ML020650727

Renewed Motion to Dismiss Applications, or in the Alternative to Hold Applications in Abeyance, and Notice of Bankruptcy Court Ruling

ML020650727
Person / Time
Site:	Diablo Canyon
Issue date:	02/11/2002
From:	Chaset L State of CA, California Public Utilities Commission
To:	NRC/SECY/RAS
Byrdsong A
References
+adjud/rulemjr200506, 50-275-LT, 50-323-LT, RAS 4002
Download: ML020650727 (56)

Text

A5~ -'/OOcZ STATE OF CALIFORNIA GRAY DAVIS, Governor PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE SAN FRANCISCO, CA 94102-3298 February 11, 2002 DOCKETED USNRC March 4, 2002 (11:09AM)

Secretary of the Commission U.S. Nuclear Regulatory Commission OFFICE OF SECRETARY Washington, D.C. 20555-0001 RULEMAKINGS AND I Attention: Rulemakings and Adjudication Staff ADJUDICATIONS STAFF Re: In the Matter of Pacific Gas and Electric Company Application for License Transfers and Conforming Administrative License Amendments for Diablo Canyon Power Plant, Units 1 and 2, Docket Nos. 50-275, 50-323 To Whom It May Concern:

Enclosed for filing in the above-docketed case, please find an electronic version of a document entitled "RENEWED MOTION TO DISMISS APPLICATIONS, OR IN THE ALTERNATIVE TO HOLD APPLICATIONS IN ABEYANCE, AND NOTICE OF BANKRUPTCY COURT RULING" ("Renewed Motion").

Thank you for your cooperation in this matter.

Si ely, Laurence G. Chaset Staff Counsel Enclosure Thnpa-k = 5secY SE-c t- 0 P..

UNITED STATES OF AMERICA BEFORE THE NUCLEAR REGULATORY COMMISSION In the Matter of Pacific Gas and Electric Company Application for License Transfers and Docket Nos. 50-275, 50-323 Conforming Administrative License Amendments for Diablo Canyon Power Plant, Units 1 and 2 RENEWED MOTION TO DISMISS APPLICATIONS, OR IN THE ALTERNATIVE TO HOLD APPLICATIONS IN ABEYANCE, AND NOTICE OF BANKRUPTCY COURT RULING Pursuant to 10 CFR §§2.1306 and 2.1309, the Public Utilities Commission of the State of California ("CPUC"), hereby renews it previously filed motions for summary dismissal of the Application submitted in the captioned dockets, or, in the alternative, to hold the Application in abeyance. In addition, the CPUC provides notice and submits a copy of the Bankruptcy Court's "Memorandum Decision Regarding Preemption and Sovereign Immunity," issued February 7, 2002 ("the Preemption Decision").1 As the CPUC previously pointed out on page 6 of its Petition that was filed in this matter on February 6, "The Bankruptcy Court's ruling on certain facial preemption issues

... will determine whether PG&E's plan is lawful and may move forward at all." In the 1Copies of the Preemption Decision are attached to this Renewed Motion as Exhibit A. Exhibit A is not attached to the service copies. The Preemption Decision is also available on the Bankruptcy Court's internet site at http://www.canb.uscourts.gov/.

I

Preemption Decision, the Bankruptcy Court has determined that PG&E's Plan is not lawful and may not move forward as it is currently designed. Specifically, the Bankruptcy Court held that:

"... there is no express preemption of nonbankruptcy law that permits a wholesale unconditional preemption of numerous state laws.... Thus if [PG&E and its corporate Parent]

adhere to their contention that express preemption is available to them, the Disclosure Statement must be disapproved since the Plan could not be confirmed in the face of the vigorous objections made by the State and the Commission."

Preemption Decision, at 3.

Although the Bankruptcy Court did give PG&E the opportunity to amend its Plan and Disclosure Statement to attempt to "establish with particularity the requisite elements of implied preemption" (Id.), the Bankruptcy Court's Preemption Decision is fatal to PG&E's Plan as currently proposed, and as proposed to be implemented in the above captioned proceedings. For instance, it is fatal to PG&E's request for transfer of those portions of its beneficial interest in the CPUC-jurisdictional Nuclear Decommissioning Trusts that are associated with the Diablo Canyon Power Plant ("DCPP"), which relies wholly on the requirement that the Bankruptcy Court either "compel" the CPUC to approve such transfer or to "deem" such approval to have been granted by the CPUC.

See the CPUC's Petition, at 14.

The Preemption Decision "rejects outright Proponents' across-the-board, take-no prisoners preemption strategy in the Plan and Disclosure Statement." Preemption Decision, at 46. PG&E's Application in this matter is mooted by the Preemption 2

Decision, since PG&E's current Plan, from which its Application flows, has been held to be unconfirmable.

In terms of process, the Bankruptcy Court has ordered PG&E, by February 21, 2002, to:

1. File and serve a response to the term sheet for the Commission's alternative plan, which will be filed on February 13, 2002.

2. File and serve a statement as to whether it intends to seek interlocutory review of the Court's order, or whether it seeks to amend its plan to attempt to meet the requirements for implied preemption. In that regard, the Court ordered that should PG&E seek to further amend its Disclosure Statement, it must do so by "showing what ultimate facts will be proven to lead the court to find that the application of [certain specified provisions of the California Public Utilities Code and Commission decisions] to the facts of PG&E's proposed reorganization are economic in nature rather than directed at protecting public health and safety or other noneconomic concerns, and that those particular laws stand as an obstacle to the accomplishment and execution of the purposes and objectives of Congress and the Bankruptcy Code." Preemption Decision, at 40-41.

3. Submit a form of order denying approval of the Disclosure Statement "for the reasons stated" in this Memorandum Decision if that is its desire. Id., at 48-49.

4. File and serve any request for interlocutory certification of the order denying approval of the Disclosure Statement that it wishes to have this court enter. Id., at 49.

Because the Bankruptcy Court has "reject[ed] outright" the preemption strategy upon which the Application herein depends, the Nuclear Regulatory Commission 3

("NRC") should dismiss the Application. At a minimum, the NRC should hold any proceedings in this matter in abeyance until there is a viable Plan pending before the Bankruptcy Court.

February 11, 2002 Re ectfully submitted, Athu'I s Gary M. Cohen, General Counsel Arocles Aguilar, Assistant General Counsel Laurence G. Chaset, Staff Counsel Gregory Heiden, Legal Counsel Public Utilities Commission of the State of California 505 Van Ness Avenue San Francisco, California 94102 Attorneys for the Public Utilities Commission of the State of California 4

EXHIBIT A 1 Original Filed February 7, 2002 2

3 4

5 6

UNITED STATES BANKRUPTCY COURT 7

NORTHERN DISTRICT OF CALIFORNIA 8

In re ) Bankruptcy Case 9 ) No. 01-30923DM PACIFIC GAS & ELECTRIC COMPANY, 10 ) Chapter 11 Debtor.

11 _

12 MEMORANDUM DECISION REGARDING 13 PREEMPTION AND SOVEREIGN IMMUNITY 14 I. Introduction 15 On September 20, 2001, Debtor, Pacific Gas and Electric 16 Company ("PG&E"), and its corporate parent, PG&E Corporation 17

("Corporation", and together with PG&E, "Proponents") filed their 18 first plan of reorganization for PG&E and a disclosure statement.

19 On December 4, 2001, this court conducted a status conference 20 regarding objections to the September 20th disclosure statement, 21 and by Order Rescheduling Hearings On Approval Of Disclosure 22 Statement ("Rescheduling Order") filed December 5, 2001, the court 23 fixed December 19, 2001, as the date for Proponents to file a 24 revised plan of reorganization and a revised disclosure statement.

25 On December 19, 2001, Proponents filed their First Amended Plan of 26 Reorganization Under Chapter 11 of the Bankruptcy Code For Pacific 27 Gas and Electric Company (the "Plan") and their First Amended 28

-I-

1 Disclosure Statement For First Amended Plan of Reorganization 2 Under Chapter 11 of the Bankruptcy Code For Pacific Gas and 3 Electric Company Proposed By Pacific Gas and Electric Company and 4 PG&E Corporation (the "Disclosure Statement").

5 The Rescheduling Order directed Proponents to include in the 6 Disclosure Statement a description specifically of 7 ... (1) the laws and regulations [Proponents] seek[] to preempt through confirmation of [Proponents' Plan]; (2) the 8 governmental units affected by any such preemption; and (3) how the various transactions contemplated by the [Plan] will 9 affect certain executory contracts and [PG&E's] obligations under those contracts.

10 That order set forth a schedule for consideration of 11 various objections to the adequacy of the Disclosure Statement, 12 including any objections to be filed by the California Public 13 Utilities Commission ("Commission" or "CPUC"), the Attorney 14 General of the State of California ("State"), and any other 15 governmental unit contending that the Plan is facially invalid 16 based upon sovereign immunity or impermissible federal preemption.

17 Thereafter the State, the Commission, and various other 18 parties filed their objections, memoranda and supporting papers 19 and Proponents and the Official Committee of Unsecured Creditors 20

("Committee") filed their memoranda and supporting papers in 21 defense of the Plan and Disclosure Statement. The court conducted 22 a hearing on the sovereign immunity and preemption challenges on 23 January 25, 2002.

24 During oral argument counsel for Corporation stated "Your 25 honor makes the law." This court doubts that with the stroke of a 26 pen upon an order confirming the Plan it could make federal law 27 and sweep aside a substantial body of nonbankruptcy law. Rather, 28 1 the court believes its job is to interpret and apply the law, 2 searching where in the Bankruptcy Code nonbankruptcy law is 3 specifically preempted and where, under controlling case law, the 4 purposes of federal bankruptcy law are frustrated such that 5 federal law must prevail over specific conflicting state law.

6 For the reasons explained below, the court concludes that 7 there is no express preemption of nonbankruptcy law that permits a 8 wholesale unconditional preemption of numerous state laws, some of 9 which are identified in the Disclosure Statement and some of which 10 are obscured by the phrase "including but not limited to." Thus, 11 if Proponents adhere to their contention that express preemption 12 is available to them, the Disclosure Statement must be disapproved 13 since the Plan could not be confirmed in the face of the vigorous 14 objections made by the State and the Commission.

15 Nonetheless, the court believes that the Plan could be 16 confirmed if Proponents are able to establish with particularity 17 the requisite elements of implied preemption. If the Disclosure 18 Statement is amended consistent with this Memorandum Decision, the 19 court will approve it and let the Proponents test preemption at 20 confirmation.

21 The court also believes the Plan as drafted offends sovereign 22 immunity because it seeks affirmative relief against the State and 23 the Commission. If the Plan and Disclosure Statement are amended 24 as Corporation's counsel intimated they would be, then the Plan 25 will overcome the sovereign immunity defense. If, however, 26 Proponents leave unchanged the provisions of the Plan that seek 27 injunctive and declaratory relief against the Commission and the 28 State, they will have to prove that there has been a waiver of 1 sovereign immunity. In that case the Disclosure Statement must be 2 amended to describe why Proponents believe sovereign immunity has 3 been waived.

4 II. Preliminary Observations 5 A. In theory, if no one objected to the Plan and Disclosure 6 Statement, Proponents are probably correct that the Plan could be 7 confirmed. The court would not independently block an 8 unchallenged march to confirmation. But Proponents' request that 9 the court not "kill" the Plan now is not persuasive given the 10 serious clash between state and federal law presented by the Plan 11 and the Commission's and the State's strenuous opposition to it.

