Source: http://docs.cpuc.ca.gov/published/COMMENT_DECISION/32181-03.htm
Timestamp: 2013-05-20 08:02:57
Document Index: 203384699

Matched Legal Cases: ['§ 1129', '§ 1129', '§ 368', '§ 368', '§ 368', '§ 368']

IV. Legal Context for Review of the PSA
In contrast, the Bankruptcy Court operates under the authority of the Bankruptcy Code, and a central purpose of the Bankruptcy Code is to "provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy `a new opportunity in life . . . '" (Grogan v. Garner (1991) 498 U.S. 279, 286.) Put another way, the two overarching purposes of the Bankruptcy Code are: "(1) providing protection for the creditors of the insolvent debtor and (2) permitting the debtor to carry on and ... make a ` fresh start.'" (In re Andrews (4th Cir. 1996) 80 F.3d 906, 909.) We note that PG&E is a solvent debtor.14 PG&E's disclosure statement (Ex. 101b, p. 2) seconds this: "Under chapter 11, a debtor is authorized to reorganize its business for the benefit of itself, its creditors, and its equity interest holders." Significantly, no mention is made of the ratepayers who are expected to shoulder 100 percent of PG&E's burden under the PSA.
The Bankruptcy Code, 11 U.S.C. § 1129 (a) (6), explicitly recognizes that utility ratemaking is the province of governmental regulatory commissions, such as the Commission, rather than the Bankruptcy Court. As stated in In re Cajun Elec. Power Co-op., Inc. (5th Cir. 1999) 185 F.3d 446, 453, "[s}ection 1129 (a) (6) of the Bankruptcy Code further provides that any rate change in a reorganization plan must be approved by governmental regulatory commissions with proper jurisdiction." The Court found no support for a narrow reading of § 1129 (a) (6), because "such an argument ` ignores the reasons which mandate [public utility commission] regulation in the first instance. The [commission] is entrusted to safeguard the compelling public interest in the availability of electric service at reasonable rates. That public interest is no less compelling during the pendency of a bankruptcy than at other times.' ("Id., at 453, n. 11, quoting with approval Flaschen & Reilly, Bankruptcy Analysis of a Financially-Troubled Electric Utility, (1985) 59 Am.Bankr.L.J. 135, 144.) The U.S. Court of Appeals November 18, 2003 decision in this instant case is consistent with this reading of the federal bankruptcy statutes.
B. Consistency with Assembly Bill 1890 and § 368(a)
At the time this Commission first raised rates on an emergency basis on January 4, 2001, there was uncertainty as to whether AB 1890 had limited the Commission's authority to allow PG&E to recover all of the wholesale power costs it had booked into its Transition Revenue Account (TRA), or all of its uneconomic generation-related costs in its TCBA. The uncertainty was due to the AB 1890 provision (i.e. § 368(a)) putting the utilities at risk for those costs not recovered by the time that the AB 1890 rate freeze ended (i.e., no later than March 31, 2002).
All parties recognize that there no longer is any uncertainty about the Commission's authority to allow PG&E's recovery of its TCBA balance because AB 6X (enacted as an immediately effective emergency measure, in January 2001) restored the Commission's ratemaking authority over generation-related facilities owned by the public utilities under our jurisdiction. As the California Supreme Court held in Southern California Edison Company v. Peevey, 31 Cal.4th at 793, "after the enactment of AB 6X in 2001,...PUC was authorized to approve rates allowing SCE to recover the costs...." Referring to AB 6X as a "major retrenchment from the competitive price-reduction approach of AB 1890," the Court found that AB 6X reemphasized "PUC's duty and authority to guarantee that the electric utilities would have the capacity and financial viability to provide power to California consumers."
The Commission has the authority to allow the utilities to recover their prudently incurred generation-related costs, because AB 6X had eliminated AB 1890's market valuation requirement for the utilities' retained generation assets and Assembly Bill 6X "allowed PUC to regulate the rates for power so generated pursuant to ordinary `cost-of-service' ratemaking." (Id. at 795.) Due to the restoration of the Commission's ratemaking authority over these assets, AB 6X had "largely eliminated the category of `uneconomic' generating asset costs," and, therefore the limit in § 368(a) "no longer applies to the generation-related costs of the utilities." Id. In view of the California Supreme Court's recent decision finding that AB 6X had made § 368(a) inapplicable to the utilities' unrecovered costs, it is clear that the Commission's authority to allow PG&E to recover the balance in its TCBA is not limited by AB 1890. However, the other statutory ratemaking principles and rules are still in effect, especially the mandate that this Commission ensure just and reasonable rates.
