ML023330445
| ML023330445 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 11/20/2002 |
| From: | Landau J Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Pacific Gas & Electric Co |
| To: | Office of Nuclear Reactor Regulation, US Federal Judiciary, Bankruptcy Court, Northern District of California |
| References | |
| 01-30923 DM, 94-0742640 | |
| Download: ML023330445 (21) | |
Text
1 JAMES L. LOPES (No. 63678) .
GARY M. KAPLAN (No. 155530) 2 JULIE B. LANDAU (No. 162038)
HOWARD, RICE, NEMEROVSKI, CANADY, 3 FALK & RABKIN A Professional Corporation 4 Three Embarcadero Center, 7th Floor San Francisco, California 94111-4065 5 Telephone: 415/434-1600 Facsimile: 415/217-5910 6
Attorneys for Debtor and Debtor in Possession 7 PACIFIC GAS AND ELECTRIC COMPANY 8
9 UNITED STATES BANKRUPTCY COURT 10 NORTHERN DISTRICT OF CALIFORNIA 11 SAN FRANCISCO DIVISION 12 In re Case No. 01-30923 DM HOWARD 13 Chapter 11 Case RICE NEMEROVSKI PACIFIC GAS AND ELECTRIC CANADY FAIN 14 COMPANY, a California corporation,
& KABKIN Date: December 23, 2002 Debtor. Time: 1:30 p.m.
"'** 15 Place: 235 Pine Street, 22nd Floor 16 San Francisco, California Federal I.D. No. 94-0742640 Judge: Hon. Dennis Montali 17 18 19 NOTICE OF MOTION AND MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT, INCLUDING PROCUREMENT OF THE RESIDUAL NET SHORT 20 POSITION AND TO INCUR POST-PETITION SECURED DEBT RELATED THERETO; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF 21
[SUPPORTING DECLARATION OF ROY KUGA FILED SEPARATELY]
22 23 24 25 26 27 28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA
1 TABLE OF CONTENTS 2 Page 3 NOTICE OF MOTION AND MOTION 1 4 MEMORANDUM OF POINTS AND AUTHORITIES 2 INTRODUCTION 2 5 I. FACTUAL BACKGROUND 4 6 A. Background Regarding Power Procurement, the Residual Net Short Position and Related Recent Legislation. 4 B. Recent CPUC Procurement Decisions. 6 8 C. PG&E's Procurement Plan. 8 9 1. Assumptions and Conditions Applicable to PG&E's Resumption of the Power Procurement Function On An Interim Basis. 9 10
- 2. Description of Transactions Contemplated in connection 11 with Power Procurement for 2003. 11 12 D. Secured Debt Requirements related to Resumption of the Procurement Function. 12
- 1. ISO Collateral Requirements. 13 HCWARD 13 ERUc 2. Collateral Requirements Related to Power and Gas EUK Agreements, Transmission Agreements and Financial 13 RAMN
,,*,*,,CM*.. 15 Hedge Agreements.
- 3. Consent of Indenture Trustee. 14 16 II. PG&E SHOULD BE AUTHORIZED TO RESUME POWER 17 PROCUREMENT FOR 2003 PURSUANT TO BANKRUPTCY CODE SECTION 363(b)(1) 14 18 III. PG&E SHOULD BE AUTHORIZED TO INCUR POST-PETITION SECURED DEBT PURSUANT TO BANKRUPTCY CODE 19 SECTION 364 15 17 20 CONCLUSION 21 22 23 24 25 26 27 28
-i-
1 TABLE OF AUTHORITIES 2 Page(s) 3 4 Cases 5 Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir. 1983) 14 6
In re Ames Dep't Stores, Inc., 115 B.R. 34 (Bankr. S.D.N.Y. 1990) 15 7 16 In re Crouse Group, Inc., 71 B.R. 544 (Bankr. E.D. Pa. 1987) 8 14 In re Lionel Corp., 722 F.2d at 1070 9 16 In re Simasko Prod. Co., 47 B.R. 444 (D. Colo. 1985) 10 16 In re Tenney Village Co., Inc., 104 B.R. 562 (Bankr. D.N.H. 1989) 11 Norris Square Civic Ass'n v. St. Mary Hosp. (In re St. Mary Hosp.), 86 B.R. 16 12 1 393 (Bankr. E.D. Pa. 1988)
HOWARD HCVM131 Official Comm. of Subordinated Bondholders v. Integrated Res., Inc.(In re 14 RICE Integrated Res., Inc.), 147 B.R. 650 (S.D.N.Y. 1992) cGAmN, 14 14 ORAMN Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)
AP,.ot,,*I . 15 14 Stephens Indus., Inc. v. McClung, 789 F.2d 386 (6th Cir. 1986) 16 17 Statutes 18 Bankr. Code 19 §1107 4
§1108 4 20 §363(b)(1) 2, 14
§364 2, 16 21 §364(d)(1) 15 22 Bankruptcy Local Rules for the Northern District of California Rule 9014-1(c)(1) I 23 California Public Utilities Code 24 §454.5 5
§454.5(a) 8 25 26 Other Authorities 27 3 Lawrence P. King, Collier on Bankruptcy ¶363.02[1][g] (15th ed. rev.
