Glynn is chairman and chief executive officer of PG&E Corp., which owns California's Pacific Gas and Electric Company. In April 2001, Pacific Gas & Electric filed for bankruptcy, declaring that it had accumulated $9 billion in debt. Critics, however, say that at the height of the crisis in California when energy prices were soaring, PG&E Corp. diverted Pacific Gas & Electric profits to another one of its subsidiaries, National Energy Group of Bethesda, Md., in effect creating a protective "ring fence" around those diverted monies. National Energy Group, meanwhile, now reportedly ranks as the nation's third-largest power trader. FRONTLINE interviewed Glynn on April 17, 2001.

The story's a little longer more complex than that. In the first half of the 1990s,the California Public Utilities Commission (CPUC) undertook to consider whether or not the electric utility industry in California ought to be restructured. The drivers for that were recognition by consumers--typically, consumers of lots of electrical...

Not your ratepayers at home.

Not individual residential consumers at all. ... The large energy consumers had seen the natural gas industry go through a similar deregulatory process. They believed that they would be better buyers, the customers, on behalf of their own individual consumer needs than they would be to stay part of some bundled class, a nameless, faceless, class of similarly structured companies. They'd had a good experience in gas, and they decided to move on to electricity. That's the roots of the desire to make the change.

They are refineries and manufacturing companies?

All of the above. They are companies who use a large amount of energy, or for whom energy is a large component of their cost structure. ...

You adopted this point of view? You, yourself, spoke out in favor of it many times.

What we said at the time was that the large consumers who want to have more freedom in their ability to purchase electrical power are, in large part, the same large consumers that were successful in doing that in natural gas. When natural gas was being deregulated, we opposed them. We learned, as a result, that it's not a good idea to be on the wrong side of a strongly felt belief that customers have. So we elected to advocate for them, rather than oppose them, when electricity deregulation started to move. ...

Let me quote you from the Commonwealth Club in 1997. You said, "As ... deregulation unfolds, consumers will benefit significantly, some energy companies will change dramatically as in PG&E." You went on in other speeches to say, "There will be lower rates."

I think that in the long term, on any broad national scale, that's exactly what we're going to find. In almost every energy market in North America, we're in a transition period, from a heavily regulated to a more competitive marketplace. Whether you look at Texas or Pennsylvania or New England, what you find is we're in the middle--not yet through a major part of the transition. That's the case in California as well.

We're going to go through some pains.

It's certainly going to be a challenging time to move through these transitions. One of the things that we advocated very strongly, that I personally did, was that the transition period in California be much longer than California chose to make it. The rationale behind that was to provide a more structured period within which both the market's behavior and the consumer opportunities could work their way through the system.

You were advocating that rate caps for consumers, and rate caps in general, stay on longer as they have in Texas, for instance?

We advocated a longer time period for a gradual introduction of competition to different segments of the consumer groups, with larger, more sophisticated consumers that had some buying power, which had the ability to interact with competitive commodity markets. They'd have the first opportunity to be exposed to market forces.

... People were saying, "It was a flawed deregulation plan; we had problems with it." But as in your case, in PG&E's case, you were enthusiastically supporting it at the point that it was voted in by the legislature.

We advocated a restructuring of the electric power industry that had many elements in it that were never adopted by the California legislature or the California regulators. We're very clear about the ones that we did like and the ones that we didn't like. ...

It was working well for a couple of years, from your point of view.

I think that people were getting used to the process for the first couple of years.

You were able to collect funds, $4 billion or $8 billion, that you were able to upstream through the holding company during the first few years of deregulation? ...

I think what you're talking about is the movement of proceeds from selling power plants--a constituent part, but not a necessary ingredient in deregulating energy markets. Not every state has chosen to include that in their elements. When those funds, when those plants were sold at greater than the value they were on our books, the cash for that certainly was available to be returned to the shareholders, and that's where it went.

