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1 BILL LOCKYER j-0 1 TABLE OF CONTENTS Attorney General of the State of California 2 KEN ALEX 2 Acting Senior Assistant Attorney General MARGARITA PADILLA, State Bar No. 99966 INT R OD UC T IO N ...........................................................................................................................
3 3 Deputy Attorney Geneal 4 1515 Clay Street, 206 Floor 4
SUMMARY
OBJECTIONS ....................................................................................................... 2 Post Office Box 70550 5 Oakland. CA 94612-0550 Telephone: (510) 622-2135 5 Facsimile: (510) 622-2270 A. The Relief Sought in PG&E's Plan Against the State Entities is Barred by 6 6 Sovereign Im m unity ........................................................................................... 2 7 STEVEN H. FELDERSTEIN, State Bar No. 059678 PAUL J. PASCUZZI, State Bar No. 148810 7 FELDERSTEIN FITZGERALD WILLOUGHBY & B. PG&E's Plan Does Not Comply With Applicable Provisions of 8 8 PASCUZZI LLP Bankruptcy Code (II U.S.C. §1129(a)(1)) ......................................................... 3 9 400 Capitol Mall, Suite 1450 Sacramento, CA 95814 9 Telephone: (916) 329-7400 C. PG&E's Plan Is Not Proposed in Good Faith and Is Proposed by Means 10 to Facsimile: (916) 329-7435 Forbidden by Laws (11 U.S.C. § I 129(a)(3)) .................................................... 10 11 11 Attorneys for the People of the State of California, Ex Rel.
California Deparmstn of Toxic Substances Control, et al. D. PG&E's Plan Is Not Feasible (II U.S.C. §1 129(a)(I 1)) ................................. 16 12 12 Additional Counse listedon signaturepage.
13 13 E. PG&E's Plan Is Not in the Public Interest ......................................................... 17 14 UNITED STATES BANKRUPTCY COURT 14 NORTHERN DISTRICT OF CALIFORNIA F. The Commission's Plan is Preferable under II U.S.C. §1129(c) ..................... 18 15 15 16 SAN FRANCISCO DIVISION 16 C O NCLU SION .............................................................................................................................. 20 17 In re: Case No. 01-30923 DM 17 18 PACIFIC GAS AND ELECTRIC Chapter 11 Case COMPANY, a California corporation, 18 19 OBJECTIONS TO CONFIRMATION OF 19 Debtor. THE PG&E PLAN BY THE PEOPLE OF 20 THE STATE OF CALIFORNIA, EX REL. 20 Federal I.D. No. 94-0742640 DEPARTMENT OF TOXIC SUBSTANCES 21 CONTROL, ET AL 21 22 Date: August 1, 2002 22 Time: 9:30 a.m.
23 Place: 235 Pine St., 22nd Floor 23 San Francisco, California 24 24 25 25 26 26 27 27 28 28 1152.100 OBJECTIONS TO CONFIRMATION 1152-10 TABLE OF CONTENTS
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1 The People of the State of California, ex rel. tie Department of Toxic Substances 1 State Entities or any such other agency, unit or entity based on the Eleventh Amendment or 2 Control, Central Coast Regional Water Quality Control Board, Colorado River Basin Regional 2 related principles of sovereign immunity or otherwise, all of which are reserved. By making this 3 Water Quality Control Board, State Water Resources Control Board, Lahontan Regional Water 3 limited and special appearance, the State Entities do not waive the PG&E Proponents' failure to 4 Quality Control Board, Central Valley Regional Water Quality Control Board, San Francisco 4 give adequate, meaningful notice to any particular agency or entity of the State of California to 5 Bay Regional Water Quality Control Board, North Coast Regional Water Quality Control Board, 5 satisfy due process to the extent relief is sought in this proceeding against such agency or entity.
6 California Department of Fish and Game, California Department of Forestry and Fire Protection, 6
SUMMARY
OBJECTIONS 7 and California Department of Water Resources (the "State Entities")' hereby object to 7 A. The Relief Sought In PG&E's Plan Against the State Entities Is Barred by Sovereign Immunity.
8 confirmation of the Plan of Reorganization under Chapter 11 of the Bankruptcy Code for Pacific 8 9 Gas and Electric Company filed by Pacific Gas and Electric Company and PG&E Corp. 9 1. The Eleventh Amendment to the U.S. Constitution prohibits state citizens from 10 ("PG&E's Plan") proposed by Pacific Gas and Electric Company and PG&E Corp. (collectively, 10 suing the State of California or any of its departments, agencies or divisions in federal court, 11 the "PG&E Proponents"). 11 including the Bankruptcy Court in this case. The California Public Utilities Commission (the 12 INTRODUCTION 12 "Commission") and the State Entities represented here are units of the State of California.
13 Pursuant to the Court's order, the State Entities file this objection to confirmation of 13 2. PG&E's Plan seeks injunctive and declaratory relief against the Commission and 14 PG&E's Plan and "briefly state the grounds on which each objection is based in a manner which 14 possibly other State Entities and agencies of the State of California.
15 is sufficient to give notice to the [PG&E Proponents] of the nature of the objection . The 15 3. To the extent PG&E's Plan seeks any relief against State Entities or other 16 State Entities reserve the right to supplement this objection with further legal and factual points 16 agencies of the State of California, such relief is barred by the Eleventh Amendment to the U.S.