28 1998) 14
-ii-
1 NOTICE OF MOTION AND MOTION 2 PLEASE TAKE NOTICE that on December 23, 2002 at 1:30 p.m., or as soon 3 thereafter as the matter may be heard, in the Courtroom of the Honorable Dennis Montali, 4 located at 235 Pine Street, 22nd Floor, San Francisco, California, Pacific Gas and Electric 5 Company, the debtor and debtor in possession in the above-captioned Chapter 11 case 6 ("PG&E"), will and hereby does move the Court for authority to resume power procurement 7 for 2003 (based on the assumption that there will be timely cost recovery for procurement 8 costs and on other conditions and assumptions described in the accompanying Memorandum 9 of Points and Authorities), and to incur post-petition secured debt related thereto (the 10 "Motion"). This Motion is based on this Notice of Motion and Motion, the accompanying 11 Memorandum of Points and Authorities, the Declaration of Roy Kuga filed concurrently 12 herewith, the record of this case and any evidence presented at or prior to the hearing on this HOWARD 13 Motion.
RICE NEMIMvKI CANADY 14 PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1(c)(1) of the R4IAMKIN
.15 Bankruptcy Local Rules for the Northern District of California, any written opposition to the 16 Motion and the relief requested herein must be filed with the Bankruptcy Court and served 17 upon appropriate parties (including counsel for PG&E, the Office of the United States 18 Trustee and the Official Committee of Unsecured Creditors) at least 14 days prior to the 19 scheduled hearing date. If there is no timely opposition to the requested relief, the Court 20 may enter an order granting such relief without further hearing.
21 PLEASE TAKE FURTHER NOTICE that PG&E is not including copies of the 22 voluminous exhibits attached to the Declaration of Roy Kuga with the service copies of this 23 Motion. However, any person served with this Motion may obtain copies of the exhibits by 24 written request by mail to Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Attn:
25 Nathaniel H. Hunt, Three Embarcadero Center, 7th Floor, San Francisco, California 94111 26 4065, or by e-mail request to nhunt@hrice.com. Additionally, copies of these exhibits will 27 be available for review at the hearing on this Motion.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 MEMORANDUM OF POINTS AND AUTHORITIES 2 Pacific Gas and Electric Company ("PG&E"), the debtor and debtor in possession 3 in the above-captioned Chapter 11 case, requests authority, pursuant to Section 363(b)(1) 4 and Section 364 of the Bankruptcy Code, to resume power procurement for 2003 and to 5 incur post-petition secured debt related thereto.
6 7 INTRODUCTION 8 As explained in more detail below, PG&E seeks authorization to enter into power 9 procurement transactions for calendar year 2003, including procurement to meet the 10 Residual Net Short Position (as defined below) of its retail customers and power 11 procurement-related services. Based on present conditions and assumptions, as summarized 12 below and explained in more detail at pp. 9-10 of this Motion, PG&E believes that such HowAR 13 procurement will not create a material financial risk for PG&E and its bankruptcy estate, or RICE NEMRVF.OSKJ CANFADy 14 adversely affect the feasibility of its proposed Plan of Reorganization (as amended from time SKABKIN 15 to time, the "Plan of Reorganization"). PG&E's ability to resume the power procurement 16 function and to meet the Residual Net Short Position is based upon: (i) recent legislation (SB 17 1976 as described below) that requires the California Public Utilities Commission ("CPUC")
18 to implement timely rate recovery mechanisms and eliminate after-the-fact reasonableness 19 reviews associated with power procurement; (ii) present conditions that indicate the Residual 20 Net Short Position will be small and wholesale prices will remain relatively stable during 21 2003, consistent with current conditions; (iii) the adoption by the CPUC of PG&E's 22 procurement plan or a plan that otherwise fully complies with and implements SB 1976 and 23 the continuing effectiveness of the various elements of such procurement plan; (iv) limited 24 procurement-related collateral requirements in order to protect against any adverse impact to 25 PG&E and its estate; and (v) transactions limited to calendar year 2003 only. In the event 26 that the CPUC modifies PG&E's procurement plan submitted to the CPUC on November 12 27 in a manner that does not comply with and fully implement SB 1976, or other conditions or 28 assumptions change or prove incorrect, PG&E reserves all rights to seek injunctive or other MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 appropriate relief from any obligation to resume procurement in the event that such 2 procurement may adversely impact its ability to confirm its Plan of Reorganization, to 3 implement the Plan of Reorganization once confirmed, or otherwise interfere with PG&E's 4 rights under the Bankruptcy Code.
5 PG&E is in bankruptcy today due to skyrocketing wholesale power prices during 6 2000 and the first quarter of 2001 and the failure of state and regulatory officials to address 7 cost recovery in a timely fashion. In order to successfully exit bankruptcy, PG&E will need 8 to have the financial strength to support power procurement for its customers, among other 9 things. PG&E's Plan of Reorganization addresses this central concern by identifying five 10 requirements for its resumption of the procurement function. The first is the requirement 11 that PG&E return to an investment grade credit rating before it starts procuring power for its 12 customers again.
