ML031200757

Notice of Motion and Motion of Pacific Gas and Electric Company for Order Authorizing Debtor to Pay Certain Refund Obligations; Memorandum of Points and Authorities in Support Thereof

ML031200757
Person / Time
Site:	Diablo Canyon
Issue date:	04/23/2003
From:	Lafferty W 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: ML031200757 (9)

Text

I1 JAMES L. LOPES (No. 63678)

WILLIAM J. LAFFERTY (No. 120814) 2 HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN 3 A Professional Corporation Three Embarcadero Center, 7th Floor 4 San Francisco, California 94111-4024 Telephone: 415/434-1600 5 Facsimile: 415/217-5910 6 Attorneys for Debtor and Debtor in Possession PACIFIC GAS AND ELECTRIC COMPANY 7

8 9 UNITED STATES BANKRUPTCY COURT 10 NORTHERN DISTRICT OF CALIFORNIA 11 SAN FRANCISCO DIVISION 12 WNWD 13 In re Case No. 01-30923 DM NAWN 14 PACIFIC GAS AND ELECTRIC Chapter 11 Case COMPANY, a California corporation, A gi I 15 Date: May 16, 2003 Debtor. Time: 1:30 p.m.

16 Place: 235 mie Street, 22nd Floor Federal I.D. No. 94-0742640 San Francisco, California 17 18 NOTICE OF MOTION AND MOTION OF PACIFIC GAS AND ELECTRIC 19 COMPANY FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS; MEMORANDUM OF POINTS AND 20 AUTHORITIES IN SUPPORT THEREOF 21

[SUPPORTING DECLARATION OF SUNITA JONES 22 FILED CONCURRENTLY HEREWITH]

23 24 25 26 27 28 MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONSS

A 1 NOTICE OF MOTION AND MOTION 2 PLEASE TAKE NOTICE that on May 16, 2003, 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" or the "Debtor"), will and hereby does move the Court, pursuant to Sections 363 7 and 105 of the Bankruptcy Code, for entry of an order authorizing the Debtor to pay certain 8 refund obligations ordered by the Federal Energy Regulatory Commission ("FERC").

9 The Motion is based on this Notice of Motion and Motion, the accompanying 10 Memorandum of Points and Authorities in support thereof, the Declaration of Sunita Jones II filed concurrently herewith, the record of this case and any evidence presented at or prior to 12 the hearing on this Motion.

HARD 13 PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1(c)(2) of the mPNs 14 Bankruptcy Local Rules for the United States District Court for the Northern District of VaK 15 California, any written opposition to the Motion and the relief requested therein must be 16 filed with the Bankruptcy Court and served upon appropriate parties (including counsel for 17 PG&E, the Office of the United States Trustee and the Official Committee of Unsecured 18 Creditors) at least five (5) days prior to the scheduled hearing date. If there is no timely 19 opposition to the requested relief, the Court may enter an order granting such relief without 20 further hearing.

21 22 23 24 25 26 27 28 MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBUGATIONS 1 MEMORANDUM OF POINTS AND AUTHORITIES 2 I.

3 INTRODUCTION 4 PG&E hereby moves this Court for an order authorizing PG&E to make refunds 5 to certain of its customers pursuant to a settlement agreement approved by FERC1. The 6 settlement agreement, which was negotiated among all active parties in the FERC 7 proceeding on PG&E's first and second transmission owner tariff case filings, reduced the 8 rates PG&E was authorized to charge certain of its customers and ordered PG&E to provide 9 refunds to customers accordingly. Some of the FERC-ordered refunds can be addressed by 10 adjustments and credits to customer accounts but others necessitate actual payments to II customers, as detailed below.

12 As a highly regulated entity subject to FERC orders, PG&E believes that 13 complying with the FERC order and processing these refunds are properly characterized as N O'T 14 actions taken in the ordinary course of its business. Nonetheless, out of an abundance of 15 caution, PG&E seeks this Court's approval to process the refunds.

16 17 II.

18 FACTUAL BACKGROUND 2 19 As explained in greater detail below, by this Motion, PG&E seeks permission to 20 make two types of FERC-ordered refunds prior to confirmation of its Plan: (1) a refund of 21 approximately $50,000 to certain of its retail Transmission Owner Tariff customers and (2) a 22 refund of approximately $725,000 to its wholesale Transmission Owner Tariff customers.

