ML032120243

Petitioners' Excerpts of Record, Volume I of III, Dated 12/5/02

ML032120243
Person / Time
Site:	Diablo Canyon
Issue date:	12/05/2002
From:	San Luis Obispo County, CA, State of CA, California Public Utilities Commission
To:	Office of Nuclear Reactor Regulation, US Federal Judiciary, Court of Appeals, 9th Circuit
References
02-72735
Download: ML032120243 (414)

Text

IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 02-72735 PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, AND COUNTY OF SAN LUIS OBISPO Petitioners-Appellants.

V.

US. NUCLEAR REGULATORY COMMISSION, Defendants-Appellees, PACIFIC GAS AND ELECTRIC COMPANY, et a.

Interenors PETITONERS' EXCERPTS OF RECORD VOLUME I OF HI A_

Gary M. Cohen James B. Lindholm, Esq.

Arocles Aguilar Timothy McNulty, Esq.

Laurence G. Chaset, Esq. Office of the County Counsel Public Utilities Commission County Government Center Rm. 386 of the State of California San Luis Obispo, CA 93408 505 Van Ness Avenue, Rm 5131 Telephone (805) 781-5400 San Francisco, California 94102 Facsimile (805) 7814221 Telephone (415) 355-5595 Facsimile (415) 703-2262 Robert K Temple, Esq.

Sheldon L Trubatch, Esq.

Offices of Robert K. Temple, Esq.

Counsel for Petitioner 2524 N. Maplewood Avenue Public Utilities Commission Chicago, Illinois 60647-1929 of the State of California Telephone (773) 292-0492 Facsimile (773) 292-0497 Counsel for Petitioner Dated: December 5,2002 County of San Luis Obispo 136843

CHRONOLOGICAL INDEX Page VOLUME I Application Seeldng Approval Under Section 203 of the Federal Power Act and Related Declaratory Orders under Sections 201 and 305 of the Federal Power Act and Section 12 of the Natural Gas Act (selected pages)................................................. 0001 67 Federal Register, 2455 (Jan. 17, 2002) ................................................. 0005 Petition of the California Public Utilities Commission for Leave to Intervene and Motion to Dismiss Application, or in the Alternative, Request for Stay of Proceedings, and Request for Subpart G Hearing due to Special Circumstances ................................................. 0007 VOLUME II Petition of the California Public Utilities Commission for Leave to Intervene and Motion to Dismiss Application, or in the Alternative, Request for Stay of Proceedings, and Request for Subpart G Hearing due to Special Circumstances (continued)..........................................................0408 VOLUME III Renewed Motion to Dismiss Applications, or in the Alternative to hold Applications in Abeyance, and Notice of Bankruptcy Court Filing ................... 0971 Reply of the California Public Utilities Commission ("CPUC") to the Answer of Pacific Gas & Electric Company to the CPUC's Petition for Leave to Intervene, Motion to Dismiss Application, etc .................................... 1027 Reply of the California Public Utilities Commission ("CPUC") to the Answer of Pacific Gas & Electric Company to the CPUC's Renewed Motion to Dismiss Application ................................................. 1071 Order Terminating Exclusivity with Respect to the California Public Utilities Commission and Authorizing the California Public Utilities Commission to File an Alternate Plan of Reorganization .................................. 1078 i

VOLUME 1II (continued)

U.S. Nuclear Regulatory Commission, Memorandum and Order, CLI-02-12 (April 12, 2002) ................................................. 1080 Further Briefing of the California Public Utilities Commission on the Questions Posed by the Nuclear Regulatory Commission on April 12, 2002 1082 Petition of the County of San Luis Obispo for Leave to Intervene and Request for Hearing .1094 Reply of the County of San Luis Obispo to the Answer by Pacific Gas

& Electric Company to the Petition of the County of San Luis Obispo for Leave to Intervene and Request for Hearing .1118 Addendum to Reply of the County of San Luis Obispo to the Answer by Pacific Gas & Electric Company to the Petition of the County of San Luis Obispo for Leave to Intervene and Request for Hearing .1141 U.S. Nuclear Regulatory Commission, Memorandum and Order, CLI-02-16,55 NRC --- (June 25, 2002) .1148 U.S. Nuclear Regulatory Commission, Atomic Safety and Licensing Board, Memorandum and Order (Ruling on Standing and Contentions of 10 C.F.R. § 2.714 Petitioners and Admission of 10 C.F.R. §2.715(c)

Interested Governmental Entities and Their Issues) LBP-02-23 (December 2, 2002) .1178 ii

PUBLIC VERSION (ONLY VOLUME V CONTAINS PRIVILEGED INFORMATION)

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Pacific Gas and Electric Company )

PG&E Corporation ) Docket Nos. EC02-_-000, On Behalf of Its Subsidiaries ) EL02- -000 and Electric Generation LLC, ) CP02- _-000 ETrans LLC and GTrans LLC )

APPLICATION SEEKING APPROVAL UNDER SECTION 203 OF THE FEDERAL POWER ACT AND RELATED DECLARATORY ORDERS UNDER SECTIONS 201 AND 305 OF THE FEDERAL POWER ACT AND SECTION 12 OF THE NATURAL GAS ACT VOLUME I APPLICATION ATTACHMENTS 1 THROUGH 3 REQUIRED ExHmrrs A THROUGH H Joshua Bar-Lev Earle H. O'Donnell Mark Patrizio Donna M. Attanasio PACIFIC GAS AND ELECTRIC COMPANY DEWEY BALLANTINE LLP 77 Beale Street 1775 Pennsylvania Avenue, N.W.

San Francisco, California 94177 Washington, D.C. 20006-4605 Attorneysfor Attorneysfor Pacific Gas and Electric Company PG&E Corporationand Electric Generation LLC. ETrans LLC and GTrans LLC November 30, 2001 0001 I

approximately 50% beginning with the end of the eleventh year of the 12-year term). This is consistent with Commission policy; the Commission has encouraged "the [California]

IOUs to move their load to long-term contracts of two years or more." See December 15 Order, 93 FERC at 61,993. The Power Sales Agreement will thus be one component of PG&E's portfolio so as to avoid return to the pre-December 15 structure of excessively heavy reliance on spot market purchases. The Power Sales Agreement will also assure continued access by Reorganized PG&E to ancillary services sufficient to support the load requirements of its control area. Thus, the Plan contributes to resolution of the problems that the December 15 Ordersought to alleviate."

V. REQUEST FOR AUTHORIZATION TO TRANSFER NUCLEAR DECOMMISSIONING FUNDS As part of the Transaction, PG&E will transfer to Diablo Canyon LLC ownership of DCPP and all assets related thereto. Accordingly, Applicants are seeking Commission authorization for PG&E to assign 100% of the beneficial interest in the portions of PG&E's Nuclear Decommissioning Trusts associated with DCPP to Diablo Canyon LLC. The assignment by PG&E of its beneficial interest in these portions of its Nuclear Decommissioning Trusts to Diablo Canyon LLC is an essential element of the 55 PG&E respectfully requests relief from the Commission's December15 Order to the extent that the Order returned rate regulation of the output of PG&E's generation facilities to the CPUC. FERC ruled that as of December 15, 2000, "25,000 MW of generation owned by or under contract to the IOUs, . . . may be sold directly at retail by the IOUs subject to the regulation of California. The State is free as of the date of issuance of this order to regulate this power on a cost-of-service basis, subject to a cost cap, or in any way it sees fit." Id at 61,982. The FERC identified this "market reform" as a "'remedial measure" required to address the specific problem of state-mandated sales to the PX, which was aggravating the high cost of power in the market. Id The market structure permitted other companies to bid up the price of power available from PG&E's owned generation, and profit by reselling it to PG&E, rather than permitting PG&E to secure long-term access to such output. That situation, with the termination of PX operations, is now moot so this requirement is no longer relevant.

72 0002

Transaction as the NRC requires Diablo Canyon LLC to have adequate assurance of decommissioning funding.

PG&E maintains external Nuclear Decommissioning Trusts as authorized by 10 C.F.R. § 50.75(eXl)(ii) in order to provide the NRC with the required decommissioning funding assurance for its nuclear generating plants. The Trusts include money associated with both DCPP Unit 1 and DCPP Unit 2.56 Because PG&E is subject to regulation by both the CPUC and FERC, the Trusts, as they pertain to DCPP, consist of both CPUC jurisdictional and FERC jurisdictional trusts.

Concurrently with this Application, Applicants are filing an application with the NRC, pursuant to Section 184 of the Atomic Energy Act of 1954 ("AEA"), 42 U.S.C. § 2234 and 10 C.FR § 50.80, to transfer the operating licenses for DCPP Units I and 2 to Diablo Canyon LLC and to Gen ("NRC Application'). Diablo Canyon LLC would be licensed to own (possess) DCPP Units 1 and 2 and Gen would be licensed to possess, use and operate the units. Gen will lease DCPP from Diablo Canyon LLC and operate DCPP. As part of its review of the NRC Application, the NRC will evaluate the technical and financial qualifications of Diablo Canyon LLC and Gen, including the sufficiency of the Trusts to meet the eventual decommissioning costs for DCPP.

To the extent the Commission may deem the transfer of such beneficial in 1,Applicants are seeking Commission approval under Section 203 to assign PG&E's beneficial interests in the portions of the Trusts that are associated 56 The Trusts also include money associated with Humboldt Bay Unit 3. PG&E will retain its beneficial interests in the Trusts associated with Humboldt Bay for the purpose of decommissioning7 Humboldt Bay. AU of the fimds in the Trusts associated with Humboldt Bay will be segregated from the DCpp components of the Trusts as part of the Transaction.

73 0003

with both DCPP Unit I and Unit 2 to Diablo Canyon LLC.57 Assignment of PG&E's beneficial interests in the portions of the Trusts associated with DCPP is an essential element of the Transaction because it is necessary to permit Diablo Canyon LLC to become the owner of DCPP under the AEA and the NRC's implementing regulations, is consistent with the public interest and is in the public interest. See NiagaraMohawk PowerCorp., 89 FERC ¶ 61,124 at 61,347-48 (1999); see also Baltimore Gas & Elec. Co.,

90 FERC ¶ 62,222, reh 'g denied, 92 FERC ¶ 61,043 (2000) (Commission found that the entirety of a proposed intra-corporate asset transfer, including the transfer of a decommissioning trust fund, was consistent with the public interest and authorized the proposed transaction under Section 203). (Diablo Canyon LLC will be obligated to return to PG&E for refund to its customers any decommissioning funds unexpended when the decommissioning of Diablo Canyon is complete.) As discussed above, the proposed Transaction as a whole, including the transfer of the Trusts, is in the public interest.

Accordingly, the Commission should authorize PG&E to assign 100% of its beneficial interests in the Trusts associated with DCPP Units 1 and 2 to Diablo Canyon LLC as part of its authorization for the Transaction.

VI. REQUEST FOR CONFIRMATION THAT THE PLAN DOES NOT VIOLATE SECTION 305(a) OF THE FPA OR SECTION 12 OF THE NGA A. Statutory Standard Applicants seek affirmation that the declaration and payment of certain dividends does not constitute the making or paying of dividends from funds properly 57 In connection with the confumation of its Plan, PG&E will also seek an order of the Bankruptcy Court pursuant to Section 1142(b) of the Bankruptcy Code (11 U.S.C. § 1142(b)) compelling the CPUC to approve the transfer of the beneficial interests of the CPUC jurisdictional trusts associated with DCPP to Diablo Canyon LLC, or, in the alternative, deeming such approval to have been granted by the CPUC.

74 0004 E - -

Federal Register/Vol. 67, No. 12/Thursday, January 17, 2002/Notices 2455 Consent Decree may also be obtained by Under the proposed settlement, v. Texaco Exploration and Production mail from the Consent Decree Library, Texaco will submit a certification that Inc. and Envirotech Inc., DOJ Ref. 90-PO Box 7611, U.S. Department of its affected facility is now in compliance 5-2-1-06466.

Justice, Washington, DC 20044-7611. In with the monitoring, recordkeeping. and requesting a copy, please refer to United reporting requirements of 40 CFR part Ellen M.Mahan, States v. Texaco Exploration and 60, subpart KKK. In addition, Texaco Assistant Section Chief Environmental Production Inc. andEnvirotech Inc., will pay a civil penalty of $243,725 and Enforcement Section, Environment and NaturalResources Division.

Case No. 2:01 CV-1050 ST (D.Utah). provide up to $51,275 in emergency DOJ Ref. 90-5-2-1-06466, and enclose response equipment and hazardous IFR Doc. 02-1177 Filed 1-16-02; 8:45 am]

a check in the amount of $6.75 (25 cents materials training to a local fire 53ILUN0 CODE 441011-per page reproduction cost) payable to department in Montezuma Creek, Utah, the Consent Decree Library. as a supplemental environmental project. Envirotech will pay a civil NUCLEAR REGULATORY Ellen M.Mahan, penalty of $10,000. COMMISSION Assistant Section Chief, Environmental The Department of Justice will receive Enforcement Section, Environment and Pocket Nos. 50-275 and 50-323]

NaturalResourcesDivision. comments relating to the proposed consent decree for a period of thirty (30) Paclifc Gas and Electric Company,

[FR Doc. 02-01176 Filed 1-16-02; 8:45 am] days from the date of this publication.

SLISG CODE 410-15-U Diablo Canyon Nuclear Power Plant, As a result of the discovery of anthrax Unit Nos. I and 2; NotIce of contamination at the District of Consideration of Approval of Transfer DEPARTMENT OF JUSTICE Columbia mail processing center in of Facility Operating Licenses and mid-October, 2001, the delivery of Conforming Amendments and Notice of Lodging of Consent Decree regular first-class mail sent through the Opportunity for a Hearing Under the Clean Air Act and the U.S. Postal Service has been disrupted.

Consequently, public comments that are The U.S. Nuclear Regulatory Emergency Planning and Community Commission (the Commission) is Right-To-Know Act addressed to the Department of Justice in Washington, DC and sent by regular, considering the Issuance of an order In accordance with Departmental first-class mail through the U.S. Postal under 10 CFR 50.80 approving the policy, 28 CFR 50.7. notice Is hereby Service are not expected to be received transfer of Facility Operating Licenses given that on December 28, 2001, a in a timely manner. Therefore, Nos. DPR-80 and DPR-82, for the proposed consent decree in United comments should be addressed to the Diablo Canyon Nuclear Power Plant, States v. Texaco Explorationand Assistant Attorney General, Unit Nos. I and 2 (Diablo Canyon)

ProductionInc. and Envirotech Inc., Environment and Natural Resources currently held by Pacific Gas and Case No. 2:01 CV-1050 ST, was lodged Division, U.S. Department of Justice, Electric Company (PG&E). as owner and with the United States District Court for and sent: (1) C/o Robert D. Mullaney, licensed operator of Diablo Canyon. The the District of Utah. U.S. Department of Justice, 301 Howard Commission is also considering This consent decree represents a St., Suite 1050, San Francisco, CA amending the licenses for settlement of claims brought against 94105; and/or (2) by facsimile to (202) administrative purposes to reflect the Texaco Exploration and Production Inc. 353-0296; and/or (3) by overnight proposed transfer, and amending the

("Texaco") and Envirotech Inc. under delivery, other than through the U.S. antitrust conditions in licenses as section 113(b) of the Clean Air Act ("the Postal Service, to Chief, Environmental discussed below.

CAA"). 42 U.S.C. 7413(b), and section Enforcement Section. 1425 New York According to an application for 325(b)(3) of the Emergency Planning Avenue, NW., 13th Floor, Washington, approval filed by PG&E, the transfer of and Community Right-to-Know Act DC 20005. Each communication should the licenses would be to a new

("EPCRA"). 42 U.S.C. 11045(b)(3), In a refer on its face to United States v. generating company named Electric civil complaint filed concurrently with Texaco Exploration and ProductionInc. Generation LLC (Gen), which would the lodging of the consent decree. The and Envirotech Inc.. DOJ Ref. 90-5 operate the facility, and to a new complaint alleges that Texaco violated 1-06466. wholly-owned subsidiary of Gen named the CAA and the New Source The proposed consent decree may be Diablo Canyon LLC (Nuclear), which Performance Standards, 40 CFR part 60, examined at the Office of the United would hold title to Diablo Canyon and subparts A and KKK, at Its Aneth gas States Attorney, 185 South State Street, lease it to Gen. PG&E Is requesting plant by failing to monitor its Suite 400, Salt Lake City, Utah 84111, approval of these transfers in equipment for VOC leaks, maintain and at the Region IX Office of the connection with a comprehensive Plan records, submit reports, test its flare, Environmental Protection Agency, 75 of Reorganization (Plan) for PG&E filed and use a thermocouple to monitor its Hawthorne Street, San Francisco, CA under Chapter 11 of the United States flare's pilot flame. The complaint also 94105. A copy of the proposed Consent Bankruptcy Code.

alleges that Texaco and Envirotect Decree may also be obtained by faxing No physical changes to Diablo Canyon violated the CAA and the National a request to Tonia Fleetwood, or operational changes are being Emission Standards for Hazardous Air Department of Justice Consent Decree proposed in the application.

Pollutants for asbestos, 40 CFR part 61, Library, fax no. (202) 616-6584; phone The proposed conforming subpart M, during the removal and confirmation no. (202) 514-1547. There administrative amendments generally disposal of asbestos-containing material is a charge for the copy (25 cent per would replace references to PG&E in the at the Aneth gas plant. Finally, the page reproduction cost). Upon licenses with references to Gen and complaint alleges that Texaco violated requesting a copy, please mail a check Nuclear, as appropriate, to reflect the section 304 of EPCRA, 42 U.S.C.11004, payable to the "U.S. Treasury," in the proposed transfer. With specific regard by twice failing to report the release of amount of $6.75 to: Consent Decree to the antitrust conditions in the more than 500 pounds of sulfur dioxide Library. U.S. Department of Justice, P.O. licenses, the application proposes from its oil and gas production field in Box 7611. Washington, DC 20044-7611. changes such that Gen will be inserted Aneth, Utah. The check should refer to United States in the conditions and thus become 0005

2456 Federal Register/Vol. 67, No. 12/Thursday, January 17, 2002/Notices subject to complying with them, and E generic determination reflected in 10 As an alternative to requests for Trans LLC, a new company that will be CFR 2.1315, no public comments with hearing and petitions to intervene, by affiliated with Gen upon respect to significant hazards February 19, 2002, persons may submit implementation of the Plan and that considerations are being solicited, written comments regarding the license will acquire the electric transmission notwithstanding the general comment transfer application, as provided for in assets of PG&E but not have any interest procedures contained in 10 CFR 50.91. 10 CFR 2.1305. The Commission will in Diablo Canyon. will be also be The filing of requests for hearing and consider and, if appropriate, respond to inserted in the conditions and thus petitions for leave to intervene, and these comments, but such comments become subject to complying with them. written comments with regard to the will not otherwise constitute part of the In addition, the application proposes license transfer application, are decisional record. Comments should be that PG&E will remain designated in the discussed below. submitted to the Secretary, U.S. Nuclear conditions for the limited purpose of By February 6,2002, any person Regulatory Commission, Washington, compliance with the conditions, whose interest may be affected by the DC 20555-0001, Attention: Rulemakings notwithstanding the divesting of its Commission's action on the application and Adjudications Staff, and should cite interest in Diablo Canyon, while may request a hearing and, if not the the publication date and page number of Nuclear will not be named in the applicant, may petition for leave to this Federal Register notice.

conditions. intervene in a hearing proceeding on the Further details with respect to this Notwithstanding the proposed Commission's action. Requests for a action, see the application dated changes to the antitrust conditions hearing and petitions for leave to November 30, 2001, available for public proffered as part of the amendments to intervene should be filed in accordance inspection at the Commission's Public conform the licenses to reflect their with the Commission's rules of practice Document Room, located at One White transfer from PG&E to Gen and Nuclear, set forth in Subpart M, "Public Flint North, 11555 Rockville Pike (first the Commission is considering Notification, Availability of Documents floor), Rockville, Maryland. Publicly specifically whether to approve either and Records, Hearing Requests and available records will be accessible all of the proposed changes to the Procedures for Hearings on License electronically from the Agencywide conditions, or only some, but not all, of Transfer Applications," of 10 CFR Part Documents Access and Management the proposed changes, as may be 2. In particular, such requests and Systems (ADAMS) Public Electronic appropriate and consistent with the petitions must comply with the Reading Room on the Internet at the Commission's decision in Kansas Gas requirements set forth in 10 CFR 2.1306, NRC Web site, http://www.nrc.govl and Electric Co., et al. (Wolf Creek and should address the considerations ADAMS/index.html. Persons who do Generating Station, Unit 1), CLI-99-19, contained in 10 CFR 2.1308(a). not have access to ADAMS or who 49 NRC 441, 466 (1999). In particular, Untimely requests and petitions may be encounter problems in accessing the the Commission is considering denied, as provided in 10 CFR documents located in ADAMS, should approving only those changes that 2.1308(b), unless good cause for failure contact the NRC Public Document Room would accurately reflect Gen and to file on time is established. In (PDR) Reference staff by telephone at 1-Nuclear as the only proposed entities to addition, an untimely request or 800-397-4209, 301-415-4737 or by operate and own Diablo Canyon. petition should address the factors that email to pdr@nrc.gov.

Pursuant to 10 CFR 50.80, no license, the Commission will also consider, in or any right thereunder, shall be reviewing untimely requests or Dated at Rockville, Maryland this 10th day of January 2002.

transferred, directly or indirectly, petitions, set forth in 10 CFR through transfer of control of the 2.1308(b)(l)-(2).

For the Nuclear Regulatory Commission.

license, unless the Commission shall Requests for a hearing and petitions Girija S. Shukla, give its consent in writing. The for leave to intervene should be served ProjectManager, Section 2, Project Commission will approve an upon Richard F. Locke, Esq., Pacific Gas DirectorateIV. Division ofLicensing Project and Electric Company, 77 Beale Street, Management, Office of NuclearReactor application for the transfer of a license Regulation.

if the Commission determines that the B30A, San Francisco, California 94105 proposed transferee is qualified to hold (e-mail address rfl6@pge.com), and to IFR Doc. 02-1211 Filed 1-16-02; 8:45 aml the license, and that the transfer is David A. Repka, Esq., Winston & IUING CODE 7550-1-P otherwise consistent with applicable Strawn, 1400 L Street, NW.,

provisions of law, regulations, and Washington, DC 20005 (e-mail address orders issued by the Commission drepka¢winston.com);the General SENTENCING COMMISSION pursuant thereto. Counsel, U.S. Nuclear Regulatory Before Issuance of conforming license Commission, Washington, DC 20555 (e- Sentencing Guldelines for United amendments, the Commission will have mail address for filings regarding license States Courts made findings required by the Atomic transfer cases only: ogcltinrc.gov); and AGENCY: United States Sentencing Energy Act of 1954, as amended (the the Secretary of the Commission, U.S. Commission.

Act), and the Commission's regulations. Nuclear Regulatory Commission, ACTION: Notice of proposed amendments As provided in 10 CFR 2.1315, unless Washington, DC 20555-0001, Attention: to sentencing guidelines, policy otherwise determined by the Rulemakings and Adjudications Staff, in statements, and commentary. Request Commission with regard to a specific accordance with 10 CFR 2.1313. for public comment. Notice of public application, the Commission has The Commission will issue a notice or hearing.

determined that any amendment to the order granting or denying a hearing license of a utilization facility which request or intervention petition,

SUMMARY

Pursuant to section 994(a).

does no more than conform the license designating the issues for any hearing (o), and (p) of title 28, United States to reflect the transfer action involves no that will be held and designating the Code, the Commission is considering significant hazards consideration. No Presiding Officer. A notice granting a promulgating certain amendments to the contrary determination has been made hearing will be published in the Federal sentencing guidelines, policy with respect to this specific license Register and served on the parties to the statements, and commentary. This amendment application. In light of the hearing. notice sets forth the proposed 0006

UNITED STATES OF AMERICA BEFORE THE NUCLEAR REGULATORY COMMISSION In the Matter of Pacific Gas and Electric Company Docket Nos. 50-275, 50-323 Application for License Transfers and Conforming Administrative License Amendments for Diablo Canyon Power Plant, Units 1 and 2 PETITION OF THE CALIFORNIA PUBLIC UTILITIES COMMISSION FOR LEAVE TO INTERVENE, AND MOTION TO DISMISS APPLICATION, OR IN THE ALTERNATIVE, REQUEST FOR STAY OF PROCEEDINGS, AND REQUEST FOR SUBPART G HEARING DUE TO SPECIAL CIRCUMSTANCES February 5, 2002 4111 0007

TABLE OF CONTENTS Page VOLUME I Order to Show Cause why The Burlington Northern Santa Fe Railway Company and the Union Pacific Railroad Company should not be ordered to comply with California Labor Code section 6906, filed June 3, 1999 ........................................... 001 Administrative Law Judge's Ruling, filed June 14, 1999 ........................... 127 Administrative Law Judge's Ruling, filed June 22, 1999 ........................... 132 Motion to Dismiss, filed September 3, 1999 ........................................... 136 Administrative Law Judge's Ruling, filed September 30, 1999 ................. 315 Response to Motion to Dismiss, filed October 19, 1999 ............................ 319 Reply to Response of the United Transportation Union to Railroads' Motion to Dismiss, filed November 12,1999 ........................... 360 Administrative Law Judge's Ruling, filed May 25,2000 ........................... 383 Order Extending Statutory Deadline (D.00-06-033),

dated June 8,2000 ........................................... 391 Notice of Prehearing Conference, dated June 9, 2000 ................................ 397 Prehearing Conference Statement, filed June 16,2000 .............................. 403 Prehearing Conference Statement of the United Transportation Union, filed June 16, 2000 ........................................... 406 Respondents Opening Brief, filed November 3, 2000 ................................ 409 120965

Page Respondents' Reply Brief, filed November 13, 2000 ................................. 442 Notice of change of Address, filed November 28, 2000 ............................. 460 Draft Decision of AU Ryerson, filed August 21, 2001 .............................. 462 Respondents' Comments on Proposed Decision, filed SeptemberlO, 2001 .............................................. 475 Opinion (D.01-10-066), dated October 25, 2001 ........................................ 488 Application for Rehearing of Decision 01-10-066, filed November 13, 2001 .............................................. 503 Order Granting Stay of Decision 01-10-066 (D.02-01-045),

dated January 9, 2002 .............................................. 536 Order Denying Application for Rehearing of Decision (D.) 01 066, (D.02-04-066), dated April 22, 2002 .............................................. 541 120965

TABLE OF CONTENTS I. THE INTERESTS OF THE CPUC IN THIS MATTER AND MOTION TO DISMISS ................................................. 4 A. PG&E's NOVEMBER 30 FILINGS ................................................. 4 B. THE ALTERNATIVE PLAN ................................................. 7 C. THE PREEMPTION HEARING ................................................. 10 D. ALTERNATIVE MOTION TO STAY PROCEEDINGS .......................................... 11 II. THE REQUEST FOR AUTHORIZATION TO TRANSFER NUCLEAR DECOMMISSIONING TRUST FUNDS MAY NOT LAWFULLY BE APPROVED BY THE NRC ....................................... 12 A. THE NRC LACKS JURISDICTION TO AUTHORIZE ANY AS SIGNMENT OF PG&E's INTERESTS IN THE TRUSTS .................................. 13 B. NO TRANSFER OF THE TRUSTS MAY BE ACCOMPLISHED WITHOUT THE APPROVAL OF THE CPUC ................................................. 15 C. ASSIGNMENT OF THE TRUSTS' ASSETS WOULD NOT BE IN THE PUBLIC INTEREST ................................................. 17 D. THE INMPRACTICALITY OF ASSIGNING THE TRUSTS' ASSETS ........................ 19 III. THE PROPOSED TRANSFEREE IS NOT FINANCIALLY QUALIFIED TO BE THE NRC'S LICENSEE FOR THE DCPP ................................................. 21 A. GEN WILL NOT BE A FINANCIALLY VIABLE ENTITY .............................. 23 B. THE RATES IN THE PROPOSED PSA ARE UNJUST AND UNREASONABLE TO REORGANIZED PG&E AND ITS RETAIL CUSTOMERS WHO WILL FOOT THE BILL ................................................. 24 1.The Proposed PSA Rates Must be Evaluated in Comparison with Otherwise Applicable Rates ...................................... 25

2. PG&E's Benchmark Analysis is Inyalid ............................................... 29

3. PG&E's Market Power Analysis is Woefully Insufficient .................... 38

4. In Light of the Inadequacies of PG&E's Showing, and the Unique Aspects of the Proposed PSA, Only Cost-based Rates May be Accepted as Just and Reasonable .................................... 40 C. PG&E ACKNOWLEDGES THAT THE TRUE JUSTItfICATION FOR THE RATES PROPOSED IN THE PSA IS TO SERV ICE THE DEBT TO BE INCURRED BY GEN UNDER THE PLAN .............................. 41 0008

IV. THE TRANSFER OF DIABLO CANYON OWNERSHIP AND OPERATING LICENSES FROM PG&E TO GEN AND DIABLO WOULD REDUCE CALIFORNIA'S REGULATORY RESPONSIBILITIES OVER NUCLEAR POWER TO THE DETRIMENT OF THE PUBLIC HEALTH, SAFETY AND WELFARE OF THE CITIZENS OF CALIFORNIA ............................................... 43 A. THROUGH ITS REORGANIZATION AND LICENSE TRANSFER SCHEME, PG&E ISSEEKING TO TRUMP THE STATE'S VITAL INTERESTS INREGULATING UTILITIES ............................................... 43

1. California's Basic Interest in Regulating Public Utilities ...................... 43

2. California's Interest in Ensuring Universal Service and Fair and Just Utility Rates ............................................... 45

3. California's Interest in Protecting Financial Integrity and Dedication of Service ............................................... 47

4. California's Interest in Preventing the Loss of In-State Generation Facilities ............................................... 48

5. California's Interest in Preventing Improper Inter-Company Transactions ............................................... 49

6. California's Interest in Preventing the Misuse of the Holding Company Structure ............................................... 50 B. STATE REGULATION HAS SIGNIFICANT ADVANTAGES OVER FEDERAL REGULATION ............................................... 51 V. PUBLIC SAFETY AND WELFARE ARE THREATENED BY THE PROPOSED LICENSE TRANSFER ................................................ 53 A. FINANCIAL ASPECTS ................................................ 54 B. PUBLIC SAFETY ASPECTS .............................................. 57 VI. CONCLUSION ............................................... . 58 0009

LIST OF EXHIBITS Exhibit A: "California Public Utilities Commission's Objection to Proposed Disclosure Statement for Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by Pacific Gas and Electric Company and PG&E Corporation," filed on November 27, 2001 in the case, In re Pacific Gas andElectric Company, United States Bankruptcy Court Northern District of California, San Francisco Division, Case No. 01-30923 DM Exhibit B: "Objection To Pacific Gas & Electric Company's Second Motion For Order Further Extending Exclusivity Period For Filing Plan Of Reorganization To Permit The California Public Utilities Commission To File An Alternate Plan Of Reorganization," filed on January 8,2002 by the California Public Utilities Commission in the case, In re PacificGas andElectric Company, United States Bankruptcy Court Northern District of California, San Francisco Division, Case No. 01-30923 DM Exhibit C: "The Commission's Memorandum In Further Support Of Its Objection To Proposed Disclosure Statement For PIdn Of Reorganization Under Chapter 11 Of The Bankruptcy Code For Pacific Gas And Electric Company," filed on January 8, 2002 by the California Public Utilities Commission in the case, In re Pacific Gas and Electric Company, United States Bankruptcy Court Northern District of California, San Francisco Division, Case No. 01-30923 DM Exhibit D: "Motion for Summary Disposition, or in the Alternative, Protest and Request for Consolidation and Hearing, of the Public Utilities Commission of the State of California," filed on January 29, 2002 in Pacific Gas and Electric Company, et al., Federal Energy Regulatory Commission, Docket Nos.

EC02-31-000, EL02-36-000 and CP-02-38-000 Exhibit E: "Motion to Dismiss, or, in the Alternative, Protest and Request for Hearing, and Comments of the Public Utilities Commission of the State of California," filed on January 29, 2002 in Pacific Gas andElectric Company, et al., Federal Energy Regulatory Commission, Docket No. ES02-17-000 iii 0010

Exhibit F: "Motion for Summary Disposition, or in the Alternative, Protest and Request for Consolidation and Hearing, of the Public Utilities Commission of the State of California," filed on January 29, 2002 in Electric GenerationLLC, Federal Energy Regulatory Commission, Docket No. ER02-456-000 Exhibit G: Declaration of David R. Effross Exhibit H: Oakland Tribune, February 1, 2002, copy of newspaper article, "New Terror Attacks on U.S. Predicted/ Nuclear reactor seen as possible target" Exhibit I: Diablo Canyon Independent Safety Committee, Annual Report, covering July 1, 2000 through June 30, 2001 iv 0011

UNITED STATES OF AMERICA -

BEFORE THE NUCLEAR REGULATORY COMMISSION In the Matter of Pacific Gas and Electric Company Docket Nos. 50-275, 50-323 Application for License Transfers and Conforming Administrative License Amendments for Diablo Canyon Power Plant, Units 1 and 2 PETITION OF THE CALIFORNIA PUBLIC UTILITIES COMMISSION FOR LEAVE TO INTERVENE, AND MOTION TO DISMISS APPLICATION, OR IN THE ALTERNATIVE, REQUEST FOR STAY OF PROCEEDINGS, AND REQUEST FOR SUBPART G HEARING DUE TO SPECIAL CIRCUMSTANCES Pursuant to 10 CFR §§ 2.1306,2.1309 and 2.1329(b), the Public Utilities Commission of the State of California ("CPUC") hereby petitions for leave to intervene in the pending Application of the Pacific Gas and Electric Company ("PG&E") to transfer the operating licenses for the Diablo Canyon Power Plant ("DCPP") Units 1 and 2 to a new operating and generating company named Electric Generation LLC ("Gen")

and to transfer the ownership of the DCPP units to a new, wholly owned subsidiary of Gen named Diablo Canyon LLC ('Diablo") submitted in the above-captioned dockets (the "Application"), moves to dismiss the Application, or, in the alternative, requests a stay of the proceedings, and requests the United States Nuclear Regulatory Commission

("NRC" or "Commission") to conduct a hearing on the Application.

I 0012

Communications to the CPUC in this matter should be addressed to:

Laurence G. Chaset David Effross Public Utilities Commission of the Public Utilities Commission of the State of California State of California 505 Van Ness Avenue, Room 5131 505 Van Ness Avenue, 4th Floor San Francisco, California 94102 San Francisco, California 94102 (415) 355-5595 (415) 703-1567 e-mail: lauecpuc.ca.gov e-mail: dreecpuc.ca.gov Gregory Heiden Public Utilities Commission of the State of California 505 Van Ness Avenue, Room 5024 San Francisco, California 94102 (415) 355-5539 e-mail: gxhecpuc.ca.gov In support of its Petition for Intervention, its Motion to Dismiss the Application, or, in the alternative, to stay the proceedings, and its request for a subpart G hearing due to special circumstances, and pursuant to 10 CFR § 2.1306, the CPUC identifies herein below, and in the various Exhibits hereto, the issues it seeks to raise, as well as (i) a demonstration that these issues are within the scope of the proceeding, (ii) a demonstration that these issues are relevant to the findings that the NRC must make in order to grant PG&E's requested transfer, (iii) a statement of the facts and expert opinion supporting the CPUC's position and its requests, and (iv) information showing that a genuine dispute exists with PG&E on material issues of fact and fact.

Finally, if and when the Commission moves forward in this matter, the CPUC also requests, pursuant to 10 C.F.R. §2.1329(b), due to the "special circumstances concerning 2

0013

the subject of the hearing" that the Commission hold a substantive subpart G hearing.

The CPUC contends that due to the complex nature of the legal, policy and factual issues it raises, as set forth herein below, the application of subpart M, particularly in cross examination and discovery, would not serve the purposes for which the rule was intended

- full and fair hearing on license transfer on an expedited basis. The CPUC contends that upon careful examination of the materials provided herein below and attached hereto, the Commission will have an adequate basis to determine that the matters in this license transfer are not strictly "financial in nature" as contemplated in the promulgation of Subpart M. In this regard, the Commission's ruling in NiagaraMohawk Power Corporation,New York State Electric & Gas Corporation,and AmerGen Energy Company, LLC (Nine Mile Points, Units I & 2), 50 NRC 333, 1999 NRC LEXIS 1 5 at

• 18-19 (December 22, 1999), is distinguishable from the instant case. In this case, there are fundamental legal issues at stake, as well as important considerations of public policy, national security and public health and safety, not merely administrative determinations concerning the paper transfer of a the license and conforming of technical specifications to reflect such a mere paper change.

The CPUC contends that the Commission will completely abdicate its responsibility to protect public health and safety, and thereby abdicate its duty to safeguard the national interest under the Atomic Energy Act, §§ 105, 184, 189a, if it permits the license transfer at issue to go forward as a purely ministerial determination without considering the extensive substantive issues surrounding this particular proposed license transfer. Such issues will only receive adequate attention in the context of a full 3

0014

adjudicatory hearing process with the right to call for evidence, present evidence, and cross examine evidence.

In support of the above motions and requests, the CPUC sets forth as follows:

I. THE INTERESTS OF THE CPUC IN Tuis MATTER-AND MOTION TO DIsMIss The CPUC is a constitutionally established agency charged with the responsibility for regulating electric corporations within the State of California. In addition, the CPUC has a statutory mandate to represent the interests of electric consumers throughout California in proceedings before the Commission. The CPUC currently exercises regulatory authority over DCPP. As is set forth in detail below, these fundamental interests and responsibilities of the CPUC are directly threatened by the proposed license transfer at issue in this Application.

A. PG&E's NOVEMBER 30 FILINGS On November 30, 2001, PG&E submitted this Application, as well as a voluminous and complex series of filings before the Federal Energy Regulatory Commission

("FERC"), (collectively, the "November 30 Filings") as part of the implementation of PG&E's proposed Plan of Reorganization under Chapter 11 of the Bankruptcy Code

("Plan"). The Plan was jointly filed by PG&E and its holding company parent, PG&E Corporation ("Parent"), with the Bankruptcy Court on September 20, 2001. PG&E's Plan involves a complex disaggregation of various businesses within PG&E and the spin-off of its distribution business to a Reorganized PG&E, which will be a separate company that will no longer be affiliated with the remainder of the disaggregated businesses. In effect, the current vertically-integrated PG&E will become a distribution company only 4

0015

and its generation, electric transmission and gas storage and transmission operations will be unbundled into separate companies that remain affiliated with one another under the Parent, but unaffiliated with Reorganized PG&E. Under this Plan, only this Reorganized PG&E will be subject to CPUC regulation. Indeed, as the CPUC has recently stated in its November 27, 2001 bankruptcy filing in response to PG&E's proposed disclosure statement:

"Through its Plan and Disclosure Statement PG&E seeks to affect a regulatory jailbreak unprecedented in scope in bankruptcy annals. Under the guise of section 1123(a)(5) of the Bankruptcy Code and through a misapplication of the debtor protection provisions of chapter 11, PG&E seeks sweeping preemptive relief primarily in the form of no fewer than fifteen affirmative declaratory and injunctive rulings, each designed to permanently dislocate various state and local laws and regulations affecting PG&E's operation of its public utility. (Fn omitted). PG&E's Plan is concerned only secondarily with adjusting debtor-creditor relations and restoring its utility operations to financial health. To be sure, if those were PG&E's primary concerns, then it would have proposed a much more straightforward reorganization strategy. PG&E has as its own agenda an escape from CPUC and State regulation."'

The November 30 Filings are highly controversial. The various applications before the FERC, together with this Application before the NRC, are inextricably linked, and the November 30 Filings involve complex legal issues that will be heavily contested.

The NRC and the FERC will be required to carefully scrutinize these applications, as they raise difficult legal issues in order to ultimately determine whether PG&E's filings "California Public Utilities Commission's Objection to Proposed Disclosure Statement for Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by Pacific Gas and Electric Company and PG&E Corporation," filed November 27, 2001, In re Pacific Gas andElectric Company, United States Bankruptcy Court Northern District of California, San Francisco Division , Case No. 01-30923 DM, at

3. A copy of the CPUC's November 27,2001 filing in that case is attached as Exhibit A to this pleading.

5 0016

are in the public interest, and meet related statutory requirements. PG&E has not sought state-required approvals for any of its proposals, asserting that all state law is preempted by section 1123(aX5) of the Bankruptcy Code. This assertion is being vigorously challenged by the CPUC, the State of California, and other parties before the Bankruptcy Court.