12 From the commencement of this case the antagonism between PG&E and 13 the Commission has been palpable. The sweep of preemption in the 14 Plan and Disclosure Statement will not go unchallenged. The 15 situation here is not unlike what the court was presented with in 16 the celebrated public utility bankruptcy of Public Service Company 17 of New Hampshire. There the court chose to decide the preemption 18 issue in an adversary proceeding, before confirmation. See Public 19 Service of New Hampshire v. State of New Hampshire (In re Public 20 Service Company of New Hampshire), 99 B.R. 506, 509 (Bankr. N.H.

21 1989) ("Public Service") ("In the present case there is no 22 uncertainty or contingency about the dispute arising in concrete 23 form between the [debtor] and the [state].") The magnitude and 24 complexity of this case weigh heavily in favor of addressing the 25 central issues as early as possible. Once Proponents file a 26 revised plan and set forth in a revised disclosure statement how 27 the various state laws and regulations frustrate Congressional 28 purposes and objectives, the stage will be set for Proponents to 1 attempt to establish that the Plan should preempt conflicting 2 state law at confirmation.

3 B. As the development of the reorganization plan for PG&E 4 has progressed throughout this case, Proponents have submitted 5 mark-ups of the Plan and the Disclosure Statement as recently as 6 February 4, 2002. Thus, for reasons wholly apart from the 7 preemption and sovereign immunity issues, the plan of 8 reorganization and its accompanying disclosure statement are very 9 much works in progress. For simplicity, however, the court will 10 refer to the Plan and the Disclosure Statement (filed December 19, 11 2001) for purposes of the analysis that follows. The February 4th 12 submission has not been reviewed.

13 Also for convenience in this Memorandum Decision, the court's 14 reference to nonbankruptcy "law(s)" will include statutes, 15 regulations, Commission decisions, Commission rules, Commission 16 resolutions and all other state law authorities that Proponents 17 seek to preempt through confirmation of the Plan.

18 C. The following discussion deals with arguments made by the 19 State and the Commission. To the extent other objectors joined 20 the State and the Commission, their positions are addressed below.

21 The court will only make the following brief comments about other 22 objections.

23 The California Hydropower Reform Coalition argues, in part, 24 that the rate making authority of the Commission which is not 25 challenged under the Plan will be implicated because its 26 traditional jurisdiction over some of PG&E's properties will 27 cease. It also contends that the Proponents cannot be selective, 28 preempting some state laws but not other state and federal laws.

1 The court is not persuaded by those arguments. Similarly, the 2 City and County of San Francisco maintains that the deference 3 bankruptcy law pays to state law for the definition of property 4 rights somehow supports its opposition to Proponents' attempted 5 preemption of state laws in the Plan. The court also rejects 6 those arguments. Any other remaining objections by other parties 7 are largely rendered moot in view of the obvious fact that, unless 8 this court's decision is reversed on appeal, the Plan and 9 Disclosure Statement will have to be modified consistent with this 10 Memorandum Decision.

11 III. Provisions of Plan Calling For Preemption 12 Proponents' full-scale attack on any state law that 13 interferes with the Plan is anything but subtle:

14 Section 1123(a) of the Bankruptcy Code preempts any otherwise applicable non-bankruptcy law that may be contrary to its 15 provisions. Accordingly, a plan may contain certain provisions that would not normally be permitted under 16 non-bankruptcy law. For example, section 1123(a) (5) of the Bankruptcy Code authorizes, among other things, the sale or 17 transfer of assets by [PG&E] without the consent of the State or the [Commission].

18 Disclosure Statement, 4:18-23.

19 Then they continue:

20 The preemptive effect of the Confirmation Order extends to 21 all statutes, rules, orders and decisions of the [Commission]

otherwise applicable to the Restructuring Transactions and 22 the implementation of the Plan. In the Proponents' view, the Confirmation Order supersedes any statute, rule, order or 23 decision that the [Commission] might interpret to otherwise apply to the Restructuring Transactions and the 24 implementation of the Plan whether specified here or not.

The statutes, rules, orders or decisions thus preempted 25 include, but are not limited to, the following....

26 Disclosure Statement, 129:15-20 (emphasis added).

27 Proponents argue that confirmation of the Plan will have the 28 following results:

1 Accordingly, the Proponents contend that the Confirmation Order approving the Plan and authorizing the transactions 2 pursuant to the Plan will preempt 'otherwise applicable nonbankruptcy law' in the following areas: (1) any approval 3 or authorization of the [Commission] or compliance with the California Pubic Utilities Code or [Commission] rules, 4 regulations or decisions otherwise required to transfer public utility property (including authorizations to 5 construct facilities), issue securities and implement the Plan; and (2) the exercise of discretion by any other state 6 or local agency or subdivision to deny the transfer or assignment of any of [PG&E's] property, including existing 7 permits or licenses, or the issuance of identical permits and licenses on the same terms and conditions as the [PG&E's]

8 existing permits and licenses where both the Reorganized Debtor and one or more of ETrans, GTrans and Gen require such 9 permit or license for their post Effective Date operations.

Such preemption pursuant to section 1123(a) of the Bankruptcy 10 Code shall occur at the time the Plan is implemented.'

11 Disclosure Statement, 10:9-20.

12 Later in the Disclosure Statement Proponents set forth a 13 series of California Public Utility Code Sections, Commission 14 Decisions, Commission Resolutions or Commission Rules that they 15 contend will be superseded by confirmation of the Plan. 2 While 16 State and Commission challenge any preemptive effect of 17 confirmation of the Plan, the particular sections of the Public 18 19 ' Reorganized Debtor is PG&E post-confirmation; ETrans, GTrans, and Gen are limited liability companies to be formed in 20 connection with confirmation of the Plan.

21 2 Although the Rescheduling Order directed Proponents to describe preempted laws and regulations and the affected 22 governmental units specifically, Proponents simply stated: "See Exhibit H to this Disclosure Statement for a list of some of the 23 state agencies and political subdivisions that may be impacted by the Plan." Disclosure Statement, 127:18-19 (emphasis added).

24 "Exhibit I to this Disclosure Statement lists some of the laws, regulations and rules of state agencies and subdivisions that are 25 subject to preemption, along with the relevant agencies."

Disclosure Statement, 132:15-17 (emphasis added). In view of the 26 court's decision that Proponents' theory of express preemption preemption applied specifically as 27 must to each offending and be rejected, law, implied the objections by various parties that Proponents did not comply with the precise terms of the 28 Rescheduling Order, although meritorious, will be treated as moot.

I Utilities Code, Commission rule and Commission decision that the 2 Commission seems most concerned about are the following (with the 3 brief explanation Proponents make in the Disclosure Statement 4 concerning each particular code section, decision and rule):

5 Public Utilities Code § 377: This section, enacted in January 2001, purports to prohibit the transfer of generating assets 6 to Gen as part of the Plan, and to otherwise require

[Commission] authorization of the transfer of those assets 7 under Public Utilities Code § 851.

8 Public Utilities Code § 451: The [Commission] could interpret this section to conflict with the Bankruptcy Court's 9 establishment of the conditions under which the Reorganized Debtor may resume procurement of the net open position or the 10 transfer of any of [PG&E's] assets or businesses to any of ETrans, GTrans or Gen. To that extent, § 451 would be 11 preempted.

12 Public Utilities Code § 453: The [Commission] could interpret

§ 453 to preclude the Reorganized Debtor entering into the 13 power sales agreement with Gen, the transportation and storage services agreement with GTrans, and some or all of 14 the transitional service agreements with ETrans, GTrans and Gen. To that extent, § 453 would be preempted.

15 Public Utilities Code §§ 816-830: These sections govern the 16 issuance by a public utility of debt or equity securities, among other things requiring the approval of the [Commission]

17 prior to the issuance. These sections are preempted because the Confirmation Order will authorize the issuance of 18 securities and the financings that are required for the Restructuring Transactions and the implementation of the 19 Plan.

20 Public Utilities Code § 851: This section would require approval of the [Commission] before [PG&E] could 'sell, 21 lease, assign, mortgage, or otherwise dispose of or encumber' its property, including certificates of public convenience 22 and necessity, pursuant to the Plan. The Bankruptcy Court's Confirmation Order would preempt the need for this 23 authorization.

24 [Commission] Resolution L-244: By this Resolution, the

[Commission] purported to prohibit [PG&E] from moving its gas 25 transmission assets to FERC jurisdiction under the NGA without express authorization by the [Commission]. The 26 Bankruptcy Court's Confirmation Order would preempt the need for this authorization, even if it were an otherwise lawful 27 requirement. (Footnote omitted.)

28 [Commission] Gain on Sale 'Rules': Over the years, the 1 [Commission] has issued a number of often-inconsistent decisions assigning or allocating the gain on the sale of 2 public utility property to or between shareholders and ratepayers. To the extent that the [Commission] attempts to 3 apply its gain on sale 'rules' in a manner that results in the application of proceeds from property sold pursuant to 4 the Plan other than as provided for in the Plan or that imputes a 'gain on sale' from the transfer of assets or the 5 other Restructuring Transactions or implementation of the Plan, such action would be preempted. (Footnote omitted.)

6 D.01-12-017 (December 11, 2001), Ordering Paragraph 5: In 7 this Decision, issued December 11, 2001, the [Commission]

attempts to exercise control over [PG&E's] property by 8 purporting to 'reserve[] the right to claim a return of the full value of the asset to [PG&E's] ratepayers' should the 9 Bankruptcy Court authorize the transfer of [PG&E's]

transmission assets pursuant to the Plan. Inasmuch as this 10 is a direct attempt to interfere with the Plan, this Decision is preempted.

11 Disclosure Statement, 129:21-131:15.

12 A core feature of the Plan is referred to by the parties as 13 "disaggregation," meaning PG&E's creation of three new limited 14 liability companies and the separation of all of PG&E's operations 15 primarily into four lines of business based upon PG&E's historical 16 functions: retail gas and electric distribution, to be carried out 17 by Reorganized Debtor; electric transmission, to be carried out by 18 ETrans, LLC ("ETrans"); interstate gas transmission, to be carried 19 out by GTrans, LLC ("GTrans"); and electric generation, to be 20 carried out by Electric Generation, LLC ("Gen", and collectively 21 with ETrans and GTrans, the "LLC's"). Disclosure Statement 6:16 22 20.

23 For the disaggregation of the electrical transmission, the 24 Plan contemplates that ETrans and the Proponents:

25 shall seek an affirmative ruling of the bankruptcy court, 26 which may be the Confirmation Order, that, pursuant to section 1123 of the Bankruptcy Code, the approval of any 27 California state and local Governmental Entity, including but not limited to, the [Commission], shall not be required in 28 order to, among other things, transfer or operate the ETrans 1 Assets, for the transfer and use of various permits, licenses, leases, and other entitlements in connection with 2 the transfer and operation of the ETrans Assets, to transfer operational control of its transmission facilities . . to 3 issue securities, to assume the ETrans liabilities or to otherwise effectuate the Restructuring Transactions.

4 Plan, 60:24-61:4.3 5

As shown above, Proponents want the Plan to preempt the 6

Commission's "gain on sale" rules. As a condition precedent to 7

confirmation of the Plan, the Plan requires this court to enter an 8

order prohibiting officials of the Commission and officials of the 9

State ". from taking any action related to the allocation or 10 other treatment of 'gain on sale' related to assets transferred or 11 disposed of under the Plan that would adversely impact the 12 4 In their response to the preemption and Reorganized Debtor."

13 sovereign immunity objections, Proponents concede that the relief 14 sought in connection with the "gain on sale" rules are in the 15 nature of an injunction. At the same time, Proponents have 16 indicated that even that injunctive provision would be amended, 17 and thus be limited to seeking declaratory relief only. For 18 purposes of the present analysis, however, the court will assume 19 that Proponents desire confirmation to constitute an injunction 20 21 22 23 3 Comparable language appears for the transactions involving Reorganized Debtor (Plan, 72:10-18), Gen (Plan, 66:13-22) and 24 GTrans (Plan, 63:11-18).