TURN argues that under basic principles of utility ratesetting, ratepayers cannot be forced to contribute capital to a utility and that utilities are not entitled to earn a return on their expenses. (TURN Op. Br. p. 11-13.) As we discussed above, in Southern California Edison v Peevey 31 Cal. 4th at 793, the Court reemphasized the Commission's duty and authority to guarantee that the electric utilities would have the capacity and "financial viability to provide power to California customers." (Emphasis added.)
C. Adequacy of a Settlement Proposal in Achieving Feasible Plan of Reorganization The Bankruptcy Code requires any plan of reorganization to be feasible - to allow a debtor to successfully emerge from bankruptcy. To be feasible, a proposed plan must be such that if implemented it will leave the debtor in a situation where it is not likely that the reorganization will be followed by unanticipated liquidation or further reorganization:
It is the Bankruptcy Court that ultimately will determine whether any given proposed plan is feasible. The Commission should not authorize any settlement unless the Commission believes that the settlement is likely to result in a feasible plan consistent with the Commission's Constitutional and statutory duties to follow the law of the State of California and to ensure just and reasonable rates. For the reasons detailed below, the PSA, modified as we propose, satisfies this requirement.
For more than three years, the Commission and PG&E have been in continuous litigation against each other before the state appellate courts, the federal courts, and the Bankruptcy Court. A settlement between PG&E and the Commission would end this litigation and resolve claims totaling billions of dollars made by PG&E against the Commission and ratepayers. Prior to the settlement, both the Commission and PG&E faced risks and consequences depending on the outcome of PG&E's litigation claims and proposal to disaggregate itself through the preemptive authority of the Bankruptcy Court. On the one hand, PG&E filed a complaint in federal court seeking authority to recover billions of dollars of undercollected costs (which PG&E now estimates at $11.0 billion15) from retail ratepayers and to transfer its assets outside the regulatory reach of the State of California. On the other hand, the Commission and other agencies of the State, including the State Attorney General, continue to fight PG&E's proposals, vowing to carry their opposition beyond the federal trial court and Bankruptcy Court to the highest appellate levels. In addition, the Commission had proposed an alternative plan of reorganization in the Bankruptcy Court, and had obtained the support of the OCC for its alternative plan. PG&E just as vigorously opposed the Commission's alternative plan, and threatened to carry its opposition to the highest appellate levels. PG&E's reorganization plan appears even less feasible in light of the recent U.S. Ninth Circuit Court of Appeals decision on November 19 that16" confirms significant legal hurdles for the PG&E disaggregation plan. Moreover, the PG&E plan faces enormous financial and practical financing issues. PG&E's plan cannot obtain assurances of creditworthiness or any 2003 assurances that the financing required and anticipated by the PG&E plan can in fact be obtained in this changed energy industry marketplace.
2. The Risk, Expense, Complexity, and Likely Duration of Further Bankruptcy Litigation
From the perspective of the Commission and ratepayers, the principal risks of continued litigation in PG&E's bankruptcy proceeding is that some combination of the Bankruptcy Court and federal appellate courts ultimately will approve PG&E's requested $11.0 billion in unrecovered costs and its proposal to disaggregate its traditional utility business into four separate entities, three of which would be permanently outside the jurisdiction of the Commission. The Commission continues firm in its belief that these risks are highly unlikely as both valid legal arguments exist to preclude such claims as well as extensive factual bases to offset any such claims. Moreover, any such risk is much less likely now that the U.S. Court of Appeals for the Ninth Circuit has decided the express preemption issues in the Commission's favor on November 19, 2003.17 Regardless of the Commission's strong position in the courts, the Commission's costs and delays of further litigating against PG&E are likely to be considerable (although totaling only a small fraction of PG&E and its affiliated companies' costs), given the possibility of appeals through several layers of the federal court system. The Commission already has expended approximately $25 million in PG&E's bankruptcy, and has not completed the trial and post-trial briefing on its own plan.