HOWARD 13 PG&E will not regain an investment grade credit rating by January 1, 2003, when RICE NEMERIOVSKi G4,mDy 14 the CPUC has ordered it to resume procurement. However, under current and forecast 2003 FALl1
&KABKIN 15 conditions, PG&E anticipates that it can resume the procurement function on an interim 16 basis. The 2003 Residual Net Short Position is forecast to be small, unlike the substantially 17 larger net short position in 2000 and 2001. Also, wholesale power prices are at much lower 18 levels than California experienced during the height of the energy crisis in 2000 and 2001.
19 SB 1976 has been enacted requiring the CPUC to implement prompt rate recovery 20 mechanisms, strictly limit reasonableness reviews, and mandate up-front standards and 21 procurement plan approvals.
22 In combination, these factors create a current situation where PG&E believes it 23 can resume power procurement on an interim basis. However, the interim procurement 24 PG&E proposes to undertake beginning January 1, 2003 is not an unqualified, long term 25 resumption of the procurement function. PG&E is not in a position to resume permanent, 26 on-going power procurement except under the terms specified in its Plan of Reorganization.
27 Consequently, PG&E does not believe that this Motion requires any change to its Plan of 28 Reorganization. The Plan of Reorganization's conditions for PG&E's resumption of power MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 procurement must still be satisfied before PG&E can resume the power procurement 2 function on a permanent, on-going basis.
3 4 I. FACTUAL BACKGROUND' 5 PG&E filed a voluntary petition for relief under Chapter 11 of the Bankruptcy 6 Code on April 6, 2001. A trustee has not been appointed, and PG&E continues to function 7 as a debtor in possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
8 9 A. Background Regarding Power Procurement, the Residual Net Short 10 Position and Related Recent Legislation.
11 Due to a number of events that occurred prior to the filing of PG&E's Chapter 11 12 petition, including the downgrading of its credit ratings and resulting loss of its investment HOWARD 13 grade status, market participants were unwilling to sell power to PG&E and PG&E became N WMPRiCE
,OVSKI2 0FALK 14 unable to serve its customers' net short position in early 2001.2 In January 2001, the
&RABKIN 15 California Department of Water Resources ("DWR") was authorized to purchase power to 16 maintain the continuity of supply to retail customers of PG&E and other investor owned 17 utilities (collectively, the "IOUs"). In February 2001, California Assembly Bill No. 1 of the 18 first extraordinary session ("AB lX") was enacted into law. With the authority granted to it 19 under AB 1X, DWR entered into a large number of bilateral power contracts with third party 20 power suppliers to obtain power for the purpose of supplying the retail customers of PG&E 21 and other IOUs ("DWR Contracts"). In 2001 and 2002, DWR also purchased power in the 22 default and short-term markets operated by the California Independent System Operator 23 ("ISO") as needed to meet the utilities' customer loads not otherwise met by the utilities' 24 ' The evidentiary basis and support for the facts set forth in this Motion is contained 25 in the Declaration of Roy Kuga filed concurrently herewith.
2 For additional background regarding PG&E's inability to purchase wholesale 26 power, see Section IV.B of the Disclosure Statement for Plan of Reorganization Under Chajpter 11 of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by 27 Pacific Gas and Electric Company and PG&E Corporation dated April 19, 2002 (Docket No.
28 6054).
MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 own resources and the DWR Contracts executed prior to January 1, 2003. This additional 2 amount of power required to serve an IOU's customers, beyond the IOU's own generation 3 and power purchase contracts (including power from the DWR Contracts allocated to the 4 IOU for operational purposes, as described further below), is referred to as the "Residual Net 5 Short Position". However, AB IX prohibited DWR from entering into new contracts to 6 purchase energy on and after January 1, 2003. In light of the large amount of power under 7 contract in the existing DWR Contracts allocated to PG&E for operational purposes, PG&E 8 anticipates that there will be a relatively small Residual Net Short Position during portions of 9 2003, as explained further below.
10 On September 24, 2002, California Senate Bill 1976 ("SB 1976") was signed into 11 law as an emergency measure, immediately making effective California Public Utilities 12 Code Section 454.5.3 SB 1976 requires the CPUC to allocate the electricity under the HOwA^,D 13 existing DWR Contracts among the customers of the IOUs as a precondition to returning the RICE NEMEROvSKI CANADY FAU.
14 1 IOUs to the procurement function. SB 1976 specifically requires that each IOU submit,
& RABKIN "15 within 60 days of the CPUC's allocation, an electricity procurement plan specifying detailed 16 plans for how the IOU intends to resume procurement of electricity for its retail customers.
17 As part of the resumption of the procurement function, the IOU would procure power for its 18 customers' needs that are not covered by the combination of the IOU's allocation of power 19 from existing DWR Contracts, and the IOU's own power resources and contracts (i.e., the 20 Residual Net Short Position). Additionally, as part of resuming procurement, the IOU would 21 sell surplus power resulting from the DWR Contracts that have been operationally allocated 4
22 to the IOU (referred to as the "Residual Net Long Position").
23 SB 1976 requires that each procurement plan include certain features designed to 24 ensure timely rate recovery for the IOUs' costs of procurement. The critical features of SB 25 3 California Public Utilities Code Section 454.5 is attached as Exhibit A to the Kuga 26 Declaration.
