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Frantic efforts to avoid bankruptcy fail
Pacific Gas officials: No Davis meetings in three weeks By Russ Britt, CBS.MarketWatch.com Last Update: 8:51 PM ET Apr 6, 2001 LOS ANGELES (CBS.MW) - California's desperate efforts to keep its largest utility out of the bankruptcy courts may ultimately have failed because of lack of face time between executives and state leaders.
Although California Gov. Gray Davis repeatedly insisted he would work to avoid a utility bankruptcy, on Friday Pacific Gas & Electric Co. threw in the towel and sought court protection.
Call it a case where absence didn't make the heart grow fonder.
Pacific Gas and Electric officials said Friday they hadn't met with representatives of Gov. Gray Davis's office in more than three weeks. And it proved to be a costly mistake.
PG&E officials said that led them to believe negotiations over transmission line pricing, compensation from rate hikes and the utility's own fate were stalled. Feeling it had little alternative, PG&E filed for bankruptcy protection Friday.
"No face-to-face meetings for over three weeks was a big part of it," said Robert Glynn, Pacific Gas's chairman. "They said that they were choosing to negotiate with (Southern California Edison) first. ... When they got done with them, then they would deal with us."
So in one fell swoop, the utility deflated the state's efforts to avoid the one thing Davis sweated to achieve - keeping Pacific Gas and Edison out of bankruptcy court. The action by Pacific Gas, a unit of PG&E Corp. (PCG: news, msgs, alerts) leaves in doubt whether the state can acquire California's electric lines and distribute electricity itself.
Davis spokesman Steve Maviglio said it was true that the governor was trying to finish negotiations with Edison before turning to PG&E, but added the governor's office remained in contact with the utility.
"We've been talking on the phone almost every day," Maviglio said.
Late Friday Davis said in a statement that Pacific Gas & Electric had "dishonored" itself with the filing.
Davis was trying to work out a deal in which the state would acquire the transmission lines of Edison, part of Edison International (EIX: news, msgs, alerts) and Pacific Gas. Cost was estimated at $7 billion to $9 billion, and it was expected to help relieve the utilities' debt burden.
Davis had reached an agreement "in principle" with Edison, but details have yet to be worked out, company spokesman Gil Alexander said. Edison still plans to go forward with the deal, he said.
"I believe that's exactly the case. It certainly was yesterday," Alexander said.
Alexander pointed to a statement issued by the company that said Edison preferred a path different from Pacific Gas.
"We at Southern California Edison continue to believe that working out a comprehensive solution to our current crisis is a preferable course to take," the statement said. PG&E's decision "does not change our position."
Analysts say despite the rhetoric exchanged between the two, PG&E may have had no choice. Bankruptcy probably was the company's only option at this point.
Jerry Taylor, director of natural resources for the Cato Institute, said regardless of the state's plan to purchase PG&E's utility lines wouldn't have gone nearly far enough to help pay off the debt.
The rate hikes approved last week by the California Public Utilities Commission also wouldn't cover it, Taylor said. The utilities would be allowed to collect roughly 10 to 11 cents per kilowatt/hour for electricity under the rate hike plan but are paying twice to four times that in wholesale costs.
"That's a recipe for bankruptcy," Taylor said.
The state's rate hike plan will do little to help PG&E get out from under its debt burden, said PG&E's Glynn. Among the provisions passed last week the PUC is a little-noticed amendment that funnels much of that extra rate back to the state for fronting money to pay for electricity.
"It's going to take a comprehensive solution to solve all our problems," Glynn said.
PUC officials did not have a response PG&E's statement.
Whether intended or not, PG&E also is throwing a wrench into the California's plans to acquire its transmission lines. If PG&E had not agreed to sell the asset - which analysts say was being negotiated at a bargain price - the state eventually could have claimed them through eminent domain.
"That could be prompted PG&E to use default on debt to force a solution," said Charles Cicchetti, public policy professor at the University of Southern California.
Cato Institute's Taylor said a bankruptcy judge represents another hurdle the state would have to jump over in order to get access to those lines. There also will be a number of creditors that might want the lines - and might pay more for them, he added.
"The creditors now are going to claim all the assets they can," Taylor said. "The state may have to line up."
PG&E officials declined to discuss the state of negotiations over the power grid on Friday.
"We haven't chosen to negotiate our deal in the public," said PG&E's Glynn.