Through the holding company, to start new enterprises, because you were changing the company--the company now described as a holding company, PG&E, I think in some of your statements.

It is in fact a holding company. We were pretty clear that we felt that the change in the regulatory environment was one that would have a reduction of the business opportunity we have in half of California. We give up our monopoly on half of one state in exchange for an opportunity to do business in the other 49 1/2 states.

So you were able to no longer be just a California company, but a national energy company.

Exactly.

You were able to get enough money to fund those enterprises through the sale of the power plants.

Strictly going to capital markets, as well, to raise the funds.

Right. You were able to pay some funds to your shareholders, and also buy back shares to raise the price of your company on the market.

That's exactly what companies do.

So it was good for you.

That's exactly what companies do. ...

When did you realize that this [spike in energy prices] wasn't just a temporary plague?

The prices didn't return with the same kind of rapid response in the California market that they had in virtually every one of the others.

You knew that by the time the rate caps came off first in San Diego in the summer?

Yes.

Prices went through the ceiling, right?

That was, I would say, much more their response when prices in San Diego moved. The issue was when the wholesale prices went up. That's the fundamental driver that took place, when wholesale prices in California went up. That was in June 2000.

When did you realize that they weren't coming down?

Not terribly long after they went up, when they didn't go back down. That's when we realized it.

Your costs started mounting?

Right.

You went to the PUC, started asking for assistance to deal with this problem?

There were a number of different ... communications, as well as filings, that we made with the PUC to try to get the situation under control.

You were allowed to do long-term contracts early in August. You could transition from the spot market to long-term contracts by early August of 2000. The PUC gave you that authority because of these wholesale prices going out of control.

I think that that statement misses a very important added element. What the CPUC did not do, ... in addition to [granting us authority to transition to long-term contracts, is] identify the rules under which they expected us to use that authority. We called them the reasonableness standards.

There are many cases where the California PUC adopts an authority, or grants an authority and provides with it a clear statement of the expectation under which that authority would be used. We asked for those upfront reasonableness standards over and over again. The CPUC acknowledged that they were needed. The governor said they were critically needed. The FERC said the lack of granting those upfront reasonableness standards was the major reason why the utilities didn't enter into long-term contracts as much as otherwise would have been the case.

You did eventually do long-term contracts.

We did a few. ...

But you're saying it's red tape from basically the Utilities Commission that stopped you from doing something that might have averted what came next?

That's correct.

In that process, while that was already happening, PG&E had already changed. It was no longer just a utility in California. You had other entities through the holding company as part of your general corporation. What are those other entities?

The fundamental additional element in our company is our National Energy Group.

And that's power plants? Generators? Traders?

The National Energy Group builds, owns and operates power plants across the U.S. It operates interstate natural gas pipelines, and it trades gas and electricity commodities. ...

The California Public Utilities Commission filed a complaint with the FERC back in April of last year, saying that agreements between El Paso Natural Gas, its affiliate company on its main pipeline--which is the largest pipeline in California--would result in manipulation of natural gas prices in California. By August of last year, [CPUC commissioners] were in front of the FERC saying, "We need immediate action." ... Your company filed documents in support of many of their motions. I believe your company said that there was evidence there of market manipulation. So do you believe there was market manipulation?

I haven't seen a credible explanation for why the southern California prices went to $50 when the national prices only went to, let's say, $8 or $9. I think that has yet to be explained, and has raised questions in many, many people's mind. The pipeline that we have in the Pacific Northwest that brings gas to California's northern border didn't experience price spikes like that to any comparable degree.

I understand that your company went to El Paso and, on a number of occasions, said, "We would like to move gas through your pipeline. We know there should be capacity on the pipeline." And you were told, "There is no capacity available. But if you want to buy it at the border price, the $40 or $50 price, we'll give it to you at that price."

That's interesting. I'm not aware on a personal level that those transactions took place. I'm certainly aware of the prices, and they were very, very high.

