ML031570326

Notice of Motion and Motion for Order Approving (1) Sale of Westside Zone Facilities and Related Property to Turlock Irrigation District Free and Clear of Liens and Interests (Other than Lien of Bny Western Trust Company), and (2) Compromis

ML031570326
Person / Time
Site:	Diablo Canyon
Issue date:	05/30/2003
From:	Schaffer 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: ML031570326 (30)

Text

1 JAMES L. LOPES (No. 63678)

JEFFREY L. SCHAFFER (No. 91404) 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

Attomeys for Debtor and Debtor in Possession 7 PACIFIC GAS AND ELECTRIC COMPANY 8

9 UNITED STATES BANKRUPTCY COURT 10 NORTHERN DISTRICT OF CALIFORNIA 11 lSAN FRANCISCO DIVISION 12 In re Case No. 01-30923 DM 13 HRD l PACIFIC GAS AND ELECTRIC Chapter 1 Case C,, 14 COMPANY, a Califomia corporation,

&RA3<N I Date: June 30, 2003 15 Debtor. Time: 1:30 p.m.

Place: 235 Pine Street, 22nd Floor 16 San Francisco, California Federal I.D. No. 94-0742640 17 18 19 NOTICE OF MOTION AND MOTION FOR ORDER APPROVING (1) SALE OF 19 l -WESTSIDE ZONE FACILITIES AND RELATED PROPERTY TO TURLOCK IRRIGATION DISTRICT FREE AND CLEAR OF LIENS AND 20 INTERESTS (OTHER THAN LIEN OF BNY WESTERN TRUST COMPANY), AND (2) COMPROMISE OF CONTROVERSY INVOLVING SUCH SALE AND RELATED 21 NON-SALE TRANSACTIONS;-

SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES 22 ISUPPORTING DECLARATION OF DAVID RUBIN FILED SEPARATELY]

23 Note: BNY Western Trust Company should take special notice that the 24 relief requested in this Motion includes the sale of real property that constitutes part of the Westside Zone Facilities described in this Motion, 25 that such real property is subject to the lien of BNY Western Trust Company, and that the Debtor has agreed as part of the sale of the real 26 property to seek and demand, after the closing of such sale, the release of the lien of BNY Western Trust Company on such real property pursuant to 27 the Debtor's rights under applicable nonbankruptcy law.

28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 TABLE OF CONTENTS 2 Page 3 NOTICE OF MOTION AND MOTION 1 4 INTRODUCTION 3 5 I. THE FACTS 4 6 A. The Dispute Resulting In The Agreements/Transactions Covered By This Motion 4 7

B. The Regulatory Approvals 5 8

C. The Agreements Comprising The Proposed Settlement 6 9

1. Asset Sale Agreement 8 10

2. New Service Area Agreement 10

3. Installment Sales Agreement 1 12

4. Closing Agreement 12 HOWARD 13 NEMEOKI 5. Tolling and Mutual Release Agreement 13 CANADY FALK 14

&RABI<N 6. The Lease Agreements 13 15

7. Private Electrical Lines Assignment and Assumption 16 Agreement 13 17 II. THE SETTLEMENT AND RESULTING AGREEMENTS PROVIDE FAIR VALUE AND SATISFY THE SOUND 18 BUSINESS PURPOSE TEST, AND SHOULD BE AUTHORIZED PURSUANT TO SECTION 363(b) OF THE BANKRUPTCY 19- CODE 14 20 A. PG&E Has A Sound Business Reason for the Sale, Lease And Other Transactions Comprising The Settlement With TID 16 21

1. The Company Will Obtain a Fair Price Based on 22 RCNLD 16 23 2. The Agreements Between the Parties Resolve The Serious Disputes and Related Risks Concerning The 24 1953 Service Agreement In a Manner Consistent With the Enactment of AB 2638 17 25

3. The Agreements Are Consistent With The Public 26 Utilities Code Sections Added By Assembly Bill 2638 18 27 4. The Boundaries of the Westside Zone Were Negotiated to Avoid Leaving PG&E With Isolated, Sparsely 28 Populated Areas That Are Costly to Serve 19 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 TABLE OF CONTENTS 2 Page 3 5. TID Will Assume Responsibility for the Non-Bypassable Charges Owed by Consumers in the 4 Westside Zone 20 5 B. The Sale, Lease and Related Transactions Comprising The Settlement Have Been Proposed In Good Faith 20 6

C. Interested Parties will Receive Adequate and Reasonable 7 Notice 21 8 D. The Settlement And The Consideration Which PG&E Will Receive Are Fair and Reasonable 21 9

III. THE COURT SHOULD AUTHORIZE THE SALE OF THE 10 WESTSIDE ZONE FACILITIES FREE AND CLEAR OF ALL LIENS AND INTERESTS, EXCEPT THE LIEN OF BNY

11. WESTERN TRUST COMPANY 22 12 CONCLUSION 25 HOWARD 13 RUCE NEMERIDSKJ AFAIK

&KABIN 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 TABLE OF AUTHORITIES 2 Page(s) 3 Cases 4 240 North Brand Partners, Ltd. v. Colony GFP Partners, L.P. (In re 240 North Brand Partners, Ltd.), 200 B.R. 653 (B.A.P. 9th Cir. 1996) 14, 20 5

Abel v. Shugrue (In re Ionosphere Clubs, Inc.), 184 B.R. 648 (S.D.N.Y.

