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These articles appeared in the editorial section of the Sacramento Bee:
The inside story of why PG&E went bankrupt: Top officials of the huge utility say they didn't think Sacramento could fix their problem. (Published April 22, 2001) On April 13, a week after Pacific Gas & Electric filed for Chapter 11 bankruptcy protection, Gordon R. Smith, president and chief executive officer of the utility, and Dan Richard, vice president for public affairs, met with The Bee's editorial board. What follows are edited excerpts from the interview: Bee: Why don't we start with a single-word question -- why? Gordon Smith: Why did we file Chapter 11 [bankruptcy] a week ago today? In all sincerity, it was the right venue for trying to resolve the financial energy crisis facing our company. It's a means to get somewhere else from where we were before or where we are now. There have been a lot of statements over the last 10 months now that we've been looking for a bailout. I think even the [Southern California] Edison agreement reached with the governor has been viewed by some as a bailout. We never viewed it as a bailout. What we really wanted was the state Public Utilities Commission to follow the law to determine the end of the rate freeze, to give a valuation of our hydro [electric] facilities and after that, pass on the costs of wholesale power costs to our customers. It's not our power costs. It's our customers' power costs. And, in fact, the PUC in the last several weeks and months has been issuing destabilizing orders to us. You probably saw two and a half weeks ago that they announced a 3-cent kilowatt-hour increase, which is described as somewhere between a 40 and 47 percent rate increase. None of that money in fact stopped with financially troubled PG&E. It went right onto the state. In fact, as we read their orders, there was even more than that coming out of our treasury to go to the state. That, along with a few other orders, just said we needed to take a look at a different venue. Chapter 11 appeared to be the best one. Dan Richard: I think we really did lose faith that there was going to be a solution coming out of the political process. And I have to tell you, people in Sacramento were saying to me, "We don't believe there's the political will to fix this problem." It was kind of startling. But there were a number of leaders who were saying, "We don't think you're going to get there." And we didn't think we were going to get there. Bee: What is your evaluation of the Edison deal? Smith: Well, I think our press release said we're delighted. We're happy to see that they've reached a conclusion. We're still evaluating it to see what is in it and what isn't in it, and whether or not it might be a framework for a settlement. Bee: The conventional wisdom I'm hearing is that Edison pretty much got everything that it wanted. A lot of people were asking if that deal was on the table a week before, why would PG&E not have taken it? Smith: I don't think that deal -- and I'm speculating here so forgive me -- was on the table the week before for Edison. Bee: How about for you? Smith: I would speculate that our actions last Friday spurred people to work around the clock over the weekend and for an announcement on Monday. Richard: I think the governor actually said almost those very words. Bee: You think he gave them a better deal to prevent them from going to bankruptcy? Smith: Absolutely. Yeah. Bee: What's not to like about that proposal from a utility point of view? Smith: We were prepared to accept many of the terms that the governor outlined in his televised speech a week ago last night. There were things that we wanted to have in that agreement that never appeared to show up in a written agreement. Bee: What was PG&E's comfort level with selling either its transmission or its hydro to the state? Smith: Well, it's a Sophie's choice for us. Part of the company was based on our hydro system and our transmission system. In order to stem off where we ended up, we were willing to put those on the table. Bee: From your perspective, did it make more sense for the state to be in the ownership business of the hydro or the transmission. Smith: Not really. Richard: Is there a third choice? Smith: They give us a dollar, and we give them back their IOU, and not a hot dog? It was a currency that obviously the state is interested in, and Edison is willing to agree to. As Dan indicated, we were willing to make a Sophie's choice and put it on the table. But in return, we needed some things as well to take the transaction forward that we didn't have, nor do I believe Edison had a week ago today. Bee: You mentioned the guarantee that wouldn't end up with another under-collection was one of the things you wanted, and couldn't get. What else? Smith: You say guarantee. I guess it might be characterized like that in some fronts. We have been forced by the state of California, either the Public Utilities Commission or the Legislature, depending how you look at it, to be out of the generation business. The public policy of the early or middle '90s was to get the utilities out of the vertically integrated business. All right. We sold power plants. The ones that we held had a reduced return in equity on them. What we really want is some assurances for what we purchase will be passed through. No business can stay in business if it can't pass on the wholesale costs. Bee: What else did you need? Smith: For a deal with the state? Bee: Yes. Smith: I'm really not in a great