On the other hand, PG&E faces much more extensive risks, expenses, and delays. Even if it were to prevail in persuading the Bankruptcy Court to impliedly or expressly preempt the Commission's jurisdiction, the Commission has vowed to appeal and further challenge PG&E's plan through the courts. If PG&E were not to prevail, the Commission staff's plan would severely reduce the amount of money sought by PG&E.
PG&E presented testimony that claimed $11.0 billion in unrecovered costs of utility service and financial distress which it asserts are recoverable from retail electric ratepayers. (Ex. 120b, PG&E/McManus.) PG&E asserts that it is likely to prevail on its claims before the Commission and/or the state and federal courts. (Exs. 120, 120c, 121, PG&E/McManus.) PG&E cites the ruling of Judge Walker in PG&E v. Lynch, which held that the "cost of wholesale energy, incurred pursuant to rate tariffs filed with FERC, whether these rates are market-based or cost-based, must be recognized as recoverable costs by state regulators and may not be trapped by excessively low retail rates or other limitations imposed at the state level." (Ex. 120 and120c, PG&E/McManus.) PG&E also presented testimony on its claims for cost recovery under state law. (Ex. 120 and 120c, PG&E/McManus.) This testimony asserts that even if its undercollected costs are not classified as wholesale costs protected by the Filed Rate Doctrine under federal law, the costs are still legitimate costs of utility service that PG&E is legally entitled to recover in full from retail ratepayers under California state law. The Commission staff presented testimony arguing that PG&E was unlikely to prevail in PG&E v. Lynch. (Ex. 122, p. 17, CPUC Staff/Clanon.) The staff relied on the testimony of an expert who argued that Judge Walker's ruling was incorrect. The Commission staff estimated that the net present value of the estimated ratepayer contribution to the settlement would be $7.129 to $7.229 billion. (Ex.122, p. 9, CPUC Staff/Clanon.)18 The components of these ratepayer contributions use the same time frames and components that PG&E used to estimate its claims, i.e. the period from the beginning of the energy crisis to the present. This period treats PG&E's 2001 and 2002 pre-tax headroom revenues under the Commission's surcharge revenue decisions as a ratepayer contribution under the settlement. The Commission staff then quantified the net present value of the regulatory asset, including the costs of taxes and return on the asset. To determine if this settlement amount is just and reasonable, we must compare the ratepayer contributions to PG&E's legitimate claims. Witness McManus asserts that PG&E's total unrecovered costs are 11.9 billion. (Ex. 120b, p. 12-4, PG&E/McManus). PG&E and ORA's late-filed comparison exhibit on unrecovered costs provides a great amount of detail about the actual amount of PG&E's valid claims. (Ex. 184, p.1, PG&E and ORA) PG&E estimates its total unrecovered costs to be $3.7 billion19, whereas ORA's estimate is $800 million. The differences are in the amount of profit or headroom, return on URG, and bankruptcy-related costs.
The headroom numbers between ORA and PG&E are inconsistent because, unlike other proceedings before this Commission, PG&E has chosen to use Generally Accepted Accounting Principles ("GAAP") as a basis for calculating headroom. The difficulties created by using a GAAP methodology, rather than standard regulatory accounting shall be discussed later in this decision (see section V(B)2)
In the late-filed comparison exhibit, PG&E asserts that it possesses a valid claim for $387 million in Return and Taxes on Retained Generation Plant. PG&E asserts that it is entitled to the recovery of these dollars (even though this issue was addressed in D.02-04-016) because "PG&E has filed or would be likely to file claims for recovery ... in the end-of-freeze rehearing proceeding." (Ex. 120b, p. 12-8/McManus) In establishing the end-of-freeze proceeding, D.02-01-001 noted that "we must also determine the extent and disposition of stranded costs left unrecovered" 20- in other words, the end-of-freeze proceeding is to focus on the TCBA. However, PG&E's claim herein is not related to the collection of unrecovered stranded costs; it is a proposal to retroactively increase the rate of return on transition costs from the 7% in place in 2001, up to PG&E's full 2003 return on equity (ROE) of 11.22%. This claim clearly is not reasonable, and is effectively retroactive ratemaking. Therefore, we shall not include this asserted cost in our cost-benefit analysis for the purposes of evaluating the PSA.
