The $14 billion is the difference between what the state’s two biggest utilities–Pacific Gas & Electric and Southern California Edison–have paid for power since last spring and what regulators have let them charge their customers for it. The companies covered this difference by running up staggering debts to their suppliers (more than $9 billion) and to the state of California ($4.6 billion), which has been buying power for them since they lost their credit ratings a few months ago. California’s tab is rising at the rate of $40 million a day. So much for worrying about what to do with its budget surplus.
We’re not going to deal with the question of who’s at fault for this mess, how it was allowed to metastasize and how it could have been avoided–that’s not our problem today. Our problem is the $14 billion. The utilities haven’t got it, and have no way to raise it. Their parent companies–PG&E Corp. and Edison International–would be shot by their shareholders for even thinking of tossing such a sum into the abyss. And electricity suppliers aren’t about to declare themselves public charities and forgive the utilities’ debts. Which leaves customers and taxpayers. And bankruptcy, which could wipe out the parent companies’ investment and give creditors cents-on-the-dollar rather than their full claims.
If the utilities were typical, boring companies making widgets or something unessential, they would have been in bankruptcy court long ago. By not paying their creditors on time, Pacific Gas and SoCal Edison have become what bankruptcy law calls “insolvent,” and what civilians call “busted. " As a result, the companies’ boards of directors are running a big but little-recognized legal risk by not having already filed for bankruptcy. “When your company is insolvent, your fiduciary duty is to the creditors,” says Elizabeth Warren, a Harvard Law School bankruptcy professor. “The directors are facing personal liability for failing their responsibility to the creditors of the company.” Indeed, the $3 billion or so of obligations the companies have added since year-end dilutes the claims of earlier creditors.
Why aren’t the companies already in bankruptcy? Partly because it’s embarrassing, time-consuming, expensive and messy, and grubby bankruptcy types can show up in court and tear your face off. And because they may get bailed out by the state, given that Gov. Gray Davis is desperate to avoid bankruptcy court. “We don’t want to turn into a Cleveland-on-the-Pacific,” says Steven Maviglio, Davis’s press secretary, referring to Cleveland’s infamous 1978 default. (The city didn’t go bankrupt, though.)
The state had better hope the utilities stay out of bankruptcy. Had they gone bankrupt before the state started buying power for them, only shareholders and creditors would have been at risk. Now the taxpayers have $4.6 billion at stake. Maviglio says Davis is concerned that a bankruptcy judge would triple electricity rates, which would lead to a voter initiative to limit rates, which would discourage power producers from investing in California. Tripled rates sounds awfully high to me, and the rest seems, shall we say, somewhat iffy? But hey, I’m from the East Coast. What do I know?
Davis is peddling a plan, still under construction, he says will solve the problem. The utilities’ parent companies would kick in a total of $1.4 billion. The state and the utilities would borrow big bucks by selling bonds: $15 billion, $20 billion, who knows? Creditors would be paid in full, the sun would shine, everything would be wonderful. But someone would have to pay the interest on those bonds. Guess who? California’s utility customers, its taxpayers or both. “It’s our hope and expectation that rate increases would be minimal,” Maviglio says. Good luck. Of course, had the utilities been allowed to raise rates a few months ago, we might not have had this problem.
Look. I’m not touting bankruptcy as a cure-all. Or even necessarily as a good idea. But posturing, shrieking and looking for villains hasn’t worked real well. And, when last heard from, the energy fairy had not yet lined up $14 billion of magic dust.