25 4 The Disclosure Statement is conspicuously lacking in any detailed information that describes the operation of those rules 26 and how they would affect the post-confirmation activities of the Reorganized Debtor, the LLC's, or any other entity. More 27 information is needed regardless of the ultimate outcome of the sovereign immunity issue if Proponents wish to attempt to preempt 28 those rules.

I against enforcement of those rules.'

2 IV. Issues 3 In order to decide whether to approve or disapprove the 4 Disclosure Statement, the court must answer the following 5 questions.

6 A. Does the Bankruptcy Code expressly or impliedly preempt 7 California laws so that Proponents may ignore them and seek to 8 obtain confirmation of the Plan?

9 B. Does sovereign immunity protect the Commission and the 10 State from the declaratory and injunctive relief requested by 11 Proponents in the Plan? 6 12 V. Discussion 13 14 5 The specific provisions of the Plan which would carry out the preemptive effect of confirmation appear to be the following:

15 Article VII, Implementation Of The Plan, including § 7.1(k) (ii),

(as to ETrans), referring to Bankruptcy Code section 1123; 16 § 7.2(i)(ii) (as to ETrans), referring to Bankruptcy Code section 1123; § 7.3(j)(ii) (as to Gen), referring to Bankruptcy Code 17 sections 1123 and 1142(b); § 7.5(n) (iii) (as to Reorganized Debtor), referring to Bankruptcy Code section 1123; and § 7.5(e),

18 prohibiting assumption of the net open position. In Article VIII, Confirmation and Effectiveness of the Plan, the following 19 subparagraphs of § 8.1, Conditions Precedent to Confirmation are noted: (b) declaring that Proponents and their respective 20 affiliates are not liable for Department of Water Resources contracts; (c) prohibiting assignment of the Department of Water 21 Resources contracts; (d) prohibiting assumption of the net open position; (g) prohibiting officials of the Commission and the 22 State from enforcing the "gain on sale" rules; (h) declaring Commission's affiliate transaction rules not applicable; and 23 (i) calling for approval of the Restructuring Transactions as preempted by Bankruptcy Code section 1123.

24 6 The court conducted an emergency telephone conference with 25 counsel for Proponents, the Commission, the State and others two days prior to the oral argument in this matter. Pursuant to the 26 instructions of the court during that conference, any issue about whether sovereign immunity had been waived was deferred and the 27 question will not be addressed in this Memorandum Decision, notwithstanding the fact that Proponents argued the doctrine of 28 waiver extensively in their written submissions.

1 A. Preemption.

2 1. Overview 3 In Baker & Drake, Inc. v. Public Service Commission of Nevada 4 (In re Baker & Drake, Inc.), 35 F.3d 1348 (9th Cir. 1994) ("Baker 5 & Drake"), the Ninth Circuit Court of Appeals quoted Supreme Court 6 authority on preemption:

7 "It is a familiar and well-established principle that the Supremacy Clause, U.S. Const., Art. VI, cl. 2, invalidates 8 state laws that 'interfere with or are contrary to, federal law.'"

9 Baker & Drake, 35 F.3d at 1352, cquoting Hillsborough County v.

10 Automated Medical Labs, Inc., 471 U.S. 707, 712 (1985) (ciuotinq 11 Gibbons v. Ogden, 9 Wheat. 1, 211, 6 L.Ed. 23 (1824)).

12 "In considering a preemption claim, we look first to the 13 intent and sweep of the federal statute." Baker & Drake, 35 F.3d 14 at 1352. More elaborately, the Supreme Court has stated that:

15

[t]he purpose of Congress is the ultimate touchstone" in 16 every pre-emption case. As a result, any understanding of the scope of a pre-emption statute must rest primarily on "a 17 fair understanding of congressional purpose." Congress' intent, of course, primarily is discerned from the language 18 of the pre-emption statute and the "statutory framework" surrounding it. Also relevant, however, is the "structure 19 and purpose of the statute as a whole," as revealed not only in the text, but through the reviewing court's reasoned 20 understanding of the way in which Congress intended the statute and its surrounding regulatory scheme to affect 21 business, consumers, and the law.

22 Medtronic, Inc. v. Lohr, 518 U.S. 470, 485-86 (1996) (emphasis in 23 original, citations omitted).

24 As Baker & Drake observed, there are several types of 25 preemption:

26 The statute's preemptive intent may be either express or implied:

27 Under the Supremacy Clause, federal law may supersede 28 state law in several different ways. First, when acting 1 within Constitutional limits, Congress is empowered to pre-empt state law by so stating in express terms.

2 Absent express pre-emptive language, Congress' intent to pre-empt all state law in a particular area may be 3 inferred where the scheme of federal regulation is sufficiently comprehensive to make reasonable the 4 inference that Congress "left no room" for supplementary state regulation. Pre-emption of a whole field also 5 will be inferred where the field is one in which "the federal interest is so dominant that it will be assumed 6 to preclude enforcement of state laws on the same subject."

7 Even where Congress has not completely displaced 8 state regulation in a specific area, state law is nullified to the extent it actually conflicts with 9 federal law. Such a conflict arises when "compliance with both federal and state regulations is a physical 10 impossibility," or when state law "stands as an obstacle to the accomplishment and execution of the full purposes 11 and objectives of Congress."

12 Baker & Drake, 35 F.3d at 1352-53 (emphasis added), quoting 13 Hillsborough County, 471 U.S. at 713 (citations omitted).

14 only the two emphasized types of preemption above are at 15 issue: express preemption and the last category of implied 16 preemption. Proponents have not urged the court to consider the 17 "Congress left no room" and "federal law is so dominant" types of 18 preemption.

19 Express preemption has been defined as "where Congress 20 explicitly defines the extent to which its enactments preempt 21 state law." Williamson v. General Dynamics Corp., 208 F.3d 1144, 22 1149 (9th Cir. 2000), cert. denied, 531 U.S. 929. See also 23 English v. General Elec. Co., 496 U.S. 72, 78 (1990) ("Congress 24 can define explicitly the extent to which its enactments pre-empt 25 state law").

26 Implied preemption was addressed by Baker & Drake, which 27 examined whether the state law at issue was an obstacle to the 28 accomplishment and execution of the full purposes of the 1 bankruptcy laws. Baker & Drake reviewed two Supreme Court cases 2 that are critical to this court's analysis of the present 3 controversy: Perez v. Campbell, 402 U.S. 637 (1971), and Midlantic 4 National Bank v. New Jersey Depart. of Environmental Protection, 5 474 U.S. 494 (1986). Perez concluded that the Bankruptcy Code 6 preempted state law that interfered with a discharge in bankruptcy 7 and Midlantic acknowledged that the Bankruptcy Code does not 8 preempt state environmental laws or regulations reasonably 9 designed to protect the public health or safety from imminent and 10 identifiable harm. Referring to both decisions, the Ninth Circuit 11 set forth a template which this court finds not only helpful, but 12 controlling in resolving this dispute:

13 As we view these cases, they suggest that federal bankruptcy preemption is more likely (1) where a state 14 statute facially or purposefully carves an exception out of the Bankruptcy Code, or (2) where a state statute is 15 concerned with economic regulation rather than with protecting the public health and safety.

16 Baker & Drake, 35 F.3d at 1353. See also Midlantic, 474 U.S. at 17 506 n. 9 and accompanying text.

18 One of the cases Proponents feature prominently in their 19 argument is Public Service Companv of New Hampshire v. State of 20 New Hampshire (In re Public Service Company of New Hampshire), 108 21 B.R. 854 (1989) ("PSNH"). There, the court -- years before Baker 22

& Drake -- stated the same principle:

23 However, federal preemption is more likely when the state 24 "police power" involved is economic regulation rather than health or safety."

25 PSNH 108 B.R. at 869. The court then cited one of Proponents' 26 counsel in a discussion about preemption under the Commerce Clause 27 of the Constitution:

28 1 State regulations seemingly aimed at furthering public health or safety, or at restraining fraudulent or otherwise unfair 2 trade practices, are less likely to be perceived as "undue burdens on interstate commerce" than are state regulations 3 evidently seeking to maximize the profits of local businesses. Indeed, where the Supreme Court has held that 4 the national interest in the free flow of commerce supersedes a state interest in public safety, it has generally seemed 5 that the challenged statute contributed only marginally if at all to the public safety.

6 Id., quoting L. Tribe, American Constitutional Law, p. 437 (2d ed.

7 1988).

8 It is important to point out that this court does not read 9

Baker & Drake as holding that there can be no preemption of state 10 law except where express preemption appears in the statute. If 11 that were the holding, this matter would be over and the 12 Disclosure Statement would be disapproved. Rather, the court 13 believes there are clear signals in the decision that suggest that 14 there can be implied preemption. First, the above-quoted 15 reference to "economic regulation rather than . . . protecting the 16 public health and safety" suggests a balancing test. Next, the 17 court stressed that while there can be a reorganization, it just 18 may be difficult:

19 Congress in enacting the Bankruptcy Code was not to mandate 20 that every company be reorganized at all costs, but rather to establish a preference for reorganizations, where they are 21 legally feasible and economically practical.

22 Baker & Drake, 35 F.3d at 1354 (italics in original; emphasis 23 added).

24 Further, noting that a Nevada statute at issue was 25 promulgated as part of a safety measure, the court pointed out 26 that if compliance with that statute were to render the debtor 27 financially unable to reorganize, neither it nor the state would 28 be violating any provision of the Bankruptcy Code. But in a 1 footnote the court pointed out that the debtor had not shown that 2 complying with the statute would make a successful reorganization 3 impossible in its case. Id., n. 5. The powerful inference, 4 therefore, is that under appropriate circumstances the state 5 statute could be preempted with a proper showing of what is 6 necessary to make the reorganization possible.

7 One more general principle of preemption is particularly 8 apropos: deference to areas of traditional state regulation.

9 In all preemption cases, and particularly in those in which Congress has "legislated . . . in a field which the States 10 have traditionally occupied," . . . we "start with the assumption that the historic police powers of the States were 11 not to be superseded by the [f]ederal [alct unless that was the clear and manifest purpose of Congress."

12 Medtronic, 518 U.S. at 484. See also CSX Transp., Inc. v.

13 Easterwood, 507 U.S. 658, 664 (1993) ("[A] court interpreting a 14 federal statute pertaining to a subject traditionally governed by 15 state law will be reluctant to find pre-emption.").

16 Public utility regulation and environmental regulation are 17 both areas where this deference applies. See Pacific Gas and 18 Elec. Co. v. State Enerqy Resources Conservation & Development 19 Com'n, 461 U.S. 190, 206 (1983) ("Congress legislated here in a 20 field which the States have traditionally occupied . . . so we 21 start with the assumption that the historic police powers of the 22 States were not to be superseded by the [flederal [a]ct unless 23 that was the clear and manifest purpose of Congress"); Fireman's 24 Fund Ins. Co. v. City of Lodi, 271 F.3d 911, 932-33 (9th Cir.

25 2002) (as amended) ("we are 'highly deferential' to local 26 legislation in areas such as environmental regulation, which 27

'traditionally has been a matter of state authority'") (citation 28 1 omitted).

2 With this overview in mind, the court turns to Section 3 1123(a) (5).'

4 2. Preemption under Section 1123(a)(5) generally 5 a. Lanquaqe of the Statute 6 Section 1123(a) (5) provides, in relevant part:

7 § 1123. Contents of Plan 8 (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall 9

(5) provide adequate means for the plan's 10 implementation, such as 11 (B) transfer of all or any part of the property of the estate to one or more 12 entities ...