We are troubled by PG&E's inclusion of its bankruptcy-related costs in its asserted claims. In justifying these bankruptcy-related costs totaling $672 million (pre-tax), PG&E's witness (Exh. 120b, p. 12-8/McManus) stated that "[n]othing in CPUC policy or past decisions would suggest that PG&E should not recover these costs it incurred for continuing to provide safe reliable service to customers." This testimony directly contradicts testimony PG&E has provided in a separate proceeding pending before this Commission; its General Rate Case (GRC). PG&E has not included any bankruptcy costs in its GRC application.21 The CEO of PG&E, Gordon Smith, noted in his testimony that PG&E was not seeking recovery of bankruptcy related costs in its GRC, because "PG&E's GRC request covers the ... ordinary course of business costs of continuing to provide distribution services to PG&E's customers."22 (A.02-11-017. Exh. 1, Ch 2, pp 2-10/Smith). In its GRC application, PG&E made clear that it has not included its costs for legal costs associated with the bankruptcy.23 The bankruptcy related costs are not valid claims in our view: they are not clearly part of the TCBA, and PG&E has not included these costs in any application before the commission. Based on the discussion above, we shall not rely on the inflated assertions of claims provided by PG&E in its direct testimony, and rather, shall use the numbers included in the PG&E/ORA comparison exhibit (summary table from Exh. 184).
Comparison of PG&E and ORA Assertions (in $millions)
We agree with ORA's analysis that the asserted claims on line 3 should be removed, as well as those bankruptcy-related claims on lines 5 through 8. We find that the $1.3 billion in Incremental Interest Expenses (line 4) are reasonable claims because a majority of those interest costs would have been incurred because PG&E was not creditworthy. It would be impossible to differentiate which portion of the interest was solely due to PG&E filing for Chapter 11, versus simply being uncreditworty.24 For the headroom for 2001 and 2002 (lines 9 and 10), we shall use ORA's numbers, because they are based on regulatory accounting, rather than the GAAP accounting used by PG&E.25 In its testimony, ORA questioned the accuracy of PG&E's calculation of undercollected costs in light of headroom revenues reported in PG&E's regulatory balancing accounts. (Ex. 139, ORA/Reid, Danforth; Ex. 187, ORA/Bumgardner.) By ORA's calculation, PG&E had collected $694 million more in headroom revenues during 2001- 2002 than PG&E estimated in its testimony. (Ex. 187, ORA/Bumgardner.) PG&E responded that the difference between ORA and PG&E was that ORA did not take into account anticipated additional costs or reductions in revenue that PG&E had accrued and reported in its SEC financial reports under generally accepted accounting principles (GAAP), but that had not yet flowed through PG&E's regulatory balancing accounts. As a regulatory agency, we cannot rely on GAAP accounting, because it allows PG&E to manipulate its expenditures in such a way to minimize GAAP-defined headroom which results in undercounting of PG&E's funds available to pay down PG&E's undercollection, requiring more ratepayer dollars be paid to PG&E. Moreover, locking down a definitional switch in headroom from the standard regulatory definition to GAAP can result in double payments of PG&E's costs between the bankruptcy settlement and the GRC authorized costs. These adjustments are shown in the table below:
Reasonable Net Undercollection (in $millions)
Using the Commission staff's estimate of ratepayer contributions (less headroom contributions), and comparing it to PG&E's valid pre-settlement claims (reduced by headroom offsets), the proposed settlement would force ratepayers to settle PG&E's $2.1 billion (line 13 of table above) in claims for a ratepayer contribution (in net present value) of $3.2 billion26, or at 150% of the claims value. The only other parties presenting any detailed testimony on the strength and quantification of PG&E's claims were The Utility Reform Network (TURN) and the City and County of San Francisco (CCSF). TURN's testimony relied primarily on the legal position taken by the Commission staff's outside expert as well as the position TURN itself took before the California Supreme Court in the SCE case. TURN also alleged that PG&E's estimate of undercollected costs was inflated. CCSF assumed that PG&E's undercollected procurement costs should be netted against $2.5 billion in power generation revenues identified in the same exhibit. (Ex. 138, p. 6, CCSF/Barkovich.) PG&E argues that although it is possible for the Commission to quantify the amount of PG&E's various claims that the utility would be giving up under the settlement, it is not so easy to compare those claims to the costs ratepayers would bear under the settlement. This is primarily because before any comparison can be done, the costs of the settlement to ratepayers must be netted against the benefits that ratepayers will receive directly from the settlement itself. The settlement does not fare well under this calculus. The threat of PG&E's Plan of Reorganization being confirmed is highly unlikely due to its substantial legal barriers and financial infirmities, and with the evaporation of that threat, so goes the threat that PG&E's ratepayers and Californian's at large will be harmed by PG&E's attempts to disaggregate and avoid state regulation. In addition, the proposed settlement plan would maintain rates at a high level, requiring between $520 million and $620 million per year over the nine-year span of the regulatory asset - at an average cost to ratepayers of 0.8 cents per kilowatt-hour for the next nine years.