The CPUC submits that the November 30 Filings, including this Application, are premature and must be dismissed. The November 30 Filings seek to implement PG&E's Plan of Reorganization ("Plan") on file with the Bankruptcy Court. The November 30 Filings thus assume the legal validity of the Plan, and assume that the Plan will move forward. Both of these critical assumptions underlying the November 30 Filings may be, and in the CPUC's view are, incorrect. Moreover, the Bankruptcy Court is expected to issue rulings on these matters in the near future. The Bankruptcy Court's ruling on certain facial preemption issues, discussed further below, will determine whether PG&E's plan is lawful and may move forward at all. The Bankruptcy Court's ruling on whether the CPUC may file an Alternative Plan, also discussed below, will bear on, if lawful, whether and to what extent PG&E's Plan moves forward. Accordingly, PG&E's pending Application in this matter should be dismissed pending orders from the Bankruptcy Court. In the alternative, the Commission should stay all proceedings in this matter, and should defer taking any action on PG&E's Application herein until the complex legal issues being addressed in the Bankruptcy Court -- which issues directly bear on PG&E's authority even to submit this Application -- are resolved. A failure to deny this motion will necessarily result in wasteful, expensive and possible useless 6

0017

proceedings, the results of which, depending on the rulings of the Bankruptcy Court, could well have to be undone.

B. THE ALTERNATIVE PLAN On January 16, 2002, the Bankruptcy Court held a hearing on PG&E's motion to extend the period in which PG&E has an exclusive right to propose plans of reorganization beyond February 4, 2002. The CPUC, the State of California on behalf of various state agencies, and others opposed PG&E's motion. The CPUC has developed and is prepared to file in short order an Alternative Plan of Reorganization ('Alternative Plan"). Unlike the PG&E Plan, the Alternative Plan does not require disassembling the nation's largest public utility, and does not require either the Bankruptcy Court or FERC to reject the application of century-old state regulatory statutes critical to health, safety, and welfare of thirty million citizens. The Bankruptcy Court did not issue a final ruling on the motion at the January 16 hearing. Rather, the Bankruptcy Court provided the CPUC until February 13, 2002 to provide the Bankruptcy Court with a term sheet demonstrating that the CPUC's proposed Alternative Plan is feasible. 2 Upon review of the term sheet, the Bankruptcy Court will rule on whether the CPUC will be permitted to file the Alternative Plan.

A copy of the CPUC's "Objection To Pacific Gas & Electric Company's Second Motion For Order Further Extending Exclusivity Period For Filing Plan Of Reorganization To Permit The California Public Utilities Commission To File An Alternate Plan Of Reorganization" is attached hereto as Exhibit B. The following are 2 The Bankruptcy Court extended the exclusivity period as to all parties other than the CPUC to June 30, 2002.

7 0018

certain of the significant provisions of the CPUC's Alternative Plan:

• PG&E's short-term borrowings incurred during the energy crisis would be paid in full in cash (including accrued and unpaid interest through the effective date) by the first quarter of 2003 through a combination of PG&E s cash on hand (approximately $4.9 billion as of November 30, 2001 according to PG&E's most recent 8-K filing with the SEC)3 and PG&E's residual revenues after deducting authorized revenue requirements from billed revenues ("residual revenues");

• all of PG&E's remaining indebtedness would be reinstated or refinanced;

• PG&E's creditworthiness and financial viability would be restored - the Commission would adopt a post-bankruptcy rate structure consistent with state law that would provide PG&E with an opportunity to earn a reasonable return that would allow it to maintain an investment-grade credit rating;

• valuable claims against the Parent (which under PG&E's Plan are to be released} and other assets such as PG&E's refund claims pending before FERC would be preserved and transferred to a litigation trust or similar entity and prosecuted for the benefit of PG&E's ratepayers;

• costly and time-consuming preemption litigation would be avoided;

• PG&E would emerge promptly from chapter 11;

• the Commission and State of California would continue to regulate PG&E's operations;

• PG&E's integrated operations would not be disaggregated;

• rates would not increase, and may be reduced in 2003 (or earlier);

• utility assets would not be diverted to pay the Parent's expenses; and

• costly litigation at the FERC, NRC and SEC would be avoi ed.

3 The CPUC expects this number to increase over time.

4 These claims include, among others, claims that the Parent has violated the "first priority" condition imposed upon the Parent by a Commission order approving PG&E's holding company structure and claims that PG&E declared and paid dividends to its Parent while it was insolvent.

8 0019

The Alternative Plan reflects the fact that wholesale market prices have declined during the last six months, while the CPUC has increased PG&E's retail rates by over 30% since January 2001. As press reports have noted, "The PUC came up with a straightforward plan based on cash flow to put Southern California Edison back in the black.

Why can't it do the same with PG&E? If it can, the court should pay attention. Bankruptcy court is supposed to be about debtors paying creditors, not about debtors seeking to shed regulation."

Sacramento Bee, Editorial: "PG&E solution: Nothing? Cash flow may easily resolve bankruptcy," Jan. 10, 2002.

If, as the CPUC anticipates, the Bankruptcy Court terminates PG&E's exclusivity period and permits the CPUC to file the Alternative Plan, it will be impossible to know which, if either, of the two plans the Bankruptcy Court will approve. If the Alternative Plan is approved, the November 30 Filings, including this Application, will be moot. 5 The November 30 Filings assume PG&E's view of the world. It is far from certain that that view will prevail in the Bankruptcy Court. Should the proceedings in this matter nonetheless proceed, both the NRC and the parties will be required to expend very significant resources vigorously litigating proceedings which may well become moot. 6 There is a better course. The NRC should dismiss PG&E's Application in this 5

An illustrative example of how such circumstances should play out is demonstrated by the decision of the FERC in the case of Committee of CertainMembers of Cajun Electric Power Cooperative. Inc., 87 FERC ¶ 61,129 (2001)

("Cajun"). In Cajun, FERC dismissed as premature a petition which was "based on the possibility that the Bankruptcy Court may adopt one of two pending, competing plans of reorganization. Id. The same result should obtain in this case, both before the FERC and before the NRC.

6Such premature litigation is to the detriment of PG&E and its creditors as well as to protesting parties and FERC.

For instance, for the month of November 2001, outside counsel involved in the preparation of PG&E's Section 7 filing CP02-39-000 et al. (Winston & Strawn), billed the estate $358,222.38. Counsel involved in the preparation of the ETrans filing, ER02455-000 (Skadden, Arps), charged PG&E, S410,790.87, for October 2001, and S382,252.71 9

0020

matter, without prejudice, as premature. PG&E could subsequently re-file any applications necessary to implement an approved bankruptcy reorganization plan at the appropriate time. One thing, however, is sure; in the event that the CPUC's Alternative Plan is adopted, any application to the NRC for a license transfer for DCPP will look very different from PG&E's present Application.7 C. THE PREEMPTION HEARING PG&E's Plan relies heavily on its assertion that central features of the California Public Utilities Code, which are generally applicable to all public utilities in the state, are preempted by the Bankruptcy Code, and consequently that PG&E needs neither to seek nor to obtain approval by the state of any part of the transactions proposed in the November 30 Filings and in the Plan. The CPUC, the State of California, representing other state agencies, and others have objected that PG&E's unlawful misuse of the Bankruptcy Code renders the Plan unconfirmable on its face. That is, under existing law, the Bankruptcy Court cannot lawfully approve the Plan as proposed. The Ninth Circuit has held in Baker & Drake Inc. v. PublicService Commission ofNevada, 35 F.3d 1348 (9th Cir. 1994), that the Bankruptcy Code does not preempt state statutes or regulations intended to protect the public safety and welfare. According to the Ninth Circuit, state statutes may be preempted by the Bankruptcy Code only if, at a minimum, they are directed narrowly and solely at economic regulation, and if certain other factors apply.

for November 2001. These figures do not even include amounts billed by Dewey Ballantine, counsel on the Section 203 and other applications.

7At the January 16, 2002, hearing the Bankruptcy Court also issued an oral order to show cause as why PG&E and the CPUC should not be required to enter into court appointed mediation, which would be paid for by the Debtor's estate. The Bankruptcy Court has asked these two parties to respond by January 25, 2002.

10 0021

The provisions of the Public Utilities Code that PG&E seeks to preempt protect the public safety and welfare, and accordingly preemption cannot occur. That is true even if enforcement of the challenged provisions of state law would make a bankruptcy reorganization more difficult, or even impossible. A copy of the CPUC's "Memorandum In Further Support Of Its Objection To Proposed Disclosure Statement For Plan Of Reorganization Under Chapter 11 Of The Bankruptcy Code For Pacific Gas And Electric Company" is attached hereto as Exhibit C.

The Bankruptcy Court held a hearing on the preemption issues on January 25, 2002 and took the issues raised during the hearing under review. A ruling on these issues is expected to occur within the next few weeks. A ruling in the CPUC's favor would doom PG&E's Plan, as it would not be feasible as a matter of law. Such a ruling would require submission, either by PG&E or another party, of a new, lawful, Plan, and moot the November 30 Filings, including PG&E's Application herein. In any event, it is expected that the Court's ruling on these preemption issues are likely to be appealed, and a final resolution of these issues could be many months in the future. It would therefore be an extraordinary waste of resources to proceed on this Application pending the Bankruptcy Court's ruling on the facial preemption issue and the outcome of any appeals of that ruling. Accordingly, the CPUC submits that the NRC should dismiss this Application without prejudice until these preemption issues are finally resolved.

D. ALTERNATIVE MOTION TO STAY PROCEEDINGS In the alternative, in the event that the NRC declines to dismiss this Application, the NRC should issue an order staying the proceedings in this matter. For the same II 0022

reasons set forth above, there is little reason for the parties or the NRC to expend the resources necessary to litigate these proceedings given the current uncertainty as to whether PG&E's plan is lawful, and whether the CPUC will be permitted to submit its Alternative Plan as an alternative plan to PG&E's current Plan.

If the Bankruptcy Court rules against PG&E on preemption, PG&E's Plan falls apart and the November 30 Filings, including this Application, are moot. If the Bankruptcy Court permits the filing of an alternative plan, it will be impossible to know which, if either, of the two plans the Bankruptcy Court will approve.

Accordingly, if the NRC does not determine to dismiss these proceedings altogether, the NRC should certainly to hold the matter in abeyance until the Bankruptcy Court's rulings on the preemption issue and on the filing of the Alternative Plan have been finalized.

H. THE REQUEST FOR AUTHORIZATION TO TRANSFER NUCLEAR DECOMMISSIONING TRUST FUNDS MAY NOT LAWFULLY BE APPROVED By THE NRC In its application, PG&E states that decommissioning funding assurance for DCPP is provided by an external Nuclear Decommissioning Trust, as authorized under the Commission's regulations at 10 CFR 50.75(e)(l)(ii), and that PG&E will "transfer" to Diablo the "beneficial interest" in those portions of the CPUC Qualified and Nonqualified Nuclear Decommissioning Trusts (the "Trusts") "associated with" DCPP.

Unfortunately, in its filing, PG&E has failed to inform the Commission that it does not have the legal authority to make this transfer. If PG&E cannot transfer its interest in the Trusts to Diablo, the proposed licensee has no decommissioning funding assurance, and 12 0023

the Commission cannot approve the requested license transfer, because decommissioning funding assurance is a sine qua non of Commission approval of any such license transfer.

The reasons why PG&E's beneficial interest in the Trusts cannot be transferred, and thus, the requested license transfer cannot be approved, are as follows: (1) the NRC does not have any direct jurisdiction over these Trusts and accordingly cannot authorize their assignment; (2) the proposed assignment cannot be accomplished without approval of the CPUC, which opposes the transfer; (3) it would be unjust and unreasonable to the California ratepayers who have funded these Trusts to authorize their assignment to a holding company that has no explicit obligation to those ratepayers and that could loot or exploit the Trusts' assets to its own advantage, and to the ratepayers' disadvantage; and (4) the Trusts provide funds for the eventual decommissioning of other PG&E assets --

specifically, Humboldt Bay Nuclear Unit No. 3 ("HB-3") -- which will be retained by PG&E, as well as for the eventual decommissioning of DCPP; thus, on purely practical grounds, the proposed assignment will create serious difficulties and potential inequities in terms of allocating the Trusts' assets as between the needs of DCPP and those other assets.

A. THE NRC LACKS JURISDICTION TO AUTHORIZE ANY ASSIGNMENT OF PG&E'S INTERESTS IN THE TRUSTS Because the Trusts are not NRC-jurisdictional agreements, the NRC has no authority to approve the transfer proposed by PG&E, nor does PG&E claim that the NRC has any direct jurisdiction over these Trusts (although NRC regulations clearly do require that such trusts be in effect and do impose certain requirements relating to such trusts).

13 0024

Rather, the Trusts were developed in a vertically integrated environment in which PG&E's nuclear facilities provided energy at retail to California consumers, under CPUC regulation. The parties to the Trust agreements are PG&E, the CPUC and the Trustee, Mellon Bank, NA. The NRC is not a party to these agreements. The Trusts themselves provide that they were established pursuant to the regulatory authority of the CPUC and the NRC. See also Cal. Pub. Util. Code §§ 8321-8330 (the California Nuclear Facility Decommissioning Act of 1985). Any disposition of the Trusts' assets must be pursuant to CPUC order, and to the extent applicable, NRC order.

PG&E does acknowledge that authorization of the assignment of PG&E's beneficial interests in the portions of the Trusts associated with DCPP is "an essential element of the Transaction as the NRC requires Diablo Canyon LLC to have adequate assurance of decommissioning funding." See PG&E's Section 203 application to FERC, Docket EC02-3 1-000, at 72-73. PG&E is correct, of course, that the assignment of the DCPP portion (whatever that is) of PG&E's interests in the Trusts may be necessary under the Atomic Energy Act and NRC regulations to effectuate the transfer of DCPP to Diablo Canyon LLC, but the NRC lacks the authority to "authorize" the assignment of PG&E's interests in the DCPP portion of these trusts to Diablo Canyon LLC or to any other entity.

This is true regardless of any order the Bankruptcy Court may or may not issue.

In a footnote in its FERC Section 203 application, PG&E indicates that it will ask the Bankruptcy Court to "compel" the CPUC to approve the transfer or to "deem" the approval to have been granted by the CPUC. Id., at 74, n.57. However, the funds 14 0025

contained in the Trust are not subject to creditors' claims (except,. of course, for claims relating to decommissioning activities for which a proper Disbursement Certificate is submitted to the Trustee)l and are therefore outside the purview of the Bankruptcy Court.

The Bankruptcy Court therefore has no authority to "break" the contact as part of its approval of a reorganization plan. In any event, even if the Bankruptcy Court may or indeed does issue an order of the type contemplated by the PG&E footnote, such an order would in no way bestow jurisdiction over these Trusts on the NRC.

B. NO TRANSFER OF THE TRUSTS MAY BE ACCOMPLISHED WITHOUT THE APPROVAL OF THE CPUC As noted above, the Master Trust Agreements that govern the management of the Trusts are contracts between the CPUC, PG&E and the Trustee, Mellon Bank, N.A. The Master Trust Agreements are, by their terms, irrevocable and not transferable. Section 2.07 of the Master Trust Agreement for the Qualified Decommissioning Trust (the larger of the two in terms of asset value) provides as follows:

"The interest of the Company [PG&E] in the Master Trust is not transferable by the company, whether voluntarily or involuntarily, nor subject to the claims of the creditors of the Company, provided, however, that any creditor of the Company as to which a Disbursement Certificate has been properly completed and submitted to the Trustee may assert a claim directly against the Master Trust in an amount not to exceed the amount specified on such Disbursement Certificate. Nothing herein shall be construed to prohibit a transfer of the Company's interest in the Master Trust upon sale of all or part of the Company's-ownership interest in any Plant or Plant's; provided, however, that any such transfer shall be subject to the prior approval of the CPUC."

(Emphasis added.)

'See discussion infra.

15 0026

Section 2.06 of the Master Trust Agreement for the Qualified Decommissioning Trust sets forth identical language.

The Master Trust Agreements thus explicitly deny PG&E the authority to transfer its interest in the Trusts either voluntarily or involuntarily. The only exception is in connection with a sale of PG&E's ownership interest in the plant. However, in such a case, the Master Trust Agreement specifically provides that "any such transfer shall be subject to the prior approval of the CPUC." In its Application in this matter, at page 1 1, PG&E states that it is seeking to obtain approval from FERC via its Section 203 filing for this transfer of interests in the Trusts to Diablo, without first seeking the approval of the CPUC. However, PG&E's effort to circumvent the required CPUC approval of a transfer of the Trusts by its appeal to FERC on its face violates the terms of its contractual agreement and is accordingly a void and unlawful act.

Ultimately, PG&E's request that FERC "authorize" its assignment of its DCPP-related interests in the Trusts to Diablo is an idle and futile exercise. The one leading authority cited in section V of PG&E's Section 203 application to FERC, which deals with this issue, NiagaraMohawk Power Corp., 89 FERC ¶ 61,124 (1999) in no way supports PG&E's "authorization" request with respect to assignment of PG&E's DCPP-related interests in the Master Trust Agreements. Indeed, if anything, the Niagara Mohawk decision undermines the basis for PG&E's request.

In NiagaraMohawk, the co-tenants of the proposed transferee of a majority interest in the Nine Mile Point II power plant protested the proposed transfer based on concerns that the proposed transferor might have insufficient funds to meet its portion of 16 0027

eventual decommissioning expenses, and complained in this regard that the transferor failed to seek FERC approval for the transfer of nuclear decommissioning funds. In its decision, FERC found that there was no need to separately address whether such authorization was needed in that case, and noted that the financial ability of the proposed transferee to fund nuclear decommissioning was a matter to be addressed in an NRC proceeding. Moreover, in NiagaraMohawk, FERC explicitly recognized that the proposed transaction was "subject to review by the New York State Commission, and no state commission has argued that the proposed transaction would impair state regulation."

See 89 FERC, at 61,347. Thus, PG&E's citation to this FERC decision attempts to turn the plain language of the decision inside out. PG&E is attempting to use a finding that holds that the specific authorization of the transfer of decommissioning funds is a matter, not requiring specific FERC approval, for other agencies (the NRC and, in the case of DCPP, the State of California) to decide into a pretext for de facto preemption of the state's clear contractual right to make that policy judgment.

C. ASSIGNMENT OF THE TRUSTS' ASSETS WOULD NOT BE IN THE PUBLIC INTEREST PG&E contends, at page 74 of its Section 203 application to FERC, without any evidentiary support or analysis, that the assignment of its beneficial interests in the portions of the Trusts associated with DCPP "is consistent with the public interest and is in the public interest." In fact, the opposite is closer to the truth. For instance, the U.S.

General Accounting office has just released a report (GAO-02-048, January 2002) finding that the NRC has been approving licensing transfers and related decommissioning 17 0028

efforts even though new owners and operators are unable to assure regulators that the money for decommissioning will be there when reactors are ready for burial.

The specific question of whether the transfer of a nuclear decommissioning fund would be in the public interest, was examined in detail by the CPUC several years ago in a case, A.97-12-039, involving the application of San Diego Gas and Electric Company (SDG&E) for authority to sell its share of the San Onofre Nuclear Generating Station

("SONGS"). There, even SDG&E's partner in SONGS, Southern California Edison Co.

("Edison") expressed concern regarding the proposed transfer, questioning how ratepayers can be assured of protection if a decommissioning trust fund is dissipated by a new, non-utility owner after the transfer. (See RT of October 21, 1999 hearing in CPUC Docket A-97-12-039, at 22.) PG&E does not even suggest an answer to that question, either in its Application in this matter or in its voluminous Section 203 application to FERC, which also addresses the proposed transfer of PG&E's beneficial interest in the Trusts to Diablo. However, this question is as compelling today in the context of the transfer that PG&E is requesting the Commission to authorize herein as it was 2'/2 years ago in the SONGS proceeding. 9 It should also be noted that California's decommissioning law is stricter than required by the NRC. Pursuant to the California Nuclear Facility Decommissioning Act of 1985 (Pub. Util. Code §§ 8321 through 8330), California's nuclear power plants generally have considerably more money in their decommissioning trust funds than do 9 It should be noted that on November 5, 1999, SDG&E withdrew its request to divest its interest in SONGS. See, In the Matter ofthe Application ofSan Diego Gas & Electric Company (U-902-E)for Authority to Sell Electrical Generation Facilitieset al., D.00-10-054, 2000 Cal. PUC LEXIS 760 (2000).

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the plants in most other states. This is because most other states typically only require compliance with NRC rules. Under this California law, not only must more money be put into such funds (the maximum contribution allowed pursuant to section 468A of the U.S. Internal Revenue Code, and applicable regulations adopted pursuant thereto), but also California has the oversight authority to make sure that the decommissioning work gets done in a timely fashion. Under CPUC oversight, PG&E has been a good steward of the Trusts, to date.

However, there is absolutely no guarantee that a Diablo Canyon LLC or some other entity that is not regulated by the CPUC would maintain that stewardship. And yet, the transfer of PG&E's "beneficial interest" in the portions of the Trusts associated with DCPP will effectively put much of the Trusts assets in the hands of such a less reliable and less trustworthy entity, over which, in PG&E's view, neither FERC nor the CPUC would have regulatory authority. Such an unregulated entity would have a strong financial incentive to delay performing the decommissioning as long as possible, in order to make as much money for itself, using ratepayer provided funds. It would not be in the public interest, and it would be unjust and unreasonable to PG&E's ratepayers, who have footed the bill for the eventual decommissioning of DCPP, to allow such a situation to arise.

D. THE IMPRACTICALITY OF ASSIGNING THE TRUSTS' ASSETS Based on information contained in the most recent annual report (for calendar year 2000) from PG&E's Nuclear Facilities Decommissioning Master Trust Committee

("NFDMTC"), there is currently a total of some $1.462 billion of assets in the Trusts. At 19 0030

page 11 of the Application, PG&E states that approximately $ 1.1 01 billion of this sum is the "liquidation value" of the DCPP portion of the Trusts. It is important to note, however, that the Trusts are intended to cover decommissioning costs for the shut down of both HB-3 and the DCPP units. By their terms, the Trust documents do not allocate any given amount of the funds controlled by the Trusts to either plant.

PG&E attempts to sweep this serious problem under the rug by blithely asserting in a footnote (at page 11 n.10 of the Application) that all of the funds in the Trusts associated with HB-3 will be "segregated" from the DCPP components of the Trusts as part of the larger transaction that PG&E is requesting FERC to approve. Unfortunately, nothing in the Application indicates how this "segregation" will take place. Nor does PG&E explain how such a "segregation" is consistent with, or permitted by, the Trust documents.

Even if it were both lawful and achievable to so segregate the Trust funds, given the unpredictable nature of decommissioning activities, it would be unreasonable and impractical to attempt to allocate the Trusts into separate HB-3 and DCPP components without a detailed study of the likely scope of the decommissioning effort required for each facility. Such a study would be a lengthy, complicated and expensive endeavor.

However, without a proper allocation of Trust assets to HB-3 and DCPP based on a prudent and thorough analysis of the likely costs of decommissioning for both facilities, there is a significant likelihood that one or the other of the facilities would have too few funds to properly complete decommissioning, thereby resulting, especially in the case of HB-3, in an unnecessary, unjust and unreasonable adverse impact on PG&E's ratepayers, 20 0031

and potential health, safety, and welfare concerns for California citizens. Thus, assuming, arguendo, that some entity other than the CPUC had the authority to divide the corpus of the Trusts and to assign some share of the Trusts' assets that would be allocated to DCPP to Diablo, and notwithstanding PG&E's unsupported statement of the liquidation value of the DCPP component of the Trusts, it would be improper, imprudent and impractical to do so absent the results of a detailed study which has not yet even been commenced.

III. TMo PROPOSED TRANSFEREE IS NOT FINANcIALLY QUALIFIED TO BE THE NRC's LICENSEE FOR THE DCPP The license for DCPP should not be transferred to Gen, because, as the discussion below amply sets forth, Gen's finances are highly questionable. It is accordingly uncertain that Gen will have the resources to carry out the critical plant maintenance and public safety-related functions that will enable the DCPP to continue to meet the Commission's rigorous regulatory requirements. It would be imprudent in the extreme to license untested, financially unstable entities to own and operate a commercial nuclear reactor, an installation that must meet critically high standards of operations and maintenance.

As part of its Reorganization Plan, PG&E would divest most of its generation assets, including DCPP, to Gen, and would then enter into a Purchase & Sale Agreement

("PSA") to buy back the power output of DCPP for the next twelve years. This proposal is seriously flawed, because the rates proposed in the PSA are unjust and unreasonable, and FERC cannot legally or properly approve them. Assuming that FERC properly 21 0032

determines that Gen should only be allowed to collect cost-based -rates for DCPP, there will simply not be enough money coming in to both operate the plant properly, and to service the debt to be incurred by Gen under the Plan. Under such circumstances, Gen will be in no position to satisfy the requirement of the Commission's regulation, at 10 CFR 50.33(f)(2), that a non-utility applicant (such as Gen would be) must have reasonable assurance of obtaining the funds necessary to cover the plant's estimated operating costs.

The CPUC is currently attempting to thwart this scheme in a motion contesting PG&E's Federal Power Act Section 203, 204 and 205 filings with FERC, as well as before the Bankruptcy Court. Copies of the CPUC's filings in these three FERC Dockets, EC02-3 1-000 (the "203 application")', ES02-17-000 ("the 204 application")"

and ER02-456-000 (the "Gen 205 application")'2 are attached hereto as Exhibits D, E and F, respectively. The CPUC incorporates the substance of those filings by reference, as if filly set forth herein. Should the CPUC prevail on any of the issues it has raised in those FERC proceedings (or on the legal and policy issues the CPUC has raised in the Bankruptcy Court, which are discussed above), the house of cards on which PG&E's applications, both to this Commission and to FERC, are based, will quickly collapse. In 0 Inits 203 application, PG&E requests, among other things, that FERC authorize it to transfer to Diablo Canyon LLC, one of the subsidiaries of Gen, its beneficial interest in the Nuclear Decommissioning Trusts associated with DCPP.

" Gen plans to finance acquisition of DCPP through the issuance of bonds, which it asks FERC to authorize in the 204 application. However, under §204 of the Federal Power Act, FERC clearly lacks jurisdiction to do so. FERC must accordingly deny PG&E's 204 application on its merits.

12 In the Gen 205 application, PG&E seeks, among other things, approval by FERC of a power sales agreement whereby Gen would enter into a 12-year contract to sell the power output of DCPP to PG&E for a specified price.

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such event, Gen will not be a financially viable entity, and will thus be rendered, beyond any doubt, unqualified to hold the license for DCPP. For this reason alone, the Commission should dismiss the application under review in this proceeding, or, at least, hold the requested license transfer in abeyance until the disposition of PG&E's restructuring plan is settled by the Bankruptcy Court. The Declaration of David R.

Effross, which is attached hereto as Exhibit G, provides evidentiary support for the following analysis showing why Gen will not be a financially viable entity.

A. GEN WILL NOT BE A FINANCIALLY VIABLE ENTITY PG&E's Plan proposes to transfer PG&E's electric generation, electric transmission, and natural gas transportation facilities to PG&E's Parent, PG&E Corporation, leaving a Reorganized PG&E to emerge from bankruptcy as an under funded distribution-only utility possessing only assets and liabilities not desired by the corporate parent. Included is a proposal to transfer all of PG&E's hydroelectric and its operating nuclear generation facilities (i.e., DCPP) to Gen, and then to transfer Gen to the corporate Parent by means of an unlawful stock dividend in violation of § 305 of the Federal Power Act (see Exhibit D).

Should the various transactions proposed in PG&E's Plan be approved, PG&E proposes that Gen enter into a proposed Purchase & Sale Agreement ("PSA") with Reorganized PG&E. Under the PSA, Gen proposes to sell all of the output of the (former) PG&E generation facilities to Reorganized PG&E for an eleven year period at an unjust and unreasonable price, approaching double the rates PG&E would receive for the output of the facilities in the absence of the proposed transactions, and justified only 23 0034

by the need to service the unnecessary debt which Gen proposes to incur upon receipt of the facilities (the PSA includes a twelfth year for approximately half of the facilities' output). Under this Plan, as noted in part I above, only Reorganized PG&E would be subject to CPUC regulation.

The terms of the PSA are spelled out in PG&E's Gen 205 application. The CPUC's preliminary review of the Gen 205 application (which is summarized in Exhibit F) discloses strong indications that the pricing, terms and conditions of the PSA are not just and reasonable, and thus, may not be approved by FERC.

PG&E has wholly failed to meet FERC's standards applicable to power sales agreements between affiliates. Moreover, under the circumstances here, the applicable standards must be applied with extraordinary scrutiny. The PSA was not reached at arm's-length by entities with competing interests, but rather was developed by the same counsel working simultaneously for all the (affiliated!) parties, one of which is essentially non-existent. PG&E concedes that the PSA was developed, on behalf of both the "buyer" and "seller" by a single "Team [which] developed the price, terms and conditions of the PSA.'s 13 B. THE RATES IN THE PROPOSED PSA ARE UNJUST AND UNREASONABLE TO REORGANIZED PG&E AND ITS RETAIL CUSTOMERS WHO WILL FOOT THE BILL The heart of the Gen 205 application is PG&E's contention that the rates in the proposed PSA are just and reasonable to Reorganized PG&E on the basis of a 13 See Exhibit 1 (Kuga Testimony) to PG&E's Gen 205 application, at 11.

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"benchmark" analysis conducted by PG&E's witness Meehan. However, as set forth in detail below, PG&E's "benchmark" analysis misses the mark. First, the rates in the proposed PSA must properly be evaluated not against other long-term power transactions, but rather against the rates which PG&E would receive in the absence of the proposed Spin-Off and related transactions. That is, the proposed PSA rates must be compared against the CPUC's rates for Utility Retained Generation. Second, even if it is appropriate to measure the proposed PSA against "comparable" wholesale transactions, PG&E's benchmark analysis fails to establish that the proposed PSA rates are just and reasonable. Third, PG&E fails to provide a cogent analysis of its market power.

Consequently, PG&E fails to establish that the price and non-price terms and conditions of the PSA are just and reasonable, and that the PSA is not fatally tainted by self-dealing.

1. The Proposed PSA Rates Must be Evaluated in Comparison with Otherwise Applicable Rates Under PG&E's proposal, Gen will sell the output of the electric generation facilities currently owned and operated by PG&E to Reorganized PG&E, which would in turn resell the facilities' output to its retail customers. In the absence of the transactions proposed in PG&E's Plan, PG&E would retain the electric generation assets which it proposes to transfer to Gen and to the subsidiaries of Gen, including, in this case, to Diablo Canyon LLC, and would continue selling the output of the generation facilities directly to its retail customers.' 4 Under either scenario PG&E's retail customers will receive the same energy and Ancillary Services from the same facilities. Thus, the 14 As discussed in greater detail in part I above, the CPUC has formulated an Alternative Plan under which PG&E would be able to emerge from bankruptcy without disposing of its electric generation assets.

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appropriate comparator against which to measure the PSA is the utility-retained generation ("URG") component of PG&E's retail rates.

Under current California law and CPUC policy, such rates are determined on a traditional cost-of-service basis. See, e.g., Application of San Diego Gas & Electric Company et al., D.0l-12-015, 2001 Cal. PUC LEXIS 1072, *7 ("We intend to apply cost-based ratemaking to all of SDG&E's retained generation assets ... which we believe is consistent with ABXI 6"); Application of Southern CaliforniaEdison Company et al.,

D.01-01-061, 2001 Cal. PUC LEXIS 30 ("PG&E, SDG&E and Edison shall establish a cost-based rate for URG"). The CPUC has expressly rejected PG&E's request to set its URG revenue requirement based on market valuation rather than cost-of-service.

Application ofSouthern CaliforniaEdison Company et al., D.0l-10-067, 2001 Cal. PUC LEXIS 959 ("We determine that market valuation does not apply to setting a prospective revenue requirement for PG&E's URG assets").

PG&E's witness Meehan states that the levelized price over the twelve-year period of the PSA is approximately $52.29/MWh. 15 Elsewhere, PG&E asserts that the average price under the contract over the life of the contract is approximately 5.1 cents/kWh

($51 MWh).16 That the contract costs are unjust and unreasonable as to Reorganized PG&E (and to its retail ratepayers) is confirmed by PG&E's own numbers. In its Plan, PG&E projects revenues under the contract of approximately $1.5 billion annually. For calendar year 2003, PG&E projects revenues under the contract of $1,471,500,000. (See 15 The testimony of Mr. Meehan is set forth in Exhibit 2 to PG&E's Gen 205 application.

16 See PG&E's Gen 205 application, at 3.

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a page from PG&E's Plan, which is attached to Exhibit F hereto as "Exhibit A.") Based solely on the numbers presented by PG&E in its Plan, PG&E's revenue requirement based on traditional cost-of-service principles would be approximately $790.4 million for 2003-about half of PG&E's projected revenues. This translates to an illustrative rate of approximately 2.5 cents/kwh.' 7 This calculation proceeds as follows: PG&E's Plan projects total operating expenses for Gen in 2003, including depreciation, of $759.7 million. From this figure is subtracted "other income" of $88.9 million, leaving net operating expenses of $670.8 million. To this is added a rate of return and taxes of $119.6 million, calculated utilizing PG&E's projected 2003 net plant shown in the Plan of Reorganization for the nuclear and hydro assets of $913.8 million and PG&E's rate of return grossed up for income tax authorized by the CPUC of 13.09%.18 This results in an illustrative cost-of-service revenue requirement for Gen, using PG&E's own figures, of $790.4 million for 2003.

The illustrative cost-of-service revenue requirement of $790.4 million is 53.7% of the proposed revenues PG&E would receive under the PSA in 2003 of $1,471.5 million.

PG&E asserts that rates under the PSA in 2003 would be approximately 4.6 cents/kWh.

Since, as PG&E asserts, revenues of $1,471.5 million equates to 4.6 cents/kWh on average, the cost-of-service revenue requirement is approximately 2.5 cents/kWh on 17 This pleading does not purport to determine the rate which the CPUC would actually set for PG&E's URG for any particular customer or class of customers, but simply utilizes figures provided by PG&E to provide, for illustrative purposes, a rough calculation of a cost-of-service rate based on such figures.

la PG&E's Plan shows higher figures for return, interest expense, and taxes, totaling $S800. million, because the figures reflect and are being used to support the borrowing of over $2 billion to help pay off creditor claims. The SI 19.6 million in the calculation above includes interest expense on the net plant of $913.6 million, as it is based on a 13.090/%weighted average rate of return that includes interest and taxes. See PG&E work papers submitted in CPUC Docket No. A.00-1 1-038, Scenario 1.

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average (.537 x 4.6 cents/kWh) for 2003. '9 While a rate of 2.5 cents/kWh is low compared to recent prices for gas-fired generation, the rate reflects the resource mix utilized for the PSA and PG&E's actual costs-not including the cost of unnecessarily borrowing over $2 billion. PG&E's hydroelectric resources are highly depreciated. PG&E's nuclear and hydro pumped storage resources, including DCPP, have been subject to accelerated depreciation during the transition period established under California's deregulation law. Ratepayers have paid several billion dollars of accelerated depreciation through California's Competitive Transition Charge, and would be losing a good portion of what they paid for under PG&E's Plan of Reorganization. See also the proposed decision addressing PG&E's revenue requirement for utility-retained generation ("the URG PD") recently issued by a CPUC Administrative Law Judge.20 While these figures may be subject to some refinement, this illustration demonstrates that the PSA is grossly overpriced. If the PSA were approved as proposed, PG&E's ratepayers would make some $700 million in excess payments to Gen over and above the otherwise applicable rate for the same energy from the same facilities in 2003.

Over the life of the PSA, the overpayments approximate $8 billion.

19 A recent report issued by the consumer group TURN estimates the "Expected Price Under Regulation" at approximately 2.5 cents/kWh in 2003, and 2.9 cents over the term of the PSA. See "Highway Robbery: Unmasking the PG&E Bankruptcy Plan's Financial Impact on California Consumers:' available at http://www.turn.orXlturnarticles/PG&E report.pdf.

20 California law generally requires the CPUC's proposed decisions to be released for comment prior to a Commission vote. See Cal. Pub. Util. Code § 311(d), (g). The URG PD is available from the CPUC's web site, at htt://lwww.cpuc.ca.gov/published/comment decision/I2655.htm. An alternate proposed decision of CPUC Commissioner Lynch is available at httn:/Hwww.cvuc.ca.gov/published/Agenda decision/I2659.htm.

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2. PG&E's Benchmark Analysis is Invalid Assuming, arguendo1 that the benchmark analysis utilized by FERC in connection with previous affiliate transactions is applicable, PG&E's benchmark analysis, supported by the testimony of witness Meehan, is invalid for a number of reasons, discussed below.

FERC has articulated standards pursuant to which it will accept power sales contracts between affiliates in a series of three orders over the past ten years. Boston Edison Co. Re: EdgarElectricEnergy Co., 55 FERC 1 61,382 (1991) ("Edgar"); Ocean State Power II, 59 FERC $61,360 (1992), reh'g denied, 69 FERC ¶ 61,146 (1994)

("Ocean State"); Ameren Energy Mktg. Co., 96 FERC 1 61,306 (2001) ("Ameren"). In Edgar, FERC stated that such arrangements will be permitted if two conditions are satisfied. First, FERC requires a showing that there exists no potential abuse of self-dealing or reciprocal dealing. Second, if there has been a showing of no potential abuse of self-dealing or reciprocal dealing, FERC has found that market-based rates may be acceptable if the seller can also demonstrate that it lacks market power (or has adequately mitigated its market power), under familiar principles. Edgar, 55 FERC at 62,167.

As PG&E recognizes, the potential for self-dealing is present here, where the seller under the proposed PSA is essentially non-existent, and the terms and conditions of the PSA were developed by a single entity acting on behalf of both the putative seller and buyer. The risk of self-dealing is at its height in this transaction, in which the buyer under the proposed PSA would, if PG&E's Plan is confirmed, be stripped of all of its most valuable assets and the affiliate relationship then terminated.

FERC has articulated three means by which lack of self-dealing or reciprocal 29 0040

dealing may be shown, to ensure that an affiliated "buyer has chosen the lowest cost supplier from among the options presented, taking into account both price and non-price terms (i.e., that it has not preferred its affiliate without justification"). Edgar, 55 FERC at 62,168. PG&E has chosen to present "benchmark evidence" of market value, i.e.

evidence of other relevant power sales agreements between non-affiliates, which it claims demonstrates that the PSA is not unreasonable. Under the Edgar line of cases, the benchmark sales must be: (1) transactions in the relevant market; and (2) should be contemporaneous with; and (3) involve service that is comparable to, the instant transactions. In addition, FERC requires that the benchmark analysis examine non-price as well as price terms, and assumptions used in comparing the various projects should be explained with respect to both price and non-price terms. Finally, the applicant must demonstrate that the benchmark evidence was not distorted by the exercise of market power by the seller or its affiliates. Ocean State, 59 FERC at 62,333. FERC has observed that it must "take into account the evolving nature of our analyses of market-based affiliate transactions," including changes to the national generation market. Ocean State, 59 FERC at 62,332.

PG&E contends that the relevant market is "the market for firm, long-term baseload and peaking capacity and energy for a duration of approximately 10-15 years with a start date expected near January 2003," and that the relevant region must be limited to suppliers which can deliver energy to PG&E. 22 PG&E contends that the 21 See PG&E's Gen 205 application, at 14 ff.

22 See PG&E's Gen 205 application, at 17.

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relevant "contemporaneous" period is May 2000 through November 200 1.23 By so attempting to confine the analysis, PG&E contends that the appropriate benchmark sales are nine long-term contracts entered into by the California Department of Water Resources ("DWR") during 2001.

PG&E's Reliance on DWR Contracts In confining its benchmark comparison to the DWR contracts, PG&E has sought to define as the relevant period precisely the same period in which the California wholesale electricity markets exhibited extreme dysfunction. PG&E has previously characterized this as a period of "massive market failure and upheaval in the regulatory regime that has led to billions of dollars in overcharges since May 2000."24 Similarly, PG&E has attempted to confine its benchmark comparison to DWR contracts, the negotiation of which PG&E has previously contended were subject to the exercise of market power, and as to which PG&E has contended FERC ought to order refunds." As PG&E stated in its Request for Rehearing of FERC's July 25, 2001 order (San Diego Gas

& Electric Company, et al., 97 FERC 61,275 (2001), filed in Docket No. ELOO-95 on August 24, 2001, at 12:

"the DWR bilaterals . . . have drawn the most attention.