13 (D) sale of all or any part of the property of the estate ......

14 11 U.S.C. § 1123(a) (5) (B) and (D).

15 Starting with the words of the statute, paragraph (5) of 16 Section 1123(a) says only that the plan shall "provide adequate 17 means for the plan's implementation, such as [various 18 alternatives]." 11 U.S.C. § 1123(a) (5) (emphasis added).

19 Paragraph (5) can be read simply as a directive to the plan 20 proponent about what must go into the plan. It does not have to 21 be read as an "empowering" statute that, under Proponents' 22 construction, would permit them to do whatever they wanted - "such 23 as" but not limited to the statutory examples - subject only to 24 25 26 27 7 Unless otherwise indicated, all Section and Rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.

I the requirements of Section 1129.8 2 This construction - interpreting Paragraph (5) as directive 3 rather than empowering - does not read the "notwithstanding" 4 clause out of the statute. As several parties suggest, that 5 clause still serves a useful purpose by preempting any state law 6 that, for example, would prohibit a party from even submitting a 7 plan to the bankruptcy court without first obtaining approval from 8 a debtor's shareholders. The court can imagine other examples, 9 such as labor laws that might obligate a plan proponent to 10 negotiate in good faith with unions before submitting a plan or 11 corporate laws that would require "a resolution of the board of 12 directors" before a plan could be proposed. 124 Cong. Rec. H11103 13 (Sept. 28, 1978); S17419 (Oct. 6, 1978) (statement of Senator 14 DeConcini).9 15 16 8 Moreover, there is some ambiguity in Congress' use of the words "adequate means" for the plan's implementation. If 17 Congress had meant "any means, provided they are adequate," it could have said so. See Cipollone v. Liggett Group, Inc., 505 18 U.S. 504, 529 and n. 27 (1992) (rejecting "theoretical elegance" of interpreting statute at highest or lowest level of generality 19 in favor of middle ground "fair understanding of congressional purpose").

20 9 The court is not at all troubled that the above 21 construction involves a relatively minor role for the "notwithstanding" clause as applied to Paragraph (5). See 22 Medtronic, 518 U.S. at 484 (even where express preemption is clear, "we must nonetheless 'identify the domain expressly pre 23 empted'"). That clause does not appear to apply at all to some Paragraphs of Section 1123(a). For example, it is doubtful 24 Congress saw any need to preempt nonbankruptcy laws that might contradict Paragraph (2). That paragraph only requires a plan to 25 "specify any class of claims or interests that is not impaired under the plan." What nonbankruptcy law would contradict that 26 provision? See also 11 U.S.C. § 1123(a)(1) (plan shall designate classes) and (a) (3) (plan shall specify treatment of impaired 27 classes). Compare 1123(a) (6) (corporate debtors must include in their charter a ban on issuance of nonvoting securities, 28 notwithstanding any contrary nonbankruptcy law) and 1123 (a) (7) 1 Not only is Proponents' reading unnecessary, it leads to 2 absurd results. At the hearing on January 25, 2002, the court 3 questioned whether under Proponents' reading of Section 1123(a) (5) 4 there would be any limit to what a debtor could do. The court 5 asked counsel about several hypothetical situations, following the 6 Supreme Court's directive to discern "the way in which Congress 7 intended the statute and its surrounding regulatory scheme to 8 affect business, consumers, and the law." Medtronic, 518 U.S. at 9 486. The court questioned whether a plan could provide for a 10 debtor to sell liquor to minors (notwithstanding state laws to the 11 contrary), or trade with foreign enemies (notwithstanding federal 12 statutes to the contrary), or dump toxic wastes (notwithstanding 13 environmental laws and Supreme Court precedent), or merge with 14 competitors to create a monopoly or gain some other competitive 15 advantage (in violation of state or federal antitrust laws).

10 16 There were no satisfactory answers.

17 Taken in context, Section 1123 looks more like a component of 18 Congress' roadmap that heads towards confirmation. First, 19 20 (governing selection of officer, director, or trustee under the plan, notwithstanding any contrary nonbankruptcy law).

21 10 The most offensive plans might be reined in by something 22 like Midlantic's limitation on abandonment of toxic wastes. See Midlantic, 474 U.S. at 494. That decision, however, arose under 23 Section 554, which does not have the "notwithstanding" clause.

See 11 U.S.C. § 554. Moreover, Midlantic was strictly limited to 24 state laws or regulations reasonably designed to protect the public health or safety from "imminent" and "identifiable" harm.

25 See Midlantic, 474 U.S. at 506 n. 9 and accompanying text. The potential harm from antitrust violations, for example, might not 26 be imminent and clearly identifiable, but the court does not believe Congress intended to eviscerate all antitrust laws for 27 debtors in bankruptcy (especially solvent debtors). In other words, Midlantic does not cure the problems with Proponents' 28 reading of the statute.

1 Subchapter II of Chapter 11, entitled "The Plan," begins by 2 stating by whom and when plans may be filed (Section 1121. Who may 3 file a plan); then directs how a plan is to position creditors and 4 owners (Section 1122. Classification of claims or interests); next 5 prescribes what goes into a plan (Section 1123. Contents of plan).

6 That section, and in particular its internal structure, is a 7 "blueprint" the plan proponent is to follow when constructing what 8 has been characterized as resembling a contract. Hillis Motors, 9 Inc. v. Hawaii Automobile Dealers' Association, 997 F.2d 581, 588 10 (9th Cir. 1993) ("A reorganization plan resembles a consent decree 11 and therefore, should be construed basically as a contract.")

12 The mandatory rules Congress has established for that 13 contract include the designation of classes of claims or interests 14 (Section 1123(a) (1)); the designation of not impaired classes of 15 claims or interests (Section 1123(a) (2)) ; the treatment of 16 impaired classes of claims or interests (Section 112'.(a) (3));

17 equal treatment of classes, unless members agree otherwise 18 (Section 1123(a) (4)); adequate means for implementation (Section 19 1123(a)(5)); corporate charter provisions (Section 1123(a) (6));

20 and provisions consistent with public policy for selection of 21 officers, directors and trustees (Section 1129(a) (7)).

22 A plan that lacks any of these seven components (except where 23 one or more may be inapplicable) is structurally defective because 24 the "shall" directive of Section 1123(a) has not been satisfied."

25 In view of the scant legislative history about Section 1123 26 27 ' In Section 1123(b) Congress has given plan proponents various options that a plan may contain. Those options are not 28 relevant to this discussion.

1 discussed, infra, it is apparent that that section is largely a 2 carryover from its counterparts under the former Bankruptcy Act.

3 Section 91 of that Act (former 11 U.S.C. § 91) described 4 provisions a Chapter IX petitioner "may include" in a plan 5 (provisions modifying or altering rights of creditors generally; 6 other provisions not inconsistent with Chapter IX; provisions for 7 rejection of executory contracts or unexpired leases). Section 8 216 of the Bankruptcy Act (former 11 U.S.C. § 616) contained nine 9 subparagraphs beginning with "shall include in," "shall provide 10 for," or "shall specify." Five subparagraphs provided that the 11 plan "may" deal with, provide for, or include other provisions.12 12 In Chapter XI, Bankruptcy Act Section 356 (former 11 U.S.C. § 13 756) required inclusion of provisions dealing with unsecured 14 creditors ("An arrangement [Bankruptcy Act practitioners will 15 recall the phrase "plan of arrangement" in Chapter XI practice]

16 within the meaning of this chapter shall include provisions 17 modifying or altering the rights of unsecured creditors generally 18 or some class of them, upon any terms or for any consideration.")

19 Then Bankruptcy Act Section 357 (former 11 U.S.C. § 757) set forth 20 eight subparagraphs specifying provisions an arrangement "may 21 include."

22 Finally in Chapter XII, Bankruptcy Act Section 461 (former 11 23 U.S.C. § 861) resembled Section 216 (in Chapter X) and set forth 24 seven "shall" include, provide or specify subparagraphs and six 25 "may" subparagraphs.

26 Under the Bankruptcy Act there was no counterpart to today's 27 28 12 See footnote 15, infra, and accompanying text.

1 disclosure statement. Now in Section 1125 Congress has directed 2 that adequate information be provided that would enable a 3 hypothetical investor typical of holders of claims or interests of 4 a relevant class to make an informed judgment about the plan. In 5 practice it is in the disclosure statement that plan proponents 6 set forth a description of their business, the reasons for their 7 financial difficulties, historical and current financial 8 information, material post-petition events, a summary of assets 9 and liabilities, a description of the plan, and perhaps most 13 10 importantly, a means for effectuating the plan.

11 This court is convinced that the contents of the plan's 12 provisions, and in particular those found in Section 1123(a) (5),

13 are derived from the Bankruptcy Act that required the plan to tell 14 creditors what they were going to get and how they were going to 15 get it. That is still the purpose of the section.

16 From the foregoing the court rejects the notion that 17 Congress, without a hint in the legislative history, in a section 18 of the Bankruptcy Code entitled "Contents Of Plan," and using 19 words calling for "adequate means for the Plan's implementation,"

20 intended to permit a debtor's plan -- confirmed by a bankruptcy 21 judge (not by a legislative act, as in most preemption 22 23 13 For example, the United States Trustee's Guidelines For 24 Region 17 (covering this district) include a requirement that the disclosure statement include:

25 (j) MEANS OF EFFECTUATING THE PLAN: The statement should 26 include how the goals of the plan are to be accomplished, e.g., infusion of cash by an investor, sale of real or 27 personal property, continued business operations, or issuance of stock. If an investor is to provide funds, financial 28 information about the investor should be included.

1 situations)' 4 -- to obliterate a whole area of jurisdiction and 2 authority traditionally left to state law. If the PSNH court 3 thought this was a simple matter of "plain meaning" (PSNH, 108 4 B.R. at 874-879), that interpretation was a far cry from its 5 observation only a few months earlier, that there was an 6 . . . ambiguity left in the statute by Congress in the enactment of the 1978 Code. Bankruptcy Code §§ 1123(a) (5);

7 1129(a) (3) and 1129(a) (6).

8 Public Service, 99 B.R. at 509.

9 b. Legislative History of Section 1123 10 Proponents contend that by inserting the clause 11 "notwithstanding any otherwise applicable law" into Section 1123, 12 Congress expressly exempted all state laws inconsistent with what 13 a plan proposes and a court chooses to confirm. Nothing in the 14 legislative history of Section 1123, however, indicates that its 15 drafters intended for state law to be so expansively preempted.

16 To the contrary, the absence of any meaningful discussion 17 regarding the purpose and consequences of the clause demonstrates 18 that Congress did not draft Section 1123 as a blanket preemption 19 of state law.

20 Section 1123(a), as initially enacted, did not state that its 21 provisions were applicable "notwithstanding any otherwise 22 applicable nonbankruptcy law." The legislative history of 23 Section 1123 does not indicate that its provisions preempt state 24 law; rather, the legislative history suggests that Section 1123 is 25 26 27 14 See, i.e., Schneiderwind v. ANR Pipeline Co., 485 U.S.

28 293, 108 S.Ct. 1145, 99 L.Ed.2d 316 (1988).

