ML023250008
| ML023250008 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 11/14/2002 |
| From: | Brendan Collins US Dept of Justice, Civil Div |
| To: | Office of Nuclear Reactor Regulation, US Federal Judiciary, Bankruptcy Court, Northern District of California |
| References | |
| 01-30923 DM | |
| Download: ML023250008 (7) | |
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PACIFIC GAS AND ELECTRIC
- COMPANY, a California Corporation, CASE NO.
01-30923 DM
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Debtor.
CHAPTER 11 Date: November 18, 2002 Time: 9:30 a.m.
UNITED STATES' TRIAL BRIEF IN OPPOSITION TO CPUC'S PLAN OF REORGANIZATION The United States of America, on behalf of its various agencies, files its Trial Brief in Opposition to the Plan of Reorganization propounded by the California Public Utilities Commission
("CPUC")
and the Official Committee of Unsecured Creditors, (the "CPUC Plan").
64 ROBERT D.
- MCCALLUM, JR.
Assistant Attorney General J.
CHRISTOPHER KOHN Director BRENDAN COLLINS SBN DC 413658 MATTHEW J.
TROY SBN GA 717258 5ý5-2-16 Trial Attorneys Commercial Litigation Branch Civil Division Department of Justice P.O. Box 875 Ben Franklin Station Washington, D.C. 20044-0875 Telephone:
(202) 616-2231 Facsimile:
(202) 307-0494 KEVIN V.
- RYAN, SBN CA 118321 United States Attorney DOUGLAS CHANG, SBN HI 2922 Assistant United States Attorney 450 Golden Gate Avenue San Francisco, California 94102 Telephone:
(415) 43)6-6985 Facsimile:
(415) 436-7234 Attorneys for the United States of America UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA In re
1 Dismissal of Rate Recovery Litigation 2
The CPUC's Plan contemplates dismissal with prejudice of the Rate 3 Recovery Litigation pursuant to which PG&E seeks recovery of retail 4
rate costs incurred in the federally regulated wholesale market.
See 5
CPUC Plan § 7.3.
Such dismissal is contrary to the CPUC's fiduciary 6
obligation to maximize value for the estate, particularly when the 7
CPUC's Plan faces significant questions as to its financial 8
feasibility and substantial legal questions exist as to whether the 9
estate will receive any economic benefit in return for such dismissal.
10 The Rate Recovery Litigation is currently proceeding in the 11 United States District Court for the Northern District of California 12 in a case styled Pacific Gas & Electric Co.
- v. Loretta Lynch, et al, 13 No. C-01-3023-VRW.
In the litigation, PG&E seeks to recover billions 14 of dollars of undercollected procurement costs that it sustained when 15 the CPUC refused to allow it to collect in its retail rates the actual 16 costs incurred in procuring electricity for its ratepayers.
17 PG&E, in its complaint, estimated these undercollections to be 18 approximately $9.2 billion.
The CPUC estimates the amount of the 19 claims to be between $6 billion and $9.2 Billion.
CPUC Trial Brief at 20
- 18.
21 The CPUC justifies its dismissal of the Rate Recovery Litigation 22 on the grounds that some of the relief being sought in the litigation 23 is being provided to PG&E under the Commission's Plan in the form of 24 revenues in excess of costs in rates ("headroom")
from June 2001 25 through the Effective Date.
CPUC Trial Brief at 17.
Further, the 26 CPUC states that, if the Commission's plan is confirmed, the CPUC will 27 permit the Debtor to recover in rates the cost of the debt securities 28 United States'Trial Brief in Opposition to CPUC's Plan of Reorganization 2
1 to be issued under the plan, the proceeds of which are being used to 2
repay a portion of PG&E's indebtedness incurred during the energy 3 crisis.
Id.
Finally, the CPUC asserts that dismissal is appropriate 4
because of the substantial litigation risks that exist in the Rate 5
Recovery Litigation.
6 Litigation Risks 7
Among the litigation risks addressed in CPUC's Disclosure 8
Statement is the likelihood that the CPUC's motion to dismiss the 9 complaint and/or its motion for summary judgment will be granted.