These transactions are not bilateral purchases in the conventional sense with a willing buyer and a willing seller.

Rather, they reflect the state stepping into the shoes of insolvent utilities as the default buyer of power in order to 23 See PG&E's Gen 205 application, at IS.

24 See PG&E's Request for Rehearing of FERC's July 25, 2001 order (San Diego Gas & Electric Company, et al.,

97 FERC 61,275 (2001), filed in FERC Docket No. ELOO-95 on August 24, 2001, at 19.

25 FERC has not found any specific DWR contracts to be "just and reasonable." See, e.g.. GWF Energy, 97 FERC 61,297 (2001), slip op. at pp. 3-4.

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backstop the ISO's efforts at maintaining reliability- in a dysfunctional market."

PG&E's reliance on the DWR contracts for its benchmark analysis is fatal. The DWR contracts were negotiated and executed during a period of extreme exercise of market power, as FERC has acknowledged on repeated occasions. FERC has expressly recognized that the exercise of market power in the spot markets extended to the forward markets during the time period to which PG&E seeks to confine the analysis. 26 Thus, the DWR contracts cannot be relied on to be a benchmark of market value in a competitive market, and cannot be relied on to demonstrate that the PSA reflects a competitive market value.27

.The Relevant Market In Ocean State, FERC indicated that a benchmark analysis should consider as the geographic market suppliers that can supply the relevant product to the buyer. Ocean State, 59 FERC at 62,333. However, FERC also expressly stated that its analysis and holding in Ocean State were confined to the facts of that proceeding. Ocean State, 59 FERC at 62,338 n. 117. With respect to the PG&E reorganization, it is inappropriate to consider only a geographic market centered on PG&E's service territory. First, as discussed above, an analytic limitation to contracts in PG&E's California service territory focuses the analysis on an environment of acknowledged market power.

26 San Diego Gas & Electric Company, et at., 93 FERC ¶61,121 (2000) at 61,358 ("higher spot prices in turn affect the prices in forward markets"); San Diego Gas & Electric Company, et al., 95 FERC ¶ 61,418 (2001), at 62,556 (expanded spot market mitigation plan 'will, over time, impact bilateral and forward markets as well"); see also AEP PowerMarketing, Inc., 97 FERC ¶ 61,219 (2001).

27 Only a competitive market value is relevant to an analysis under section 205 of the Federal Power Act to determine whether a proposed rate is just and reasonable, as "t]he prevailing price in the marketplace cannot be the final measure of 'just and reasonable' rates mandated by the Act." FPC v. Texaco, 417 U.S. 380, 397 (1974).

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Second, a broader geographic market is appropriate to consider in this case due to the nature of the PSA. The PSA is a long-term agreement with a delayed implementation date. Developed in 2001, it is proposed that the PSA run from January 2003 through 2014. The market for such contracts is decidedly national, not regional. That is, a seller need not be physically located in California in 2001 in order to provide power under a 12-year contract commencing in 2003. Because of the long duration and delayed implementation date, a seller would have sufficient time to build new facilities to satisfy all but the earliest segments of the twelve year period.

That the long-term market for electric generation is essentially national rather than regional is confirmed by an examination of regional pricing for forward electricity contracts. During the height of the recent California energy crisis, western forward prices were substantially higher than forward contracts at other national trading hubs -- as much as an order of magnitude higher. Since FERC's summer 2001 orders restored a measure of stability to western markets, however, forward contract prices at various regional hubs have tended to converge. For instance, as of December 12, 2001 (when the notice was issued in this proceeding) the simple average of reported futures prices for calendar year 2002 were $30.66 for the California-Oregon border ("COB"), $34.25 for PJM, and

$30.80 for ClNergy.2 g Longer-term prices should show similar convergence. As the relevant market for products similar to the PSA is a national rather than regional market, and PG&E analyzes only a corrupted regional market, PG&E's benchmark analysis fails to satisfy the "relevant market" prong of the benchmark analysis.

28 See www.enerfax.com. By late January 2002, prices in all three markets had declined.

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Contemporaneousness PG&E's benchmark analysis similarly fails to satisfy the "contemporaneous" prong articulated in the relevant cases. PG&E examined only contracts "entered into between May 2000 and the date of this Application." 29 Meehan's benchmark analysis focuses on nine contracts entered into between February and August 2001 as his "comparison group." 30 As discussed above, this is precisely the period in which all energy transactions in the California markets were tainted with market power. It is patently unreasonable to consider only such contracts. Moreover, this period is not contemporaneous with the period in which the PSA was developed. PG&E filed its Plan with the Bankruptcy Court on September 20, 2001; however, the key event in this scenario is the order issued by FERC on June 19, 2001, which quickly restored a semblance of stability to the California markets. All of the contracts in witness Meehan's "comparison group" were either executed or had an executed letter of intent no later than June 22, 2001.3' That is to say, the negotiation of all of the comparison group contracts took place in the market power period. By the fall of 2001 when the PSA was developed, forward contract prices in California had already begun to converge with forward prices in regional markets across the country, at prices well below the prices in the PSA. PG&E has thus failed to examine any contemporaneous contracts in its benchmark analysis.

In Ocean State, FERC approved a benchmark analysis, which considered as the 29 See PG&E's Gen 205 application, at I8.

30 See PG&E's Gen 205 application, at 20-2 1.

31 See, CaliforniaState Auditor, "California Energy Markets: Pressures Have Eased, But Cost Risks Remain," 193-195, Table 10. The report is available at http:/lwww.bsa.ca.gov/bsa/Ddfs/2001009.pdf 34 0045

relevant period late 1987 into 1989, "reflecting the period during which the purchasers made their decisions to contract with Ocean State II." Ocean State, 59 FERC at 62,334.

PG&E provides no similar justification for the period it has chosen. Certainly, PG&E makes no claim that that the roughly eighteen month period it has selected for examination represents the only, or even the most relevant, time period in which buyers seeking energy for the 2003-2014 period would have, or did, engage in negotiations.

The CPUC has no principled objection to a "contemporaneous" period of roughly eighteen months. But PG&E has disingenuously selected the precise 18 months in which the California market was at its most dysfunctional. Were there no long-term power contracts entered into in the western United States in the first quarter of 2000? In the last quarter of 1999? Or, for that matter, in the truly contemporaneous period - the third and fourth quarters of 2001? The "contemporaneous" period selected by PG&E is invalid on its face, particularly when coupled with the limited geographical market also selected by PG&E. Any valid benchmark analysis must, if not be limited to, certainly include an examination of contracts executed during a period of relative market stability. Such a period could include, for instance portions of 1999 and 2000, and the latter third of 2001.

Evidence as to whether and to what extent buyers sought long-term contracts for period comparable to the PSA during these periods can be presented at hearing.

Comparability As PG&E observes, FERC has held that benchmark evidence must encompass "similar services when compared to the instant transaction." Edgar, 55 FERC at 62,129; Ocean State, at 62,333. PG&E's benchmark analysis fails this requirement as well. In 35 0046

the instant case, the PSA provides for capacity and energy from approximately 7,100 MW of hydroelectric and nuclear power plants. The size of the PSA alone disqualifies each of the purported "comparison group" contracts from consideration as comparable.

PG&E witness Meehan admits that he must treat each of the comparison group contracts as "infinitely scalable" in order to make a comparison. 32 In Ocean State, the applicant provided comparison evidence relating to 33 projects. FERC confined its analysis to the ten projects which were "comparable to Ocean State II with respect to size and technology." Ocean State, 59 FERC at 62,334. Similarly, in Edgar, FERC rejected a benchmark showing in part due to the applicant's failure to evaluate the proposed rates against truly comparable projects. Edgar, 55 FERC at 62,169 ("Boston Edison's comparison of projects [against a 306 MW combined-cycle generating unit] includes projects as small as 0.7 MW and powered by wind, wood, waste, peat and hydropower").

Here, of course, the facilities proposed to support the PSA are exclusively hydroelectric and nuclear generating plants. The "comparison group" contracts, to the extent that they have any specific source of generation attached to them, are exclusively natural gas-fired units. The PSA is for some 7,100 MW. Only one of the comparison group contracts is within the same order of magnitude. The comparison group contracts are comparable in neither size nor technology to the PSA. 33 32 See PG&E's Gen 205 application, at 27, and Exhibit 2 to the Gen 205 application, at 25.

33 PG&E declines to provide benchmark evidence regarding "buy-back" agreements executed in recent years in connection with sales of nuclear facilities in New York, or with fairly large hydroelectric portfolios elsewhere in the U.S.

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Price The foregoing establishes that PG&E's benchmark analysis fails to establish the absence of self-dealing in the development of the PSA. As such, the PSA may not be accepted. Edgar, 55 FERC at 62,170. Moreover, the proposed rates in the PSA are simply too high to be considered just and reasonable. For instance, the capacity charges in the first year of the PSA amount to $ 170.751kW-year. 34 Specifically, the capacity charges are $20.50/kW-mo for the peak months of July and August, $15.25/kW-mo for June, September, and October, and $12/1kW-mo for November through May. The capacity payment is paid on a portfolio of 7,100 MW of capacity." Thus the capacity payments alone under the PSA, in the first year, amount to over $1.2 billion, and escalate to nearly $1.5 billion in year eleven.

FERC recently addressed another power sales agreement between affiliates in Ameren. The contract is for a minimum of 350 MW of capacity and energy per hour from June 2001 through May 2002. In the affiliate contract at issue in Ameren, the maximum capacity charge is $4/kW-mo. The minimum capacity charge in PG&E's PSA exceeds that by 300 per cent.

At this juncture, one point should be clear: the value of PG&E's Plan to Gen exceeds the revenues that Gen would receive under the PSA. Under the Plan, Gen will receive not only $52.29/MWh for twelve years, but in addition, Gen will receive virtually all of PG&E's electric generation assets for a fraction of their value. Gen will effectively 34 See Exhibit I (Kuga testimony) to PG&E's Gen 205 application, at 6.

35 See Exhibit I (Kuga testimony) to PG&E's Gen 205 application, at 5.

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pay reorganized PG&E $2.4 billion for PG&E's hydroelectric assets and DCPP.36 Gen thus proposes to acquire the hydro and nuclear assets for less than PG&E has previously proposed as the market value for the hydro facilities alone.37 The foregoing facts demonstrate that the PSA cannot appropriately be considered in isolation. However, any substantive evaluation of the PSA must consider related issues including the value to Gen of obtaining the PG&E generating facilities for a fraction of their PG&E-proposed market value.

3. PG&E's Market Power Analysis is Woefully Insufficient The Edgar line of cases requires an applicant in an affiliate sales case to make two separate market power showings. First, PG&E must demonstrate that "the benchmark evidence was not distorted by exercise of market power by the seller or its affiliates."

Ocean State, 59 FERC at 62,333. In this regard, FERC is concerned that, "If the seller or any of its affiliates has exercised market power and thus kept prices high in the relevant market, the benchmark evidence would be skewed in favor of the seller and thereby allow the affiliated buyers to give an undue preference to the sellers." Ocean State, 59 FERC at 62,337. In the Gen 205 proceeding, FERC must address not only whether PG&E has exercised market power and thus skewed the benchmark evidence, but rather whether any party exercised market power in connection with the benchmark evidence. That is, a 36 See PG&E's Gen 205 application, at 2. Upon receiving the generating facilities from PG&E, "Gen will then transfer cash and notes to PG&E amounting to $2.4 billion".

3? See Exhibit D, at 17-33. The market value of the hydro facilities was set at $2.8 billion in a settlement agreement proposed by PG&E, TURN, and other parties in CPUC Docket No. A.99-09-053, but which was not approved by the CPUC. PG&E subsequently proposed a market value of S4.1 billion for the hydroelectric facilities alone in CPUC Docket No. A.00-1 1-056.

38 0049

proper market analysis in this proceeding must consider whether the benchmark evidence was skewed by the exercise of market power. As discussed above, there is no doubt that it was. Accordingly, the benchmark evidence is invalid, and cannot be used to support the PSA.

Second, if there has been a showing of no potential abuse of self-dealing or reciprocal dealing, FERC has found that market-based rates may be acceptable if the seller can also demonstrate that it lacks market power (or has adequately mitigated its market power), under familiar principles. Edgar, 55 FERC at 62,167. As PG&E requests acceptance of the PSA as market-based rate, 3 S PG&E must satisfy this standard (although, as is noted above, PG&E has not demonstrated the lack of abuse of self-dealing).

PG&E currently possesses in excess of, and Gen proposes to acquire, 7,100 MW of generation. PG&E's contention that a supplier of such magnitude in frequently constrained Northern California does not have market power fails the straight face test.

Indeed, PG&E has been among the loudest voices arguing that suppliers with much smaller portfolios have both possessed and abused market power. 39 Whether measured by the now-disregarded hub-and-spoke methodology or the 31 See PG&E's Gen 205 application, at 14 n. 13.

39 See, e.g.. "Late Motion to Intervene and Protest of Pacific Gas & Electric Company and Southern California Edison Co." in FERC Docket No. ER99-1722-004, filed April 3, 2001, at 7 ("because the premises on which Williams based its market power analysis are no longer valid, and because of the clear evidence that Williams can exercise market power in the WSCC, the Commission's review should lead to a suspension of Williams' market-based rate authority") (emphasis added) and "Testimony of James Wilson for PG&E" in FERC Docket No. ELOO-95-000 at 10-16 and Figures 1,2 and 5 (unrebutted testimony demonstrating that conditions in the California marketplace have permitted the exercise of market power, bidding without adequate competition by pivotal suppliers, and existence of Cournot pricing conditions during potentially 4000 hours0.0463 days <br />1.111 hours <br />0.00661 weeks <br />0.00152 months <br /> in 2001).

39 0050

Supply Margin Assessment ("SMA") screen established in AEP Power Marketing, Inc.,

97 FERC 1 61,219 (2001) ("AEP"), PG&E indisputably possesses market power. At best, PG&E's showing - i.e. that it is a net purchaser rather than a net seller of electricity, and that its generation resources are currently required both by state and federal regulation to be devoted to native load - demonstrates that under current circumstances it has little incentive to exercise the market power it possesses. 40 All this, of course, will change should PG&E's Plan be implemented. Gen would become a stand-alone merchant seller with the largest single generation portfolio in California, and one of the largest generation portfolios in the country. Moreover, although the Gen 205 application is a new market-based rate application submitted after the announcement of the SMA screen in AEP, PG&E has failed to perform an SMA analysis. Nor has PG&E submitted a hub-and-spoke analysis.

In sum, there can be no question that a supplier with a generation portfolio of the magnitude at issue here in Northern California possesses market power.

4. In Light of the Inadequacies of PG&E's Showing, and the Unique Aspects of the Proposed PSA, Only Cost-based Rates May be Accepted as Just and Reasonable PG&E's Gen application to the FERC wholly fails to satisfy the applicable standards necessary to support the rates in the proposed PSA, or any market-based rates.

Due to the unique nature of both the proposed transaction and the magnitude of the generation portfolio supporting it, it is unlikely that PG&E could make a showing that satisfies the benchmark standards and effectively rebuts the presumption of self-dealing 4 See PG&E's Gen 205 application, at 34-35.

40 0051

which must be drawn from the facts at issue here.

PG&E has asserted that other suppliers in California should be subject to cost-based ratemaking. For instance, in PG&E's Request for Rehearing of FERC's July 25, 2001 order (filed August 24, 2001), PG&E asserted that "cost of service rates [are] the only legally appropriate baseline given the fact that the California wholesale markets have been found to be unable to yield just and reasonable rates in all hours." Id., at 2. In that Rehearing Request, PG&E similarly states that, "As PG&E has previously stated in these dockets, absent a properly functioning market sellers should be permitted to collect no more than their cost of service, which would include a reasonable return on equity."

PG&E is entitled to no more. As the example set out above illustrates, a lawful cost-of-service rate for the portfolio supporting the PSA is on the order of 2.5 cents/kWh for 2003-roughly half of the rate proposed by PG&E.

C. PG&E ACKNOWLEDGES THAT THE TRUE JUSTIFICATION FOR THE RATES PROPOSED IN THE PSA IS TO SERVICE THE DEBT TO BE INCURRED BY GEN UNDER THE PLAN Further evidence that the rates proposed in the PSA are justified neither by truly comparable benchmark sales in a competitive environment, nor by any other measure of just and reasonable pricing, is provided in various statements of PG&E's, which reveal the true justification for the proposed rates. For instance, at 41-42 of its Gen 205 application, PG&E states that "it would not be possible for Gen to assume this substantial portion of Exit Financing Debt without the PSA." That is, the rates in the PSA were determined by reference solely to the amount of financing which PG&E anticipates that Gen will incur after taking possession of the generating assets, including DCPP, and by 41 0052

the cash flow necessary to support that debt. If PG&E thought it could raise additional debt, the rates in the PSA would have been higher. If it had to finance the true market value of the facilities, the rates under the PSA would have to be substantially higher.

In fact, neither the income stream under the PSA nor the PSA itself are necessary for PG&E to emerge from bankruptcy. Nor will PG&E's Plan provide, as PG&E asserts, a quick route out of bankruptcy. The legal infirmities of PG&E's Plan are so extensive (and PG&E apparently so determined to press on with its Plan despite its legal infirmities) that years of litigation over the plan are almost inevitable. Rather, as discussed in part I above, the CPUC has formulated an Alternative Plan, to be outlined in greater detail to the Bankruptcy Court on February 13, 2002, which would enable PG&E to promptly emerge from bankruptcy with a minimum of litigation, without dismantling the company, and without the need to charge PG&E ratepayers the egregious rates proposed in the PSA.

As noted in part I above, the legal infirmities of the PG&E Plan, and their attendant regulatory uncertainties, raise serious doubt about the ultimate approval of that Plan. However, these infirmities and uncertainties also demonstrate that there is no reasonable assurance that Gen will be able to cover the estimated operating costs of DCPP. Thus, Gen cannot by any stretch of the imagination be deemed to satisfy the financial responsibility requirement of the Commission's regulation, at 10 CFR 50.33(f)(2). Moreover, there is a reasonable Alternative Plan, sponsored by the CPUC, under which PG&E will continue to operate DCPP under cost-of-service rates, that does 42 0053

provide reasonable assurance of more than adequate funding for all of DCPP's plant operational and maintenance-related needs, thereby assuring protection of public health and safety. For all these reasons relating to the lack of financial responsibility of the proposed transferee of DCPP, the Commission should reject PG&E's request for a license transfer.

IV. THE TRANSFER OF DIABLO CANYON OWNERSHIP AND OPERATING LICENSES FROM PG&E TO GEN AND DIABLO WOULD REDUCE CALIFORNIA'S REGULATORY RESPONSIBILITIES OVER NUCLEAR POWER TO THE DETRIMENT OF THE PUBLIC HEALTH, SAFETY AND WELFARE OF THE CITIZENS OF CALIFORNIA.

A. THROUGH ITS REORGANIZATION AND LICENSE TRANSFER SCHEME, PG&E IS SEEKING TO TRUMP THE STATE'S VITAL INTERESTS IN REGULATING UTILITIES

1. California's Basic Interest in Regulating Public Utilities Approval of PG&E's application to transfer DCPP, as well as other generation facilities, from a state regulated utility to a newly created, largely unregulated LLC would undermine the longstanding relationship between the utility and the ratepayers of California. The contours of this relationship are established in a number of California Public Utilities Code sections that PG&E would like to unilaterally nullify through its reorganization and license transfer scheme.

Under its reorganization scheme, PG&E seeks to evade Public Utilities Code §§ 701, 702, 728, and 761. See PG&E's Amended Disclosure Statement ("Amend. Disc.

Stmt.") dated December 19, 2001. These sections establish the fundamental relationship between the State of California and its regulated public utilities. Section 701 is the basic enabling provision that establishes the Commission's power to regulate public utilities. It 43 0054

provides that "[tihe Commission may supervise and regulate every public utility in the State and may do all things, whether designated in this part or in addition thereto, which are necessary and convenient in that exercise of such power and jurisdiction." Cal. Pub.

Util. Code §701. Section 702 requires that every public utility obey and comply with every order, decision or rule of the CPUC. Cal. Pub. Util. Code §702. Section 728 provides that whenever, after a hearing, the CPUC finds that rates or classifications set by a public utility are unjust and unlawful, the CPUC shall determine and fix reasonable rates to be observed by the utility. Cal Pub. Util. Code §728. Section 761 provides that whenever, after a hearing, the CPUC finds that any other aspect of a public utility's business is unjust, unreasonable, or otherwise contrary to the public interest, the CPUC shall determine the proper course of conduct for the utility, and order the utility to perform accordingly. Cal. Pub. Util. Code §761.

These four statutes establish the core powers of the CPUC as a regulator. The State of California's interest in enforcing them is, thus, synonymous with its interest in the regulation of public utilities itself. PG&E is using the Bankruptcy Court, the NRC and FERC to dodge its responsibilities under these code provisions. The attempt to transfer its substantial generation assets, particularly DCPP, from this regulated utility to an unregulated LLC is a direct attack on the authority of the State of California, in its sovereign capacity as a government and a regulator, to regulate electrical utilities in the interest of the health and safety of the citizens of California.

44 0055

2. California's Interest in Ensuring Universal Service and Fair and Just Utility Rates Through its reorganization and license transfer scheme, PG&E also seeks to escape from its responsibilities under Public Utilities Code Sections 451 and 453.

(Amend. Disc. Stmt., at 129). Section 451 establishes the fundamental "duty to serve" obligation on the part of a public utility to serve all of the needs of its customers within its designated area of operation. Cal. Pub. Util. Code §451. Section 451 also establishes the rule that all rates or charges demanded by a public utility for any service rendered or commodity furnished shall be just and reasonable. Id. Section 453 provides that all such rates and charges must be set on a non-discriminatory basis, without any unreasonable difference in rates between customers, localities, or classes of service. Cal. Pub. Util.

Code § 453.

If Sections 701, 702, 728, and 761 set forth the basic powers of the CPUC and the relationship between the State and its regulated public utilities, Sections 451 and 453 represent the basic purpose of public utility regulation. Without its ability to enforce the utilities' basic obligation to provide electric service to every California customer on a fair and non-discriminatory basis, the State's ability to guarantee this essential right would be eviscerated. See Cal. Pub. Util. Code §739.

3. California's Interest in Protecting Financial Integrity and Dedication of Service PG&E also seeks to shirk its duties under California Public Utilities Code Sections 701.5, 816-830, 845, 851, 852, and 854 by transferring the Diablo Canyon ownership and operating licenses. (Amend. Disc. Stmt., at 130.) These laws provide that a public utility may not enter 45 0056

into certain transactions that effect its ownership and control, financial integrity, or ability to carry out its functions without prior review and approval by the CPUC. Cal. Pub. Util. Code

§§ 701.5, 816-830, 845, 851, 852, 854. The purpose of these sections is to ensure that regulated public utilities do not enter into transactions that undermine their ability to serve their customers. Section 851, for example, prevents a utility from disposing of property useful in the performance of its duty to serve the public without the prior approval of the CPUC, to ensure that a public utility does not jeopardize the public health and welfare by rendering itself unable to serve. Cal. Pub. Util. Code § 851.

As a regulated public monopoly, PG&E does not have the same freedom with its property and operations as a purely private company. In exchange, PG&E enjoys the considerable advantages of being a public monopoly. The State of California has a strong interest in ensuring that its public utilities remain financially sound and in the position to satisfy their obligations to serve their designated service areas. The Legislature determined that the above kinds of transactions have the potential to affect a utility's ability to perform its duties. Thus, the Legislature directed the CPUC to review all such transactions to ensure that they do not have a detrimental impact upon a utility's ability to serve.

Furthermore, California has a strong interest in conditioning any public utility transaction with the potential to affect the environment upon the performance of a CEQA environmental review. See Cal. Pub. Res. Code § 21000, et. seq. Only by weighing the environmental impacts of a proposed action before it is taken can the State protect its environment and inhabitants from unnecessary harm.

In attempting to bypass the CPUC's review obligation through a bankruptcy 46 0057

reorganization and license transfer, PG&E attacks the State's basic power to protect the public against the danger that a utility will fail to carry out its duties, or the danger that a proposed utility transaction will have adverse impacts upon the environment.

4. California's Interest in Preventing the Loss of In-State Generation Facilities PG&E also seeks to dodge the mandates of Public Utilities Code Section 377. (Amend.

Disc. Stmt., at 129.) Prior to January 2001, that section provided that, after market valuation, an electrical utility's generation assets would become eligible for deregulation. In the midst of the State's energy crisis, however, the government feared that California electrical utilities might sell or dispose of generation assets to third parties not obligated to serve California ratepayers and not subject to regulation by the Commission.

In January 2001, the California Legislature passed AB1X 6, amending Section 377 to prohibit any public utility from disposing of any generation facilities before January 1, 2006.

See, California Statutes of 2001, chapter 2. As the Legislature explained in adopting AB1X 6 to take effect immediately as an urgency statute, it amended Section 377 "to ensure that public utility generation assets remain dedicated to service for the benefit of California ratepayers, and are not deregulated as a consequence of market valuation, without appropriate review and authorization of the Public Utilities Commission pursuant to Section 851 of the Public Utilities Code." Id., Sec. 5.

In seeking to thwart Section 377's moratorium, PG&E is using the Bankruptcy Court, the NRC and FERC in an attempt to reverse the California Legislature's recent sovereign determination, during a time of crisis, that it is essential to public health and 47 0058

safety that all electrical generation assets located in California remain dedicated to service for the benefit of the people of California. Following the proposed license transfer, Diablo would have no such obligation to the citizens of California.

5. California's Interest in Preventing Improper Inter-Company Transactions Under the reorganization and license transfer scheme, PG&E also seeks to avoid the application of California Public Utility Code Sections 797 and 798 and the CPUC's Affiliate Transaction Rules. (Amend. Disc. Stint., at 130-31.) Section 797 provides that the Commission shall periodically audit all significant transactions between a public utility and its subsidiaries or affiliates. See Cal. Pub. Util. Code § 797. Section 798 provides for civil penalties where the Commission determines that a utility has willfully made an imprudent payment to, or received a less than reasonable payment from, a subsidiary or affiliate. See Cal. Pub. Util. Code § 798.

The Affiliate Transaction Rules provide a comprehensive code governing the relationship between California's energy utilities and certain of their affiliates. These Rules set forth rules of nondiscrimination and disclosure and separation standards. They also address to what extent a utility should be required to have its non-regulated or potentially competitive activities conducted by its affiliate. See CPUC Decision No. 98-08-035, 1998 Cal. PUC LEXIS 594, *2 (August 8, 1998).

The State has an obvious and strong interest in limiting the scope of the monopolies it grants to public utilities in exchange for the utilities' undertaking to serve. These provisions and rules prevent a public utility from abusing its non-arm's length relationship with subsidiaries and affiliates in competition, and otherwise acting to the detriment of the public. In short, these 48 0059

rules ensure that the considerable benefits that flow from being a regulated public monopoly are properly concentrated in that "regulated" monopoly, and not inappropriately transferred to or otherwise enjoyed by private, unregulated affiliates of that monopoly, which would not be subject to the same regulatory restrictions.

6. California's Interest in Preventing the Misuse of the Holding Company Structure In Decisions Nos. 96-11-017 and 99-04-068, the CPUC first approved a transaction in which PG&E became a wholly owned subsidiary of a utility holding company. See CPUC Decision No. 96-11-017, 1996 Cal. PUC LEXIS 1141 (November 6, 1996). The CPUC later approved a second transaction in which a major subsidiary of the regulated utility, through which it conducted most of its business, became a subsidiary of the parent. See CPUC Decision No. 99-04-068, 1999 Cal. PUC LEXIS 242 (April 22, 1999).

In approving these transactions, the CPUC ordered PG&E to continue to comply with its obligations under the Public Utilities Code, including providing appropriate reports to the CPUC, providing the CPUC with access to the corporate books and records, paying dividends only on the basis of a ratepayer interest standard, rather than when it might be in the interest of an affiliate, and properly reporting transactions with affiliates. See Decision No. 99-04-068, 1999 Cal. PUC LEXIS at

• 140-141. As a condition of this approval, PG&E agreed not to abuse the holding company structure as a means to evade its obligations under the Public Utilities Code, and agreed not to abuse the structure to enter into improper self-dealing transactions and cross-subsidize unregulated lines of business. Id.

The CPUC imposed these conditions to prevent PG&E from defeating-regulation through 49 0060

a purely formal change in corporate organization. In claiming that these conditions imposed by the CPUC are invalidated due to its bankruptcy filing, PG&E signals its intent to employ the holding company structure as a means to escape its obligations under the California Public Utilities Code. As was amply discussed in Section III above, the new holding company structure created by this reorganization is ripe for abuse.

7. California's Interest in Requiring Utilities to Share Gains On Sale with Ratepayers PG&E has claimed that the CPUC's "gain-on-sale" rules would be preempted by a Confirmation Order of the Bankruptcy Court. (Amend. Disc. Stmt., at 130.) Generally, these rules establish that gain on the sale of utility properties must be allocated between the shareholders of the utility and the ratepayers, in the form of an offset to the rate base.

Because public utilities operate with ratepayer funds, for the benefit of the ratepayers, the CPUC has determined that ratepayers are entitled to share the benefit of the sale of utility property. The CPUC adopted these rules to encourage utilities to maximize the value of utility assets, while at the same time giving ratepayers the greatest possible reduction in the rate base. California ratepayers have an obvious economic stake in an asset as valuable as the DCPP. Thus, the CPUC's gain-on-sale rules assure that the ratepayers receive an adequate return on the long-term investment they have paid for through rates, and that the property's value is not distributed to holding companies and private shareholders only.

50 0061

B. STATE REGULATION HAS SIGNIFICANT ADVANTAGES OVER FEDERAL REGULATION With its reorganization and license transfer scheme, PG&E seeks to transfer its crown jewels from the utility, permanently removing major generating assets from CPUC regulation. Removing state oversight of DCPP is not in best interest of Californians.

Under PG&E's proposed scheme, oversight over the rates charged for power generated by the plant would pass from the CPUC to FERC, which oversees wholesale transactions.

However, FERC's oversight over the proposed 12-year wholesale power purchase agreement between the proposed Gen and PG&E is insufficient to protect the interests of California ratepayers. State oversight is additionally necessary to handle the many other responsibilities relating to energy generation by a facility such as DCPP.

Ultimately, any regulatory regime exists for the benefit of the public. Here, the residents of California can best be served by local regulations by the CPUC. In a state with such a large population and economy, the regulatory oversight of energy matters necessarily involves considering the rights and interests of many diverse individuals, consumer groups, commercial entities, municipalities, regional districts, other public utilities, and a host of marketing and shipper interests. For one thing, unlike FERC, the CPUC provides for local public hearings, not just in large cities around the State, but also in smaller suburban and rural communities. These hearings allow the average customers of public utilities to communicate their recommendations and objections, based on real-life experiences with their public utilities. Many of the parties and stakeholder groups who appear before the CPUC would almost certainly be unable to participate at FERC, 51 0062

which holds its hearings in Washington, D.C. and does not address the type of local regulatory concerns, and the health and safety of California citizens, that the CPUC routinely deals with.

Furthermore, in formal proceedings before the CPUC, many cities, consumer groups, irrigation districts, and individuals have the realistic opportunity to participate as active parties. By statute, interveners who contribute to the outcome of the proceeding can receive compensation. See Cal Pub. Util. Code §§ 1801, et seq. In this way, customers or customer groups can afford, for example, to hire expert witnesses and generally have the means to advocate their views and protect their interests. This important element of the CPUC's regulation of PG&E, as well as the other public utilities of the state, would be lost with respect to an extremely large part of the costs that are calculated into rates, and with respect to the administration of safety and reliability standards that directly involve the public welfare. Under FERC regulations and procedures, only those who can afford to travel to Washington, D.C. (where the FERC exclusively resides) and only those who pay for their own time and expert witnesses would be able to participate in setting rates and in adopting the rules for services that affect their personal lives as well as the economies of their communities. In such cases, these hearing may be without the voices of individuals and consumer groups that directly represent the public interest.

52 0063

V. PUBLIC SAFETY AND WELFARE ARE THREATENED BY THE PROPOSED LICENSE TRANSFER Such local concerns are particularly relevant in a post September 11th country where citizens are anxious about state infrastructure reliability and safety, particularly regarding potential terrorist targets such as nuclear power plants. Just this past Friday, a front-page headline in the local Oakland Tribune newspaper read:

New Terror Attacks on U.S. Predicted Nuclear reactor seen as possible target See Exhibit H, which is a copy of the newspaper article under this headline clipped from Oakland Tribune of February 1, 2002.

The attached article speaks for itself. According to Secretary of Defense Donald Rumsfeld, nuclear power plant safety is now a fundamental matter of national security, and the lives of millions of Americans are at stake. In the vicinity of DCPP, the lives of over a hundred thousand Californians are at stake.

Given its mission to protect public health and safety, the NRC most certainly should not approve a license transfer, such as the one at issue in this proceeding, in which important safeguards to public health and safety will be lost as a result of the deprivation of concurrent state jurisdiction over an NRC-regulated facility. The task of protecting public safety and national security does not fall to the federal government alone. Since DCPP was licensed in the 1980's, the CPUC the NRC have worked in tandem to assure the safety and reliability of that facility.

In the wake of September I 1'h, it would be a dereliction of its public duty for the 53 0064

NRC to dissolve the fruitful and beneficial collaboration of state and federal agencies in overseeing the safety and reliability of DCPP. And yet, as astonishing and unacceptable as its implications are, in this Application, PG&E asks the NRC to dismiss the State of California from any further responsibility to help the NRC oversee the public safety related aspects of the operation of DCPP. Such a dismissal would unquestionably harm public health and safety and would certainly constitute a dereliction by the NRC of its duty to the public and, more broadly, to help assure national security in connection with the operation of nuclear power plants.

A. FINANCIAL ASPECTS Several critical financial-related public safety and security issues arise in connection with the proposed transfer of the DCPP license from PG&E to Diablo. These issues arise from the transition from a cost-of-service to a market-driven rate base. In the past, nuclear power has required massive public subsidy. Now, however, previously subsidized assets are being transferred out from under public control. This phenomenon poses two major sets of problems:

1. How can nuclear power plants be guaranteed to be run properly at market-based rates? No subsidy plus lower profits equals a recipe for cutting corners. In order to be as competitive as possible in the free market, Diablo will certainly attempt to reduce operating expenses, which, in turn, could very conceivably affect plant safety and reliability, and lead to disaster.

2. The relatively distant relationship between Diablo and its ultimate Parent, PG&E Corporation, seems structured to flow profits from Diablo to Parent while isolating Parent from responsibility for plant operations and safety. Diablo will be held by Gen, which in turn will be held by Newco, which in 54 0065

turn will be held by Parent, PG&E Corporation, three levels of limited liability away. In a worst-case scenario, Parent could loot Diablo, blow it out into bankruptcy and then leave the public holding the bag.

A huge safety risk is imposed upon the public by allowing nuclear plants to be run on a profit maximization basis. As is discussed in great detail in part III above, the NRC must accordingly determine whether or not this new entity can properly run DCPP. In this regard, it must be noted that Parent and its subsidiaries have no experience operating nuclear power plants in a deregulated environment. Diablo will operate under a new set of incentives, i.e. market ones, and will strive to be unprecedentedly "lean and mean."

As a matter of sound public policy, especially in the wake of September 11, should we as a society give control over a nuclear power plant to an entity which may be feeling its way along, and compromising safety and reliability in the process? Public safety and national security dictate that this is too important a matter to allow for unsupervised experimentation.

We can safely presume that, in response to newly relevant market constraints, DCPP will try to downsize its workforce. Even though DCPP will be locked into a 12-year contract to provide power above market rates, the profits realized will not necessarily be applied towards plant maintenance and safety. It will most likely follow the industry trend and not hire the full complement of staff from DCPP's current owner, PG&E. Similarly, DCPP will probably increase its use of overtime. Safety and reliability can only be negatively affected by the likely implementation of such policies.

Moreover, in light of this and other license transfers, the NRC's Revised Reactor 55 0066

Oversight Process and shift towards "risk based" regulations come at a particularly inopportune moment. They reduce the number of resident inspectors and lessen NRC oversight and on-site support at time of change in ownership and operational priority (i.e.

merchant rather than regulated cost-of-service based). Not only is the risk to public health and safety evidently increased, but also the failure of any nuclear power plant at this juncture, for operational or financial reasons, could lower market confidence and adversely affect the entire nuclear power industry. Once again, unsupervised experimentation poses unreasonable risks.

Unlike the previous owner, DCPP will have no rate base to support it in time of financial need. The proposed license transfer lacks any adequate assurances of Diablo's ability and financial wherewithal to assure safe operation. A dip in the profitability of the plant could therefore compromise public safety.

Furthermore, as Californians have seen during the recent energy crisis, Diablo's profits will flow to the Parent along a one-way pipeline. The manner in which Diablo's limited liability corporation is structured could well inhibit its flexibility to react quickly to unanticipated problems. Diablo, as a nested LLC, will provide a source of profit to Parent in good times, but will be forced to stand on its own when profits go negative.

Accordingly, if Diablo is to acquire the license for DCPP, we must be sure that it is capable of anticipating and meeting maintenance and decommissioning costs. Otherwise, in the event of a crisis or prolonged period of unstable or negative profits, the LLC structure will allow the holding company to bankrupt Diablo and avoid financial responsibility. We have already seen such a scenario realized in the current PG&E 56 0067

bankruptcy case.

B. PUBLIC SAFETY ASPECTS Finally, the proposed license transfer would remove a significant level of public safety oversight from DCPP simply by taking ownership out of the hands of PG&E. If PG&E is successful in persuading the Bankruptcy Court to accept its proposed bankruptcy reorganization Plan, DCPP will no longer fall under California regulation.

This would not only remove the CPUC from its oversight role, but would also spell the death knell of the Diablo Canyon Independent Safety Committee ("DCISC"). The DCISC was established as a part of a settlement agreement arising out of the CPUC's proceedings in connection with its approval of DCPP. This agreement set up the DCISC as an independent safety committee for the purposes of reviewing DCPP's operations with respect to safety, and for recommending changes to improve safety. The agreement further provided that: (1) the DCISC shall have the right to receive certain operating reports and records of Diablo Canyon; (2) the DCISC shall have the right to conduct an annual examination of the Diablo Canyon site and such other supplementary visits to the plant site as it may deem appropriate; and (3) the DCISC is to prepare an annual report, and such interim reports as may be appropriate, which shall include any recommendations of the Committee.

The detailed nature of the review that the DCISC conducts, and the great value of that review both for public health and safety, for national security, and as a crucial adjunct to the NRC's own oversight responsibility, can best be demonstrated by a review of the thorough and detailed nature of the DCISC's Annual Reports. Accordingly, a copy 57 0068

of the most recent such Annual Report, covering July .1,2000 through June 30, 2001, and approved on October 17, 2001, is attached hereto as Exhibit I. Although this Report is voluminous, it evidences a high seriousness of purpose and a profound depth of technical expertise. Indeed, one of the current members of the DCISC, Dr. E. Gail DePlanque, is a former NRC Commissioner.

It would be a shame and, again, a dereliction of the NRC's public responsibilities, to approve a proposed license transfer that would have the effect of eliminating a public oversight body that has done such a commendable job in dovetailing with, and supplementing, the Commission's own nuclear power plant safety oversight jurisdiction.

Given the urgent need since September 1P for nuclear power plant safety to be a major national priority, groups like the DCISC should be encouraged and supported, not overlooked and dismissed. For this important public policy and national security reason alone, the NRC should reject PG&E's application in this matter.

VI. CONCLUSION For the foregoing reasons, the CPUC respectfully requests that the NRC grant its petition for leave to intervene in this matter, and grant its motion to dismiss the Application on file in this matter as premature. In the alternative, CPUC requests that the NRC issue an order holding any proceedings in this matter in abeyance until the all legal issues relating to the possible preemption of state authority raised in the Bankruptcy Court proceeding have been fully addressed and resolved. Finally, if and when the NRC does moves forward on this matter, the CPUC requests the Commission to hold a substantive subpart G hearing pursuant to 10 C.F.R. §2.1329(b), due to the special 58 0069

circumstances concerning the subject of the hearing.