23 Each of the refunds that PG&E now seeks authority to make to its customers 24 results from a settlement agreement approved by FERC. That settlement modified a rates 25 that an earlier preliminary FERC order had authorized PG&E to begin charging. In other 26 'The settlement agreement is not attached as it is quite voluminous but PG&E will make 2it available to the Court and interested parties upon request.

27 The evidentiary basis and support for the facts set forth in this Motion are contained in 28 the Declaration of Sunita Jones filed concurrently herewith.

MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS 1 words, the effect of the settlement agreement, and FERC order approving it, are to require 2 PG&E to make adjustments and refunds for past charges, in this case going back to April 1, 3 1998, when the California Independent System Operator Corporation ("ISO") began 4 operating.

5 PG&E's electric transmission customers are divided into two general categories:

6 Existing Transmission Contract ("ETC") customers and Transmission Owner Tariff ("TO 7 Tariff') customers. The ETC customers are those customers who entered into binding long-8 term transmission contracts with PG&E before the creation of the ISO. These ETC 9 customers are primarily municipal utilities and they are not the subject of this Motion.

10 TO Tariff customers, on the other hand, take any needed transmission service 11 pursuant to the current ISO and TO Tariffs, which allows the pass-through of certain ISO 12 costs. Accordingly, TO Tariff customers are obligated to reimburse PG&E for applicable HOVAM 13 charges that PG&E receives from the ISO under the ISO Tariff, and are responsible for VW RuE 14AROSK Gulp 14 paying transmission service rates as set out in PG&E's TO Tariff. TO Tariff customers are EIR.UN

15 divided into two groups

wholesale and retail.

16 The refund obligations that PG&E now seeks this Court's authority to satisfy, 17 reflect changes to various rates or rate structures under PG&E's TO Tariff. Simply put, 18 FERC has modified its approval for PG&E to charge certain TO Tariff rates and has adopted 19 the compromise rates reflected in a settlement agreement approved in the relevant FERC 20 proceeding. Thus, PG&E must adjust the way it charged certain of its customer groups and 21 FERC has ordered PG&E to make the appropriate adjustments. Because the reimbursements 22 relate to pre-petition payments, PG&E seeks this Court's approval to process the refunds.

23 24 A. TOI and T02 Tariff Refunds 25 On March 31, 1997, PG&E filed its first TO Tariff rate case with FERC ("TOI").

26 On December 17, 1997, FERC accepted PG&E's proposed tariff rates for filing, effective 27 March 31, 1998, subject to refund, suspended the rates for five months and set them for 28 hearing. On March 30, 1998, PG&E filed its second TO Tariff rate case with FERC MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS 1 ("T02"). On May 28, 1998, FERC accepted PG&E's proposed tariff rates for filing, 2 effective October 30, 1998, subject to refund, suspended the rates for one day, set them for 3 hearing and consolidated the case with the TO1 docket.

4 On March 31, 1999, PG&E filed its third TO Tariff rate case with FERC 5 ("TO3"). FERC accepted PG&E's proposed tariff rates for filing, effective May 31, 1999, 6 subject to refund. The effect of each of these successive TO Tariff rate case filings was to 7 limit the effective periods of the earlier filings. Specifically, the effective period for 8 PG&E's TOI rates limisted to was March 31, 1998 though October 29, 1998, and the 9 effective period for PG&E's T02 rates was October 30, 1998 through May 30, 1999.

10 On April 14, 1999, PG&E submitted an Offer of Settlement and Stipulation (the 11 "Settlement") that resolved all outstanding issues for both the TOl and T02 dockets. The 12 Settlement, inter alia,provided for an effective reduction of 4.24 percent to PG&E's TOI HOVIPM 13 rates and an effective reduction of 8.07 percent to PG&E's T02 rates. FERC approved the grE 14 Settlement on January 28, 2003.

15 Because the Settlement had the effect of reducing the rates PG&E was authorized 16 to charge during the effective periods of the TOI and T02 cases, FERC has ordered PG&E 17 to refund customers accordingly. While some of these refunds can be addressed by 18 adjustments and credits to customer accounts, others necessitate actual payment.