4 The Residual Net Long Position is the amount of surplus power in PG&E's 27 combined portfolio of utility resources and DWR-allocated contracts that needs to be sold to the market or otherwise reduced.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 1976 include: (i) the CPUC is required to implement a rate-making mechanism that provides 2 for timely recovery of procurement costs and ensures that rates are adjusted if existing 3 revenues are not adequate to recover procurement costs; (ii) the CPUC is required to adopt 4 pre-approval or up front standard processes that allow the IOUs to know in advance and at 5 the time a procurement commitment occurs that the transactions are reasonable and fully 6 recoverable in rates without the risk of after-the-fact prudence reviews; (iii) the CPUC's 7 review of the reasonableness of utility administration of procurement contracts is limited to 8 verification of whether the utility performed in accordance with the terms of the 9 procurement contract and reasonably resolved any disputes with the supplier; and (iv) the 10 CPUC is required to evaluate the impact of an approved procurement plan on the ability of 11 the IOU to restore or maintain its investment grade creditworthiness and the CPUC is 12 prohibited from adopting elements of a plan that would impair restoration or maintenance of HOWARD 13 investment grade creditworthiness.
RICE NEMEROVSKI CANADY FALlK 14 SB 1976 also requires the CPUC to create and implement a ratemaking cost
&KABKIN
- .....15 recovery mechanism to track the differences between recorded revenues and costs incurred 16 under an approved procurement plan. The CPUC must review, at least semi-annually, the 17 balancing accounts, and to adjust rates or order refunds, as necessary to amortize the 18 balancing account. For the period prior to January 1, 2006, SB 1976 requires the CPUC to 19 establish a schedule for amortizing the over-collections or under-collections in the power 20 procurement balancing accounts so that the aggregate over-collection or under-collection 21 reflected in the accounts does not exceed five percent of the utility's actual recorded 22 generation revenues for the prior calendar year, excluding revenues collected on behalf of 23 the DWR. This feature is referred to as the "trigger mechanism" as it requires an immediate 24 adjustment in revenues and, if necessary, rates if the disparity between procurement 25 revenues and costs grows too large. For PG&E, it is expected that the 5% threshold in SB 26 1976 results in a trigger amount of approximately $150 million.
27 28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 B. Recent CPUC Procurement Decisions.
2 To address power procurement for the period beginning January 1, 2003, the 3 CPUC instituted a proceeding entitled OrderInstitutingRulemaking to Establish Policies 4 and Cost Recovery Mechanismsfor GenerationProcurementand Renewable Resource 5 Development (the "Procurement Proceedings"). On August 22, 2002, the CPUC issued 6 Decision 02-08-071 in the Procurement Proceedings. This decision sets forth procedures for 7 PG&E (and the other IOUs) to follow for an expedited procurement process for electric 8 procurement beginning January 1, 2003. Under the decision, PG&E was authorized to 9 obtain new contracts with third party suppliers by using DWR as the creditworthy purchaser 10 until such time as PG&E regains an investment-grade credit rating. Based thereon, PG&E 11 filed its Motion for Authority to enter into Certain Power Procurement Contracts on October 12 25, 2002 (Docket No. 10697), requesting authority to enter into certain power procurement HOWARD 13 contracts, which motion was approved by the Court at the hearing conducted on November RJCE NEMEOVSK1 CANADY FALK1 14 14, 2002.
SKABKIN
- ' ....15 In addition to the August 22 decision described above, on October 24, 2002, the 16 CPUC issued its Decision 02-10-062 (the "October 24 Decision",). 5 The October 24 17 Decision requires PG&E and the other IOUs to resume power procurement responsibilities, 18 including procurement of the Residual Net Short Position, effective January 1, 2003, 19 regardless whether PG&E has regained an investment-grade credit rating, by posting 20 collateral or providing letters of credit with the ISO and suppliers where required.
21 The October 24 Decision sets forth requirements for PG&E and the other IOUs' 22 future procurement activities and requires each utility to file a short-term procurement plan 23 for 2003 on November 12, 2002 for the CPUC's review and approval. The CPUC has 24 indicated that it will act on the November 12 procurement plan at a decision conference in 25 mid-December 2002. PG&E has set the hearing on this Motion for December 23, 2002, with 26 the expectation that the CPUC will act on its procurement plan no later than December 19, 27 5 The October 24 Decision is attached as Exhibit B to the Kuga Declaration.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 2002. This Motion is premised upon the assumption that the CPUC will approve PG&E's 2 procurement plan without any unacceptable modifications or will otherwise approve a 3 procurement plan that fully complies with SB 1976. Because PG&E will not be able to 4 assess whether the CPUC's decision on the procurement plan complies with SB 1976 until 5 mid-December, PG&E reserves all rights to supplement or modify this Motion or seek 6 injunctive or other appropriate relief from any obligation to resume procurement in the event 7 that such procurement may adversely impact its ability to confirm its Plan of Reorganization, 8 to implement the Plan of Reorganization once confirmed, or otherwise interfere with 9 PG&E's rights under the Bankruptcy Code.
10 11 C. PG&E's Procurement Plan.