10 Disclosure Statement at 60-61.
Similarly, in the trial testimony of 11 its expert, Ashutosh Bhagwat, the CPUC reiterates that PG&E's claims 12 in the Rate Recovery Litigation face substantial risks on the merits.
13 Specifically, Mr.
Bhagwat asserts that significant doubts exist as to 14 whether the filed rate doctrine will apply to the market based tariffs 15 which form the basis of PG&E's claims and, if so, whether the Supreme 16 Court's preemption decision in Nantahala Power & Light Co.
- v.
17 Thornburg, 476 U.S.
953 (1986),
applies in this context.
18 The CPUC's arguments as to the substantial risks that PG&E faces 19 in the Rate Recovery Litigation, however, gloss over the fact that 20 the district court has already denied the CPUC's motions to dismiss 21 and for summary judgment.
In so doing, the court considered and 22 summarily rejected the legal arguments now being advanced by Mr.
23 Bhagwat.
In its lengthy and well-reasoned decision, the court held 24 that:
25 the filed rate doctrine applies here in much the same way as it does under a cost-of-service regime.
The 26 rule adopted by the court may be stated as follows:
costs of wholesale energy, incurred pursuant to rate 27 tariffs filed with FERC, whether these rates are market-based or cost-based, must be recognized as 28 United States'Trial Brief in Opposition to CPUC's Plan of Reorganization 3
1 recoverable costs by state regulators and may not be trapped by excessively low retail rates or other 2
limitations imposed at the state level.
3 In light of this rule, the novel features of California's regulatory scheme are in some ways 4
ultimately irrelevant. Utilities must be able to recover their wholesale costs incurred pursuant to 5
FERC-filed tariffs even when FERC allows sale of wholesale electricity at prices the market will bear, 6
even when this federal approval is based in part on a retail rate freeze and even when, as here, FERC 7
subsequently has determined that the market-based rates were, at times, unreasonable.
8 Opinion at 43, Exhibit 2 to Bhagwat Report.
9 Thus, Mr. Bhagwat's suggestion that there are very powerful 10 arguments for not applying the filed rate doctrine to market based 11 tariffs is entitled to little weight.
Similarly, his argument that a 12 court will not apply the Nantahala doctrine under these facts has been 13 proven wrong.
This Court need look only to the holding of the 14 district court to determine that the CPUC's assessment of the 15 litigation risks posed by the Rate Recovery Litigation is faulty.
16 Recovery under the Suit 17 Similarly, the CPUC glosses over and ignores the amount of the 18 recovery PG&E is likely to win for the benefit of the estate.
Judge 19 Walker's order denying the CPUC's motions to dismiss and for summary 20 judgment did leave open certain issues for trial, including the total 21 amount of undercollections, whether revenues received from different 22 sources could be applied to reduce the amount of undercollection and 23 whether revenues from the entire rate freeze period should be 24 considered.
The CPUC fails to provide any legitimate basis for this 25 Court to conclude, however, that the paltry settlement CPUC proposes 26 is adequate.
The CPUC states that the value of the revenues in excess 27 of costs that PG&E has been collecting from June 2001 through the 28 United States'Trial Brief in Opposition to CPUC's Plan of Reorganization A
1 Effective Date equals approximately $2.7 billion.
CPUC Trial Brief at 2
17.1 The CPUC further states that it will permit PG&E to recover in 3 rates the cost of the securities to be issued under the Joint Plan as 4 well as approximately $1.75 billion of a regulatory asset that will 5 amortize over ten years.
The CPUC estimates the value of the entire 6
settlement package at between $2.75 billion and $4.45 billion.
CPUC 7 Trial Brief at 18.
Thus, even under the CPUC's own self serving 8 calculations, it is settling the litigation for between $4.7 and $6.5 9 billion less than PG&E's claim.
The CPUC fails to justify a 10 settlement involving such a drastic reduction in recovery to the 11 estate, particularly given the substantial financial feasibility 12 questions that exist with its plan.
