BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Investigation No. 02-04-026
EXECUTIVE SUMMARY OF DIRECT TESTIMONY THE UTILITY REFORM NETWORK
The Utility Reform Network
711 Van Ness Avenue, Suite 350
San Francisco, CA 94102
Telephone: (415) 929-8876
Facsimile: (415) 929-1132
E-mail: mflorio@turn.org
August 29, 2003
EXECUTIVE SUMMARY OF DIRECT TESTIMONY THE UTILITY REFORM NETWORK
The Proposed Settlement Agreement ("PSA") between Pacific Gas and Electric Company and the California Public Utilities Commission ("CPUC") staff is far from the fair and equitable resolution of remaining litigation left over from California’s energy crisis that PG&E and CPUC staff would have the Commission believe. In reality, it would actually be PG&E’s coup de grace, ensuring that PG&E management and shareholders are richly rewarded for the company’s aggressive litigation tactics and efforts to evade state economic and environmental regulation through manipulation of federal bankruptcy law.
TURN and its financial consultants independently evaluated the PSA, using the same model that PG&E and the CPUC staff relied upon for their analysis, and concluded that it would enable PG&E to emerge from bankruptcy with an investment grade credit rating, but at an astonishingly high cost - $2.8 billion more over the next nine years than is reasonable, prudent or necessary to bring PG&E out of bankruptcy and accomplish all of the other objectives of PG&E and the CPUC staff in entering into the PSA.
The cost to ratepayers of the PSA is likely to be even greater than that of either PG&E’s Proposed Plan of Reorganization or the CPUC’s alternative plan, and PG&E would enjoy greater than 100% recovery of its remaining energy crisis costs. The settlement therefore does not represent any "compromise" of competing economic interests whatsoever.
The PSA would require California ratepayers to pay unnecessarily high rates and costs from the aftermath of the crisis for at least another nine years. And if this were not enough, virtually the entire burden of the PSA would be imposed on ratepayers. PG&E shareholders would, in contrast, be richly rewarded with far higher earnings than PG&E was able to achieve before the energy crisis, and PG&E would be provided with the means to substantially increase future dividends to fully make up for the dividends that shareholders would temporarily forego through July 2004.
In TURN’s opinion, neither ratepayers nor the California economy can bear such an excessive economic burden. Nor is it fair, equitable or necessary that they do so. All of the objectives of the PSA can be accomplished at significantly lower cost to ratepayers through a simple modification of the PSA financing plan to take advantage of the benefits of securitization, in essentially the same manner as California financed the 10% rate reduction required by AB 1890 using Rate Reduction Bonds. By securitizing a PG&E dedicated rate component ("DRC") and issuing new Energy Recovery Bonds ("ERBs") through a bankruptcy-remote Special Purpose Entity ("SPE"), instead of establishing the Regulatory Asset called for in the PSA, the cost of implementing the PSA, paying off PG&E creditors in full in cash, resolving PG&E’s bankruptcy, restoring PG&E’s credit rating to investment grade, and resolving all outstanding energy crisis related litigation between PG&E and the CPUC could be dramatically reduced. TURN has determined that savings of $2.8 billion could be achieved over the next nine years. Such savings are possible for several reasons. Securitization would permit a portion of the financing necessary to pay off creditors and bring PG&E out of Chapter 11 to be moved off PG&E’s balance sheet. It would also qualify for a much higher credit rating than PG&E’s corporate debt, thereby significantly reducing borrowing costs.
Financing a portion of the cost of paying off PG&E’s creditors and bringing PG&E out of bankruptcy through a Regulatory Asset, as provided in the PSA, would be extraordinarily costly. The $2.21 billion Regulatory Asset provided for in the PSA would support the issuance of some additional new PG&E corporate debt, but it would cost ratepayers an astonishing $5.3 billion over its nine year term, and the bulk of this cost ultimately serves only to benefit PG&E’s shareholders. Reducing this cost by $2.8 billion, over one half the total life cycle cost of the Regulatory Asset, would only require that the financing plan provided for in the PSA be modified in one key respect - to substitute $2.03 billion in ERBs in place of the $2.21 billion Regulatory Asset.
Modifying the financing plan in the PSA in this manner would not only generate significant savings in financing costs over the next nine years, but would also provide immediate benefits for ratepayers. The rate reductions would be twice as large as those PG&E and CPUC staff claim for the PSA without this modification. An immediate rate reduction of 0.62 cents/kwh could be implemented through issuance of ERBs, whereas current rates could only be reduced by 0.31 cents/kwh, one half this amount, if a Regulatory Asset is used instead. Use of ERBs in lieu of the Regulatory Asset would also result in further rate savings over time, increasing to an additional 0.55 cents/kwh over the PSA by 2012.
In light of the extraordinary and continuing burden that has already been imposed on ratepayers and on the California economy as a direct result of the energy crisis, and the gross inequities inherent in the allocation of costs and benefits between ratepayers and shareholders under the PSA, TURN urges the Commission to condition its approval of the PSA on modification of the financing plan under the PSA to substitute $2.03 billion in ERBs in place of the $2.21 billion Regulatory Asset. The savings that can be achieved through this relatively simple and modest modification are far too large, and the burden that would otherwise be imposed on ratepayers and the economy far too great, for the Commission to disregard this opportunity.