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(OAKLAND, Calif.) – Attorney General Bill Lockyer today charged Pacific Gas & Electric Corporation with illegal, unfair and fraudulent business practices that drove its California utility subsidiary into bankruptcy and breached legal agreements with the state to protect California ratepayers.
"PG&E agreed more than five 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," Lockyer said. "Instead of keeping its promise, PG&E Corp. drained the assets of its California utility and put billions of dollars into unregulated affiliates in order to achieve its ultimate objective of becoming one of the largest unregulated power generating companies in the nation."
The civil suit filed in San Francisco Superior Court seeks to have Pacific Gas & Electric Corp. pay between $600 million and $4 billion plus monetary penalties for the violations.
In November 1996, the California Public Utilities Commission allowed the state-regulated utility to restructure into a holding company with utility and non-utility activities subject to 22 conditions aimed at protecting ratepayers from the potential risks and abuses of a holding company structure. The conditions included: (1) protections against non-utility activities being subsidized by PG&E ratepayers; (2) requiring the PG&E board of directors to handle dividends as though PG&E were a stand-alone utility company; and (3) giving "first priority" to the capital needs of the PG&E utility by infusing necessary operating funds if the utility experienced financial distress.
"PG&E Corp. has been engaging in unfair and deceptive practices," Lockyer said. "The corporation deliberately failed to disclose its true intentions and misled the California Public Utilities Commission to gain approval of its holding company structure."
Lockyer said that after the holding company structure was approved cash flowed in only one direction, away from the utility to the parent corporation then to unregulated PG&E affiliates, violating PG&E's legal agreement to protect California ratepayers from holding company abuses and to maintain the utility's financial health.
From 1997 through the summer of 2000, PG&E provided over $4.6 billion in cash to PG&E Corp. in the form of $1.76 billion in shareholder dividends and repurchases of PG&E common stock, representing 60 percent of the cash inflow to the utility's parent corporation for this period. Even as the California utility sank into financial difficulties, PG&E Corp. continued to collect payments from the utility without infusing needed capital.
In 1997, PG&E generated $5 billion in cash and transferred $699 million to its parent corporation in the form of dividends. PG&E Corp. that same year invested $150 million in its subsidiaries, used $804 million to repurchase common stock and paid $524 million to shareholders.
In 1998, PG&E generated $3.8 billion in cash and transferred $2 billion to its parent corporation in the form of $1.6 billion in PG&E common stock repurchases and $416 million in paid dividends. PG&E Corp. this same year invested $616 million in its subsidiaries, used $1.1 billion to repurchase common stock and paid $470 million to shareholders.
In 1999, PG&E generated $3.4 billion in cash and transferred $1.3 billion to PG&E Corp. in the form of $926 million for PG&E common stock repurchases and $415 million to shareholders. PG&E Corp. this same year invested $72 million in subsidiaries, used $693 million to repurchase common stock and paid $465 million to shareholders.
In the summer of 2000, PG&E accumulated large debts from the dramatic increases in wholesale energy prices resulting in operating costs exceeding revenues. PG&E applied for emergency rate increases from the California Public Utilities Commission, fearing inability to serve and operate. Despite its losses, PG&E transferred $632 million from its $1.8 billion in cash generated in the first nine months of 2000. The payments involved $275 million in PG&E common stock repurchases and $357 million in dividends to shareholders.
"While required to ensure the viability of PG&E for California ratepayers, PG&E Corp. continued to drain assets from the financially distressed utility and at no time infused needed capital to rescue the company," Lockyer said. "PG&E Corp. in fact ring-fenced lucrative assets in new holding companies to keep them away from the ailing utility, further breaching its promises to the state."
The Attorney General's complaint said PG&E Corp. created new holding companies in a ring-fencing move to prevent assets from being diverted for possible creditor claims if the utility filed for bankruptcy. The complaint said PG&E Corp. also funneled cash from PG&E through tax payments that exceeded the utility's actual share of liabilities. In 1999 alone, PG&E paid to PG&E Corp. some $278 million more in cash as its share of income taxes than was actually paid by PG&E Corp. in taxes in 1999. The difference was used by the parent corporation to subsidize its own activities in violation of its agreement with the California Public Utilities Commission against cross-subsidization of holding companies.