17 and authorities and to further expand these objections after discovery and in accordance with the 17 Constitution, and the State Entities (or other agencies of the State of California) assert their 18 Court's briefing schedules. The State Entities reserve the right to join in any other objection to 18 sovereign immunity in defense thereto. Although the current version of PG&E's Plan does not 19 confirmation of PG&E's Plan filed by any party in interest. 19 on its face appear to seek any monetary, declaratory or injunctive relief against any State Entities 20 By filing these objections, the State Entities are making a special and limited appearance. 20 other than the Commission and PG&E's Plan now provides that PG&E will follow established 21 The State Entities do not waive any objections or defenses that the State Entities or any other 21 regulatory procedures for transfer or reissuance of permits and licenses under applicable state 22 agency, unit, or entity of the State of California may have to this Court's jurisdiction over the 22 and federal law, PG&E's Plan reserves the right to seek relief in the Bankruptcy Court against 23 23 state agencies in the event its applications for transfer or reissuance are unsuccessful.2 Thus, In addition, the following State agencies join only in the objections relating to the assumption 24 and/or assignment of certain executory contracts and unexpired leases under PG&E's Plan: 24 California Department of Motor Vehicles, California Energy Commission, California Department 2 PG&E's Plan seeks to enjoin PG&E from assuming the net open position or taking an 25 of Justice, California State Board of Equalization, California Department of Parks and Recreation, 25 assignment of the DWR long-term electric contracts. In effect, PG&E's Plan seeks to enjoin state California Department of General Services, California Department of Consumer Affairs (Bureau regulatory authorities from requiring PG&E to comply with its legal obligation under its duty to 26 of Security and Investigative Services), and California State Lands Commission. California 26 serve its customers. PG&E's Plan is vague as to which agencies this "reverse injunction" applies.
Department of Transportation ("Cal Trans") also joins only in the objections relating to the To the extent PG&E's Plan seeks such relief against the Department of Water Resources or any 27 assumption and/or assignment of certain executory contracts and unexpired leases under PG&E's 27 other State agency or entity, the State Entities object to confirmation on the ground that such Plan and is represented by the counsel listed on the signature page of this pleading. However, all relief violates sovereipn immunity under the principles discussed herein and on the other bases 28 statements and reservations made in the Introdumtion apply to these State agencies as well. 28 discussed in this pleadmg.
i ir2e1o - I- onlsC-ioNs TOCONFIRMATION 1152.100 ossaCTIONS To CONMIPMATION
1 PG&E's Plan appears to improperly reserve to PG&E the opportunity to seek relief against state 1 3. Each of the laws that the PG&E Proponents contend is preempted or superceded 2 regulatory agencies. 2 by the Bankruptcy Code is not purely economic in nature, but rather is directed to protecting 3 4. Neither the State Entities, nor any other agency or entity of the State of California, 3 public health, safety, environment or other noneconomic concerns as follows:
4 has waived sovereign immunity as to any relief sought in PG&E's Plan. 4 a. California Public Utilities Code ("PUC") §377 prohibits the transfer of 5 5. The PG&E Proponents cannot meet their burden to show that any of the State 5 any facility for the generation of electricity owned by a public utility prior to January 1, 2006, 6 Entities, or any other agency or entity of the State of California, against which they seek relief 6 and requires the Commission to ensure that public utility generation assets remain dedicated to 7 has knowingly and intelligently waived its sovereign immunity. In this regard, PG&E's Plan 7 service for the benefit of California citizens. PUC §377 (as amended by AB6-X) is not 8 does not provide adequate means for its implementation. 8 preempted by the Bankruptcy Code. PUC §377 is intended to protect the public health, safety 9 6. The State Entities intend to conduct discovery on this objection. The discovery 9 and welfare by ensuring that sufficient generation assets remain dedicated to service for the 10 may include, but is not limited to, depositions, interrogatories, production of documents, requests 10 benefit of all Californians. In the midst of California's energy crisis and in an effort to take 11 fbr admissions and third party discovery. In particular, the State Entities intend to seek 11 "immediate steps" to correct "dysfunctions in California's wholesale bulk power markets," the 12 discovery from the PG&E Proponents as to the relief requested under PG&E's Plan against any 12 Federal Energy Regulatory Commission ("FERC") issued its order of December 15, 2000 (the 13 of the State Entities other than the Commission, or any other agency or entity of the State of 13 "FERC Order"). 93 FERC ¶ 61,294, 61,981. The FERC Order defederalized electricity sales 14 California, and the conduct that the PG&E Proponents contend evidences a waiver of sovereign 14 from the retained generation assets of the public utilities (including PG&E) by eliminating the 15 immunity. 15 Mandatory PX (Power Exchange) Buy-Sell Requirement. The California Legislature then 16 B. PG&E's Plan Does Not Comply With Applicable Provisions of Bankruptcy 16 amended PUC §377 by passing AB6-X in January of 2001. PUC §377, as amended, is intended, Code (11 U.S.C. §1129(a)(1)).
17 17 inter alia, to protect the public from the threat of blackouts caused by electricity shortages and to 18 1. The PG&E Proponents have the burden of proving by a preponderance of the 18 implement FERC's Order. Under PG&E's Plan, the Commission is not able to "ensure that 19 evidence that "[tihe plan complies with the applicable provisions of [Title 11]." 11 U.S.C. 19 [PG&E's] generation assets remain dedicated to service for the benefit of California ratepayers,"
20 Section 1129(a)(1). PG&E's Plan must meet the requirements of §1123(a), including providing 20 as required by AB6-X.
21 adequate means for its implementation. 21 1/H 22 The Bankruptcy Code Does Not Preempt State Laws or Supercede Federal 22 ///
Regulatory Laws. ///
23 23 24 2. PG&E's Plan contends that the Bankruptcy Code preempts certain state laws and 24 '//
25 mupercedes federal regulatory laws enacted to protect the public health, safety and welfare of the 25 'I/
26 citizens of California, as well as the State's environment. 26 27 27 I//
28 28 ///
11s2.10e 1152 100 o02)WnoNS TO COMMIMATION oaJE"TIONS TO CoNYrMMATION
1 b. PG&E's Plan proposes to transfer valuable and environmentally sensitive 1 property from a regulated utility to an unregulated entity. If the Commission approves such a 2 electric generation assets, including the largest privately owned hydroelectric generation system 2 transfer, it is required to impose conditions on the transfer necessary to protect the public 3
3 in the United States, from one plan proponent, PG&E, to the other plan proponent, PG&E 3 interest, including health, safety and the environment.
