Power Plays: Where Did the California Utilities Money Go?
by Charlie Cray

When California lawmakers voted unanimously to deregulate the state's electricity market in 1996, California's three biggest utilities—PG&E, SoCalEdison, and San Diego Gas & Electric (SDGE)—owned most of the state's power generating plants, as well as most of the state's distribution grid and power lines. The companies operated as regional monopoly utilities, with strict regulatory oversight over retail electricity rates.

Once deregulation began, however, the companies rapidly began to restructure. First, they "unbundled" their assets—selling off some of their power generating plants while keeping their distribution grid and power lines and other assets such as nuclear and hydro power generation facilities.

The money from the power plant sales and high utility charges was siphoned off to the utilities' parent companies (e.g., PG&E restructured in 1997, creating a separate holding company called PG&E Corporation), which then passed the money on to other unregulated subsidiaries, which acquired new generating facilities in other states and (in the case of Edison International and SDGE) other countries. The parent companies built a diverse array of new assets and services, including natural gas pipelines, storage and processing plants.

Since the summer of 2000 price spikes, PG&E and SoCalEdison have claimed they are going broke by having to pay the difference between high electricity prices charged by wholesale power suppliers in the newly deregulated market and lower fixed retail rates that the utilities themselves originally negotiated with state regulators.

Claiming they needed relief or else they would be forced to declare bankruptcy, the utilities convinced the state to begin spending $50 million of taxpayer monies per day to purchase wholesale electricity on their behalf. The state began buying super-high-priced electricity on the wholesale market, including on the spot markets where prices were orders of magnitude higher than just a couple years before, and conveying the electricity to the utilities. By May, California taxpayers had spent more than $6 billion, with no end in sight. As the state's budget surplus quickly eroded, Governor Davis proposed floating $13.4 billion in bonds to cover the cost (the bonds are to be paid off over 15 years by ratepayers via higher electricity rates).

Meanwhile, federal regulators (FERC) agreed in January to allow the companies to organize their corporate structure so as to preemptively shield their assets during bankruptcy proceedings.

Less than two months later, on April 6, PG&E—the utility, not the holding company—filed for bankruptcy, leaving consumers and taxpayers in even more of a bind.

But was the company really bankrupt? While the utility was losing $300 million a month in wholesale power purchase costs, its parent company was pulling down a healthy profit. At the end of 2000, the PG&E Corporation (the parent company) reported $30 billion in assets and $20 billion in revenues for the year. It had an ownership interest in 30 independent operating plants in 10 states, including a number under development. In October 2000, it spent nearly $8 billion to acquire 44 new turbines.

Moreover, between 1997 and 1999, PG&E transferred $4 billion to its parent corporation. In the first nine months of 2000, PG&E transferred an additional $632 million. An audit sponsored by the California Public Utility Commission (CPUC) concluded that "historically, cash has flowed in only one direction, from PG&E to PG&E Corp. and then to the unregulated affiliates." Similarly, SoCalEdison transferred $4.8 billion to its parent corporation (Edison International) between 1995 and 2000.

CPUC's audit also found that PG&E Corporation (the parent) is expected to receive an additional federal tax refund of up to $1 billion "largely due to losses sustained by PG&E."

The San Francisco-based Utility Reform Network explains in its report "Cooking the Books" that the utilities' position was "akin to a situation in which one pocket is empty and another is full of cash. A reasonable person would check both pockets before assuming that they are penniless."

PG&E's Jon Tremayne responds that deregulation was set up "to pay the utility investors back money that they invested in power plants that they were now forced under law to sell. So the shareholders essentially recovered their investments and reinvested it. This was done under the direction of the Public Utilities Commisssion, in synch with the state law."

With support from the FERC, PG&E maintains that its California subsidiary is completely separate from the parent holding company, despite the fact that the two companies have virtually identical boards and file a joint annual report with the Securities and Exchange Commission.

The company may not be entirely in the clear. PG&E admitted in April in a quarterly filing with the U.S. Securities and Exchange Commission that, depending on the terms and conditions of the company's reorganization plan adopted by the company's Bankruptcy Court, creditors of the bankrupt PG&E utility unit may be able to grab some assets from PG&E National Energy Group, a subsidiary the parent had intended to insulate through its restructuring plan.

© Multinational Monitor June 2001