Frontlines

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.