October 16, 2002

IT'S BEEN TWO years since officials at Pacific Gas and Electric Co. demanded an emergency rate increase to keep up with the out-of-control prices the company was having to pay for power. The California Public Utilities Commission granted increases of up to 40 percent because PG&E executives argued that the price hikes weren't the company's fault and that utility didn't have the money.

Or did it?

Critics are saying PG&E did indeed have the money but gave it away to its holding company, PG&E Corp. Court records and other government documents paint a picture that looks like a well-planned scheme to insulate the gas and electricity giant from having to pay for any increased energy costs out of its own pocket.

It all started back in October 1995, when PG&E made a pitch to the CPUC to get permission to reorganize and make its utility operation a separate and independent subsidiary of a holding company that would be called PG&E Corp. If the state-regulated utility operation was its own entity, company officials argued, it would be protected from the risky dealings of the other parts of the company.

It took more than a year, but the CPUC gave the plan its stamp of approval – provided PG&E agreed to some conditions that state officials believed would protect gas and electric customers from getting shafted with either higher prices or a reduction in the quality of service.

Among other conditions, PG&E Co. agreed to not cross-subsidize any nonutility activities, to institute a dividend policy as if it were a "stand-alone" company, and to operate in such a way that the holding company would give it "first priority" in case it needed help. The corporation also agreed to some clear rules involving transactions between the utility and its affiliates.

The whole idea was to ensure the utility would not take a nosedive because the holding company snatched away all of its money. The deal went through, and in a series of complicated legal moves partially detailed in the chart on this page, the structure of PG&E changed. Instead of a traditional stand-alone electric and gas company, PG&E emerged as a dizzying array of subsidiaries and wholly owned limited liability corporations.

PG&E Corp. created other subsidiaries for electric generation, energy trading, and gas transmission. Later it formed yet another subsidiary, PG&E National Energy Group, which builds, acquires, and operates independent electric generating facilities in various places across the globe.

It's this entity that investigators and government lawyers believe ended up with a lot of the money that could have paid for increased energy prices – and prevented PG&E Co. from needing a huge, multibillion-dollar bailout by ratepayers and taxpayers.

From the very beginning, investigators say, the utility started transferring money into the holding corporation – in spite of its promise not to. Between 1997 and 1999, investigators for the San Francisco City Attorney's Office and the state Attorney General's Office say, the utility provided at least $4 billion to the corporation in the form of stock dividends and repurchases of PG&E Co. common stock held by the parent corporation. That, they say, represented 60 percent of the cash inflows to PG&E Corp.

And during that same time PG&E Corp. invested $800 million in its other subsidiaries, spent $2.7 billion to buy back its stock from the public, and paid $1.5 billion in dividends to its shareholders.

Nobody paid much attention; these sorts of intercorporate transfers go on all the time, and neither business reporters nor regulators saw any signs of funny business. It became a different story, however, in the summer of 2000, when wholesale energy prices skyrocketed and the utility had to request a rate increase. In January and March of 2001, the CPUC allowed rates to soar by as much as 40 percent.

But government lawyers, including San Francisco city attorney Dennis Herrera, are suing PG&E Co. because they say the utility could have easily handled the increased energy costs – if it hadn't given its money away to PG&E Corp.

And there's more. The lawsuit filed by the city of San Francisco alleges PG&E Corp. created a special-purpose entity, NEG Holdings LLC, now known as PG&E National Energy Group LLC, a Delaware corporation based in Bethesda, Md., and filled it with 100 percent of the issued and outstanding shares of PG&E Corp. The purpose was to keep the money from ever having to be used by any other entity – including the utility, even if it was deeply in debt, facing bankruptcy, and demanding bailouts. Lawyers say the corporate officials used a technique called "ring fencing."

Even money that was supposed to be used to pay taxes ended up enriching the parent company, government officials claim. They say the parent corporation collected taxes from the utility its accountants said it owed. But court papers argue that the utility paid the holding company more money than the combined tax liabilities. And the holding company used the money for other projects.

There were other examples of PG&E Corp. using PG&E Co. as a cash cow. In the first nine months of 2000, for example, court records claim the utility generated $1.8 billion in cash, and transferred more than a third of it ($632 million) to its parent corporation. It paid $275 million of it for PG&E common stock repurchases and $357 million in dividends – both in violation of the conditions corporate officials promised they'd honor, lawyers allege.

However, because PG&E has a corporate structure that includes more than 200 subsidiaries that stack up to 12 levels – some of them in the Cayman Islands, Malaysia, and Australia, such claims may be difficult to prove.

