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A viewpoint by Thomas D. Elias: PG &E bankruptcy may drag Edison along

April 10, 2001

The bottom line in the surprise Pacific Gas & Electric bankruptcy filing is that it's a tactical move. But it's one that almost certainly will drag California's other large electric company after it — because it likely means the end of negotiations for a state purchase of the power transmission system.

It was no coincidence that PG&E took its action — a move Gov. Gray Davis said for months he wanted to avert — just hours after Davis made a vacuous five-minute television speech he inexplicably billed as "historic."

The timing alone suggests PG&E's move is largely tactical.

"They keep running the company and power keeps flowing, but they keep their creditors at bay for awhile," said Leonard Snaider, formerly a top attorney for the state Public Utilities Commission. "They can even pull out of bankruptcy later on if they choose, since this was a voluntary filing."

Even though PG&E was one of the prime movers for the 1996 deregulation law that ultimately led to this bankruptcy, it plainly didn't believe Davis was doing enough to bail it out. The governor has complained for two months that PG&E was dragging its feet in bailout negotiations that included a state buyout of California's electric transmission grid.


PG&E didn't feel it was offered enough for its share of the grid.

"The regulatory and political processes have failed us and now we are turning to the court," said company chairman Robert D. Glynn Jr.

Now PG&E can't sell the grid or even a pencil without permission of a federal bankruptcy judge. Davis has long said it's pointless to buy any part of the grid without taking the whole thing. So the grid sale is off for now, and with it most of the Davis-planned bailout of Southern California Edison, with whom negotiations were further along.

In a domino effect, this means — regardless of statements to the contrary by Edison executives — it probably won't be long before that utility also heads to bankruptcy court, either in a voluntary filing or through forced action by its creditors. These include both large out-of-state power generators and much smaller "green power" companies that make juice from all manner of renewable sources including wind and geothermal energy.

Ultimately, both companies may be better off, as the open-market value of the grid and the real estate that comes with it would probably be far higher than what the state was prepared to pay. That's one reason PG&E filed for bankruptcy and pulled the plug on negotiations. First, though, they'd have to find folks other than state government willing to buy the transmission lines under today's dicey conditions.

The big questions for consumers will be whether all this translates into more and longer blackouts and whether it means price increases even greater than the hikes already approved by the PUC.

One answer is it won't change anything about blackouts. Yes, the big utilities' credit is ruined by bankruptcy — but it already stank. Bond rating companies were about to downgrade both companies' bonds to junk status before the court filing. For months, the state and not the companies has been buying power beyond what Edison and PG&E generate from facilities they didn't sell off under deregulation — mostly hydroelectric dams and nuclear plants.

So there won't be any more — or less — blackouts than would otherwise have occurred.

The other is that rates probably won't differ much, if at all, from what they would have been had PG&E agreed to be bailed out.

"A bankruptcy trustee cannot assess rates to the consumers," said Snaider. "The trustee will be concerned with creditors and what they are owed, but the jurisdiction to set rates remains with the PUC as long as PG&E, Edison or any successor companies are in being."

Yet consumers may end up better off as a result of the bankruptcy proceedings. For sure, any competent judge will have to examine closely whether it was prudent for Edison and PG&E to give their newly created parent companies billions of dollars in profits gleaned before deregulation collapsed. The parents passed some profits along to shareholders as dividends, but also invested billions in other ventures. They have steadfastly refused to help their California utility subsidiaries, conduct that's about to become the focus of a state investigation.

If those actions should be ruled illegal or imprudent, the cash-rich parent companies might have to cough up huge chunks of money to Edison and PG&E creditors.

The bottom line is that no one now can be sure of the ultimate outcome. This is the second major action by PG&E in the last five years. The first was to back deregulation and fight to preserve it. That venture eventually led to bankruptcy. No one can be sure this tactic will be any less disastrous for the company and the state.

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