February 5, 2002 Respectfully submitted, Gary M. Cohen, General Counsel Arocles Aguilar, Assistant General Counsel Laurence G. Chaset, Staff Counsel Gregory Heiden, Legal Counsel Public Utilities Commission of the State of California 505 Van Ness Avenue San Francisco, California 94102 Attorneys for the Public Utilities Commission of the S e of California By: PLC nce G. Chaset 59 0070

EXHIBIT A 0071

r 1 GARY M. COHEN, SBN 117215 AROCLES AGULAR, SBN 94753 2 MICHAEL M. EDSON, SBN 177858 CALIFORNIA PUBLIC UTILITIES COMMISSION 'OV 2 7ZO0i 3 505 Van Ness Avenue San Francisco, California 94102 ftoSp.- EOsT 4 Telephone: (415) 703-2015 Facsimile: (415) 703-2262 5

ALAN W. KORNBERG 6 BRIAN S. HERMANN PAUL, WEISS, RPFKIND, WHARTON & GARRISON 7 1285 Avenue of the Americas New York, New York 10019-6064 8 Telephone: (212) 373-3000 Facsimile: (212) 757-3990 9

Attorneys for Objector California Public Utilities Commission 10 11 UNITED STATES BANKRUPICY COURT 12 NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION 13 In re Case No. 01-30923 DM 14 PACIFIC GAS AND ELECTRIC COMPANY, Chapter 11 Case 15 a California corporation, CALIFORNIA PUBLIC UTILITIES 16 Debtor. COMMISSION'S OBJECTION TO PROPOSED DISCLOSURE 17 STATEMENT FOR PLAN OF REORGANIZATION UNDER 18 CHAPTER 11 OF THE BANKRUPTCY CODE FOR PACIFIC GAS AND 19 ELECTRIC COMPANY PROPOSED BY PACIFIC GAS AND ELECTRIC 20 Federal I.D. No. 94-0742640 COMPANY AND PG&E CORPORATION 21 Date: December 19,2001 22 Time: 9:30 a.m.

Place: 235 Pine Street, 22 nd Floor, 23 San Francisco. California 24 25 26 27 0072 28 IDoc#: N6: 83129.7 CASE No. 01-30923 DM I

a oh, I TABLE OF CONTENTS 2 Pas 3 BACKGROUND.............................................................................................................................

4 PRELIMINARY STATEMENT.....................................................................................................

5 ARGUMENT 6 I. PG&E'S DISCLOSURE STATEMENT DESCRIBES A PLAN THAT IS 7 UNCONFIRMABLE AS A MATWER OF LAW...............................................................

8 A. PG&E's Plan Violates Section 1129(a)(1) of the Bankruptcy Code.

9 B. PG&E's Plan Violates Section 1129(a)(3) of the Bankruptcy Code.

C. PG&E's Plan Violates Section 1129(a)(6) of the Bankruptcy Code .................... 13 10 II D. PG&E's Plan Violates Section 1129(a)(1 1)'s Feasibility Requirement ............... 1 II. PG&E's DISCLOSURE STATEMENT CONTAINS INADEQUATE 12 I INFORMATION...............................................................................................................

M.1I 13 A. The Disclosure Statement Fails to Disclose Claims Against Third Parties . 17 14 B. The Disclosure Statement Insufficiently Discloses the Risks 15 Associated with PG&E's Scheme to Escape State Regulation .1 16 C. PG&E Should Disclose the Laws it Seeks to Preempt. 21 D. The Disclosure Statement Fails to Disclose Adequately (a) the Values of the 17 Assets it Seeks to Transfer, (b) the Consideration to be Received in Exchange, 18 and (c) the Identities of the Transferees. 22 19 E. Litigation .23 20 F. Corporate Governance. 24 21 G. Executory Contracts and Unexpired Leases .25 22 H. Asset Sales .25 23 I. Other items. 26 24 CONCLUSION .3 25 26 27 28 0073 Doct: NY6: 33128.7 (i) CASE No. 01-30923 DM

TABIE OF AUTHORITIES CASES In re 266 Washington Assoc's., 141 B.R. 275 (Bankr. E.D.N.Y. 1992), aff'd 147 B.R. 827 (E.D.N.Y. 1992) ........................................................ 5 Big Shanty Land Corp. v. Comer Prop., Inc., 61 B.R. 272 (N.D. Ga. 1985) ............ ....... 10 In re Dakota Rail, Inc., 104 B.R. 138 (Bankr. D.Minn. 1989)............................ l7 1

In re DiversifiedInvestors Fund XV7I, 91 B.R. 559 (Bankr. C.D. Cal. 1988)............ 16,17 In re Eastern Maine Elec. Coop., Inc., 125 B.R. 329 (Bankr. D. Me. 1991) ..................... 6 H & L Dev., Inc. v. ArvidalJMB Partners(In re H & L Dev., Inc.), 178 B.R. 71 (Bankr. E.D. Pa. 1994) ............................................... 16 In re Jeppson, 66 B.R. 269 (Bankr.D.Utah 1986) ................................... 17 Knupfer v. Wolyberg (In re WolJberg), 255 B.R. 879 (B.A.P. 9th Cir. 2000) .................. 1 l6 In re Main Street AC, Inc., 234 B.R. 771 (Bankr. N.D. Cal. 1999) .......................... 5 In re Microwave Prod. of Am., Inc., 100 B.R. 376 (Bankr. W.D. Tenn. 1989) ................. 17 Official Comm. of UnsecuredCreditorsv. Michelson (In re Michelson), 141 B.R.

715 (Bankr. E.D. Cal. 1992) .16 Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414 (3d Cir. 1988),

cert. denied, 488 U.S. 967 (1988) .16 Pac. FirstBank v. Boulders on the River (In re Boulders on the River), 164 B.R.

99 (B.A.P. 9th Cir. 1994) .9 PacificGas & Elec. Co. v. California Public Utilities Comm'n, et al. (In re Pacific Gas & Elec. Co.), 263 B.R. 306 (Bankr. ND. Cal. 2001) .20 Re: Pacific Gas and Elec. Co., 1999 WL 589171 (Cal. P.U.C.) 194 .P.U.R. 4th 1 (Apr. 22, 1999) .18 Place: 235 Pine Street, 22nd Floor, San Francisco, CaliforniaDebtor.Federal.

I.D. No. 94-0742640 .I In re Reilly, 71 B.R. 132 (Bankr. D. Mont. 1987) ..................................................... 16, 17 Resorts Int'l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995) .............. 6 Ryan v. Loui (In re Corey), 892 F.2d 829 (9th Cir. 1989) .................................................. 9 0074

In re S&WEnter., 37 B.R. 153 (Bankr. N.D. Ill. 1984) ...................................................... 6 Shell Oil Co. v. City of Santa Monica, 830 F.2d 1052 (9th Cir. 1987), cert.

denied, 487 U.S. 1235 (1988) .......................................................... 9 In re Silberkraus, 253 B.R. 890 (Bankr. C.D. Cal. 2000) ................................................... 5 Southern Cal. Edison Co., 2001 WL 327151 (Cal. P.U.C.) 207 P.U.R. 4th 261 (Mar. 27. 2001) (nt. opinion re: proposed rate increases) ...................................... 3 Stolrow v. Stolrow's, Inc. (In re Stolrow's Inc.), 84 B.R. 167 (9th Cir. B.A.P.

1988) ..................................................... 9 In re Sunflower Racing, Inc., 219 B.R. 587 (Bankr. D. Kan. 1998), aff'd 226 B.R.

673 (D. Kan. 1998) .......................................................... 7 Texas Extrusion Corp. v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142 (5th Cir. 1988), cert. denied, 488 U.S. 926 (1988) ...................................... 16 In re Valrico Square Ltd. P'ship, 113 B.R. 794 (Bankr. S.D. Fla. 1990) ............. .............. 6 In re Yates Dev., Inc., 258 B.R. 36 (Bankr. M.D. Fla. 2000) ............................................. 7 STATUTES I I U.S.C. § 362(b)(4) ......................................................... 10 11 U.S.C. § 541 ......................................................... 10 11 U.S.C. § 1123(a)(5) .......................................................... 6 11 U.S.C. § 1129(a)(1) ......................................................... 6 11 U.S.C. § 1129(a)(3) .......................................................... 9 11 U.S.C. § 1129(a)(5) ......................................................... 24 11 U.S.C. § 1129(a)(6) ......................................................... 13 I I U.S.C. § 129(a)(11) ......................................................... 8, 16 28 U.S.C. § 959(b) ........... 10 MISCELLANEOUS I Lawrence Tribe, American ConstitutionalLaw (ed ed. 2000) ....................................... 21 Review of PacificGas and Elec. Co. FinancialConditionfor Cal. Public Utilities Comm'n, Barrington-Wellesley Group, Inc. (Jan 30,2001) ................................ 18 ii 0074(A)

Id b 2 Ronald Rotunda & John E. Nowak, Treatiseon ConstitutionaiLaw (3d ed.

i999) . 21 iii 0075

I . . _ ,

1 The California Public Utilities Commission (the "CPUC"), a creditor and party in interest 2 in this chapter 11 case, by and through its undersigned counsel, submits this objection (the 3 "Objection") to the proposed Disclosure Statement For Plan of Reorganization Under Chapter Il 4 of the Bankruptcy Code For Pacific Gas and Electric Company Proposed by Pacific Gas and 5 Electric Company and PG&E Corporation, dated September 20, 2001 (the "Disclosure 6 Statement" or "D.S."). In support of its Objection, the CPUC respectfully represents as follows:

7 BACKGROUND 8 On September 20, 2001, Pacific Gas and Electric Company ("PG&E") filed its proposed 9 Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric 10 Company (the "Plan") together with its Disclosure Statement.

11 On October 9. 2001, this Court held a status conference concerning the Disclosure 12 Statement (the "October 9 htStatus Conference"). At that Status Conference, it was made clear 13 that the Plan and Disclosure Statement were prepared and filed without any negotiation or 14 discussion with many of the key players involved in this case and in the regulation of PG&E's 15 operations, including the CPUC and representatives of the State of California. The CPUC and 16 the State Attorney General's Office also expressed their concern that the myriad requests for 17 declaratory and injunctive relief dispersed throughout the Plan and Disclosure Statement, most of 18 which are aimed at displacing the CPUC's and the State's existing regulatory oversight over 19 PG&E, must be the subject of one or more adversary proceedings.

20 By Order dated October 10, 2001 (the "October I0th Order"), this Court required that any 21 party in interest that contends that an adversary proceeding is required for the Proponents' to 22 obtain any of the relief requested in the Plan must file an objection (the "Adversary Proceeding 23 Objection") by November 6, 2001 setting forth the specific relief sought in the Plan that such 24 party contends can only be obtained by adversary proceeding. This Court further set November 25 27, 2001 as the last day for filing and serving written objections to the Disclosure Statement and 26, Capitalized terms used and not defined herein shall have the meanings ascribed to them in 27 the Plan and Disclosure Statement.

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I established December 19, 2001 as a "place holder" for a hearing to consider approval of the 2 Disclosure Statement.

3 Pursuant to the October I0"& Order, on November 6,2001, the CPUC timely filed and 4 served its Adversary Proceeding Objection, which is incorporated herein. The CPUC now 5 submits this Objection to PG&E's Disclosure Statement.

6 PRELIMINARY STATEMENT 7 Through its Plan and Disclosure Statement PG&E seeks to affect a regulatory jailbreak 8 unprecedented in scope in bankruptcy annals. Under the guise of section 1123(aX5) of the 9 Bankruptcy Code and through a misapplication of the debtor protection provisions of chapter 11.

10 PG&E seeks sweeping preemptive relief primarily in the form of no fewer than fifteen II affirmative declaratory and injunctive rulings, each designed to permanently dislocate various 12 state and local laws and regulations affecting PG&E's operation of its public utility. 2 PG&E's 13 Plan is concerned only secondarily with adjusting debtor-creditor relations and restoring its 14 utility operations to financial health. To be sure, if those were PG&E's primary concerns, then 15 would have proposed a much more straightforward organization strategy.

16 PG&E has as its own agenda an escape from CPUC and State regulation. From the 17 outset of this case it has been clear that PG&E seeks to employ this Court as a super-legislature.

18 It first tried in its adversary proceeding against the CPUC where it attempted (unsuccessfully) to 19 overturn portions of the CPUC's March 27'h Order.3 Its Plan and Disclosure Statement constitute 20 more of the same. As with its earlier case against the CPUC, its current scheme is deeply flawed 21 on many levels - constitutional and bankruptcy alike. Such flaws make approval of PG&E's 22 Disclosure Statement at this stage imprudent.

23 24 25 2 See CPUC's Adversary Proceeding Objection (Docket No. 3104), at 4-5, for a brief 26 description of such requests for declaratory an' :njunctive relief.

. Southern Cal. Edison Co., 2001 WL 327151 (Cal. P.U.C.) 207 P.U.R. 4Ih 261 (Mar. 27, 27 2001) (int. opinion re: proposed rate increases) (the "March 27th Order).

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I The fundamental problem in approving PG&E's Disclosure Statement is that it describes 2 a Plan that is unconfirmable. As demonstrated below, the-Plan fails to satisfy certain plan 3 confirmation standards, including those contained in sections 1129(a)(1), (3), (6) and (11) of 4 title 11 of the United States Code, 11 U.S.C. §§ 101 et (the "Bankruptcy Code"), for the 5 following reasons:

6

• The Plan may not comply with the Bankruptcy Code, as required by section 1129(a)(1), because it fails to contain adequate means for its 7 implementation, a requirement under section 1123(a)(5) of the Bankruptcy Code.

The CPUC recognizes that a conclusive determination of this issue necessarily 8 must await the outcome of the adversary proceeding(s) PG&E must commence to obtain the declaratory and injunctive relief it seeks. But approval of the 9 Disclosure Statement at this stage is, at best, premature.

10

• The Plan has not been proposed in good faith, as required by section 1 129(a)(3),

because it is inconsistent with the purposes and objectives of the Bankruptcy 11 ~~~Code.

12

• The Plan may provide for hidden rate increases without CPUC approval, in 13 violation of section 1129(a)(6) of the Bankruptcy Code.

• The Plan may not be feasible, as required by section 1129(a)(l 1). The Plan is 14 predicated entirely upon PG&E's receipt of favorable rulings on many of its requests for declaratory and injunctive relief, as well as favorable outcomes at the 15 FERC, SEC and NRC. Until PG&E obtains such rulings, including by way of 16 one or more adversary proceeding(s), a feasibility determination is impossible.

17 Where, as here, a disclosure statement describes a Plan that is unconfirmable, the law is clear -

18 such disclosure statement should not be approved.

19 Approval of PG&E's Disclosure Statement now would place the proverbial confirmation 20 cart before the horse. The Court should first determine whether the relief PG&E seeks is lawful.

21 There is sufficient uncertainty surrounding the lawfulness of PG&E's Plan to warrant such an 22 approach. To proceed otherwise may result in the waste of huge amounts of estate and judicial 23 resources.

24 Yet, even if this Court disagrees that approval now is premature, the Disclosure 25 Statement still should not be approved. Styled as a complaint against the CPUC and the State of 26 California, the Disclosure Statement lacks the objectivity required for its dissemination to 27 creditors. The Disclosure Statement is riddled with half-truths, misstatements and omissions.

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Io * *k I Also, in many instances it leaves unanswered more questions than it answers. Thus, at a 2 minimum, the Disclosure Statement must be substantially amended prior to its approval by thiy 3 Court.

4 For these reasons approval of the Disclosure Statement is unwarranted and inappropriate.

5 6 ARGUMENT 7 I.

PG&E'S DISCLOSURE STATEMENT DESCRIBES A 8 PLAN THAT IS UNCONFIRMABLE AS A MATTER OF LAW 4 9

10 This Court should not approve PG&E's Disclosure Statement because it describes a nonconfirmable Plan. The law is well settled in this Circuit and elsewhere that a disclosure 12 statement that describes a nonconfirrnable plan is incapable of being approved. In re Silberkraus, 253 B.R. 890, 899 (Bankr. C.D. Cal. 2000) ("There are numerous decisions which 13 14 hold that where a plan is on its face nonconfirmable, as a matter of law, it is appropriate for the 15 court to deny approval of the disclosure statement describing the nonconfinnable plan.") (citi 16 In re United States Brass Corp., 194 B.R. 420 (Bankr. E.D. Tex. 1996); In re Spanish Lake Assoc., 92 B.R. 875, 877 (Bankr. E.D. Mo. 1988); In re Pechk, 57 B.R. 137, 139 (Bankr. E.D.

17 Va. 1986); In re Century Investment Fund VIWI Ltd. Partnership,114 B.R. 1003 (Bankr. E.D.

18 Wis. 1990)); In re Main Street AC, Inc., 234 B.R. 771, 776 (Bankr. N.D. Cal. 1999) (denying 19 20 approval of disclosure statement where plan whose principal purpose was avoidance of 21 application of securities laws was unconfirnable); In re 266 Washington Assoc's., 141 B.R. 275, 288 (Bankr. E.D.N.Y. 1992), affd 147 B.R. 827 (E.D.N.Y. 1992) (same).5 To hold otherwise, 22 23 4 At the outset, the CPUC reserves the right to make these and other objections to the Plan's 24 confirmability in connection with any confirmation hearing that may be scheduled by this Court.

25 5 This Court has acknowledged as much. See Transcript of October 9tI Status Conference at 26 37 (responding to the U.S. Trustee's position that the Court should not send out a disclosure statement that describes a flawed plan; "If it's - on its face it's unconfirmable, I agree with 27 you of course. The law is clear on that ...

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I would result in a waste of time and resources and burden the estate with unnecessary expense. In 2 re EasternMaine Elec. Coop., Inc., 125 B.R. 329, 333 (Bankr. D. Me. 1991) ('iU)ndertaking the 3 burden and expense of plan distribution and vote solicitation is unwise and inappropriate if the 4 proposed plan could never legally be confirmed."); In re Valrico SquareLtd. P'ship, 113 B.R.

5 794,796 (Bankr. S.D. la. 1990) ("Soliciting votes and seeking court approval on a clearly 6 fruitless venture is a waste of the time of the Court and the parties.").

7 As described more fully below, PG&E's Plan is unconfirmable because it fails to satisfy 8 the confirmation standards set forth in sections 1129(a)(1), (3), (6) and (11) of the Bankruptcy 9 Code. These Plan infirmities render PG&E's Disclosure Statement incapable of being approved.

10 A. PG&E's Plan Violates Section 1129(a)(1) of the Bankruptcy Code.

11 Section 1129(a)(1) of the Bankruptcy Code requires a plan of reorganization to comply 12 "withtheapplicableprovisionsof[title 11]." 11 U.S.C.§ 1129(a)(1); Resortslnt'lv.

13 Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401 (9g Cir. 1995). ("The bankruptcy court 14 lacks the power to confirm plans of reorganization which do not comply with applicable 15 provisions of the Bankruptcy Code."). "An examination of the Legislative History of 16 [section 1129(a)(1)] reveals that although its scope is certainly broad, the provisions it was most 17 directly aimed at were Sections 1122 and 1123." In re S&W Enter., 37 B.R. 153, 158 (Bankr.

18 N.D. ll. 1984).

19 PG&E's Plan violates section 1123(a)(5) of the Bankruptcy Code by failing to provide 20 adequate means for its implementation. See 11 U.S.C. § I123(a)(5).6 As noted above and in the 21 _ _ _ _ _ _ _ _ _ _ _

22 6 Section 1123(a)(5) provides that (a) [nlotwitstanding any otherwise applicable nonbankruptcy law, 23 a plan shall - (5) provide adequate means for the plan's 24 implementation such as-(A) retention by the debtor of all or any part of the 25 property of the estate; 26 (B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the 27 confirmation of such plan;.

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1 CPUC's Adversary Proceeding Objection, PG&E's Plan is predicated upon its obtaining no 2 fewer than fifteen favorable declaratory and injunctive rulings, each designed to displace 3 portions of the CPUC's and the State of California's century-old regulatory authority over 4 PG&E's operations. 7 Where, as here, a plan is largely predicated on one or more favorable 5 judicial rulings, courts have held that the plan fails to satisfy section 1123(a)(5). See In re Yates 6 Dev., Inc., 258 B.R. 36, 43 (Bankr. M.D. Fla. 2000) (holding that plan predicated on favorable 7 appellate court ruling impermissibly shifted the risk of delay in plan effectiveness from the 8 debtor to creditors); In re Sunflower Racing, Inc., 219 B.R. 587, 604-05 (Bankr. D. Kan. 1998) 9 affrd. 226 B.R. 673 (D. Kan. 1998) (holding that plan that is predicated on the occurrence of 10 multiple events whose outcome is uncertain is infeasible).

12 (C) merger or consolidation of the debtor with one or more 13 persons; (D) sale of all or any part of the property of the estate, 14 either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in 15 such property of the estate; 16 (E) satisfaction or modification of any lien; 17 (F) cancellation or modification of any indenture or similar is instrument; 19 (G) curing or waiving of any default; (H) extension of a maturity date or a change in an interest 20 rate or other term of outstanding securities; 21 (1) amendment of the debtor's charter, or 22 (J) issuance of securities of the debtor, or of any entity referred to in subparagraph (B) or (C) of this paragraph, for cash, 23 for property, for existing securities, or in exchange for claims or 24 interests, or for any other appropriate purpose.

25 11 U.S.C. § 1123(a)(5).

7 See Plan Art. 8.1 (listing many of the declaratory and injunctive requests Es conditions 26 precedent to confirmation); D.S. at 147-48 (noting that the Bankruptcy Court's refusal to approve the Reorganized Debtor's conditions for its assumption of the net short position 27 would jeopardize PG&E's financial viability rendering it "unable to consummate the Plan").

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a &L 1 That same result is particularly warranted here given that the relief PG&E seeks is 2 unlawful. PG&E bases its claim for such relief on its unprecedented and incredibly sweeping 3 interpretation of section 1123 of the Bankruptcy Code." However, the preemptive relief PG&E 4 seeks is not available under section 1123, nor under any other provision of the Bankruptcy Code 5 for that matter. In addition, PG&E is barred from obtaining the relief it seeks against'the CPUC 6 or the State under the Eleventh Amendment to the U.S. Constitution and related principles of 7 sovereign immunity. These legal infirmities render the Plan incapable of being implemented, as 8 required under section 1123(aX5), which, in turn, renders the Plan unconfirmable.9 9 However, this Court need not, and indeed should not, rule on the Plan's confirmability 10 under sections 1129(a)(1) or (11) in the context of a Disclosure Statement hearing. Rather, such 11 rulings must await the Court's separate determination of the lawfulness of the declaratory, 12 injunctive and other preemptive relief PG&E seeks - relief that is the linchpin of PG&E's Plan 13 and which the CPUC submits may only be sought through PG&E's commencement of one or 14 more adversary proceeding(s) against the CPUC and others whose rights PG&E seeks to affect.

15 See generally, CPUC's Adversary Proceeding Objection (Docket No. 3104).1° Only at that point 16 can interested parties be relatively certain whether PG&E's Plan complies with section 17 18 a See, eg., D.S. at 3 ("Pursuant to section 1123(a) of the Bankruptcy Code, the Bankruptcy Code preempts any otherwise applicable non-bankruptcy law that may be contrary to its 19 provisions.").

20 9 The Plan is likewise infeasible and, thus, violates section 1129(a)( 1I) as well. Section 1129(a)(I 1)requires that a plan may only be confirmed if confirmationin of the plan is not 21 likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan." 11 U.S.C. §I 129(a)(I 1). By its 22 own admission, certain of the declaratory and injunctive relief PG&E seeks "is a critical component of the overall feasibility of the Plan." D.S. at 147-48 (discussing PG&E's need 23 for this Court to declare that PG&E need not resume procurement of its net open position until certain PG&E-imposed criteria have been satisfied). See Objection, infra at pp. 14-15, 24 for a further discussion of the CPUC's feasibility concerns.

25 to That the Plan itself purports to provide for such declaratory and injunctive relief is violative of section II 29(a( 1)of the Bankruptcy Code. Rule 70D1 of the Bankruptcy Rules requires 26 that such relief must be obtained by adversary proceeding. See Fed. R. Bankr. P. 7001(7),

(9); CPUC's Adversary Proceeding Objection at 8-12. By failing to comply with Bankruptcy 27 Rule 7001 PG&E's Plan cannot comply with section 1129(a)(1).

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I 1 29(a)( 1)or (I 1) of the Bankruptcy Code and is otherwise confirmable. Until then, however, 2 approval and dissemination of PG&E's Disclosure Statement would be premature and could 3 result in a waste of estate and judicial resources.

4 Accordingly, because the adversary proceeding(s) likely will resolve a number of critical 5 issues directed at the Plan's confirmability, approval and dissemination of the Disclosure 6 Statement should await their outcome."

7 B. PG&E's Plan Violates Section 1129(a)L3) of the Bankruptcy Code.

8 PG&E's Plan has not been submitted in good faith as required by section 1129(aX3) of 9 the Bankruptcy Code. Under that section, a prerequisite to confirmation is that "[tlhe plan has 10 been proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1129(a)(3).

11 To satisfy section 1129(a)(3)'s "good faith" requirement, "a Plan must be intended to achieve a 12 result consistent with the objectives of the Bankruptcy Code." Ryan v. Loui (In re Corey), 892 13 F.2d 829, 835 (9"h Cir. 1989); Pac. FirstBank v. Boulders on the River (In re Boulders on the 14 River), 164 B.R. 99, 103 (B.A.P. 9h Cir. 1994). Whether a plan is proposed in "good faith" 15 depends upon 'the totality of the circumstances" surrounding the debtor's chapter I I case. See 16 Stoirow v. Stolrow's, Inc. (In re Stolrow's Inc.), 84 B.R. 167, 172 (9"' Cir. B.A.P. 1988).

17 In addition to being consistent with the Bankruptcy Code's purposes and objectives, to 18 satisfy the "good faith" requirement the Plan and Disclosure Statement must not be intentionally 19 20 l PG&E's legal entitlement to the declaratory, injunctive and other preemptive relief it seeks is ripe for determination right now. The doctrine of ripeness "prevents courts from deciding 21 theoretical or abstract questions that do not yet have a concrete impact on the parties." Shell Oil Co. v. City of Santa Monica, 830 F.2d 1052, 1061 (9"' Cir. 1987), cert. denied, 487 U.S.

22 1235 (1988). Ripeness requires that a court "'look at the facts as they exist today in evaluating whether the controversy ... is sufficiently concrete to warrant Uudiciall 23 intervention."' Id. at 1062 (quoting Assiniboine & Sioux Tribes v. Bd. of Oil & Gas 24 Conservation,792 F.2d 782, 788 (9"' Cir. 1986)).

PG&E's filing of its Plan clearly raises the preemption issue and puts squarely before this 25 Court each of its approximately fifteen requests for declaratory and injunctive relief. The CPUC and others have made no secret of our (and their) opposition to the relief PG&E seeks 26 and our (and their) belief that such relief is unlawful. The issues have been joined and it is appropriate to litigate them now, prior to approval of the Disclosure Statement. No purpose 27 is served by delay.

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I misleading or incomplete. Big Shanty L=md Corp. v. ComerProp., Inc., 61 B.R. 272, 281 (N.D.

2 Ga. 1985) (noting that where disclosure is intentionally misleading or incomplete "there is 3 sufficient precedent for resting a finding of bad faith") (citing American United Mutual 4 Insurance Co. v. City ofAvon Park, 311 U.S. 138 (1940); Barnes v. Whelan, 689 F.2d 193 (D.C.

5 Cir. 1982); In re Goeb, 675 F.2d 1386, 1390 n.9 (91h Cir. 1982)).

6 PG&E's Plan and Disclosure Statement are both inconsistent with the Bankruptcy Code's 7 purposes and objectives and are intentionally misleading.

8 (a) PG&E's Scheme to Escape from State Regulation is 9 Inconsistent with the Bankruptcy Code's Purwoses and Obiectives 10 Though masked in debtor-creditor garb, the focus of PG&E's Plan is its desired escape II from state regulation, an unattainable objective long sought by PG&E. Indeed, it may well be 12 the primary motivation for PG&E's decision to walk away from the negotiating table and go its own way in bankruptcy. Surely, a less draconian approach exists for PG&E to satisfy its debts 13 and repay creditors. But PG&E apparently will not consider alternatives that keep it under 14 15 CPUC and State regulatory control.

There exists no basis under the Bankruptcy Code for PG&E's attempted use of chapter 11 16 17 as a legislative device to displace entire regulatory schemes. To the contrary, numerous 18 Bankruptcy Code provisions evince Congressional respect for state and local laws and regulations. See e.g., 11 U.S.C. § 362(b)(4) ("police and regulatory power" exception to the 19 automatic stay); § 541 (property rights determined by reference to state law); 28 U.S.C. § 959(b) 20 21 (requiring debtors in possession to operate their businesses in accordance with state laws). If PG&E desires to "FERC itself" by transferring vast amounts of property from state to federal 22 control, it must seek the approval of appropriate state and federal legislators and regulators.

23 Such relief is not available to it under chapter 11.

24 PG&E is not acting in good faith by attempting to use the plan process to deregulate itself 25 by shifting significant estate assets beyond state regulation. As a result, its Plan is incapable of 26 satisfying section 1129(a)(3)'s "good faith" requirement and is thus, unconfirmable.

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2 1 (b) The Disclosure Statement is Misleading In PG&E's effort to excoriate (unfairly) the CPUC and the State of California and in th j

3 process turn creditors against the CPUC and the State and in favor of PG&E's deregulation 4 scheme, PG&E ends up grossly mischaracterizing many of the CPUC's and the State's actions 5 taken prior to and during this case. The result is that the Disclosure Statement is riddled with half-truths and hyperbole and is plainly misleading.

6 For instance, in Section IV of the Disclosure Statement, captioned "Events Preceding the 7

Commencement of the Chapter 11 Case and Filing of the Plan," PG&E paints an extremely distorted and one-sided picture of the regulatory events preceding its chapter 11 filing. Without 9

10 responding to each and every misstatement, mischaracterization, distortion or omission (which II would take great length), the CPUC will nonetheless, through a few key illustrations, attempt to debunk certain of PG&E's myths:

12

• MYTH: The CPUC and representatives of the State of California failed to 13 address promptly PG&E's financial situation. See, e.g., D.S. at 41-43.

14

• FACT: On the contrary, the CPUC moved quickly. As a regulatory body, the CPUC is required, among other things, to provide due process to the various partie.

15 its proceedings and to comport with various statutory and procedural requirements. In many instances, the CPUC accelerated the emergency rate relief proceedings, waived or 16 reduced parties' comment periods and removed procedural barriers that otherwise would have delayed CPUC decisions. The CPUC also aided PG&E in other respects, such as by 17 implementing the State's emergency energy legislation and challenging at the FERC the unjust and unreasonable wholesale electric prices charged to PG&E and seeking refunds 18 therefor.

19

• MYTH: The CPUC hindered PG&E's ability to enter into block forward contracts for the purchase of power to hedge against spikes in market prices. D.S. at 20 32-34.

21

• FACT: During the first 18 months after the CPUC approved PG&E's participation in the California Power Exchange Corporation's block forward market 22 ("BFM') (July 1999 through December 2000), PG&E utilized only about 35% of its BFM procurement allotment. Though PG&E faults the CPUC for not authorizing its use 23 of hedging instruments earlier, PG&E failed to fully utilize the authority it was given.

PG&E claims that the BFM proved to be thinly traded and of limited use for hedging 24 purposes. D.S. at 26. While that may be true, it was due, in large part, to PG&E's and California's other investor-owned utilities' reluctance to commit their demand to the 25 BFM. PG&E would have been afforded significant price protection against the run up of wholesale electric prices that began in h:.y 2000 had it utilized the BIM to a greater 26 extent.

27

• MYTH: The CPUC, consumer groups and policymakers thrust deregulation 28 upon PG&E and California's other investor-owned utilities. D.S. at 28-30.

0085 Doc#: WY6: V121 7 CASE No. 01-30923 DM

• FACT: PG&E not only supported passage of AB 1890 in 1996, but claimed 1 credit for its development. For example, in its 1997 annual report, the Parent stated that "our Utility in conjunction with other California electric utilities, the CPUC, state 2 legislators, consumer advocates, and others, developed a transition plan, in the form of state legislation [AB 1890], to position California for the new market environment." Sec 3 1997 PG&E Corp. Annual Report, at 20-21. It is not surprising that PG&E and its Parent took credit for deregulation in 1997. During the first few years of deregulation PG&E 4 profited handsomely as a result of the artificially high rate freeze and was able to upstream billions of dollars to its Parent. Now, unhappy with the way things turned out, 5 PG&E and its Parent seek only to attribute blame. PG&E cannot have it both ways.

6

• MYTH: The CPUC's audits revealed that PG&E "had accurately portrayed the accounting on which the Debtor had calculated that the rate freeze had ended." D.S.

7 at 48-49.

8

• FACT: The CPUC's audit report contained no such finding. Such a finding would have required the auditors to market value PG&E's assets, which the auditors did not do.

10

• MYTH: "The Debtor was forced to seek relief under Chapter II of the Bankruptcy Code in part because of the unlawful actions of the State and the CPUC II relating to the recovery of transition costs and the filings to timely conclude that the 12 conditions for ending the rate freeze had been satisfied." D.S. at 91 (emphasis added).

• FACT: This is an expression of PG&E's opinion; it is not a fact. Neither the 13 State's nor the CPUC's actions have been held to be unlawful. To the contrary, in the only challenge to have been decided, this Court held that the accounting true-up portion 14 of the CPUC's March 27t Order did not violate the Bankruptcy Code's automatic stay.

15 The Disclosure Statement is misleading in other key respects as well. For example, 16 PG&E represents that Gen's, ETrans' and GTrans' assets will "continue to be regulated to 17 protect the public interest," D.S. at 7, but fails to take account of the vast range of environmental 18 and public interest issues imperiled by PG&E's proposed wholesale transfer of such assets, 19 particularly the hydroelectric and land assets to be transferred to Gen.' 2 In addition, PG&E 20 asserts that "[tfhe Plan . . . is, in the Proponents' reasoned opinion, the only reasonable solution .

21 .. ." D.S. at 54 (emphasis added). The CPUC submits that this is a gross overstatement for at 22 _ _ _ _ _ _ _

12 For example, the Disclosure Statement fails to address the impact upon California's 23 environment and the public of PG&E's planned swith to the FERC's environmental standards which, in many respects, are less strict than those of the CPUC and the State. The 24 CPUC is concerned that the wholesale transfer of PG&E's transmission and generation assets beyond CPUC and State control could, among other things, negatively impact the State's 25 water flows and water and air quality and result in significant losses of forest, habitat and recreation in PG&E's watershed lands. These and other environmental issues are the subject 26 of an extensive report prepared in connection with PG&E's proceeding before the CPUC to sell its hydroelectric assets. These issues are important and deserve greater mention in the 27 Disclosure Statement.

28 0086 Doc :NY6:83128.7 CASENo.01-23DM

I least two reasons: first, PG&E never once approached the CPUC or the State to see if an 2 alternative existed; and second, the drastic decline in wholesale power prices during the last fL.

3 months has left PG&E with "headroom" again, which may provide PG&E and its creditors with 4 viable alternatives.13 In short, PG&E's Plan is not the "only solution," it merely is PG&E's 5 preferred outcome.

6 PG&E's intent in unfairly slanting the factual background and other aspects of its 7 Disclosure Statement is clear - it seeks to portray the CPUC and the State as incompetent so that 8 it can curry favor with creditors in support of its deregulation scheme. Essentially, PG&E is 9 telling those voting on the Plan that their only chance to be paid in full is for PG&E to embark 10 upon a regulatory sea change that transfers valuable assets beyond CPUC and State control. That II is ludcirous. And, more importantly, it constitutes an abuse of the disclosure process, which is 12 intended to ensure that creditors/voters are presented with objective information that hopefully 13 will inform their decision to accept or reject a plan of reorganization. PG&E's exaggerations and 14 misrepresentations alone merit denial of the Disclosure Statement.' 4 15 C. PG&E's Plan Violates Section 1129(aX(6) of the Bankruptcv Code.

16 Despite representations to the contrary in its Disclosure Statement, 1 ' the CPUC suspects 17 that PG&E's Plan is premised upon a disguised rate increase.16 Section I 129(a)(6) of the 18 Bankruptcy Code requires as a condition to confirmation that "[amny governmental regulatory 19 commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has 20 21 13 PG&E's Disclosure Statement nowhere mentions "headroom" in electric rates or its record profits in the latest quarter, both of which have been widely reported in the press and 22 PG&E's own SEC filings. Surely, such information is relevant.

23 14 In the event that this Court disagrees, then the CPUC requests that, at a minimum, PG&E be required to amend its Disclosure Statement to correct the various misrepresentations 24 contained therein. The CPUC is available to meet and confer with PG&E to craft acceptable 25 alternative language.

Is see D.S. at 6, 69 ("Without raising retail electricity rates above current levels, the Plan 26 provides .... ).

27 16 If the CPUC is wrong, then PG&E should demonstrate why through added disclosure.

0087 Dom: NY6: fu 7 - ASE No. 01-30923 DM C3-

I approved any rate change provided for in the plan, or such rate change is expressly conditioned 2 on such approval." 11 U.S.C. § 1129(aX6)."7 PG&E's failure to provide for CPUC approval of 3 any rate increase in its Plan violates section 1129(a)(6) and, as a result, renders PG&E's Plan 4 unconfirmable.

5 At least two factors inform the CPUC's rate suspicion. The first is that the Plan and -

6 Disclosure Statement may be premised upon the assumption that the entire three-cent rate 7 increase ordered by the CPUC on March 27, 2001 belongs to PG&E. Pursuant to the express 8 terms of the March 27"' Order, however, a portion of that three-cent rate increase is to be 9 allocated to DWR. March 27d' Order at 19 n.4, 27,56, 64, 67. Thus, if PG&E hopes to keep it 10 all (or any portion that would otherwise belong to DWR), then its electric rates must necessarily 11 increase.'

12 Second, the rates Gen proposes to charge the Reorganized Debtor under the Power Sales 13 Agreement to be entered into between the two exceeds Gen's cost-based rate. Currently, CPUC 14 regulations and State law permit PG&E to charge only cost-based rates. The mark-up above cost 15 provided for in PG&E's Plan is without CPUC consent.

16 For these reasons, PG&E's Plan is unconfirmable under section 1129(aX6) of the 17 Bankruptcy Code.

18 D. PG&E's Plan Violates Section 1129(a)(1I)'s Feasibility Reguirement.

19 As noted above, section 1129(a)(l 1)requires that before a Plan may be confirmed, its 20 proponent must demonstrate that, 21 "[ceonfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the 22 debtor or any successor to the debtor under the plan."

23 24 1' In its Disclosure Statement, PG&E admits that *'t"heCPUC will continue to have jurisdiction over the Debtor's retail electric and gas distribution assets, rates and services 25 ... ." D.S. at 7. Accordingly, pursuant to section 1129(a)(6) of the Bankruptcy Code, any rate increase provided for by the Plan requires CPUC approval.

26 18 Because the CPUC has not yet allocated the three-cent rate increase among DWR and PG&E 27 it is unclear how PG&E can keep any portion of such increase without CPUC approval.

28 0088 Doc: NY6: 3123.7 CASE No. 01-30923 DM

I I U.S.C. § 1129(a)(l 1).

2 Clearly, if PG&E is unable to obtain at least certain of the various declaratory and 3 injunctive rulings and other preemptive relief it seeks, then its Plan will not be feasible. This 4 much PG&E admits in its Disclosure Statement. See n. 9, supra.

5 Other feasibility concerns persist as well. For one thing, PG&E's projections for the 6 Reorganized Debtor's operating revenues assume that "[e]lectric annual load growth 7 approximates 2% per year." Exhibit C to D.S. at 3. This assumption, however, is unsupported 8 by historical evidence, which instead shows that electric load growth has been flat, if not 9 declining. If PG&E is wrong, and history is a more accurate barometer of future load growth, 10 then the Reorganized Debtor may experience unanticipated financial pressures.