I derived from Section 216"5 of the Bankruptcy Act (also known as the 2 Bankruptcy Statute of 1898). The House Report pertaining to the 3 Bankruptcy Reform Act of 1978 states that, with respect to 4 sections 1123 (a) (5):

5 Subsection (a) specifies the matter that a plan of reorganization must contain. . . Paragraph (4) [now 6 paragraph (5)] of subsection (a) is derived from section 216 of current law, with some modifications. It 7 requires the plan to provide adequate means for the plan's execution. These means may include retention by 8 the debtor of all or any part of the property of the estate, transfer of all or any part of the property of 9 the estate to one or more entities, whether organized pre- or postconfirmation, merger or consolidation of the 10 debtor with one or more persons, sale and distribution of all or any part of the property of the estate, 11 satisfaction or modification of any lien, cancellation or modification of any indenture or similar instrument, 12 curing or waiving of any default, extension of maturity dates or change in interest rates of securities, 13 amendment of the debtor's charter, and issuance of 14 1s Section 216 of the Bankruptcy Act did not contain any 15 provision preempting state law. Subsection 216(10) (the subsection from which section 1123(a) (5) is derived) provided:

16 A plan of reorganization under this chapter -

17 18

. . shall provide adequate means for the execution of the 19 plan, which may include: the retention by the debtor of all or any part of its property; the sale or transfer of all of 20 or any part of its property to one or more other corporations theretofore organized or thereafter to be organized; the 21 merger or consolidation of the debtor with one or more other corporations; the sale of all or any part of its property, 22 either subject to or free from any lien, at not less than a fair upset price and the distribution of all or any assets, 23 or the proceeds derived from the sale thereof, among those having an interest therein; the satisfaction or modification 24 of liens; the cancellation or modification of indentures or of other similar instruments; the curing or waiver of 25 defaults; the extension of maturity dates and changes in interest rates and other terms of outstanding securities; the 26 amendment of the charter of the debtor; the issuance of securities of the debtor or such other corporations for cash, 27 for property, in exchange for existing securities, in satisfaction of claims or stock or for other appropriate 28 purposes. . ..

1 securities.

2 H.R. Rep.95-595, 1978 U.S.C.C.A.N. 5963, 6363, 95th Cong., 1st 3 Sess. 1977 (Sept. 8, 1977). The foregoing legislative history of 4 section 1123, as initially enacted, does not indicate that it 5 preempts state law.

6 In 1980, Congress amended Section 1123(a) to add the phrase 7 "[njotwithstanding any otherwise applicable nonbankruptcy law."

8 Despite this change, the legislative history accompanying the 9 amendment states that "This amendment makes it clear that the 10 rules governing what is contained in the reorganization plan are 11 those specified in this section; deletes a redundant word; and 12 makes several stylistic changes." H.R. Rep. 96-1195, at 22, 122 13 23, 96th Cong., 2d Sess. 1980 (July 25, 1980). If the words 14 "notwithstanding otherwise applicable nonbankruptcy law" meant 15 that a debtor could propose a plan contrary to any law, Congress 16 would not have treated the amendment as merely "stylistic." More 17 importantly, the observation that the amendment "makes it clear 18 that the rules governing what is contained in the reorganization 19 plan are those specified in this section" indicates that this 20 section (and no other law) governs what is to be placed into a 21 plan of reorganization. 16 It does not indicate that whatever is 22 placed into a plan of reorganization preempts state law. The 23 legislative history of Section 1123(a) simply does not support the 24 revolutionary significance that PG&E attributes to the amendment.

25 c. Case Law 26 27 16 This phrase further supports this court's conclusion that Section 1123(a) (5) is a directive as opposed to an empowering 28 statute.

1 Proponents cite several cases in support of their reading of 2 Section 1123(a), and they point out that parties opposing the Plan 3 have cited no case to the contrary. Proponents' cases, however, 4 are all distinguishable.

5 Proponents' two leading cases are PSNH and Universal 6 Cooperatives, Inc. v. FCX, Inc. (In re FCX, Inc.), 853 F.2d 1149 7 (4th Cir. 1988), cert. denied, 489 U.S. 1011 (1989) ("FCX").

8 In PSNH the proposed plan of reorganization was very similar to 9 Proponents' Plan. It involved:

10 the proposed use of § 1123(a) (5) of the [Bankruptcy] Code to authorize transfer of assets and restructuring of entities 11 [of the public utility therein, PSNH,] in such a fashion as would result in transfer of regulatory jurisdiction over the 12 debtor and its rates from the New Hampshire Public Utilities Commission ["NHPUC"] to the Federal Energy Regulatory 13 Commission ["FERC".]

14 PSNH, 108 B.R. at 857 (quoting court's earlier order).

15 The State of New Hampshire apparently opposed PSNH's plan 16 because moving into federal jurisdiction 17 would enable PSNH to recover much of its investment in the Seabrook nuclear power plant even before Seabrook operates[,]

18 in contrast to what state law would allow before operation under the "Anti-CWIP" law in New Hampshire.

19 PSNH, 108 B.R. at 860 (footnotes omitted).

20 In this context the PSNH court conducted a scholarly, 21 thorough and helpful analysis of the legislative history and 22 statutory framework. Focusing on the history of Section 23 1129(a) (6), the PSNH court noted that "prior to 1978 public 24 utilities had to have public utility commission approval for plans 25 of reorganization." Id. at 863. Then, with the adoption of the 26 Bankruptcy Reform Act of 1978, regulatory approval was explicitly 27 required for reorganizations involving railroads and 28 I municipalities, but no such explicit requirement applied to non-2 railroad reorganizations under chapter 11 except that Section 3 1129(a) (6) requires regulators' approval for any change in rates.

4 See 11 U.S.C. § 943(b) (6) (municipalities), § 1129(a) (6) (rates),

5 § 1172(b) (railroads), and PSNH, 108 B.R. at 864-66. Considering 6 this history and its reading of Section 1123(a) (5) as an 7 "empowering" statute, the PSNH court held that NHPUC did not have 8 an absolute "veto" power over PSNH's plan of reorganization. Id.

9 at 883 and 891.17 10 The PSNH decision relies on express preemption, which has 11 17 The PSNH court stated:

12 In my opinion, the reorganization process of chapter 11 13 cannot work B in the way that Congress envisioned under the drastic overhaul of the reorganization chapters in the 1978 14 Act [i.e., when it removed the veto power of public utility commissions from Chapter 11 cases generally] B if one party 15 in interest has an effective veto over the necessary restructuring to implement a plan and the reorganization 16 court no longer has an early and direct role in plan formulation and approval.

17 PSNH, 108 B.R. at 891 (emphasis in original).

18 After the PSNH decision, Congress considered amending Section 19 1129(a) (6). As summarized by the legislative history, the amendment would have provided that electric utilities would need 20 state regulators' approval not only for confirmation of any plan but also to "take any other action pertaining to the debtor that 21 would terminate or restrict the existing jurisdiction of the state regulatory authority." H.R. Rep. 101-1015, at 43, 1991 W.L. 4376 22 (Leg. Hist.), 101st Cong., 2d Sess. 1990 (Jan. 3, 1991).

23 Congress did not enact this absolute veto power. If Congress' failure to act has any weight at all, it is entirely 24 consistent with the disposition herein. The Bankruptcy Code neither gives an absolute preemption power to Proponents nor an 25 absolute veto power to the State and the Commission. Rather, each alleged instance of implied preemption must be tested to determine 26 whether the particular state law at issue "stands as an obstacle to the accomplishment and execution of the full purposes and 27 objectives of Congress." Baker & Drake, 35 F.3d at 1353 (citation omitted).

28 1 been rejected above. Nevertheless, as an alternative basis for 2 its conclusion PSNH relies on implied preemption, and its analysis 3 appears generally consistent with Baker & Drake's observation that 4 federal bankruptcy preemption is more likely "where a state 5 statute is concerned with economic regulation rather than with 6 protecting the public health and safety." Baker & Drake, 35 F.3d 7 at 1353.18 8 According to PSNH: (1) the State of New Hampshire's concerns 9 were purely economic not health or safety (PSNH, 108 B.R. at 890),

10 (2) "the inescapable result of the State's position is that no 11 plan can be confirmed in this case unless it is approved by the 12 [NHPUCI" (id. at 861, emphasis in original)," 9 (3) the consequent 13 jurisdictional "stalemate" would be inimical to the "prompt and 14 orderly processes necessary to an effective reorganization 'before 15 the patient dies'" (id. at 856 n. 1, 890 and 891), and (4) the 16 Bankruptcy Code "would seem to indicate" a preemptive intent as to 17 18 18 It is noteworthy that, having decided that express preemption pertains, the court in PSNH immediately qualified the 19 so-called unconditional preemption:

20 In terms of the literal language of § 1123(a) (5) it seems obvious that the section on its face contemplates that 21 restructuring transactions necessary to a plan of reorganization may be provided....

22 PSNH, 108 B.R. at 881 (emphasis added).

23 Since there is nothing in the statute about "necessary" it seems 24 the court was really considering implied -- or better yet "applied" -- preemption.

25 26 19 "[If] the PUC has the last say about everything, we may as well close up our tents and send it over to the PUC, let them 27 reorganize this company and when they have approved it, send it over and I'll sign it." PSNH, 108 B.R. at 887 (quoting hearing 28 transcript).

1 "restructuring provisions of a chapter 11 plan of reorganization" 2 (an express intent, according to PSNH) (id. at 882) .20 The PSNH 3 court specifically reserved some issues for the hearing on plan 4 confirmation:

5 1. Those aspects of the debtor's plan of reorganization

. or any amended plan containing similar provisions 6 that are necessary and required to effectuate the "restructuring" of the debtor into a reorganized entity or 7 entities capable of achieving a feasible reorganization, subject to the confirmation requirements of § 1129 of the 8 Bankruptcy Code, and are actions specifically covered by

§ 1123(a) (5) of the Bankruptcy Code, may be approved as part 9 of confirmation . . . notwithstanding any otherwise applicable law that would require approval of such actions by 10 the New Hampshire Public Utilities Commission.

11 12 3. Whether such restructuring is necessary and required for a feasible reorganization will be a § 1129 issue . ...

13

4. the effect on the public interest of such a 14 plan arguably will be one of the factors to be considered at confirmation . ...

15 PSNH, 108 B.R. at 892 - 893 (Appendix ¶¶ 1, 3 and 4) (emphasis 16 added).

17 The PSNH decision emphasized that "the issue is a narrower 18 one than may first appear." Id. at 861. The essential holding of 19 PSNH is only that the Bankruptcy Code preempts the public utility 20 commission's absolute "veto" power over a bankruptcy 21 restructuring. The PSNH decision noted that, ironically, the 22 bankruptcy restructuring might have been "essential to restoring 23 the enterprise to financial health so it can then comply with 24 ongoing regulatory requirements." Id. at 890 n. 38 and 891 25 (emphasis in original). Moreover, the PSNH court emphasized that 26 27 20 According to the PSNH court, the State of New Hampshire "does not really argue to the contrary." PSNH, 108 B.R. at 882.

28 Here the State and the Commission do!

1 there was no preemption of such ongoing regulatory requirements:

2 Nothing in § 1123 or § 1129 of the Bankruptcy Code has the effect of exempting the reorganized entity or entities 3 under a confirmed plan of reorganization from any ongoing applicable regulatory requirements by NHPUC as to the future 4 operations of said entity or entities (save for any questioning of the restructuring itself) once the 5 restructuring necessary and required for a feasible reorganization has been effectuated as part of a confirmed 6 plan of reorganization.

7 PSNH, 108 B.R. 893 (Appendix T 5).

8 The PSNH court acknowledged that NHPUC might lose its rate 9 setting jurisdiction over some reorganized entities because they 10 would come under FERC jurisdiction, 11 [but] the argument that "Congress didn't intend to take rate setting authority from the states" by § 1123 of the 12 Bankruptcy Code is simply misplaced. Congress already considered the public interest when it withdrew considerable 13 regulatory authority from the states in its FERC legislation, as affirmed in the preemption decision by the Supreme Court 14 in Mississippi Power & Light v. State of Mississippi, 487 U.S. 354 [1988] . . . .