13 Moreover, the CPUC fails to address the fact that even the $2.75 14 billion it estimates as the value of the settlement may be illusory.
15 First, as set forth in PG&E's Trial Brief in Opposition to the CPUC 16 Plan, there is no assurance that future commissions will be bound by 17 the settlement.
See PG&E Trial Brief at 3-10.
In addition, the CPUC 18 ignores the legal cloud hanging over the $2.75 billion recovery in--
19 light of the Ninth Circuit's certification decision in Southern 20 California Edison Co. v. Lynch, 307 F.3d 794 (9th Cir. 2002).
- There, 21 the Ninth Circuit considered a settlement agreement between Southern 22 California Edison and the CPUC in the form of a stipulated judgment 23 setting rates at an amount sufficient to allow Edison to recover 24 substantially all of its past procurement cots.
In considering that 25 26 Interestingly, however, the only source the CPUC provides for this calculation is its own press release.
Whether the CPUC 27 will be able to prove at confirmation that this figure is real remains to be seen.
28 United States'Trial Brief in Opposition to CPUC's Plan of Reorganization 5
1 settlement, which is substantially similar to the settlement at issue 2
here -- but for the fact that the Edison settlement would pay Edison a 3
much greater recovery on its filed rate claim than PG&E's recovery -
4 the Ninth Circuit stated that serious questions existed as to whether 5
it violated state law, both in substance and the procedure by which 6
the CPUC agreed to it.
"If so, then the Commission lacked capacity to 7
consent to the Stipulated Judgment, and we would be required to vacate 8
it as void."
Id.
at 809.
Recognizing that the issue presented a 9
question of state, as opposed to federal law, however, the Ninth 10 Circuit certified the question of whether the stipulated judgment 11 violated state law to the California Supreme Court.
If the California 12 Supreme Court agrees with the reasoning of the Ninth Circuit, the 13 settlement would be void and the $2.75 billion of headroom would no 14 longer be available for payment to PG&E's creditors but would instead 15 be recoverable by ratepayers.
Under that scenario, dismissal with 16 prejudice of the Rate Recovery Litigation and the loss of billions of 17 dollars owed to the estate, would provide no concomitant benefit for 18 creditors.
19 Conclusion 20 The CPUC's dismissal with prejudice of the Rate Recovery 21 Litigation against itself cannot be justified.
Despite the statement 22 of the CPUC's legal "expert," no substantial legal questions exist as 23 to whether the filed rate doctrine and the related Nantahala 24 preemption rule can be applied to the claims asserted by PG&E.
25 Indeed, the district court already so held.
In contrast, in light of 26 the Ninth Circuit's recent decision in Southern California Edison Co.
27 v. Lynch, substantial questions do exist as to whether any of the 28 United States'Trial Brief in Opposition to CPUC's Plan of Reorganization 6
1 purported $2.7 billion benefit to the estate under the settlement will 2
be available for creditors.
Thus, the estate may receive no benefit 3
whatsoever from dismissal with prejudice of the multi-billion dollar 4
Rate Recovery Litigation.
Moreover, even if the funds from the 5
headroom in rates are ultimately available for creditors, the CPUC 6
cannot establish that the $4-6 billion give away proposed by the 7
settlement is justified.
8 9
Respectfully submitted, 10 ROBERT D. MCCALLUM Assistant Attorney General 11 KEVIN V.
- RYAN, SBN CA 118321 12 United States Attorney 13 DOUGLAS.
K.
- CHANG, HI No.
02922 Assistant United States Attorney 14 A
6e, 4
15 J.
CHRISTOPHER KOHN TRACY J.
WHITAKER 16 BRENDAN COLLINS MATTHEW J.
TROY 17 Commercial Litigation Branch Civil Division 18 United States Department of Justice P.O. Box 875, Ben Franklin station 19 Washington, DC 20044 (202) 616-2231 20 Attorneys for United States of America 21 22 November 14, 2002 23 24 25 26 27 28
,United States'Trial Brief in Opposition to CPUC's Plan of Reorganization 7