The record demonstrates that PG&E's total claims (netted against 2001 and 2002 headroom) are approximately $2.1 billion, and that the ratepayer costs of the Settlement Agreement, using the Commission staff's calculations, are about 150% of those claims. This comparison shows that the ratepayer dollar settlement is unfair and unreasonable when compared to the claims PG&E would waive and release.
Analysis of the reasonableness of the settlement must begin with the rates themselves. PG&E's current system average rate is 13.6 cents/Kwh. Using the asserted revenue requirements for PG&E's various cost components, current rates would provide $1.158 billion in headroom (approximately 1.62 cents/Kwh).27 PG&E's estimate of the proposed settlement's regulatory asset revenue requirement would only cut the 1.6 cents/Kwh paid to headroom in half, and maintain those high rates for nine years. The PSA provides no guarantee of any overall rate reduction. Instead, the Commission relies on probable outcomes based on likely estimates.
PG&E's estimated revenue requirement ranges from $520 million in 2004 to $670 million in 2012. (PSA, Part E of Appendix A) This revenue requirement translates into approximately 0.8 cents28 per kilowatt-hour for PG&E's customers. These high revenues over the next nine years, would allow PG&E to pay historic dividends.29 In its own financial projections, PG&E anticipates that it can provide cash to shareholders that range from $922 million in 2006, to over 1.3 billion in 2011.30 PG&E forecasts the total amount of cash to shareholders over the life of the regulatory asset to be $6.6 billion. PG&E's reply briefs claim that their pre-crisis earnings are "in line with those in the settlement." (PG&E Reply Br. at 9. 28) This claim by PG&E is a red herring, obfuscating how large a profit PG&E makes from the regulatory asset. In the first place, PG&E does not disagree that its dividends to shareholders, what the utility pays in cash to its shareholders, will be roughly double the level of dividends PG&E paid historically. Historic dividends were in the range of $500 to $600 million annually. PG&E forecasts that with the regulatory asset, it will be able to pay annual dividends of $922 million to $1.3 billion in the future.
Rather than admitting this embarrassment of riches, PG&E doesn't address the increase in dividends but refers to future earnings instead. The earnings PG&E cites in the future are roughly the same as the historic level of earnings, roughly $1 billion per year. However, this does not tell the whole story regarding PG&E's profits from the regulatory asset.
