposals outlined in Davis' speech Thursday night, the executives said they concluded there was little hope of getting financial relief from the state.

"We believe that we are better able to serve our customers inside Chapter 11 than outside Chapter 11," PG&E President Gordon Smith said in a conference call. "We believe (the bankruptcy judge) will provide a more disciplined and organized approach" to solving the utility's financial crisis.

PG&E officials, state leaders and consumer activists agreed that the utility's insolvency shouldn't lead to any more blackouts than already expected in the upcoming months as California scrambles to buy enough electricity to meet the peak demands of summer.

But the road map to a solution for California's power woes will have to be redrawn with PG&E's bankruptcy, which caught almost everyone off guard even though the utility had been warning that it might take the step for months.

Sen. Debra Bowen, D-Marina del Rey, chairwoman of the Senate Energy Committee, said consumers "should see no change in the short run" in either prices or service. But she said the bankruptcy filing could derail the state's negotiations to purchase transmission lines from PG&E and Edison - and force the state into a bidding war for the lines.

"We've lost control over doing any kind of transaction that solves the problem ourselves," Bowen said. "We now need the approval of a bankruptcy judge and creditor committees."

Filing for bankruptcy court protection allows the utility to protect its assets from creditors, but could devastate PG&E Corp.'s already shell-shocked shareholders and also could hurt the company's 20,000 employees.

The preliminary bankruptcy filing lists debts as of early September, long before wholesale energy prices skyrocketed and the company incurred its biggest debts.

In the filing, the utility's top creditor is listed as Bank of New York, which was owed $2.2 billion as of September. The now-defunct California Power Exchange was owed $1.96 billion, and Bankers Trust Co. of New York was owed $1.3 billion.

Other creditors include banks and energy companies that sold power to PG&E.

PG&E told investors the first court hearing likely will be Monday or Tuesday. The first meeting of creditors was scheduled for May 8 with a representative of the U.S. Trustee's office. The case was assigned to U.S. Bankruptcy Judge Dennis Montali.

Consumer activists were quick to pounce on the news as more evidence that the utility is not getting enough help from its parent company, which has profited during California's energy crisis.

"Pacific Gas and Electric reaped the rewards of their deregulation scheme, but now they're paying the price for the absurd energy system they created," said Douglas Heller of the Foundation for Taxpayer and Consumer Rights.

"PG&E Corp. will walk away from this unscathed. They are killing their first born to keep the corporate family very well off. It's a sacrifice the ratepayers of Northern California are being forced to pay."

The bankruptcy doesn't affect the parent company or another PG&E Corp. subsidiary, National Energy Corp., which has been cashing in on the high wholesale electricity prices even as the utility sank into deeper financial trouble.

From the start of 1998 through September 2000, PG&E Corp. had reported operating profits of $4.9 billion. Deregulation took effect in March 1998

Southern California Edison, the state's second-largest utility, would not say whether it would follow PG&E's lead, but issued a statement suggesting it has no immediate plans to seek bankruptcy protection.

The stock of parent company Edison International was down $4.39, or 35%, to $8.25 on the New York Stock Exchange.

Sempra Energy, the parent company of San Diego Gas & Electric that serves 3 million customers in the San Diego area, also was getting hammered on Wall Street. It was down $1.85, or 8%, to $22.30 per share. Sempra is not facing the same financial pressures as PG&E and Edison.

Bankruptcy attorneys and industry analysts expect PG&E's creditors to argue that the parent company should be held responsible for some of the utility's debts.

Industry analyst Barry Abramson of UBS Warburg said PG&E was "taking a calculated risk, but they must believe they have a strong argument to make in bankruptcy court."

"There's nothing positive about a bankruptcy, but in the long run it might be PG&E's best move," Abramson said. "A bankruptcy judge might be able to sort out all these complex issues without dealing with the political realities."