4 Corp., through an intermediate entity to be known as Newco, without prior review and approval 4 d. By contending that the Bankruptcy Code preempts PUC §851, the PG&E 5 by the Commission as required by statute. Such Commission review and approval would be 5 Proponents are also contending that the California Environmental Quality Act ("CEQA") is 6 required even ifPUC §377 did not prohibit the transfer The State of California has enacted laws 6 preempted. The California Legislature enacted CEQA in order to protect the health, safety and 7 to protect the public health and safety of its citizens and the environment of the state- Some of 7 welfare of the citizens of California. Cal. Pub. Res. Code §21000(b)(c)(d). CEQA is a critically 8 these laws are implemented through the Commission's regulation of the transfer of these 8 important environmental regulatory statute which applies broadly to all "discretionary projects 9 environmentally sensitive assets. The Commission's regulation is accomplished through the 9 proposed to be carried out or approved by public agencies," such as the Commission. Cal. Pub.
10 specific laws the PG&E Proponents contend are preempted, as set forth below. Because these 10 Res. Code § 21080 (a). CEQA also ensures global environmental review of successive 11 laws authorize the Commission to protect the public health, safety and environment, they are 11 "piecemeal" disaggregations that might otherwise be too small to cause concern. When applying 12 directed at protecting the public safety or other noneconomic concerns. The PG&E Proponents 12 CEQA, the Commission may not approve a project that has significant environmental impacts 13 cannot meet their burden of showing that by enacting the Bankruptcy Code or amending 13 unless all feasible mitigation measures within the jurisdiction of the Commission have been 14 Section 11 23(a)(5) Congress intended to impliedly preempt these laws. 14 imposed. Cal. Pub. Res. Code § 21081. To assure compliance with mitigation measures, CEQA 15 c. By transferring these important and environmentally sensitive assets from 15 requires public agencies to adopt reporting and monitoring programs and to assure that 16 PG&E to PG&E Corp., the PG&E Proponents are permanently removing those electric 16 mitigation measures are enforceable. Cal. Pub. Res. Code § 21081(b). CEQA protects 17 generation assets from Commission regulation, thus undermining the California Legislature's 17 California's public health, safety and welfare, which are manifestly noneconomic concerns.
18 determination that such regulation is needed to protect the public health, safety and environment. 18 e. For the last 80 years, the Commission has created financial incentives for 19 Absent PUC §377, PUC §851 requires Commission approval for a proposed transfer of such 19 PG&E to operate its hydropower system, and manage its lands at stewardship levels higher than 20 3 The PG&E hydro system includes: 20 minimunm legal standards. These higher stewardship levels have created environmental quality 21 , 174 dams and diversions on 16 major California river and stream systems from the 21 benefits for public trust resources. Ensuring the continued higher environmental stewardship McCloud River near Mount Shasta, to the Kern River near Bakersfield, including the Eel 22 River on the Coast Range Mountains; 22 levels is part of the review process mandated by PUC §851 and enforced by the Commission. If 23
- 99 reservoirs with 2.3 million acre feet of storage capacity and 200,000 acre feet of 23 PUC §851 is preempted, the Commission would be enjoined from protecting the public health, consumptive water rights; 24 24 safety and welfare when these public trust resources are transferred post-confirmation.
0 26 FERC licenses; 25 25 f. PG&E has previously sought to divest its hydroelectric system assets. In 6 68 powerhouses with 3,896 MW of capacity, which provides about 5% of California's 26 electric energy; 26 1999, PG&E applied to the Commission for permission to transfer its hydroelectric assets to 27 0 140,000 acres of watershed lands, 88,000 of which are outside FERC license boundaries. 27 unregulated entities in Application No. 99-09-53. There, a Draft Environmental Impact Report 28 See, Draft Environmental Impact Report ("DEIR") at page ES-I to ES-5. 28 ("DEIR") was prepared for the Commission pursuant to its CEQA authority. While PG&E 1152,100 OBJECTrIONSTo CONFIRMA'TION 1152,100 OBJECTIONSTOCONFIRMA1TM
1 asserted that its proposal would have no "significant adverse effects" on the environment, the 1 Congress and the Bankruptcy Code. The laws the PG&E Proponents contend are preempted do 2 DEIR found that transferring the assets to non-regulated entities would result in forty-nine (49) 2 not directly conflict with the purposes of the Bankruptcy Code in any way that could be 3 significant adverse effects, including impacts to water quality, air quality, endangered species, 3 generalized beyond the particular aspects of PG&E's Plan. Thus, PG&E's Plan does not provide 4 forests, recreation, public safety and electrical supply reliability.4 According to the DEIR, 4 adequate means for its implementation. The PG&E Proponents misstate their burden on this 5 mitigation conditions that could be imposed by the Commission would reduce forty-seven (47) 5 element of preemption in the disclosure statement to PG&E's Plan.
6 of the impacts to insignificant levels, but two significant impacts could not be mitigated. See 6 5. The State Entities intend to conduct discovery on this objection. The discovery 7 DEIR, Table S-I "Summary of Project Impacts and Mitigation by Resource."
