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Nearly five months after PG&E Co. filed its bankruptcy reorganization plan, the judge overseeing the case has rejected the utility’s controversial proposal. PG&E wanted to break itself into four operating companies and leverage the new entities to raise cash to pay back the $13 billion it owes creditors. In effect, the California utility was asking the federal bankruptcy court to pre-empt 37 state laws in approving the radical plan. But Judge Dennis Montali was unconvinced. “This Memorandum decision rejects outright [PG&E's] across-the-board, take-no-prisoners preemption strategy,” Montali wrote in the 49-page decision. The San Francisco judge ordered the utility to respond by Feb. 21 to an alternative reorganization proposal from the California Public Utilities Commission. The group is expected to file a term sheet for its plan by Wednesday, and the judge set a Feb. 27 hearing to consider it. The verdict is a victory for the CPUC, which led the campaign against PG&E’s bankruptcy plan. Hanging in the balance is disposition of the utility’s $13 billion debt, 140,000 acres of California land and costs to millions of electricity and gas customers. CPUC general counsel Gary Cohen, who has led the commission’s legal battle, spoke with The Daily Deal shortly before Montali rendered his decision. The Daily Deal: What is your main objection to PG&E’s reorganization plan? Gary Cohen: PG&E’s plan basically is to take from under state law and regulation all of its assets with the exception of its electric distribution system — the poles and the wires — and turn them into, with regard to, say, hydro systems, a merchant generator just like the Enrons, the Dukes, the Dynegys, that would be free to charge market rates. That’s the whole reason why we got into the terrible situation we were in at the first end of 2000 and 2001. DD: What are the environmental concerns? Cohen: PG&E owns tens of thousands of acres of pristine watershed lands that right now are subject in their entirety to jurisdiction by the Public Utility Commission. So whenever they want to do anything on those lands, they have to come to the PUC, and the PUC is able to look at whether what they want to do is in the public interest or not and look at the whole network of those lands in its entirety, rather than piece by piece. The PUC is under obligation under the California Environmental Quality Act, CEQA, to do an environmental review before allowing PG&E to develop land, sell it off, what have you. So when PG&E came up with this idea of selling off their hydro assets once before, there was a process at the PUC where an environmental review was done, and interested parties were able to come in and talk about what the effects would be if those lands were sold off to a number of different buyers. That process was under way; there was a draft environmental impact report done, and then PG&E went into bankruptcy. Now they want to chuck all that process out the window and say, “Just because we’re in bankruptcy, we should be able to do whatever we want with those lands,” including sell them off, develop them, do whatever they want. What they’re saying is that they’re still going to be subject to whatever laws apply to them, but what that means as a practical matter is that they’re only going to be subject to local regulation, and there won’t be any kind of comprehensive or state regulation over them. DD: How do you respond to PG&E’s argument that its plan requires only a one-time violation of state laws and that, once reorganized, it will operate according to applicable laws? Cohen: That’s really disingenuous. For example, the only thing that subjects the watershed lands to CEQA review is the fact that they have to come to the PUC for permission to take some action. What CEQA says is that any time a state agency has a discretionary decision before it that could affect the environment, the requirements of CEQA are triggered. Well, if you take away the PUC’s authority over the land, then you take away the trigger for CEQA review. That’s like saying, “Yeah, we’ll be subject to all the laws in the state of New York that apply to us, but we’re moving to California.” DD: What is the CPUC’s plan for PG&E, and why is it a better alternative? Cohen: What our plan is going to do is pay creditors in full, in cash, by the first quarter of next year through existing rates, and it won’t require any restructuring of PG&E. It will leave PG&E as the regulated utility that it is now. There are going to be some differences, but it’s going to look similar to the settlement that we reached with Southern California Edison last year [Southern California Edison and the CPUC reached agreement in October under which the utility set up an account to raise more than $3 billion in bonds, bridge financing and cash to pay back its creditors. The deal also settled a lawsuit that Edison had brought against the commission.] The other aspect that is quite different than what PG&E has proposed is that PG&E has claims that it could bring against third parties that we propose should be put in what’s called a litigation trust. So basically there would be a trustee responsible for prosecuting that litigation for the benefit of ratepayers. It’s our view that those claims should be prosecuted for the benefits of the ratepayers so that if there is a recovery, it would reduce the pain that the ratepayers are going to have to absorb to solve this problem. DD: PG&E has raised questions about whether your plan is financially feasible. Are those questions valid? Cohen: What PG&E doesn’t appreciate is that they’re going to be in a position where they will have paid their obligations by the first quarter of next year. I haven’t seen the final numbers so I can’t tell you exactly, but they’ll have some long-term debt of the nature they had before they went into bankruptcy. It’s not like they won’t have any debt; they’ll have some debt, but all of the bankruptcy creditor claims will be paid in full. I predict we will see in the next three weeks or a month that Southern California Edison is going to be exactly in this position. They’ll be creditworthy again, and they’ll be able to pay their creditors. That will demonstrate that the kind of plan that we’re talking about is doable because Southern California Edison is pretty much in the same position as PG&E, except they didn’t file Chapter 11. DD: How do you expect the legal fight with PG&E to finally resolve itself? Cohen: I believe very strongly that at the end of the day what PG&E is trying to do won’t happen. That having been said, Judge Montali’s going to have to be persuaded of our alternative, and he hasn’t seen it yet. I’m optimistic that when he does see it, he will see that it’s a much cleaner and simpler way to go and that it doesn’t involve all this lengthy, complex litigation. What we’re proposing I think is a lot more straightforward. Copyright (c)2002 TDD, LLC. All rights reserved.

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