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PG&E Exits Bankruptcy
By Christopher
A. Hilen
[April 2004]
On April 12, 2004, three years after filing for bankruptcy
protection, Pacific Gas and Electric Company (PG&E) emerged
from bankruptcy as an investment-grade, vertically integrated
utility fully subject to the ratemaking jurisdiction of the
California Public Utilities Commission (the CPUC). The emergence
of the San Francisco-based gas and electric utility that serves
northern California concludes the largest, costliest, and most
complex utility bankruptcy in U.S. history. PG&E’s
emergence from bankruptcy at this time portends a broader return
to normalcy for California’s electric industry. Its emergence
was made possible by the CPUC’s adoption in December 2003
of a settlement agreement PG&E entered into with CPUC staff
in June 2003.
PG&E’s bankruptcy was one of the many adverse consequences
of the California energy crisis of 2000-2001, during which the
wholesale cost of electricity increased to unprecedented levels
and for a significant period exceeded the amount that California’s
investor owned utilities could recover through retail rates
as a result of the California electric restructuring legislation
having “frozen” the retail rates. In early 2001,
the CPUC authorized two rate increases for both PG&E and
Southern California Edison Company (“Edison”) in
the aggregate amount of four cents/kwh to recover future
power procurement costs, but prohibited the utilities from using
the revenue from the prospective rate increase to repay previously
incurred wholesale procurement costs. PG&E filed for bankruptcy
protection in April 2001. Edison thereafter entered into a settlement
with the CPUC that allowed it to continue to recover in retail
rates on a going-forward basis approximately $3.6 billion of
its unrecovered past wholesale power procurement costs.
PG&E is emerging from bankruptcy under much different conditions
than it proposed in its original plan of reorganization. The
initial PG&E bankruptcy reorganization proposal advocated
the disaggregation of PG&E’s utility businesses into
four separate companies, three of which—hydroelectric
generation, nuclear generation, and gas transmission—would
have been spun off into separate subsidiaries to operate exclusively
under the jurisdiction of the Federal Energy Regulatory Commission
(FERC), and thereby escaping regulation by the CPUC. Only PG&E’s
gas distribution and electric distribution operations would
have remained under CPUC jurisdiction. Former CPUC President
Loretta Lynch characterized the original PG&E reorganization
plan as a “jail break.”
The CPUC vigorously opposed PG&E’s disaggregation
plan and countered with a competing reorganization plan that
would preserve CPUC regulation over PG&E’s existing
regulated assets. Two years of contentious litigation before
the Bankruptcy Court, other federal courts, the FERC, and the
CPUC ensued. PG&E ultimately entered into a complex settlement
agreement with the CPUC staff in June 2003 providing a means
for PG&E to pay all creditors in full in cash and to emerge
from bankruptcy with an investment grade credit rating (the
“Settlement Agreement”). Following expedited hearings
before the CPUC on the proposed Settlement Agreement last fall,
the CPUC approved it on Dec. 18, 2003, with certain significant
modifications. Although the Settlement Agreement was entered
into by CPUC staff, it had to be reviewed and approved by the
Commissioners. As approved by the CPUC, the Settlement Agreement
provides for the following:
- The use by PG&E of almost $4 billion in accrued overcollections
to repay creditors.
- The addition of a $2.2 billion “Regulatory Asset”
to PG&E’s rate base to support the issuance of new
debt and provide additional cash and earnings for the company.
PG&E will earn a return on the Regulatory Asset, which
will be amortized on a mortgage-style basis. The Regulatory
Asset will be refinanced through the issuance of bonds securitized
by a dedicated rate component (DRC) upon adoption of authorizing
legislation by the California Legislature (the Regulatory
Asset and the DRC provided the basis for PG&E to obtain
an investment grade credit rating that allowed it to issue
first mortgage bonds used to repay creditors).
- A guaranteed minimum return on equity of 11.22 percent
on the outstanding balance of the Regulatory Asset using a
capital structure with a minimum of 52 percent common equity.
