Informational Hearing

Proposed Bankruptcy Settlement Between Pacific Gas and Electric
Company and the California Public Utilities Commission

State Capitol, Room 3191
September 3, 2003
1:30 p.m.

I. Opening Comments

• Senator Debra Bowen, Chairwoman
  Senate Energy, Utilities & Communications Committee

II. Witnesses

• Tom Edmister (PPT)
  California Public Utilities Commission (EU&C questions to PUC)
   
• Joe Malkin
  Pacific Gas and Electric Company
   
• Mike Florio and Margaret Meal (PPT)
  The Utility Reform Network
   
• Truman Burns
  Office of Ratepayer Advocates
   
• Mary Nichols
  Secretary for Resources
   
• Stephen Wald
  California Hydropower Reform Coalition

Proposed Bankruptcy Settlement Between
Pacific Gas & Electric Company and the California Public Utilities Commission

Background

On June 19, 2003, Pacific Gas & Electric Company (PG&E) and the staff of the California Public Utilities Commission (CPUC) announced a proposed settlement of their competing plans of reorganization in the PG&E bankruptcy proceeding.

Like both the PG&E and CPUC plans, the settlement anticipates that all approved creditor claims will be paid. The settlement commits approximately $4 billion in accumulated cash from excess rates collected by PG&E through 2003 to partially pay off the bankruptcy claims. New debt will be issued to pay off the remaining bankruptcy claims and expenses, with the cost collected in rates until 2013.

The key financial feature of the settlement is the addition of $2.21 billion to PG&E’s rate base in the form of a new "regulatory asset." According to the settlement, the regulatory asset will be amortized between 2004 and 2013 and will earn no less than PG&E’s current equity return of 11.22%. The regulatory asset effectively obligates PG&E customers to borrow $2.21 billion and pay it back with the equity return, plus taxes and amortization. The total ratepayer cost of the regulatory asset over its nine-year amortization is estimated at $5.27 billion. The revenues generated by the regulatory asset will support the issuance of new debt by PG&E. The after-tax amount of any generator refunds will offset the regulatory asset.

The settlement also contains several regulatory commitments on the part of the CPUC. The CPUC agrees to act to facilitate and maintain investment grade credit ratings for PG&E. The settlement requires the CPUC to maintain at least an 11.22% return on equity on the regulatory asset for its life, as well as on PG&E’s entire rate base until PG&E obtains an "A-" (S&P) or "A3" (Moody’s) credit rating. The CPUC agrees to maintain current rates through 2003. PG&E agrees not to pay any common stock dividends before July 1, 2004. Otherwise, the CPUC is prohibited from restricting the payment of dividends.

The settlement provides for conservation of PG&E’s watershed lands (144,000 acres) and the Carizzo Plains parcel (655 acres). These lands will be placed in conservation easements or donated to public agencies or conservation organizations, subject to a plan to be developed and implemented by an ad hoc "Environmental Enhancement" corporation, in conjunction with PG&E and the CPUC. PG&E ratepayers are to provide $7 million per year for 10 years to fund administration and environmental enhancements undertaken by the corporation.

In order to be effective, the settlement must be approved formally by the CPUC and confirmed by the bankruptcy court. The settlement is also not effective until the CPUC issues final, unappealable orders approving all rates, tariffs, and agreements necessary for implementation and PG&E is rated investment grade by S&P and Moody’s. The settlement is currently being reviewed by the CPUC. A decision is scheduled for adoption in December.