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A last-minute effort to block Pacific Gas & Electric Co.’s bankruptcy reorganization plan from taking effect fell short Friday, as U.S. District Judge Vaughn Walker denied a motion to stay filed by two dissident state regulators. PG&E’s reorganization plan officially goes into effect today, three years after the utility voluntarily filed for Chapter 11 bankruptcy protection. The motion before Walker was part of an ongoing appeal of the plan filed by California Public Utilities Commissioners Loretta Lynch and Carl Wood. A separate third-party challenge to the plan is expected to be filed in state court this week. The two commissioners asked Judge Walker to prevent the plan from taking effect until the appeals were heard, given the severe constitutional violations they claimed were part of the plan. According to the motion, the PG&E plan forces the CPUC to abdicate its ratemaking authority for the next nine years, in violation of state and federal laws. In a nine-page order released late Friday, Judge Walker was unswayed by the commissioners’ arguments. “Appellants’ interests simply do not compare with the grave harms that would result to PG&E, its creditors and the public if a stay is issued,” Judge Walker wrote. “No reasonable amount of bond could protect the very substantial interest that a stay would jeopardize.” The order followed a 1 1/2-hour hearing Friday morning, in which Judge Walker did not hide his skepticism of the motion to stay, wondered why the commissioners waited until the last minute to request a stay, questioned their standing to bring the motion, and noted that the harm of staying the plan appeared to outweigh any hardships caused by allowing it to go forward. Who besides commissioners Lynch and Wood would suffer as a result of the plan going forward? Judge Walker asked San Diego attorney Alan Mansfield, who was representing the commissioners. “There really are quite compelling interests on the other side, are there not?” Judge Walker added, referring to the creditors and the utility, which contended they would be adversely affected had the plan been delayed. PG&E told the court that delaying the plan would cost the company $1.7 million a day. Mansfield argued that the balance of hardship tipped in his clients’ favor, since the PG&E plan infringes on their First Amendment rights . He said a provision in the plan bound the CPUC and its individual commissioners to “support” the plan in all legal, legislative and administrative forums. This “specifically interferes with their ability to speak freely,” Mansfield said. And since the plan also contains a waiver of sovereign immunity, Lynch and Wood could be personally liable for any positions they take opposing the plan. Stephen Neal, a Cooley Godward partner representing PG&E, acknowledged later in the hearing that this “would be a serious constitutional violation if it were true.” But Neal said that the reorganization plan did not prevent individual commissioners from speaking their minds, and only required that the commission as a body support it. “We cannot and will not take action against them” individually, Neal said. This affirmation by Neal caused Walker to discount the First Amendment claims in his order. Walker’s order also suggested Lynch and Wood’s standing to bring the case was on thin ice — which doesn’t bode well for a decision on the merits of the appeal. “Appellants are simply on the losing side of a vote in the CPUC. The intensity of appellants’ conviction that the CPUC majority acted incorrectly does not convert that conviction into a personal loss to support Article III standing,” Walker wrote. Friday’s hearing marked the second time that fighting over PG&E’s restructuring has spilled into Judge Walker’s courtroom. In September 2002, Judge Walker ruled that federal bankruptcy law allowed PG&E to expressly pre-empt any non-bankruptcy laws that prevent it from implementing its reorganization, overturning a decision by U.S. Bankruptcy Judge Dennis Montali. The ruling endorsed PG&E’s initial reorganization plan, since shelved, which called for splitting the utility into four separate companies and transferring three of the companies under federal oversight. In November 2003, the Ninth Circuit U.S. Court of Appeals narrowed Judge Walker’s decision, holding that federal bankruptcy law expressly pre-empts only financial matters, rather than trumping any laws that stand in the way of a reorganization plan. PG&E sought bankruptcy protection on April 6, 2001, after the state’s energy crisis left it buried under $12 billion in debt. The CPUC voted 3-2 in favor of the current plan in December 2003, after its staff members resolved differences with PG&E in judicially supervised mediation. The plan calls for PG&E to sell roughly $7 billion in bonds and to establish a multibillion-dollar “regulatory asset” from which it can borrow money to repay creditors. It also stipulates that the utility maintain an investment-grade rating throughout the nine-year life of the regulatory asset. Although the plan “constrains the CPUC s future conduct in certain respects, [it] does not surrender or abdicate the CPUC’s regulatory authority,” Walker wrote.

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