Saturday January 6, 10:34 am Eastern Time
Bankruptcy May Provide Refuge for Calif.
By Nigel Hunt
LOS ANGELES (Reuters) - As California's two largest utilities struggle to survive a storm set off by skyrocketing wholesale power prices, their best option may be to seek refuge in the protection offered by U.S. bankruptcy laws, legal experts say.
``I think (filing for Chapter 11 bankruptcy protection) is actually a pretty good step. It provides a forum where all of the competing concerns can be evaluated,'' said Kenneth Klee, an acting law professor at the University of California in Los Angeles.
``The negatives are that is certainly a political black eye and not something managers like to do, but it makes it easier to share the pain with bondholders and stockholders of the utility,'' said Klee, who is also a partner with Los Angeles law firm Klee, Touchin, Bogdanoff and Stern LLP.
Two utilities, Southern California Edison and Pacific Gas and Electric, have run up a total of about $12 billion in costs buying power that they cannot pass on to consumers under terms of the state's electricity deregulation legislation.
The burden has driven them to the brink of bankruptcy. Southern California Edison, a unit of Edison International (NYSE:EIX - news) has around 11 million customers while Pacific Gas and Electric, a subsidiary of PG&E Corp (NYSE:PCG - news), has 13 million.
California Treasurer Phil Angelides on Friday launched a rescue plan, proposing creating a new state authority able to issue up to $10 billion in bonds to help the nation's most populous state pay for operating power plants and distributing electricity.
``The idea of the state proposing a rescue package seems very viable and gives hope, but I just don't think these companies can survive without bankruptcy protection,'' cautioned Josefina McEvoy, bankruptcy partner at the Los Angeles law firm of Markowitz & Fernandez.
Klee said the advantages of Chapter 11 include not having to pay interest on any bonds issued before the filing. It would also make it easier to borrow more funds as any money lent after the filing has a prior claim on assets. But it could be a slow and expensive process. Klee said it could take two to three years for the utilities to emerge from Chapter 11 and McEvoy estimated legal fees could reach $100 million.
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