PG&E: The 'E' ain't for Ethics
Pacific Gas & Electric is the Halliburton of utilities. It owns more than $26 billion in assets. It controls a vast swath of Northern California's rivers and forest lands. It owns the most expensive nuclear plant in the nation -- the 2,200 MW Diablo Canyon Nuclear Power Plant -- and serves 13 million customers in Northern and Central California. It rivals any other power utility in the nation in financial wherewithal.
Its bankruptcy fight and ultimate settlement -- after an 11th-hour capitulation from consumer groups -- is a lesson to the country. In federal bankruptcy court only creditors matter; forget the environment, forget the impact on consumers. Any company with entrenched social and environmental ties can extricate itself through the narrow focus of federal bankruptcy court. PG&E's bankrupcty exemplifies how far capitalism has the potential to override the environment. Utility customer concerns come in last place.
In a nation where one of the most basic commodities -- energy -- is pressured by attempts at both federal and state deregulation, as well as the tendency of utilities to merge, bloat and sometime implode, PG&E's story is a Grim Fairy Tale to environmental and consumer activists -- and just about anyone who pays (or ditches) a monthly energy bill.
The utility voluntarily entered bankruptcy court in April 2001 to freeze billions of dollars in debt racked up during California's chaotic energy crisis, which sent wholesale power prices soaring.
An unprecedented utility bankruptcy called for an unprecedented move. Bob Glynn, president and CEO of the utility parent, PG&E Corp., made a grand public stand after the utility proposed its first bankruptcy reorganization plan to exit from Chapter 11. Glynn was adamant that the utility had to spin off its huge nuclear plant and vast hydroelectric facilities to an unregulated subsidiary -- and that it had to do the same with its transmission system. The only state-regulated part of the utility left after bankruptcy reorganization would be its distribution system. He told the financial community that this plan was the only way PG&E could emerge from bankruptcy as a viable utility.
The state of California, however, drew its own line in the regulatory sand and fought PG&E's further descent into deregulation. The state eventually won, sort of.
The federal bankruptcy court knew just how important the case is -- and the precedent it could set. In charting new territory, the court had a huge obligation to protect the utility, its creditors and keep intact a service essential to modern society. After months of stalemate between the vying parties and millions of dollars spent in litigation fees, bankruptcy judge Dennis Montali forced the recalcitrant Glynn and other PG&E officials into negotiations with the California Public Utilities Commission and the creditors committee in early March 2003. Financial analysts began urging PG&E to work out a deal with the CPUC and creditors.
When PG&E was ordered to the negotiating table, Glynn could tell the financial community he did not back down but was forced to negotiate. In reality, however, the bold position he held -- spinning off utility assets away from state regulation -- was neither socially or politically tenable.
Glynn's threats that it was his way or the highway fizzled out. The Ninth Circuit Court of Appeals cut most of his bargaining position out from under him by affirming the state's regulatory clout over PG&E. The appeals court rejected the utility's argument that state safety and environmental laws interfering with PG&E's reorganization plan were preempted, knocking the teeth out of the utility's original plan for ensuring Wall Street's seal of approval. The crux over the debate for getting PG&E out of bankruptcy then became a matter of figuring out at what point changes to the proposed settlement would undo the deal in the eyes of PG&E and the credit rating agencies.
The deal Glynn subsequently reached included maintaining state regulation over PG&E's generating and transmission assets. But, it forced the state to give up its power to protect ratepayers' interest for nine years. While most would agree that it is in ratepayers' interest to have a solvent utility returned to a solid investment grade status, the CPUC-PG&E deal essentially handcuffs state regulators and allows the utility and its bankers to make decisions impacting rates for nearly a decade.
After the negotiated court settlement was announced, Glynn told the financial community it was a done deal that had to be approved by the CPUC as is. Otherwise, he said he'd go back to the first deal -- the one that sent government into conniption fits. The original reorganization plan would put the utility's nuclear, hydropower and transmission facilities out of the state's reach.
A deal with the huge consumer advocate group, The Utility Reform Network, at the last minute made sure that didn't happen. However, it did raise the costs to consumers and lowered protections from what state regulators were about to impose on PG&E.
Bankruptcy litigation continues. Some state regulators are still trying to get the last-minute deal overturned. There was one single seemingly win-win deal as a part of PG&E's settlement to have a non-profit take over managing the 140,000 acres of rivers and forest lands. It is now bogged down in politics. Environmentalists have been edged out by politicians, and even a pastor, for the lands' board of directors.
The costs -- intentional to ratepayers at $8 billion, and who-knows-how-much unintentionally both to customers and the environment -- are still mounting. The lesson to the nation is first: Reform bankruptcy law to include environmental and consumer fallout and until that's done, keep precious utility providers far away from federal bankruptcy courts.
J.A. Savage and Elizabeth McCarthy authored the March 2004 book: "Big Deal, PG&E's Bankruptcy" from which this is an excerpt. The book is available at californiaenergycircuit.net.