6 1995) 14 7 Citicorp Homeowners Servs., Inc. v. Elliott (In re Elliott), 94 B.R. 343 (E.D.

Pa. 1988) 22,24 8

Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 9 F.2d 1063 (2d Cir. 1983) 14 10 Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599 (2d Cir. 1983) 15 11 Fulton State Bank v. Schipper (In re Schipper), 933 F.2d 513 (7th Cir. 1991) 14 12 Har rave v. Township of Pemberton (In re Tabone, Inc.), 175 B.R. 855 (Bankr. D.N.J. 1994) 22, 24 HOWARD 13 NEMERvSJ In re America West Airlines, Inc., 166 B.R 908 (Bankr. D. Ariz. 1994) 14 FAK 14

&RABrJN In re Karpe, 84 B.R. 926 (Bankr. M.D. Pa. 1988) 21 15 In re Lady H Coal Co., 193 B.R. 233 (Bankr. S.D. W. Va. 1996) 14,16 16 In re Purofied Down Prods. Corp., 150 B.R. 519 (S.D.N.Y. 1993) 15, 16

• 17 In re Roberts, 249 B.R. 152 (Bankr. W.D. Mich. 2000) 24 18 In re Shary, 152 B.R. 724 (Bankr. N.D. Ohio 1993) 24 19 In re Weatherly Frozen Food Group, Inc., 149 B.R. 480 (Bankr. N.D. Ohio 20 1992) 14 21 In re Wilde Horse Enters., Inc., 136 B.R. 830 (C.D. Cal. 1991) 14, 20 22 Martin v. Kane (In re A & C Props.), 784 F.2d 1377 (9th Cir. 1986) 15, 16 23 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996) 15 24 Nellis v. Shugrue, 165 B.R. 115 (S.D.N.Y. 1994) 15, 16 25 Official Unsecured Creditors' Comm. of Pennsylvania Truck Lines, Inc. v.

Pennsylvania Truck Lines, Inc. (In re Pennsylvania Truck Lines, Inc.),

26 150 B.R. 595 (E.D. Pa. 1992), affd mem., 8 F.3d 812 (3d Cir. 1993) 16 27 Port O'Call Inv. Co. v. Blair (In re Blair), 538 F.2d 849 (9th Cir. 1976) 15 28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WE-STSIDE ZONE FACILITIES, ETC.

1 TABLE OF AUTHORITIES 2 Page(s) 3 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v.

Anderson, 390 U.S. 414 (1968) 15 4

Titusville Country Club v. Pennbank (In re Titusville Country Club), 128 5 B.R. 396 (Banl. W.D. Pa. 1991) 16 6 Vaughn v. Drexel Bumham Lambert Group, Inc. (In re Drexel Bumham Lambert Group, Inc.), 134 B.R. 499 (Bankr. S.D.N.Y. 1991) 15, 16 7

Veltman v. Whetzal, 93 F.3d 517 (8th Cir. 1996) 24 8

WBQ P'ship v. Virginia Dep't of Med. Assistance Servs. (In re WBQ 9 P'ship), 189 B.R. 97 (Bankr. E.D. Va. 1995) 14,16,21 10 11 Statutes 12 11 U.S.C.

§363(b) 1,3, 14,21,25 HOmWRD 13 §363(f) 1, 3, 22, 25 NM ED SK §363 (f)(2) 24 c&NFA, 14

&KA13KIN Fed. R. Bankr. P. 9019(a) 1, 3, 14, 15, 25 Ah 15 N.D. Cal. Local Bankr. R. 9014-1(c)(1) 1 16 Pub. Util. Code 17 §9607 18, 19

§9607(a) 18 18 §9608 18, 19

§9610(b)(2) 18 19 AB 2638 (2000 Cal. Stat. ch. 1042) 5, 18 20 21 22 23 24 25 26 27 28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

-iv-

1 NOTICE OF MOTION AND MOTION 2 PLEASE TAKE NOTICE that on June 30, 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"), will and hereby does move the Court (the "Motion") for entry of an order (1) 7 authorizing PG&E to sell to Turlock Irrigation District, free and clear of liens and interests, 8 those certain distribution facilities and related property as more particularly described in the 9 accompanying Memorandum of Points and Authorities (the "Westside Zone Facilities"), and 10 (2) to approve PG&E's compromise of controversy with Turlock Irrigation District, I1 encompassing both the aforementioned sale and various related transactions with Turlock 12 Irrigation District as described more particularly herein.

HOWM 13 This Motion is made pursuant to 11 U.S.C. Sections 363(b) and (f) and Rule

• M- -

.'ND?14 9019(a) of the Federal Rules of Bankruptcy Procedure, and is based on the facts and law set

., -. 15 I C forth herein (including the accompanying Memorandum of Points and Authorities), the 16 Declaration of David Rubin filed concurrently herewith, the record of this case and any 17 evidence presented at or prior to the hearing on this Motion.

