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Nearly one year into Pacific Gas & Electric Co.’s bankruptcy, the utility and California regulators are at an impasse. Now the battle reaches a turning point. Today a bankruptcy court will begin deliberations on PG&E’s revised plan to emerge from Chapter 11. The San Francisco utility wants to sidestep several state laws and create three new companies that operate mainly under federal, not state, control. On April 15, the California Public Utilities Commission submits a competing reorganization plan. The CPUC, which is fighting to maintain regulatory jurisdiction over the utility, proposes that PG&E use dividends and cash to pay back creditors. Only one reorganization plan will go before creditors for their approval, meaning the bankruptcy court rulings over the next few weeks will outline the path PG&E must travel as it struggles to regain strong financial footing. Both PG&E and the CPUC could face significant challenges pushing their plans forward. PG&E’s challenge lies in persuading U.S. Bankruptcy Judge Dennis Montali, of the Northern District of California, that its business simply can’t operate under existing state regulatory powers. Federal law grants bankruptcy court the authority to pre-empt state laws so debtors can repay creditors and emerge from Chapter 11. PG&E seeks to sidestep 37 CPUC regulations and state laws. Specifically, the utility wants exemption from provisions barring it from selling property and assets, issuing debt or securities and operating its affiliates. But traditionally, bankruptcy judges have been loath to strip power from state regulators, said Robert Keach, a Portland, Maine, bankruptcy attorney with Bernstein, Shur, Sawyer & Nelson. “I don’t think it’s a slam dunk,” he said of PG&E’s proposed restructuring plan. Indeed, Montali rejected PG&E’s first proposal, calling it a “full-scale attack” on state law. Meanwhile, the CPUC must submit a plan that satisfies creditors, which have already backed PG&E’s plan. The utility vows to repay all claims in full. The commission proposes the utility use the $6.1 billion it estimates PG&E will have in cash by January 2003 to repay certain creditors, while refinancing and reinstating balances owed to holders of long-term notes, and meeting other obligations not immediately due. The struggle between PG&E and California predates the bankruptcy filing. The utility and the governor’s office held talks on PG&E’s future last year at the height of California’s energy crisis, when blackouts struck and wholesale energy rates soared. PG&E said it went bankrupt in part because of a lack of progress during those negotiations. That turn of events upset California Gov. Gray Davis, who did manage to strike a deal with Southern California Edison Co., helping it stave off Chapter 11 even as it was battered by the energy crisis. From the outset PG&E’s case has been rancorous. The company, for example, called the CPUC’s plan “fatally flawed,” saying it overestimates the company’s current cash and future income and underestimates the utility’s debt by billions of dollars. Last week utility regulators urged Montali to reject PG&E’s reorganization plan. “PG&E’s agenda is to escape from commission and state regulation,” CPUC lawyers said in court filings. “From the outset of this case, it has been clear that PG&E seeks to employ this court as a superlegislature.” Still, Montali has ordered PG&E and the commission into mediation. Those talks have begun and could eventually influence a reorganization plan. California’s largest utility, PG&E filed for Chapter 11 protection in April 2001, posting $9 billion in losses. In the quarter ended Dec. 31, PG&E reported net income of $529 million, compared with a loss of $4.1 billion in the year-ago quarter. It recovery was aided by rate increases last year and a slackening in customer demand for energy. Copyright (c)2002 TDD, LLC. All rights reserved.

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