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Settlement Reached On PG&E Bankruptcy Reorganization
By Ed
O'Neill and Chris Hilen
[June 2003]
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.
Published by Davis Wright Tremaine's Energy
Law Group
Any questions about this Advisory should be directed to:
Ed
O'Neill, San Francisco, (415) 276-6582, edoneill@dwt.com
Steve Greenwald,
San Francisco, (415) 276-6528, stevegreenwald@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 © 2003, Davis Wright Tremaine
LLP.
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