PUC Not Ready to Concede Its Rate-Setting Authority to Judge
California’s utility regulators, refusing to relinquish any jurisdiction over Pacific Gas & Electric Co., are jockeying in Bankruptcy Court to maintain their electricity rate setting authority.
The legal maneuvering is so sensitive that lawyers have advised state agencies not to submit claims in federal Bankruptcy Court for money the gigantic Northern California utility owes them until further study is done. The state fears that entering the Chapter 11 case as a creditor might bring it under the jurisdiction of the Bankruptcy Court.
Although the state Public Utilities Commission customarily has authority over what PG&E; can charge customers, the bankruptcy judge will call the shots in PG&E;’s reorganization, the third-largest bankruptcy filing in U.S. history.
The uncertainty centers on what happens when the federal judge’s lines of authority intersect with the regulatory commission’s powers.
“If you are regulated by a state body, you can’t use bankruptcy to throw off the shackles of regulation,” said Alan W. Kornberg, a New York lawyer who is representing the PUC in the case.
PG&E; is not trying to escape regulation, its lawyers say, but believes the bankruptcy judge should make the calls when the jurisdictions of the PUC and the judge collide.
“The bankruptcy judge will be able to decide where the line has to be drawn,” said Christopher J. Warner, a regulatory lawyer for PG&E.;
Many lawyers say PG&E; filed for bankruptcy April 6 in an effort to use the court to squeeze concessions from the state after unsuccessful negotiations with Gov. Gray Davis. By overcoming the regulatory authority of the state, the bankruptcy judge could create a situation that could “essentially compel a rate increase,” said Beatus Morris, a senior assistant attorney general.
The first legal showdown in Bankruptcy Court is set for May 14, when PG&E; will ask U.S. Bankruptcy Judge Dennis Montali to block a PUC-ordered accounting change.
PG&E; says the accounting change illegally extends a rate freeze and prevents the utility from recovering the full costs of buying power.
The lawsuit is viewed by lawyers in the case as a “test shot” by PG&E; to determine whether the court will use its leverage to force a state agency into submission.
PG&E; wasted no time in taking on the PUC in court. After filing for bankruptcy on a Friday, a lawyer for the firm marched into court the next Monday with a thick lawsuit to block the PUC’s accounting order.
“When you go into bankruptcy, you need to protect the property of the debtor” PG&E;’s Warner said. “So we felt we had no choice but to go in and say, under bankruptcy law, this is stayed.”
Lawyers for the state assert that the commission has sovereign immunity under the 11th Amendment, which says a state may not be sued in federal court by citizens of the state.
Gary Cohen, the PUC’s general counsel, said Montali could rule in the state’s favor in a “limited way, in which case the issue could come up again.”
“I suspect that if we get a ruling in our favor on this motion, it doesn’t necessarily mean that PG&E; will not try again and again in some other context to argue that [Montali] should exercise jurisdiction over us.”
Montali’s response to PG&E; will be closely watched because it will “give a pretty good indication of what his intentions are,” Cohen said.
Lawyers following the case said Montali is in a tough spot because most bankruptcy judges want to maintain as much control over the process as possible.
“If he rules in favor of the PUC, he is sending a message that he is going to take kind of a back seat in some aspects of this case, which is not what PG&E; wants,” said a lawyer whose firm represents a creditor in the case. “PG&E; is counting on the court to bully the state a little.”
Several bankruptcy experts said in interviews that the law favors the PUC’s position, and some said flatly that the judge is not empowered to raise electricity rates during the case.
“Bankruptcy judges don’t have the power to set utility rates,” said Harvard law professor Elizabeth Warren, a bankruptcy specialist.
But the judge can approve a final organization that includes large rate increases. The regulatory commission would be under strong pressure to agree to them.
By remaining outside the jurisdiction of the Bankruptcy Court, the utility regulators also would retain their authority over what assets PG&E; will be allowed to sell.
The utility has listed several state agencies, including the PUC, as creditors. The agencies have 180 days from the filing of bankruptcy to file a claim for the money owed.
But entering the case as a creditor could be tantamount to waiving the state’s assertion of immunity, state lawyers and legal experts in bankruptcy said. At the same time, by not filing claims, the state risks not getting paid millions of dollars.
“We don’t want to take any chance of giving up any regulatory power to a federally appointed judge without having fully considered the ramifications of doing that,” said Steven Felderstein, a bankruptcy lawyer who is representing the state.