11 The CPUC is skeptical of the Reorganized Debtor's survival for another reason as well.

12 Assuming PG&E's Plan is confirmed, the Reorganized Debtor would be stripped of many crown 13 jewels, such as its hydroelectric and transmission assets and any recovery in its Rate Recovery 14 Litigation (all of which would be transferred to its Parent), yet it would remain burdened with 15 many of the liabilities with which it entered bankruptcy (i.e., those that according to PG&E's 16 Plan will survive chapter 11). The CPUC fears that this imbalance in the Reorganized Debtor's 17 remaining assets and liabilities could seriously jeopardize its ability to weather future financial 18 storms. This fear is underscored by PG&E's own financial projections which show that the 19 Reorganized Debtor's current liabilities will exceed its current assets by between approximately 20 $750- 800 million per year between the years 2002 through 2005. See Exhibit C to D.S.,

21 Reorganized Debtor Balance Sheet.

22 For these reasons, the CPUC believes that PG&E's Plan may not satisfy section 23 1129(a)(1 )'s "feasibility" requirement.

24 25 26 27 28 0089 Doc: KY6: 8312.7 15- CASE No. 01 -30923 DM

1 II~~~~~~~~~.

2] PG&E's DISCLOSURE STATEMENT 2 CONTAINS INADEOUATE INFORMATION 3

4 Despite its length, PG&E's Disclosure Statement is riddled with inadequacies.

Meaningful and accurate disclosure is at the heart of the reorganization process. Oneida Motor 5

6 Freight,Inc. v. UnitedJerseyBank, 848 F.2d 414, 417 (3d Cir. 1988), cert. denied, 488 U.S. 967 7 (1988); H & L Dev., Inc. v. ArvidIJMB Partners(In re H & L Dev., Inc.), 178 B.R 71, 74 8 (Bankr. E.D. Pa. 1994). Effective disclosure requires the dissemination of "adequate 9 information," Knupfer v. Wolfberg (In re Woljberg), 255 B.R. 879, 883 (B.A.P. 9" Cir. 2000),

10 defined under the Bankruptcy Code to include:

information of a kind, and in sufficient detail, as far as is 11 reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that 12 would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed 13 judgment about the plan ....

14 11 U.S.C. § 1125(a)(1).

15 What constitutes adequate information varies from case to case. Texas Extrusion Corp.

16 v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1157 (5th Cir. 1988), cert.

17 denied, 488 U.S. 926 (1988); In re DiversifiedInvestors FundXVII, 91 B.R. 559,560 (Bankr.

18 CD. Cal. 1988); In re Reilly, 71 B.R. 132, 134-35 (Bankr. D. Mont. 1987). As a general rule, 19 however, "[t]he [plan] proponent should be biased towards more disclosure than less." Official 20 Comm. of UnsecuredCreditorsv. Michelson (In re Michelson), 141 B.R. 715, 720 (Bankr. E.D.

21 Cal. 1992). In that vein, courts have established certain minimum disclosure requirements -

22 information that must be contained in every disclosure statement - including the following:

23 (a) the events leading to the filing of the bankruptcy petition; 24 (b) a summary of the proposed plan of reorganization; 25 (c) a description of the available assets and their values; 26 (d) the condition and performance of the debtor while in chapter 11; 27 (e) information regarding claims against the estate; 28 0090 Dec#: NY6: 3128.7 CASE No. 01-30923 DM

(f) a liquidation analysis setting forth the estimated return that creditors would receive under chapter 7; 2 (g) the accounting and valuation methods used to produce the financial 3 information in the disclosure statement; 4 (h) the collectability of any accounts receivable; 5 (i) any financial information, valuations or pro forma projections that would be relevant to determinations of whether to accept or reject the plan; -