12 In connection with the October 24 Decision, PG&E filed its short-term HOWARD 13 procurement plan for 2003 with the CPUC on November 12, 2002 (the "Procurement KICE NEMEK(]VSKI CANAY FAM! 14 Plan").6 The Procurement Plan includes various elements, including: (i) a risk management SRABKJN strategy; (ii) identification of the types of products to be procured, and types and quantities 16 of transactions proposed to meet the Residual Net Short Position and to offset the Residual 17 Net Long Position; (iii) an assessment of price risks across the utility portfolio; (iv) use of a 18 competitive bid system for new power contracts; and (v) standards and criteria to guide
-19 procurement transaction cost recovery.
20 21 22 23 6 Public Utilities Code Section 454.5(a) specifies that after approval of a procurement 24 plan for a utility, the CPUC shall allow not less than 60 days before the utility resumes procurement. As the CPUC will not issue a decision on PG&E's Procurement Plan until late 25 December, the CPUC is restrained by law from ordering PG&E to procure power under the plan on January 1, 2003. However, PG&E states in its Procurement Plan that it is prepared 26 to waive this 60-day requirement provided that the CPUC approve its Procurement Plan or a procurement plan that otherwise fully complies with and implements SB 1976, and further 27 provided that PG&E receives advance authorization from this Court to resume procurement on an interim basis for 2003.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 7
1 With the operational allocation to PG&E of the DWR Contracts, PG&E's 2 existing power resources, and the new power procurement contracts obtained in connection 3 with the CPUC's August 22 Decision (with DWR having legal and financial responsibility 4 until PG&E regains its investment-grade credit rating), PG&E anticipates that it will have 5 sufficient energy to satisfy the bulk of its customers' power needs in 2003. For some time 6 periods in 2003, however, a Residual Net Short Position is likely to remain, primarily during 7 peak periods (such as periods with warmer weather and/or lower availability of power 8 resources). Depending on actual conditions during the year, at times PG&E will likely have 9 a Residual Net Long Position and be in a position to dispose of surplus power.
10 11 1. Assumptions and Conditions Applicable to PG&E's Resumption of the Power Procurement Function On An Interim Basis.
12 HOWA.D 13 The following assumptions and/or conditions are critical to PG&E's ability to IUCE NEMEJROVSKJ cANADY FAI.K 14 resume and continue procurement on an interim basis, including meeting the Residual Net KABKIN F
""-* 15 Short Position and managing the Residual Net Long Position. In the event that any of these 16 conditions change or assumptions prove to be incorrect, PG&E reserves the right to seek 17 injunctive or other appropriate relief from the Bankruptcy Court from any obligation to 18 resume procurement in the event that such procurement may adversely impact its ability to 19 confirm the Plan of Reorganization, to implement the Plan of Reorganization once 20 confirmed, or otherwise interfere with PG&E's rights under the Bankruptcy Code.
21 a. Procurement Limited to 2003. Since PG&E does not have an investment 22 grade credit rating, it does not have the access to external credit needed to support long-term 23 procurement contracts and new facility projects. Thus, PG&E is seeking authority for 24 procurement solely for 2003 and will not be entering into any long-term contracts for 25 7 DWR will continue to retain full legal title and responsibility under the allocated 26 contracts. Under the CPUC's decision regarding the allocation of the DWR Contracts, the IOUs are directed solely to administer the DWR Contracts. PG&E has filed a request for 27 rehearing of the CPUC's decision regarding allocation of the DWR Contracts and reserves all rights to challenge the decision.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 procurement needs beyond 2003.8 2 b. Timely Cost Recovery and Prospective Reasonableness Standards. PG&E's 3 resumption of procurement is based on the assumption that the CPUC will timely and fully 4 comply with SB 1976 and will approve PG&E's Procurement Plan or otherwise approve a 5 procurement plan that fully complies with and implements SB 1976. This includes timely 6 cost recovery, including both revenue requirements and rate adjustments to enable PG&E to 7 collect its generation and power procurement costs from ratepayers on a timely basis. This 8 also includes clear, up-front, achievable standards to determine the acceptability and 9 eligibility for rate recovery of the costs of the proposed transactions, including no after-the 10 fact reasonableness review except as allowed by SB 1976 to verify compliance with contract 11 terms and reasonable resolution of contract disputes. Consistent with SB 1976, PG&E's 12 resumption of procurement must be pursuant to a CPUC-approved procurement plan so that HOWARD 13 (i) PG&E's actions may be in compliance with the approved procurement plan, and (ii) the RICE NEMEKOVSM CANADY FALl( 14 CPUC can determine if a feature or mechanism of the procurement plan would impair
&RABKJN S1 5 PG&E's restoration to creditworthiness. PG&E's Procurement Plan incorporates the 16 necessary elements to ensure implementation of timely cost recovery consistent with the 17 requirements of SB 1976. It is critical that the CPUC order approving PG&E's Procurement 18 Plan approve and implement effective January 1, 2003 a ratemaking cost recovery 19 mechanism that satisfies the requirements of SB 1976, including, without limitation, the 20 "trigger" mechanism that requires the CPUC to adjust rates to the extent that current 21 revenues are inadequate to recover actual procurement costs. If CPUC action on PG&E's 22 Procurement Plan deviates from any material aspect of the Procurement Plan, PG&E will 23 need to carefully consider whether the CPUC's decision satisfies SB 1976 and other 24 conditions necessary to protect the bankruptcy estate and to support PG&E's return to an 25 s The only exception is with respect to the Interim Procurement Contracts and 26 Renewable Energy Contracts described in the Motion for Authority to enter into Certain Power Procurement Contracts filed on October 25, 2002, which contracts may extend 27 beyond 2003 but will be the legal and financial responsibility of DWR until such time as PG&E regains its investment-grade credit rating.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 investment grade credit rating.