18 BNY Western Trust Company should take special notice that the relief requested 19 in this Motion includes the sale of real property that constitutes part of the Westside Zone 20 Facilities, that such real property is subject to the lien of BNY Western Trust Company, and 21 that the Debtor has agreed as part of the sale of the real property to seek and demand, after 22 the closing of such sale, the release of the lien of BNY Western Trust Company on such real 23 property pursuant to the Debtor's rights under applicable nonbankruptcy law.

24 PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-1(c)(1) of the 25 Bankruptcy Local Rules for the Northern District of California, any written opposition to the 26 Motion and the relief requested therein must be filed with the Bankruptcy Court and served 27 upon appropriate parties (including counsel for PG&E, the Office of the United States 28 Trustee, the Official Committee of Unsecured Creditors, and BNY Western Trust Company NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 in its capacity as Trustee under the Indenture described in the accompanying Memorandum 2 of Points and Authorities) at least fourteen (14) days prior to the scheduled hearing date. If 3 there is no timely objection to the requested relief, the Court may enter an order granting 4 such relief without further hearing.

5 111 6

7 11/

8 9

10 111 11 11-12 111 13 111

~14 11-Add~15 111 1 6 1/1 17 /11 18 111 19 '11 20 111 21 11-22 111 23 111 24 111 2-5 /1 26 111 27 I11 28 111 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 MEMORANDUM OF POINTS AND AUTHORITIES 2 INTRODUCTION 3 By this Motion, Pacific Gas and Electric Company, the debtor and debtor in 4 possession in this Chapter 11 case ("PG&E"), seeks an order (1) pursuant to 11 U.S.C.

5 Sections 363(b) and 363(f),1 authorizing the sale free and clear of liens (other than the lien of 6 BNY Western Trust Company) of certain electric distribution facilities, related transmission 7 facilities and related property rights (including easements and rights of way) as well as the 8 lease of certain PG&E-owned land related thereto, all located in a service area known as the 9 "Westside Zone" (located in a portion of western Stanislaus County, including the City of 10 Patterson, the Conmunity of Crows Landing and adjacent rural areas) and collectively 11 referred to herein as the "Westside Zone Facilities," to Turlock Irrigation District ("TID"),

12 and (2) pursuant to 11 U.S.C. Section 363(b) and Bankruptcy Rule 9109(a), approving

_13 PG&E's compromise of controversy with TID encompassing the aforementioned sale and

-~I 14 certain related transactions between PG&E and TID as more particularly described below.

15 The sales price for the sale of the Westside Zone Facilities is $15,111,825 for various 16 scheduled assets, plus other compensation for unscheduled assets as described more 17 particularly below.

18 The only known lien on the Westside Zone Facilities (or any portion thereof) is 19 the lien of BNY Westem Trust Company in its capacity as Trustee under the Indenture as 20 described more fully in Part III below.

21 The proposed sale of the Westside Zone Facilities and the related proposed 22 agreements and transactions between PG&E and TID described herein represent the parties' 23 comprehensive settlement of various disputes between them. Those aspects of the 24 settlement that involve the transfer of Federal Energy Regulatory Commission ("FERC")

25 jurisdictional assets already have been approved by FERC, and those aspects of the proposed 26 27 lUnless otherwise indicated, all statutory references in this Motion are to the United States Bankruptcy Code (Title 11 of the United States Code).

28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILiTIES, ETC.

1 settlement requiring the California Public Utilities Commission ("CPUC") approval already 2 have been approved by the CPUC. Accordingly, this Court's approval of this Motion is the 3 only remaining approval needed to consummate the settlement and proceed with the subject 4 sale and related transactions.

5 I.

6 THE FACTS2 7 A. The Dispute Resulting In The Agreements/Transactions Covered By This Motion 8 TID is an irrigation district organized under California law that owns and 9 operates an electric distribution and transmission system and provides electric service to 10 customers in portions of Merced, Stanislaus, and Tuolumne Counties. TED has been in the retail electricity business since 1923 and currently serves over 67,000 accounts, which range 12 from residential to large industrial users.

The CPUC previously approved service area agreements for PG&E and TID in 134 7 .14 1941 and 1953. In recent years, disputes arose between PG&E and TID regarding the continuing validity of the 1953 service area agreement. TID contended that the 1953 16 agreement was no longer enforceable. PG&E contended that TID had violated the 1953 17 agreement by offering electric distribution service within PG&E's service area in Stanislaus 18 County, including the cities of Gustine, Los Banos, Patterson and Newman. PG&E also 19 claimed that the formation of the Westside Power Authority ("WPA") by TID and the 20 Patterson Irrigation District ("PID") violated the 1953 agreement and that WPA was formed 21 for the purpose of providing electric service to customers in PG&E's service area.

22 In August 1999, PG&E filed Application (A.) 99-08-018, which asked the 23 Commission to clarify the continued validity of the 1953 service area agreement. In D.00-24 06-002, the CPUC denied the application on the grounds that PG&E sought an advisory 25 opinion and that Assembly Bill (AB) 2638, which was then pending before the Legislature, 26 2 The evidentiary basis and support for the facts set forth in this Motion are contained in 27 the Declaration of David Rubin (hereinafter referred to as the "Rubin Declaration" and cited as the "Rubin Decl.") filed concurrently herewith.

