Pacific Gas and Electric Co. funneled money to its parent company last summer even as the utility was sinking deeper into debt, an audit of PG&E's books revealed last night. The independent audit, commissioned by the California Public Utilities Commission, suggests PG&E executives did not act quickly enough to stem the growing crisis.
The auditors found that PG&E's managers failed to recognize the impact the utility's debt burden would have on securing bank loans, "and did not develop a cash conservation program until December 2000" -- nearly half a year after the losses began mounting.
Moreover, the utility transferred $632 million to its parent company, PG&E Corp., "for common stock purchases and dividends" over the first nine months of the year, the auditors discovered.
By summer, however, the utility already had started going into the red as wholesale electricity costs spiked sharply higher. PG&E has since requested help from California authorities to avert bankruptcy.
"They can't just move money to the parent company and then go to the state and ask for cash," said Nettie Hoge, executive director of The Utility Reform Network in San Francisco. "If they hadn't transferred the wealth, they wouldn't need a bailout."
PG&E officials declined to comment last night on the audit's findings.
But the utility said in a statement that it disagrees with the auditors' conclusion that PG&E did not do enough to cut costs, and challenged an assertion that $117 million earned last year by the lucrative power-generating subsidiary of PG&E Corp. could have been used to help purchase electricity for consumers.
"The report suggests that the use of affiliate earnings and greater cash conservation efforts could have made a difference," the statement said. "That is simply not the case."
The statement went on to note that even if PG&E laid off 1,000 workers, fired "every management employee," broke existing contracts, froze union members' wages and applied the $117 million in generation earnings to power purchases, "the total savings would amount to less than one month's worth of power at current prices."
While the utility's increasing debt remained a secret throughout last summer, The Chronicle learned in early September that PG&E's unrecovered expenses by then totaled about $2 billion.
The utility subsequently estimated that it was losing about $1 million an hour as a result of runaway wholesale power costs, suggesting that PG&E executives knew by mid-summer that the utility was headed for a fiscal catastrophe.
Nevertheless, according to the audit, millions of dollars were still being shipped from the utility to the corporate parent even as the red ink was gushing from PG&E's ledgers.
By last September, the utility already was suggesting that customers' rates would have to be increased to cover its rising wholesale expenses. Today, PG&E is almost $7 billion in the hole and is seeking state assistance to keep it from bankruptcy.
The utility's parent company, meanwhile, has distanced itself from its subsidiary's troubles and insisted that it cannot be held accountable for any rescue effort.
"The audit shows the public for the first time that the holding company structure allowed the utility to take from one pocket and put in another," said Michael Shames, executive director of the Utility Consumers' Action Network in San Diego.
"It probably wasn't illegal," he said, "but it doesn't pass the straight- face test."
The audit of PG&E's books was conducted by the Barrington-Wellesley Group, an accounting firm that specializes in utilities.
A similar study of Southern California Edison's finances, released Monday night, was performed by accounting giant KPMG. It backed up Edison's claims of looming impoverishment and contained no indications of misbehavior on the part of company officials.
It is not yet clear what state regulators will do with both audits. Immediate action affecting rates is unlikely as lawmakers haggle over possible legislative solutions to California's energy woes.
But the audits -- and especially the findings on PG&E -- may make it hard for lawmakers to be as generous as they once might have been in drafting terms of possible bailout schemes.
Among the results of PG&E's audit:
-- Some of the utility's assumptions regarding cash-flow projections were "not supported and are likely to result in overstated cash requirements."
-- Forecasts of energy supply and demand, along with related revenue, submitted by PG&E to regulators did "not accurately portray near-term operating constraints and opportunities in responding to the current crisis."
-- The utility provided its parent company with $4 billion from 1997 to 1999 in the form of dividends and stock repurchases.
-- Cash moved only from the utility to the parent, never in reverse.
TURN's Hoge said the audit illustrates for regulators and lawmakers "that there is significant wealth in the parent company."
This awareness, she said, may deter officials from allowing PG&E to fully recover its $7 billion in losses, leading instead to some sort of compromise solution.
"A great portion of ratepayers' money was uploaded to the mothership, which has sailed off into the twilight," Hoge said.
Legislators are now drafting a bill that would authorize the state to purchase electricity on behalf of PG&E and Edison, with the utilities in return offering warrants to purchase stock in their parent companies at fixed prices.
Negotiations are under way over how much stock might be offered as part of such a plan. Those talks almost certainly will be influenced by the findings of the audits.
"I think the Legislature is not going to be willing to accept the fact that these people would get off scot-free," said Sen. Dede Alpert, D-Coronado. "They are going to have to assume some of the responsibility of that debt.
"That debt is too large for the state or the consumers of the state to pay when we know that there is money that has gone to the shareholders and the salaries and bonuses of the people running the companies," she said.
E-mail David Lazarus at dlazarus@sfchronicle.com
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