California:
PG&E, a Big Utility, Declares Bankruptcy. What Are They Really Up To?

May 7, 2001

On April 6, the electricity deregulation melodrama in California took another turn when the public utility that serves central and northern California, Pacific Gas and Electric (PG&E), declared bankruptcy.

PG&E spokespersons said that the company had no choice but to make that drastic move, and seek protection from its creditors, having already run up over nine billion dollars in bills that it could not pay. According to corporate executives, PG&E is caught in the middle of deregulation of electricity. While the utility is being charged the full exorbitant cost of the deregulated price of wholesale electricity, they said that PG&E was not allowed by state regulators to pass that cost on to its customers. As if utility customers should be expected to pay electricity bills that are three or four times higher than the previous year!

But if PG&E really was out of money, how did it manage, only hours before filing for bankruptcy, to "scrape" together 30 million dollars to pay bonuses to 6,000 management personnel? How did it, only a few weeks after filing for bankruptcy, continue to make quarterly dividend payments of 110 million dollars to its stockholders, and still have enough money to grant salary increases of up to $300,000 to each of its top executives?

From local utility to nationwide supplier of energy

The law that deregulated electricity in California was passed in 1996. Since then, PG&E went from being a regulated utility functioning only in California collecting a "modest" 11% profit year in and year out, to an owner of 30 electric generating plants in 21 states, a supplier of electricity and gas to one out of every 20 people in the United States, one of the largest U.S. transporters of Canadian natural gas, and a marketer of energy services and products throughout North America.

How did PG&E do this in such a short time? First, the deregulation law that PG&E executives helped write in 1996 allowed the parent company, PG&E Corp., to use the old utility, PG&E, still supposedly under state regulation, as a cash cow. PG&E Corp. stripped the utility of its most profitable assets, funneling billions of dollars out of the utility into new businesses. In other words, while ratepayers thought they were paying for electricity and gas, upkeep of the infrastructure and construction of new plants, in fact, PG&E was taking this money and using it to greatly expand its business empire.

PG&E says it’s caught in a squeeze because it was forced to sell off all of its electric generating capacity. It’s not true. PG&E kept almost half of its electric generating capacity, including its network of hydroelectric dams, its nuclear power plant at Diablo Canyon and many of its coal-fired plants. These also happen to be its most profitable electric generating plants. But it didn’t hold those plants under the management of the old utility. Instead it placed them in a new PG&E subsidiary, which it calls National Energy Group. This subsidiary is not regulated by the government and, as of 1998, was free to charge the going rate, the same exorbitant prices as the other companies are charging for providing electricity to the utilities.

This is why, by the way, about half the money that PG&E owes today is not to other companies, but only to National Energy Group, the other subsidiary of its parent company. In other words, half of its debt is to itself.

In the same 1996 deregulation law, PG&E and the other private utilities were given the right to add a large rate surcharge to everyone’s electric bill. This rate surcharge was supposed to allow the companies to pay off large debts on their electric generating plants so that they could be more "competitive" in a newly deregulated market. That surcharge has netted PG&E close to nine billion dollars in just four years.

Once PG&E got its hands on this money, they were free to do with it what they wanted. The first thing they did was take several billion dollars to buy back the company’s own stock and to pay dividends. That is, the corporate executives made sure that stockholders pocketed a big chunk of this money. They then funneled the rest of the money into the new subsidiary, National Energy Group, which went on a buying spree all over the country. The new subsidiary started by buying New England Electricity System for 1.6 billion dollars. This became the cornerstone for becoming one of the largest power generators in the Northeast. In fact, ratepayers in Massachusetts are currently suing the power company owned by PG&E for price gouging on their bills!

This left the old utility, PG&E, that still serves over five million people in northern and central California, looking like it was going broke. And no wonder! The parent company had stripped it of its most valuable assets and drained it of its money!

Walling off the losses from the profits

The parent company, PG&E Corp., wanted to make sure that the losses that were building up in the old PG&E, did not drain away the profits building up in its new subsidiary, National Energy Group. So, they asked the federal government for permission to wall off the profits and losses between the two subsidiaries. On January 12, the Federal Energy Regulatory Commission (FERC) ruled in PG&E’s favor. It issued an order that in effect shielded PG&E’s profitable National Energy Group from the debts faced by its utility subsidiary, PG&E.

Once PG&E Corp. did that, it was free to go ahead with the bankruptcy of its utility, without having to worry about endangering the profits that its other subsidiary was producing.

For PG&E, the bankruptcy filing is merely a political maneuver. By claiming that the utility is broke, they hope to force the government to okay another huge state bailout financed by taxpayers and ratepayers.

Of course, if a big state bailout proceeds, as PG&E wants, it could create quite an uproar. After all, electric rates in California are already skyrocketing, the state treasury is already being drained to the tune of billions of dollars every month just to keep the electricity on, and... the state is facing a summer of power blackouts.

But just incidentally, by claiming bankruptcy, the entire matter is put before a federal judge who is appointed for life, and who therefore can rule more easily in the utility’s favor without fear of facing voters in an election. California politicians, facing voters, can now blame it all on the courts.

PG&E’s bankruptcy is just one more link in the great electricity ripoff chain going forward in California.

But California is not alone. It simply is a snapshot of the future awaiting every state now undergoing deregulation.