15 Like it or not, Congress has decreed that local rates 16 can be determined by FERC . . . Congress apparently believes that regional requirements and regulation sometimes 17 have to override local state requirements to have a rational power supply system in the country.

18 PSNH, 108 B.R. at 872 (footnotes omitted).

19 The court does not disagree with most of the PSNH analysis.

20 Although the court cannot agree that Section 1123(a) (5) is an 21 "empowering" statute that explicitly preempts or overrides all 22 contrary nonbankruptcy law, the court agrees that restructuring 23 generally is a proper purpose of chapter 11 and that the 24 Bankruptcy Code would seem to indicate at least some preemptive 25 intent in favor of restructuring, which would preempt a state 26 regulator's absolute veto power over bankruptcy restructuring.

27 See PSNH, 108 B.R. at 882. To the extent that PSNH implies a 28 1 broader preemption, it may be factually distinguishable because 2 (a) any economic need for PG&E to disaggregate is not immediately 3 obvious, unlike in PSNH, and (b) the objecting parties in this 4 case advance some non-economic concerns, unlike the State of New 5 Hampshire in PSNH. See Baker & Drake, 35 F.3d at 1353 (bankruptcy 6 preemption more likely for economic regulation rather than public 7 health and safety).

8 No evidence exists at this stage in the reorganization 9 process whether PG&E has an economic need to disaggregate. In 10 PSNH, unlike this case, the court questioned the debtor's solvency 11 and emphasized the need to reorganize "before the patient dies."

12 PSNH, 108 B.R. at 856 n. 1, 890 n. 38, and 891. The Proponents 13 and the Committee have suggested that there is some economic need 14 to disaggregate because the financial markets effectively may 21 The court agrees with PSNH, however, that "[w]hether 15 require it.

16 such restructuring is necessary and required for a feasible 17 reorganization will be a § 1129 issue." PSNH, 108 B.R. at 892, 18 Appendix ¶ 3. Preemption and feasibility can be addressed in that 19 context, but only after further elaboration in a revised 20 Disclosure Statement.

21 As to non-economic considerations, the State, the Commission 22 and other objectors have argued that Proponents are abusing the 23 bankruptcy process to escape the Commission's jurisdiction. To 24 25 21 Apparently the Proponents and the Committee believe that PG&E's creditors will need to be paid over time, that this 26 requires debt securities, and that the debt securities will not be acceptable to the financial markets, or perhaps will not trade at 27 par, unless PG&E's business is removed to some extent from the Commission's jurisdiction by disaggregation. The court makes no 28 determination on these issues.

1 the extent that this is a "facial invalidity" objection the court 2 rejects it. Using bankruptcy reorganization to move from state 3 regulation to federal regulation is not necessarily improper.

4 Proponents have argued without dispute that there is nothing 5 illegal about a disaggregated utility structure, and that if PG&E 6 had founded its business as several separate entities, or if 7 another entity did so now, those entities would be outside the 8 Commission's jurisdiction to the same extent as proposed under the 9 Plan. Moreover, among the purposes of the Bankruptcy Code is 10 giving debtors a fresh start. Perez, 402 U.S. at 649. Applied to 11 corporate debtors the fresh start might entail restructuring their 12 business. The court believes, however, that for Proponents to 13 preempt state law barring disaggregation, they will need to rely 14 on more than just the general policy of Chapter 11 favoring 15 reorganizations. They must show that enforcing such state law 16 would be an "obstacle to the accomplishment and execution of the 17 full purposes of the bankruptcy laws." Baker & Drake, 35 F.3d at 18 1353. The court does not presently decide whether Proponents must 19 show that disaggregation is necessary to pay past debts, or to 20 avoid incurring future significant debts, or any other standard.

21 These are matters to be shown in general in a revised Disclosure 22 Statement, and to be proven at trial.

23 Another non-economic consideration raised by several 24 objectors is that there are potential environmental impacts from 25 disaggregation. 2 2 How disaggregation itself would have any adverse 26 27 22 It is not clear that environmental impacts are matters of public "safety" or even public "health," although at some point 28 environmental degradation no doubt would have serious health 1 environmental impact is not immediately obvious. As Proponents 2 point out, the disaggregated entities will still be subject to all 3 the usual zoning and environmental regulations. The objectors 4 argue, however, that disaggregation will remove some lands from 5 the Commission's jurisdiction, that FERC has previously defined 6 its mandate to exclude environmental concerns, that even if FERC 7 were to consider environmental issues most of PG&E's current land 8 holdings will not be subject to either the Commission's or FERC's 9 jurisdiction, and that under California law this would be 10 sufficient to block PG&E's proposed disaggregation or perhaps 23 11 condition it on some level of environmental commitments. The 12 court finds merit in both arguments. The court agrees with PSNH 13 that Proponents would have a more difficult preemption argument if 14 15 consequences for some or all of us. As noted above, however, 16 preemption is particularly unlikely for environmental matters.

Midlantic, 474 U.S. 494; Fireman's Fund, 271 F.3d at 932 - 933 17 ("highly deferential" to local environmental regulation). See also Baker & Drake, 35 F.3d at 1354 (noting non-economic purposes 18 of state regulation other than health and safety).

19 23 The Plan and Disclosure Statement include assurances that PG&E, the LLCs and Land Holdings (another entity to be formed by 20 Proponents after confirmation) will remain subject to any applicable environmental laws and regulations and that Proponents 21 have no intention of changing their environmental policies and standards. See Plan § 7.8 (Regulatory Issues") at 74:5-9 and 22 Disclosure Statement §§ VI.D.4 ("Land Ownership") and L.

("Regulatory Impact of the Plan") at 99:1-3 and 126:16-127.19.

23 The court notes that these commitments do not necessarily bar all development of all land forever, nor is it clear that they must do 24 so to comply with state law. Unlike most other land-holders PG&E has been subject to additional restrictions because of the 25 Commission's jurisdiction over it. The Commission has argued that this is appropriate because, as part of the "regulatory compact,"

26 California ratepayers subsidized PG&E's acquisition and non development of its land. The merits of this argument are not 27 before the court, and the issue is described here only to clarify that the alleged environmental consequences of disaggregation do 28 not render the Plan facially unconfirmable.

1 they intended to block "ongoing regulatory requirements." PSNH 2 108 B.R. at 890 n. 38, 891 and 893 (Appendix ¶ 5). On the other 3 hand, the court rejects any argument that preemption is less 4 serious because conceptually it occurs only at the instant of 5 disaggregation. Proponents attempt to distinguish Baker & Drake 6 by arguing that there the Nevada law on point did not impede the 7 event of reorganization, but only the post-confirmation operations 8 of the reorganized debtor. Here they emphasize that once the Plan 9 is confirmed and becomes effective, Reorganized Debtor, the LLC's 10 and all other affiliated entities will comply fully with 11 applicable law just as PG&E is doing now as required by 28 U.S.C.

12 § 959(b). Their theory is that only a single event -- what their 13 counsel calls the "big-bang" of confirmation -- will be exempt 14 from state law that would otherwise prohibit the Restructuring 15 Transactions. The court rejects this theory. State law applies, 16 or it is preempted. It is not a temporal thing, suspended only 17 for a moment. Therefore, the environmental objections do not 18 render the Plan facially unconfirmable but they may be relevant to 19 preemption issues at the confirmation hearing.

20 In sum, the court cannot agree with PSNH to the extent it 21 suggests a sweeping mandate to preempt whatever plan proponents 22 (and perhaps a single bankruptcy judge) decide should be 23 preempted. The court has found no other cases that suggest such 24 an open-ended preemption. Rather, in all those cases the scope of 25 preemption is limited either by the description of the law being 26 displaced or by the nature of the preemptive statute.

27 Proponents' other leading case is FCX. FCX held that state 28 law restrictions on the surrender of collateral known as ill "patronage certificates" were preempted by the Bankruptcy Code.

2 FCX, 853 F.2d 1149. In distinguishing a decision that reached the 3 opposite conclusion (Calvert v. BonQards Creameries (In re 4 Schauer), 62 B.R. 526 (Bankr. D. Minn. 1986), aff'd, 835 F.2d 1222 5 (8th Cir. 1987)), FCX stated:

6 In re Schauer, however, is distinguishable on two grounds.

First, the trustee there did not rely on § 1123(a) (5) (D), but 7 [instead on] § 363(b) (1) and § 704 . . . Second, and more importantly, § 363(b) (1) and § 704 are substantively 8 different from § 1123(a) (5) (D). . . . § 363(b) (1) and § 704 are no more than "enabling statutes that give the trustee the 9 authority to sell or dispose of property if the debtor[

would have had the same right under state law." .

10 In contrast, § 1123(a) (5) is an empowering statute. As 11 stated by Collier: "The alternatives set forth in § 1123(a) (5) are self executing. That is, the plan may propose 12 such actions notwithstanding nonbankruptcy law or agreements." 5 Collier on Bankruptcy ¶ 1123.01, at 1123-10.

13 Section 1123(a) (5) (D) then does not simply provide a means to exercise the debtor's pre-bankruptcy rights; it enlarges the 14 scope of those rights, thus enhancing the ability of a trustee or debtor in possession to deal with property of the 15 estate.

16 FCX, 853 F.2d at 1154-55.24 17 The court disagrees with FCX to the extent, if any, that it 18 supports an unfettered right to dispose of assets without regard 19 to state law as part of a plan pursuant to Section 1123(a) (5) (D).

20 The court in FCX was not faced with anything similar to relief 21 sought by Proponents in this case, and did not discuss the 22 ramifications of such a reading. In fact, the debtor did not even 23 seek to sell or transfer the patronage certificates to a third 24 25 24 The Collier treatise provides no analysis or discussion of the issues and simply cites a few cases that also have no 26 meaningful discussion for present purposes. See also PSNH, 108 B.R. at 883 n. 25 (no meaningful discussion in cases other than 27 FCX).

28 1 party. It proposed - and was allowed - to force a creditor to 2 accept collateral in violation of that creditor's own articles of 3 incorporation. FCX, 853 F.2d at 1149.

4 In addition, the court notes that debtors are already 5 empowered to sell property, notwithstanding some nonbankruptcy 6 laws, pursuant to Sections 363(f) and 1129(b) (2) (A) (ii). Those 7 sections have carefully worked-out limitations on sales (such as 8 requiring that any liens attach to the proceeds of sale and that 9 sales be subject to credit bids). See 11 U.S.C. §§ 363(f) and 10 1129(b)(2)(A)(ii). Therefore, it is not necessary to rely on 11 Section 1123(a) (5) (D) as an empowering statute for any sales of 12 the type that Congress explicitly authorized. Moreover, even if 13 Section 1123(a) (5) (D) were an empowering statute, it would be 14 inappropriate to interpret it in such a way as to ignore the 15 carefully limited powers in Sections 363(f) and 16 1129(b) (2) (A) (ii) .25 17 18 25 The court notes that other sections of the Bankruptcy Code, or nonbankruptcy law, appear to be more appropriately 19 tailored sources of empowerment for the other paragraphs of Section 1123(a) (5). For example, Paragraph (G) of Section 20 1123(a) (5) suggests that one means of implementing a plan is to provide for "curing or waiving a default." 11 U.S.C.