6 (j) information relevant to the risks being taken by the creditors and interest 7 holders; 8 (k) the actual or projected value that can be obtained from avoidable transfers; 9 (1) the existence, likelihood and possible success of nonbankruptcy litigation; 10 (in) the debtor's relationship with its affiliates; 11 (n) the future management of the debtor; 12 (o) the source(s) of information stated in the disclosure statement; 13 (p) the scheduled claims; 14 14 (q) the estimated fees;

~~~~~accountants' administrative expenses, including attorneys' and 15 (r) the debtor's tax attributes; and 16 (s) the anticipated future of the company.

17 See, e.g., In re Dakota Rail, Inc., 104 B.R. 138, 142 (Bankr. D. Minn. 1989); In re Microwave 19 Prod. of Am., Inc., 100 B.R. 376, 378 (Bankr. W.D. Tenn. 1989); Diversified Investors Fund XVII, 91 B.R. at 560; Reilly, 71 B.R. at 134; In re Jeppson, 66 B.R. 269,292. (Bankr. D. Utah 20 1986).

21 In this case, PG&E's Disclosure Statement clearly fails to satisfy at least items (c), (g),

22 23 (j), (k), (1), (in) (n), (o), (q) and (r) of the foregoing list. PG&E's Disclosure Statement is deficient in numerous other respects as well, as described below.

24 A. The Disclosure Statement Fails to Disclose Claims Against Third-Parties.

25 PG&E's Disclosure Statement fails to identify significant claims PG&E's bankruptcy 26 estate may have against third-parties. The most glaring omissions are claims against the Parent 27 28 and against generators and others who sold power to PG&E.

0091 UOcM: MDy: L12L5.I

1. 7ACV Arcs M-z.-

Al v--v- of rKA va

(i) Claims against the Parent I

2 PG&E's estate holds certain claims against its Parent which could prove to be a valuable source of recovery for its creditors. The CPUC is aware of at least two types of such claims:19 3

4 (i) claims that the Parent violated the "first priority" rule ordered by the CPUC when it approved PG&E's holding company structure;2 and (ii) avoidance actions for dividend and other 5

payments made by PG&E to its Parent while PG&E may have been insolvently Disclosure of 6

7 these (and other) claims not only is required under the case law cited above, but is essential, for instance, for creditors and others to value the release to be provided to the Parent under Article 8

9 11.5(b) of the Plan.22 Accordingly, PG&E's Disclosure Statement must be amended to include a discussion of the nature and potential value of the claims PG&E's bankruptcy estate may have 10 against the Parent.

11 12 19 These claims are the subject of a pending CPUC investigation. To the extent other claims exist their disclosure is similarly required.

13 20 The "first priority" rule addresses the Parent's obligation to give "first priority" to PG&E's 14 capital requirements to meet its obligations to serve. Re: PacificGas andEec. Co., 1999 WL 589171 (Cal. P.U.C.) 194 P.U.R. 4" 1 (Apr. 22, 1999) (decision approving formation of 15 holding company) at § 6.4. According to the report (the "Audit Report") issued by the auditors retained by the CPUC in December of 2000 to audit PG&E, "[sJince 1997 [when the 16 holding company was formed, Parent] has not provided cash, credit or other financial assistance or support to PG&E .... Historically, cash has flowed in only one direction, from 17 PG&E to [Parent] and then to [PG&E's] unregulated affiliates." Review of Pacific Gas and Elec. Co. FinancialConditionforCal. Public Utilities Comm'n, Barrington-Wellesley 18 Group, Inc. (Jan. 30, 2001) at I-5 available at www.cpuc.cagov/word.pdf/auditlpge-report

.pdf. By failing to downstream funds to PG&E during times of need, the Parent violated the 19 "first priority" rule.

20 21 The Audit Report further disclosed that "(fjrom 1997 to 1999 PG&E provided [Parent] $4.0 21 billion in the form of dividends paid and repurchases of stock." Id.

22 Article 11.5(b) of the Plan provides that:

22

[als of the Effective Date, the Debtor releases the Parent from any 23 and all Causes of Action held by, assertable on behalf of, or derivative from, the Debtor, in any way relating to the Debtor, the 24 Debtor-in-Possession, the Chapter 11 Case, the Plan, negotiations regarding or concerning the Plan, the ownership, management and 25 operation of the Debtor, and any transactions or transfers between the Parent and the Debtor, including but not limited to, any Cause 26 of Action arising under Chapter 5 of the Bankruptcy Code or any state fraudulent conveyance statute.

27 Plan Art. 11.5(b).

28 0092 a

MN DMcO: NY6: 3128.7 %SMJJ:11%o.VI -au~w pin

(ii) Generator claims 2 PG&E must similarly disclose claims, including refund claims pending before the FEF 3 that PG&E may have against generators and others that sold it power at unjust and unreasonable 4 prices.23 As the Disclosure Statement correctly points out, the FERC has determined that certain 5 electric sales in California since October 2, 2000 are subject to refund. D.S. at 55. The potential 6 total recovery to the State and its three investor-owned public utilities could range from SI to $9 7 billion. Despite their significance, PG&E pays these claims mere lip service in its Disclosure 8 Statement. See D.S. 54-55. Greater disclosure is required. Specifically, PG&E should, at a 9 minimum, disclose the estimated value of these claims as well as the likelihood and timing of recovering on them and the potential impact of such recoveries on its reorganization.2 4 PG&E 10 I should be compelled to do the same with respect to any and all other claims it may have against 12 the generators and other power sellers.

B. The Disclosure Statement Insufficiently Discloses the Risks 13 Associated with PG&E's Scheme to Escape State Regulation.

14 On its face, PG&E's Plan seems like a panacea for PG&E's creditors - recovery in full 15 with interest. However, it is far from certain that PG&E will obtain the various declaratory and 16 injunctive rulings and other preemptive relief necessary for it to confirm its Plan. Indeed, the 17 CPUC believes that such relief is unlawful. Surely, those voting on the Plan are entitled to know 18 just how bumpy a confirmation road lies ahead. Presently, they are offered no clue.

19 For starters, the Disclosure Statement should inform those voting on the Plan that the 20 preemptive relief PG&E seeks is unprecedented in scope.25 The CPUC is unaware of any case in 21 22 23 The CPUC is aware that this may be a sensitive issue for PG&E given the generators' significant representation on the Creditors' Committee and the Creditors' Committee's 23 support of its Plan. Nevertheless, such disclosure is required because claims against the 24 generators constitute significant assets of PG&E's chapter 11 estate.

24 PG&E's estate has retained outside counsel to investigate and prosecute claims against the 25 generators and PG&E is active in the FERC refund proceedings. As a result, PG&E could 26 easily supply these added disclosures.

25 Undoubtedly, PG&E and those familiar with bankruptcy lore will quickly point to the Public 27 Service ofNew Hampshirecase as precedential value for the relief PG&E seeks. However, 28 the scope of the preemptive relief sought in that case was much narrower than the relief 0093 Doc#: NY6:8312fl7 CASE No.o01-30923 DM I

I which a regulated utility succeeded in deregulating itself under a plan of reorganization.

2 Creditors voting on PG&E's Plan should be made aware of this. In addition, creditors should be 3 apprised of the procedural and timing issues associated with the requested relief. Nowhere does 4 the Disclosure Statement mention that to obtain such relief PG&E likely will have to litigate with 5 the CPUC, the State and others every step of the way, inclu4ing by way of one or more adversary 6 proceedings against multiple defendants. Nor does the Disclosure Statement contain any 7 reference as to how long it may take PG&E to prevail (including appellate proceedings) or how 8 much it may cost. This information is critical to those evaluating whether to accept or reject the 9 Plan. It is one thing for creditors to expect to receive distributions by January 2002; it is quite 10 another to caution that litigation may delay distributions for years.

11 Finally, PG&E should provide creditors with some insight into the likelihood that it will 12 obtain the various declaratory and injunctive rulings and other preemptive relief it seeks. It is 13 not enough for PG&E simply to state that such relief is available under section 1123(a)(5) of the 14 Bankruptcy Code. That is a legal determination to be left to this Court. Creditors should be 15 apprised (objectively) of the strengths and weaknesses of PG&E's position, particularly given 16 this Court's stated reluctance to solve "PG&E's, or California's or the country's energy crisis."

17 Pacific Gas & Elec. Co. v. CaliforniaPublic Utilities Comm'n, et al. (In re PacificGas & Elec.

18 Co.), 263 B.R. 306,309 (Bankr. N.D. Cal. 2001) (noting that "[t]hat is for others to attempt.").

19 In a similar vein, PG&E should be required to disclose the obstacles, risks and costs 20 involved in obtaining the various regulatory approvals needed to effectuate its Plan. PG&E 21 should expect that the regulatory approvals and certificates it seeks from the FERC, SEC, NRC 22 and others will be challenged by the CPUC and others whose rights it seeks to affect before those 23 regulatory bodies. All of this should be disclosed.

24 25 26 PG&E seeks here and, ultimately, the chapter 11 plan approved in PSNH was a consensual 27 one, rather than a litigation result. Moreover, PSNH has no precedential value in this Circuit.

28 0094 Doc: KY6: 3123.7 CASE No. 01-30923 DM

C1 PG&E Should Disclose the Laws it Seeks to Preempt.

2 PG&E should not be allowed to claim preemption of various state and local laws and regulations without first specifically identifying them. Preemption inquiries require precise 4 statutory analyses of both the federal and state statutes in question and an examination of the legislative history of each. I Lawrence Tribe, American ConstitutionalLaw § 6 -2 8 p. 1177 5

6 (3d ed. 2000) ("MTihe most fundamental point to remember is that preemption analysis is, or at 7 least should be, a matter of precise statutory construction rather than an exercise in free-form 8 judicial policymaking."); 2 Ronald Rotunda & John E. Nowak, Treatise on ConstitutionalLaw,

§ 12.1 (3d ed. 1999) ("Before a judicial determination occurs, therefore, the Court must consider 9

10 the federal law and its operation compared with the state statute and its operation.').

II PG&E's assertions that it will seek an affirmative ruling of this Court that section 1123 o 2 the Bankruptcy Code preempts various "state and local laws," are insufficient under any 13 preemption analysis.26 Instead, PG&E should identify each and every state and local law and regulation it seeks to preempt. Because preemption forms the undergirding of PG&E's Plan, 14 such disclosure is necessary so that interested parties will be on notice of the laws PG&E seek 15 6 to preempt. In addition, if this Court overrules the CPUC's and others' Adversary Proceeding Objections, then the Disclosure Statement may serve as the only notice of the Plan's preemptive 17 sweep. 27 18 19 20 21 26 See, e.g., D.S. at 74, 76-77, 80-81; see also D.S. at 84 (noting that PG&E will seek a ruling 22 that section 1123 preempts "certainprovisions of the California Corporations Code in connection with the Internal Restructurings and the Reorganized Debtor Spin-Off")

23 (emphasis added).

24 27 The CPUC has tried on its own to identify the myriad laws and regulations PG&E seeks to preempt, and the list is long. However, the CPUC and others should not be required to 25 engage in a guessing game. As the party seeking the relief, PG&E should be required to 26 clearly identify each law it hopes to preempt.

27 28 0095 Dock Y6: 8312.7 -21 - CASE No. 01-30923 DM

a D. The Disclosure Statement Falls to Disclose 1 Adequately (a) the Values of the Assets it Seeks to Transfer, (b) the Consideration to be Received in2 2 Exchange. and (c) the Identities of the Transferees.

3 PG&E should disclose the (a) market values of the assets it seeks to transfer to each of 4 ETrans, GTrans and Gen (and their respective subsidiaries and affiliates), (b) the precise 5 consideration to be received by the Reorganized Debtor in exchange therefor, and (c) the 6 identities of the transferees. Presently the Plan and Disclosure Statement provide only as 7 follows:

8 (a) PG&E's electric transmission assets will be transferred to ETrans (or one or more subsidiaries or affiliates of ETrans) in 9 partial consideration of $770 million in cash (subject to adjustment), $380 million in long-term notes and the assumption of 10 certain (unspecified) liabilities; 11 (b) PG&E's gas transmission and storage assets will be transferred to GTrans (or one or more subsidiaries or affiliates of GTrans) in 12 partial consideration of $390 million in cash (subject to adjustment), $420 million in long-term notes and the assumption of 13 certain (unspecified) liabilities; and 14 (c) PG&E's generation assets will be transferred to Gen (or one or more subsidiaries or affiliates of Gen) in partial consideration of 15 $200 million in cash (subject to adjustment), $1.9 billion in long-term notes and the assumption of certain (unspecified) liabilities.

16 D.S.at7l,75,78.

17 PG&E's disclosure in this area is woefully inadequate. First, PG&E fails to disclose the 18 market values of the assets to be transferred. A comparison of the market values and the 19 consideration to be paid for such assets is necessary so that PG&E's creditors can make informed 20 decisions about whether such transfers are fair and reasonable or, alternatively, whether they 21 reflect sweetheart deals between PG&E and its Parent. For example, how can PG&E justify the 22 transfer of its generation assets to Gen for only $2.1 billion in cash, notes and the assumption of 23 certain (unspecified) liabilities when PG&E itself recently valued its hydroelectric assets alone at 24 approximately $4.1 billion in proceedings before the CPUC to determine whether the rate freeze 25 has ended? In other words, if PG&E believes that its generation assets are worth in excess of 26 28 Schedules identifying the precise assets to be transferred should be annexed to the Disclosure 27 Statement.

28 0096 CASE No. 01-30923 DM WC-; n .B. God. t

1 $4. 1 billion, then why is it willing to transfer them to its Parent for only $2.1 billion? PG&E 2 should be required to explain this and any other discrepancies in the values of the assets to be 3 transferred and the consideration to be received in exchange therefor.

4 In addition, PG&E should have to disclose the precise consideration to be paid for such 5 assets. It cannot suffice for PG&E to disclose only the "partial consideration" to be received 6r 6 that the cash portion of the consideration remains "subject to adjustment" or the assumed 7 liabilities unspecified. Rather, PG&E must disclose all of the consideration to be received and 8 specify, at a minimum, the reasons for any adjustments to the cash portion of the consideration.

9 As for the assumed liabilities, PG&E knows what they are and should be forced to disclose them.

10 See, e.g., D.S. at 73, 79 (noting that the FERC must approve ETrans' and Gen's assumption of 11 liabilities; PG&E anticipates making its FFRC filings on or before November 30,2001).

12 Finally, PG&E should disclose the identities of the entities to whom such assets will be 13 transferred. PG&E recently filed notices with the CPUC of its intent to form a number of Parent 14 subsidiaries and affiliates in anticipation of implementing its Plan. The names of these entities 15 along with descriptions of the assets to be transferred to each should be included in the 16 Disclosure Statement. It is not sufficient for the Disclosure Statement merely to recite that '[tjhe 17 Debtor may also create indirect subsidiaries or affiliates to hold other assets." See D.S. at 5 18 (emphasis added).

19 E. Litigation.

20 Section VI(H) of the Disclosure Statement, captioned "Litigation," describes certain 21 claims PG&E's estate has against third parties, 29 as well as certain claims asserted against 22 PG&E. D.S. at 87-91. Lacking, however, are any objective assessments of such claims, 23 including (i) PG&E's claims in the Rate Recovery Litigation30, the BFM Contract Seizure 24 25 29 Excluding, notably, potential claims against the Parent and generators and other power 26 sellers. See pp. 17-19, supra.

At a minimum, PG&E should disclose that the CPUC has moved to dismiss PG&E's 27 complaint in that case.

28 0097 Doc#: NY6: 33122.7 - - CASE No. 01-30923 DM

X.-.

I Litigation, and the appeal of this Court's Order dismissing PG&E's complaint in its adversary 2 proceeding against the CPUC and its Commissioners, all of which PG&E believes are significant 3 estate assets, and (ii) the claims asserted against PG&E in the Compressor Station Chromium 4 Litigation. Also lacking is any explanation of why PG&E's Plan provides for the assignment of 5 virtually the entire recovery (if any) in each such case, as well as its claims against the State, to 6 Newco or its subsidiary.31 These assignments are particularly troubling given that it is PG&E or 7 the Reorganized Debtor, not the Parent or Newco, that will continue funding such lawsuits.

8 PG&E needs to explain these transfers and to justify them, if possible.

9 A further issue is PG&E's description of its adversary proceeding against the CPUC and 10 its Commissioners. See D.S. at 52, 62. In its description, PG&E never discloses that its II adversary complaint was dismissed with prejudice. Nor does it disclose this Court's reluctance 12 to solve California's or PG&E's energy crisis (a disclosure that is particularly relevant in light of 13 the sweeping relief PG&E seeks under its Plan). See p. 20, supra. Further, on page 62 of the 14 Disclosure Statement, PG&E mistakenly represents that its adversary complaint was filed "in 15 accordance with the automatic stay provision of the Bankruptcy Code ... ." Clearly, this Court 16 decided otherwise. PG&E should be compelled to clarify and correct each of these items.

17 F. Corporate Governance.

18 The Disclosure Statement fails to identify the members of the boards of directors or 19 control (as applicable) or the senior management of each of ETrans, Gtrans, Gen and the 20 Reorganized Debtor. D.S. at 72, 75, 78, 83. These disclosures are required by law and, in any 21 event, are a prerequisite to plan confirmation. 32 Their importance is particularly significant 22 _ _ _ _ _ _ _

31 See, e.g., D.S. at 88 (noting that PG&E will assign to Newco or its subsidiary "the rights to 23 95% of the of the net after-tax proceeds from any successful resolution of the Rate Recovery Litigation and resulting CPUC rate order requiring collection in rates."); D.S. at 91 (noting 24 similar assignments of recoveries from the BFM Contract Seizure Litigation and from claims a2gainst the CPUC and the State regarding PG&E's transition cost recovery).

32 See 11 U.S.C. § I129(a)(5), providing that:

26 (a) The court shall confirm a plan only if all of the following 27 requirements are met:

28 0098 Dccl: NY6: 83128.7 CASE No. 01-30923 DM

1 where, as here, there is the potential for interlocking directorates and sharing of management 2 roles and responsibilities, which give rise to obvious conflict-of-interest concerns. Therefore, 3 PG&E should be required to include this information in its Disclosure Statement.

4 G. Executory Contracts and Unexpired Leases.

5 PG&E's Disclosure Statement should list and briefly describe each significant executery 6 contract and unexpired lease that it anticipates assuming, assuming and assigning to a third party 7 (including such third party's identity), or rejecting. The cure amount for each such contract or 8 lease to be assumed, or assumed and assigned, should similarly be disclosed. Finally, PG&E 9 should update Section V(14) of the Disclosure Statement to reflect this Court's grant or denial, as 10 the case may be, of any further requested extensions of the time within which PG&E may 11 assume or reject its unexpired reat property leases. D.S. at 63 (reflects extension only through 12 October 5, 2001).

13 H. Asset Sales.

14 PG&E's Disclosure Statement provides that "[c]ertain other assets of the Debtor deemed 15 not essential to operations will be sold under the Plan." D.S. at 65 (providing that PG&E exph-ts 16 to yield approximately $75 million from the sale of certain land parcels and property rights it 17 deems nonessential). PG&E should specifically identify the assets to be sold and their 18 approximate values.

19 20 (5)(A)i) The proponent of the plan has disclosed the identity and 21 affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor, an 22 affiliate of the debtor participating in a joint plan with the debtor, or a successor to the debtor under the plan; and (ii) the 23 appointment to, or continuance in, such office of such individual, is consistent with the interests of creditors and equity security 24 holders and with public policy; and 25 (B) the proponent of the plan has disclosed the identity of any insider that will be employed or retained by the reorganized debtor, 26 and the nature of any compensation for such insider.

27 11 U.S.C. § I 129(a)(5).

28 0099 DOCN:NMb: 531UN.J werev. vs-Jv^ - ................ ,

VAC M. nt alM092 DTM

Idb 1 I. Other items.

2 (i) Certain allocations among ETrans, 3 GTrans. Gen and the Reorganized Debtor No basis exists, nor is one offered, for the following allocations among ETrans, GTrans, 4

Gen and the Reorganized Debtor.

5 6 The long-term notes to be issued under the Plan by each of 6 ETrans (12%), GTrans (15%) and Gen (73%). D.S. at 14 n.l.

7

• The long-term subordinated notes to be issued to holders of QUIDS Claims (Class 11) by each of ETrans (27.5%), GTrans (19.8%)

8 and Gen (52.7%). D.S. at 22.

9

• The Reorganized Debtor remaining solely liable on the Mortgage Backed PC Bond Claims (Class 4a), the MBIA Insured PC 10 Bond Claims (Class 4b), the MBIA Claims (Class 4c), the Prior Bond Claims (Class 4f), and the Treasury PC Bond Claims (Class 4g). D.S. at 11 15-19. This is especially puzzling given that many of the assets securing 12 such claims are to be transferred to ETrans, GTrans and Gen.

• Liability for the Letter of Credit Backed PC Bond Claims 13 (Class 4d) and the Letter of Credit Bank Claims (Class 4e) being shared among the Reorganized Debtor (26%), ETrans (17%), GTrans (14%) and 14 Gen (43%), respectively. D.S. at 16-18.

15

• Liability for the Allowed Chromium Litigation Claims for Actual Damages (Class 9a) and Punitive Damages (Class 9b) being shared 16 among the Reorganized Debtor (50%), ETrans (12.5%), GTrans (12.5%)

17 and Gen 25%. D.S. at 20-21.

PG&E should be required to explain and to justify each such allocation, if possible.

18 19 (ii) Estimate of PX. ISO and Generator Claims (Class 6)

PG&E fails to substantiate its $1.060 billion estimate of the PX, ISO and Generator 20 Claims (Class 6)33 despite its admission that the filed claim amounts are substantially higher.

21 PG&E should explain the variance between the filed and estimated claim amounts and disclose 22 whether its Plan can be consummated if the actual claim amounts exceed PG&E's estimate.

23 24 25 26 33 PG&E represents that this amount also includes an estimate of the allowable ESP Claims.

D.S. at 19 n. 4. This is perplexing given that the ESP Claims are separately classified in 27 Class 7 and are estimated to equal $4.204 billion. Id.

28 0100 DMCC NY6: 3125.7 26 - rA Gus CC M IO.-

Al 2110)2 MA v-v -a-

I (Hi) The Plan Supplement 2 PG&E's Plan Supplement should be on file with the Court and made available to interested parties at or prior to the time that its Disclosure Statement is disseminated.34 3

According to the Disclosure Statement, the Plan Supplement will contain, among others things, 5 material agreements to be entered into between the Reorganized Debtor and each of ETrans, GTrans and Gen.3 5 Inasmuch as these agreements will largely govern the relations among these 6

7 entities subsequent to PG&E's reorganization, their terms should be disclosed up front so they may inform decisions to accept or reject the Plan.

9 (iv), EmDlovee Issues 10 PG&E should be required to identify the individuals to be employed by each of the II Reorganized Debtor, EMrans, GTrans and Gen. In addition, PG&E should disclose each entity's 12 additional employee-related costs resulting from, among other things, (i) the renegotiation of 13 various collective bargaining agreements with PG&E's employees, D.S. at 95, (ii) the need for new hires as a result of the Internal Restructurings (e.g., whereas one person could operate and 14 maintain certain transmission and distribution assets, two may become necessary if ownershi- f 15 16 those assets no longer is shared), and (iii) the increased cost of the Reorganized Debtor's 17 workers' compensation insurance given that the Parent will no longer guarantee payment of such claims.36 D.S. at 96. Finally, PG&E should quantify the cost to ETrans, GTrans and Gen and 19 20 34 Presently, the Disclosure Statement provides only that the Plan Supplement will be filed at least ten days prior to the voting deadline. D.S. at 129.

21 35 These include, without limitation, the Power Sales Agreement to be entered into between the 22 Reorganized Debtor and Gen, the gas transmission and storage agreement to be entered into between the Reorganized Debtor and GTrans, and the master separation and distribution 23 agreement to be entered into among the Reorganized Debtor, ETrans, GTrans and Gen. D.S.

at 85-86, 92-93.

24 36 On a related issue, PG&E should explain the statement on page 120 of the Disclosure 25 Statement that all workers' compensation programs are to be treated as executory contracts and assumed under the Plan. PG&E's Plan provides for drastic changes to its workers' 26 compensation program as a result of the Internal Restructurings. It is unclear just how PG&E can assume such programs cum onore, as it is required to under section 365 of the 27 Bankruptcy Code, in light of such expected changes.

28 0101 Dwd: NY6: 831287 - 27 CASE No. 01-30923 DM

I the impact upon its reorganization if this Court holds that the.CPUC's affiliate transaction rules 2 apply. 3 7 3 (v) Claims Resolution 4 PG&E should disclose where it is in the claims allowance process and, assuming it 5 obtains all of the preemptive and other relief it seeks in connection with its Plan, when creditors 6 might expect distributions on their allowed claims.

7 (vi) $40 million "Placement Fee" 8 PG&E's Plan provides that, in addition to being paid in full with interest, holders of 9 allowed claims in Classes 5 (Unsecured Claims), 6 (ISO, PX and Generator Claims), 7 (ESP 10 Claims) and 9 (Chromium Litigation Claims for Actual Damages) will each receive its pro rata 11 share of a $40 million "'placement fee." D.S. at 19-21. It is unclear from the Plan what that 12 placement fee represents and whether it is part of the consideration to be paid to holders of 13 allowed claims in those classes on account of such claims. If the placement fee constitutes an 14 additional distribution on such allowed claims, then PG&E's Plan may be unconfirmable in that 15 it unfairly discriminates in favor of creditors in those classes and provides them with greater than 16 a full recovery on their allowed claims. Alternatively, if the placement fee is something else, 17 PG&E should state what it is and under what circumstances and why it is to be paid.

18 '(vii) DWR's Revenue Requirement 19 The Disclosure Statement's discussion of DWR's revenue requirement and the CPUC's 20 proceedings and PG&E's and others' challenges relating thereto is inaccurate, stale and in need 21 of updating. PG&E's description has been superseded in many key respects by intervening 22 events since the filing of its Disclosure Statement.

23 24 25 26 37 The CPUC's affiliate transaction rules require that a utility be compensated whenever a utility-employee is transferred to an affiliate. In the past, the CPUC has determined that a 27 utility should be paid 25% of the worker's annual compensation.

28 0102 Doc#: NY6: 3312B7 CASE No. 01-30923 DM

(viii) Gen as a "Public Utility" At page 151 of its Disclosure Statement, PG&E states ihat it will seek an affirmative 2

ruling of this Court that Gen's facilities will not be dedicated to the public and, thus, that Gen is 3

4 not a "public utility" within the meaning of the California Public Utilities Code. Elsewhere in its Disclosure Statement, however, PG&E freely admits that Gen is indeed a "public utility." D.S.

5 at 73, 80 (noting that the Parent will own two public utilities - ETrans and Gen). Which is it?

6 7 (LX) Hunters Point and Humboldt Bar Power Plants 8 PG&E fails to explain why the Hunters Point and Humboldt Bay Power Plants will remain with the Reorganized Debtor and not be transferred along with PG&E's other generation 9

10 assets to Gen. Is the Parent seeking to saddle the Reorganized Debtor with the decommissioning II responsibilities associated with these power plants?

(x) Mortgage Backed PC Bond Claims, MBIA Insured 12 PC Bond Claims and Treasury PC Bond Claims 13 As noted above, the Plan provides that the Reorganized Debtor will remain solely liable 14 for payment of PG&E's Mortgage Backed PC Bond Claims, MBIA Insured PC Bond Claims and 15 Treasury PC Bond Claims (Classes 4a, 4b and 4g, respectively). Yet, certain of the obligatioz.

16 under the loan documents covering such claims contain covenants that require ETrans', GTrans' 17 and Gen's compliance (as applicable). See e.g., D.S. at 102-103, 110-111.3' If ETrans, GTrans 1 38 Those portions of the Disclosure Statement provide as follows:

19 With respect to any property transferred by the Debtor to ETrans, 20 GTrans or Gen pursuant to the terms of the Plan, the acquisition or construction of which was financed or refinaned with the proceeds 21 of a series of Mortgage Backed PC Bonds [, MBIA Insured PC 22 Bonds or Treasury PC Bonds, as the case may be], the transferee shall assume the obligation to perform, satisfy and/or comply with 23 those terms, covenants, conditions or obligations under the related PC Bond Documents arising from and after the Effective Date 24 which are to be observed, performed, satisfied or complied with by the owner or operator of the "Project" (as described therein) or any portion thereof which is then owned or controlled by such party, 26 including, without limitation, (a) any obligation to maintain such Project or portion thereof and its other assets and to timely pay any 27 taxes, governmental charges, assessments, insurance premiums or other costs or expenses related thereto, (b) the obligation to comply 28 0103 Doc# Y6: 83128.7 -29 - CASE No. 01-30923 DM

I and/or Gen fail to comply with these covenants, then any resulting liability will be borne solely 2 by the Reorganized Debtor, despite the fact that the Reorganized Debtor cannot compel their 3 compliance. This risk should be disclosed.

4 (xi) Resumption of the Net Short 5 PG&E's self-imposed criteria for the Reorganized Debtor's resumption of the net short 6 are at best unclear and confusing. See, e.g., D.S. at 66 (setting forth the criteria). For example, 7 PG&E fails to disclose the party responsible for establishing the objective retail rate recovery 8 mechanism or the objective procurement standards. Will it be this Court, the CPUC, the 9 Reorganized Debtor or some other body or entity? Equally unclear, is what PG&E means when 10 it says that the Reorganized Debtor will assume the net open position "not already provided 11 through the DWR's contracts .... " Id. Currently, DWR covers the entire net short, much of it 12 through contracts it has with power suppliers. Under PG&E's formulation, what-does PG&E 13 forecast would remain for the Reorganized Debtor to cover? The Disclosure Statement needs to 14 provide answers to these questions.

15 16 17 18 19 20 21 22 23 24 with all restrictions on the use of such Project or portion thereof set forth in the related PC Bond Documents, and (c) the obligation to refrain from taking any action or pennitting any action to be taken 26 with respect to such Project or portion thereof that could cause interest on the related series of PC Bonds to become includable in 27 the gross income of the holders thereof for federal income tax 28 purposes.

0104 Dcet: NY6: 33123.7

- NIP AF M.

cast YO. Vl.lU Al

(xii) Separate Classification of the Environmental and Tort I Claims for Actual and Punitive Damages (Classes &a and 8b, respectively) and the Chromium Litigation Claims 2 for Actual and Punitive Damages (Classes 9a and 9b, respectively) 3 PG&E offers no justification for the separate classification and treatment of the 4 Environmental and Tort Claims for Actual and Punitive Damages (Classes 8a and 8b, 5 respectively), on the one hand, and the Chromium litigation Claims for Actual and Punitive 6 Damages (Classes 9a and 9b, respectively), on the other.

7 O(xii) Tax Consequences 8 According to PG&E's Disclosure Statement, the Proponents will seek a private letter 9 ruling from the IRS or, alternatively, a legal opinion from their tax advisors, stating that the 10 Internal Restructurings and the Reorganized Debtors Spin-Off will not be taxable events. D.S. at 11 163-64. PG&E admits, however, that any resulting tax liability could be substantial. Id. at 164.

12 PG&E should estimate the amount of such potential tax liability and describe its potential impact 13 on PG&E's proposed reorganization.

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 0105 1 MO: NY6:831297 -31 - CASE No. 01 -30923 DM

1 CONCLUSION 2 For the reasons set forth herein, the CPUC respectfully requests that this Court refuse to 3 approve PG&E's Disclosure Statement.

4 DATED: November 27,2001 5 Respectfully submitted, 6 GARY M. COHEN AROCLES AGUILAR 7 MICHAEL M. EDSON CALIFORNIA PUBLIC UTILITIES COMMISSION 8

9 10 B y: / u 11 -and-12 ALAN W. KORNBERG BRIAN S. HERMANN 13 PAUL, WEISS, RIFKIND, WHARTON & GARRISON 14 Attorneys for the California Public Utilities Commission 15 16 17 18 19 20 21 22 23 24 25 26 27 28 0106 DocM: NY6: 83128.1 CASE No. 01-30923 DM I

EXHIBIT B 0107

I GARY M. COHEN, SBN 117215 AROCLES AGUILAR, SBN 94753 2 MICHAEL M. EDSON, SBN 177858 CALIFORNIA PUBLIC UTILITIES COMMISSION 3 505 Van Ness Avenue San Francisco, California 94102 4 Telephone: (415) 703-2015 Facsimile: (415) 703-2262 5

ALAN W. KORNBERG 6 BRIAN S. HERMANN SUSAN E. WELBER 7 PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 Avenue of the Americas 8 New York, New York 10019-6064 Telephone: (212) 373-3000 9 Facsimile: (212) 757-3990 10 Attorneys for Objector California Public Utilities Commission 11 UNITED STATES BANKRUPTCY COURT 12 NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION 13 In re Case No. 01-30923 DM 14 PACIFIC GAS AND ELECTRIC COMPANY. Chapter 11 Case 15 a California corporation, OBJECTION TO PACIFIC GAS 16 Debtor. & ELECTRIC COMPANY'S SECOND MOTION FOR ORDER 17 FURTHER EXTENDING EXCLUSIVITY PERIOD FOR FILING 18 PLAN OF REORGANIZATION TO PERMIT THE CALIFORNIA PUBLIC 19 UTILITIES COMMISSION TO FILE AN ALTERNATE PLAN OF 20 Federal I.D. No. 94-0742640 REORGANIZATION 21 Date: January 16,2002 Time: 9:30 a.m.

22 Place: 235 Pine Street, 2 2 ,d Floor, San Francisco, California 23 Judge: Hon. Dennis Montali 24 [SUPPORTING DECLARATION OF GARY M. COHEN FILED SEPARATELY]

25 26 27 28 0108 CASE No. 01-30923 DM Doc#: NY6: 114S94.6 I

I TABLE OF CONTENTS 2 Pages 3 Table of Authorities ............... ii 4 I. PRELIMINARY STATEMENT.................................................................................................

5 II.BACKGROUND........................................................................................................................

6 m. COMMISSION'S ALTERNATE PLAN..................................................................................

7 IV. ARGUME T...........................................................................................................................

8 PG&EFS SECOND EXTENSION MOTION SHOULD BE DENIED FOR FAILURE TO SHOW "CAUSE" UNDER SECTION 1121(d) OF THE BANKRUPTCY CODE 9

A. PG&E Has Not Made Substantial Progress Towards A Successful Consensual 10 Reorganization Sufficient To Justify An Extension of Exclusivity ...................... 11 11 (i) PG&E Has Failed to Negotiate with the Commission and Other 12 Key Parties in Interest ............................................... 1 13 (ii) It is Too Early to Determine Whether PG&E's Plan Can Result in a Successful Reorganization .............................................. 1 14 (iii) PG&E's Use of Exclusivity As a Tactical Device to Bully the 15 Commission, the State and its Creditors to Accept its Plan 16 Undermines its Requested Extension ......................... 1 B. The Size and Complexity of PG&E's Chapter II Case Do Not Justify an 17 Extension............................................................................................................... 17 I18 C. Denying PG&E's Motion to Allow the Commission to File its Alternate 19 Plan Would Benefit Interested Parties Without Prejudicing PG&E..................... 2 20 V. CONCLUSION. 2 21 22 23 24 25 26 27 28 0109 Dow#NY6 114W.26 iCASE No. 0 1-30923 DM

1 TABLE OF AUTHORITIES -

2 Page(s) 3 CASES 4

In re Dow Coming Corp.,

5 208 B.R. 661 (Bankr. E.D. Mich. 1997) ............................................. 9, 11, 20 6 In re Express One Int'l, Inc.,

• 194 B.R. 98 (Bankr. E.D. Tex. 1996) ............................................. 9, 11, 19, 20 7

Gaines v. Perkins(In re Perkins),

8 71 B.R. 294 (W.D. Tenn. 1987) ............................................. 16, 20 9 In re Gibson & Cushman Dredging Corp.,

101 B.R. 405 (E.D.N.Y. 1989) ............................................. 16 10 In re Homestead Partners,Ltd.,

11 197 B.R. 706 (Bankr. N.D. Ga. 1996) ............................................. 16 12 In re Interco, Inc.,

137 B.R. 999 (Bankr. E.D. Mo. 1992) ............................................. 21 13 In re Manville ForestProds. Corp.,

14 31 B.R. 991 (S.D.N.Y. 1983) ............................................. 12 15 In re McLean Indus., Inc.,

87 B.R. 830 (Bankr. S.D.N.Y. 1987) ........... .................................. 15 16 In re Nicolet, Inc.,

17 80 B.R. 733 (Bankr. E.D. Pa. 1988) ............................................. 16 18 In re Pub. Serv. Co. of New Hampshire, 88 B.R. 521 (Bankr. D. N.H. 1988) ............................................. 17, 19,20, 21 19 In re Pine Run Trust, Inc.,

20 67 B.R. 432 (Bankr. E.D. Pa. 1986) ............................................. 10, 12, 15, 20 21 In re Pub. Serv. Co. of New Hampshire, 99 B.R. 155 (Bankr. D.N.H. 1989) ............. ................................ passim 22 In re Sharon Steel Corp..

23 78 B.R. 762 (Bankr. W.D. Pa. 1987) ............................................. 9, 19 24 In re Southwest Oil Co. of Jourdanton, Inc.,

84 B.R. 448 (Bankr. W.D. Tex. 1987) ............................................. 12 25 In re Swatara Coal Co.,

49 B.R. 898 (Bankr. E.D. Pa. 1985) ............................................. 15 26 Teachers Ins. & Annuity Assoc. of Am. v. Lake in the Woods (In re Lake in the Woods),

27 10B.R. 338 (E.D. Mich. 1981) ....................................... 17 28 Dock NY6 1141S4 6 ii C01A09()t CASE No. 0130923 DM D

Paee(s) 1 In re Texaco Inc..

2 81 B.R. 806 (Bankr. SDNY 1988) ....................................................... 18.20.22 In re Trainer's,Inc.,

3 17 B.R. 246 (Bankr. E.D. Pa. 1982) ........................................................ 16 4 In re United Press Int'l, Inc.,

5 60 B.R. 265 (Bankr. D.C. 1986) 16, 18, 20, 21 United Savings Assoc. of Tx. v. Timbers of Inwood ForestAssocs., Ltd. (In re Timbers of 6 Inwood ForestAssocs., Ltd.),

7 808 F.2d 363 (5th Cir. 1987) .................................. 10 In re Washington -St. Tamnany Elec. Coop., Inc.,

8 97 B.R. 852 (ED. La. 1989) .................................. 10 9 ............ STATUTES 10 11 U.S.C. §1121(d) ............ passim LEGISLATIVE HISTORY 12 13 S. Rep. No.95-989, at 118 (1978) reprinted in 1978 U.S.C.C.A.N. 5787, 5904 . ........... 10 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 0110 Dac#.NY6: 114.6 CASENo. 01-30923 DM

I The California Public Utilities Commission (the "Commission"), a creditor and party in 2 interest in this chapter 11 case, by and through its undersigned counsel, submits this objection 3 (the "Objection") to Pacific Gas & Electric Company's Second Motion for Order Further 4 Extending Exclusivity Period for Filing Plan of Reorganization (the "Second Extension Motion")

5 to permit the Commission to file its alternative plan of reorganization (the "Alternate Plan"). In 6 support of its Objection, the Commission respectfully represents as follows:

7 I 8 PRELIMINARY STATEMENT 9 Plan exclusivity extensions must be earned by hard bargaining. That is the clear purpose 10 and intent of section 1121(d) of the Bankruptcy Code, which balances the estate's interest in 1! promoting a consensual reorganization plan with the debtor's urge to use its exclusive right 12 tactically to compel creditors and other interested parties to accede to its view of the world. It is 13 that very tension that is at issue in the Second Extension Motion filed by Pacific Gas & Electric 14 Company ("PG&E").

15 PG&E has enjoyed the exclusive right to file a plan of reorganization for more than nine 16 months, since April 6, 2001. During that period, PG&E has not even attempted to negotiate with 17 the Commission, its chief regulator. Instead, PG&E has initiated a frontal assault on the 18 Commission's and the State's regulatory authority. From the first days of this case, when PG&E 19 filed an adversary proceeding to strike a portion of a Commission order, to its plan filing some 20 five months later, PG&E's strategy has been obvious - it prefers to fight, rather than reach 21 agreement, with the Commission.

22 Its confirmation efforts complicated by its own belligerence, PG&E seeks an additional 23 four month extension of its exclusive period, until June 30, 2002, to seek confirmation of its 24 plan. PG&E has not earned such an extension. PG&E has enjoyed nine months of exclusivity 25 and the time has now come to level the playing field. PG&E's creditors and other interested 26 parties no longer should be held hostage to PG&E's battle plans against the Commission. In 27 addition, a further extension of exclusivity would unjustifiably reward PG&E for pursuing 28 011 I (kro NYe, 1148846 CASE No. 0 1 30923 DM

1 precisely the type of "take-it-or-leave-it" attitude section 1121(d) of the Bankruptcy Code is 2 designed to prevent.

3 As described more fully in the Declaration of Gary M. Cohen filed in support hereof (the 4 "Cohen Declaration"), the Commission has developed an alternate approach, and this Court 5 should deny PG&E's Second Extension Motion to the extent necessary to permit the 6 Commission to file and solicit acceptances to its Alternate Plan. Such an approach is fully 7 justified. To begin with, PG&E has failed to meet its burden of establishing "cause" for its 8 second exclusivity extension, as it is required to do under section 1121(d) of the Bankruptcy 9 Code. In fact, PG&E's Second Extension Motion does not contain any evidence of "cause."

10 Rather, the Motion contains only unsupported allegations of alleged progress toward 11 confirmation of a plan and the size and complexity of this case. PG&E's Sec. Ext. Mot. at 7-9.

12 That, without more, is insufficient to satisfy the "cause' requirement.

13 The truth is, PG&E has made little, if any, progress toward confirmation of a consensual 14 plan. As is obvious from the roughly 70 Disclosure Statement objections filed to date, the Plan 15 does not enjoy the support of key constituencies in this case, including the Commission and the 16 State of California, and PG&E has done nothing to gain their support. Moreover, as those 17 objections point out, the Plan is infirm in a number of respects, leaving its confirmability in 18 doubt. Allowing PG&E to proceed with its current Plan to the exclusion of all others may result 19 in nothing more than wasted time and delay at the expense of PG&E's creditors who, in PG&E's 20 own words, are footing the bill for "literally millions of dollars per week in fees, costs and 21 interest accruals with respect to creditor claims." PG&E's Sec. Ext. Mot. at 4.

22 Similarly, the size and alleged complexity of this case do not support PG&E's second 23 requested extension. While this case is no doubt large, its size is largely irrelevant to PG&E's 24 need to maintain plan exclusivity. Size is important, where, unlike here, the existence of 25 multiple creditor constituencies with varying rights and priorities magnify the difficulty of 26 negotiating a consensual plan. Here, PG&E purportedly is offering to pay creditors in full.

27 28 0112 Ducs N Y6 1148K4.6 3 ,-.. tAKD 1n 1 tLADE NU. U1-_3UVL n

Um

I Regardless of the number of constituencies involved, it should not be difficult for PG&E to 2 convince creditors to take 100 cents-on-the-dollar. In short, size really does not matter.

3 PG&E's assertions of complexity are similarly unavailing. Much of the complexity 4 surrounding this case has been engineered by PG&E. If PG&E were concerned only with 5 debtor-creditor issues and emerging quickly from bankruptcy, more mundane alternatives exist 6 for it to do so. In fact, the Commission has developed one such alternative, which is described 7 below and in the Cohen Declaration. But, PG&E obviously is more interested in walking a legal 8 minefield in an effort to remove itself from Commission and State regulation. Thus, PG&E itself 9 has unnecessarily complicated matters by foisting upon creditors and this Court its complicated 10 preemption battle. PG&E should not be allowed to create complexity where none needs to exist II and then use it as a basis to monopolize the plan process.

12 "Cause" lacking, PG&E should not be granted a further extension of its exclusive period.

13 Rather, this Court should deny PG&E's requested extension to allow the Commission to file and 14 solicit acceptances to its own Alternate Plan. The Commission is keenly interested in PG&JE's 15 reorganization and has worked diligently to construct its Alternate Plan. The Commission is 16 now poised, with this Court's permission, to present creditors and this Court with an alternative 17 that, among other things, pays creditors in full in cash in a manner that is consistent with the 18 broader interests of the State of California and PG&E's ratepayers, allows PG&E to emerge 19 promptly from chapter 11 as a viable, creditworthy utility and avoids the costly preemption 20 litigation at the heart of PG&E's Plan. Whereas creditors currently are stranded by PG&E's 21 "take-it-or-leave-it" approach, they would now have a choice.

22 Accordingly, as discussed more fully below, the Commission requests that PG&E's 23 Second Extension Motion be denied to permit the Commission to file its Alternate Plan.

24 II.

25 BACKGROUND 26 1. On April 6, 2001 (the "Petition Date"), PG&E filed a voluntary petition under 27 chapter II of title 11 of the United States Code, I I U.S.C. §§ 101 et seq. (the "Bankruptcy 0113 t~og# NY6 II~846 LA~NO4 -3J13W t h3 k No. Ul-I LIM II Docha NY6 114884t

I Code"). PG&E continues to manage and operate its business and property as a debtor in 2 possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. No trustee has been 3 appointed in this case.

4 2. The Commission is an independent, Constitutional agency of the State of 5 California charged with, among other things, regulating California's public utilities. Cohen 6 Decl. ¶ 2. PG&E is a public utility subject to the Commission's jurisdiction. Id. The 7 Commission is also a creditor of PG&E and a party in interest in this case with standing to file a 8 plan of reorganization.'

9 3. On July 3, 2001, PG&E made its first request to extend exclusivity, which was 10 granted by an order (the "Extension Order") of the Court dated July 20, 2001. Order Extending 11 Exclusivity Period, In re Pacific Gas & Elec. Co., No. 01-30923 DM (Bankr. N.D. Cal., July 20, 12 2001). PG&E's first request was premised principally upon the size and alleged complexity of 13 its chapter 11 case and its need for additional time to develop a plan of reorganization. Debtor's 14 Motion for Order Extending Exclusivity Period For Filing Plan of Reorganization at 7-8. The 15 Extension Order granted PG&E an additional four months within which to file a plan, until 16 December 6, 2001, and in the event that PG&E did file a plan by December 6, 2001, the 17 Extension Order extended the period during which plan exclusivity was maintained under section 18 1 121(c)(3) until February 4, 2002. Extension Order at 1.

19 4. On September 20, 2001, PG&E, together with its parent company, PG&E 20 Corporation (the "Parent"), as co-proponent, filed a Plan of Reorganization under Chapter 11 of 21 the Bankruptcy Code for Pacific Gas and Electric Company (as amended, the "Plan") together 22 with a proposed disclosure statement (as amended, the "Disclosure Statement").

23 24 25 On October 2. 2001, the Commission filed a proof of claim for approximately $12 million 26 representing amounts due from PG&E for, among other things, unpaid fees and expenses under the California Environmental Quality Act and unpaid user fees and other amounts due 27 under the Women/Minority/DisabledlVeteran Business Enterprise Program.

28 0114 Deco NY6 1148S.6 CASE No. 01-30923 DM

I 5. The Plan and Disclosure Statement were prepared and filed without any 2 negotiation or substantive discussion with many of the key players involved in this case and in 3 the regulation of PG&E's operations, including the Commission. Cohen DecI. I 8.

4 6. As this Court is keenly aware, the Plan is premised, in large part, upon PG&Es 5 wholesale transfer of its generation and its electric and gas transmission assets to newly formed 6 entities that would be beyond the purview of Commission regulation. First Am. Plan, Art. 7. In 7 addition, the Plan hinges on PG&E's receipt of no fewer than fifteen affirmative declaratory and 8 injunctive rulings against the Commission and various other State and local agencies, and 9 approvals from the Federal Energy Regulatory Commission ("FERC"), the Securities and 10 Exchange Commission ("SEC") and the Nuclear Regulatory Commission ("NRC"). all of which 11 will be the subject of significant litigation before this Court and elsewhere. First Am. Plan, Art.

12 7, 8; First Am. D.S. at 123, 200-01. Assuming PG&E is successful on all of these fronts, the 13 Plan allegedly provides for creditor claims to be satisfied in full, with interest, in the form of 14 either cash or a combination of cash and debt securities. First Am. Plan, Art. 4.

15 7. As set forth more fully in the Commission's Objection to PG&E's Disclosure 16 Statement, filed on November 27,2001 (the "Disclosure Statement Objection"), the Commission 17 submits that PG&E's Plan, which attempts to preempt myriad Commission, State and local laws 18 and regulations, is unlawful and incapable of being confirned.

19 8. Specifically, the Commission and other parties have identified the following 20 critical confirmation infirmities:

21

• The Plan may not comply with the Bankruptcy Code, as required by section 11 29(a)(1), because it fails to contain adequate means for its 22 implementation, a requirement under section 1123(a)(5) of the Bankruptcy Code.

23 Discl. Stmt. Obj. 6-9.

• The Plan has not been proposed in good faith, as required by section 1129(a)(3).

24 because it is inconsistent with the purposes and objectives of the Bankruptcy Code. Id. at9-13.

25

• The Plan may provide for hidden rate increases without Commission approval, in 26 violation of section 1129(a)(6) of the Bankruptcy Code. Id. at 14.

27

• The Plan may not be feasible, as required by section 1129(a)( 11). The Plan is 28 predicated entirely upon PG&E's receipt of favorable rulings on many of its 0115 Doc* NY6 114W6 6 CASE No. 01-30923 DM

requests for declaratory and injunctive relief relating to preemption, as well as 1 - favorable outcomes at the FERC, SEC and NRC. Until PG&E obtains such 2 rulings, a feasibility determination is impossible. Id. at 14-15.

• The Plan fails the "best interests" test of section 1129(a)(7) of the Bankruptcy 3 Code because it seeks to transfer proceeds of the Rate Recovery Litigation (as defined in the Plan) and other litigation to the Parent. See Objection of Certain 4 Debtholders to Approval of the Disclosure Statement for Plan of Reorganization of Pacific Gas and Electric Company and PG&E Corp. at 10-14.

5

• The Plan improperly grants third party releases to the Parent and other creditors.

Id. at 14-15.

6 The Plan fails to comply with the "absolute priority rule" under 7 section 1129(b)(2) of the Bankruptcy Code because it (a) allows equity holders to retain their ownership interest in PG&E when senior creditors are not paid in full, 8 and (b) provides that QUIDS claimants will receive property of PG&E when senior creditors have not been paid in full. Id. at 15-19.

9. Pursuant to this Court's Order dated December 5, 2001, PG&E filed its amended 10 Plan and Disclosure Statement on December 19, 2001. Hearings to consider approval of the I amended Disclosure Statement are scheduled for January 14, 2002, to address the adequacy of 12 disclosure only, and January 25, 2002, to address whether PG&E's Plan is unconfirmable as a 13 matter of law based upon sovereign immunity or preemption grounds.

14 10. Pursuant to this Court's December 5dtOrder, on December 18, 2001, the 15 Commission and its counsel met with PG&E and its counsel and counsel to the Parent to discuss

-16 the Commission's objections to the Disclosure Statement. Cohen Decl. ¶ 8. As of the date of 17 this Objection, many of the Commission's objections to the Disclosure Statement remain 18 unaddressed by the amended Disclosure Statement, although the Commission and PG&E have 19 scheduled a further "meet and confer" for January 9, 2001. Id. at j 6.

20 11. On December 19,2001, PG&E filed its Second Extension Motion.

21 III.

22 COMMISSION'S ALTERNATE PLAN2 Faced with PG&E's refusal to negotiate, the Commission has developed its Alternate 24 Plan. Now, with PG&E's exclusive right about to expire (absent an extension), the Commission 25 2 The following description of the Alternate Plan is for informational purposes and is included 26 only as support for this Objection. By this Objection, the Commission is not proposing an alternative plan nor is it soliciting acceptances to any such alternative or rejections of 27 PG&E's Plan.

28 0116 I -l#NY6 114Z146 CASE No. 01-30923 DM

I is prepared to describe the salient features of its Alternate Plan and, with this Court's permission, 2 to file a plan and disclosure statement in short order.

3 The following are certain of the significant provisions of the Commission's Alternate 4 Plan:

5

• PG&E's short-term borrowings incurred during the energy crisis would be paid in full in cash (including accrued and unpaid interest through the effective date) by 6 the first quarter of 2003 through a combination of PG&E's cash on hand (approximately $4.9 billion as of November 30, 2001 according to PG&E's most 7 recent 8-K filing with the SEC)3 and PG&E's residual revenues after deducting 8 authorized revenue requirements from billed revenues ("residual revenues");

9

• all of PG&E's remaining indebtedness would be reinstated or refinanced;

• PG&E's creditworthiness and financial viability would be restored - the 10 Commission would adopt a post-bankruptcy rate structure consistent with state law that would provide PG&E with an opportunity to earn a reasonable return that 11 would allow it to maintain an investment-grade credit rating; 12

• valuable claims against the Parent (which under PG&E's Plan are to be released) 4 and other assets such as PG&E's refund claims pending before FERC would be 13 preserved and transferred to a litigation trust or similar entity and prosecuted for 14 the benefit of PG&E's ratepayers; 15

• costly and time-consuming preemption litigation would be avoided; 16

• PG&E would emerge promptly from chapter 11;

• the Commission and State of California would continue to regulate PG&E's 17 operations; 18

• PG&E's integrated operations would not be disaggregated; 19 rates would not increase, and may be reduced in 2003 (or earlier);