Closer scrutiny of the workpapers underlying PG&E's assertions on their level of earnings demonstrates that this claim is misleading. In an interesting accounting trick in PG&E's workpapers31, PG&E is obscuring the revenues, or earnings, it receives when it amortizes the regulatory asset by entering it as depreciation, rather than earnings. The fact that PG&E must pay taxes on the amortization demonstrates that all the money paid towards the regulatory asset is actually revenue for PG&E, and is not repayment of a debt. It is precisely because of the very high revenues and earnings PG&E receives from its regulatory asset that it is able to enrich shareholders so handsomely in the later years of the regulatory asset. Combining the income PG&E receives from what it classifies as depreciation of the regulatory asset with its other earnings, shows that PG&E's actual net income available to pay dividends to its shareholders increases significantly in the future compared to the historic $1 billion level. That is why PG&E is able to increase the size of the actual dividend payout to nearly double historic levels. In evaluating the amount of funds PG&E will need to collect from ratepayers and in determining the necessary size of the regulatory asset, PG&E and the Commission Staff have failed to consider all the revenues PG&E expects to have available in 2004. For example, they do not include any amounts related to pending refunds from generation companies subject to our litigation at FERC. They also fail to include expected revenues associated with the AEAP incentive mechanism, which in a decision just last month the Commission reiterated it would continue to be paid to utilities. The joint analyses also fail to include any additional headroom that will be available during the first quarter of 2004 prior to the implementation of any rate decrease (none of the currently forecasted rate decreases from the PSA or the general rate case are scheduled to be implemented on January 1, 2004, but will instead be implemented at some later date). Whereas the PSA contains a mechanism for reducing the size of the regulatory asset on an after tax dollar for dollar basis for any funds that become available from pending FERC refunds, there is nothing in the PSA addressing how other funds excluded from their analyses should be used. To correct this oversight, we will require that any additional funds that become available which PG&E and the Commission Staff failed to consider or reflect in their analyses should be treated similarly to the treatment of FERC refunds.
14 As a solvent debtor, while litigating in bankruptcy court, PG&E has paid off approximately $1.56 billion of its debts (Direct testimony of P. Clanon, at 12), and has continued its utility operations, including maintaining and constructing facilities and equipment necessary to provide electric service.
15 Ex. 120B, p. 12-4, ORA/McManus. Table 12-A outlines TCBA costs, including procurement undercollections ($9.7 billion) and Interest Costs ($1.3 billion), but does not include headroom. 16 17 Pacific Gas and Electric Company v. People of the State of California, Nos. 02-16990 and 02-80113, issued November 19, 2003. 18 In $Millions
19 It is worth noting that PG&E's $3.7 billion value is pre-tax and is equivalent to a $2.21 after-tax regulatory asset. In other words, PG&E's values indicate that a $2.21 billion regulatory asset will fully compensate PG&E for all of its bankruptcy costs, filed rate doctrine claims, plus provide PG&E with a bonus on its 2001 Return on Equity.
20 D.02-01-001, at p. 25
21 A.02-11-017
22 This material can be found in the record for PG&E's Test Year 2003 GRC currently pending before the Commission (A.02-11-017), documents, and pleadings of which the Commission may take official notice. The record in PG&E's GRC is available on PG&E's website (at https://
www.pge.com/regulation/GRC2003-Ph-I/Testimony/PGE/2002-11-Fwd/GRC2003-Ph-I_Test_PGE_20021108-002-Exh001-Ch02.doc), as well as on the CPUC website, at http://www.cpuc.ca.gov/proceedings/A0211017.htm
23 "PG&E has hired outside counsel to help PG&E prepare its PoR to find an equitable and expeditious way out of Chapter 11. Such costs are not included in PG&E's GRC request...." PG&E GRC Direct Testimony (Exh. 1, Ch. 4, at pages 4-10, 4-11).
24 In the Edison settlement, the Commission allowed Edison to recoup its interest costs.
25 For a discussion of GAAP accounting versus Regulatory Accounting and its consequences to Northern California Ratepayers, see below at section V(B)2.
26 Ex. 122, p. 9, CPUC Staff/Clanon.
27 Based on P. 3 of PG&E's reply brief, filed October 20, 2003; derived from Ex. 117b, p.10-7, Table 10-1, PG&E/Montana, and Ex. 9, Corrected Attachment A, "Rate Comparisons," line 20, CPUC Staff/Clanon.
28 Calculated as $520 million divided by 71.3 billion Kwh, derived from Ex 9, Corrected Attachment A, "Rate Comparisons," line 20, CPUC Staff/Clanon.
29 TURN Op. Br. At 28 - 31.
30 PG&E Chapter 5.
31 Footnote 2, p. 15 of the workpapers to PG&E's Chapter 5