7 may include, but is not limited to, depositions, interrogatories, production of documents, requests 8 g. Since PG&E has never filed an application to divest many of the assets it 8 for admissions and third party discovery. In particular, the State Entities intend to seek 9 seeks to transfer as part of its plan, the Commission has never studied the entire environmental 9 discovery respecting: (a)the PG&E Proponents' commitment to maintaining existing 10 impact that such divestitures would have on the State's environment. CEQA review, pursuant to environmental standards; and (b) the factual basis for the PG&E Proponents' contention that the 10 11 PUC §851, is also required for divestiture of these other assets and it is possible that those laws their plan seeks to preempt are directed only towards economic purposes and stand as an 11 12 transfers would also have significant adverse environmental impacts.
12 obstacle to the accomplishment and execution of the purposes and objectives of Congress and the 13 h. Transferring the electric generation assets from the regulated utility to an Bankruptcy Code.
13 14 unregulated entity will eliminate the Commission's ability to prospectively assure, through 14 PG&E's Plan Improperly Grants a Non-Debtor Release.
15 CEQA review, that future modifications and additions to those transferred assets will not have 15 6. PG&E's Plan releases PG&E Corp. from any and all claims arising under the 16 significant adverse impacts on the environment.
16 "First Priority Rule" and any claims arising under Section 17200 of the California Business and 17 i. Public control over the transfer of these assets provides the State of Professions Code. The proposed release improperly includes claims belonging to others, 17 18 California, through Commission regulation, the inherent ability to ensure that the assets are 18 including the California Attorney General and the City and County of San Francisco, on the 19 operated in a manner that protects and preserves the environment. The California Legislature 19 erroneous basis that such claims are property of the estate. See, Memorandum Decision on 20 uses its legal authority to regulate utilities to, inter alia, protect the environment.
20 Motions to Remand issued June 14, 2002, page 20-21. The release violates the Bankruptcy Code 21 4. The laws the PG&E Proponents contend are preempted are of broad and general 21 and a plan containing such a release cannot be confirmed.
22 applicability, unquestionably apply to PG&E, and were promulgated long before PG&E filed its 22 7. The State Entities intend to conduct discovery on this objection. The discovery 23 chapter 11 bankruptcy case. The specific laws the PG&E Proponents contend are preempted do 23 may include, but is not limited to, depositions, interrogatories, production of documents, requests 24 not stand as an obstacle to the accomplishment and execution of the purposes and objectives of 24 for admissions and third party discovery. In particular, the State Entities intend to seek 25 25 discovery regarding the PG&E Proponents' factual and legal basis for seeking a release of a non 26 4 The entire DEIR is available at htt:I/ICommission-ngehvdro.suoportnet. Due to the voluminous nature of the DEIR (4,000 pages, nine volumes), the State Entities are not providing 26 debtor contrary to established law. The State Entities also intend to conduct discovery regarding 27 the Court with a copy at this time; however, the State Entities do request that the Court review the Executive Summary to the DEIR and admit the DEIR as evidence in this proceeding. Fed. R. 27 the value of the claims being released by PG&E's Plan.
28 Evid. 803(8). 28 1152.100 OBJECrTIONS TO CONFIRMATION 1152.100 OBJECTIONSTO CONFIRMATION
1 PG&E's Plan Does Not Comply With the Requirements for the Assumption & 1 c. PG&E is attempting to assume and/or assign part but not all of a contract Assignment of Executory Contracts and Unexpired Leases.
2 2 or lease according to its terms in violation of Section 365.
3 8. PG&E's Plan assumes and/or assigns all executory contracts and unexpired leases 3 d. Cal Trans or the State Entities cannot identify any contract or lease that 4 to which any agency or entity of the State of California is a party, unless PG&E files a motion to 4 corresponds to PG&E's list in its Plan Supplement.
5 reject such contract or lease, or PG&E amends its lists of assumed and assigned contracts and 5 10. Cal Trans and the State Entities intend to conduct discovery on this objection, 6 leases in the Plan Supplement. 6 The discovery may include, but is not limited to, depositions, interrogatories, production of 7 9. Cal Trans and the State Entitics5 object to the assumption and assignment of any 7 documents, requests for admissions and third party discovery. In particular, Cal Trans and the 8 such executory contract or unexpired lease unless the requirements of II U.S.C. §365 are met, 8 State Entities intend to seek discovery on the PG&E Proponents' factual and legal basis for 9 including but not limited to, subsections (b)(1), (c), (d)(2), (d)(3), (e), and (1). More specifically, 9 assuming and assigning any instrument that is not actually a "contract" or "lease," for any 10 and without limiting the foregoing in any respect, the State Entities object to the assumption t0 assumption and assignment of a lease that would result in a violation of a use restriction, or for 11 and/or assignment of any executory contract or unexpired lease to the extent that: I1 the assumption and assignment of less than the entire contract or lease. Further, Cal Trans and 12 a. Certain items listed under PG&E's Plan as a "contract" or "lease" are not 12 the State Entities will conduct discovery on what PG&E intends to offer as proof that the 13 contracts or leases at all, but rather are permits, licenses, regulatory requirements, or statutory 13 requirements of section 365 are met with regard to each contract or lease to which any agency or 14 obligations of PG&E or an entity to be created under PG&E's Plan. 14 entity of the State of California is a party.
15 b. In the event the lease between a state agency and PG&E is a sublease 15 C. PG&E's Plan Is Not Proposed in Good Faith and Is Proposed by Means where the state agency is the landlord to PG&E, there may be use restrictions in the master lease Forbidden by Laws (11 U.S.C. §1129(a)(3)).
