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State, PG&E Propose Deal to Erase Debt

Settlement would allow utility to emerge from bankruptcy and lower electricity rates. Gov. Davis says customers deserve bigger cuts.

June 20, 2003|Tim Reiterman and Nancy Rivera Brooks | Times Staff Writers

SAN FRANCISCO — State regulators and Pacific Gas & Electric Co. announced a proposed settlement Thursday that would allow California's largest electricity utility to emerge from its contentious bankruptcy by paying off creditors while lowering electricity rates.

The compromise would reduce electricity rates by $350 million a year starting Jan. 1, lowering the average residential customer's electricity bill by $3.50 a month.

Gov. Gray Davis and consumer groups immediately criticized the proposal, saying PG&E's customers should see bigger rate cuts.

The plan would erase PG&E's nearly $13 billion in electricity debts amassed during the energy crisis of 2000-2001, when the utility's rates were not high enough to cover the cost of buying wholesale electricity.

Part of the amount would be paid with about $4 billion in surplus electricity charges banked by the utility since energy prices went down. An additional $8 billion in debt would be paid off over time, financed by its customers, who are in Northern and Central California.

In addition, the utility would be allowed to add $2.21 billion to its rate base -- its expenses, including capital costs, on which rates are based -- for the next nine years.

Officials could not immediately say what the effect of that adjustment would be. One consumer group said it could obligate customers to pay as much as $5.3 billion. "This is obscene," said Mike Florio, senior attorney at the Utility Reform Network.

Shareholders of PG&E Corp., parent company of the utility, would contribute $1.7 billion by forgoing stock dividends until at least mid-2004. And the company would dedicate 140,000 acres of watershed land, mostly surrounding hydroelectric projects in the Sierra Nevada and valued at $300 million, to be used in perpetuity for public purposes.

The announcement was billed as a major step in repairing the damage from the state's failed 1996 deregulation law, which brought PG&E and Southern California Edison to the brink of financial ruin and forced California to spend billions of dollars on electricity on behalf of the utilities.

"The settlement marks a significant turning point not only in California's energy crisis but in the relationship of these parties as well," said Bankruptcy Court Judge Randall J. Newsome, who presided over the negotiations. "Today's settlement is a fair deal for both sides and of great benefit for all Californians."

The deal still must be approved by the PUC, the PG&E Corp. board and bankruptcy trial Judge Dennis Montali, who scheduled a conference today among lawyers in the case.

Opposition by Gov. Davis is perhaps the biggest hurdle. Although the settlement was negotiated by the PUC staff, the five commissioners who must approve the deal are appointed by Davis.

"The proposed settlement is too expensive for the ratepayers. PG&E's shareholders must bear a greater share of the burden. I will oppose any deal that does not provide greater rate reductions for PG&E's ratepayers," Davis said.

Echoing that sentiment, Commissioner Susan Kennedy issued a statement saying, "More of the funds ... needs to go back into ratepayers' pockets."

Nettie Hoge, executive director of the Utility Reform Network, said the proposed settlement would keep PG&E accountable to the PUC. As part of its bankruptcy proposal, the utility had suggested splitting off valuable assets and moving them to sister companies outside the PUC's reach.

"We paid dearly to keep a unified utility," Hoge said.

Doug Heller of the Foundation for Taxpayer and Consumer Rights promised a fight at the PUC, saying "This is a total sellout of PG&E customers, and the [commission] should reject the proposed settlement."

PG&E sought Chapter 11 bankruptcy protection from creditors in April 2001. PG&E and the PUC submitted competing plans for reorganizing the company's financial affairs, and Judge Montali ordered them in March to commence negotiations with the official committee of creditors.

The specter of protracted litigation hung over the case. Key issues, such as whether PG&E's bankruptcy plan could pre-empt state law, already are playing out in courtrooms. And both sides threatened to appeal if the other's bankruptcy plan prevailed.

The settlement would resolve litigation between PG&E and the PUC, but not other suits involving the utility and the state, such as the state attorney general's suit against PG&E Corp. over millions of dollars transferred to the parent company from the utility during the energy crisis.

"We have to eat the elephant one bit at a time," Newsome said. "This is one piece."

The utility said the deal would "allow it to emerge from Chapter 11 as an investment-grade utility, pay all valid creditor claims in full, with interest, and do so without raising our customers' rates."

Reiterman reported from San Francisco and Rivera Brooks from Los Angeles.

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