2 c. Limited Residual Net Short Position and Market Stability. PG&E's current 3 forecast of power resources and customer loads produces a relatively small Residual Net 4 Short Position of no greater than two percent of its total load requirements based on current 5 assumptions and projections. PG&E is also assuming that the power market will remain 6 relatively stable through 2003, both as to supply availability and price.
7 d. Limited Collateral Requirements. Under anticipated conditions in 2003 and 8 with approval of PG&E's Procurement Plan by the CPUC, PG&E forecasts that its collateral 9 requirements will not exceed $150 million.
10 11
- 2. Description of Transactions Contemplated in connection with Power Procurement for 2003.
12 HOWA^D 13 PG&E anticipates entering into the following types of transactions to procure FUCE NEMER_*vSrI FALK¥ CANADY4 14 power, to meet its Residual Net Short Position and to manage its Residual Net Long Position K ABIJN 15
... ...... for 2003:
16 a. Purchases and Sales through CPUC-Approved Markets. PG&E intends to 17 balance its Residual Net Short and Residual Net Long Positions with the following types of 18 transactions: (i) purchases and sales of day-ahead and hour-ahead spot energy and gas, and 19 electric and gas transmission rights; (ii) purchases and sales of forward contracts for 20 electricity and gas, and electric and gas transmission rights; and (iii) purchase of electricity 21 and gas options and swaps. Examples of the types of markets contemplated include bilateral 22 contracts done through brokers or individual negotiations, or transactions executed via 23 transaction processing services or electronic exchanges such as Automatic Power Exchange 24 or Intercontinental Exchange. Examples of an option may include either a physical or 25 financial option; a physical option would give PG&E the right but not the obligation to take 26 physical delivery of electricity or gas at a fixed price, while a financial option would provide 27 for an equivalent cash flow without the need for physical delivery.
28 b. Transactions, Purchases and Sales through the ISO. Since PG&E lost its MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 investment grade credit rating, DWR has been the creditworthy party transacting with the 2 ISO to secure services under the ISO's Federal Energy Regulatory Commission approved 3 tariffs that are necessary for the transmission of power to serve PG&E's retail customers and 4 to meet its wholesale obligations. Beginning January 1, 2003, DWR will cease to procure 5 the ISO services to support PG&E's customers and wholesale obligations. Instead, PG&E 6 anticipates resuming responsibility for obtaining the ISO services to serve all its customer 7 load, including but not limited to the Residual Net Short Position. PG&E also anticipates 8 purchasing and selling limited amounts of real time energy through the ISO daily markets.
9 However, PG&E intends to satisfy its ancillary service needs through its own resources.
10 c. Inter-Utility Exchanges. Exchanges between utilities may be used to swap 11 power resources to each utility's benefit. Exchanges of peak for off-peak, or seasonal peak 12 for peak exchanges may be executed by PG&E if a suitable exchange counter-party can be HOWARD 13 secured and the exchange provides cost/benefit ratios consistent with the Procurement Plan.
ICE NEMEr.VSKI CANADY FALK 1
14 d. Purchases through Contracts with Suppliers for Gas and Electricity. PG&E
&RABKIN
.15
"°"... anticipates entering into contracts with suppliers and other counter parties through the 16 process of competitive bidding in order to purchase or sell power, gas or related services for 17 transactions where delivery will begin more than six months from the competitive bidding 18 solicitation date.
19 20 D. Secured Debt Requirements related to Resumption of the Procurement Function.
21 22 PG&E estimates that up to $150 million in cash may be utilized during 2003 for 23 purposes of posting collateral with the ISO and with counter parties to contracts, as 24 described below. PG&E expects to fund its collateral requirements from revenues generated 25 on and after January 1, 2003 and therefore funds needed for implementation of the Plan of 26 Reorganization should not be jeopardized. The only exception to the use of going-forward 27 revenues will be for any cash deposits to be made with the ISO (as described below) to cover 28 transactions for January 2003 only.
MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 1. ISO Collateral Requirements.
2 Under ISO Tariff 2.2.3.2, PG&E must satisfy ISO collateral requirements in 3 order to schedule and participate in the ISO, in the absence of an investment-grade credit 4 rating. PG&E intends to satisfy this requirement through the use of cash deposits. These 5 deposits will be held in an escrow account, with the ISO having the right to monitor the its ISO invoices 6 account and to draw from the account in the event that PG&E does not pay 7 in accordance with the ISO tariff.