21 § 1123(a) (5) (G). The curing and waiving powers are covered either by Section 1129(a) (8) (A) (class accepts a plan, thereby waiving 22 defaults) or Section 1129(a) (8) (B) (class is unimpaired because defaults are cured). Moreover, those powers are more precisely 23 tailored to this purpose: Sections 1124(2) (A) and 365(b) (2) (D) specify that the "cure" need not include, for example, any 24 "penalty rate." See 11 U.S.C. §§ 365(b) (2) (D), 1124(2) (A), and 1129 (a) (8) (B) 25 Another example is that Paragraph (H) of Section 1123(a) (5) 26 provides for "extension of a maturity date or a change in an interest rate or other term of outstanding securities." 11 U.S.C.

27 § 1123(a) (5) (H). These powers are covered by Sections 506(b),

1129(a) (7), 1129(a) (8) (A) and 1129(b) (2) (B), which collectively 28 tailor such powers to assure that the interest rate provides 1 The PSNH decision states that "FCX apparently is the only 2 case that has any meaningful discussion of the provisions of 3 1123(a) (5) for present purposes." PSNH, 108 B.R. at 883 n. 25.

4 Proponents have not cited any other case. 2 6 Therefore, the 5 applicable cases reinforce the court's view, based on the 6 statutory language, that Section 1123(a) (5) does not empower 7 Proponents to engage in wholesale preemption of nonbankruptcy law 8 through their Plan. For all of these reasons, Proponents' 9 reliance on PSNH and FCX is insufficient to justify the full scope 10 of relief they seek. At this stage, however, the court cannot say 11 as a matter of law that Proponents will be unable to establish 12 implied preemption of otherwise applicable state laws at the 13 confirmation hearings.

14 d. Other Bankruptcy Preemption Statutes 15 Here, Proponents urge this court to adopt an interpretation 16 of Section 1123(a) (5) that would allow plans and orders confirming 17 18 adequate present value, or else that the affected class consents 19 or no junior class receives or retains anything under the plan on account of their claims or interests.

20 Similarly, nonbankruptcy law such as state and federal 21 antitrust laws may place carefully tailored limits on mergers under Paragraph (C) of Section 1123(a) (5).

22 26 Cf. Great Western Bank & Trust v. Entz-White Lumber and 23 Supply, Inc. (In re Entz-White Lumber and Supply, Inc.), 850 F.2d 1338, 1340 n. 3 (9th Cir. 1988) (holding that debtor is entitled 24 to cure default using pre-maturity interest rate pursuant to Section 1124(2), but commenting in dicta that Section 1123 "would 25 appear to allow debtors to cure this type of default even if a party with a claim cured in this way would be impaired under 26 § 1124') and Citibank v. Udhus (In re Udhus), 218 B.R. 513 (9th Cir. BAP 1998) (concept of "cure" used throughout bankruptcy code 27 nullifies default, so cure referred to in Section 1123(a) (5) (G) does not require payment of default interest even where creditor 28 is impaired).

1 plans -- the terms of which are not codified or even known until a 2 plan and disclosure statement are filed -- to preempt all state 3 law. Generally, unlike Proponents' interpretation of Section 4 1123(a)(5), other portions of the Bankruptcy Code which preempt 5 state law are self-limiting in scope. In other words, the 6 provisions explicitly describe and set the parameters of state law 7 being exempted, or specifically set forth the nature and scope of 8 the statutory bankruptcy law which preempts the state law. They 9 do not contemplate having parties and the court "make" the 10 preemptive law.

11 For example, Section 1125(d) provides that a bankruptcy 12 court's determination regarding the adequacy of a disclosure 13 statement is not governed by otherwise applicable non-bankruptcy 14 law. The preemption is not open-ended. Similarly, Section 15 1124(2) provides that, notwithstanding any law that entitles a 16 claim or interest to receive accelerated payment upon default, a 17 plan may cure the default and reinstate the maturity of the claim 18 or interest. See Entz-White, 850 F.2d 1338. The statute 19 specifically defines the nature of those state laws being 20 preempted.

21 Likewise, Section 1142(a) defines the type of state law being 22 pre-empted: those laws relating to financial condition. Section 23 1142(a) provides that "notwithstanding any otherwise applicable 24 nonbankruptcy law, rule, or regulation relating to financial 25 condition," the debtor or reorganized entity shall carry out the 26 plan and shall comply with orders of the court. Section 1145, 27 which pertains to specified offers or sales of securities under a 28 plan, exempts (with certain exceptions) debtors and plan 1 proponents from complying with state and local laws requiring 2 registration for offer or sale of a security or registration or 3 licensing of an issuer of, underwriter of, or broker or dealer in 4 a security.

5 Section 541(c) (1) provides that an "interest of the debtor in 6 property becomes property of the estate . . . notwithstanding any 7 provision in . . applicable nonbankruptcy law" that restricts 8 the transfer of such interest or that is conditioned on the 9 insolvency or financial condition of the debtor. Section 363(l) 10 provides that a trustee may sell, use or lease property 11 "notwithstanding any provision . . . in applicable law that is 12 conditioned on the insolvency or financial condition of the debtor 13 . . ."). Section 365(e) (1) and (f) (3) allow a trustee to assume 14 or assign leases and executory contracts notwithstanding otherwise 15 applicable law that purports to terminate the contract upon such 16 an assumption or which purports to terminate the contract due to 17 the financial condition of the debtor. Section 545 allows a 18 trustee to avoid the fixing of certain statutory liens. Section 19 546(c) places limitations on a seller's statutory right to reclaim 20 goods.

21 In each of these cases, the scope of the preemption is 22 limited either by the description of the law being displaced or by 23 the nature of the preemptive bankruptcy statute. None of these 24 provisions allows a plan or order or law of undefined scope to 25 preempt any and all laws inconsistent with its provisions.

26 e. Conclusion as to Section 1123(a) (5) 27 For the foregoing reasons, the court rejects Proponents' 28 interpretation of Section 1123(a)(5) as allowing it to 1 disaggregate with unfettered preemption of any contrary 2 nonbankruptcy law. The scope of preemption, if any, must be 3 considered in light of the nonbankruptcy laws at issue.

4 3. Necessary Modifications To Disclosure Statement 5 At the beginning of this Memorandum Decision the court 6 reminded Proponents that the Rescheduling Order directed them to 7 describe specifically laws they sought to preempt and the 8 governmental units affected by such preemption. Now that the 9 matter has been fully briefed, argued and analyzed, and 10 Proponents' express preemption theory rejected, the court believes 11 it appropriate to expand upon the Rescheduling Order and give 12 Proponents some direction as to minimum disclosures necessary to 13 set the stage for their implied preemption confirmation contest.

14 It would be burdensome, of course, to require Proponents to 15 fill a revised Disclosure Statement with a detailed explanation of 16 each and every law, regulation, decision, ruling, ordinance or 17 other authority Proponents believe stand in the way of 18 confirmation, and further to require Proponents to set forth their 19 entire evidentiary support for their position. That being said, 20 the court will require Proponents to state in summary fashion the 21 reasons why they believe it necessary for each of the Public 22 Utilities Code sections referenced in section III, the gain on 23 sale rules, and Ordering Paragraph 5 of Commission Decision D.01 24 12-017, to be preempted. Proponents do not need to include 25 specific details at this time. It is sufficient if they prepare 26 the revised disclosures as they would prepare a trial brief, 27 showing what ultimate facts will be proven to lead the court to 28 find that the application of those laws to the facts of PG&E's Sf 1 proposed reorganization are economic in nature rather than 2 directed at protecting public safety or other noneconomic 3 concerns, and that those particular laws stand as an obstacle to 4 the accomplishment and execution of the purposes and objectives of 5 Congress and the Bankruptcy Code.

6 B. Sovereign Immunity Implications 7 1. As noted in Section III, several provisions of the 8 Plan seek an affirmative ruling of this court under Section 1123 9 that approval of various state and local governmental units is not 10 required to carry out many of the contemplated transactions. The 11 Plan also seeks an injunction prohibiting members of the 12 Commission and officials of the State from taking certain 13 actions. 2 7 14 In addition, the Plan seeks to exempt PG&E from its statutory 15 obligation to fund the net open position to provide sufficient 16 electric power to serve the public. The Commission argues that 17 this constitutes an attempt to recover money from the State. That 18 duty includes purchasing and paying for power from wholesale 19 suppliers when the demand for power by ratepayers exceeds the 20 utility's own generation capacity. Whether or not the State is 21 22 27 Apart from the sovereign immunity issues discussed in this Memorandum Decision, at a prior hearing the court considered 23 whether injunctive or declaratory relief could be sought as part of the confirmation process or, as the Commission, the State and 24 others contended, required commencement of an adversary proceeding under Part VII of the Federal Rules of Bankruptcy Procedure. The 25 court accepted Proponents' arguments that Rule 7001(7) authorizes obtaining an injunction or other equitable relief as part of a 26 Chapter 11 plan, without the need for an adversary proceeding.

The court's decision on that procedural point has not been reduced 27 to an order to date but it can and will be dealt in any order approving a disclosure statement or any order confirming a plan of 28 reorganization.

1 obligated to pay for power purchased by the California Department 2 of Water Resources to cover PG&E's net open position, the Plan -

3 while it may attempt to prevent PG&E from having to pay certain 4 amounts of money -- does not constitute an impermissible attempt 5 to recover money from the State. This is much different from 6 Proponents' attempt to have the Plan prohibit the Reorganized 7 Debtor from assuming the net open position or prohibiting the 8 Reorganized Debtor from accepting, directly or indirectly, an 9 assignment of Department of Water Resources contracts. For the 10 Plan to restrain the Reorganized Debtor from doing such things is 11 the functional equivalent of having the Plan declare that the 12 Reorganized Debtor does not have to comply with certain applicable 13 provisions of nonbankruptcy law. These matters are dealt with in 14 the court's decision concerning implied preemption, supra.

15 The Plan seeks equitable and injunctive relief. As such it 16 constitutes ". . the prosecution, or pursuit, of some claim, 17 demand, or request." Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 18 407 (1821). More recently than the early 1800s, the Ninth Circuit 19 held that suits requesting nonmonetary relief do not divest the 20 state of its immunity. Mitchell v. Franchise Tax Board (In re 21 Mitchell), 209 F.3d 1111, 1116 (9th Cir. 2000), quoting Seminole 22 Tribe of Florida v. Florida, 517 U.S. 44, 58 (1996) ("The Eleventh 23 Amendment does not exist solely in order to prevent federal court 24 judgments that must be paid out of a State's treasury"). In 28 25 Mitchell, the bankruptcy court, the Bankruptcy Appellate Panel 26 27 28 See Mitchell v. Franchise Tax Board (In re Mitchell), 222 B.R. 877 (9th Cir. BAP 1998), aff'd, 209 F.3d 1111 (9th Cir.

28 2000).

-. I --

1 and the Ninth Circuit determined an adversary proceeding commenced 2 by a debtor to be a "suit" for Eleventh Amendment purposes. And 3 in NVR Homes, Inc. v. Clerks of the Circuit Courts (In re NVR, 4 LP), 189 F.3d 442 (4th Cir. 1999), cert. denied, 528 U.S. 1117 5 (2000), the court extended the application of this principle to a 6 contested matter commenced against state agencies by motion under 7 Fed. R. Bankr. P. 9014. Rule 7001(7) takes out of the definition 8 of "adversary proceeding" a proceeding to obtain an injunction or 9 other equitable relief when a Chapter 11 plan provides for such 10 relief. But permitting such relief without an adversary 11 proceeding does not change the result for sovereign immunity 12 purposes. Fed. R. Bankr. P. 9014 deals with contested matters 13 "not otherwise governed by [Federal Rules of Bankruptcy Procedure]

14 wherein relief shall be requested by motion." There can be no 15 question but that the attempt to obtain declaratory or injunctive 16 relief through the Plan confirmation process is subject to a 17 properly invoked sovereign immunity defense.

