Judge Rejects PG&E; Plan for Reorganization

A federal bankruptcy judge in San Francisco on Friday rejected Pacific Gas & Electric Co.’s “across-the-board, take-no-prisoners” strategy for bypassing state laws and regulations as a reorganized company.

Judge Dennis Montali rebuffed PG&E;’s argument that federal bankruptcy law automatically supercedes state law and would allow the preemption of numerous state statutes.

But Montali left the door open for PG&E; to modify its controversial reorganization plan, which, among other things, calls for shifting its generation and transmission facilities outside the regulatory reach of the state Public Utilities Commission.

The judge said that the utility’s plan could be confirmed if the company establishes that specific laws need to be preempted for the plan to succeed.

The utility issued a terse statement, saying, “PG&E; intends to move forward with its plan,” taking into account Montali’s decision.

PG&E;, which filed for Chapter 11 bankruptcy protection in April, said its plan will fully repay creditors and will not cause a rate increase. Government agencies and consumer groups allege that the plan amounts to a “jailbreak” from state regulation that would result in higher-cost, less-reliable utility service.

State officials, including Gov. Gray Davis, hailed Montali’s decision.

PUC General Counsel Gary Cohen told a news conference that “PG&E;’s plan is dead in the water.” To preempt state law, Cohen said, PG&E; would have to show that the laws it seeks to avoid are not important to health and safety. “The burden ... is so high as to be insurmountable,” he said.

Attorney General Bill Lockyer, whose office opposed the preemption of dozens of state laws, said the laws “are almost entirely health and safety. We need to keep the energy flowing to keep people and businesses healthy. We want the environment healthy.”

Davis said it’s in California’s interest to keep PG&E;’s vast system of hydroelectric facilities and watershed under state laws.

PG&E;’s plan calls for transferring such assets to new subsidiaries of its parent company. The utility seeks to preempt the PUC’s review of the transfer, which includes a state environmental assessment. But PG&E; said it would comply with all applicable laws after the transfer.

Contrary to arguments by the state, Montali said that “using bankruptcy reorganization to move from state regulation to federal regulation is not necessarily improper,” nor is disaggregating a company’s assets as PG&E; proposes.

But the judge raised questions in court and in his decision about PG&E;’s request for a broad preemption of state laws. He asked, for example, whether a plan could provide for a debtor to sell liquor to minors, which state law prohibits. “There were no satisfactory answers,” he said.

U.S. Trustee Linda Ekstrom Stanley said she was pleased that Montali’s decision acknowledged that the case’s impact is more than purely economic and affects more people than creditors. “He’s saying you have to be very careful before you preempt laws of the state that are designed to protect Californians,” she said.

“PG&E; is arrogant enough to think they are above the law,” said Nettie Hoge, head of the Utility Reform Network. “This decision sets them back on their heels and reminds them there must be a reason other than increasing corporate profits to set aside state law.”

The PUC won permission to submit the outlines of an alternative reorganization plan by Wednesday so the judge can determine whether it appears viable. PG&E; must submit its response to the PUC’s plan on Feb. 21, along with a statement of its intentions for its own plan.

On Friday, PG&E;’s parent company--PG&E; Corp.--filed a motion transferring to Bankruptcy Court a lawsuit by the attorney general alleging that it improperly siphoned up to $4 billion from the utility.

The attorney general’s office said it would challenge the change of venue from San Francisco Superior Court.