March 28, 2002

Pacific Gas & Electric Clears Way For California’s Plan to Sell Bonds

By Mitchel Benson, Staff Reporter of The Wall Street Journal

SACRAMENTO, Calif. — Pacific Gas & Electric Co. has removed a major obstacle from California’s plan to sell up to $11.1 billion in electric-revenue bonds, saying it does not intend to challenge key elements of the sale in the state Supreme Court.

“Our company has no plans to challenge or impede the recent” decisions by the California Public Utilities Commission that are necessary building blocks to the bond sale, Gordon Smith, the utility’s president and chief executive, wrote to Treasurer Phil Angelides in a March 26 letter.

California needs to sell the bonds to help pay back the state treasury and private investors for billions of dollars in power purchases and loans last year. The state had to step in and begin purchasing power when generators — concerned about the financial stability of Pacific Gas & Electric, a unit of PG&E Corp., and Southern California Edison, a unit of Edison International — cut them off. Last April Pacific Gas & Electric filed for protection from creditors in federal bankruptcy court in San Francisco.

Mr. Angelides, in an interview Wednesday said Mr. Smith’s letter “is a positive development. It is light at the end of the tunnel and, perhaps for the first time, it’s not a train coming at us.” Mr. Angelides, whose responsibility it would be to sell the bonds, said the development “doesn’t mean that there’s clear sailing ahead. But it is a positive piece of news and for PG&E, it was the right thing to do.”

Dan Aschenbach, a senior vice president of Moody’s Investors Service, went further, calling the letter “a huge step forward by PG&E to move ahead with this bond issue.” At the same time though, Mr. Aschenbach added, “From a credit perspective, we still have serious reservations about the regulatory uncertainty in California and how that will affect future decisions on rates.”

Indeed, other parties who might want to challenge elements of the bond sale, including Southern California Edison and consumer-advocacy groups, still have a little less than 30 days to decide whether they want to appeal recent PUC decisions to the state Supreme Court.

To facilitate the bond sale, the state PUC has approved a rate agreement, which is the method by which rates will be set to collect and pay back the state for its power charges; and a revenue requirement, which is the actual bill submitted by the state to the utilities — Pacific Gas & Electric, Southern California Edison and Sempra Energy’s San Diego Gas & Electric — to pay off the state’s debt.

Pacific Gas & Electric challenged the PUC’s Feb. 21 rate agreement and the utility, along with Southern California Edison, consumer-advocacy groups and the city of San Diego — challenged the PUC’s Feb. 21 decision on the revenue requirement. At a meeting last week, the PUC refused to re-hear the cases, leaving the questions up to appeal to the state Supreme Court.

In his March 26 letter, Pacific Gas & Electric’s Mr. Smith wrote, “We do not intend to” appeal the revenue requirement “and this matter is closed.” He was slightly more circumspect on the other matter, saying the utility will not appeal it immediately, but reserved their rights to do so in the future.

Joseph Fichera, chief executive of Saber Partners LLC, New York, who was Gov. Gray Davis’s chief financial adviser last year on energy matters, said that sort of uncertainty could cost Californians, who will be paying off the bondholders through their electric rates. “Particularly in this environment, Mr. Fichera said, “investors do not want risks. California’s ratepayers will need to compensate investors for any uncertainty over the implementation of the plan. If there is no litigation now, but could be in the future, that’s a risk that the market will charge for. As we have seen, the capital markets are brutal reactionaries.”