8 The amount of cash to be posted with the ISO is based on PG&E's net 9 outstanding and estimated liability to the ISO for the time period between the ISO's 10 provision of services and the date payment is due-for such services. Based on the ISO's l1 current invoice cycle, the time period is approximately 90 days.
12 HOWARD 13 2. Collateral Requirements Related to Power and Gas Agreements, NEMERMKJ Transmission Agreements and Financial Hedge Agreements.
RANM3KI 15 PG&E also anticipates that parties to new power or gas purchase or sale agreements (such 16 agreements, gas or electric transmission agreements, or to financial hedge against PG&E's 17 as options and swaps), will demand collateral if and when the market goes 18 position in the contract. For example, if PG&E has a contract to buy power in Summer 2003 19 at $40 per megawatt hour ("MWh"), and the market price moves downward to $16 per 20 MWh, the contract could require PG&E to post cash collateral to cover the difference in the 21 between the contract and market prices. There may be similar collateral requirements such power 22 event of a PG&E sale of surplus power, for example where the market price for portion of 23 moves upward. With respect to options, parties may require collateral equal to a to 24 the capacity or premium payment if they are concerned about PG&E not being able PG&E 25 perform under the contract. With respect to all of the foregoing types of agreements, 26 will attempt to minimize any collateral requirements.
27 28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 3. Consent of Indenture Trustee.
2 The indenture trustee for certain mortgage bonds issued by PG&E (the "Indenture 3 Trustee"), who holds a lien on substantially all of PG&E's assets for the benefit of the 4 mortgage bondholders, is aware that PG&E is filing this Motion and is requesting the 5 Indenture Trustee's consent to the senior security interests described above, although such 6 consent has not yet been obtained. PG&E will work with the Indenture Trustee to obtain 7 such consent in advance of the hearing on this Motion. Such consent is required under the 8 Cash Collateral Stipulation between PG&E and the Indenture Trustee (which was approved 9 by Order entered on May 9, 2001).
10 11 II PG&E SHOULD BE AUTHORIZED TO RESUME POWER 12 PROCUREMENT FOR 2003 PURSUANT TO BANKRUPTCY CODE SECTION 363(B)(1)
HOWARD 13 NEM4EROVSKJ EdCE cFALAD 14 In determining whether to authorize the use, sale or lease of property of the estate F ABKIN "15 under Section 363(b)(1), courts require a debtor to show that a sound business purpose 16 justifies such actions, applying essentially the same "business judgment" test that is used in 17 determining whether to approve the assumption or rejection of an executory contract. See, 18 e.g., Stephens Indus., Inc. v. McClung, 789 F.2d 386, 3 89-90 (6th Cir. 1986); Committee of 19 Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1070-71 (2d Cir.
20 1983); 3 Lawrence P. King, Collier on Bankruptcy ¶363.02[1] [g] (15th ed. rev. 1998).
21 The burden of establishing a valid business purpose for the use of property of the 22 estate outside the ordinary course of business falls upon the debtor. See In re Lionel Corp.,
23 722 F.2d at 1070-71. Once the debtor has articulated a rational business justification, 24 however, a presumption attaches that the decision was made on an informed basis, in good 25 faith and in the honest belief that the action was in the best interest of the debtor. See, e.g.,
Res.,
26 Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated 27 Inc.), 147 B.R. 650, 656 (S.D.N.Y. 1992) (citing Smith v. Van Gorkom, 488 A.2d 858, 872 28 (Del. 1985)).
MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 Sound business justifications support PG&E's decision to resume procurement of 2 power and related services, including those needed for the Residual Net Short Position and 3 Residual Net Long Position, and to enter into the transactions and agreements necessary for 4 such procurement. PG&E is only seeking authority to resume procurement for calendar year 5 2003, and on the basis that the conditions and/or assumptions described above will remain in 6 place, including timely cost recovery as provided under SB 1976 and PG&E's Procurement 7 Plan. On this basis, PG&E believes that it can resume the procurement function on an 8 interim basis while protecting its bankruptcy estate from any material financial risk.
9 II1.
10 PG&E SHOULD BE AUTHORIZED TO INCUR POST 11 PETITION SECURED DEBT PURSUANT TO BANKRUPTCY CODE SECTION 364 12 Bankruptcy Code Section 364(d)(1) provides, in pertinent part, as follows:
HOWA^D 13 The Court, after notice and a hearing, may authorize the obtaining of
,UCE NEMEvIVSKI cANADY 14 FALK credit or the incurring of debt secured by a senior or equal lien on
& ABKJN property of the estate that is subject to a lien only if S. . 15 (A) the trustee is unable to obtain such credit otherwise; and 16 (B) there is adequate protection of the interest of the holder of the lien 17 on the property of the estate on which such senior or equal lien is proposed to be granted. (11 U.S.C. §364(d)(1))
18 Thus, the only statutory prerequisites for obtaining credit on a senior secured 19 basis is that the debtor be unable to obtain such credit otherwise, and that there be adequate 20 protection for the existing lienholder. This test is clearly satisfied in this case. As discussed 21 above, absent an investment-grade credit rating, PG&E cannot participate in the ISO market 22 without posting collateral; nor does PG&E believe it can negotiate all the necessary power 23 related transactions without agreeing'to post collateral. Further, the only existing potential 24 lienholder (the Indenture Trustee) is fully secured and adequately protected by a substantial 25 equity cushion, as has been demonstrated in previous motions filed by PG&E in this case.