28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 might give the parties guidance on this issue. 3 During legislative discussions of AB 2638, 2 Assemblymembers Cardoza and Calderon, co-authors of the legislation, urged affected 3 parties, including TID and PG&E, to attempt to resolve their disputes. The agreements and 4 transactions proposed in this Motion result from a compromise by PG&E and TID to resolve

.5 issues related to their respective service areas and represent a comprehensive settlement of 6 various disputes between the parties.

7 B. The Regulatorv Approvals 8 On January 4, 2002, pursuant to applicable provisions of the California Public 9 Utilities Code, PG&E filed with the CPUC an application pertaining to the subject sale and 10 related transactions with TID, entitled "Application For Authorization To Sell Electric 11 Distribution and Certain Related Transmission Facilities [etc.]" (the "Application"), a true 12 and correct copy of which is attached as Exhibit A to the Rubin Declaration. On April 3, 13 2003, the CPUC issued its Decision No. 03-04-032 granting the Application with certain EOWaVD 13 modifications, entitled "Decision Granting Approval For Conveyance Of Facilities By NE1_C 14J Pacific Gas and Electric Company (PG&E) To Turlock Irrigation District (TID), New 16 Service Area Agreement Between PG&E and TID, And Related Transactions" (the "CPUC 17 Decision"), a true and correct copy of which is attached as Exhibit C to the Rubin 18 Declaration. 4 In addition, on or about November 25, 2002, PG&E applied to FERC for 19 authorization to sell that portion of the Westside Zone Facilities constituting transmission 20 facilities over which FERC has jurisdiction. On January 3, 2003, FERC approved the sale of 21 such transmission facilities to TID pursuant to its "Order Authorizing Disposition of 22 Jurisdictional Facilities" (the "FERC Order"), a true and correct copy of which is attached as 23 Exhibit D to the Rubin Declaration. Accordingly, PG&E has obtained all necessary 24 3 AB 2638 (2000 Cal. Stat. ch. 1042) became effective on January 1, 2001.

25 4 While the CPUC Decision approved the Application in all significant respects, the CPUC Decision, in Ordering Paragraphs 2 and 5, required a few modifications to certain 26 aspects of the agreements described in the Application, some of which are more particularly summarized in footnotes 7 and 9 below. This Motion seeks approval of the agreements and 27 transactions described in the Application, as modified pursuant to Ordering Paragraphs 2 and 5 of the CPUC Decision.

28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

I regulatory approvals in connection with the sale and related agreements encompassing the 2 settlement.

3 C. The Agreements Comprising The Proposed Settlement 4 There are several related agreements comprising the proposed compromise of 5 controversy between PG&E and TID. Most central, pursuant to an Asset Sale Agreement by 6 and between PG&E and TID dated as of December 18, 2001, as amended (the "Asset Sale 7 Agreement"), a true and correct copy of which is attached as Exhibit A to the Application, 8 PG&E has agreed to sell to TID (subject to any necessary regulatory and Court approval and 9 certain other conditions) PG&E's electric distribution facilities, certain related transmission 10 facilities, and related land rights (including easements and rights of way) located in a portion 11 of westem Stanislaus County, including the City of Patterson, the Community of Crows 12 Landing and adjacent rural areas (referred to herein as the "Westside Zone"). In addition, HOW,R 13 pursuant to various separate agreements with TID summarized more fully below, PG&E has agreed, among other things, to lease to TID certain PG&E-owned real property, to sell to TID a 60 kV transmission tap line serving a large food processing customer, and to assign to 16 TID three private electrical line agreements.

17 As of the date that the Application was filed with the CPUC, the Westside Zone 18 consisted of approximately 225 square miles wherein PG&E served approximately 5,450 19 electric customers. Such customers annually used approximately 110 million kWh, 20 producing approximately $9.2 million in annual electric revenue. Once the Westside Zone 21 Facilities are sold to TID, PG&E will no longer provide electric distribution services to 22 customers in the Westside Zone.

23 The Westside Zone Facilities being sold or leased to TID by PG&E are described 24 in Article 2 and Schedules 2.1(a) through (e) of the Asset Sale Agreement (Exhibit A to the 25 Application), and in the various ancillary agreements attached as Exhibits B through H to the 26 Application, and include the following:

27 Land Rights and Facilities. (a) Various easements, permits, licenses and rights-28 of-way located in the Westside Zone (as described on Schedule 2.1(a)(i) to the Asset Sale NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY VITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 Agreement); (b) distribution circuits and all associated distribution poles, conductors, 2 hardware, secondaries, services, meters, transformers, capacitors, switches, regulators, street 3 lights, control and protective devices associated with the distribution circuits, and four 60 kV 4 transmission poles and associated equipment located in the Westside Zone (as described on 5 Schedule 2.1 (a)(ii) to the Asset Sale Agreement); and (c) the partial assignment of certain 6 easements for transmission lines (as described on Schedule 2.1(a)(iii) to the Asset Sale 7 Agreement).

- 8 Salado Assets. The distribution substation equipment located at PG&E's Salado 9 Substation (the "Salado Assets"), as listed on Schedule 2. (b) to the Asset Sale Agreement, 10 including, for example, transforners, switches and insulators.