18 2. Most of Proponents' arguments regarding sovereign 19 immunity are premised upon the notion that the requested relief is 20 proper under Ex Parte Young, 209 U.S. 123 (1908). This court has 21 joined countless others in relying on Ex Parte Young in holding 22 that federal courts can take actions against state officials 23 acting in their representative capacity if they are violating 24 federal law. See Pacific Gas and Electric Co. v. California 25 Public Utils. Comm'n (In re Pacific Gas and Elec. Co.), 263 B.R.

26 306, 314 (Bankr. N.D. Cal. 2001). With that principle as a 27 starting point, Proponents would have the court believe that an 28 injunction is proper because officials of the Commission or the 1 State might violate federal law -- an order confirming a plan of 2 reorganization -- sometime in the future.

3 The Ninth Circuit has held in Goldbercr v. Ellett (In re 4 Ellett), 254 F.3d 1135 (9th Cir. 2001), petition for cert. filed, 5 70 U.S.L.W. 3374 (U.S. Nov. 20, 2001), that discharge orders are 6 binding on states notwithstanding their avoidance of bankruptcy 7 court jurisdiction, whether or not the result would prevent a 8 state from collecting monies otherwise owed to it. Ellett, 254 9 F.3d at 1141, citing Mitchell, 209 F.3d at 1117. Authorities from 10 other circuits agree that there are no sovereign immunity 11 implications when the bankruptcy court exercises jurisdiction over 12 the res of the bankruptcy estate. Texas v. Walker, 142 F.3d 813 13 (5th Cir. 1998), cert. denied, 525 U.S. 1102 (1999); State of 14 Maryland v. Antonelli Creditors' LiQuidating Trust, 123 F.3d 777 15 (4th Cir. 1997) (confirmation order not a suit against state; 16 state not named as defendant or served with process mandating 17 appearance; order confirming plan, including a provision 18 interpreting Bankruptcy Code § 1146(c), derived not from 19 jurisdiction over the estate or other creditors, but rather from 20 the jurisdiction over debtors and their estates).29 See Section 21 22 29 Lurking beneath the surface of the instant dispute is the intimation by Corporation's counsel that officials of the 23 Commission or the State will simply take the position that they may ignore an order confirming a plan of reorganization, and thus 24 they will be free to enforce state law based upon the inability of this court to grant in rem relief that preempts such state law.

25 For example, he stated (without offering any evidence) that they will "impute" things when it comes to rate making. The cases 26 cited in the text contrast an attempt to obtain affirmative relief from a sovereign with a bankruptcy court exercising traditional ir 27 rem jurisdiction over the debtor and its assets. That in rem jurisdiction is binding. Stated otherwise, if an order confirming 28 the Plan, or any similar plan found to preempt specific state laws 1 1141(a) (confirmed plan binds "any creditor", and Section 1142(a) 2 (debtor and ". . . any entity organized . . for the purpose of 3 carrying out the plan shall carry out the plan . . .").

4 The Ninth Circuit visited the Ex Parte Young exception 5 recently in Duke EnergV Trading and Marketing, LLC v. Davis, 267 6 F.3d 1042 (9th Cir. 2001). There again, as only a few weeks 7 earlier in Ellett, the court upheld the ability of the trial court 8 to enjoin a violation of federal law. Similarly, a threatened 9 violation of federal law can be restrained as well. Aqua Caliente 10 Bank of Cahuilla Indians v. Hardin, 223 F.3d 1041 (9th Cir. 2000),

11 cert. denied, 121 S.Ct. 1485 (2001).

12 The problem with their reliance on Aqua Caliente, Duke 13 Energy, Ellett and similar cases at the present time is that 14 Proponents can point to no ongoing or threatened violation of 15 federal law. They treat the opposition of the Commission and the 16 State to approval of the Disclosure Statement (based upon 17 sovereign immunity, preemption and numerous other grounds) as a 18 presumed threat just as PG&E did when it sought to enjoin the 19 Commission early in this case and was turned away, in part because 20 it could not point to any actual or threatened violation of 21 federal law. See Pacific Gas and Elec., 263 B.R. at 323. Absent 22 such a real threat or an ongoing violation, Ex Parte Young is not 23 available to support injunctive relief through confirmation. Thus 24 and regulations, is entered, the bankruptcy court must take the 25 position that any attempt to circumvent the effectiveness of such an order will be met with an injunction as authorized under Ex 26 Parte Young, just as occurred in Ellett. This bankruptcy court will do exactly that. Otherwise the integrity of the federal 27 court and its order will be undermined. Thus counsel's warning that the state officials are "bound to take the plan seriously" is 28 unquestioned.

1 the Plan as drafted cannot overcome the sovereign immunity 2 objection.

3 Finally, State and Commission argue that the Plan is so 4 pervasive a threat to sovereign immunity that Ex Parte Young is 5 not available based upon the exception found in Idaho v. Couer 6 D'Alene Tribe of Idaho, 521 U.S. 261 (1997). In view of the 7 court's rejection of Proponents' wholesale express preemption 8 theory and its refusal to apply an Ex Parte Young exception to the 9 sovereign immunity defense at this time, it is unnecessary to 10 reach this issue.

11 3. Proponents point to several instances of conduct 12 during this Chapter 11 case that amount to a waiver of sovereign 13 immunity by the Commission and the State. As noted in footnote 6, 14 waiver of sovereign immunity was not an issue the court was 15 willing to consider at the January 25, 2002 hearing. If 16 Proponents believe that the provisions of the Plan seeking 17 injunctive or declaratory relief can be justified because of a 18 waiver of sovereign immunity, then the revised disclosure 19 statement should state with specificity the facts suggesting such 20 a waiver. The issue will be tried as part of confirmation.

21 VI. Disposition 22 This Memorandum Decision rejects outright Proponents' across 23 the-board, take-no-prisoners preemption strategy in the Plan and 24 Disclosure Statement. If Proponents believe the court is in 25 error, they are entitled to attempt to seek review on appeal. To 26 that end, the court will, if requested, enter an order 27 disapproving the Disclosure Statement (or the latest version of 28 it) for the reasons stated herein. Approval of a disclosure 1 statement is not a final order for purposes of appeal. Everett v.

2 Perez (In re Perez), 30 F.3d 1209, 1217 (9th Cir. 1994), citing 3 Texas Extrusion Corp. v. Lockheed Corp. (Matter of Texas Extrusion 4 Corp.), 844 F.2d 1142, 1154 (5th Cir. 1988), cert. denied, 488 5 U.S. 926 (1988). Denial of approval of a disclosure statement is 6 likewise interlocutory. Asbestos Claimants v. Aetna Casualty &

7 Surety Co. (In re The Wallace & Gale Co.), 72 F.3d 21, 25 (4th 8 Cir. 1995) ("the bankruptcy court's order denying approval of the 9 disclosure statement was interlocutory"), citing Adams v. First 10 Fin. Dev. Corp. (In re First Fin. Dev.,Corp.), 960 F.2d 23, 26 11 (5th Cir. 1992). Any appeal will be discretionary with the 12 District Court or the Bankruptcy Appellate Panel (28 U.S.C. § 13 158(a)(3) & (b)) and the court will not impede Proponents if they 14 wish to attempt an appeal of an interlocutory order. In the 15 alternative, the court will consider a proper request to certify 16 the order disapproving the Disclosure Statement under Fed. R. Civ.

17 P. 54(b), made applicable by Fed. R. Bankr. P. 7054(a) and Fed. R.

18 Bankr. P. 9014.

19 Regardless of any decision about an appeal from this 20 decision, the court and parties in interest need to know 21 Proponents' intentions. Will they eliminate the provisions of the 22 Plan and Disclosure Statement that implicate sovereign immunity?

23 Will they amend the Plan to eliminate the express preemption 24 provisions and amend the Disclosure Statement to meet their prima 25 facie burden of disclosure and proceed to a confirmation hearing 26 in an attempt to carry their burden to show implied preemption as 27 the court recognizes as possible? Will they submit an alternative 28 plan to replace the Plan and Disclosure Statement?

1 Apart from the foregoing -- and unrelated to the merits of 2 the court's decision here -- the Commission has stated its 3 intention to file its own plan of reorganization. 30 PG&E is 4 entitled to respond to Commission's term sheet.

5 Accordingly, the following schedule will apply:

6 A. No later than February 21, 2002, PG&E is to:

7 1. File and serve its response to Commission's term 8 sheet. The response is to be limited to twenty (20) pages.3 If 9 Commission does not file the term sheet by the February 13, 2002, 10 deadline, PG&E's counsel may submit a declaration of noncompliance 11 together with an order that will supplement the Exclusivity Order, 12 terminating Commission's right to file a term sheet and extending 13 all plan exclusivity until June 30, 2002.

14 2. File and serve a statement of its (and 15 Corporation's) intentions as to the future of the plan and 16 disclosure statement process in this Chapter 11 case, addressing 17 the questions raised above.

18 3. Submit a form of order denying approval of the 19 20 30 On February 1, 2002, this court entered its Order Further Extending Exclusivity Period For Plan of Reorganization, and on 21 February 3, 2002, its Amended Order Further Extending Exclusivity Period For Plan of Reorganization ("Exclusivity Order"). By that 22 Exclusivity Order the court extended PG&E's exclusivity under Section 1121(c) (3) to June 30, 2002, except for the Commission.

23 The Commission has until February 13, 2002, to file and serve a term sheet regarding its contemplated plan of reorganization, 24 specifying (i) the proposed classification of all claims in interest; (ii) the proposed treatment of all claims in interest; 25 (iii) the proposed means for implementation of any such plan (including, without limitation, specifics how particular claims 26 will be satisfied, reinstated or refinanced); and (iv) a time-line for proposing and seeking approval of the plan it contemplates.

27 31 The Committee may also file its response to the 28 Commission's term sheet, subject to the same page limitations.

1 Disclosure Statement "for the reasons stated" in this Memorandum 2 Decision if that is its desire.

3 4. File and serve any request for interlocutory 4 certification of the order denying approval of the Disclosure 5 Statement that it wishes to have this court enter.

6 B. The papers described in the foregoing paragraph A are to 7 be served upon the United States Trustee, counsel for the 8 Committee, and counsel for all parties who filed oppositions to 9 PG&E's Motion For Order Further Extending Exclusivity Period For 10 Plan Of Reorganization and/or any objections to the adequacy of 11 the Disclosure Statement based upon preemption and sovereign 12 immunity grounds.

13 C. Any party who objected to the adequacy of the Disclosure 14 Statement on the basis of preemption and sovereign immunity may 15 present any opposition it has to any request PG&E may file in 16 accordance with paragraph A.4 for certification of any order 17 denying approval of the Disclosure Statement at the hearing 18 mentioned below.

19 D. The court will conduct a hearing on February 27, 2002, at 20 1:30 P.M., to consider all matters addressed in the foregoing. No 21 papers other than those requested are to be filed in connection 22 with that hearing.

23 Dated: February 7, 2002 24 S/

Dennis Montali 25 United States Bankruptcy Judge 26 27 28 CERTIFICATE OF SERVICE I hereby certify that in accordance with the Commission's regulation at 10 CFR 2.1313, I have this day caused the foregoing document be served upon the following parties by mailing by first-class mail a copy thereof properly addressed to each such party:

Richard F. Locke, Esq.

Pacific Gas and Electric Company 77 Beale Street, B30A San Francisco, CA 94105 David A. Repka, Esq.

Winston & Strawn 1400 L Street, NW Washington, DC 20005 Dated at San Francisco, California, this 11th day of February, 2002.

Laurence G. Chaset