20

• utility assets would not be diverted to pay the Parent's expenses; and 21

• costly litigation at the FERC, NRC and SEC would be avoided.

22 Cohen Decl. ¶ 9.

23 24 2 The Commission expects this number to increase over time. Cohen Decl. I 10.

25 4 These claims include, among others, claims that the Parent has violated the "first priority" 26 condition imposed upon the Parent by a Commission order approving PG&E's holding company structure and claims that PG&E declared and paid dividends to its Parent while it 27 was insolvent.

28 0117 D.Oe NY6 1146 8 CASENo.01-30923DM

I Mindful of the chaos that could ensue if PG&E's plan exclusivity were terminated 2 generally to allow any party in interest to file a plan, the Commission's Objection is more 3 limited. The Commission objects to PG&E's Second Extension solely to allow it to file and 4 solicit acceptances to the Commission's Alternate Plan. For the reasons that follow, the 5 Commission submits that such relief is required under section 1121(d) of the Bankruptcy Code 6 and is in the best interests of PG&E's estate, its creditors and other parties in interests.

7 IV.

8 ARGUMENT 9 PG&E'S SECOND EXTENSION MOTION SHOULD BE DENIED FOR FAILURE TO SHOW "CAUSE" 10 UNDER SECTION 1121(d) OF THE BANKRUPTCY CODE II The Court should deny PG&E's Second Extension Motion to the extent necessary to 12 permit the Commission to file its Alternate Plan because PG&E has failed to meet its burden of 13 establishing "cause" for an extension as required under section 1 21(d) of the Bankruptcy Code.

14 11 U.S.C. § 1121(d)5 ; In re Dow CorningCorp., 208 B.R. 661, 663 (Bankr. E.D. Mich. 1997) 15 ("a debtor bears the burden of proof when it requests an extension of its period of exclusivity");

16 In re Express One Int'l, Inc., 194 B.R. 98, 100 (Bankr. E.D. Tex. 1996) ("The debtor-in-17 possession bears the burden of establishing 'cause' for an extension of its exclusivity period.").

18 Though the Bankruptcy Code does not define "cause," it is well established that "cause" is a 19 flexible concept that provides courts with broad discretion in determining when it exists based 20 upon the particular facts and circumstances of each case. See In re Sharon Steel Corp., 78 B.R.

21 762, 763-64 (Bankr. W.D. Pa. 1987) ("In essence, Congress has left the meaning of the phrase 22 'for cause' to be determined by the facts and circumstances in each individual case."); In re 23 Public Serv. Co. of New Hampshire ("PSNH'), 99 B.R. 155, 173 n. 1O (Bankr. D.N.H. 1989) 24 ("(l1f a debtor-in-possession is to retain exclusive control of the formulation of a plan of 25 5 Section 1121(d) provides that "[ojn request of a party in interest made within the respective 26 periods specified in subsections (b) and (c) of this section and after notice and a hearing, the court mayfor cause reduce or increase the 120-day period or the 180-day period referred to 27 in this section." I I U.S.C. § 1121(d) (emphasis added).

28 0118

, MD NY6 114S46 9 CASE No. 01-30923 DM

X I reorganization under an exclusivity period it must demonstrate that it uses its position to 2 effectively foster consensual agreement by all entities involved").

3 Critical to the determination of whether "cause" exists is consideration of the balance 4 Congress intended to strike in section 1121 between the relative negotiating positions of the 5 debtor and its creditors and other key constituents. Section 1121 is the product of Congress' 6 attempt to remedy the imbalance between debtors and creditors found under chapter XI of the 7 former Bankruptcy Act. Under chapter XI, debtors maintained the exclusive right to propose a 8 plan indefinitely, thereby giving debtors undue leverage over creditors whose only recourse was 9 to move for conversion of the case to chapter X. an unattractive alternative. In contrast, under 10 section 1121 of the Bankruptcy Code, debtors enjoy exclusivity only for a limited period of time 11 - 120 days to file a plan and no more than 180 days from the inception of the case to seek its 12 acceptance - which may only be extended or reduced upon a showing of "cause." As the 13 legislative history of section 1121(d) makes clear, extensions should not be used to upset the 14 delicate balance Congress sought: "Since the debtor has an exclusive privilege for 6 months 15 during which others may not file a plan, the grantedextension should be based on a showing of 16 some promise of probable success. An extension should not be employed as a tacticaldevice to 17 put pressure on parties in interest to yield to a plan they consider unsatisfactory." S. Rep. No.

18 95-989, at 118 ( 1978). reprintedin 1978 U.S.C.C.A.N. 5787, 5904. See also In re Pine Run 19 Trust, Inc., 67 B.R. 432,434 (Bankr. ED. Pa. 1986) ("By granting the debtor a limited period of 20 exclusivity in plan filing, the Code seeks to balance the relative negotiating positions of the 21 debtor and creditors."); In re Washington -St. Tammany Elec. Coop., Inc., 97 B.R. 852, 855 22 (E.D. La. 1989) ("Congress enacted ... 1121 in order to limit the debtor's exclusive rights to file 23 a plan to clearly defined periods."); United Savings Assoc. of Tx. v. Timbers of Inwood Forest 24 Assocs., Ltd. (In re Timbers of Inwood ForestAssocs., Ltd.), 808 F.2d 363, 372 ( 5 th Cir. 1987) 25 ("[TIhe bankruptcy court must avoid reinstituting the imbalance between the debtor and its 26 creditors that characterized proceedings under the old Chapter XI.") (en banc), affd, 484 U.S.

27 365 (1988).

28 0119 PI>JNVV6 II"" 6 10 CASENo. 01-3023DM

I In balancing the relative positions of various constituencies, courts examine a variety of 2 factors to determine whether "cause" ior an extension exists. In one of the leading decisions in 3 this area, the court in PSNH considered whether an extension was paid for with "hard 4 bargaining:' whether a further extension would promote a consensual plan of reorganization 5 within a reasonable timeframe and whether chaos would ensue following the expiration of 6 exclusivity. PSNH, 99 B.R. at 173-77. Other courts have considered multiple factors, many of 7 which amount to variations on the same theme. See, e.g., Express One inM'O, 194 B.R. at 100; 8 Dow Corning, 208 B.R. at 64-65.6 9 PG&E has not submitted any evidence that "cause" for an extension exists. Instead, its 10 Second Extension Motion is premised solely upon boilerplate suggestions of "cause:' including 11 PG&E's alleged progress towards reorganization and the size and complexity of this case. The 12 cited reasons are unsupportable. Even if true, though, they do not add up to "cause." Under such 13 circumstances it is appropriate for the Court to deny PG&E's Second Extension Motion to the 14 extent necessary to allow the Commission to file its Alternate Plan.

15 A. PG&E Has Not Made Substantial Progress Towards A Successful Consensual 16 Reorianization Sufficient To Justify An Extension of Exclusivity.

The purpose of the exclusive period is to enable the debtor to negotiate a consensual plan 17 of reorganization with its creditors. See In re PSNH, 99 B.R. at 173 n. 10 ("if a debtor-in-I18 possession is to retain exclusive control of the formulation of the plan of reorganization under an 19 exclusivity period it must demonstrate that it uses its position to effectively foster consensual 20 21 6 The Express One court considered the following factors: (1) size and complexity of the case; (2) necessity of sufficient time to permit the debtor to negotiate a plan of reorganization and 22 prepare adequate information; (3)the existence of good faith progress toward reorganization; (4) the fact that the debtor is paying its bills as they become due; (5) whether the debtor has 23 demonstrated reasonable prospects for filing a viable plan; (6) whether the debtor has made progress in negotiations with its creditors; (7) the amount of time which has elapsed in the 24 case; (8) whether the debtor is seeking an extension of exclusivity to pressure creditors to submit to the debtor's reorganization demands; and (9) whether an unresolved contingency 25 exists. Express One Int'l 194 B.R. at 100. Courts that employ the factors analysis do not merely tally the factors for and against an extension but rather view them holistically. See 26 Dow Corning, 208 B.R. at 659 ("Sometimes one or more factors strongly point to a particular result while others point the other way only weakly. And sometimes certain factors are just 27 more relevant or important than others.").

28 0120 NO. NY6 1141466 CASE No. 01-30923 DM

I agreement by all entities involved') (emphasis added). Accordingly, in evaluating whether cause 2 exists for an extension, courts examine whether there is a '"reasonable probability that . [the 3 debtor] will be able to propose a plan that will result in a successful reorganization within a 4 reasonable time." In re Southwest Oil Co. of Jourdanton, Inc., 84 B.R. 448,451 (Bankr. W.D.

5 Tex. 1987); see In re Pine Run Trust. Inc., 67 BR. 432,435 (Bankr. E.D. Pa. 1986) (justifying 6 exclusivity extension on, among other things, a finding that "substantial progress has been made 7 in negotiations that, all concede, are critical to a successful reorganization"). Even after a plan is 8 filed, courts evaluate the status of negotiations between the debtor and key parties in interest 9 towards achieving a consensual reorganization. See generally PSNH, 99 B.R. at 175-76 10 (denying debtor utility's second extension request where status of negotiations indicate that a 11 further extension of exclusivity will not promote a consensual plan of reorganization within a 12 reasonable time frame).

13 PG&E claims that it has made "substantial efforts towards a successful reorganization,"

14 citing that (i) it has already filed a Disclosure Statement and Plan which it claims enjoy broad 15 creditor support, (ii) it is in the process of obtaining approval of its Disclosure Statement, and 16 (iii) it has amended the Plan and Disclosure Statement to address concerns raised by interested 17 parties. PG&E's Sec. Ext. Mot. at 9-10. PG&E's submissions in this respect are insufficient to 18 establish cause. First, PG&E has failed to engage in the "hard bargaining" (indeed any 19 bargaining) with several key constituencies, which is a necessary prerequisite to a grant of an 20 extension of exclusivity. PSN'H, 99 B.R. at 173. Second, until critical determinations are made 21 regarding, among other things, the lawfulness of the preemption PG&E seeks under its Plan, its 22 confirmability remains very much in doubt. Therefore, whatever progress PG&E has made to 23 date may prove to be illusory and of no consequence to creditor recoveries and its eventual 24 emergence from chapter I .

25 (i) PG&E Has Failed to Neeotlate with the Commission and Other Key Parties In Interest.

26 Extensions of exclusivity must be paid for by "hard bargaining." Id. (citing In re 27 Manville Forest Prods. Corp., 31 B.R. 991, 993 (S.D.N.Y. 1983)). As the government body 28 0121 t:NY PJV&.

a_. . . v. ,IA wLA

_vv_.v 12 CASE No. 01-30923 DM

1 charged with regulating most of PG&E's operations, the Commission is a critical player in this 2 case. Yet, PG&E has not negotiated any terms of a plan with the Commission, preferring instead 3 to embroil this chapter 11 estate in a risk-laden attack on the Commission's regulatory authority.

4 Such failure to negotiate is fatal to PG&E's Second Extension Motion.

5 faced with a similar circumstance of a regulated utility failing to negotiate the terms of 6 its reorganization plan with its regulators, the court in PSNH refused to grant the debtor utility a 7 further extension of exclusivity. In that case, the court denied the debtor's second request for an 8 extension of exclusivity because instead of continuing to bargain with state representatives, the 9 debtor filed a non-consensual "FERC plan" similar in some respects to PG&E's Plan.

10 Specifically, in PSNH the court found that although representatives of the debtor, the state and 11 key creditor and equity security holder constituencies met on more than one occasion and 12 discussed and exchanged proposals, the debtor was uninterested in making real progress in its 13 negotiations with the state toward a consensual plan of reorganization. PSNH, 99 B.R. at 174.

14 Instead, the court found that much like PG&E here, the debtor utility preferred to "stiff arm" th 15 state and go it alone in furtherance of its own agenda. Id. at 175. The court there was left only 16 to conclude that after the debtor utility's "FERC plan" was filed, unless exclusivity was 17 terminated and parties were permitted to file alternative plans, there was little likelihood that the 18 debtor and the state would negotiate a consensual plan of reorganization. Id. at 176. As a result, 19 the court denied the debtor utility's requested extension of plan exclusivity. Id. at 177.

20 Here, PG&E's behavior is even more egregious than that of PSNH. PG&E flat out has 21 not negotiated at all with the Commission. Cohen Decl. I 8. During the approximately nine 22 months in which PG&E has enjoyed exclusivity it has not met with or phoned representatives of 23 the Commission to discuss substantively its Plan. Id. The most PG&E has done is to provide 24 one informational "briefing" to Commission staff on November 30,2001, at which it described 25 its filings with the FERC, SEC and NRC in furtherance of its Plan. There was no negotiation 26 over the terms of the Plan at this briefing. Id. In addition, the Commission's counsel attended a 27 court-ordered "meet and confer" session on December 18. 2001 to discuss the Commission's 28 0122 Y6 4.8.4.

Doc#l: NY6 114So4 6

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I Disclosure Statement Objection. Id. Another "meet and confer" is scheduled for January 9, 2 2002. Id. at ¶ 6.

3 PG&E's deliberate decision to exclude its chief regulator from the Plan process reflects 4 PG&E's poor judgment and belligerence toward a significant constituency in this case. It also 5 flies directly in the face of section 1121 and its accompanying legislative history, which evincea 6 clear Congressional intent that favors a negotiated, consensual resolution of chapter I I cases.

7 PG&E's failure to negotiate with the Commission and the State constitutes conduct undeserving B of a further extension of exclusivity. Given PG&E's recalcitrance, this Court, like the court in 9 PSNH, should promote a consensual plan of reorganization by terminating exclusivity to allow 10 the Commission to file its Alternate Plan. A contrary result would allow PG&E to reap the II benefits afforded by plan exclusivity without paying the toll of hard bargaining. It would also 12 allow PG&E to continue to kidnap the plan process to pursue its own deregulation goal, holding 13 the Commission, the State and creditors hostage in the meantime.7 (ii) It is Too Early to Determine Whether PG&E's Plan Can Result in 15 a Successful Reoreanization.

16 PG&E claims that an extension of exclusivity is warranted because it has "made 17 substantial efforts towards a successful reorganization." PG&E's Sec. Ext. Mot. at 9. PG&E 18 then pins its requested extension on a line of cases as well as section 1121's legislative history 19 which, as PG&E concedes, establish 'that exclusivity period extensions are appropriate where 20 the debtor displays some likelihood of a successful, consensualreorganization." Id. at 8 21 (emphasis added). PG&E's factual averments are misleading and the cases upon which it relies 22 are factually inapposite.

23 7 PG&E's creditors are hostage to PG&E's "willful blindness" to plan alternatives. PG&E 24 would have those voting on its Plan and this Court believe that its drastic "FERC plan" involving massive dislocations of Commission, state and local laws and regulations is the 25 only plan capable of being confirmed, i.e., that there are no alternatives. First Am. D.S. at 64-65. PG&E is wrong. If allowed to file its Alternate Plan, the Commission intends to 26 show that a very simple alternative exists, one that pays creditors in full in cash by the first quarter of next year without the need for years of litigation. Creditors and other parties in 27 interest should be given the chance to choose the alternative most attractive to them.

29 0123 I),Dxg NY6 1145846 14 rcA LA>:lIN.

%n no a, WI -u-Wd 9,Oa L1614 l

I

I First, as detailed above, PG&E has made no effort during this case to build consensus 2 with the Commission on a plan of reorganization. It strains credulity for PG&E to imply 3 otherwise.

4 Second, despite having filed its Plan more than three months ago, PG&E has been unable 5 to move it out of the starting blocks. As PG&E admits, "70 parties have filed objections to the 6 Disclosure Statement, many of which also reflect opposition to the Plan." PG&E's Sec. Ext.

7 Mot. at 34. PG&E further freely concedes that "in view of the sheer number and complexity of 8 the issues involved, it may take months to fully resolve these matters and obtain confirmation of 9 the Plan." Id. at 4. PG&E also recognizes that there are likely to be "dozens of contested issues 10 with respect to confirmation of the Plan, many of which are likely to be quite time-consuming to 11 resolve or adjudicate." Id. Much of the same can be said of PG&E's various proceedings at the 12 FERC, NRC and SEC. In view of the foregoing, it is premature at best for PG&E to trumpet its 13 efforts at making substantial progress towards a successful reorganization (certainly not a 14 consensual reorganization). It may very likely be the case that PG&E's Plan has failed to 15 advance the confirmation ball at all.

16 Finally, the cases cited by PG&E where courts have granted an extension based in part on 17 a showing of progress towards reorganization are factually inapposite and do not support I8 PG&E's Second Extension Motion. In many, no plan of reorganization had yet been filed, and it 19 still appeared that extra time would afford the parties the opportunity to negotiate a consensual 20 plan.8 Others involved unique circumstances not present here.9 21 8 See, e.g., In re Pine Run Trust, Inc., 67 B.R. 432,435 (Bankr. E.D. Pa. 1986) (no plan filed; 22 granting first extension to allow debtors who run retirement community to continue negotiations with residents' committee where creditor-objector asked not to be included in 23 such negotiations, and there was no evidence that debtor sought additional extension in order to pressure creditors to accede to reorganization demands); In re Swatara Coal Co., 49 B.R.

24 898, 899-900 (Bankr. E.D. Pa. 1985) (no plan filed; justifying first extension on fact that debtor's owners did not acquire ownership and control of the debtor until nearly three months 25 after case was filed and that pursuant to stipulation and order agreed to by debtor and objector-committee, debtor is required to negotiate with certain parties for a set period yet to 26 expire); In re McLean Indus., Inc., 87 B.R. 830, 833, 835 (Bankr. S.D.N.Y. 1987) (no plan filed; objector agreeswith course of direction debtor is taking and complex issues relating to 27 liquidation and estimation of certain claims and asset valuation need to be resolved or close to resolution before debtor can negotiate terms of plan, meaningful disclosure can be made tt 28 0124 Dms NY6 11446 15 CASE No. 01-30923 DM I

I In short, PG&E's mere filing of a Plan and Disclosure Statement that lacks the support of 2 key constituencies and is legally infirm does not, without more, constituw the type of progress 3 toward a successful reorganization that justifies a further extension of PG&E's exclusive period.

4 (iii) PG&E's Use of Exclusivit As a Tactical Device to Bully the Commission, the State and Its Creditors to Accept its Plan 5 Undermines Its Requested Extension.

6 PG&E further argues that its "progress" towards reorganization justifies "cause" for an 7 extension because "there is nothing to suggest that PG&E seeks the requested extensions in order 8 to pressure its creditors to accede to its reorganization demands." PG&E's Sec. Ext. Mot. at 9.

9 The Commission disagrees. As demonstrated below, PG&E's strategy for seeking a further 10 extension of its exclusive period has at least two objectives: first, it allows PG&E to continue to 11 prevent the Commission from having a meaningful, affirmative voice in its reorganization; and 12 second, by silencing other voices, PG&E can pressure creditors into believing its own rhetoric 13 that "(tlhe Plan ... is, in the Proponents' reasoned opinion, the only reasonable solution'...."

14 First Am. D.S. at 64-65 (emphasis added). However, where, as here, a debtor seeks to employ 15 exclusivity as a tactical device to force parties in interest to accede to its reorganization demands, 16 17 creditors and creditors will be able to determine their distributions); In re Gibson & Cushman Dredging Corp., 101 B.R. 405, 409-10 (E.D.N.Y. 1989) (no plan filed; debtor's attempts to 18 negotiate with creditors' committee ongoing); In re Trainer's,Inc., 17 B.R. 246, 247 (Bankr.

E.D. Pa. 1982) (no plan filed; debtor making substantial efforts to sell main asset, a 19 restaurant).

20 9 In re HomesteadPartners,Ltd., 197 B.R. 706, 719-20 (Bankr. N.D. Ga. 1996) ("new value" plan filed; court denies motion to terminate by undersecured licnholdcr on debtor's principal 21 asset because need for competition can be satisfied by requirement that a competitive auction for new equity interest be held at confirmation and grants motion to extend because of lien-22 holder's high degree of recalcitrance and presence of complex legal issues); In re United PressInt'l, Inc., 60 B.R. 265, 271 n.12 (Bankr. D.C. 1986) (granting debtor's motion to 23 extend exclusivity to allow debtor tofile a plan where the court had previously modified exclusivity to allow creditors' committee and another creditor to file plans); Gaines v.

24 Perkins (In re Perkins), 71 B.R. 294, 295, 298 (W.D. Tenn. 1987) (affirming bankruptcy court's decision allowing extension to continue soliciting acceptances where lower court had 25 found, among other things, that the debtor's plan had already received acceptances from all but a few creditors, the two bankruptcy judges in the district had to contend with 26 approximately 14,000 pending cases between them and progress had been made with respect to creditors who had objected to plan); In re Nicolet, Inc., 80 B.R. 733, 744 (Bankr. E.D. Pa.

27 1988) (decision on exclusivity scheduled for a later date).

28 0125 Doc* NY6 114994 6 16 CASE No OI-30923DM

I courts uniformly hold that such a factor weighs heavily against a finding of "cause" to extend a

, debtor's plan exclusivity. See. e.g., PSNH, 88 B.R. 521, 537 (Bankr. D. N.H. 1l988) (courts 3 consider general balancing analysis "to avoid allowing the debtor to hold the creditors and other 4 parties in interest 'hostage' so that the debtor can force its view of an appropriate plan upon the 5 other parties"); Teachers Ins. & Annuity Assoc. ofAm. v. Lake in the Woods (In re Lake in the 6 Woods), 10 B.R. 338, 34546 (E.D. Mich. 1981) (holding that "extensions are impennissible if 7 they are for the purpose of allowing the debtor to prolong reorganization while pressuring a 8 creditor to accede to its point of view on an issue in dispute").

9 Thus far, PG&E's actions amount to the very "take-it-or-leave-it" attitude Congress 10 sought to prevent by replacing the Bankruptcy Act. See In re Lake in the Woods, 10 B.R. at 344 11 ("'The take-it-or-leave-it attitude on the part of debtors as permitted by Chapter XI is fraught 12 with potential abuse. The granting of authority to creditors to propose plans of reorganization 13 and rehabilitation serves to eliminate the potential harm and disadvantages to creditors [and]

14 democratizes the reorganization process."') (quoting Bankruptcy Act Revision, Serial No. 27, 15 Part 3, Hearings on H.R. 31 and H.R. 32 before the Subcomm. on Civil and Constitutional Rights 16 of the Comm. on the Judiciary, 94gb Cong., 2d Sess. (March 29, 1976) (prepared statement of 17 Harvey R. Miller, William J. Rochelle and J. Ronald Trost ) 1875-76 (footnotes omitted)).

18 PG&E's own words evidence that it has foreclosed consideration of all alternatives. See First 19 Am. D.S. at 64-65. In so doing, it is forcing creditors to accept its own view of the world and, in 20 the process, using exclusivity to freeze out the Commission and the State while it embarks upon 21 a massive regulatory sea change. Terminating exclusivity now to allow the Commission to file 22 its own Plan would free creditors from the vise PG&E currently has them in and allow the 23 Commission to continue with its State-mandated mission to regulate California's public utilities.

24 B. The Size and Complexity of PG&E's Chapter 11 Case Do Not Justify an Extension.

25 Aside from its alleged "progress" toward a successful reorganization, PG&E's only other 26 proffered justification for its requested extension is the often-cited (and overused) "size-and-27 complexity" excuse. Specifically, PG&E argues that because this case involves "tens of billion.

28 0126 17 eVt eIn ns ¶AAo2

%-P:aG [NU. VI MA UV "we; Dock NY6 114UJ 6

I of dollars of assets, and claims of more than 13,000 creditors" its sheer size together with its 2 exceeding complexity justify its requested extension. PG&E's Sec. Ext. Mot. 7-8. PG&E's 3 argument in this regard elevates form over substance and ignores the fact that PG&E itself has 4 engineered much of the cited complexity.

5 This is a very large case - of course it is. However, size and complexity do not 6 necessarily go hand in hand. Here, for instance, where creditors likely will be paid in full, much 7 of the complexity associated with having to negotiate with multiple creditor constituencies with 8 different rights and priorities is nonexistent. After all, it should not be difficult to convince 9 creditors to take 100 cents-on-the-dollar with interest. So while the sheer size of this case may 10 present administrative difficulties, it does not support an extension of time ostensibly needed for 11 the debtor to negotiate with its creditors.

12 Nor can PG&E hide behind the alleged "complexities" of this case in seeking to extend 13 plan exclusivity. PG&E contends that this case "is exceedingly complex, based on, interalia, 14 PG&E's status as a utility company subject to a myriad of state and federal statutes, rules and 15 regulations," many of which PG&E seeks to preempt through confirmation of its Plan. PG&E's 16 Sec. Ext. Mot. at 2,8.10 Elsewhere in its Motion PG&E contends that "in view of the sheer 17 number and complexity of the issues [raised in the objections to PG&E's Plan and Disclosure 18 Statement] ... it may take months to fully resolve these matters and obtain confirmation of the 19 Plan." Id. at 4. Nowhere, however, does PG&E mention that it is responsible for much of the 20 complained-of complexity. As evidenced by the Commission's Alternate Plan, alternatives exist 21 to repay creditors in full and to have PG&E emerge from chapter 11. Indeed, the elegance of the 22 Commission's Alternate Plan lies in its simplicity. But PG&E is not interested in simplicity, or 23 primarily in creditor recoveries. Its interests lie elsewhere - in the massive dislocation of the 24 25 '° PG&E further premises the complexity of this case on "the fact that PG&E continues to grapple with an unprecedented energy crisis." PG&E's Sec. Ext. Mo. at 8. PG&E's 26 statement is an exaggeration. As the CPUC's Alternate Plan would very clearly show, PG&E's retail electric rates exceed its wholesale costs, and have since at least around June 27 2001, leaving PG&E with substantial "residual revenues." Cohen Dccl. ¶ 10.

28 0127 Doc- NY6 114U4 6 18 A c I5b PON f I .nua n

- U.VI . V7 .--

r

I Commission and the State of California's laws and regulations governing its operations. The 2 preemption fight PG&E has started is the cause of much of the complexity surrounding this btse, 3 and PG&E should not be permitted to exploit problems it creates.

4 Finally, size and complexity cannot, without more, constitute "cause" for an extension of 5 exclusivity where other bases for cause are lacking. See, e.g., In re Sharon Steel Corp., 78 B.R.

6 762,766 (Bankr. WD. Pa. 1987) (denying extension of exclusivity despite size and complexity 7 of debtor); PSNH, 88 B.R. at 537 (size and complexity alone do not justify extension for cause);

8 In re Express One Int'l, 194 B.R. at 100-01 (same). The PSNH court thoroughly addressed the 9 circumstances under which size and complexity would justify an extension for "cause" in its 10 decision on the debtor's first extension request:

11 It seems clear from a review of the relevant authorities that size 12 and complexity alone cannot suffice as "cause" for a continuation of a debtor's plan exclusivity right in a chapter 11 reorganization.

13 If that were so, a debtor in a case such as the present would automatically have a right to plan exclusivity throughout the 14 proceedings - contrary to the "balancing" and "tension" rationale underlying § 1121 as detailed above. It does stand to reason that a 15 debtor in a large and complex case may make a showing of cause 16 on those facts for exclusivity extension in the initial stages of the reorganization by virtue of that factor .... If size and complexity 17 alone were sufficient cause, that interpretation of the statutory 18 standard would in effect eat up the rule.

The court concludes that an appropriate interpretation of the "for 19 cause" language of § 1121(d) would provide that the size and 20 complexity must be accompanied by other factors pertinent to the particular debtor and its reorganization to justify extension of plan 21 exclusivity, except perhaps in the very early, initial stages of the chapter 11 proceeding. Such factors include those developed in 22 the cases, i.e., the likelihood of an imminent consensual plan if the debtor retains control, no alternate substantial plan being held off 23 by debtor exclusivity, and the general balancing analysis to avoid 24 allowing the debtor to hold the creditors and other parties in interest "hostage" so that the debtor can force its view of an 25 anpropriate plan upon the other parties."

26 " In this first PSNH decision on exclusivity, an extension was granted principally because the court saw a seven-month "window of opportunity" within which the parties could negotiate 27 towards a consensual plan. 88 B.R. at 538.

28 0128 19 .A tr A. snot ns Doc NY6! 114SE4.6  %-^3t NO. V l _IW 1 1 UMV

PSNH, 88 B.R. at 537 (citations omitted) (underlined emphasis supplied).

Applying this rationale here, size and complexity alone simply do not justify a further 3 extension for PG&E. First, PG&E has already enjoyed one extension, premised at least in part 4 on the size and complexity of its case; granting PG&E another would lead to the very rule-S swallowing cautioned against by the court in PSNH. Second, confirmation of PG&E's Plan is 6 neither imminent, nor likely to be consensual. Third, here, exclusivity would prevent the filing of an 4alternate substantial plan," the Commission's Alternate Plan. Finally, as argued above, it 7

8 appears that the only benefit an extension would offer PG&E would be an opportunity to further 9 cram its views of an appropriate Plan down the throats of creditors, the Commission and other 10 parties in interest that are currently held hostage by PG&E's exclusivity. Under these circumstances, an extension should not rest on "size and complexity."' 2 C. Denying PG&E's Motion to Allow the Commission to File Its Alternate 12 Plan Would Benefit Interested Parties Without PreiudicinE PG&E.

13 Terminating PG&E's Plan exclusivity to allow the Commission to file and solicit 14 acceptances to its Alternate Plan is in the best interests of PG&E's creditors and its estate and 15 would not prejudice PG&E. Presently, creditors have only one choice - PG&E's Plan. Their 16 options are to either accept PG&E's Plan and endure years of litigation and uncertainty while 17 they continue to finance, in PG&E's words "literally millions of dollars per week in fees, costs 18 and interest accruals" (PG&E's Sec. Ext. Mot. 4), or to reject PG&E's Plan in the face of no 19 known alternatives. Neither option may be particularly appealing. Fortunately, a third option 20 exists - the Commission's Alternate Plan. As detailed elsewhere, it provides for creditors to be 21 12 The cases relied upon by PG&E do not suggest otherwise; in each there existed some 22 independent basis for cause other than size and complexity. See, e.g., In re Dow Corning, 80 B.R. at 668 (debtor willing to discuss other means of reorganizing); In re Express One, 23 194 B.R. 100-01 (size and complexity only appropriate consideration where, among other things, no alternative plan); PSNH, 88 B.R. at 538 (extension premised principally on 24 .'window of opportunity" to negotiate, not size and complexity of debtor); In re Texaco, 76 B.R. 322 (plan product of settlement between primary adversaries; plan proposed by party 25 seeking termination is substantially similar, the only changes affecting corporate govern-ance); In re Perkins, 71 B.R. at 295 (plan had "overwhelming" creditor support; most 26 acceptances already solicited); In re Pine Run Trust, 67 B.R. at 435 (court found that "traditional ground" of large size not established); In re United Press Int'l, 60 B.R. at 271 27 n. 12 (modifications of exclusivity already granted to certain parties).

28 0129 DkLE0NY6 114Yd46 20 CASE No. 01-30923 DM

I paid in full in cash by no later than the first quarter of 2003 and avoids the unnecessary and 2 costly legal battle to preempt a century of state laws and regulations. In addition, it gives the 3 Commission a voice in PG&E's restructuring, which to date it has been denied by PG&E.

4 Creditors that are not interested in joining PG&E's preemption bandwagon should be given the 5 option not to. Denying PG&E's Second Extension Motion to allow the Commission to file its 6 Alternate Plan gives them that option.

7 Moreover, modifying PG&B's plan exclusivity to permit the Commission to file its 8 Alternate Plan comes without cost to PG&E. PG&E may still pursue confirmation of its Plan 9 should it choose to do so. In addition, notwithstanding PG&E's unsupported rhetoric to the 10 contrary, the requested modification of PG&E's exclusive period would not "create needless 11 confusion and conflicts that will presumably prejudice all parties." PG&E's Sec. Ext. Mot. at 4.

12 This Objection is limited in that it seeks only to open up the plan process to the Commission's 13 Alternate Plan - the Commission is not advocating that it be opened up generally to all parties 14 in interest. Courts in similar situations have recognized that allowing competing plans may be 15 efficient and can be used as an appropriate means of facilitating reorganization. See In re 16 Interco, Inc., 137 B.R. 999, 1001 (Bankr. E.D. Mo. 1992) (noting that "simultaneous 17 consideration of competing plans may be an efficient procedure"); PSNH, 88 B.R. at 539 n.16 18 (rejecting an argument similar to PG&E's; "If taken literally, the debtor's position would mean 19 that the debtor must have the sole power to present a plan, because multiple plans will bring 20 chaos; therefore, the debtor's exclusivity period must be continued indefinitely."); In re United 21 Press Int'l, 60 B.R. at 271 n.12 (justifying the "middle course" taken in an earlier decision to 22 modify exclusivity to allow parties the opportunity to present plans and at the same time prevent 23 the disturbance to the process that may result from terminating exclusivity entirely);' 3 In re 24 13 Specifically, the United Press court offered the following rationale for its approach: "'Thus, this Court adopted a middle approach, initially suggested by the parties themselves - opening 25 up the right to file a plan on a limited basis to those two entities (besides the Debtor itself) that have the most at stake in this case and have shown themselves to be responsible parties, 26 while refraining from opening the floodgates completely. The statute does not expressly prohibit this eminently sensible middle course, and I can perceive no reason to find any such 27 prohibition by implication." UnitedPress, 60 B.R. at 271 n. 12.

28 0130 Dock NY6 114884A 21 CASE No. 01-3023 DM

1 Texaco, 8I B.R. at 808 (Bankr. S.D.N.Y. 1988) (referring to earlier ruling from bench that "it 2 would be willing to terminate die exclusivity periods on motion if the statutory committees 3 and . . . [the debtor's principal adversary] could agree unconditionally to a baselcap plan, 4 provided that Texaco was given an opportunity to have input with respect to the negotiations").

5 Finally, if PG&E's concerns about ensuing chaos have merit, then this Court can 6 construct adequate procedural safeguards to address such concerns. See PSNH, 99 B.R. at 177.

7 In sum, PG&E's threats of "chaos" are sufficiently remote and capable of being 8 addressed so as not to warrant exclusion of the Commission's Alternate Plan.

9 V.

10 CONCLUSION 11 For the reasons set forth herein and in the Cohen Declaration, the Commission 12 respectfully requests that this Court deny PG&E's Second Extension Motion to the extent 13 necessary to permit the Commission to file its Alternate Plan and solicit acceptances thereto.

14 DATED: January 8, 2002 15 16 Respectfully submitted, GARY M. COHEN 17 AROCLES AGUILAR 18 MHAEL M.EDSON CALIFORNIA PUBLIC UTLITIES COMMISSION 19 21 By:___

22 -and-23 ALAN W. KORNBERG BRIAN S. HERMANN 24 SUSAN E. WELBER PAUL, WEISS, RIFKIND, WHARTON & GARRISON 25 26 Attorneys for the California Public Utilities Commission 27 28 0131 Dad NY6 114SR46 22 rsec [MU Mn Al.

At UlOn-t nMI U I-JV7J LuFrn

EXHIBIT C 0132

A a 1 GARY M. COHEN, SBN 117215 AROCLES AGUILAR, SBN 94753 2 MICHAEL M. EDSON, SBN 177858 CAL1FORNIA PUBLIC UIILITIES COMMISSION 3 505 Van Ness Avenue San Francisco, California 94102 FKILED 4 Telephone: (415) 703-2015- JAN - 8 2002 Facsimile: (415) 703-2262 5 S MWEIL0D MKUT~YO=R 1TE ALAN W. KORNBERG 6 WALTER RIEMAN, SBN 139365 THOMAS M. KEANE 7 ERIC TWISTE MATIHEW J. PRESS 8 PAUL, WEISS, RIFKND, WHARTON & GARRISON 1285 Avenue of the Americas 9 New York, New York 10019-6064 Telephone: (212) 373-3000 10 Facsimile: (212) 757-3990 11 Attorneys for Objector California Public Utilities Commission 12 UNITED STATES BANKRUPTCY COURT 13 NORTHERN DISCT OF CALUFORNIA 14 SAN FRANCISCO DIVISION 15 In re Case No. 01-30923 DM 16 PACIFIC GAS AND ELECTRIC COMPANY, Chapter 11 Case 17 a California corporation, 18 Debtor. THE COMMISSION'S MEMORANDUM IN FURTHER 19 SUPPORT OF m OBJECTION TO PROPOSED DISCLOSURE 20 STATEMENT FOR PLAN OF REORGANIZATION UNDER 21 CHAPTER 11 OF THE BANKRUPTCY Federal ID. No. 94-0742640 CODE FOR PACIFIC GAS AND 22 ELECTRIC COMPANY 23 Date: January 25,2002 Time: 9:30 am.

24 Place: 235 Pine Street, 22d Floor.

San Francisco. California 25 26 27 0133 28 I

THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF IMS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

1 Table of Contents 2 PRELIMINARY STATEM ............. 2................

3 STATEMENT OF FACTS ..................... 4 4

5 ARGUMENT .................... 7 6 I. PG&E'S PROPOSED PLAN IS UNCONFIRMABLE ON ITS FACE BECAUSE IT DEMANDS DECLARATORY AND INJUNCTIVE RELIEF THAT THE 7 BANKRUPTCY COURT CANNOT GRANT .7 8 A. Section 1123(aX5) Does Not Authorize Preemption of the State Regulatory Laws That PG&E Seeks to Avoid 9

1. Section 1123(a)(5) Governs the Required Contents of a Plan, Not the 10 Substantive Legality of the Transactions Described in the Plan .................... 9 11 2. At Most, Section 1123(a)(5) Merely Codifies General Principles of Implied Preemption, as Set Forth by the Ninth Circuit in Baker &

12 Drake........................................1.................................................................... 17 13 3. The Scope of Preemption Sought by PG&E Is Inconsistent on its Face with the Ninth Circuit's Controlling Decision in Baker &

14 Drake............................................................................................................ 18 15 4. Background Principles of Preemption Demonstrate That Section 1123(a) Should Not Be Read to Authorize Preemption of 16 State Law Protecting Public Safety and Welfare, Especially in an 17 Area Traditionally Reserved to State Regulatory Authority . 21

5. PG&E's Position, Which Calls for Unprecedented Preemption of 18 Core California Regulatory Law Protecting Public Safety and Welfare, Finds No Support in the Case Law .......................................... 21 19

6. Preemption Is Not Essential to a Successful Reorganization of 20 PG&E and Accordingly Is Impernissible As a Matter of Law ................... 24 21 B. The State Regulatory Laws that PG&E Seek to Preempt Protect Public Safety and Welfare, and for That and Other Reasons Cannot Be 22 Preempted 24 23 1. PG&E Impermissibly Seeks to Preempt State Regulation Affecting Public Safety and Welfare.................................2..........................................24 24 2. The Extraordinary Scale of the Preemption Sought by PG&E, and 25 the Fact That Preemption is the Central Purpose of the Proposed Plan, Further Demonstrate That the Proposed Plan is Unconfirmable . 26 26 3. The Preemptive Orders that PG&E Demands Would Frustrate Congressional Intent to Delegate Regulatory Authority to the States, 27 and Leave Dangerous Gaps in the Regulatory Regime Applicable to 28 the Reorganized PG&E Entities .................... 28 0134 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF m OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

II. PG&E'S PROPOSED PLAN IS UNCONFIRMABLE BECAUSE ir I DEMANDS RELiEF AGAINST THE STATE OF CALiFORNIA THAT IS 2 BARRED BY THE ELEVENTH AMENDMENT AND RELATED PRINCIPLES OF SOVEREIGN IMMNITY . .31 3

A. The Court Should Look to the Substance of the Relief Sought by PG&E in 4 its Plan to Determine Whether the Relief is a "Suit" Against the State for 5 Purposes of the Eleventh Amendment 32 B. The "Essential Nature and Effect" of the Relief Demanded by PG&E 6 Involves the Pursuit of a "Claim, Demand, or Request" Against the State, and Such Relief Is Therefore Barred by the Eleventh Amendment 34

1. The Relief that PG&E Requests Would Require Payment of Money 8 by the State .. 34 9 2. PG&E Demands Affirmative Relief Specifically Directed Against the State of California As a Sovereign Regulator .36 1o 3. The Relief that PG&E Requests Would Require the Court to 11 Exercise In PersonamJurisdiction Over the State of California .37 C. Neither the Commission Nor the State Has Waived Its Sovereign 12 Immunity 39 13 CONCLUSION........... . 39 14 16 17 18 19 20 21 22 23 24 25 26 27 28 0135 ii THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

OrAOIV s Kv lC AT f DVnVO I Aft A JL.L, 1 vr 11J AA1 I1' . &I a CI 2 FEDERAL CASES 3 Ark. Elec. Coop. Cor vArk. Pub. Serv. Cosmnb, 461 US. 375 (1983) ............

V. .......... 21 4 Baker & Drake Inc. v. Public Service Commission of Nevada, 35 F3d 1348 (9th 5 Cir. 1994) .................................................... 2,18-21,24 6 Buckman Co. v. Plaintiffs' Leial Conm., 531 U.S. 341 (2001) ....................................... 9 8 Cipollone v. liggen Group. Inc., 505 U.S. 504 (1992) .9 B Cohens v. Vrginia, 19 U.S. (6 Wheat) 264 (1821) . .4,33 9

Commonwealth of Massachusetts v. First Alliance Mortgaae Co. (In re First 10 Alliance Mortnage Co.), 263 B.R. 99 (9th Cir. BAP 2001) .19 11 Conn. Light & Power Co. v. Federal Power Comm'n, 324 U.S. 515 (1945) 30 12 Edelman v. Jordan, 415 U.S. 651 (1974). 31 13 14 Ford Motor Co. v. Dep't of Treasury, 323 U.S. 459 (1945) .33 15 Gardner v. New Jersey, 329 U.S. 565 (1947) .37 16 Gen. Motions Corn. v. Tracy, 519 U.S. 278 (1997) .21 17 Goldbera v. Ellet (In re Ellett), 254 F.3d 1135 (9th Cir. 2001) ............................ 34, 37,38 In re MCorp., 101 B.R. 483 (S.D. Tex.1989), rev'd, vacated. 900 F.2d 852 (5th 19 Cir. 1990), aff'd in parnand rev'd in part, 502 U.S. 32 (1991) .............................. 23 20 In re NVR.LP, 189 F.3d 442 (4th Cir. 1999) ............................................... 34,36,38,39 21 in re New York. 256 U.S. 490 (1921) ............................................... 33 22 In re Silberkraus, 253 B.R. 890 (Bankr. C.D. Cal. 2000) ................................................ 7 23 Medtronic. Inc. v. Lohr, 518 U.S. 470 (1996) ......................... ...................... 3, 17 24 25 Midlantic Natl Bank v. N.J. Dep't of Envir. Protection, 474 U.S. 494 (1986) ................. 21 26 Mitchell v. Franchise Tax Bd., 209 F.3d III1(9th Cir. 2000) ................................... 32, 22 27 Natl Waranty Ins. Co. RRG v. Greenfield, 214 F.3d 1073 (9th Cir. 2000) .................... 21 28 Panhandle E. Pipe Line Co. v. Pub. Serv. Comm'n, 332 U.S. 507 (1947) ....................... 30 iii 0136 I

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%P4 U P L`u8s ec4ur9 Co. of New Hampshite), 108 B.R. 854 (Bankr. DXN.H. 1989)........................ 22,23 2

San Die2o Gas & Elec. Co. v. Sellers of Energv & Ancillary Servs., 93 F.E.R.C.

3 61 (2000) ...................................................... 31 4 Seminole Tribe v. Florida, 517 U.S. 44 (1996) ...................................................... 31 Texas v. Walker, 142 F.3d 813 (5th Cir. 1998) ...................................................... 37 6

7U1aleo v. Paty, 902 F.2d 1395 (9th Cir. 1990) ...................................................... 33 8 Universal Cooperatives. Inc. v. FCX. Inc., 853 F.2d 1149 (4th Cir. 1988) ................ 11,21 9

LEGISLATIVE HISTORY 10 11I H.R. Conf. Rep. No.98-882 (June 29, 1984) reprinted in Amold & Porter Legislative History: Pub. L. No.98-353 at 55 ................................................ 15 12 Ornibus Bankruptcy Improvements Act of 1983, S. 445, 98th Cong., 1st Sess.

13 1983, S. Rep. No. 98-65, 96th Cong., 1st Sess., Calendar No. 102 at 51 ....... 13, 14 14 An Act to Correct Technical Errors, Clarify and Make Minor Substantive 15 Changes to Public Law 95-598, S. 658,96th Cong., 2d Sess. 1980, H.R.

Rep. No. 96-1195, 96th Cong., 2d Sess. 122-23 (July 25, 1980) ................. ....... 10 16 An Act Correcting Technical Errors and Making Minor Substantive Changes to 17 Public Law 95-598, S. 658, 96th Cong., 2d Sess. 1980 reprinted in 30 18 Bankr. L. Rep. 83, 198 (CCH)................................................................... 12 19 Bankruptcy Amendments Act of 1981. S. 863,97th Cong., 1st Sess. 1981, S.

Rep. No.97-150, 97th Cong.. 1st Sess. at 2 (July 10, 1981) ................................ 12 20 21 Bankruptcy Federal Judgeship Act, Pub. L. No.98-353, 98 Stat. 333 ............................. 15 22 23 FEDERAL STATUTES 24 11 U.S.C. 1123(a)(5) ................ passim 25 26 STATE STATUTES 27 Cal. Water Code § 80002 ................ 25 28 iv 0137 I

I GARY M. COHEN, SBN 117215 AROCIES AGUILAR, SBN 94753 2 MICHAEL M. EDSON, SBN 177858 CALIFORNIA PUBLIC UTILITIES COMMISSION 3 505 Van Ness Avenue San Francisco, California 94102 4 Telephone: (415) 703-2015 Facsimile: (415) 703-2262 5

ALAN W. KORNBERG 6 WALTER RIEMAN, SBN 139365 THOMAS M. KEANE 7 ERIC TWISTE MA ATIEW J. PRESS 8 PAUL, WEISS, RHIaND, WHARTON & GARRISON 1285 Avenue of the Americas 9 New York, New York 10019-6064 Telephone: (212) 373-3000 10 Facsimile: (212) 757-3990 II Attorneys for Objector California Public Utilities Commission 12 UNITED STATES BANKRUPTCY COURT 13 NORTHERN DISTRICT OF CALIFORNIA 14 SAN FRANCISCO DIVISION 15 In re Case No. 01-30923 DM 16 PACIFIC GAS AND ELECTRIC COMPANY, Chapter 1 Case 17 a California corporation, 18 Debtor. THE COMMISSION'S MEMORANDUM IN FURTHER 19 SUPPORT OF ITM OBJECTION TO PROPOSED DISCLOSURE 20 STATEMENT FOR PLAN OF REORGANIZATION UNDER 21 CHAPTER 11 OF THE BANKRUPTCY 22 Federal I.D. No. 94-0742640 ELECTRIC COMPANY 23 Date: January 25,2002 Time: 9:30 am.

24 Place: 235 Pine Street, 22t Floor, San Francisco, California 25 PRELIMINARY STATEMENT 26 PG&E's proposed Plan and Disclosure Statement have little to do with the 27 traditional bankruptcy goal of adjusting debtor-creditor relationships and other interests in 28 0138 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

I property of the debtor. Instead, the centerpiece of PG&E's proposed plan is its attempt to obtain 2 unprecedented and sweeping relief against the Commission and the State of California enjoining 3 them from exercising their sovereign regulatory authority. PG&E has not proposed a normal 4 plan of reorganization; it has proposed a plan of preemption and deregulation. PG&E asks the 5 Court to order that PG&E, unlike all other integrated public utilities in this country, need not 6 comply with applicable state statutes, state regulations, and state regulatory authority.

7 The Court should not approve PG&E's Disclosure Statement because it describes 8 a Plan that is unconfirmable on its face, for at least two independent reasons:

9 1. No Preemption. According to PG&E, section 1123(a)(5) of the 10 Bankruptcy Code evinces Congressional intent to sweep aside virtually all state regulatory 11 authority over public utilities that file for bankruptcy. But Congress intended nothing of the 12 kind. Section 1123(aX5) provides that "(n]otwithstanding any otherwise applicable 13 nonbankruptcy law, a plan shall ... provide adequate means for the plan's implementation...."

14 On its face, this language refers to the contents of a plan, and preempts nonbankruptcy laws that 15 might otherwise regulate the content of the plan, such as securities-rmlated laws that might 16 otherwise require more disclosure in the plan than is mandated by the Bankruptcy Code.

17 Section 1123(a), read naturally, does not provide for express preemption of nonbankruptcy laws 18 regulating transactions contemplated by the provisions of a proposed plan. Nor could Congress 19 reasonably have intended that the phrase "notwithstanding any otherwise applicable 20 nonbankruptcy law" would confer upon the bankruptcy court the discretion or authority to 21 authorize violations of state or federal nonbankruptcy law, civil or criminal, merely because the 22 debtor has indicated its intention to violate those laws in its plan.

23 The legislative history of section 1123(a)(5) shows that the "notwithstanding" 24 phrase was added in 1984 as a technical amendment that was nor intended to alter the prior scope 25 of the law. Furthermore, the "notwithstanding" phrase derives from a provision in a 1980 bill 26 that was described in a Report of the House Judiciary Committee in a way that squarely supports 27 the Commission's reading of the text, and is completely irreconcilable with PG&E's. Under 28 0139 2

THE COMMISSION'S MEMORANDUM IN FURTA SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

1 applicable case law, which was left unaffected by enactment of the "notwithstanding" phrase, the 2 extent to which provisions of a proposed -plan may displace otherwise applicable state law is 3 governed by principles of implied preemption. The backdrop for those principles includes 4 presumptions that militate strongly against preempting state regulatory law. See Medironic, Inc.

5 v. Lohr. 518 U.S. 470.485 (1996).

6 In keeping with these principles, the Ninth Circuit ruled in Baker & Drake Inc. v.

7 Public Service Commission of Nevada, 35 F.3d 1348 (9th Cir. 1994), that the Bankruptcy Code 8 does not preempt state statutes or regulations intended to protect the public safety and welfare.

9 According to the Ninth Circuit, state statutes may be preempted by the Bankruptcy Code only if, 10 at a minimum, they are directed solely at economic regulation, narrowly understood, and if 11 certain other factors apply. The provisions of the Public Utilities Code that PG&E seeks to 12 preempt protect the public safety and welfare, and accordingly preemption cannot occur. That 13 would be true even if enforcement of the challenged provisions of state law would make a 14 bankruptcy reorganization more difficult, or even impossible.

15 Here, however, that is not the case. As the Commission states in its objection to 16 PG&E's second request for an extension of its plan exclusivity, which the Commission is also 17 filing today. the Commission has formulated an alternative plan. With the Court's permission, 18 the Commission intends to propose that plan. The Commission's plan does not require 19 preemption of state regulatory law, maintains adequate safeguards for the safety and welfare of 20 California citizens, and provides PG&E's creditors with payment in full in cash (including 21 accrued interest through the plan's effective date). Preemption is not even necessary here, and 22 that is an additional reason why it is impermissible.

23 2. Sovereign Immunity. The Eleventh Amendment and related principles of 24 sovereign immunity will bar requests for relief against a state or state agency, whether sought in 25 an adversary proceeding or by way of a chapter II plan, that have the practical effect of 26 constituting "the prosecution, or pursuit, of some claim, demand, or request ... in a court of 27 justice." Cohens v. Virginia, 19 U.S. (6 Wheat) 264, 407 (1821) (Marshall, C.J.). Here, the 28 0140 3

THE COMMISSION'S MEMORANDUM IN FURJrER SUPPORT OF ITS OBJECllON TO PROPOSED DISCLOSURE STATEMENT I

1 relief PG&E demands in its proposed plan is just such a "claim, demand, or request" against the 2 State of California. PG&E demands sweeping declaratory, injunctive, and the functional 3 equivalent of monetary relief against the Commission and the State of California. These 4 demands for relief are doubly offensive to the sovereignty of the State. First, the demands are 5 aimed specifically and purposefully at the Commission and the State in their capacities as 6 sovereign regulator, PG&E is not requesting relief against the Commission or the State as 7 ordinary creditors. Second, PG&E's demands for relief seek to bar the Commission and the 8 State from exercising sovereign powers that are absolutely fundamental to the State's regulatory 9 authority over PG&E, a public utility, and consequently to the safety and welfare of the citizens 10 of California.

11 STATEMENT OF FACTS 12 In its proposed plan, PG&E demands sweeping declaratory and injunctive relief 13 against the Commission and its sovereign regulatory authority. PG&E's proposed plan seeks to 14 dislodge the Commission's regulatory jurisdiction to review, for compliance with California law, 15 the four main transactions through which PG&E will separate its current business into ETrans, 16 GTrans, Gen, and the Reorganized Debtor.' In this way, PG&E hopes to push through a series 17 of transactions that, in their current form, could not reasonably be expected to survive the 18 scrutiny of the Commission and its experts. PG&E also demands that the Bankruptcy Court 19 retain jurisdiction over several critical aspects of the operations of the proposed Reorganized 20 Entities, even after PG&E emerges from bankruptcy. In essence, PG&E would have this Court 21 remain on as a "super-regulator" to review and manage the relationship between PG&E, the 22 Commission, and ratepayers in California.

23 As set forth at greater length in the accompanying declaration of Loretta M.

24 Lynch, President of the Commission, the state statutes and regulations that PG&E seeks to 25 preempt constitute the heart of the Commission's regulatory authority over public utilities like 26 27 Capitalized terms not defined herein shall have the meanings ascribed thereto in PG&E's First Amended Disclosure Statement ("Am. Discl. Stint."). I 28 4 0141 THE COMMISSIOWNS MEMORANDUM IN FURTHER SUPPORT OF mTS OBIECTION TO PROPOSED DISCLOSURE STATEMENT I

I PG&E, and reflect sovereign determinations of the State of California that balance the competing 2 interests of regulated public monopolies and those of the citizens of the State.

3 The statutes and regulations that PG&E seeks to preempt art not merely 4 "economic" in the sense that they primarily generate revenue or taxes for the State, or are 5 primarily concerned with other economic or debtor-creditor matters. Rather, these statutes and 6 regulations directly further the State's police power and sovereign obligation to provide for the 7 safety and welfare of its residents. For example, PG&E demands that section 451 of the Public 8 Utilities Code be preempted. That section, together with other provisions of California law, 9 establishes PG&E's fundamental "obligation to serve," which requires PG&E to provide 10 electricity at all times to every ratepayer within its service area.2 PG&E demands that the 11 Bankruptcy Court preempt PG&E's obligation to serve and replace it with a new regulatory 12 regime of PG&E's own making, under which the Bankruptcy Court would retain jurisdiction 13 indefinitely to regulate and oversee the relationship between PG&E and its customers. See Am.