- With respect to PG&E’s rate base other than the
Regulatory Asset, a guaranteed floor on its authorized return
on equity of 11.22 percent using a capital structure with
a minimum of 52 percent common equity during the nine-year
term of the Settlement Agreement or until either S&P confers
at least an “A-“ credit rating or Moody’s
confers an “A3” rating on PG&E.
- The Commission “agrees to act to facilitate and maintain
investment grade company credit ratings for PG&E.”
- Continued regulation by the CPUC of PG&E’s power
generation and California gas transmission assets.
PG&E emerged from bankruptcy with the $2.2 billion Regulatory
Asset in place, but it will be refinanced by lower cost bonds
secured by a DRC once the California Legislature adopts authorizing
legislation that is currently pending. It is estimated that
refinancing the Regulatory Asset with DRC securitized bonds
will reduce the costs of the settlement to PG&E ratepayers
by approximately $1 billion in financing and tax costs over
the nine-year term of the Settlement Agreement.
Davis Wright Tremaine played a key role in securing that $1
billion ratepayer cost reduction. A team of DWT attorneys, including
Ed
O’Neill, Lindsey
How-Downing and Jeff
Gray, undertook the lead role in contesting the proposed
Settlement Agreement on behalf of the consumer group The Utility
Reform Network. They succeeded in persuading the CPUC to modify
the terms of the Settlement Agreement to require that PG&E
refinance the Regulatory Asset with the lower cost DRC securitized
bonds.
The Bankruptcy Court confirmed PG&E’s amended bankruptcy
reorganization plan based on the CPUC-approved Settlement Agreement
the last week of December 2003. In February and March, 2004,
the CPUC approved $800 million in rate reductions and changes
to PG&E’s tariff to implement the Settlement Agreement.
In March, the CPUC denied rehearing of its decision approving
the Settlement Agreement.
In March 2004, Standard & Poor’s and Moody’s
Investors Service upgraded PG&E’s credit rating to
investment grade. The rating agencies’ upgrades were based
on the CPUC’s adoption of the Settlement Agreement which
is enforceable by the Bankruptcy Court, the Bankruptcy Court’s
approval of the reorganization plan incorporating the Settlement
Agreement, the stability of cash flows and operating earnings
the Settlement Agreement provides over the next nine years,
and PG&E’s improved working relationship with the
CPUC evidenced by the Settlement Agreement and the CPUC’s
adoption of implementing decisions in February and March. Following
the credit rating upgrade, PG&E issued $6.7 billion in first
mortgage bonds which it used to repay creditors.
In an unusual development, the two commissioners who opposed
the adoption of the Settlement Agreement—Loretta Lynch
and Carl Wood—are appealing the Bankruptcy Court’s
confirmation of PG&E’s bankruptcy reorganization plan.
A motion by Commissioners Lynch and Wood to stay the effectiveness
of the reorganization plan, and thereby prevent PG&E from
emerging from bankruptcy, was denied by the U.S. District Court
on April 9, clearing the way for PG&E’s emergence
on April 12.
Although PG&E’s emergence from bankruptcy signals
a return to normalcy for California’s energy industry,
it occurs amid significant regulatory uncertainty over the role
of California’s load serving utilities in the generation
and procurement of electricity. That regulatory uncertainty,
coupled with the heavy debt load of non-utility power producers,
continues to impede the development of needed additional power
plants in California. These regulatory issues are addressed
in a companion Advisory Bulletin.
Published by Davis
Wright Tremaine's Energy Law Group
Any questions about this
Advisory should be directed to:
Steven
F. Greenwald, San Francisco, (415) 276-6528, stevengreenwald@dwt.com
This Energy Advisory is a publication
of the Energy Department of Davis Wright Tremaine LLP. Our purpose
in publishing this Advisory is to inform our clients and friends
of recent developments in energy law. It is not intended, nor
should it be used, as a substitute for specific legal advice
as legal counsel may only be given in response to inquiries
regarding particular situations.
Copyright © 2004, Davis Wright
Tremaine LLP.
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