-- Martin Thompson (email@example.com), April 06, 2001
Looks like the Governor hasn't been minding the store
Calif.'s Davis 'Surprised' by PG&E Bankruptcy Move April 6, 2001 3:25 pm EST
By Jonathan Stempel NEW YORK (Reuters) - Pacific Gas & Electric Co., California's largest utility, said on Friday it filed for voluntary bankruptcy protection, citing the failure of the political process to resolve the state's power crisis.
The Chapter 11 filing with the U.S. Bankruptcy Court for the Northern District of California by Pacific G&E, which owes $9 billion for power costs, is one of the largest ever by a U.S. utility.
It was disclosed in mirror filings by the utility and its parent, San Francisco-based PG&E Corp., with the Securities and Exchange Commission. The parent did not file for court protection.
Trading was halted in PG&E shares before the filing. The shares last traded on Friday at $11.36, down 2 cents. They had fallen 46 percent in the last year. Its bonds fell about 2 cents on the dollar.
The filing for bankruptcy reorganization was disclosed fewer than 18 hours after California Gov. Gray Davis, in a speech televised statewide, proposed his own plan to help rescue Pacific G&E and the state's second-largest investor-owned utility, Southern California Edison.
"What happened was that last night we saw very disappointing comments from Gov. Davis," said Dan Scotto, senior utilities analyst for BNP Paribas. "Last night's speech was pregnant with anticipation, but fell short of investor expectations."
Pacific G&E, which serves 13 million Californians, had piled up about $9 billion in debts because its wholesale prices have soared, yet a rate freeze imposed under California's 1996 utility deregulation capped retail prices. The state's power shortage has resulted this year in four rolling blackouts so far.
"The regulatory and political processes have failed us, and now we are turning to the court," said Robert Glynn, chairman of PG&E and Pacific G&E, in a press statement.
GOVERNOR DAVIS "SURPRISED"
A spokesman for Davis said the governor was "surprised" by Pacific G&E's bankruptcy filing.
"We were talking to them last night," said spokesman Steve Maviglio. "We had a four-hour meeting with them the day before -- they were ongoing, continued, frank discussions. We agreed to meet again."
Trading was halted in shares of Rosemead, Calif.-based Edison International, the parent of SoCal Edison, after the filing. By the middle of Friday afternoon, they traded at $8.95, down $3.69, or 29 percent on the day and down 47 percent in the last year.
In a press statement, John Bryson, Edison's chairman, called Pacific G&E's filing "a sad day for California.
"We at Southern California Edison continue to believe that working out a comprehensive solution to our current crisis in a preferable course to take," he said. "PG&E's decision today does not change our position."
Analysts have said SoCal Edison, which has more than $5.4 billion in uncollected costs, is financially stronger than Pacific G&E. It has not sought court protection,
The utilities have already defaulted on a wide array of bonds and bank loans. Other utilities to have defaulted include Public Service Co. of New Hampshire, which also sought bankruptcy protection, and the Washington Public Power Supply System -- often referred to as "Whoops."
Pacific G&E said in its filing that it "retains control of its assets and is authorized to operate its business as a debtor in possession while being subject to the jurisdiction of the Bankruptcy Court."
Glynn said Pacific G&E filed because California will not cover the utility for its unrecovered costs, which it said are now increasing by more than $300 million a month. Bankruptcy, he said, is the "fairest" venue for shareholders.
Pacific G&E also attacked decisions by the California Public Utilities Commission that it said "undermined" the utility's ability to return to financial viability and recover its uncollected costs, as well as a "lack of progress" with the state to recover prior wholesale power costs.
The PUC, which sets rates, last week awarded Pacific G&E and SoCal Edison a roughly 40 percent rate hike. This initially cheered investors, but it soon became apparent the hike would not address the utilities' prior power costs.
California, meanwhile, has been planning to sell up to $14 billion of bonds to help fund future power purchases.
With the matter now in the bankruptcy court, "you've got the question of 'What do we do to restore some sound footing here?"' said Mitchell Stapley, a portfolio manager for Lyon Street Asset Management in Grand Rapids, Mich.
Scotto said "the one thing they can count on is that the whole process will be under the auspices of one individual, mainly the federal bankruptcy judge. This may be the best for everybody -- this places everyone on the same playing field."
Davis on Thursday had proposed an average 26.5 percent rate increase for fewer than half of the customers of Pacific G&E, SoCal Edison and San Diego Gas & Electric Co., the state's third-largest investor- owned utility, a unit of San Diego-based Sempra Energy Inc..
The proposal had several conditions, including PG&E selling off its share of the state's power grid, which analysts said the company was resistant to doing. Edison in February reached a preliminary agreement with the state to sell its share.
-- Martin Thompson (firstname.lastname@example.org), April 06, 2001.