California AG files billion-dollar suit against PG&E Corp.

California's attorney general filed suit Thursday against PG&E Corp. for allegedly funneling huge sums of money from its regulated utility to unregulated affiliates, violating agreements with the California Public Utilities Commission. The suit filed in San Francisco Superior Court seeks $600 million to $4 billion, plus penalties for the alleged violations.

Jan. 10, 2002

3 min read

By the OGJ Online Staff

HOUSTON, Oct. 10 -- California's attorney general filed suit Thursday against PG&E Corp. for allegedly funneling huge sums of money from its regulated utility to unregulated affiliates, violating agreements with the California Public Utilities Commission.

The suit filed in San Francisco Superior Court seeks $600 million to $4 billion, plus penalties for the alleged violations.

"PG&E agreed more than 5 years ago, as a condition of approval to form a massive holding company, to protect California ratepayers and ensure the healthy operation of its California regulated utility," said Atty. Gen. Bill Lockyer. "Instead of keeping its promise, PG&E drained the assets of its utility and put billions of dollars into unregulated affiliates."

Lockyer said cash flowed in only one direction after the holding company was approved, away from the utility to the parent and then to the affiliates. He said the transfer violated PG&E's legal agreement to maintain the utility's financial health.

In the summer of 2000, the holding company's utility Pacific Gas & Electric Co. accumulated large debts because of the dramatic increases in wholesale power costs. That contributed to its bankruptcy filing in April 2002. The utility tried to get the PUC to allow a retail rate increase to compensate for the increased costs but insufficient rate relief was granted and too late.

PG&E called the suit "unwarranted and discriminatory. These financial transactions cited by the attorney general have been thoroughly reviewed and audited multiple times and were found to be entirely appropriate and legal," the company said in a statement.

State regulators conducted an independent audit last year of the transactions between the utility and the parent corporation and found nothing inappropriate or illegal, PG&E said.

Lockyer contended in the suit that even though Pacific Gas & Electric applied to state regulators for the rate increases, the utility transferred to the parent $632 million of its $1.8 billion in cash generated in the first 9 months of 2000. The payments, according to the attorney general, involved $275 million in PG&E stock repurchases and $357 million in dividends to shareholders.

The cash transfers began soon after the holding company was created, according to Lockyer. From 1997 to the summer of 2000, the utility provided $4.6 billion in cash to PG&E Corp., representing 60% of the holding company's cash flow. In 1997, the utility transferred $699 million to its parent in the form of dividends, according to the lawsuit.

In 1998, the utility generated $3.8 billion in cash and transferred $2 billion to its parent for common stock repurchases and for dividends, the lawsuit alleges. That same year, PG&E Corp. used $1.1 billion to repurchase common stock and paid $470 million to shareholders, Lockyer said. In 1999, the transfer amounted to $1.3 billion.

Lockyer said that during 2000, PG&E Corp. continued to drain assets from the financially strapped utility and at no time infused capital to rescue the company. In the period preceding the bankruptcy filing, Lockyer said PG&E "ring-fenced assets" in new holding companies to keep them away from the utility and creditors in case of a bankruptcy filing.