11 Patterson Assets. The distribution substation equipment located at PG&E's 12 Patterson Substation (the "Patterson Assets"), as listed on Schedule 2.1(c) to the Asset Sale HYYEPD 13 Agreement, including, for example, transformers, switches and insulators.

Pa cu- 14 Other Distribution Equipment. A partial interest in certain transmission poles as EU}C

&RABKThN APd 15 listed on Schedule 2.1(d) to the Asset Sale Agreement.

16 Assigned Private Line Agreements. Three agreements relating to private lines 17 (consisting of a portion of the Del Puerto Road Private Line, the Crows Landing Private Line 18 and the Adobe Creek Road Private Line) as listed on Schedule 2.1(e) to the Asset Sale 19 Agreement and pursuant to the Private Electrical Lines Assignment and Assumption 20 Agreement attached as Exhibit H to the Application.

21 Assigned Contracts. (a) Agreements between PG&E and its customers in the 22 Westside Zone covering the customer's special facilities, to the extent a customer has 23 consented to the transfer to TID if such consent is required; and (b) a 60kV tap line to 24 Patterson Frozen Foods, whereby PG&E will sell to TID certain electric facilities and 25 easements constituting the 60 kV tap line pursuant to the Installment Sales Agreement 26 attached as Exhibit G to the Application.

27 Leases. (a) A lease for a portion of the real property constituting PG&E's Salado 28 Substation, in order for TID to maintain the Salado Assets located at the Salado Substation NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TD AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 (the "Salado Lease"); and (b) a lease for the real property constituting PG&E's Patterson 2 Substation, in order for TID to maintain the Patterson Assets located at the Patterson 3 Substation (the "Patterson Lease"). The Salado and Patterson Leases are attached as 4 Exhibits D and E, respectively, to the Application.

5 The specific agreements and transactions for which Court approval is sought in 6 this Motion, and a summary of each, are as follows:

7 8 1. Asset Sale Agreement 9 As already indicated, the principal terms and conditions of the proposed sale are 10 contained in the Asset Sale Agreement, and the facilities being sold include all electric 11 distribution circuits and associated distribution facilities, meters, streetlights, and control and 12 protective devices in the Westside Zone, associated easements and rights of way, the HCWAZRD 13 Patterson substation facilities, a portion of the Salado substation facilities, a portion of UCAN' 14 transmission poles with distribution underbuild, and a few associated transmission poles that

.sBd>i 15 would otherwise be stranded. Specific descriptions of the land rights and facilities to be sold 16 are contained in Section 2.1 and Schedules 2.1(a)(i), 2.1(a)(ii), 2.1(b), 2.1(c), and 2.1(d) of 17 the Asset Sale Agreement. The vast majority of the transmission facilities in the Westside 18 Zone are necessary for PG&E's overall system reliability and are therefore being retained by 19 PG&E. No gas distribution facilities are included in the sale, and PG&E will remain the gas 20 distribution utility in the Westside Zone.

21 The sale price for the assets described in the Schedules to the Asset Sale 22 Agreement is $15,111,825, based on the Replacement Cost New Less Depreciation 23 ("RCNLD") method.5 Additional sale proceeds in connection with the Asset Sale 24 5The RCNLD approach is a commonly accepted method for valuing utility distribution 25 assets and streetlight assets. "Replacement cost new" is defined as the current cost, new, of a similar new property having the nearest equivalent use as the property being appraised. It 26 represents total installed costs, which consist of material costs, including allowances for stores expense, freight, taxes, labor costs, and general and administrative overhead. In 27 developing the replacement cost new for distribution facilities, PG&E generally uses multiple computer programs and resources reflecting current construction practices and 28 (continued ... )

NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 Agreement include $67,221 under the Installment Sales Agreement described below, plus an 2 estimated $6 million for certain unscheduled assets arising and services provided after the 3 execution of the Asset Sale Agreement. 6 Accordingly, the estimated sales proceeds under or 4 in connection with the Asset Sale Agreement are approximately $21.18 million.

5 The Asset Sale Agreement further provides, in Section 4.3, that TID will pay all 6 authorized nonbypassable charges as defined in Section 1.1 (NBCs") for Westside Zone 7 consumers subsequent to the closing, in the amounts set forth in PG&E's tariffs. 7 8 l The Asset Sale Agreement also covers a variety of other issues, including 9 delivery of customer information (Sec. 4.1(c) and Schedule 1.1(a)), delivery of facilities 10 information (Sec. 2.12 and Schedule 1.1(b)), sales of replacement parts if necessary (Sec.

11 2.11), joint pole arrangements (Sec. 2.10), final customer meter reads (Sec. 4.1(f)),

12 disconnecting the facilities from the Company's system (Sec.4.2), and numerous other HC&AwD 13 matters.

c 14 (. continued)

__R__5N costs.

l5 The concept of depreciation in the valuation context can simply be defined as the 16 measure of loss in value. A definition suitable to facilities sold by PG&E is found in Iowa Bulletin 156:

17 Depreciation of a unit of physical property at any age is the difference 18 between the present worth of its present probable future operation returns or services and the present worth of its probable future 19 operation returns or services if it were new. (Condition-Percent Tables for Depreciation of Unit and Group Properties; Iowa 20 Engineering Experiment Station Bulletin 156, 1942, page 6)

Not only is the RCNLD approach common in the industry, it is the approach that 21 PG&E has historically used and the approach expected by municipalities and other buyers of small segment distribution facilities and streetlight facilities. Furthermore, the RCNLD 22 approach is accepted by the CPUC.