How your PG&E bill goes to Australia - a case study

Government attorneys are saying PG&E Corp. has been sucking billions of dollars out of its subsidiary, PG&E Co., the utility it was supposed to be financing in the event of an emergency. Instead, they say, the utility has been helping its parent company pay for ventures throughout North American, as well as in other parts of the world.

Instead of paying for the cost of providing utility services to San Francisco gas-and-electric customers, or investing in the crumbling, inadequate, and dangerous local infrastructure, the money, lawyers say, could have ended up funding projects halfway around the world - all in violation of PG&E Corp.'s promises to the California Public Utilities Commission.

If the attorneys from the city of San Francisco and the state attorney general's office are correct, some of the money a San Francisco customer paid for an electric bill might have taken a path such as this:

PG&E Co., which sells electric power to most of northern California, cashes the check. Some of the money then goes to its parent company, PG&E Corp.

Some or all of that money could then go to PG&E National Energy Group LLC, a Delaware limited liability company based in Bethesda, Md., which was formed for the purpose of holding stock in another Bethesda-based Delaware corporation called PG&E National Energy Group Inc.

Then PG&E National Energy Group Inc. might receive the money from it's parent limited liability corporation. Next, the cash might trickle down to PG&E Enterprises, a California corporation based in Bethesda.

Then it could drip down another level to PG&E National Energy Group Holdings Corp., a California corporation based in Bethesda that is a holding company for PG&E National Energy Group generation and energy trading subsidiaries.

It could easily pass from there to PG&E Energy Trading Holdings LLC, a Delaware limited liability company also based in Bethesda. It was formed for the purpose of holding stock in PG&E Trading Holdings Corp.

As you might guess, the next stream leads to PG&E Energy Trading Holdings Corp., a California corporation based in Bethesda. It's a holding company for energy trading and overseas entities.

Next stop: PG&E International Inc., a California corporation based in Bethesda that is a holding company for overseas project companies.

Now the money could flow down the East Coast to PG&E Overseas Holdings I Ltd., a Cayman Islands company. It is the owner of PG&E Overseas Holdings II Ltd, based in Labuan, Malaysia. The company is the owner of PG&E Corp. Australian Holdings Ltd., who could be the next recipient.

Australian holdings is based in Brisbane and is the holding company for Australian entities.

It might pass some of that electric bill money to PG&E Energy Trading Australia Ltd., an Australian corporation based in Brisbane that markets energy.

If the theory holds up, San Franciscans – who face blackouts due to inadequate investment in PG&E's local system – may very well have been paying to keep the lights on in Queensland, down under.

D.R.

PG&E: The evil empire
While San Francisco's electricity infrastructure crumbles from a lack of investment, PG&E has sucked your money out of town and used it to build and expand a global empire

Pacific Gas and Electric Corp.

Holding company formed in 1997 in part to protect Pacific Gas and Electric Co. money from possible problems during deregulation

California

Pacific Gas and Electric Co.

Local utility, which sends ratepayer money to PG&E Corp. – but gets none back

Elm Power Corp.

Delaware corporation formed to repurchase PG&E stock

Etrans LLC

Formed to own electricity transmission assets under bankruptcy plan

Gtrans LLC

Formed to own gas transmission assets under bankruptcy plan

Electric Generation LLC

Formed to own electricity generation assets under bankruptcy plan

29 other limited liability corporations

Formed to own individual hydroelectric projects

Alaska Gas Exploration Associates

Owns PG&E's stake in Alaska Highway Pipeline Project

Eureka Energy Co.

Managed Utah coal venture; now holds Marre Ranch property in San Luis Obispo County

201 Turk St L.P.

Formed to own and construct low-income housing project in San Francisco

7 other limited partnerships created to invest in and build low-income housing in Oakland, Chico, and other communities

Oak Creek Associates Joint Venture

Land development in Yolo County

Conway Conservancy Group Joint Venture

Owns land in Yolo County

PG&E Strategic Capital Inc.

Venture capital firm formed to invest in telecommunications and related business activities

Pacific Venture Capital

Venture capital firm formed to manage investments in energy and telecommunications companies

PG&E Ventures eProp LLC

Venture capital firm formed to invest in "e-procurement"

PG&E Telecom LLC

Formed to engage in telecommunications and related activities

United States

PG&E National Energy Group Inc.

Bethesda, Md.

Holding company formed to own subsidiary companies, primarily in the energy field

Property Holdings LLC

Bethesda, Md.

