Auditor: Pacific Gas & Electric transferred $4 billion to parent

Pacific Gas & Electric Co. was caught by surprise when its credit was downgraded and may have overstated its cash requirements, according to an independent audit ordered by the California Public Utilities Commission (PUC).

The near-bankrupt utility subsidiary of PG&E Corp. did not anticipate it would be constrained in its borrowings and did not develop a cash conservation program until December 2000, months after the strain on the market became apparent, the independent auditors said.

Since PG&E Corp. was formed as a holding company, it has not provided cash, credit, or any other financial assistance to the utility, the auditors said, although it invested $800,000 in its other subsidiaries. "Historically, cash has flowed in only one direction, from PG&E to PG&E Corp., and then to the unregulated affiliates," the auditors concluded.

Between 1997-1999, auditors found the utility transferred $4 billion for dividends and stock repurchase payments to parent PG&E Corp. Also in the first 9 months of 2000, the utility turned over $632 million, nearly one-third of its cash flow, to its corporate parent.

In a statement, PG&E Corp. defended it practices. The company said the $4 billion transfer to the parent company from the utility was "consistent" with PUC directives. When PG&E electric plants were sold under deregulation, shareholders were entitled to recover their investments, it said.

No subsidies
Moreover, it said, ratepayers are not to subsidize the growth of PG&E's unregulated national energy business under PUC rules, and "they have not."

The PUC ordered the audit in conjunction with a temporary rate hike granted Jan. 4 to PG&E and Southern California Edison Co., a unit of Edison International. The utilities warned the 7-14% increase was not enough to allow them to recover their undercollections which have been growing in special accounts.

The auditors acknowledge the PG&E has exhausted is borrowing capability under existing lines of credit and that it is in technical default on some of its loan agreements, which have provisions triggering default when the company's credit rating falls below a certain level.

The audit showed the utility's undercollections amounted to $6.7 billion Dec. 31 during the past year because the full amount of high wholesale prices could not be passed on to consumers. If PG&E assumptions are used, the auditors agreed the utility will run out of cash Thursday. But, they say, certain assumptions by the company "are not supported and are likely to result in overstated cash requirements."

The auditors says the availability of energy from so-called qualifying facilities�cogeneration units for the most part�in the first quarter is understated with no explanation and estimated out-of-market purchases of energy by the California Independent System Operator (ISO) appear overstated.

Using a market clearing price of $180/Mw-hr, auditors Barrington-Wellesley Group Inc., New London, NH, projected the utility would have a positive cash balance until March 2. And if the California Department of Water Resources assumes responsibility for buying power on behalf of PG&E, net of the utility's own generating resources, PG&E's cash position would remain positive until March 30.

PG&E raised to 75% from 40% its pro-rata share of ISO out-of-market purchases, pushing its estimated costs to $1.4 billion for December, January, and February. Reducing the percentage to 40% cuts its estimated cost to $808 million and dropping its daily projection to $15 million from $20 million would further cut its total for the 3-month period to $680 million.

As of Jan. 15, the utility estimated its out-of-market purchases through the ISO for the first quarter will amount to $715 million.

In December, the utility bought 4 million Mw-hr at $315/Mw-hr and sold 3.6 million Mw-hr of must-take generation for $265/Mw-hr for a net cost of $74/Mw-hr, auditors said. In comparison, PG&E's December transactions with the ISO cost $484/Mw-hr.

Auditors said PG&E sold generation from its non must-take generation for an average $2,124/Mw-hr, but the amount was small. Its real-time purchases in December amounted to more than $1,000/Mw-hr.