... People say to us, "There must be some manipulation going on here." It seems to me you're saying, "At least in the natural gas market, it looks like it's true."

What I said was that there's no explanation that I've heard yet for the prices being as high as they were in southern California.

El Paso, in part, says that the reason there was a spike was because you, as PG&E and other utilities in California, don't have enough interstate pipeline capacity to handle the amount of gas you need. Does that make sense to you?

I'm not going to get into a debate here or elsewhere with El Paso. I'm going to describe what I believe. What I believe is that there's yet to be a credible explanation for the high prices that occurred in southern California. ...

You then found yourself in the summer of last year with electricity prices spiking, in the system where the highest price leads everyone on a daily market basis. [CPUC President] Loretta Lynch says that they have evidence that there was cartel-like behavior on the part of generators supplying PG&E. Truth?

The most interesting finding for me is when the Federal Energy Regulatory Commission said that they believed that unjust, unreasonable prices had been charged in the California market, because they're the relevant regulator of the wholesale market. They've got an obligation under the Federal Power Act to only allow power to be sold at "just, reasonable prices." That's a term in quotes, I guess, somewhere in one of the acts that gives them their authority. So I thought it was pretty profound when they said, "Unjust and unreasonable."

Did it help you?

We have encouraged them very directly to move against any generator whose rates, in fact, were unjust and unreasonable, and require them to issue refunds, which would go back to consumers. ... FERC has the authority to do that. Price levels vary because of lots of factors. Natural gas prices have gone up by a factor of four. So if you're operating a natural gas-fired power plant, one of your cost elements went up a lot. We rely on FERC to make those findings, and we have encouraged FERC to act on the ones that they've made.

You have an energy trading group outside of Bethesda, Maryland, that trades gas and electricity nationally.

Right.

Just like Enron's or El Paso.

That's correct.

They're involved in the electricity market and the gas market every day. My understanding is that half of their profit is due to selling back into the California market. Is that right?

That's very different. First of all, that's not accurate. Second of all, we've disclosed that an extremely small fraction of their business is associated with California. I can't imagine...

It's 4.4 percent of their business. ...

I can't imagine where you got half the profit from. ...

This is from the CPUC audit. The National Energy Group had $117 million dollars in profits in the first 11 months of 2000, buying and selling gas and energy. It sold $677 million into the California markets though the ISO, and the TX made $50 million in profits. That was 58 percent of its total profit by trading 4.4 percent of its overall sales. That's also in the SEC files.

We testified; we filed with the SEC that in fact that had been what was said.

The reason I'm raising the question is your company, especially the holding company, was aware of what the marketplace was like in California--how much money you could make in it during this period of time.

That's correct. But the audit results that you just referred to didn't ... do anything other than ignore the overhead costs of that business.

The profits weren't so big?

I testified to that fact that we've released our financial results for the year. It's pretty clear that we didn't make any extremely large fraction of the business in California.

You made profit in California.

We made some profit in California.

The reason I raise it is that you must have been aware, or your people must have been aware, that the marketplace in California was not only volatile, but that lots of things were going on that weren't normal, in terms of bidding strategies and things that were going on at that time.

I don't certainly reach the conclusion that in fact there were bidding strategies, let alone that we were aware of them. ...

Was there manipulation in the electricity market that you saw?

I don't know if there was manipulation in the electricity market. I know two things. Prices really went high. I know that FERC has made a conclusion that unjust, unreasonable rates were charged. But I've been asked, did I think that participants in that market had to manipulate in order to collect the high prices that they did? I think that it wasn't necessary for them to do so. I'm not going to try characterize whether they did or they didn't.

But the rules in California that were chosen to set wholesale prices were going to result in unbelievably high prices in periods of shortage. So it is conceivable that people didn't have to manipulate, because the system by itself generated pretty large prices, and therefore pretty good-sized [profits].

There was no cop on the beat to keep it under control?

