The $14 Billion Question: The Fighting Has Started over Who Gets the Bill for California's Bungled Attempt to Deregulate Electricity. Alas, the Energy Fairy Is Not in Sight

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Most of the news out of California these days involves rolling blackouts, summer-meltdown scenarios, finger-pointing and posturing. But when you come right down to it, the story isn't about energy, it's about money. To be specific, $14 billion that someone is going to have to come up with to pay for the fallout from the state's ill-fated utilities-deregulation plan. Will California's electricity customers get stuck with the tab? Utility-company stockholders? Power producers? Or California taxpayers? "The money will have to come from somewhere, unless the energy fairy shows up," says Jan Smutney-Jones of the Sacramento-based Independent Energy Producers Association. And energy fairies don't show up very often.

The $14 billion is the difference between what the state's two biggest utilities--Pacific Gas & Electric and Southern California Edison--have paid for power since last spring and what regulators have let them charge their customers for it. The companies covered this difference by running up staggering debts to their suppliers (more than $9 billion) and to the state of California ($4.6 billion), which has been buying power for them since they lost their credit ratings a few months ago. California's tab is rising at the rate of $40 million a day. So much for worrying about what to do with its budget surplus.

We're not going to deal with the question of who's at fault for this mess, how it was allowed to metastasize and how it could have been avoided--that's not our problem today. Our problem is the $14 billion. The utilities haven't got it, and have no way to raise it. Their parent companies--PG&E Corp. and Edison International--would be shot by their shareholders for even thinking of tossing such a sum into the abyss. And electricity suppliers aren't about to declare themselves public charities and forgive the utilities' debts. Which leaves customers and taxpayers. And bankruptcy, which could wipe out the parent

companies' investment and give creditors cents-on-the-dollar rather than their full claims.

If the utilities were typical, boring companies making widgets or something unessential, they would have been in bankruptcy court long ago. By not paying their creditors on time, Pacific Gas and SoCal Edison have become what bankruptcy law calls "insolvent," and what civilians call "busted. " As a result, the companies' boards of directors are running a big but little-recognized legal risk by not having already filed for bankruptcy. "When your company is insolvent, your fiduciary duty is to the creditors," says Elizabeth Warren, a Harvard Law School bankruptcy professor. …