Felderstein believes that PG&E; wants a ruling against the state to gain leverage in any future negotiations.
“They are trying to get out of being regulated by the state, and they want the Bankruptcy Court to do things that they can’t get the regulatory body in California to do,” Felderstein said.
Normally a company files for bankruptcy because creditors are squeezing it or because it has run out of cash, he said. “Here, the debtor has $2.5 billion in cash,” Felderstein said. “When have you ever heard of that?”
If a state agency files a claim for money owed by PG&E;, “they have said to the Bankruptcy Court, ‘You have jurisdiction,’ ” said Southwestern University School of Law professor Judy Beckner Sloan.
She cautioned that Chapter 11 is an expensive legal process, and turf fights between the judge and the state will only prolong the case. Although the PUC can order the utility to take a certain action, PG&E; will have to obtain approval from the bankruptcy judge to do it, she said.
Already, the PUC has asked the utility to take certain actions and the utility has insisted that it first needs the approval of Montali.
“I would hope that people didn’t draw their lines in the sand and litigate and litigate,” Sloan said.
State lawyers do not know yet how much PG&E; owes the state. If the state simply agrees to the amounts that PG&E; eventually reports, it can be paid without entering the case and jeopardizing immunity, a state lawyer said.
For the state, keeping control over rates is vital to Davis’ plan to sell $12.5 billion in bonds to pay for future energy costs. The state must guarantee bond buyers that the rate base, established by the PUC, dedicates a portion of the bill for bond repayment.
In its lawsuit, PG&E; seeks to prevent the utilities commission from enforcing the accounting order while the bankruptcy case is proceeding. PG&E; contends that the bookkeeping order would adversely affect creditors. It would change the amount PG&E; has recovered to pay for the costs of state-ordered deregulation and prolong the freeze on electricity rates.
“Keep in mind the impact the accounting proposal has in terms of our recovery of those [deregulation transition] costs,” PG&E;’s Warner said. “The PUC would be saying in effect, ‘PG&E;, we are going to wipe those costs off your books and not allow you to recover them.’ ”
He said the accounting order was a major blow to the utility, an illegal retroactive revision of the books that would affect PG&E;’s finances and assets.
A ratepayers group proposed it, and the utility had been strenuously fighting it for months. The commission approved it on March 27, and PG&E; filed for bankruptcy several days later.
It seemed to PG&E; that talks with the state over 10 months had not helped the utility. In fact, Warner said: “Things were going backward in the final stage.”
Although state regulators want to remain outside the Bankruptcy Court’s purview, that independence may come at a price, several lawyers said. Without participating, the utilities commission will not have any influence over the final shape of PG&E;’s reorganization, those lawyers said.
But the PUC’s Cohen said the commission does not need to participate in the bankruptcy for its influence to be felt.
“There are a lot of ways for us to have our views made known to the Bankruptcy Court without implicating the sovereign immunity problem,” he said.
The U.S. trustee, the administrator for the bankruptcy, may establish a committee that represents the public and ratepayers, and a public interest group also may file a motion to enter the case, Cohen said.
The state also can influence the process by meeting outside court with creditors, who will be involved in negotiating a reorganization plan.
As the legal maneuvers proceed, creditors will be closely watching the PUC’s investigation of PG&E;’s transfer of billions of dollars to its parent corporation in the years prior to filing for bankruptcy.
The parent company spent the money on dividends and used it to purchase other assets. In January, PG&E; took steps to insulate the parent from responsibility for the utility’s debts in a maneuver known as “ring fencing” or judgment proofing.
“It’s really astonishing,” said UCLA law professor Lynn M. LoPucki, a bankruptcy specialist. “There are very few examples of a major American company engaging in blatant judgment proofing, yet this is what PG&E; did. And they did it at the height of the controversy.”
Bankruptcy experts said creditors probably will seek some form of payment from the parent firm.
“The chances are very high that the claim will be settled by the parent company handing over money or agreeing to give up its share-holding interest in the utility,” LoPucki said.
PG&E;’s Warner said the ring fencing was approved by the Federal Energy Regulatory Commission and was necessary to provide for a separate credit rating for the parent company’s other entities.
There were no extraordinary transfers of money, and in fact the amounts sent to the parent firm have declined in recent years, the PG&E; lawyer said.
