Is bankruptcy a good idea?

Bankruptcy is a threat that looms over PG&E and So Cal Edison. Some people wish it would happen—as in "serves them right". But what does bankruptcy entail and would it help the energy crisis?

Companies can choose bankruptcy when their creditors insist on payment and there is not enough cash on hand to pay. Chapter 11 is a form of bankruptcy wherein creditors are put on hold while the company reorganizes itself into a form that can be financially viable. The original creditors may be paid a fraction of the outstanding debt if any at all. Lawyers, accountants, and consultants earn big fees.

The Chapter 11 bankruptcy of a utility company is managed completely by a judge of the federal bankruptcy court. The court's primary duty is to protect creditors and only they must approve the plan of reorganization that allows a company to emerge from bankruptcy. Regulators, politicians, shareholders, employees, and customers are simply parties to the proceedings and have no real influence on the outcome. During the period of the proceedings, it is the judge that controls both the process and the utility's business.

As a result, the state turns over the total control of its major utility to a federal judge who has no responsibility to it. The final plan could include anything from a disposition of non-utility related assets and subsidiaries, an outright sale of the utility to the highest bidder including out-of-state companies, or severe rate increases that would probably be litigated up to the U. S. Supreme Court. (The possiblity of litigation related to rate increases is because bankruptcy law is far from clear as to whom has jurisdiction over electric rates during the pendency of the bankruptcy proceedings, leaving room for various jurisdictional battles.) The judge could also order the utility to stop spending money it does not have to purchase power, regardless if this causes power shortages.

El Paso Electric Co. filed bankruptcy in January 1992 after regulators and politicians refused to grant the rate relief necessary to avoid it. Four years and $100 million in fees later, El Paso emerged from bankruptcy with a rate plan negotiated with the politicians, Texas regulators and creditors and a $1.2 billion public financing of new equity and debt. The rate plan implementing a long-term increase in electric rates was remarkably similar to the original compromise plan that El Paso was negotiating prior to the default and bankruptcy—the same plan that the politicians had refused. David H. Wiggs, Chairman and CEO of El Paso at the time summarizes this as follows: "In other words, the bankruptcy process added nothing but complication, time and huge expense."

So, to answer the original question, the only beneficiaries of such a bankruptcy are the creditors. The rest of us will likely be stuck with rate increases and taxpayer-funded debt relief. And the costs to be covered will have gone up by the amount of the costs of the bankruptcy proceedings. The problems of supply and demand will remain untouched. This does not seem to be in our best interest.

The best course of action is to abandon the game of chicken currently being played out between politicians, regulators, creditors, suppliers, and bankers. Admit that the current state of price-fixing is not workable and replace it with one that is. Retail prices must cover the supply and distribution costs and should encourage needed conservation.