16 16 I PG&E's Plan is not proposed in good faith because PG&E Corp. is manipulating 17 between the state agency and the land owner that limit the use of the premises by PG&E or its 17 its control over PG&E in the bankruptcy proceedings to subordinate the interests of PG&E and 18 assignee. Cal Trans and the State Entities object to the assignment of any such lease to any 18 its ratepayers to PG&E Corp., as part of a common plan or design to evade the Commission's 19 entity to the extent the assignee does not comply with such use restrictions, thereby causing Cal 19 jurisdiction and to promote the corporate objectives of PG&E Corp. for its own gain and the gain 20 Trans or the State Entities to be in default under the terms of the master lease. Any assumption 20 of its subsidiaries and affiliates to the detriment of ratepayers. PG&E's Plan effectively 21 and/or assignment must be of the entire lease with all of its terms, including use restrictions. 21 supplants the California Legislature by revising the existing utility regulatory structure as it 22 tI U.S.C. §365. 22 applies to PG&E and deprives ratepayers of the benefits and protections which are to be afforded 23 23 them through the Commission's existing authority over PG&E. PG&E's Plan is further designed 24 5As stated in footnote 1 herein, the following State agencies join only in the objections relating to 24 the assumption and/or assignment of certain executory contracts and unexpired leases under to create a safe haven for PG&E Corp. and its officers and directors by attempting to protect 25 PG&E's Plan: California Department of Motor Vehicles, California Energy Commission, 25 California Department of Justice, California State Board of Equalization, California Department them against liability for their improper prepetition conduct, including but not limited to causing 26 of Parks and Recreation, California Department of General Services, California Department of 26 Consumer Affairs (Bureau of Security and Investigative Services), and California State Lands PG&E to transfer over S4 billion in ratepayer-generated funds to PG&E Corp. PG&E's Plan 27 Commission. In addition, Cal Tmns, which is separately represented by the counsel listed, joins 27 only in the objections relating to the assumption and/or assignment of certain executory contracts improperly seeks approval to:
28 and unexpired leases under PG&E's Plan. 28 1152.A00 OBJEM'TONS TO CONFIRMATION 1152.100 --1o0- OBJECTIONS TO 0ONFfWJATiON
l a. restructure PG&E's operations, including transferring PG&E's electric 1 these conditions. The Commission determined that these conditions were necessary to protect 2 transmission, gas transmission and generation lines of business to newly created limited liability the public's interest and maintain ratepayer indifference; 2
3 companies under the control of PG&E Corp. or its affiliates at below market prices, in violation 3 g. shift the Commission's regulatory authority over certain PG&E 4 of law, and without approval from the Commission. While PUC §377 prohibits such transfers, operations and activities from the Commission to FERC in a manner that would result in 4
5 PUC §851 requires every public utility to secure authorization from the Commission prior to 5 regulation of PG&F's operation in a manner different than other similarly situated California 6 disposing of any property "necessary or useful in the performance of its duties to the public."
6 utilities engaged in similar operations and activities; 7 The Commission's authority under PUC §851 is fundamental to utility regulation because it 7 h. deregulate certain operations and activities currently conducted by PG&E 8 ensures that the Commission maintains the powers and functions necessary to protect the public; 8 from the Commission's jurisdiction; and 9 b. transfer PG&E's generating assets in violation of the Legislature's i. release non-debtors, PG&E Corp. and its officers and directors, from any 9
10 mandate in AB6-X (PUC §377), and at below fair market value without Commission approval or 10 claims for fraudulent conveyances/transfers under the Bankruptcy Code or any other analogous II any revenue sharing agreement or other 'means of sharing any gain with ratepayers; 11 state statutes, including California Business and Professions Code Section 17200.
12 c. prohibit the Commission and the State of California from taking any 12 2. These goals of PG&E's Plan are not consistent with the objectives and purposes 13 action related to the allocation or other treatment of any "gain on sale" related to assets of the Bankruptcy Code of successful rehabilitation and payment of creditors. Because PG&E's 13 14 transferred or disposed of under PG&E's Plan that would adversely impact PG&E or its 14 Plan effectively seeks to restructure the existing utility structure in California as it applies to 15 ratepayers; 15 PG&E, to subordinate the interests of PG&E and its ratepayers to the interests of PG&E Corp.
16 d. change the ownership structure for PG&E without Commission approval, 16 and its other subsidiaries and affiliates, and to evade the Commission's regulatory authority as 17 precluding the Commission from imposing any conditions necessary to protect the public and 17 part of a common plan or design to benefit and gain non-debtors, PG&E's Plan is not proposed 18 maintain ratepayer indifference; 18 in good faith.
19 C. evade compliance with the Affiliate Transaction Rules established by the 19 3. PG&E's Plan is proposed by a means forbidden by law in that it proposes 20 Commission in the public interest, in part, to ensure that ratepayers are not subsidizing 20 transactions that violate California law, improperly relies upon preemption of non-economic 21 unregulated activities. The Affiliate Transaction Rules are applicable to the restructuring 21 state laws, improperly relies on a finding that the Bankruptcy Code overrides other federal laws, 22 transactions between PG&E and PG&E Corp. and its affiliates which are proposed in PG&E's 22 and seeks relief that is not available because of the State's sovereign immunity.
23 Plan. These rules also require allocating the gain on sale of public utility property to or between 23 4. As written, PG&E's Plan violates numerous state and federal laws, including but 24 shareholders and ratepayers; not limited to all the laws the PG&E Proponents contend are preempted, PUC §§377 and 851, 24 25 f. evade compliance with the 22 Holding Company Conditions which the 25 and PG&E Corp.'s "first priority obligation."