position to speculate on all the gives and gets on that. But we wanted, as Dan indicated, a transaction that would be enduring. We wanted guidelines. We wanted assurances that when we gave up billions of dollars, there would, in fact, be a transaction.... Bee: So is it possible that you could look at the Edison deal, decide that it's wonderful and you wished they had offered it to you, and have it applied through bankruptcy? Richard: As part of our reorganization plan. Bee: Meanwhile, the Legislature could reject it for Edison and you guys could get it and they'd be out in the cold. Smith: Write that down. (Laughter.) Smith: It may very well be a solution. But as Dan indicated, our reorganization plan, at the end of the day, has to have a comprehensive solution for paying power costs going forward as well as recovering the power costs in the past. Bee: You've had a week now to pick it over. Have you seen anything in that deal that is off-putting to you, a deal-breaker? Richard: You'll have to excuse us if we decline to comment on that. If we did comment on that, it would look like we were either trying to push it through or push against it in some way. The governor and Edison are going to present that deal to the Legislature, and the Legislature is going to view it and I think what we're trying to say is we're not closing doors to anything. We're just in this venue and this venue doesn't foreclose any possibilities. Smith: Chapter 11 is not an end to itself. We would like to get out of it as soon as practical. Bee: Can I ask about the gas side? When you hear from people they talk about "energy" prices. They don't mean electricity. They mean the gas bill. Why did gas prices run up so much higher in California than they did elsewhere? What if anything do we need to do to keep that from happening again? Richard: I think we have two answers to that. One, there is more gas demand for the obvious reasons. People are converting power plants to gas or are building gas-fired plants only because it is the fuel of choice from an air-quality standpoint. The increased demand for gas by electric generation is something like 700 million cubic feet a day, and this is out of 5 billion cubic feet of day that we use. There's been a huge run-up in the pull on the natural gas system. We have infrastructure needs on natural gas. Just like we need to build new power plants in the state, we need to have new interstate gas transportation lines built. Smith: There's a restriction on both the capacity of the pipe and the commodity itself that has led to the increase. Richard: But nationwide, there is not a natural gas shortage. But it is just more in demand. So prices have come up. Now having said all of that, that there are some fundamentals that would drive the price of gas up, we don't believe that those explain how high the price of gas has gone. And there, when you can buy price at the Henry Hub, at the Texas/Louisiana border for $5, and it costs $1 to transport it to the California border, why is it selling at the City Gate (L.A.) for $20? Smith: And Southern California Gas Company pays right now, I believe, about 50 percent more for natural gas than we do, because we have Canadian gas sources. So there's something going on in the transportation capacity of the Southwest. There's just now question about it. Richard: And the FERC is looking at this, and we've joined with others in saying there may be some, something wrong in the marketplace that needs to be examined there. Bee: Whose job is it to solve this transportation problem out of the Southwest? Smith: Federal Energy Regulatory Commission. The complaints are before them. Bee: Could I ask a question about the rolling blackouts that we'll likely have, and whose lights should go off? The city of Los Angeles, as we know, has its own public power agency, and it's also in its own control area. They most likely will have enough power to survive every summer day and likely the lights will never go off in the city of Los Angeles this summer. Sacramento has its own public power agency, and most likely SMUD has bought enough power to survive every summer day. Richard: But they're part of a - Bee: But they're part of PG&E. Smith: They're part of a control area. Bee: And PG&E likely does not have enough power to survive every summer day because the state, most likely, will not be able to find enough power on the open market. PG&E wants to turn around and shut off the lights in Sacramento and have Sacramento share in these rolling blackouts. Why should Sacramento share in these rolling blackouts when we've bought enough power to survive these days? Smith: Because SMUD has a contract with PG&E that provides for that to occur in return for lower transmission rates. Bee: But weren't these interconnection agreements essentially designed to deal with malfunctions and acts of God as opposed to acts of politics? Smith: It was designed to occur when there was not enough power. Period. Richard: I don't think that PG&E wants to pursue a beggar-thy-neighbor strategy. We're subject to ISO rules and the existing rules and arrangements and contracts in place. It's not quite PG&E saying we've decided that SMUD should suffer. This is sort of similar to the other problem. We've got a set of contracts and agreements in place. People don't like the outcome and they want to change it. I'm not saying they're wrong to want to do that. Those were the institutional arrangements that were put in place. Bee: But you're saying that SMUD cannot make the policy choice to say that we're