PG&E Bankruptcy Filing

On April 6, 2001, Pacific Gas & Electric Company filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in San Francisco bankruptcy court. The case number is 01-30923-M and all case documents can be found at www.canb.uscourts.gov.

According to a statement issued by PG&E in announcing the filing, it will do the following while under Chapter 11 protection:

• Utilize existing resources to continue operating its business during bankruptcy, including paying vendors and suppliers in full for goods and services received after the filing.
   
• Pay electric commodity suppliers as provided by law.
   
• Continue normal electric and gas transmission and distribution functions.
   
• Continue paying employees.
   
• Continue paying health care plan benefits and other benefits for employees and most retirees.
   
• Fully fund and protect the utility’s qualified retirement plans for retirees and vested employees as required by federal law.

Following is a list of some of the questions and answers that come up most frequently surrounding the bankruptcy issue.

Now that PG&E has voluntarily gone into bankruptcy, what happens relative to the various court filings against the utility?

All pending collection actions against the utility are automatically stayed in a bankruptcy proceeding.

However, it does appear that PG&E’s filed rate doctrine lawsuit – a case where PG&E is the plaintiff, not the defendant – will be allowed to continue in federal court. In this case, PG&E contends it’s permitted under federal law to pass through all of its purchase costs for generation to ratepayers regardless of the rate freeze required by AB 1890, the 1996 legislation that restructured the electric market in California.

How will PG&E’s back debt and ongoing expenses be handled?

All claims or debts accrued after the bankruptcy has been filed are known as "administrative claims" and have priority over all pre-petition unsecured claims. In other words, those generators and suppliers who continue to sell power and goods to PG&E from the date of the filing forward are entitled to be paid in full for those sales before pre-filing claims are paid. The notion that the administrative claims will be paid assumes, in part, that the rate increases recently adopted by the Public Utilities Commission will provide enough money to cover the expenses of the utility on a going-forward basis.

Does a bankruptcy increase or decrease the likelihood of people and businesses being forced to endure blackouts this summer?

It’s difficult to say for sure because it depends on a number of factors. Power generators and marketers don’t have to sell power to the state Department of Water Resources (DWR) or to the Independent System Operator (ISO) while PG&E is in bankruptcy. However, it seems likely that sales to DWR will continue, since the state is already paying cash for that power.

As for sales to the ISO, the U.S. Court of Appeals for the Ninth Circuit lifted a lower court injunction on April 5, relieving Reliant Energy of its obligation to sell electricity to the ISO without assurances of payment. However, to the extent the recent rate increase adopted by the Public Utilities Commission covers PG&E’s costs on a going-forward basis and allows it to pay cash for power sold to the ISO that PG&E has to pay for, it seems likely the generators and marketers will continue to provide power.

Furthermore, qualifying facilities (QFs) that have stopped producing power because they’ve been paid only 15% of what they’re owed by PG&E may come back on line if they know they’ll be paid in full on a going-forward basis. Whether those facilities decide to come back on line will depend in part on what amount the California Public Utilities Commission (CPUC) determines the QFs should be paid based on the short-run avoided cost (SRAC) methodology it’s required to use under Public Utilities Code Section 390.

Can the QFs cancel their contracts with PG&E?

Many people believe that as long as PG&E remains current on a going-forward basis in terms of paying the QFs, they cannot cancel their contracts with PG&E. PG&E could opt to repudiate its contracts with the QFs, thus freeing the QFs to sell power on the open market and increasing the amount of the net short the state would then have to buy. However, as noted above, PG&E has stated its intention to continue paying its existing contracts in full on a going-forward basis.

What happens logistically in a bankruptcy?

This is a rough, broad sketch of the sequence of events:

• Upon a filing for bankruptcy, there is a 20-day contest period, during which time the party sent into bankruptcy via an involuntary petition filed by creditors can attempt to demonstrate to the court why the bankruptcy filing should not be permitted. Since PG&E has voluntarily filed for Chapter 11 bankruptcy protection, this 20-day contest period doesn’t apply.
   
• From the date the petition is filed, there is a 120-day exclusivity period – which can be, and frequently is, extended by a judge – during which time only the debtor can craft and submit to the court a plan that it thinks will allow it to emerge from bankruptcy. The debtor can work with other parties, including the state, to craft such a plan. After this exclusivity period, the judge can permit any creditor or group of creditors to submit a plan to the court for consideration.
   
• The U.S. trustee, an administrative office, will appoint a "creditors committee" or committees to protect the creditors’ rights. The committees attempt to group like creditors together to represent their rights and views in a bankruptcy proceeding. (See below for the creditors committees that were appointed on April 11, 2001).
   
• In order to consensually emerge from bankruptcy, any plan for reorganization must be supported by half in number of the voting creditors who control at least two-thirds of the debt within each creditor class.
   
• Alternatively, as long as at least one class of creditors votes to support a plan, that plan may be non-consensually confirmed over the objections of dissenting classes through a complicated process known as "plan cram-down."
   
• Have any creditors committees been appointed yet?
   
• Yes. On April 11, 2001, U.S. Trustee Linda Ekstrom Stanley selected eleven creditors who collectively will serve as the eyes, ears and decision makers for those who have unsecured claims against the utility. Those eleven creditors listed below are among the 100 largest unsecured creditors of PG&E:
   
• Enron Corporation ($580 million)
   
• Dynegy Power Marketing ($255 million)
   
• KES Kingsburg L.P. ($182 million)
   
• GWF Power Systems ($62 million)
   
• Bank of New York ($2.2 billion)
   
• Bank of America ($1.175 billion)
   
• U.S. Bank ($310 million)
   
• Merrill Lynch ($106 million).
   
• Davey Tree Expert Co. of Kent, Ohio ($9.6 million)
   
• City of Palo Alto ($200 million)
   
• State of Tennessee ($76 million)

Can the bankruptcy judge order PG&E to sell off certain assets, order PG&E to operate its facilities in violation of California law, or raise electricity rates?

These are complicated questions of law and fact, but as a general rule, a bankruptcy filing doesn’t suspend or override applicable statutes or regulations. It appears clear to many that a bankruptcy judge cannot order the utility to operate in a manner that abrogates the state’s health and safety laws. Generally, a bankruptcy judge won’t order a sale of assets unless it is proposed by the debtor or a creditors’ committee. Furthermore, some believe case law demonstrates the judge cannot require rates to be raised absent the consent of the CPUC. Others believe the judge has the power in a crisis situation to take the steps he or she believes are necessary to enable the utility to continue operations. A recovery plan could be created which depends on a rate increase, asset liquidation, or other actions that would require state approval to be implemented.

Can the state still buy PG&E’s transmission lines or hydroelectric plants?

As long as PG&E is still in Chapter 11 bankruptcy, it’s unlikely that PG&E would be permitted – either by its creditors or by the bankruptcy judge – to sell off assets on a piecemeal basis. It’s possible that a bankruptcy recovery plan could include the sale of assets to the state, but any such decision probably won’t be made for quite some time.

In addition, it’s customary in bankruptcy cases to hold an auction with one potential buyer, the so-called "stalking horse," who will make a proposal against which others may bid.

Because the state is buying power for PG&E’s customers, is the state at risk of not getting paid for its purchases?

No, it’s not. AB 1x (Keeley) authorized DWR to buy energy for utility customers structured the transaction as one between the state (DWR) and the customer, with the utility acting only as the distributor and billing agent for the transaction. AB 1x required utilities to segregate the state’s revenues in a separate trust to be remitted directly to DWR. This structure was specifically intended to protect the state should a bankruptcy occur.