The way the system was designed originally--with a daily spot market, with utilities effectively precluded from being able to enter into long-term contracts, with a second price auction--all of those things, in a period of shortage, ganged up together to drive prices very hard. With or without manipulation, if it ever occurred, I think the same phenomenon is the case. The prices were going to get up very high, and probably stay high. ...

The National Energy Group has been fenced, if you will, ring-fenced. What does that mean?

We've provided a basis for the National Energy Group to obtain its own credit rating, so that it can raise funds and not be affected by the bankruptcy of its sibling business unit, Pacific Gas and Electric Company. We put that structure in place and received approval for it in order to make sure that that part of our business wouldn't be damaged if the other part of our business went into voluntary or involuntary bankruptcy. So what you see is inside the National Energy Group now, and it has its own credit ratings. They range from BBB to A, depending on what part of the business...

No, it's very profitable. It's a successful business.

It's a successful business.

But it's a successful business that got its start because of the utility and because of the deregulation plan.

It's a successful business that got its start because we believed that the nation was going to deregulation, that consumers wanted it, and regulators and legislators would approve it. We wanted to take the skills that we had and use them in this newly deregulating business environment. So what they do is they operate natural gas pipelines and power plants--something we know a lot about doing in this corporate family.

Some of their profits come from people in California, from consumers in California.

A small fraction of it does.

From the gas pipelines.

Right. ...

So what is this big experiment for deregulation restructuring? What good is that to me, the consumer?

It will only be good for the consumer if, in the long term, it provides lower prices and more choice of suppliers. I think the average consumer, the residential consumer, or the homeowner, my neighbors, won't feel that they get any benefit out of it if they don't see prices that they like better, and if they don't see choice that they didn't have before. ...

When is that going to happen?

It's going to happen when the supply shortages across the country come back under control. The principal drivers for price spikes are supply shortages. It's going to take a return to the supply/demand balance that utilities used to have.

"That utilities used to have." That's the question. You used to have that balance. You used to have the planning, used to have the surplus capacity, used to have possibilities of droughts factored into what your capacity was. So why did we change? ... [FERC Commisioner] Pat Wood says that maybe we should go back.

I'm not sure that the genie will ever go back in the bottle. I think that folks who want to see this whole deregulation process go backwards--I'm not sure that that's even feasible to think about. Consumers, under the old scheme, because of the increase in natural gas prices, would be paying higher rates in 2001 than they were paying in 1998, just because natural gas prices always used to flow through to consumers, whether it was natural gas that they consumed, or whether it was electricity that resulted from natural gas. Consumers were always at the receiving end. ... My point is that it's not deregulation that caused prices to move from wholesale to consumer. That phenomenon has always been in place. And so price expectations have got to be relative to the cost of the raw materials that make the power.

And you don't think that planning and thinking about the future was an easier thing to do, and a more organized thing to do, both in California and nationally before we got into this whole thing?

Interestingly, there were lots of people who didn't like that old system-- a lot of the institutional ideology, which didn't want to see monopoly entities; nobody seems to like monopolies wherever they occur. I think a lot of the ideology that didn't like monopolies didn't like all of that centralized planning. ...

I'm just taking the position of, let's say, your wife, at home: "Hey, why tinker with something that has caused this much dislocation, this much pain?" You're telling me sometime in the future the invisible hand will right all the wrongs that are taking place here.

Deregulating the electricity market, or even the natural gas market, has never been the cause of residential consumers in any state that I know of. ... The deregulatory forces were driven by two main things: large consumers of large amounts of energy who wanted to be able to buy it directly--not through, in essence, a middleman. And the ideological view that monopolies didn't need to be in the power generation business if there was a competitive alternative that appeared to be there. ...

A bankruptcy expert that we consulted at UCLA says that he has not seen this kind of cheap judgment-proofing technique, referring to the movement of the shares into the LLC to ring-fence your assets, since Carl Icahn and RJR. You put all your shares of all your companies into this LLC. Why?

