Judge Asked to Block Freeze on Power Rate

Lawyers for Pacific Gas & Electric clashed with attorneys for the state in federal bankruptcy court here Monday over whether the court should block a state regulatory order that prolongs an electricity rate freeze.

After three hours of arguments, U.S. Bankruptcy Judge Dennis Montali said he will prepare a written decision. “It will be issued when I am ready to issue it,” Montali told a packed courtroom.

The legal battle represents PG&E;’s first attempt to use its bankruptcy petition to protect itself from state regulators--the California Public Utilities Commission.

PG&E; has asked Montali to block a key accounting order the commissioners approved March 27, several days before the Northern California utility filed for Chapter 11 bankruptcy protection.

The utility contends that the order illegally extended a freeze on electricity rates. Lawyers for the state counter that the PUC has sovereign immunity under the 11th Amendment, and the judge has no power to intrude on its regulatory decision making.

Montali asked a PG&E; lawyer how he could get around the protection argument.

“Because we have commissioners who are shielded by sovereign immunity, don’t I have to find a potential ongoing violation of federal law [to intervene]?” the judge asked.

Jerome Falk, the lawyer for PG&E;, said the regulatory commission was breaking federal law by blocking the utility’s ability to use the Bankruptcy Act’s protections to reorganize.

Under PG&E;’s calculation, the rate freeze imposed by deregulation should have ended in mid-2000. The utility stands to lose $4 billion because of the continuation of the freeze, Falk told Montali.

“Don’t let it get $4 billion worse,” he pleaded.

Walter Rieman, representing the state, countered that the commissioners were acting in their regulatory capacity when they approved the accounting change.

“Here we have rate-making and regulation in its classic and purest form,” Rieman told the judge.

Because of the rate freeze, the utility must buy power at a cost higher than the rates it charges, Falk said.

“Money is going out. . .,” Falk said. “Assets of the estate are threatened with diminution, major diminution, as a result of this order.”

Montali asked him what would happen if he blocked the regulatory order. Would the rate freeze immediately end?

Falk replied that PG&E; would return to the PUC and make its case for an end to the freeze. “I am not asking you to set rates.”

Lawyers for the state pointed out that PG&E; happily accepted the rate freeze when it allowed the utility to sell power at higher than market rates. In their view, PG&E; wants a ruling against the rate order to give the utility more leverage against the state in the future.

Montali questioned Rieman about what authority, if any, the Bankruptcy Court has over the utilities commission.

“You want me to say that everything the commission has done or will do is insulated,” Montali said. “I don’t know how I can do that, and maybe I can’t.”

The judge asked Rieman whether the PUC could eventually approve retroactive rate increases. Rieman said it was “possible” but he was not sure retroactive hikes would be “appropriate.”

PG&E; filed for bankruptcy protection after accumulating more than $9 billion in debts since state-ordered deregulation in 1996. The case is the third largest bankruptcy in U.S. history.