going to have reliable power this summer and we're willing to increase our rates to do it. And then they can't get the power delivered because PG&E is not essentially in the same situation. You're not allowing SMUD to make that choice. Richard: Well, I think that's probably a little more personal than I'm comfortable with. I don't think Gordon and I made that choice. Or PG&E made that choice. And I don't know enough about the contract. Bee: But didn't SMUD make the choice to buy enough power for this summer? Smith: I assume so. I met with Jan Schori [SMUD general manager] yesterday. And she assured me that she had enough power for the summer. Bee: So why shouldn't we - Smith: Let me get back down to it. We have a contract with SMUD that in return for lower tariff transmission rates, because they're part of a control area, when there is a shortage of supply in the control area they're dispatched off and share in the outages that the other 14 million Californians will be sharing in. Bee: To get back to the Edison MOU [memorandum of understanding] and your bankruptcy for a minute. As you read that MOU and you look at the start of your bankruptcy proceeding, what do you see in bankruptcy that is better for you than what is in that MOU? Richard: Again, that causes us to speculate on the MOU. But we went through the door because we needed to and we chose to. And we're now there. And as Gordon said, our goal now is to move through Chapter 11 as quickly and as efficiently as possible. If there are elements of the Edison MOU that are appropriate for a reorganization plan, then that gives us a head start. Now that we are in bankruptcy, there are other parties that are at the table also. The creditors are there. And that includes some of the out-of-state generators and the QFs [alternative energy providers] and so forth. All of those people. It is actually probably a broader process. At the end of the day, it may turn out to be a more open process, in terms of forging a reorganization plan. So fundamentally, I don't think what happened is bad. If our bankruptcy triggered a breakthrough on an Edison agreement, which in turn can roll into a reorganization plan that we come up with, then maybe we'll all end up at the finish line faster than we would have gotten there, if, in fact, we would have gotten there at all. Bee: We all certainly would like to get to the finish line. We certainly appreciate your helping us understand the problem. ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ -------------- Dueling energy realities: PG&E, consumers differ on financial risk (Published April 22, 2001) Pacific Gas and Electric is in bankruptcy court, as two top executives explain in today's Forum section (Page L-1), because the company concluded that the judicial system can resolve what the political system cannot. The company's explanation is articulate, revealing and self-serving. It is also not bought by regulators, consumers and in the end, we must all hope, by the courts. At its very core, this impasse between PG&E and the state's elected officials and regulators came down to two fundamental questions of risk and regulation about the past and present. First, the past. Over the last year of record-high wholesale electricity prices, whose wallet was at risk? Was it the shareholders of PG&E, the paying public or perhaps both? PG&E's answer is singular. The consumers must pay for this mess, not the company's shareholders. These past three years were supposed to have been a period of transition as the regulated PG&E prepared for competition from low-priced private generators and energy service providers. The utility's initial fear was that the generating plants it had built under regulation would become white elephants in a world of competition. So the Legislature via AB 1890, the 1996 "deregulation" bill, gave PG&E the chance to accelerate the mortgage payments on these investments during this transition. These accelerated payments were to come from the difference between what it cost PG&E to buy power on the (everyone thought) low-price wholesale market, and the high consumer electric rate frozen into law from 1998 to 2002. In fact, this is what happened for the first two years, but not the third. PG&E wants to keep all the proceeds from when times were good, and stick consumers for the tab when the market went haywire. The second question concerns the present. Can the state still regulate the price of power from PG&E's nuclear and hydroelectric plants? No, says the utility. Now that ratepayers have retired the mortgage on these plants, the utility contends it can charge market prices for the electricity they produce. By PG&E's own estimate, the utility could extract perhaps $5 billion in new profits from this source over the next 10 years. Yet remember: The reason that ratepayers paid off this mortgage is because these plants were supposedly going to be "stranded" if they had to compete. Did we accelerate these mortgage payments only to have to pay for these facilities again? The political system failed to answer these questions to PG&E's satisfaction because the utility's interpretation of what it's due defies common sense, fairness and sound public policy. This harmed, not helped, any political effort to reach a compromise. PG&E says that it is still hoping for a settlement rather than a court-ordered resolution. That can only happen when the utility's perspective on what's fair begins to converge with that of the paying, and voting, public.
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