You have two cows. You sell three of them to your publicly listed company using letters of credit opened by your brother-in-law at the bank. Then, you execute a debt-equity swap with an associated...
Bankruptcy may not be better for ratepayers.
In the Iowa Office of the Consumer Advocate, Gregory Vitale recently raised the question of whether ordinary electric customers stand to gain anything when state regulators try to help the local utility avoid bankruptcy. Vitale was responding to questions posed by the Iowa Utilities Board. The board was wondering if it should go ahead and allow Aquila to pledge its regulated assets as collateral for the working capital requirements of that company's utility operations.
"Assuming hypothetically that a public utility were to file for bankruptcy," the Iowa board wanted to know, "would Iowa customers be better off if the board allowed Iowa assets to be pledged and then the utility filed for bankruptcy, or if the Board disapproves the pledge of Iowa assets and the utility files for bankruptcy?"
There has been little precedent in this area. The only real bankruptcy that has occurred lately in the utility industry is the California crisis-induced bankruptcy of Pacific Gas & Electric. And during the boom years of the late '90s there was not much demand for pledging assets, as interest rates on unsecured debt became competitive with rates on secured debt.
These days, however, Aquila claims that the pledging of utility assets is nothing new. It defends the idea by pointing out that the collateral from the pledged utility assets should help support regulated operations.
Furthermore, some feel the company's current request to pledge assets is unfairly being scrutinized-that there is still bad blood over the collapse of the company's unregulated energy trading unit in which investors lost millions.
Vitale believes Iowa customers would be better off if the board does not approve Aquila's request to pledge its utility assets, whether Aquila files for bankruptcy or manages to avoid bankruptcy. "In the event of bankruptcy, there would be more unsecured assets available to fund interim operations as well as customers' unsecured deposits than there would be if the board approved Aquila's request," he testified. In support of his conclusion, Vitale cited a UBS Warburg report by Ronald Barone that states: "Put simply, Aquila's significant debt burden and obligation under its pre-pay contract will in our opinion be too great for its core domestic utility operations to support once it has disposed of all its other assets. As a result, Aquila's long-term prospects are limited and could include a restructuring at some point."
Back in Iowa, Vitale cited an editorial I wrote in this column (see issue of June 15) as evidence that merchant generators might be better off in bankruptcy. And merchants seemed to prove the wisdom of that view this past summer. But while I may have ventured that bankruptcy could be good for the goose, we have yet to explore in the pages of the Fortnightly whether it would be good as well for the gander. Certainly, the case between Connecticut and NRG shows quite vividly how a utility bankruptcy can create unpredictable consequences, for both regulator and ratepayer-as shown in the "Commission Watch" column in this issue.
The View from an Ex-Regulator