23

• 6 Section 4.1 of the Asset Sale Agreement provides that after December 5, 2000, PG&E will continue to install new services and facilities in the Westside Zone until the closing of 24 the transaction, and that the purchase price under the Assets Sale Agreement will be increased to take into account these additional services and facilities, using the RCNLD 25 approach. PG&E currently estimates that the RCNLD value of these additional services and facilities will be approximately $6 million by the time of closing.

26 l 7In its Decision, the CPUC required the parties to clarify Section 4.3 by filing an amendment to the Asset Sale Agreement within 60 days. CPUC Decision, at pp. 22 n.27 &

27 56 (Ordering Paragraph 5). PG&E and TID currently are discussing this amendment and 28 expect to finalize and file it soon.

NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 l 2. New Service Area Agreement 2 Under the new Service Area Agreement (in the final form attached as Exhibit B 3 to the Rubin Declaration), 8 PG&E and TID have agreed to terminate the existing 1953 4 Service Area Agreement and enter into a new 25-year Service Area Agreement. The WPA.

5 which also will serve customers in this area, is a party to the new Service Area Agreement, 6 as is PID as a member of WPA.

7 Sections 2, 3 and 4 of the new Service Area Agreement define exclusive 8 geographic zones within which TID and WPA on the one side and PG&E on the other side 9 would sell or distribute electric power or energy, directly or indirectly. There are several 10 changes to the existing service territory boundaries.

11 Under Sections 3, 4 and Sa of the new Service Area Agreement, the parties agree, 12 with certain limited exceptions, not to own or control distribution or transmission facilities HaRD 13 for the purpose of serving each other's retail customers for 25 years. In light of changes in RXE NUVTMvw w,15 16 4. The Boundaries of the Westside Zone Were Negotiated to Avoid Leaving 17 l - PG&E With Isolated, Sparsely Populated Areas That Are Costly to Serve 18 PG&E and TID negotiated at length to define Service Area boundaries that make 19 both electric distribution and economic sense. The agreed-upon Westside Zone not only 20 includes the City of Patterson and the community of Crows Landing, but also the entire area 21 west to the Santa Clara/Stanislaus County line. In establishing this western boundary, TID 22 agreed to purchase PG&E's facilities in that very sparsely populated, hilly area, including 23 facilities north and west of the proposed Diablo Grande development, that serve a state park 24 and a few residences, and would have been expensive for PG&E to continue to serve. Thus, 25 the service territory being transferred as part of the sale is not simply the denser area that 26 TID and WPA would have chosen (or initially chose) to serve, but also includes a 27 geographic area and associated cost characteristics that are somewhat more representative of 28 PG&E's rural areas.

NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 5. TID Will Assume Responsibility for the Non-Bypassable Charges Owed by Consumers in the Westside Zone 2

3 Under Section 4.3 of the Asset Sale Agreement, TID will pay PG&E the NBCs 4 owed by consumers within the Westside Zone for the period of time that they are authorized.

5 These charges include Competition Transition Charges (CTCs), trust transfer amounts, and 6 nuclear decommissioning amounts."1 These amounts will appropriately reduce the amounts 7 otherwise owed by other ratepayers. CTC amounts will be credited to the transition cost 8 balancing account (TCBA, Preliminary Statement AV), while the nuclear decommissioning 9 amounts will be credited to the Transition Revenue Account (TRA, Preliminary Statement 10 Section N.5.f.). Section 4.3 also provides that TID will pay any other NBCs owed by 11 Westside Zone consumers adopted by the CPUC or by the Legislature prior to the closing 12 date, such as any charges for Department of Water Resources costs or prior uncollected HC%ARD 13 excess power purchase costs.' 2 RIM ra 14

&RAWNQ 15 B. The Sale. Lease and Related Transactions Comprising The Settlement Have Been Proposed In Good Faith 16 17 "'Good faith encompasses fair value, and further speaks to the integrity of the 18 transaction. Typical bad faith or misconduct, would include collusion between the seller and 19 buyer, or any attempt to take unfair advantage of other potential purchasers."' 240 North 20 Brand Partners, 200 B.R. at 659 (quoting In re Wilde Horses, 136 B.R. at 842).

21 The compelling reasons for this settlement described in Part IIA immediately 22 above plainly meet this standard. There is no basis for concluding that the proposed 23 settlement has not been proposed in good faith, or that the agreements comprising the 24 25 "Consistent with Ordering Paragraph 12(h) of the. CPUC's Cost Separation Decision, D.97-08-056, customers served by TID or WPA will not be responsible for PG&E's Public 26 Purpose Program charges.

12As noted in footnote 7 above, the CPUC Decision ordered the parties to amend the 27 Asset Sale Agreement to clarify the provisions regarding payment of nonbypassable charges, and that amendment is expected to be finalized and filed shortly.

28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 settlement do not provide fair value to PG&E and its estate. Indeed, the components of the 2 settlement have been submitted to and approved by the CPUC, subject to certain conditions 3 as described and incorporated by reference in this Motion.

