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A divided California Public Utilities Commission backed Pacific Gas & Electric Co.’s reorganization plan Thursday, setting the stage for the utility to emerge from bankruptcy early next year. CPUC commissioners voted 3-2 in favor of a controversial agreement to restructure PG&E’s $12 billion in debt, bringing an end to a bankruptcy case that’s dragged on for 2 1/2 years and cost hundreds of millions of dollars in legal fees. It’s “time to end this and to move on with the business of California,” said Commissioner Susan Kennedy before voting in support of the plan. The CPUC had initially battled PG&E in bankruptcy court, advocating its own competing plan to reorganize the utility. But the staff of the CPUC and PG&E reached a compromise in private mediation last summer, resulting in the settlement agreement currently before the commissioners. The CPUC’s two objecting commissioners criticized the settlement agreement as a “regulatory jailbreak” that is “fraught with legal infirmities.” “I believe that this case will be held up as an exemplar of how the public interest can be trammeled,” said Commissioner Loretta Lynch during Thursday’s meeting. Lynch and Commissioner Carl Wood each promised to file a dissent after losing the vote to Commissioners Kennedy, Jeff Brown and CPUC President Michael Peevey. The decision appears to position PG&E to emerge from bankruptcy in the first quarter of 2004. On Dec. 12, U.S. Bankruptcy Judge Dennis Montali tentatively ruled that PG&E’s reorganization plan conformed with federal bankruptcy law. But he held off on signing the order until the CPUC, which must determine whether the plan is in the public interest, gave its blessing. PG&E filed for voluntary Chapter 11 bankruptcy court protection in April 2001 in the midst of the state’s energy crisis. The company’s initial reorganization plan envisioned splitting the utility into four separate companies and transferring three of those companies to federal, rather than state, oversight. James Lopes, a partner at Howard, Rice, Nemerovski, Canady, Falk & Rabkin who served as PG&E’s lead bankruptcy attorney throughout the case, said the CPUC vote was a huge hurdle to overcome. “I will celebrate the day we raise the money and pay off creditors, but I’m still pretty happy,” said Lopes. The approved reorganization plan keeps PG&E intact and repays its creditors in full through bond offerings and by creating a $2.2 billion regulatory asset that the utility can borrow money against. The plan ensures that PG&E maintains an investment-grade credit rating and guarantees the utility an 11.2 percent return on equity for a temporary period of time. A slew of objectors, including the city and county of San Francisco, the California attorney general and the Office of Ratepayers Advocates, have lined up against the plan, saying it places too much of the burden on consumers and that it violates state laws. In particular, objectors have attacked provisions of the plan giving the bankruptcy court exclusive jurisdiction over any potential disputes that arise from the agreement and binding future commissions to the plan’s nine-year term. “When entering into settlement agreements or contracts, the commission may not act inconsistent with state law,” Wood said at Thursday’s meeting. By giving the bankruptcy court jurisdiction, Wood argued that the CPUC was abdicating its state-mandated police powers. “It cannot be bartered away, even by contract,” Wood said. Wood advanced his own alternate version of the settlement agreement, which rectifies his legal concerns and alters some of the financial terms of the plan. But an alternate settlement agreement proposed by Peevey won the majority of votes after Brown, considered the swing vote, signed on as a co-sponsor of Peevey’s plan Thursday morning. “This protracted and difficult litigation must be brought to an end. We must do so, and we have done so, with a modified settlement that is in the public interest,” Wood said. He stressed that the CPUC will not lose its regulatory power. “The bankruptcy court’s decisions have unambiguously stated that we, not the court, will regulate the utility. The bankruptcy court’s role is to rule on claims arising out of the settlement, not to second guess our regulatory function,” Brown said. The Peevey plan ratified by the CPUC is a slight modification of the original settlement agreement proposed by PG&E. It features some enhanced environmental benefits as well as a provision to refinance the regulatory asset through a low-interest bond offering. It also deletes a clause making PG&E responsible for paying parent company PG&E Corp.’s $125 million in professional fees. Since filing for bankruptcy, PG&E has racked up more than $118 million in professional fees, much of it going to firms such as Howard, Rice, Heller Ehrman White & McAuliffe and Cooley Godward. Judge Montali has scheduled a hearing Dec. 22 to consider the CPUC’s vote and to determine whether to issue a final order confirming PG&E’s reorganization plan.

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