The Economic Relationships between Parent and Subsidiaries

Cambridge Finance Partners was asked to analyze the relationships between PG&E and its subsidiaries during the period following deregulation in 1996.  During deregulation, the wholesale generation arm of its energy business was spun off to deregulated companies and retail rates were frozen at a level above the utility’s costs to allow PG&E to recover its stranded costs. During this period, PG&E earned substantial profits which it distributed to shareholders. However, as wholesale energy prices began to rise in 2000, the gap between retail rates and wholesale costs disappeared, leading to growing liabilities, significant losses, and a credit crisis that culminated in the utility’s declaration of bankruptcy in April 2001. CFP evaluated claims that that during this time of crisis, the utility’s holding company, PG&E Corporation, was required by the CPUC’s First Priority Condition to provide the subsidiary utility with a cash infusion to avoid ratepayers bearing the cost of the energy crisis and the utility’s collapse. The AG argued that, given its profits and receipt of cash transfers from the utility in the form of dividends and share repurchases over the previous few years, the holding company had an obligation to provide assistance. CFP examined the utility’s payouts to the holding company both prior to and during the energy crisis, as well as the CPUC’s First Priority Condition and PG&E’s risk management.