4 5 C. Interested Parties will Receive Adequate and Reasonable Notice 6 In the context of a Section 363(b) sale, "notice is sufficient if it includes the terms 7 and conditions of the sale, if it states the time for filing objections, and if the estate is selling 8 real estate, it generally describes the property." In re WBO P'ship, 189 B.R. at 103 (quoting 9 In re Karpe, 84 B.R. 926, 930 (Bankr. M.D. Pa. 1988)). The use or lease of estate assets in 10 connection with a proposed settlement is subject to no more stringent a standard, so long as 11 the settlement is adequately described and the counterparty to the settlement is added to the 12 notice.

HOVUARD 13 PG&E is noticing this Motion to, and serving it and the accompanying RKE CANU" 14 Mem'orandum of Points and Authorities on, the full Special Notice List established pursuant 15 to the Case Management Order entered in this case, as well as TID. This satisfies the 16 reasonable and adequate notice requirement because such served documents describe the 17 proposed settlement, including the terms and conditions of the proposed sale, lease and 18 related transactions comprising the proposed settlement, and state the time for filing any 19 objections or opposition thereto.

20 21 D. The Settlement And The Consideration Which PG&E Will Receive Are Fair and Reasonable 22 23 For the reasons already described in Part IIA above, both the settlement itself-24 and the consideration to be received by PG&E from TID in connection with the sale, lease 25 and related transactions comprising the settlement -are fair and reasonable.

26 27 28 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 III.

2 THE COURT SHOULD AUTHORIZE THE SALE OF THE WESTSIDE ZONE FACILITIES FREE AND CLEAR OF ALL 3 LIENS AND INTERESTS, EXCEPT THE LIEN OF BNY WESTERN TRUST COMPANY 4

5 PG&E requests that this Court approve the sale of the Westside Zone Facilities to 6 TID under the Asset Sale Agreement free of all liens and interests pursuant to Bankruptcy 7 Code Section 363(f), other than the lien of BNY Western Trust Company on the real

. 8 property comprising part of the Westside Zone Facilities.

9 Section 363(f) allows for sales of property of the estate "free and clear of any 10 interest" if any one of the following five conditions are met:

11 1. applicable nonbankruptcy law permits sale of such property free and clear of such interest; 12

2. such entity consents; HOVU.RD 13 Na PIKE 3. such interest is a lien and the price at.which such property is to GCADA14 be sold is greater than the aggregate value of all liens on such eRAs[N property; A 15

4. such interest is in bona fide dispute; or 16

5. such entity could be compelled, in a legal or equitable 17 proceeding, to accept a money satisfaction of such interest.

18 These conditions are stated in the disjunctive and satisfaction of any one of the five 19 conditions will justify a sale free and clear of liens and interests pursuant to this section.

20 See, , Citicorp Homeowners Servs.. Inc. v. Elliott (In re Elliott), 94 B.R. 343, 345 (E.D.

21 Pa. 1988); Hargrave v. Township of Pemberton (In re Tabone. Inc.), 175 B.R. 855, 858 22 (Bankr. D.N.J. 1994).

23 PG&E is only aware of one lien on the Westside Zone Facilities. That is the lien 24 on substantially all assets of PG&E in favor of BNY Western Trust Company in its capacity 25 as the successor trustee (the "Trustee") under that certain Indenture dated December 1, 1920 26 as amended to date, which is the subject of that certain "Stipulation (I) Authorizing and 27 Restricting Use of Cash Collateral Pursuant to 11 U.S.C. §363 and Bankruptcy Rule 4001 28 and (II) Granting Adequate Protection Pursuant to 11 U.S.C. §§361 and 363" entered into NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 between PG&E and the Trustee on May 9, 2001 (the "Cash Collateral Stipulation") and 2 approved by the Bankruptcy Court by its Order thereon dated the same date, as modified to 3 date. As part of the Cash Collateral Stipulation, the Trustee and PG&E agreed as follows:

4 Except for transactions in the ordinary course of its business or except as otherwise permitted in the Indenture or authorized by an order of 5 this Court (after notice to the Indenture Trustee), the Debtor shall not sell, transfer, lease, encumber or otherwise dispose of any Pre-Petition 6 Collateral or Post-Petition Collateral without the prior written consent of the Indenture Trustee, and no such consent shall ever be implied 7 from any other action, inaction or acquiescence by the Indenture Trustee or any Bondholder. The Indenture Trustee expressly 8 authorizes the Debtor to sell assets pursuant to Section 363(f) of the Bankruptcy Code free and clear of any liens, claims or encumbrances 9 of the Indenture Trustee to the extent such sales are permitted by the Indenture and so long as the liens, claims or encumbrances of the 10 Indenture Trustee shall attach to the proceeds of such sales with the same validity and priority as the liens, claims and encumbrances of the 11 Indenture Trustee in the assets subject to such sales, until the disposition of such proceeds in accordance with the Indenture and 12 applicable bankruptcy law. (Cash Collateral Stipulation ¶13) 13 Thus, while the Debtor has the authority pursuant to the Cash Collateral CAMW 14 Stipulation to sell the real property that is part of the Westside Zone Assets free and clear of

&RAMNr<

15 the Trustee's lien upon meeting specified conditions, the Debtor is not by this Motion 16 requesting that this Court order the Trustee's lien to be reconveyed as a condition of closing 17 the sale. Rather, the Debtor and TID have agreed in the Asset Sale Agreement and 18 Installment Purchase Agreement that PG&E will, within 30 days after closing of the sale of 19 the real property assets, seek to obtain the prompt reconveyance of the lien of the Trustee on 20 such assets, pursuant to the Debtor's rights under the Indenture and the Cash Collateral 21 Stipualtion,.