19 As this Court is aware, as a result of California legislation known as Assembly 20 Bill ("AB") 1890, there has been a rate freeze with respect to overall retail electricity rates in 21 effect in California. Given that nearly all of PG&E's customers paid frozen rates and, as 22 such, were not impacted by the TOI and T02 rate cases, the Settlement will not result in 23 refunds to those retail customers. Instead, PG&E will account for the Settlement by making 24 an adjustment of approximately $30 million to the Transmission Revenue Account ("TRA"),

25 which is a balancing account approved by and subject to review by the California Public 26 Utilities Commission (the "CPUC").

27 However, two relatively small groups of PG&E customers were not fully covered 28 by the AB 1890 rate freeze. Accordingly, FERC has ordered PG&E to make refunds to such MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS 1 customers in accordance with the Settlement's reduction of the TOl and T02 rates.

2 3 1. CTC-Exempt Retail TO Tariff Customers 4 The TO Tariff transmission bills of certain retail customers who were exempt 5 from responsibility for Competition Transition Charges ("CTCs") under California's AB 6 1890 would have been lower if the reduced TO1 and T02 rates of the Settlement had been in 7 effect. As such, PG&E has been ordered by FERC to make a refund to these CTC-Exempt 8 customers in the approximate amount of $50,000.

9 10 2. Wholesale TO Tariff Customers 11 Similarly, the bills of the wholesale users of PG&E's TO Tariff, which were not 12 protected by the AB 1890 rate freeze either, would have been lower if the reduced TOI and Ha\M 13 T02 rates of the Settlement had been in effect. As such, PG&E has been ordered by FERC AMY 14 to make a refund to these customers in the approximate amount of $725,000.

fiRA.NGN Ai .. 15 16 m.

17 DISCUSSION 18 A. PG&E Should Be Authorized To Pay The Refund Obligations In The 19 Ordinary Course Of Business.

20 Section 363(c)(1) of the Bankruptcy Code authorizes the Debtor to "enter into 21 transactions, including the sale or lease or property of the estate ... and use property of the 22 estate in the ordinary course of business without notice or a hearing." 11 U.S.C. § 363(c)(1).

23 In light of the highly regulated nature of its industry, PG&E must abide by the rules of 24 multiple regulatory agencies, including FERC on those matters for which FERC is the 25 regulatory authority.

26 It is standard practice for FERC to approve utility rate changes on a preliminary 27 basis, subject to later review and possible subsequent refunds. See Jones Decl. ¶3.

28 Because PG&E is subject to FERC jurisdiction, it must abide by subsequent adjustments are MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS

1 1 mandated by FERC. PG&E believes that these adjustments ordered and should be followed 2 in the ordinary course of its business and can be undertaken without notice or a hearing.

3 4 B. PG&E Should Be Authorized To Pay The Refund Obligations Pursuant To Section 363(b)(1) Of The Bankruptcy Code On The Basis That It Makes 5 Sound Business Sense To Pay These Categories Of Claims Pre-Confirmation.

6 7 If the refund payments are not within PG&E's ordinary course of business, 8 PG&E should be authorized to pay the two categories of refund obligations discussed above 9 pursuant to Section 363(b)(1) of the Bankruptcy Code, which provides that "[t]he trustee, 10 after notice and a hearing, may use, sell, or lease, other than in the ordinary course of 11 business, property of the estate." 11 U.S.C. §363(b)(1).

12 In determining whether to authorize a transaction under Section 363(b)(1), courts HOUD 13 require a debtor to show that a sound business purpose justifies such actions, applying the HONV 1 14 business judgment test., See g, Stephens Indus.. Inc. v. McClung, 789 F.2d 386, 389-90 eJLA~aN 15 (6th Cir. 1986); Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.!, 722 16 F.2d 1063, 1071 (2d Cir. 1983); see also 3 Lawrence P. King, Collier on Bankruptcy 17 1363.02[l][g] (15th ed. rev. 1998).

18 The burden of establishing a valid business purpose for a transaction outside the 19 ordinary course of business falls upon the debtor. See In re Lionel Corp. 722 F.2d at 1066.

20 Once the debtor has articulated a rational business justification, however, a presumption 21 attaches that the decision was made "on an informed basis, in good faith and in the honest 22 belief that the action taken was in the best interest of the [debtor]." Se m.. Official 23 Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.),

24 147 B.R. 650, 656 (S.D.N.Y. 1992) (citing Smith v. Van Gorkom, 488 A.2d 858, 872 (Del.