26 Commission imposed upon PG&E and PG&E Corp. in approving the holding company 26 5. PG&E's Plan violates numerous federal laws that either grant exclusive 27 formation, and the agreement by the board of directors for PG&E and PG&E Corp. to abide by 27 jurisdiction to the State or require compliance with State law. Under the "coexistence" doctrine 28 28 of statutory construction, the Court must give effect to the Bankruptcy Code and federal 1s15.100 oBJECrioNs To CONRJMA'InON 1152.100 OBECTIONS TO CoNFIMMATION
nonbankruptcy law if possible. There are several provisions of the Federal Power Act ("FPA"), c. Section 1(c) of the NGA, 15 U.S.C. §717(c), specifically provides that the Natural Gas Act ("NGA"), and the Public Utility Holding Company Act ('TUHCA") that certain natural gas pipelines are regulated by the states and not FERC. These pipelines are mandate compliance with state law or require state regulatory approval for actions contemplated known generically as "Hinshaw" pipelines. A Hinshaw pipeline under Section l(c) is any by PG&E's Plan. The PG&E Proponents contend, and confinmation of PG&E's Plan depends on pipeline that is used to transport gas from the border of a state or from within the boundaries of a a finding, that the Bankruptcy Code overrides these federal nonbankruptcy laws. Since each of state to a point of consumption within that state so long as the pipeline is regulated by the state.
these federal nonbankruptcy laws can coexist with the Bankruptcy Code such that the Currently, all of PG&E's natural gas pipeline systems in California are intrastate, and thus are Bankruptcy Code does not override them, PG&E's Plan also does not provide adequate means Hinshaw pipelines. PG&E's Plan relies on FERC approval to add a three-mile segment to its for its implementation. PG&E's Plan violates federal law in each of the areas discussed below: pipeline system that would cross the Oregon border. PG&E argues that if FERC approves this
- a. Sections 19 and 20 of the FPA provide that licenses for hydroelectric addition then PG&E would be operating an interstate pipeline system that would be regulated by projects are to be subject to the rate and securities regulation of the states. See 16 U.S.C. §§812 FERC instead of the Commission. However, FERC does not have jurisdiction over PG&E's
- 13. Only in instances where a state does not regulate is it permissible under the FPA for FERC application to add the three-mile segment or to authorize abandonment and transfer of intrastate to assume jurisdiction over rate and securities regulation. PG&E's Plan to disaggregate and pipelines, because PG&E's pipelines are Hinshaw pipelines, exempt from FERC regulation.
deregulate, however, calls for FERC jurisdiction in place of state regulation in this area, which Only if the appropriate state regulator, here the Commission, approves the addition and the directly contradicts the provisions of Sections 19 and 20 of the FPA. The Bankruptcy Code and abandonment and transfer will PG&E's pipeline system be an interstate pipeline subject to FERC these provisions of the FPA are capable of coexistence, such that PG&E's Plan violates the FPA. regulation. Again, PG&E's Plan violates applicable nonbankruptcy federal law. The
- b. Section 204 of the FPA, 16 U.S.C. §824c, requires public utilities such as Bankruptcy Code does not prevail over the NGA.
PG&E to obtain authorization for the issuance of securities from FERC. Subpart (f) of this d. PG&E has applied for and must obtain approval of the Securities and section, however, provides that "The provisions of this section shall not extend to a public utility Exchange Commission ("SEC") under Public Utility Holding Company Act ("PUHCA") for its organized and operating in a State under the laws of which its security issues are regulated by a disaggregation and deregulation plan. However, section 10(f) of PUHCA provides that the SEC State commission." See 16 U.S.C. §824c(f). As PG&E admits, PUC §§816-830 require the cannot approve any acquisition "unless it appears to the satisfaction of the [SEC] that such State Commission's approval for the issuance of debt or equity securities. Thus, federal law requires laws as may apply in respect of such acquisition have been complied with." See 15 U.S.C.
the application of state law. In this regard, PG&E's Plan not only seeks preemption of state law, §790). In the SEC proceedings, PG&E argues that the SEC can approve the application but also authority to violate applicable nonbankruptcy federal law. In the FERC proceedings, notwithstanding section 10(f) because the Bankruptcy Code preempts state law, but also admits PG&E contends that the Bankruptcy Code prevails over the FPA such that the Bankruptcy Court that this is a conflict of laws issue. The Bankruptcy Code does not preempt state law in a manner approval and FERC approval of the issuance of securities is all that is required. The Bankruptcy that nullifies section 10(o), nor does it prevail over PUHCA.
Code and these provisions of the FPA are capable of coexistence, such that PG&E's Plan e. PG&E's Plan also violates Section 32 of PUHCA regarding exempt violates the FPA. wholesale generator status. In 1992, Congress added an exemption for certain types of generators known as "exempt wholesale generators." Under this provision, FERC is to make 1152.1oo OBJECTIONS TO CONFIRMA rlON 112.is0 09isC-noia TOCONPIRMATI3
I determinations regarding whether facilities qualify for exempt wholesale generator status. For 1 California Nuclear Facility Decommissioning Act of 1985, and regarding the PG&E Proponents' 2 existing rate-based facilities such as PG&E's, Section 32(c) specifically requires the state to 2 scheme to transfer valuable assets to the Debtor's parent under the guise of a plan of 3 consent to the exemption. 15 U.S.C. §79z-5a. While PG&E is not requesting exempt wholesale 3 reorganization for little consideration and benefit to the Debtor. Discovery will also be requested 4 generator status to implement its plan, PG&E's FERC and SEC applications are crafted to permit 4 from individual directors and subsidiaries and affiliates of the PG&E Proponents and other third 5 PG&E to receive the benefits of the exemption without obtaining the approval of state regulatory 5 parties.
6 authorities, contrary to Section 32(c) and the intent of Congress. PG&E will have to take the 6 D. PG&E's Plan Is Not Feasible (11 U.S.C. §1129(a)(11)).