We wanted to be able to have an independent credit rating capability in those businesses, so they'd be able to continue in business if other parts of the company went into bankruptcy. It's not a particularly uncommon technique for businesses of our type. And I'll ignore the characterization that this other party made. It was publicly announced in advance that we were doing it. It was approved in a public forum. ...

Do you think PG&E, the utility, is going to return to financial health?

Yes, I think we are. I think in the bankruptcy, in the Chapter 11 forum that we're in right now in the federal bankruptcy court, we'll be able to assemble a plan of reorganization that will return us to financial health and let us pay all of our valid debts in full, and be back in business.

You would still want ratepayers eventually to pay for the debts you incurred over the last year?

You bet. What's interesting in that regard is to think about what the state wants for the $4-plus billion that it's already rolled up this year. They want ratepayers to pay it in full, of course. They don't want to bear those costs. No business can stay in business and charge consumers a much smaller fraction of the wholesale cost. No business can stay in business doing that. I don't believe any state can stay in business and subsidize costs like that either. And I don't think California intends to.

I can see someone saying, "Wait a second. You're sure that the ratepayers should pay. But you're not sure that ... your fellow people in the energy industry--who probably gouged the market, who ran prices up, who exercised market power according to every economist we've talked to--should pay?"

I've been very clear that I think that they should only be allowed to retain funds for prices that are found to be just reasonable. I think that, at the end of the day, that's all they're going to be allowed to retain, and the balance is going to be returned.

You're in the energy business. Is "just and reasonable" 100 times what the normal price is?

"Just and reasonable" is a standard that's established in the federal legislation that puts the Federal Energy Regulatory Commission in business. ...

You don't see any obligation on the part of the holding company to use the profits it has made through its gas pipelines, its affiliates, through its energy marketing affiliate, or in the New England marketplace to help you, the utility, itself?

No, I don't, under the principle of separation of those businesses, any more than I would expect the utilities' ratepayers to solve problems if we had some in some other part of our business. ...

It sounds to me like you have some sympathy though for those people who long for the past when things were reliable, when there weren't blackouts. I mean, blackouts were a big cultural change.

No one likes the blackouts. I don't know a single entity who thinks that they're a good thing for any part of the state of California, or any surrounding states, for that matter.

But wasn't it a big cultural change? I'm told that people in your company, for 100 years, the culture has been, "Keep the lights on." In the past year, they've had to turn the lights off.

The culture is still in the company to keep the lights on, to keep the gas flowing. We, like any other utility company, have had in place the plans we would have to follow if there wasn't enough supply. In the past, that's usually been much more due to natural disasters--earthquakes, fires--than to an economic disaster. We've never had a supply shortage. ...

[CPUC President] Loretta Lynch says to us, ... the profits--all the money from the sale of the plants, the retirement of the mortgage--should come downstream.

I don't agree with that at all. We have had the behavior of the holding company and its relationship with the utility audited over and over again, and not found any action or behavior that wasn't appropriate. We had the assembly of the oversight committee examine that and conclude that the company followed the rules. I think it's just wishful thinking on someone's part that there should be a return of that.

Without arguing over how much money from an auditing point of view, didn't some of the energy sold to California by your energy group wind up in PG&E's line?

If it got sold to the independent system operator or the power exchange, it winds up wherever it winds up. We don't have any plants in California. We trade, but we don't have any plants in California.

So when [FERC Commissioner William] Massey tells us that your affiliate made money off of the energy crisis last year in California by selling power back into California, that's true?

Yes, I have agreed a couple of times in our conversation that our trading affiliate has done business in California, that it's represented a very small fraction of its earnings, that its total business is a small fraction of the company's earnings.

So were these audit figures...

So you're asking a bit of a tautology, in a sense.

Well, tautologies work. But you're disputing that it's 58 percent of the total profits of...

Yes, that's absolutely not the case.