25 1985)).

26 Here, sound business justifications exist for PG&E's pre-confirmation payment 27 of the refund obligations described above. Indeed, as a regulated electric utility, PG&E is 28 obligated to submit to FERC jurisdiction and obey FERC orders. Moreover, PG&E will be MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS 1 able to resolve these three categories of obligations by effecting refunds totaling 2 approximately $775,000 in total. PG&E is solvent and has the cash on hand to pay these 3 claims without prejudice to other creditors 3 .

4 5 C. Payment Of The Refund Obligations Is Practical, "Legal And Factually Inevitable," And In The Best Interests Of Creditors And The Estate; T-hus 6 The Court Should Order Such Payment Under Section 105 Of The 7 Bankruptcy Code.

8 Although courts demonstrate some reluctance in allowing payment of pre-petition 9 claims prior to the confirmation of a plan in a Chapter 11 case, the Court has the power 10 under Section 105 of the Bankruptcy Code to order the payment of pre-petition claims where 11 circumstances warrant. In doing so, courts have been guided primarily by "practicality and 12 common sense" and the "legal or factual inevitability of payment." In re Payless Cashwavs.

13 Inc., 268 B.R. 543, 547 (Bankr. W.D. Mo. 2001); In re Egualnet Communications Corp.

PIK 14 258 B.R. 368, 369 (Bankr. S.D. Tex. 2001).

15 Section 105 authorizes the court to "issue any order, process, or judgment that is 16 necessary or appropriate to carry out the provisions of this title." The purpose of 17 Section 105 is "to assure the bankruptcy court's power to take whatever action is appropriate 18 or necessary in aid of the exercise of its jurisdiction." 2 Lawrence P. King, Collier on 19 Bankruptcy 105.01, at 105-5 to 105-6 (15th ed. rev. 2000); see, &., Crafts Precision Indus.,

20 Inc. v. U.S. Healthcare. Inc. (In re Crafts Precision Indus., Inc.), 244 B.R. 178, 183 (B.A.P. 1st 21 Cir. 2000) (affirming authorization of vacation payments "pursuant to §105, irrespective of 22 them being non-priority obligations"); Michigan Bureau of Workers' Disability Comp. v.

23 Chateaugav Corp. (In re Chateaugay Corp.), 80 B.R. 279, 287 (S.D.N.Y. 1987) (bankruptcy 24 court has equitable power, in pre-plan stage of reorganization proceeding, to authorize 25 26 3 The authorization sought b PG&E would also benefit the estate by reducing post-27 petition interest costs and streamlning the claims resolution process, thereby allowing PG&E to focus those resources involved in the claims process on larger, more complex 28 claims.

MOTION FOR ORDER AUTHORIZING DEBTOR TO PAY CERTAIN REFUND OBLIGATIONS I,

1 debtor-in-possession to pay pre-petition debt and to allow debtor to pay some creditors in 2 class without paying others without violating Bankruptcy Code, as a "rigid application of the 3 priorities of §507 would be inconsistent with the fundamental purpose of reorganization and 4 of the [Bankruptcy Code's] grant of equity powers to bankruptcy courts, which is to create a 5 flexible mechanism that will permit the greatest likelihood of survival of the debtor and 6 payment of creditors in full or at least proportionately"); see also In re Payless, 268 B.R. at 7 547. As discussed above, the payments PG&E seeks authority to make have sound business 8 justifications and are entirely appropriate.

9 10 IV.

11 CONCLUSION 12 For all of the foregoing reasons, PG&E respectfully requests that this Court enter HOVAMR 13 its Order granting the Motion and such other and further relief as the Court deems just and 14 appropriate.

6EAM~N zR;;; 15 16 DATED: April 23, 2003.

Respectfully, 17 HOWARD, RICE, NEMEROVSKI, CANADY, 18 FALK & RABKIN A Professional Corp ation 19 20 By: WIL.L J. LAFFERTY 21 Attorneys for Debtor and Debtor in Possession 22 PACIFIC GAS AND ELECTRIC COMPANY 23 24 25 26 27 28 MOTION FOR ORDER AUTHORIZING DEBTORTO PAY CERTAIN REFUND OBLIGATIONS WD 041003/1-14199071pz110691571v1