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Finances: How PG&E managed to insulate its national assets

Sam Zuckerman, Chronicle Staff Writer Tuesday, February 6, 2001

Power plants in New England, natural gas lines in the Northwest, a multibillion-dollar energy trading unit based in Maryland.

To PG&E Corp., these are the jewels that must be protected as the company's California utility slides toward insolvency.

The company has declared its national operations off-limits in any rescue plan. And, in case the parent company or its California utility are forced into bankruptcy, PG&E is using an arcane legal maneuver known as "ringfencing" to shield those assets.

But consumer groups see these thriving national businesses as a trove that should be tapped as part of any solution to the energy crisis. While state lawmakers weigh plans to pay about $12 billion in overdue power bills of PG&E's California utility and its downstate cousin, Southern California Edison, ratepayer advocates insist that the two companies' national energy businesses pony up a big chunk of the needed cash.

Until recently, little attention was paid to PG&E's National Energy Group, the far-flung businesses the company set up outside the jurisdiction of state utility regulators after California's power deregulation scheme went into effect four years ago.

Now the status of these operations, which took in more than $12 billion in revenue and made $387 million in operating profits during the first nine months of 2000, is emerging as a critical part of the debate over a solution to the state's energy crisis.

Consumer groups contend that PG&E bought these businesses with money generated by selling energy in California. What's more, they say, the National Energy Group has capitalized on the crisis by selling high-priced power back into California's market.

Now that PG&E's state utility is in trouble, advocates argue that it's time for the company's out-of-state operations to put money back into the state.

"We suggest that PG&E look to liquidating some of these assets and use the proceeds to recapitalize the regulated utility," said Matt Freedman, a lawyer with The Utility Reform Network, a consumer group.

"But they completely oppose the idea that any money that left the regulated utility be put back on the table. We think that's outrageous."

PG&E says that, by trying to fence off its national businesses, it is merely following the rules of the game under California's deregulation law. The company points out that state officials set up legal and regulatory firewalls so that California ratepayers wouldn't be left holding the bag if its national operations or those of Edison got into financial trouble.

No one imagined that the reverse would take place-- that the utilities would collapse into near-bankruptcy while their national businesses were flush with cash.

"The law was put in place to protect California utility customers from losses incurred by our national businesses," said PG&E spokesman Greg Pruett. "It would be unfair to turn around and say those businesses should subsidize the electric company."

After passage of deregulation, PG&E overhauled its structure to take advantage of what it saw as new opportunities in the national energy market.

It formed a parent company, named PG&E Corp. PG&E Co., the California utility, became a subsidiary of the corporation.

And it organized a second subsidiary, the National Energy Group, to house national businesses unregulated by California.

Within a few years, the group had assembled an extensive portfolio of businesses:

-- PG&E Gas Transmission owns pipelines extending 612 miles, from Canada to the Oregon-California border.

-- PG&E Generating operates or is developing 30 power plants in 10 states, mostly in the Northeast.

-- PG&E Energy Trading, whose headquarters are in Maryland, swaps billions of dollars' worth of gas and electricity annually.

PG&E took some $800 million from its California utility from 1997 through September 2000 to help finance its National Energy Group businesses, according to an audit recently completed for the California Public Utilities Commission.

Meanwhile, the company sold off many of the power generating facilities owned by its California unit. Today the utility subsidiary's generation facilities are limited to 68 hydroelectric powerhouses, the Diablo Canyon nuclear power plant and two oil- or gas-fired plants.

Ironically, high energy prices -- the very circumstance that is causing PG&E's utility to go broke -- are proving a boon to the National Energy Group as a producer of power.

Late last year, PG&E changed its corporate structure to shield its national businesses. In the so-called ringfencing maneuver, it set up a new subsidiary, PG&E National Energy Group LLC, to house the businesses.

The legal structure of the new company is mind-bendingly complex. But the bottom line is that creditors probably cannot get their hands on National Energy Group assets. The ringfencing strategy protects the National Energy Group even if the debts of the utility bring down the parent company.

As a result of the reorganization, debt rating agencies assigned the National Energy Group a solid investment-grade credit rating. PG&E officials say the national businesses could not function without investment-grade credit ratings because they would not be able to finance operations or new investments.

Yet, while PG&E may have fenced off its national businesses from the legal process, it is far from certain the company has successfully shielded them from the political process. Now that Sacramento officials are focusing on utility finances, PG&E may find its national businesses up for grabs.

"Some of the politicians are contemplating methods of going after those assets," said Jon Kyle Cartwright, a bond analyst with the brokerage Raymond James in Florida.

In the wide-open debate over who pays for California's energy woes, many scenarios, even state seizure of some corporate assets, cannot be excluded, though that is probably unlikely.

"I don't see the voters and consumer advocates standing idly by while the state bails out PG&E," said Cartwright. "The truth is there is going to be a lot of pain here."


PG&E Corp. is a holding company with two subsidiaries.

--Pacific Gas And Electric Corp. The California utility distributes gas and electricity to customers. It generates electricity from the Diablo Canyon Nuclear Power Plant, 68 hydroelectric power stations and two fossil-fuel-burning plants, one in San Francisco and another in Eureka. It also buys power from independent generators.

--National Energy Group

The group is a collection of national energy businesses set up after passage of the state's energy deregulation law in 1996. They are not regulated by California authorities. Its operating units are: PG&E Gas Transmission owns pipelines extending 612 miles from Canada to the Oregon-California border.

PG&E Generating operates or is developing 30 power plants in 10 states, mostly in the Northeast. PG&E Energy Trading, headquartered in Maryland, swaps billions of dollars' worth of gas and electricity annually.

Source: Chronicle research

E-mail Sam Zuckerman at

-- Swissrose (, February 06, 2001

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