On June 19, 2003, Pacific Gas and Electric Company (PG&E), its parent PG&E Corporation, and the staff of the California Public Utilities Commission (CPUC) announced that they have reached a settlement of PG&E's Chapter 11 bankruptcy reorganization case. A majority of the CPUC's commissioners must ratify the settlement by Dec. 31, 2003. Prospects for ratification are not clear at this time.
The proposed settlement would resolve the competing reorganization plans filed by PG&E and the CPUC and end litigation between PG&E and the CPUC over the amount of PG&E's energy procurement undercollection PG&E's ratepayers must repay. Under the settlement, PG&E would emerge from bankruptcy in early 2004 as an investment-grade, vertically integrated utility fully subject to the ratemaking jurisdiction of the CPUC. The settlement must be approved by the CPUC, the corporate boards of PG&E and PG&E Corp., PG&E's creditors, and the Bankruptcy Court.
Repayment of Creditors: PG&E will use three primary revenue sources to repay the $13 billion it owes its creditors:
- PG&E will retain $3.2 billion in surplus rate revenues it has collected since January, 2001 (the so-called "headroom").
- PG&E will recover an additional $2.21 billion from ratepayers over nine years, beginning Jan. 1, 2004, through the CPUC's creation of a regulatory asset in PG&E's ratebase. The cost of this recovery will actually total $5.27 billion of ratepayer contributions over the nine years, when return on and amortization of the amount and taxes on the return and amortization are added; however, any money PG&E recovers from electricity generators and marketers in pending rate overcharge litigation would reduce this amount.
- PG&E will issue $8 billion in debt securities, the cost and repayment of which will be recovered in rates.
Creditors: Unsecured creditors will be paid entirely in cash, not long-term notes or stock or a combination thereof, except certain pollution control bonds and PG&E's preferred stock, which will be reinstated. No new preferred or common stock will be issued by PG&E to repay creditors.
Dividends Deferred: Under the terms of the settlement, PG&E will defer the issuance of dividends until July 2004. However, the day after the settlement was announced, PG&E stated that it would further defer the issuance of dividends until late 2005.
CPUC Jurisdiction Continues: The CPUC will retain its current level of jurisdiction over PG&E, which will give up its efforts to transfer its transmission assets and generation assets into separate subsidiaries that would have been subject only to FERC jurisdiction.
DWR Contracts: The CPUC can require PG&E to accept assignment of or assume legal and financial responsibility for California Department of Water Resources power contracts, but only under the following conditions:
- PG&E's credit rating following assumption would be no less than S&P "A" and Moody's "A2";
- The CPUC makes a finding that the contracts are just and reasonable; and
- The CPUC acts to ensure full and timely recovery in retail electric rates of all contract costs without further review. The CPUC would retain the right to review the reasonableness of PG&E's administration and dispatch of the DWR contracts.
PG&E Federal Litigation Against CPUC: PG&E will dismiss with prejudice its federal Filed Rate Doctrine litigation against the CPUC. The settlement would resolve all litigation between PG&E and the CPUC, but does not address separate litigation brought by the California Attorney General and other parties related to PG&E's financial practices.
Environmental Protections: PG&E will dedicate 140,000 acres of watershed around its hydroelectric facilities to public use forever and will fund a new non-profit corporation with $70 million of ratepayer money over 10 years to fund conservation efforts for this watershed.
Rate Reduction: CPUC staff projects that PG&E retail rates will drop by half a cent per kWh effective Jan. 1, 2004 and another half-cent per kWh by 2008. The settlement promises that ratepayers will contribute $8.4 billion over the next nine years, in addition to the cost of repaying the $8 billion in debt securities PG&E will issue.
Enforcement: The CPUC waives its sovereign immunity to permit litigation against it to enforce the settlement.
Prospects for CPUC Approval: The proposed settlement is likely to be actively opposed, both during the CPUC's consideration of it and in litigation following its approval, by ratepayer advocacy organizations. Governor Davis has publicly announced his opposition to the settlement on the grounds it requires too high a contribution by PG&E's ratepayers and obtains too little in concessions from PG&E. While public statements from the Commission have been sparse since the settlement was announced Thursday, Commissioners Loretta Lynch and Susan Kennedy have both been quoted as expressing concern about the cost of the settlement to ratepayers, while Commissioner Brown has spoken of the need to balance its impact on ratepayers with the CPUC's risk of losing the pending litigation if it does not settle. These statements appear to raise doubts about whether the proposed settlement will garner the required vote of three members of the Commission. However, it would be very unusual, even for the Commission, to have negotiated and publicly announced the terms of the proposed settlement and still be without support by the majority of the Commission.
CPUC Approval Process: The Commission will hold some type of hearing process to solicit testimony or at least comments on the proposed settlement prior to a vote on ratification by the Commissioners. Failure to do so would subject the settlement to the same legal challenge the CPUC's settlement with Edison has received. The CPUC has not announced a schedule for hearings and public comment on the settlement, but it has scheduled a prehearing conference on the settlement to be held on July 9 at 10 a.m. In preparation for that conference, on July 1, PG&E is to serve a proposed schedule addressing the procedures it believes are needed under the Public Utilities Code and Commission policies and practices to implement the settlement. Interested parties may service prehearing conference statements by July 7.
Any questions about this Advisory should be directed to:
Chris Hilen, San Francisco, (415) 276-6573, chrishilen@dwt.com
Ed O'Neill, San Francisco, (415) 276-6582, edoneill@dwt.com
Steve Greenwald, San Francisco, (415) 276-6528, stevegreenwald@dwt.com