7 position, which is contrary to case law, that the Bankruptcy Code allows the transactions to occur 7 1. The Plan Proponents are required to prove that confirmation of PG&E's Plan is 8 nullifying the effect of Section 32(c). 6 The Bankruptcy Code does not override the operation of 8 not likely to be followed by liquidation or the need for further financial reorganization. 11 9 Section 32(c) of PUHCA. 9 U.S.C. § 1129(a)(11). The PG&E Proponents must show that the plan has a reasonable 10 6. PG&E's Plan does not assure that the higher state safety requirements set forth in 10 probability of success and is workable.
II the California Nuclear Facility Decommissioning Act of 1985 (PUC §§8321 through 8930) can 11 2. PG&E's Plan is not feasible because it does not have a reasonable probability of 12 be met. That Act was passed "to protect California's citizens from exposure to radiation from 12 success and is not workable for many of the reasons already stated. PG&E's Plan improperly 13 nuclear facilities." Nor does PG&E's Plan ensure that the ultimate costs and health and safety 13 relies upon preemption by the Bankruptcy Code of non-economic laws where no such 14 impacts of the decontamination and decommissioning of the Diablo Canyon Power Plant are 14 preemption exists. The PG&E Plan improperly relies on the Bankruptcy Code overriding other 15 reduced to the lowest levels possible, given California's stricter standards, or that a Diablo 15 federal nonbankruptcy law such as the FPA, the NGA, and the PUHCA.
16 Canyon LLC will have sufficient capitalization required to meet higher California requirements. 16 3. In addition, PG&E's Plan depends upon the timely approvals by FERC and other 17 Moreover, PG&E's Plan does not address the continuation of the Diablo Canyon Independent 17 federal regulatory agencies of numerous transactions that will not be timely obtained, if obtained 18 Safety Committee, which was formed as part of a settlement agreement arising out of the 18 at all.
19 Commission's oversight over the Diablo Canyon Power Plant, and which has an independent 19 4. Further, the implementation of PG&E's Plan depends on relief that is not 20 safety role under California regulation. In this regard, PG&E's Plan also lacks adequate means 20 available under the Bankruptcy Code because of sovereign immunity and PG&E's Plan 21 for its implementation. 21 improperly relies on the alleged waiver of sovereign immunity.
22 7. The State Entities intend to conduct discovery on this objection. The discovery 22 5. The State Entities intend to conduct discovery on this objection. The discovery 23 may include, but is not limited to, depositions, interrogatories, production of documents, requests 23 may include, but is not limited to, depositions, interrogatories, production of documents, requests 24 for admissions and third party discovery. In particular, the State Entities intend to seek 24 for admissions and third party discovery. In particular, the State Entities intend to seek 25 discovery on the PG&E Proponents' factual and legal basis for any contention that the 25 discovery on the PG&E Proponents' factual and legal basis for contending that PG&E's Plan is 26 Bankruptcy Code and other federal laws cannot coexist, regarding compliance with the 26 feasible given the many legal problems it faces.
27 6 PG&E's disaggregation and deregulation plan may also depend on the Bankruptcy Code 27 nullifying provisions of the Raker Act, 38 Stat. 242 (1913), which is subject to the same conflict 28 of laws test. 28 11s2.10o OBJECII*ONSTO CONFIRMATION 115 2.100 OsJECTIONS TOCONFIRMATION
1 E. PG&E's Plan Is Not in the Public Interest. from ensuring that they remain dedicated to serving the public needs as mandated by the 2 1. The interest of the public must be considered at confirmation of the plan of 2 California Legislature.
reorganization of a public utility. See e.g., American United Mut. Life Ins. Co. v. City of Avon 4.
3 3 As part of its hydroelectric system, PG&E holds over 140,000 acres of 4 311 U.S. 138, 145, 61 S.Ct. 157, 161-62, 85 L.Ed.2d 91 (1940); N.L.R.B. v. Bildisco and 4 environmentally sensitive lands, over 170 dams and diversions on 16 major California rivers and Bildisco 465 U.S. 513, 104 S. Ct. 1188, 104 S. Ct. 1188 (1984); In re Public Service Company streams, and over 95 reservoirs.
5 5 PG&E also holds other environmentally sensitive lands.
6 of New Hampshire. 108 B.R. 854, 873-74 (Bankr. D.N.H. 1989). 6 Currently, state law operates to maximize protection of these lands and waters through, inter 7 2. PG&E's Plan is not in the public interest as it goes well beyond adjusting 7 alia, the regulatory oversight of the Commission. PG&E's Plan bypasses this regulatory 8
debtor/creditor relations, impacting many others who are without a voice in this Court of limited 8 oversight and significantly alters the economic incentives favoring proper envirornmental jurisdiction. PG&E's Plan manipulates the bankruptcy system to adjust the regulatory stewardship, all to the harm of the present and future citizens of the State of California.
9 9 10 framework applicable to public utilities in California and seeks to evade State regulation deemed 10 5. It is no answer to claim, as the PG&E Proponents argue in their disclosure 11 important by the California State Legislature for the protection of the public. Such attempts to statement, that there will be no regulatory gap since federal agencies will regulate the new 11 12 use the Bankruptcy Code to evade State law are inconsistent with Congressional intent evinced 12 entities and the post-confirmation entities will comply with all applicable state and federal laws.
13 in 28 U.S.C. §959(b) and elsewhere (i.e., criminal enforcement and regulatory exceptions to the The federal agencies do not have the same charter to protect the health, safety and environment 13 14 automatic stay, 11 U.S.C. §362(b)(1) and (4)). Further, the impacts of PG&E's Plan go beyond 14 of the State of California as the Commission does under California law. The very existence of 15 the creditors in the proceeding and profoundly affect non-creditors, such as ratepayers, as well as 15 such laws shows that the California Legislature has determined that federal regulation is not 16 the environment. However, because of their non-creditor status, those most impacted by 16 sufficient to protect localized interests in health, safety and the environment In this regard, 17 PG&E's Plan are unable to participate in this proceeding to express their concerns with PG&E's 17 PG&E's Plan lacks adequate means for its implementation.