22 Accordingly, pursuant to the Cash Collateral Stipulation, PG&E will comply with 23 the applicable provisions of the Indenture regarding the release/reconveyance of the 24 Trustee's lien on the real property to be sold, which in this case will result in (i) PG&E 25 delivering a Board resolution, an opinion of in-house counsel and certain certificates to the 26 Indenture Trustee pursuant to the Trust Indenture, and (ii) PG&E agreeing that the net 27 proceeds of sale be delivered to the Trustee as promptly as practicable after the closing of 28 the Asset Sale Agreement. Further, in order to flesh out the application of the Cash NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

I Collateral Stipulation to this sale and move forward with this sale with the consent of the 2 Trustee, PG&E has agreed with the Trustee (and hereby incorporates into the Motion) that 3 the net proceeds of the sale of the Westside Zone Facilities to be paid over to the Trustee 4 will be held by the Trustee in a segregated account as cash collateral for PG&E's obligations 5 under the Indenture, and such proceeds shall not be released to PG&E unless and until either

-6 (i) the Trustee has consented in writing to the release of such proceeds to PG&E, or (ii) this 7 Court orders the Trustee to release such proceeds following a noticed motion and hearing 8 thereon, any such motion to be served upon the Trustee no less than 28 days prior to the 9 scheduled hearing date. In connection with any such motion, PG&E reserves the right to 10 argue that the Trustee is required pursuant to the applicable provisions of the Indenture to 11 release some or all of the net proceeds of this sale that are held by the Trustee as cash 12 collateral, and/or that the Trustee's interest in PG&E's property is adequately protected HCMID 13 without regard to such cash collateral; and the Trustee reserves the right to oppose any or all RKE

? frl I 14 such arguments and to make any and all adequate protection arguments that it deems JUK

&RAHCN 15 appropriate.

16 Although PG&E is not aware of any other liens on the Westside Zone Facilities 17 or any portion thereof, PG&E notes that a number of courts have held that failure to object to 18 the sale after notice and a hearing constitutes implied consent sufficient to satisfy the 19 requirement of Section 363(f)(2). See, eg., Veltman v. Whetzal, 93 F.3d 517, 521 (8th Cir.

20 1996) (noting that some courts have found implied consent upon a failure to object); Elliott, 21 94 B.R. at 345 (holder of first mortgage on debtor's property "consented to the sale by 22 failing to make any timely objection after receiving notice of the sale.... []mplied consent 23 is sufficient to authorize a sale under §362(f)(2)"); In re Tabone. Inc., 175 B.R. at 858 ("As 24 the Township did not offer any objection, it may be deemed to have consented to the sale for 25 purposes of section 363(f)(2)"); In re Shary, 152 B.R. 724, 725 (Bankr. N.D. Ohio 1993) 26 ("[T]he State's failure to object to the sale, or the confirmation of the sale, implicitly 27 conveyed its consent to the sale as found under §362(f)(2)"); but see In re Roberts, 249 B.R.

28 152, 157 (Bankr. W.D. Mich. 2000) (rejecting implied consent theory despite the fact that NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITIES, ETC.

1 "every published opinion and the leading bankruptcy treatises support the ... contention that 2 the consent required by Section 363(f)(2) may be implied by the lienholder's failure to 3 object").

• ' 14 Therefore, to the extent there are any other holders of liens or other interests in 5 the Westside Zone Facilities or any portion thereof who are on notice of this Motion and 16 who fail to object to this Motion, their consent may be implied and the sale authorized free 7 and clear of those liens and interests pursuant to Section 363(f)(2).

8 9 CONCLUSION 10 For all of the foregoing reasons, PG&E respectfully requests that this Court exercise its power pursuant to Sections 363(b) and (f) of the Bankruptcy Code and 12 Bankruptcy Rule 9019(a) to approve the agreements and transactions descried above as part H7NRD 13 of PG&E's settlement and compromise of controversy with TID, and to authorize the sale of the Westside Zone Facilities to TID under the Asset Sale Agreement free and clear of liens

&RAflCN and interests (other than the lien of BNY Western Trust Company) on the terms and 211 16 conditions specified herein.

17 18 DATED: May30,2003 19 Respectfully, 20 HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN 21 A Professional Corporation 22 By:,

23 J Y L. SCHAFF 24 Attorneys for e or and Debtor in session PACIFIC GAS ND ELECTRIC COMPANY 25 26 27 28 WD 0530031F-1419914/YI/1070792/v7 NOTICE OF MOTION AND MOTION TO COMPROMISE CONTROVERSY WITH TID AND SELL WESTSIDE ZONE FACILITiES, ETC.