26 Finally, PG&E anticipates that it will obtain the lienholders' consent (the Indenture Trustee) 27 to these post-petition liens in advance of the hearing on this Motion.
28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 In determining whether to approve a transaction under Section 364, courts act in 2 their "informed discretion." In re Ames Dep't Stores, Inc., 115 B.R. 34, 37 (Bankr.
3 S.D.N.Y. 1990). Courts have established that such discretion is to be utilized to permit the 4 debtor's reasonable business judgment to be exercised so long as the financing agreement 5 does not contain terms that are primarily designed to benefit the secured party at the expense 6 of the estate or leverage the bankruptcy process. Id. at 39-40; In re Simasko Prod. Co., 47 7 B.R. 444, 449 (D. Colo. 1985). In undertaking such analysis, courts focus on the following 8 principal factors: proposed terms that would tilt the conduct of the bankruptcy case; 9 prejudice, at the early stages, to the powers and rights that the Bankruptcy Code confers for 10 the benefit of all creditors; or terms that leverage the Chapter 11 process by preventing 11 motions by parties in interest from being decided on their merits. In re Tenney Village Co.,
12 Inc., 104 B.R. 562, 567-70 (Bankr. D.N.H. 1989); Norris Square Civic Ass'n v. St. Mary HwOWAD 13 Hosp. (In re St. Mary Hosp.), 86 B.R. 393, 401-02 (Bankr. E.D. Pa. 1988); In re Crouse
.ICE NEMERPOVKI CANADY FAL.K 14 Group, Inc., 71 B.R. 544, 550-51 (Bankr. E.D. Pa. 1987).
&RABKIiN As discussed above, PG&E seeks to deposit cash with the ISO in order to meet 16 the ISO collateral requirements, a prerequisite to participating in ISO market purchases. The 17 ISO tariff requires that PG&E post collateral, absent an investment-grade credit rating.
18 In addition, PG&E anticipates that it will not be able to negotiate all of the 19 necessary power purchase or sale contracts or other power-related transactions, without 20 collateral requirements and will therefore be required to post collateral in the event that the 21 market goes against PG&E's contract positions.
22 PG&E does not believe that the foregoing uses of cash will have any adverse 23 effect on the estate, including PG&E's ability to implement its Plan of Reorganization.
24 PG&E must meet the ISO credit requirements in order to participate in the ISO market 25 purchases, which are a necessary component to PG&E's ability to resume power 26 procurement. Further, to the extent PG&E cannot negotiate power-related contracts without 27 collateral requirements, PG&E will need authority to post collateral with contract parties as 28 another critical component of its procurement function. Accordingly, the Court should MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 authorize PG&E to incur post-petition secured debt up to $150 million in favor of the ISO 2 and contract parties under Section 364.
3 4 CONCLUSION 5 As described in more detail above, the conditions and assumptions upon which 6 PG&E is proposing to resume procurement for 2003 include: (i) the CPUC's adoption of 7 PG&E's Procurement Plan or adoption of a procurement plan that otherwise fully complies 8 with and implements SB 1976 and the continuing effectiveness of the various elements of 9 such Procurement Plan; (ii) the CPUC establishing and maintaining provisions for before 10 the-fact reasonableness standards and timely cost recovery as provided for by SB 1976; (iii) 11 PG&E's Residual Net Short Position remaining small and wholesale prices remaining stable; 12 (iv) collateral requirements remaining limited to avoid any adverse impact to PG&E and its HOWARD 13 estate; and (v) transactions being limited to calendar year 2003 only. In the event these RICE NEMEBDVSK]
cANADY FALK 14 continuing conditions and assumptions do not remain effective, PG&E reserves all rights to
&KABIN S1 5 seek injunctive or other appropriate relief from any obligation to resume procurement in the 16 event that such procurement may adversely impact its ability to confirm its Plan of 17 Reorganization, to implement the Plan of Reorganization once confirmed, or otherwise 18 interfere with PG&E's rights under the Bankruptcy Code.
19 20 21 22 23 24 25 26 27 28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA 1 Based on the foregoing, PG&E respectfully requests that the Court authorize 2 PG&E to take all action necessary to resume procurement of power and related power 3 products and services, including those needed to meet the Residual Net Short Position, for 4 2003 as described herein, to incur post-petition secured debt related thereto, and grant such 5 other and further relief as may be just and appropriate.
6 7 DATED: November 20, 2002 Respectfully, 8
HOWARD, RICE, NEMEROVSKI, CANADY, 9 FALK & RABKIN A Professional Corporation 10 By: "*A 11 By: (/ JLIE B. LANDAU 12 Attorneys for Debtor and Debtor in Possession HOWARD RICE 13 PACIFIC GAS AND ELECTRIC COMPANY NEMEROVSKJ CANADY FAL(
14 WD 11 1902/1-1419905/Y1/1037858/v4 KRABKIN S15 16 17 18 19 20 21 22 23 24 25 26 27 28 MOTION FOR AUTHORITY TO RESUME POWER PROCUREMENT; MPA