Holding company formed to own PG&E property entities

Gilia Enterprises

Bethesda, Md.

Real estate investment company involved in Marengo Ranch land development in Davis

Valley Real Estate Inc.

Bethesda, Md.

Real estate development company

Mid-Columbia Generating Co.

Bethesda, Md.

Proposed energy development in Washington state

Umatilla Generating Co. LLC

Bethesda, Md.

Electricity generating facility proposed for Umatilla, Ore.

Beech Power Corp.

Bethesda, Md.

General partner in power generating project in Glouchester County, N.J.

Kentucky Hydro Holdings LLC

Bethesda, Md.

Formed to buy two hydroelectric plants in Kentucky

MASSPOWER LLC

Houston, Texas

General partner in Massachusetts cogeneration project

Pittsfield Generating Co.

Pittsfield, Mass.

Partner in natural gas power plant in Massachusetts

Selkirk Cogen Partners

Selkirk, N.Y.

Partner in natural gas generating plant in New York

Logan Generating Co.

Swedesboro, N.J.

Partner in pulverized coal generation facility in New Jersey

Hermiston Generating Co.

Hermiston, Ore.

Partner in gas-fired cogeneration plant in Oregon

Cedar Bay Generating Co.

Jacksonville, Fla.

Partner in coal-fired generating facility in Florida

Scrubgrass Generating Co.

Kennderdell, Pa.

Partner in coal-fired generating facility in Pennsylvania

Athens Generating Co.

Athens, N.Y.

Partner in natural gas-fired power plant currently under construction in New York

Lake Road Generating Co.

Dayville, Conn.

Partner in natural gas-fired generating plant currently under construction in Connecticut

US Gen New England

Bethesda, Md.

Owns 17 generating facilities in New England

Badger Generating Company

Bethesda, Md.

Partner in natural gas-fired plant in Pleasant Prairie, Wis.

Attala Generating Co.

Partner in natural gas-fired plant in Sallia, Miss.

Iroquois Gas Transmission L.P.

Shelton, Conn.

Owns a natural gas pipeline through New York, New Jersey, and New England

Colstrip Energy L.P.

Helena, Mont.

Owns and operates electric generating facility in Colstrip, Mont.

Okeelanta Power L.P.

Palm Beach, Fla.

Formed to develop, own, and operate an electric generating facility in Okeelanta, Fla.

Gator Generating Co.

Bethesda, Md.

Formed to own, operate, develop, and lease a cogeneration facility in Palm Beach County, Fla.

First Oregon Land Corp.

Bethesda, Md.

Formed to enter into real estate options in Oregon

PG&E ET Synfuel 166 LLC

Formed to acquire a synthetic fuel production facility in South Carolina

True Quote LLC

Louisville, Ky.

Energy-related software development and business-to-business Web portal limited liability corporation

North Baja Pipeline LLC

Portland, Ore.

Formed to construct a natural gas pipeline from Arizona to the Mexico border

Stanfield Hub Services LLC

Spokane, Wash.

Formed to pursue opportunities for the construction of natural gas storage facilities

Other countries

Alberta and Southern Gas Co.

Calgary, Alberta

Wholly owned Canadian subsidiary of PG&E set up to buy natural gas in Canada

PG&E Energy Trading, Canada

Calgary, Alberta

Natural gas marketing and trading in Canada

CEG Energy Options Inc.

Saskatoon, Saskatchewan

Natural gas trading in Saskatchewan

PG&E International Development Holdings LLC

Bethesda, Md.

Formed to own and sell an Australian pipeline development company

PG&E Overseas Holdings

Owns PG&E corporate holdings in Australia, including an energy marketing company and a corporate services company

The print version of this issue has a chart which shows some of the projects that PG&E has started, bought, or invested in around the country through some 200 corporate subsidiaries created in the past five years. The chart doesn't include all of the shell companies, holding companies, finance companies, Cayman Islands corporations, and other corporate entities that make it difficult to track where all the money goes (those who are interested can find that information in PG&E's Securities and Exchange Commission filings at http://www.sec.gov/Archives/edgar/data/1004980/000100498002000023/0001004980-02-000023-index.htm). The information was compiled by investigative reporter Don Ray, whose work has appeared on Inside Edition, 60 Minutes, and Primetime and in many newspapers and magazines. He waded through hundreds of pages of SEC filings and legal documents filed by the San Francisco City Attorney's Office (http://www.ci.sf.ca.us/cityattorney/press/p021102a.htm) and the California Attorney General's Office to crack PG&E's corporate veil.