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Nearly four months after being ordered into judicially supervised settlement talks, state regulators and Pacific Gas & Electric Co. have resolved their differences and have agreed to a plan that would allow the troubled utility to emerge from bankruptcy in 2004. In a press conference Thursday afternoon at San Francisco’s federal bankruptcy court, U.S. Bankruptcy Judge Randall Newsome announced a proposed settlement agreement that would repay creditors in full while keeping PG&E intact and under state regulation. “Without this agreement, PG&E faced a precarious future of uncertainty due to litigation and appeals, with troubling consequences for our state,” said Judge Newsome. “Now, the utility can regain financial soundness with a new capital structure and a stable regulatory environment. “Today’s settlement agreement is a fair deal for both sides and of great benefit for all Californians.” The settlement agreement could mark the conclusion of a contentious chapter in what has been one of the most protracted and complex Chapter 11 cases in U.S. history. But the proposal, which appears to rely substantially on retail electricity rates to repay PG&E’s $13 billion in debt, must still undergo public hearings and be approved by the California Public Utilities Commission. In a sign of the challenges facing the settlement, CPUC Commissioner Loretta Lynch issued a statement saying she was concerned about the apparent increased costs to ratepayers in the proposed settlement. Gov. Gray Davis issued a statement saying the proposed settlement was too expensive for ratepayers and that PG&E’s shareholders must bear a greater share of the burden. “I will oppose any deal that does not provide greater rate reductions for PG&E’s ratepayers,” the governor said. The proposed agreement would create a new bankruptcy reorganization plan for PG&E. The new plan, to be filed in bankruptcy court early this week, would replace the two competing plans previously on the table: one advanced by PG&E, the other backed by both the CPUC and the official committee of unsecured creditors. While both previous plans promised to repay creditors in full, they each proposed drastically different means of doing so. PG&E’s plan called for splitting the utility into four companies and shifting three of the companies under federal, rather than state, control. In addition to borrowing money against various assets, PG&E would sell $700 million in stock. The CPUC’s plan called for maintaining PG&E as a single company, regulated by the state, with creditors getting repaid through a combination of debt and preferred stock offerings. Financial details of the new plan are not entirely clear. The agreement proposes maintaining retail electricity rates at higher than historic levels in order to repay the debt. But the agreement notes that rates would still drop by $350 million per year starting Jan. 1. PG&E shareholder dividends, which have been suspended since 2000, would be reinstated July 1, 2004. PG&E and parent company PG&E Corp. — which for the past two years have adamantly defended the right to divide the utility into four entities — gave short statements endorsing the settlement at the conference. “We have agreed to this because the proposed settlement represents the fastest path out of Chapter 11 and because it is fair to customers and to the company,” said Orrick, Herrington and Sutcliffe partner Joseph Malkin, representing PG&E Corp. The confirmation hearings phase of the case, which got under way in November, has been closer to a full-fledged courtroom battle than the typical, one-day confirmation exercises in which a plan’s components are checked off against the U.S. bankruptcy code. At the trial, PG&E and the CPUC supplemented their regular bankruptcy counsel with top-shelf litigators, including Cooley Godward’s Stephen Neal, as dozens of witnesses took the stand for live testimony and cross-examination. In March, U.S. Bankruptcy Judge Dennis Montali, who is overseeing the case, ordered the parties to undergo confidential settlement negotiations with Newsome, an Oakland federal bankruptcy judge. “The hearing on confirmation of the plans had already extended nearly four months, and it is no exaggeration to suggest they might have lasted at least another six months,” Newsome said. Paul Clanon, director of the CPUC’s energy division, said the time had come for the commission and the utility to stop the wrangling and for the two parties to resolve their differences. “Once we get PG&E out of bankruptcy through the proposed settlement … we can start looking forward again instead of backwards at the crisis,” Clanon said.

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