Slightly more than six years ago, Chapter 9 bankruptcy filings occurred for Orange County as well as the Orange County Investment Pools.
These two Chapter 9 filings, which are reorganizations for qualified governmental entities under the Bankruptcy Code, came about because of losses sustained as a result of highly speculative investments of taxpayer funds by the county in the securities markets. Over the succeeding few years, under the watchful eye of bankruptcy Judge John Ryan, the remaining assets of the county were marshaled, recoveries from those parties responsible for the financial crisis obtained, and investors and creditors of the county were repaid in full.
The stakes in both cases were high. In a very similar manner, and to a significantly greater magnitude, the stakes in the Chapter 11 filing for Pacific Gas & Electric are higher.
The Orange County cases involved the financial survival of one of California’s largest and most populated counties, including its citizens and each of its cities, school districts and municipal organizations such as transportation and highway agencies.
The PG & E; case involves 21,500 employees and obligations that have been estimated as high as $9 billion. It also involves 13 billion customers.
It recently was suggested the customers do not have a legal position in the bankruptcy case. That observation is wrong. Anyone who does not believe their interests will not be occupying a paramount position in the bankruptcy judge’s mind are kidding themselves.
At stake also is California’s position in national and international financial markets, a position already substantially weakened by the state’s energy crisis, which suffered a further body blow as a result of the PG & E; bankruptcy filing. This was a key concern in the Orange County cases. While not much discussed, the ability of the state to borrow funds and otherwise fully participate in national and international financial markets will be a key component and concern in the PG & E; case.
Already, J.P. Morgan has announced it cannot go forward with the $4.2 billion of short-term bridge loan financing, recently announced the Wall Street Journal. The proceeds of these loans were to be used to bolster California’s cash reserves, which have been depleted by more than $5 billion of purchases by the state for the benefit of its utility companies and citizens. J.P. Morgan’s representative stated his reasons succinctly: “We are not going to loan money that we do not expect to get back.”
Previously, membership within the crucible of this crisis has been occupied solely by California Gov. Gray Davis. Bankruptcy Judge Dennis Montali, a very experienced bankruptcy practitioner (especially in large, complex cases) before taking the bench, and a thoughtful jurist since his ascendancy, now joins him.
Mandate Clearly Defined
Thankfully, his mandate is defined by clear statutory and procedural guidelines. While the vagaries of political solutions to complex business problems was a clear impediment to the solution to the financial problems of PG & E; (as it was in the Orange County cases), those problems will be displayed in the public forum of the bankruptcy court in San Francisco for all to see. While the ultimate resolution is still in doubt, there can be little question the PG & E; bankruptcy filing has taken all of the parties involved inexorably down the path of a financial solution to the problems involved.
All the news reports indicate Gov. Davis feels the PG & E; Chapter 11 filing was a “… slap in the face to California …” and that PG & E; has “… dishonored itself and the creditors who had faith in the negotiation process that was under way … .”
Davis, along with his legal and financial advisers, will get over their upset quickly. They have announced a comprehensive plan to rescue the state’s utilities. That plan included the purchase of the utilities’ power lines, in the case of PG & E;, for a purchase price of $7 billion.
PG & E; decided the terms the governor was attempting to dictate were not fair. In the bankruptcy court, the terms and conditions of such purchases will be based upon fairness, the evaluations and opinions of financial advisers to the debtor and the creditors and ultimately, Judge Montali’s decision concerning the fairness or adequacy of any asset purchase that is proposed. Most importantly, any such sales will be dictated by PG & E;’s exercise of its business judgment and not upon the dictates of the governor.
Recent news reports indicate PG & E; has $2.6 billion in cash. However, while these sums have clearly been stored up by the company as a part of their planning for the Chapter 11 filing, the losses being sustained in operations due to the free market pricing of energy as compared with the regulated pricing that PG & E; can charge to consumers will continue to yield operating losses.
Typically, the Chapter 11 filing permits the implementation of changes in business practices that were planned before the case was filed. However, PG & E; is restricted from raising rates to customers. Judge Montali may face this issue early in the proceedings if PG & E; and its bankruptcy counsel attempt to circumvent the regulatory process by asking him to approve rate hikes that are sufficient to sustain PG & E;’s business recovery plan.
The popular wisdom is that Montali will not take this action, as regulation of rates charged to customers clearly rests with the California Public Utility Commission. A question arises, however, concerning whether this prohibits Montali from taking action with regard to rates charged to customers during the pendency of the Chapter 11 case and before a plan of reorganization is presented or confirmed by the court.
It remains to be seen whether PG & E; will attempt to utilize this potential loophole to ask the court to raise rates beyond those approved by the PUC or recently suggested by Gov. Davis.
Without regard to this, PG & E; still needs to access needed energy resources for the benefit of its 13 billion customers. Since the start of the crisis, the state has been putting its credit behind the purchases.
Important Legal Issues
One of the crucial concerns thus far has been the “upstreaming” of $4.2 billion from PG & E; to its parent company, PG & E; Corp., in very recent times. Further, there is an indication that substantially more than this sum was paid to the debtor’s parent company over the two to three years before the Chapter 11 filing. PG & E; is also the owner of numerous other companies, none of which are in Chapter 11.
The timing of these payments and the financial condition of PG & E; at the time of such payments will be carefully examined by creditors, the state and ultimately by Montali if he is asked to require PG & E; to repay these amounts to the debtor’s bankruptcy estate.
While the payments presumably occurred in the normal course of business between PG & E; and its parent, if the debtor was insolvent, rendered insolvent or left with inadequate working capital after such payments were made, the payments are potentially recoverable.
Politics In Play
A number of factors may coalesce fairly quickly to bring about a resolution of the PG & E; case. First, Gov. Davis has suffered political damage that has been exacerbated by the bankruptcy filing.
Potential filings by Southern California Edison or San Diego Gas and Electric will likely cause him further political harm. He will be working overtime to avoid those occurrences.
The summer months will bring increased demand for energy. If those demands are not met as a result of the utility crisis, California may find itself electing a new governor in 2002.
Second, all parties involved with the state will be highly motivated to resolve this crisis because the financial markets on which all of California relies in every area of its business will demand an expeditious resolution. The pressure in the Orange County bankruptcy cases to revamp the county’s financial standing with Wall Street was huge. It will be larger still in the PG & E; case.
Montali and the professionals hired by PG & E; and the other interested parties in the bankruptcy case are expert in the bankruptcy practice. They will be under the microscope of public scrutiny to accomplish a legal and financial resolution at the earliest time. Hopefully, the political and regulatory players in this process who will play an important part in reaching this resolution will follow suit.
Sahn is a partner at Sulmeyer, Kupetz, and Baumann & Rothman in Los Angeles.