18 attempt to evade State regulatory laws and with its attempt through the Bankruptcy Court to 18 6. The State Entities intend to conduct discovery on this objection. TIe discovery 19 transfer generation assets in contravention of State law. If PG&E wants a change in the 19 may include, but is not limited to, depositions, interrogatories, production of documenta, requests 20 regulatory framework, PG&E should seek it through the legislative process or other appropriate 20 for admissions and third party discovery. In particular, the State Entities inteid to seek 21 means where all affected and concerned have a voice. PG&E's unilateral attempt to effectuate 21 discovery on the PG&E Proponents' factual and legal basis for contending that PG&E's Plan is "self-deregulation" and transfer of generation assets in contravention of State law 22 in this 22 in the public interest.
23 bankruptcy proceeding is not in the public interest. 23 F. The Commission's Plan Is Preferable under 11 U.S.C. §1129(c).
- 3. As PG&E has noted in its pleadings before this Court, PG&E serves in excess of 24 24 1. If both PG&E's Plan and the Commission's Plan meet the requirements of section 25 4,500,000 electric power and gas customers in Northern California. The State Legislature has 25 1129(a) and/or (b), the Commission's Plan is preferable under 11 U.S.C. §1129(c). Pursuant to 26 determined that retention of investor owned utility generation assets in a manner that ensures 26 section 1129(c), the Court must consider, but does not have to follow, the preferences of 27 they are dedicated to serve California citizens is necessary to protect the public interest. PUC 27 creditors and equity security holders in determining which plan to confirm. The Court should 28 §377. PG&E's Plan seeks to transfer these assets in a manner that prohibits the Commission 28 also consider other factors including the type of plan (reorganization or liquidation), feasibility, 1152.100 OBJECTIONSTO CONFIRMATION 1 1152.100 1OaJ u Fit'RMATiON
1 the treatment of creditors and equity holders, societal needs, whether a plan benefits insiders at l CONCLUSION 2 the expense of creditors, whether delay and further litigation are likely to follow confirmation, 2 The State Entities object to confirmation of PG&E's Plan on the foregoing grounds. The 3 and whether the plan is a "sweetheart" plan favoring one party. State Entities reserve the right to further brief the Court on the legal and factual bases for these 3
4 2. For the same reasons that PG&E's Plan is not in the public interest, not feasible, objections, and any other objections, to the extent discovery reveals other bases to object to 4
5 and not confirmable, it is also not the preferable plan. PG&E's Plan may well result in PG&E's Plan.
5 6 significant adverse environmental impacts. It will certainly preclude the Commission's 6 Dated: July L7 2002 Respectfully submitted, 7 comprehensive public interest review of the plan's system-wide disaggregation. And it will BILL LOCKYER 7 Attorney General of the State of California 8 impair the Commission's regulatory authority over the public health, safety and welfare and the KEN ALEX 8 Acting Senior Assistant Attorney General 9 environment. PG&E's Plan is a "sweetheart plan" benefiting the debtor's insider parent at the MARGARITA PADILLA 9
Deputy Attosey General 10 expense of the citizens of the State of California. Moreover, confirmation of PG&E's Plan is It 11 likely to result in delay and further litigation due to appeals by the State Entities and the 11 STEVEN H. LfIý) STEIN 12 Commission. The State Entities have a duty to vigorously defend the laws of the State of PAUL J. PASCUZZI 12 FELDERSTEIN FITZGERALD 13 California against PG&E's attacks. The State Entities cannot agree to any plan of reorganization WILLOUGHBY & PASCUZZI LLP 13 Attorneys for the People of the State of California, ex rel.
14 that is illegal under California law, especially in light of the clear Congressional intent that a California Department ofToxic Substances Control, Central 14 Coast Regional Water Quality Control Board, Colorado 15 debtor must reorganize within the boundaries of state and federal law. 28 U.S.C. §959(b). River Basin Regional Water Quality Control Board, State 15 Water Resources Control Board, Lahontan Regional Water 16 3. The State Entities intend to conduct discovery on this objection. The discovery 16 Quality Control Board, Central Valley Regional Water may include, but is not limited to, depositions, interrogatories, production of documents, requests Quality Control Board, San Francisco Bay Regional Water 17 17 Quality Control Board, North Coast Regional Water Quality 18 for admissions and third party discovery. In particular, the State Entities intend to seek Control Board, California Department of Fish and Game, 18 California Department of Forestry and Fire Protection, 19 discovery on the PG&E Proponents' factual and legal basis for contending that PG&E's Plan is California Department of Water Resources, California 19 Department of Motor Vehicles, California Energy 20 the preferable plan under section 1129(c). Commission, California Department of Justice, California 20 State Board of Equalization, California Department of Parks 21 and Recreation, California Department of General Services, 21 I// California Department of Consumer Affairs (Bureau of 22 22 Security and Investigative Services) and California State
/// Lands Commission 23 23
/// BRUCE A. BEHRENS, Chief Counsel 24 24 DAVID GOSSAGE, Deputy Chief Counsel 25 "// ANTONIO R. ANZANIO, Asst. Chief Counsel 25 BARBARA J. WILLS 26 'I/
26
'I/ By:J &-- & A 27 27 MARGAME 9TARK-ROBERTS, SiiN 133561
'I/ Attorneys for the People of the State of California, Ex Rel.
28 28 Department of Transportation 1152.100 OBJECTIONSTO CONFIRMATION 1152.100 OBJECTIONS TO CONFtJ2 ATION