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Less than 24 hours after an administrative law judge rejected key elements of Pacific Gas & Electric Co.’s current bankruptcy reorganization plan, the Ninth Circuit U.S. Court of Appeals dealt a blow to the utility’s backup plan for exiting Chapter 11. In a 33-page unanimous opinion released Wednesday, Judge William Fletcher wrote that federal bankruptcy law pre-emption of state regulations is not nearly as broad as PG&E contends. Federal bankruptcy law expressly pre-empts state laws only in financial matters, rather than trumping any laws that stand in the way of a reorganization plan. “The issue is not whether there is express pre-emption, but rather its extent,” Fletcher wrote in Pacific Gas & Electric v. People, 03 C.D.O.S. 9928. The case is remanded to bankruptcy court, where Judge Dennis Montali will determine whether PG&E’s plan to sidestep state regulations fits the narrower financial criteria. While the decision affects an earlier bankruptcy reorganization plan, which PG&E has since shelved, it could force the utility to the negotiating table over the terms of its current plan. Until now, PG&E has taken a hard line, threatening to revert to its original reorganization plan if state regulators don’t rubber-stamp a settlement agreement that forms the basis of its new plan. “The Ninth Circuit today took that arrow out of its quiver,” said Tom Dresslar, a spokesman for the California attorney general, one of the parties in the case. Theresa Mueller, a lawyer in the San Francisco city attorney’s office, which was also a party in the case, viewed the decision in a similar light. “If you go back to the positions the parties were in before the settlement, well, PG&E is now nowhere. They have no leverage,” Mueller said. PG&E downplayed the significance of the ruling in a statement. “We do not view today’s ruling by the three-judge panel as having an impact on our plan to emerge from Chapter 11,” read the statement. “The proposed settlement agreement reached with the staff of the California Public Utilities Commission in June is proceeding towards resolution by the end of this year and does not rely on the bankruptcy law pre-emption issues addressed in today’s Ninth Circuit decision.” Ron Low, a spokesman for PG&E, declined to comment beyond the statement. PG&E, which filed for Chapter 11 bankruptcy protection in April 2001 with more than $12 billion in debts, initially filed a reorganization plan that split the utility into four separate companies. The plan shifted three of those companies to federal, rather than state, jurisdiction. The CPUC protested that the plan violated state laws and filed its own, alternative plan to reorganize PG&E. Four months into a contentious plan-confirmation trial in bankruptcy court, the two sides were ordered into private, judicially supervised mediation. In July, the parties announced a settlement agreement that creates a new, single plan of reorganization. That agreement must be ratified by the CPUC’s five commissioners in order to be valid. In a non-binding decision released Tuesday, Robert Barnett, an administrative law judge for the CPUC, said the settlement agreement contained “patent” defects and advised the commissioners to accept a modified version of the deal. The commissioners are expected to take up the matter at their Dec. 18 meeting. It remains to be seen whether PG&E will be receptive to plan modifications. In the past, the utility has been adamant that the settlement agreement is a take-it-or-leave-it deal, not open to revision. But with its fallback plan now in jeopardy, PG&E could have little choice but to adopt a more conciliatory stance. Larry Engel, who is opposing PG&E’s current reorganization plan on behalf of the city of Palo Alto, said the Ninth Circuit’s decision could embolden the CPUC to vote against the settlement agreement in its current form. “What this really does is take any pressure off the CPUC that they might otherwise have felt based on the disaggregation plan,” said Engel. PG&E filed an appeal in district court after Judge Montali rejected the utility’s broad interpretation of express pre-emption. U.S. District Judge Vaughn Walker reversed Montali’s decision in September 2002. In narrowing the scope of express pre-emption in bankruptcy cases, Judge Fletcher delved into the legislative and linguistic history of the bankruptcy code. PG&E had cited a 1984 amendment to �1123(a) of the bankruptcy code that says a reorganization plan shall be implemented “notwithstanding any otherwise applicable non-bankruptcy law.” But Judge Fletcher opined that that provision could not be read independently from �1142(a) of the code, which limits the express pre-emption to any laws “relating to financial condition.” “As we read the 1984 amendment, the newly added ‘notwithstanding’ clause was intended to be coextensive with the already-existing ‘notwithstanding’ clause of �1142(a),” he wrote. “Our conclusion is based not only on the presumption that Congress would not have made an important change in the code without clearly indicating its intent to do so,” continued Fletcher, who was joined by Ninth Circuit Judge Michael Daly Hawkins and Senior U.S. District Judge Samuel King, sitting by designation. “Our conclusion is also based on the overall structure of the code.” Fletcher noted that his ruling only concerned express pre-emption and not any implied pre-emption that the bankruptcy court may find relevant.

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