14 Discl. St. at 112.

15 Similarly, public safety and welfare would be compromised if the Court 16 preempted, as PG&E demands, state laws that require Commission review and approval before a 17 public utility may enter into certain transactions that affect its ownership and control, financial 18 integrity, or ability to carry out its functions. (Lynch Decl. ¶1 34-37.)

19 As a regulated public monopoly, of course, PG&E does not have the same 20 freedom concerning its property and operations that a purely private company does. In 21 exchange, PG&E enjoys the considerable advantages of being a public monopoly. The purpose 22 _ _ _ _ _ _

23 2 See Cal. Pub. Util. Code §§ 451, 761, 762,768,770 (2002); see also Interim OrderAffirming the Obligation to Serve andIssuing Temporary Restraining Order, PUC Dec. 0 1-0 -046 24 dated Jan. 19, 2001, at 1-2 ("We affirm that regulated California utilities must serve their customers. This requirement, known as the 'obligation to serve,' is mandated by state law.

25 A utility's obligation to serve is part and parcel of the entire regulatory scheme under which the Commission regulates and controls utilities under the Public Utilities Act."); id. at 7, 16 26 ("State law clearly requires utilities to serve their customers"; "[ulnder Public Utilities Code sections 451, 761, 762, 768 and 770, PG&E ... [has] an obligation to provide full and 27 adequate service to all of [its] customers... ."; opinion discusses basis in California statutes and regulatory decisions for PG&E's duty to serve).

28 0142 5

THE COMMISSION'S MEMORANDUM IN FURTHE SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I of requiring Commission review of transaction involving regulated public monopolies is to 2 ensure that the monopolies do not enter into transactions, such as many of the transactions that 3 PG&E proposes here, that threaten their ability to serve their customers, have an adverse 4 environmental impact, or that have the potential to harm the public interest. (1d ft 34-35.)

5 For example, PG&E demands that the Commission's Affiliate Transaction Rules 6 be preempted. (See Am. Discl. St. at 112.) These rules establish certain limits and Commission 7 oversight of the transactions and relationship between public utilities and their affiliates. The 8 State has an obvious and strong interest in limiting the scope of the monopoly it grants to public 9 utilities in exchange for the utilities' undertaking to serve. These provisions and rules prevent a 10 public utility from abusing its self-dealing relationship with subsidiaries and affiliates in 11 competition, and otherwise acting to the detriment of the public. (Lynch Decl. IN47-48.)

12 To make matters worse, several of the critical transactions that PG&E now seeks 13 to accomplish were in substance considered by the Commission prior to PG&E's bankruptcy.

14 and were rejected because the proposed transactions would have been detrimental to public 15 safety and welfare. For example, in 1994 PG&E indicated an intention to change the 16 jurisdictional status of its California natural gas transmission and storage systems into 17 "interstate" facilities, subject to regulation by FERC rather than by the Commission. The I8 Commission determined, however, that the transactions contemplated would have potential 19 adverse impacts and were not in the public interest. (Id. ¶¶ 7-8,44-46.) Such adverse impacts 20 included "the possibility that the Commission will be unable to ensure the provision of base 21 service to homes, schools and hospitals in the case of a supply or capacity crisis; the possibility 22 that the pricing of gas service for captive customers will undermine the universal availability of 23 affordable gas service for California citizens; the possibility that pricing of gas service for 24 captive customers will necessitate the widespread use of alternative fuels, thereby creating 25 adverse impacts on the environment." (Id. I 8.)

26 Similarly, in 1999 PG&E asked the Commission to approve a proposal to break 27 its massive hydroelectric system into a number of lots, or "bundles," and auction those bundles 28 0143 6

THE COMMISSION'S MEMORANDUM INFURTHERt SUPPORT OF 11 OBJECTION To PROPOSED DISCLOSURE STATEMENT l

1 off in the market to the highest bidder. But a draft Environmental Impact Report prepared for the 2 Commission by independent consultants showed that the proposal would have significant 3 adverse environmental consequences. (d ?I 9-11 & Ex. A.)

4 The laws and rules that PG&E would have this Court preempt are vital to public 5 safety and welfare in the State of California and constitute the heart of the Commission's 6 sovereign regulatory authority. They should not be preempted.

7 ARGUMENT 8 The Court should not approve PG&E's Disclosure Statement because it describes 9 a Plan that is unconfirnable on its face. See In re Silberkraus, 253 BR. 890, 899 10 (Bankr. C.D. Cal. 2000) (Te areanumerous decisions which hold that where a plan is on its 11 face nonconfimnable, as a matter of law, it is appropriate for the court to deny approval of the 12 disclosure statement describing the nonconfirmable plan."). 3 13 I.

14 PG&E'S PROPOSED PLAN IS UNCONFIRMABLE BECAUSE IT DEMANDS DECLARATORY AND INJUNCTIVE RELIEF 15 THAT THE BANKRUPTCY COURT CANNOT GRANT 16 It appears that PG&E seeks to avoid the effect of a multitude of state statutes and 17 regulations on the grounds that those statutes and regulations are preempted by 18 section 1123(a)(5) of the Bankruptcy Code. That section, which is contained in the section of the 19 Bankruptcy Code governing the description of plan contents, provides in relevant part:

20 (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall 21 (5) provide adequate means for the plan's implementation such as-22 23 _ _ _ _ _ _ _

24 3 Pursuant to the Court's Order of December 5, 2001, this Memorandum sets forth only the Commission's arguments that the Proposed Amended Plan cannot be confirmed as a matter 25 of law (and that the Proposed Amended Disclosure Statement therefore cannot be approved),

because the plan rests on a misapprehension of the preemptive effect of the Bankruptcy Code 26 and would violate California's sovereign immunity if confinned. The Commission expressly preserves all of the arguments previously set forth, and to be raised hereafter, in support of its 27 Objection, including its other arguments that the Proposed Amended Plan cannot be confirmed.

28 7 0144 THE COMMISSION-S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

(A) mention by the debtor of all or any part of the property of I the estate; 2 (B) transfer ofall or any party of the property of the estate to one or more entities, whether organized before or after the confirmation of such 3 plan; 4 (C) merger or consolidation of the debtor with one or more persons; 5 (D) sale of all or any part of he property ofthe estate, either subject to or free of any hen, or the distribution of all or any part of the property 6 of the estate; 7 (E) satisfaction or modification of any lien; 8 instrument; (F) cancellation or modification of any indenture or similar 9 (G) curing or waiving of any default; 10 (H) extension of a maturity date or a change in an interest rate or other term of outstanding securities; 11 (1) amendment of the debtor's charter or 12 (J) issuance of securities of the debtor, or of any entity referred to in subparagraph (B) or (C) of this paragraph, for cash, for property, for existing 13 securities, or in exchange for claims or interests, or for any other appropriate 14 purpose.

PG&E evidently takes the position that, by enacting this section of the Bankruptcy Code, 15 Congress intentionally swept aside virtually all state regulatory authority over public utilities that 16 file for bankruptcy. 4 17 Congress intended nothing of the kind. Construing section 1123(a)(5) in the 18 manner PG&E proposes, in order to hold that the State of California is powerless to enforce its 19 sovereign regulatory authority over a public utility, would stretch the section beyond recognition.

20 Where the Ninth Circuit has had occasion to address similar, albeit far more modest, efforts to 21 misuse the Bankruptcy Code in this way, it has declined to accept any such overbroad 22 interpretation. See Baker & Drake, 35 F.3d 1348 (9th Cir. 1994).

23 24 _ _ __ _ __ _ __ _ _

25 4 PG&E does not want to preempt all state laws regarding public utilities, only those that it does not like. For example, while PG&E demands that the Court order that just about every 26 state law that imposes any burden or inconvenience on PG&E be preempted, PG&E nevertheless contends that another section of the Public Utilities Code should remain in full 27 force and effect, because, as PG&E reads that section, it imposes a burden on the Commission to market value PG&B's non-nuclear facilities. (Am. Disc]. Stmt. at 131 n.19.)

28 0145 THE COMMISSiONS MMORANDuM IN FURTHER SUPPORT OF ITS OBJECflON TO PROPOSED DISCLOSURE STATEMENT

A. Section 1I23(aKg) Does Not Authorize Preemption of .

I the State Reeulators Laws That PG&E Seeks to Avoid 2 The Supreme Court has classified two general categones of preemption: express 3 preemption and implied preemption. Express preemption occurs when Congress clearly 4 indicates its intent to preclude state regulation in a given area. See, e.g., Cipollone v. Liggett 5 Group, Inc., 505 U.S. 504, 517 (1992). Implied preemption refers to a situation in which 6 Congress, through its legislation, has by implication prohibited certain state regulation in a given 7 aea. See, e.g., Bucbnan Co. v. Plaintiffs'Legal Comm., 531 U.S. 341,348 (2001). Neither of 8 these categories of preemption applies to the state statutes and regulations PG&E contends arm 9 preempted.

10 I 1. Section 1123(a)(5) Governs the Required Contents of a Plan, Not the Substantive Legalitv of the Transactions Described in the Plan 11 Section 1123(a), which is entitled "Contents of plan," lists features that a debtor is 12 required to include in any proposed plan. The text of section 1123(a) imposes a duty on the 13 proponent to include the enumerated mandatory plan provisions in any proposed plan-14

"[nTotwithstanding any otherwise applicable nonbankruptcy law" that might excuse the debtor 15 from this duty or impose inconsistent duties concerning the mandatory contents of a plan.

16 Subsection 5 of section 1123(a), on which PG&E evidently relies here, provides that a plan shall 17 "provide adequate means for the plan's implementation .... " Thus, if a debtor fails to set forth, 18 in the proposed plan. adequate means of implementation, the debtor's failure demonstrates a lack 19 of good faith under section 1129(a)(5) and precludes confirmation of the plan.5 20 Section 1123(a)(5) does not, however, say or mean that "notwithstanding any otherwise 21 applicable nonbankruptcy law," the debtor may take any action that arguably constitutes 22 "adequate means for the plan's implementation," regardless of whether the means selected or the 23 plan provision to be implemented violate the criminal or civil statutes of the United States or one 24 or more of the States. Any such interpretation would be inconsistent with the natural meaning of 25 26 27 5 See CresiarBank v. Walker (In re Walker), 165 B.R. 994, 1003-04 (E.D. Va. 1994)

(collecting cases).

28 9 0146 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF 1TS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

I the text and, in particular, with the natural meaning of the "notwithstanding" phrase at the outset 2 of section 1123(a).

3 An analogy may clarify the point. If a hypothetical statute stated "the plan must 4 demonstrate how it will be funded," that mandate would not entitle the proponent to declare that 5 it intended to steal the money. Ile requirement on its face would go to the required contents of 6 the plan, and would not address the legality of the proposed method of funding. And if the 7 hypothetical statute stated "notwithstanding any otherwise applicable nonbankruptcy law, the 8 plan must demonstrate how it will be funded," the result would be the same. The 9 "notwithstanding" phrase, read naturally, would mean that the proponent must formulate and 10 disclose a proposed method of funding, notwithstanding any other law that might limit, modify, 11 or expand the duty to formulate and disclose such a method. It would still not mean that the plan 12 could be funded through theft or other violations of nonbankruptcy law. For the same reasons, 13 actual subsection 1123(a)(5) means that a plan proponent has a duty, not subject to abolition or 14 qualification under otherwise applicable nonbankruptcy law, to formulate and disclose adequate 15 means for implementation. Section 1123(a)(5) does not mean that the debtor. in the process of 16 implementation, may freely violate any and all nonbankruptcy laws.

17 This textual analysis does not, of course, mean that a plan may never displace any 18 provision of otherwise applicable nonbankruptcy law. Section 1123(a) does not expressly 19 address what happens if the plan proposes an action that is substantively inconsistent with 20 nonbankruptcy federal or state law. It leaves that problem, in the absence of an applicable 21 provision for express preemption elsewhere in the Code, to principles of implied preemption that 22 have been developed through many years of bankruptcy case law, and that historically have 23 proven adequate to the delicate problem of reconciling bankruptcy-related interests and interests 24 arising from nonbankruptcy federal and state law. In this Circuit, the definitive and controlling 25 exposition of those principles is the Ninth Circuit's decision in Baker & Drake, which is 26 discussed below.

27 28 0147 10 THE COMMISSION'S MEMORANDUM INFURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I The structure, legislative history, and overall purpose of section 1123(a) support 2 the Commission's reading. As to structure, subsections of section 1123(a) other than 3 subsection 5 focus on commands to the plan proponentthat it include various features in the 4 proposed plan. More specifically, subsections (1)through (3) require designation of classes of 5 claims, and specification of claims or interests that are not impaired or are impaired.

6 Subsection (4) commands the proponent to provide the same teatment for each claim or interest 7 of a particular class, absent consent by the relevant holder. Subsection (6) contains mandatory 8 provisions for the charter of a corporate debtor or successor entity. And subsection (7) provides 9 that plan provisions governing the selection of certain fiduciaries must be consistent with the 10 interests of creditors and equity security holders and with public policy.

11 These provisions all either direct the proponent to include features in the proposed 12 plan, or, as to subsection (7), limit the scope of certain plan provisions. Subsection (5) should be 13 read in the same way: it requires the proponent to explain why the proposed plan is workable by 14 showing that the plan "providers] adequate means for ... implementation." Subdivisions (A) 15 through (J) of subsection 5 specify particular actions that the proponent may include in its 16 proposals for implementation. And the requirements set forth in section 1123(a), including that 17 of subsection 5, are binding on the proponent "notwithstanding any otherwise applicable 18 nonbankruptcy law" that might be read to limit (or, evidently, to expand) those requirements.6 19 PG&E's view also results in a misfit between section 1123 and section 1142(a) of 20 the Code. Under section 1142(a), "In]otwithstanding any otherwise applicable nonbankruptcy 21 law, rule, or regulation relating tofinancialcondition, the debtor ... shall carry out the plan ....

22 (Emphasis added.) The obvious negative pregnant arising from section 1142(a) is that a debtor, 23 in carrying out a plan, must generally abide by otherwise applicable non-bankruptcy law that 24 25 6 FCX, Inc. v. Universal Cooperatives. Inc., 853 F.2d 1149, 1155 (4th Cir. 1988). reads 26 § 1123(a)(5) as an "empowering statute," in the sense that it authorizes a proponent to propose steps that may enlarge the debtor's prebankruptcy rights. That terminology is 27 consistent with the Commission's view that a plan may preempt state law only in the circumstances identified in Baker & Drake.

28 110148 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

I does not relate to financial condition. That negative pregnant, and indeed the necessity for this 2 portion of section 1142(a), would be ovezndden if. as PG&E evidently contends, section 1123 3 immunizes a debtor from any duty to comply with any nonbankruptcy law at all in carrying out 4 the provisions of the plan.

5 This reading finds further support in the legislative history of the statute that 6 added the phrase "[n~otwithstanding any otherwise applicable nonbankruptcy law" to 7 section 1123(a). That phrase was not included in section 1123(a) as enacted in the Bankruptcy 8 Code of 1978. The phrase apparently first appeared in S. 658 as submitted by the House 9 Judiciary Committee to the House in July 1980. The Judiciary Committee proposed to amend 10 section 1123(a) in relevant part as follows. (The Judiciary Committee indicated deleted language 11 in bold brackets, added language in italics, and unchanged language in roman type.)

12 (a) [A] Notwithstanding any otherwise applicablenonbankruptcy law, a plan shall-....

13 (5) provide adequate means for the plan's [execution) implementation, such as-14 ....

15 An Act to Correct Technical Errors, Clarify and Make Minor Substantive Changes to Public 16 Law, Pub. L. No.95-598, S. 658, 96th Cong., 2d Sess. (1980), H.R. Rep. No. 96-1195, 96th 17 Cong., 2d Sess. 122-23 (July 25, 1980) (hereinafter "H.R. Rep. No. 96-1195," Ex. A Tab 1).8 18 Two points concerning the Report of the House Judiciary Committee are highly 19 significant. First, the Judiciary Committee's comments on section 102(a) of the proposed 20 legislation (which contained the proposed amendment to section 1123(a)) in the section-by-21 section analysis read as follows:

This amendment makes clearthat the rules governing what is to be containedin 22 the reorganizationplan are those specified in this section; deletes a redundant 23 word; and makes several stylistic changes.

23 24 7 In commenting on section 1142, Collier on Bankruptcy notes that "if the plan called for a 25 transfer of a broadcast license . . ., an order implementing confirmation should not allow the debtor to evade the necessary regulatory process for obtaining such a transfer." 8 Lawrence 26 P. King, Collieron Bankruptcy1 1142.03[2] (2001).

27 Copies of the relevant portions of the legislative history cited herein are contained in a Legislative History Appendix attached hereto as Exhibit A.

28 0149 12 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF rrS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I H.R. Rep. No. 96-1195, at 22 (emphasis added) (Ex. A Tab 2).

2 Thus, according to the Judiciary Committee, the "notwithstanding" phrase was 3 added to clarify that "this section"-_i.e., section 1123(a)-definitively states "the rules 4 governing what is to be contained in the reorganization plan."9 The phrase "[n~otwithstanding 5 any otherwise applicable nonbankruptcy law" fits with that purpose only if the phrase is 6 understood to mean that otherwise applicable nonbankruptcy law is ineffective to vary the 7 specification in section 1123(a) of the mandatory provisions of a proposed plan. In other words, 8 nonbankruptcy law is ineffective to excuse a debtor from including all mandatory elements in the 9 proposed plan, and is evidently ineffective to require the inclusion of additional elements. That 10 is exactly the reading that the Commission gives to section 1123(a).

11 Second, the Report of the House Judiciary Committee is completely inconsistent 12 with the revolutionary significance that PG&E apparently attributes to the "notwithstanding" 13 phrase. PG&E's proposed plan, which calls for wholesale preemption of California regulatory 14 law, appears to rest on the assumption that under the "notwithstanding" phrase, a bankruptcy 15 court has unlimited discretion to preempt state regulatory law that prohibits either transactions 16 contemplated by a restructuring or certain post-restructuring activities. If the "notwithstanding" 17 phrase of section 1123(a) had been intended to effect such a revolutionary change, 18 notwithstanding the patent inadequacy of the text for this purpose, one would at least expect 19 documentation in the legislative history of this amazing new development. To the contrary, 20 however, the Report of the House Judiciary Committee treats this amendment to section 1123(a) 21 as entirely mundane.

22 23 _ _ _ _ _ _ _

24 9 Examination of all the amendments to section 1123 proposed by S. 658, as reported by the House Judiciary Committee, discloses that the first portion of the section-by-section analysis 25 (which is italicized in the block quotation above in text) could refer only to the addition of the "notwithstanding" phrase. A complete copy of those proposed amendments to 26 section 1123 appears as Exhibit A, Tab 3, to the Legislative History Appendix. See An Act Correcting Technical Errors and Making Minor Substantive Changes to Public Law 95-598, 27 S. 658,96th Cong., 2d Sess. 1980, reprintedin 30 Bankr. L. Rep. 83, 198 (CCH) (Nov. 20, 1980) (text of amendment to statute) (Ex. A Tab 3).

28 13 0150 TME COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

1 In its introduction to that Report, the House Judiciary Committee noted that 2 technical amendments were required to correct 'lerrors in printing, spelling, punctuation, 3 grammar, syntax, and numeration.. .. ' H.R. Rep. No. 96-1195, at I (Ex. A Tab 4). Though 4 "[sluch matters [constitute) the vast majority of the Technical Amendments Act," some items of 5 a substantive nature were also said to be included. Id at 2. The Report listed general areas in 6 which substantive changes were made, none of which embraced the subject matter of 7 section 11 23(a). See id. at 2-5 (Bankruptcy Judge's Retirement); 5-6 (Municipal Financing),

B 6-7 (StockbrokerlCommodity Broker Liquidation), 7-8 (Tax Provisions).

9 In December 1980, the House passed S. 658 by unanimous consent with 10 additional amendments. See S. Rep. No. 98-65,96th Con&., 1st Sess., Calendar No. 102, at 51 11 (chronicling legislative history) (hereinafter "S. Rep. No. 98-65," Ex. A Tab 6). The Senate 12 reintroduced the bill as S. 3259 and passed it unanimously. Id at 51-52. The House, however, 13 took no action on the final Senate changes, and consequently the bill was never enacted into law.

14 Id.

15 The remaining legislative history for the "notwithstanding" phrase confirms that it 16 was not intended to have the meaning apparently attributed to it by PG&E. On April 2, 1981, 17 three Senators introduced S. 863, which incorporated all of the provisions of S. 3259 (including 18 the "notwithstanding" amendment to section 1123(a)). See Bankruptcy Amendments Act 19 of 1981, S. 863, 97th Cong., 1st Sess. (1981), S. Rep. No.97-150, 97th Cong., 1st Sess. at 2 20 (July 10. 1981) (Ex. ATab 7). After hearings on April 3 and 6, 1981, during which no 21 statements appear to have been made concerning proposed amendments to section 1123(a), the 22 Senate Judiciary Committee reported S. 863 to the Senate. Id. In the section-by-section analysis 23 of its report, the Judiciary Committee described the proposed to amend section 1123(a) as 24 follows:

25 Paragraphs (1)through (5) make technical stylistic changes. Paragraph (6) makes clear that preferred stock without voting rights can be issued under the plan and 26 the prohibition against issuing stock that cannot be voted extends only to common stock.

27 Id. at 15, Ex. A Tab 8.

28 0151 14 THE COMMISSION'S MEMORANDUM IN FlJRTI4ER SUPPORT OF ITS OBJECTnON TO PROPOSED DISCLOSURE STATEMENT

1 - The Senate passed S. 863, but the House did not consider it. S. Rep. No. 98-65, 2 at 52 (Ex. A Tab 9). Accordingly, the bill was not enacted. Then, in 1983, S. 455 was 3 introduced in the Senate. S. Rep. No. 98-5, at 1. S. 455 contained numerous technical 4 amendments and certain substantive amendments. The technical amendment section of S. 455 5 contained the proposed amendment to section 1123(a) with the "notwithstanding" phrase.

6 S. Rep. No. 98-65, at 51-53 (Ex. A Tab 10). The Senate Judiciary Committee submitted S. 455, 7 with the amendment to section 1123(a), to the Senate. S. Rep. No. 98-65, at 2. The amendment 8 to section 1123(a) was contained in Subtitle I, entitled 'Technical and Clarifying Amendments,"

9 of the bill as reported. The summary section of the accompanying Committee Report noted that:

10 IT]he bulk of the provisions in this subtitle [1] are drawn from S. 863 [the 1981 predecessor bill), which passed the Senate by unanimous consent in 1981. The 11 provisions correct grammatical, punctuation and spelling errors in the code, clarify the intent of the drafters in certain sections, and generally refine 12 procedures.

13 S. Rep. No. 98-65, at 52-53 (Tab 11).

14 The section-by-section analysis in the Committee Report reiterated that the 15 amendment to section 1123(a) "make[s] technical stylistic changes." Id. at 84 (Tab 1I).",

16 S. 455 was ultimately incorporated in S. 1013, which in turn formed the basis for 17 a Conference Committee appointed to reconcile differing bankruptcy legislation passed by the 18 Senate and the House. The bill reported by the Conference Committee contained the amendment 19 to section 1123(a) that included the "notwithstanding" phrase. The Conference Report contained 20 only the text and did not explain its contents. See Bankruptcy Amendments and Federal 21 Judgeship Act of 1984, Pub. L. No.98-353, 98th Cong., 2d Sess. (1984), H.R. Conf. Rep.

22 No.98-882 (June 29. 1984) reprintedin Arnold & Porter Legislative History: Pub. L 23 No.98-353 at *55 (Tab 13). A concurrently issued document entitled Statements by Legislative 24 Leaders did discuss the bill, but that document made no mention of the amendment to 25 section 1123(a). See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L.

26 __ _ _ _ _ _ _ _ _ _ _ _

27 30 A complete copy of the proposed amendments to section 1123 appears at Tab 12 to the Legislative History Appendix.

28 0152 15 THE COMMIUSSION'S MEMORANDUM IN FURTHER SUPPORT OF IT'S OBJECTION TO PROPOSED DISCLO>SURE STATEMEN

I No.98-353, Swiements by Legislafive Leaders, reprintedin 1984 U.S.C.C.A.N. 576-606 2 (Tab 14). Both the Senate and the House passed the bill proposed by the Conference Report, 3 again without discussion of the provision pertinent here, and the President signed it into law on 4 July 10, 1984. See Bankruptcy Federal Judgeship Act, Pub. L No.98-353, 98 Stat. 333 5 (Tab 15). This legislative history, which uniformly treated the amendment to section 1123(a) as 6 technical and mundane, squares perfectly with Commission's reading of the statute and is 7 impossible to reconcile with PG&E's.

8 The Commission's reading also makes sense in light of the purposes of 9 section 1123(a) and the nuanced overall approach taken by Congress in the Bankruptcy Code and 10 elsewhere to reconciling interests arising from bankruptcy law and interests arising from 11 nonbankruptcy federal and state law. That approach is reflected in provisions such as 12 section 362(b)(4) of the Bankruptcy Code (the police and regulatory powers exception to the 13 automatic stay) and section 959(b) of the Judicial Code (requiring debtors in possession to 14 comply with valid state laws). On the Commission's view, section 1123(a) requires and 15 authorizes the plan proponent to include certain features in a proposed plan. The section does 16 not directly speak to whether a bankruptcy court may confirm a plan calling for actions 17 inconsistent with applicable nonbankruptcy law; rather, that problem is left to traditional case-18 by-case adjudication under principles of implied preemption.

19 PG&E, in contrast, apparently views section 1123(a) as an engine of destruction 20 for federal and state laws that, in the view of a plan proponent, stand in the way of a desired 21 reorganization or of desired post-reorganization activities. PG&E's proposed plan implausibly 22 assumes that Congress conferred unfettered discretion on plan proponents and bankruptcy courts 23 to abrogate rights under federal and state law.

24 2. At Most, Section 1123(a)(5) Merely Codifies General Principles of implied Preemption. as Set Forth by the Ninth Circuit in Baker & Drake 25 As explained above, the Commission does not view the 'notwithstanding" phrase 26 in section 1123(a) as preempting nonbankruptcy laws that would otherwise prohibit proposed 27 actions to be taken pursuant to a plan. That phrase, in the Commission's view, displaces only 28 0153 16 THE COMMISSION'S MEMORANDUM IN FURTME SUPPORT OF flS OBJECTION To PROPOSED DISCLOSURE STATEMENT

I nonbankruptcy laws that might otherwise regulate the contents of the plan. If, however, the 2 Court does not accept this view, the Court will need to formulate principles limiting the scope of 3 any express preemption flowing from the "notwithstanding" phrase.

4 The appropriate limiting principles here are those developed in implied 5 preemption cases and set forth in Baker & Drake. That interpretation gives appropriate respect 6 to the uniform treatment in the legislative history of the "notwithstanding" phrase as technical 7 and non-substantive. That interpretation also appropriately reconciles this provision with other 8 provisions of the Bankruptcy and Judicial Codes, as described above; with the approach of the 9 case law before enactment of the "notwithstanding" phrase, which is surveyed in Baker & Drake 10 and is appropriately considered in order to give meaning to this technical and clarifying change; 11 and with applicable general presumptions and canons of construction, including the presumption 12 that Congress is presumed not to displace state regulation in traditional areas of state concern and 13 must be clear and explicit in order to do so. See Medironic, 518 U.S. at 485.

14 There are only two alternatives to this interpretation of the "notwithstanding" 15 phrase, should it be read as an express preemption provision applicable to nonbankruptcy laws 16 that would otherwise prohibit proposed actions to be taken pursuant to a plan. One alternative 17 would empower every bankruptcy judge in the country, if so urged by a plan proponent, to 18 preempt any and all federal or state laws thought to impede a restructuring. As the Court has 19 recognized, that cannot be the law. To use the Court's example, a bankruptcy court obviously 20 lacks the authority to authorize a bankrupt liquor store to sell liquor to minors in violation of 21 state law, even if the liquor store were to show that a restructuring would be impossible in the 22 absence of that authorization, and even though sales of property of the estate are among the 23 transactions enumerated in section 1123(a)(5)(D). The other alternative would be to say that 24 Congress, by enacting the "notwithstanding" phrase as a technical change, intended to require 25 the courts to make up entirely new limiting principles in this area, without any express guidance 26 in the "notwithstanding" phrase itself and without being bound by prior case law, despite the 27 28 0154 17 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTlON TO PROPOSED DISCLOSURE STATEMENT I

I total absence of any Congressional intent to reject that case law. That, too, is not a plausible 2 theory of Congress's intent.

3 3. The Scope of Preemption Sought by PG&E Is Inconsistent on its Face with the Ninth Circuit's Controlling Decision in Baker & Drake In this Circuit, Baker & Drake is the controlling exposition of the extent to which S a plan of reorganization may authorize the debtor to take actions in violation of state law. There, 6 the debtor, which operated a taxicab company, proposed in its plan of reorganization to have the 7 employee-drivers of its taxicabs become independent contractors who would lease their cabs a from the debtor. This feature of the proposed plan would have diminished the debtor's tort liability for personal injury lawsuits arising from the operation of the cabs; would have reduced 10 the debtor's insurance premiums; and would have eliminated the debtor's liability for payroll II taxes. This feature of the plan, however, also violated an applicable Nevada administrative 12 regulation, which prohibited the debtor from leasing its taxicabs. Nevada defended its regulation 14 as intended to further the public convenience and safety, evidently by promoting the company's 14 control over the operation of the taxicabs.

15 The bankruptcy court in Baker & Drake approved the plan of reorganization and 16 enjoined the Nevada agency from enforcing its regulation against the reorganized debtor.

17 Adopting an approach similar to that urged here by PG&E (albeit in circumstances where the 18 preemption sought was far more limited than PG&E seeks here), the court ruled as follows:

19 I'm setting the (state) law aside in this instance. I'm not applying it. The 20 Constitution of the United States says that Congress shall prescribe bankruptcy laws. It has. It takes precedence in given situations, and I think this is one.

21 Baker & Drake, 35 F.3d at 1350 (quoting oral ruling of bankruptcy court).

22 The district court reversed the bankruptcy court's decision, and the Ninth Circuit 23 affirmed the district court's decision. The Ninth Circuit, after surveying the case law, formulated 24 the applicable inquiry as follows:

25 As we view these cases, they suggest that federal bankruptcy preemption is more likely (1) where a state statute facially or purposefully carves an 26 exception out of the Bankruptcy Code, or (2) where a state statute is concerned with economic regulation rather than with protecting the public health and safety.

27 With these principles in mind, we first note that [the Nevada administrative 28 regulation) makes no reference to the Bankruptcy Code, and that its subject matter 0155 t THE COMMISSION'S MEMORANDUM IN FURTYER SUPPORT OF MfSOBJECTION TO PROPOSED DISCLOSURE STATEMENT I

is unrelated to the Bankruptcy Code. Second, while [the Nevada regulation) may I not be as essential to the protection of health of health and safety as, for example, toxic waste laws, it was promulgated in part as a safety measure, and its 2 substantive provisions do not facially belie that goal. On the conray, the district 3 court found that the regulation was reasonably designed to protect public safety.

Id. at 1353-54; see also Commonwealth of Massachusetts v. FirstAlliance Mortgage Co. (In re 4

FirstAlliance Mortgage Co.), 263 BR. 99, 112 (9th Cir. BAP 2001).

5 Applying these principles to the facts of the case, the Ninth Circuit concluded 6

emphatically and without hesitation that the plan of reorganization could not be confirAm (The 7

Ninth Circuit did not remand the case to the Bankruptcy Court, and therefore necessarily concluded that the plan of reorganization was unconfirmable as a matterof law.) The Ninth 9

Circuit wrote as follows:

10 The Bankruptcy Code does not preempt [the Nevada administrative 11 regulation). Nevada's ban on taxi leasing is a broadly applicable regulation, not an individual, discretionary agency decision directed only at [the debtor].

12 Moreover, [the regulation] is not just an economic regulation, but one reasonably intended to secure the public convenience and safety. More importantly, it does 13 not directly conflict with the purposes of the Bankruptcy Code in any way which could be generalized beyond the particular facts of the present case. The fact that 14 a particular debtor's Chapter 11 reorganization is made more difficult because of compliance with otherwise valid state regulation is not a sufficient basis to invoke 15 preemption.

16 The Baker & Drake decision gives appropriate weight and respect to the 17 legislation of a sovereign State, and to the expertise of its regulators, in areas of public 18 convenience and safety. A bankruptcy judge may be able to police the fairness of strictly and 19 narrowly economic aspects of a bankruptcy reorganization. Bankruptcy courts, however, lack 20 authorization or expertise to substitute their judgment for that of a State and its expert regulators 21 in other areas of public policy, as the division drawn in Baker & Drake recognizes.

22 23 _ __ __ __ __ __ _

24 " Id. at 1354-55. The Baker & Drake court also clarified that the principles of that case apply even when applicable state law would render a successful reorganization impossible. On that 25 point, the Ninth Circuit wrote that "Congress's purpose in enacting the Bankruptcy Code was not to mandate that every company be reorganized at all costs, but rather to establish a 26 preference for reorganizations, where they are legally feasible and economically practical.

Thus, if compliance with [the Nevada regulation] were to render [the debtor] financially 27 unable to reorganize, neither [the debtor] nor Nevada would thereby be violating any provision of the Bankruptcy Code." Id. at 1353-54 (emphasis in original).

28 0156 19 TuH rflMMISSINS MEMORANDUM IN FURTHER SUPPORT OF mTS OBFECLON TO PROPOSED DISCLOSURE STATEMENT

I The principles of Baker & Drake plainly render PG&E's proposed plan 2 unconfirmable as a matter of law. PG&E seeks preemption of virtually the entire regulatory 3 scheme of the California Public Utilities Code (and various other California laws) with respect to 4 the transactions constituting the proposed reorganization, and it seeks preemption of fundamental 5 provisions of the California Public Utilities Code with respect to PG&E's post-reorganization 6 activities. The various provisions of the Public Utilities Code that regulate such activities are 7 generally applicable to all electric utilities subject to state regulation. The Public Utilities Code 8 is not to be equated to "an individual, discretionary agency decision directed only at [PG&E]."

9 Id. at 1354.

10 Equally obviously, the Public Utilities Code in general, and in respects relevant 11 here, is plainly a body of law "reasonably intended to secure the public convenience and safety."

12 The fundamental mandate of the Commission is to insure the provision of services by regulated 13 utilities to California citizens at just and reasonable rates. That mandate has economic 14 components, but its scope goes vastly beyond economic regulation in the sense of that term 15 relevant under Baker & Drake. Finally, the Public Utilities Code obviously "does not directly 16 conflict with the purposes of the Bankruptcy Code in any way which could be generalized 17 beyond the particular facts of the present case." Id. at 1354-55.

18 The facts of Baker & Drake involved preemption of a single regulation respecting 19 the ownership of taxicabs. The Ninth Circuit nonetheless found the preemption sought to 20 "constitute a much greater intrusion into state power" than was authorized by prior case law. Id 21 at 1354. The scope of preemption sought by PG&E so far surpasses the preemption sought in 22 Baker & Drake as to make argument on the point ridiculous. Both the result in Baker & Drake 23 on the facts and the principles laid down in that case render PG&E's proposed plan 24 unconfirmable as a matter of law.

25 26 27 28 0157 20 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DtSCLOSURE STATEMENT

4. Background Principles of Preemption Demonstrate That I Section 1123(a) Should Not Be Read to Authorize Preemption of State Law Protecting Public Safety and Welfare, Especially 2 in an Area Traditionally Reserved to State Regulatorv Authority 3 The states are independent sovereigns within the federal system, and a litigant 4 seeking preemption thus must shoulder a difficult burden. See Nat l WarrantyIns. Co. RRG v.

5 Greenfield, 214 F.3d 1073, 1076-1077 (9th Cir. 2000). "In all preemption cases, and particularly 6 those in which Congress has legislated ... in a field which the States have traditionally occupied, 7 we start with the assumption that the historic police powers of the States were not to be 8 superseded ... unless that was the clear and manifest purpose of Congress." Medtronic, 518 U.S.

9 at 485; see also Gen. Motors Corp. v. Tracy, 519 U.S. 278, 304, 308-09 (1997): MidlanticNat'1 10 Bank r. N.J. Dep't of Envir. Protection,474 U.S. 494, 506-07 (1986) (prohibiting abandonment 11 of property by debtor where such action violates laws protecting public health and safety, despite 12 absence of express limitation in the Bankruptcy Code on the abandonment power).

13 PG&E confronts these presumptions at their most vigorous. Not only was the 14 Public Utilities Code enacted in an area that has traditionally been left to state control, it 15 concerns one of the most important spheres of state police power, the regulation of public 16 utilities. See Ark. Elec. Coop. Corp. v. Ark Pub. Serv. Cornm 'n, 461 U.S. 375, 377 (1983).

17 5. PG&E's Position, Which Calls for Unprecedented Preemption of Core California Regulatory Law Protecting Public Safety 18 and Welfare, Finds No Support in the Case Law 19 Universal Cooperatives,Inc. v. FCX, Inc., 853 F.2d 1149 (4th Cir. 1988), is 20 consistent with the result for which the Commission contends here, and certainly does not 21 support the massive and unprecedented preemption PG&E seeks. There, the debtor proposed to 22 distribute certain collateral to a secured creditor in order to satisfy a claim secured by the 23 collateral. The secured creditor, however, apparently had a right under its by-laws, which had 24 been adopted pursuant to state law, to refuse to accept the collateral in satisfaction of the claim.

25 The Fourth Circuit held that the bankruptcy court nonetheless had the power to 26 approve the specific transaction under challenge. That result is consistent with a reasonable 27 application of the principles subsequently delineated in Baker & Drake. The debtor proposed the 28 210158 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I distribution of collateral pursuant to section 1123(a)(5)(D). The displaced by-law concerned the 2 particular creditor that had adopted it, and could reasonably be viewed as "economic," in the 3 narrow sense, in character. This case is entirely different.

4 PublicService Co. of New Hampshirev. New Hampshire(In re Public Service S Co. of New Hampshire), 108 B.R. 854 (Bankr. D.N.H. 1989), surveys some of the general issues 6 raised here, but for numerous reasons does not provide the answers. In that case, the State of 7 New Hampshire argued that the Bankruptcy Code did not and could not preempt any provision 8 of New Hampshire law requiring the approval of the State's Public Utilities Commission for any 9 transaction contemplated by the restructuring. The ultimate holding in Public Service Co. was 10 limited to a finding that in principle, the Bankruptcy Code might, under appropriate 11 circumstances, permit preemption of New Hampshire law. The court did not approve any 12 particular plan of reorganization; it did not approve any particular proposed preemption of New 13 Hampshire law; and it underscored that it had not provided "'carte blanche' for the debtor to run 14 roughshod over all types of state regulatory procsses both before and after confirmation of any 15 plan of reorganization." 108 B.R. at 891. The opinion is therefore inconclusive concerning the 16 extent to which a plan of reorganization may authorize a debtor to take actions in violation of 17 otherwise applicable nonbankruptcy federal or state law. The proposed plan underlying the 18 opinion was eventually abandoned, so the PublicService Co. proceeding never clarified this 19 question.

20 The opinion does contain very extensive dicta on preemption. We note, in 21 summary fashion, several reasons why those dicta are not controlling here. First, the Public 22 Service Co. court viewed the preemption sought there as involving "only a possible transfer of 23 economic regulatory jurisdiction as contrasted with the more acute situation where a transfer of 24 state regulatory authority over health or safety matters is argued to be the effect of federal 25 preemption." 108 B.R. at 859. The arguments and facts here are otherwise. Second, the New 26 Hampshire bankruptcy court obviously demonstrated far less respect for state law than did the 27 Ninth Circuit in Baker & Drake. The opinion in Public Service Co., for example, speaks of the 28 0159 22 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF rrS OBJECrIoN4To PROPOSED DISCLOSURE STATEMENT

1 "wisdom of Congress' intent to largely remove regulatory agencies from the 'restructuring' 2 necessary in a complex reorganization case." 108 B.R. at 891. Rhetoric of this kind is 3 impossible to square with the Ninth Circuit's adamant refusal in Baker & Drake to preempt the 4 authority of a Nevada regulatory agency over a common carrier. Third, Public Service Co.

5 extensively discussed and relied upon the district court's decision in In re MCorp., 101 B.R. 483 6 (SD. Tex. 1989), rev 'd, vacated, and remanded, 900 F.2d 852 (5th Cir. 1990). affd in part and 7 rev 'd in part,502 U.S. 32 (1991). which the New Hampshire court said "involved a problem 8 somewhat analogous to the question in the present case." 108 B.R. at 867. The Fifth Circuit, 9 however, rejected the relevant portions of the district court's analysis in MCorp., and the 10 Supreme Court, in a unanimous decision (with one Justice not participating) rejected the district 11 court's decision in its entirety. Fourth, PublicService Co. viewed the "notwithstanding" phrase 12 of section 1123(a) as unambiguously preempting at least some nonbankruptcy law that would 13 otherwise regulate the restructuring transactions (as opposed to the contents of the proposed 14 plan)-a conclusion that the language of that phrase simply will not sustain. (Supra at 9-11.)

15 On that flawed basis, the Public Service Co. court rejected inferences from the legislative history 16 supporting a more restrained reading, although the court failed to consider the passage from the 17 1980 Report of the House Judiciary Committee, see supra at 13, that bears most directly on the 18 meaning of this phrase.12 19 12 The PublicService Co. court also drew certain inferences respecting preemption from 20 Congress's failure to reenact, in the 1978 Bankruptcy Code, prior sections 77B(e)(2) and 77B(f) of the Bankruptcy Act of 1898, as amended in 1934. Those sections provided, 21 among other things, that a plan of reorganization for a utility regulated by a State could not be confirmed until the plan had been submitted to state regulatory authorities; the authorities 22 had had an opportunity to suggest amendments or objections; and the judge had considered those amendments or objections at a hearing. After the hearing, confirmation was possible 23 only if the judge was satisfied that the debtor had obtained appropriate authorizations, 24 approvals, or consents of regulatory authorities. 108 B.R. at 863-64.

The inferences drawn by the court were not warranted. These subsections of the Bankruptcy 25 Act created special federal rights and procedures. It is perfectly reasonable to say that Congress decided to withdraw these special federal provisions, leaving state regulatory 26 authorities to their independent rights and powers under state law. Preemption of state law is certainly not to be presumed from Congressional withdrawal of special federal rights that 27 extend beyond, and exist separately from, state law. To the contrary, the applicable 28 presumptions weigh against finding preemption of state regulatory law.

28 23 0160 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I in short, no case has ever authorized anything like ihe result PG&E seeks here:

2 essentially total preemption of state law that would otherwise regulate the dismemberment of an 3 enormous electric utility, and partial preemption of state law regulating the post-restructunng 4 operations of the utility, in circumstances where ousting state authority could have grave 5 consequences for the safety and welfare of California citizens.

6 6. Preemption Is Not Essential to a Successful Reorganization of PG&E and Accordingly Is Impermissible As a Matter of Law 7 At the very least, preemption of state law is impernissible if it is not essential to 8 the consummation of a successful reorganization. See Baker & Drake, 35 F.3d at 1354-55.

1 Preemption is not essential here. As the Commission states in its objection to PG&E's second request for an extension of plan exclusivity, the Commission has formulated an alternative plan I that does not require preemption of state regulatory law, maintains adequate safeguards for the health and welfare of California's citizens, and provides PG&E's creditors with payment in full 13 in cash (including accrued interest through the plan's effective date).

14 B. The State Regulatory Laws that PG&E Seek to 15 Preempt Protect Public Safety and Welfare, and for That and Other Reasons Cannot Be Preempted 16 1. PG&E Impermissibly Seeks to Preempt State Regulation 17 Affecting Public Safety and Welfare In its proposed plan, PG&E seeks to preempt exactly the sort of state regulation 1s affecting public safety and welfare that the Ninth Circuit held in Baker & Drake is not preempted 19 by the Bankruptcy Code.

20 First, the regulations that PG&E seeks to preempt are "broadly applicable 21 regulation[s], not an individual, discretionary agency decision directed only at" PG&E. See 22 Section 1129(a)(6) of the Code requires that prior to confirmation, regulatory authorities 24 (whether federal or state) must have approved rate changes provided for in a plan, or that such rate changes must be "expressly" conditioned on approval. This provision protects the 25 special bankruptcy interest in assuring that if the plan is funded through rate changes, either (i) that funding has been secured before confirmation through appropriate regulatory 26 approvals, or (ii) the plan "expressly" notifies parties in interest that at the time of confirmation, those approvals have not yet been obtained. Section 1129(a)(6) therefore does 27 not evidence any Congressional intent to abrogate federal or state regulation that protects nonbankruptcy interests.

28 24 0161 24 THE COMMLSSION'S MEMORANDUM IN FURTHER SUPPORT OF IrS OBJECTION To PROPOSED DISCLOSURE STATEMENT

,I

I Baker & Drake, 35 F3d at 1354. All but a few of the regulations-apply, at an absolute 2 minimum, to all investor-owned public utilities in the State, including gas and electric utilities, 3 water utilities, telecommunications utilities, and various transportation common carrers, not 4 only PG&E. Moreover, most of the regulations apply to all public utilities, not just those which 5 are investor-owned. In any event, there is no suggestion in Baker & Drake that a state regulation 6 not of general applicability can necessarily be preempted. To the contrary, the focus in Baker &

7 Drake was on whether the state regulation furthered public safety and welfare, and whether it 8 directly conflicted with the Bankruptcy Code. See also FirstAlliance, 263 B.R. at 112.

9 Second, each of the regulations "is not just an economic regulation, but one 10 reasonably intended to secure the public convenience and safety." Id. As explained in the Lynch 11 Declaration, the state statutes and regulations that PG&E seeks to preempt not only are 12 "reasonably intended" to secure public convenience and safety, they directly secure the State's 13 sovereign police power to provide for the safety and welfare of its residents. (Lynch Decl.

14 In 25-55; see supraat 5.) At the very least. the state regulation at issue here no less secures 15 public convenience and safety than the regulation which prohibited the debtor from leasing its 16 taxicabs in Baker & Drake.

17 What is more, should PG&E succeed in preempting these statutes, the 18 transactions proposed by PG&E would result in actual adverse effects to the safety and welfare 19 of the public. As explained in the Lynch Declaration, the transactions PG&E proposes would 20 have significant adverse effects to public health and safety. such as adverse environmental 21 effects from the massive transfer of hydro and gas assets and nuclear facilities; the loss of 22 in-state generation facilities that the State has determined, in its exercise of sovereign police 23 power, are essential during the energy crisis and must remain dedicated to service for the benefit 24 of the people of California; the potential that Commission will be unable to ensure the provision 25 of basic service in the case of a supply or capacity crisis; the potential that the pricing of service 26 for captive customers will undermine the availability of affordable service for California citizens 27 and necessitate the widespread use of alternative fuels, thereby creating adverse impacts on the 28 25 0162 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I environment; and the adverse effects to the safety and welfare of California residents through the 2 loss of local regulation. (Lynch Decl. i 8, 11-13, 24, 33-34, 40-46, 48-57.)

3 And finally, none of the statutes or regulations "directly conflict[sJ with the 4 purposes of the Bankruptcy Code in any way which could be generalized beyond the particular 5 facts of the present case." Baker & Drake, 35 F.3d at 1354-55; see also FirstAlliance, 263 B.R.

6 at 112. The statutes and regulations are public health and safety regulations, not economic 7 regulations. To be sure, in some sense any state regulation, even regulation directed solely at 8 public safety and welfare, will have some adverse economic consequences, or otherwise could 9 stand in the way of something that a debtor might want to do. But Baker & Drake requires 10 (among other things) that the statute "directly" conflict with the purposes of the Bankruptcy 11 Code before it can be preempted. Here, at the very least the regulations at issue here no more 12 conflict with the purposes of Bankruptcy Code than the state regulation which prohibited the 13 debtor from leasing its taxicabs in Baker & Drake.

14 2. The Extraordinary Scale of the Preemption Sought by PG&E, and the Fact That Preemption is the Central Purpose of the Proposed 15 Plan, Further Demonstrate That the Proposed Plan is Unconfirmable 16 PG&E's proposed plan is a deregulation plan, not a reorganization plan. PG&E 17 specifically indicates that it will not seek the approval of any California state or local 18 government office or agency acting in a discretionary capacity. including the Commission. To 19 be sure, upon confirmation of its proposed Plan, the reorganized PG&E (as distinct from the 20 other Reorganized Entities) plans to engage exclusively in the business of retail distribution of 21 gas and electricity, and to be subject to Commission regulation. But as we show immediately 22 below, neither that fact, nor federal regulation of certain Reorganized Entities, even begins to fix 23 the manifest defects of the proposed plan.

24 The centerpiece of PG&E's proposed plan is the massive and multi-billion dollar 25 transfer of its critical generation and transmission assets to newly created entities that, according 26 to PG&E. will not be subject to regulation by the State of California. (As we explain below, it is 27 no answer for PG&E to point to federal regulation as an alleged substitute.) PG&E intends to 28 0163 26 THE COMMISSION'S MEMORANDUM IN RTHER SUPPORT OF mTOBJECTION TO PROPOSED DISCLOSURE STATEMENT I

I make these critical transfers, moreover, without regard to the Commission's statutory obligation 2 and authority to ensure that these transactions comport with state law and will not negatively 3 impact the safety and welfare of the citizens of California. In short, the Plan is designed to use 4 the bankruptcy laws to strip the Commission (and any other state agency) ofjurisdiction over 5 three of PG&E's four lines of business. Not only that, the three new entities pursuing those three 6 lines of business, allegedly free from state regulation, will own and operate the very types of 7 utility assets that generate the most intense local public safety and welfare concerns (such as 8 power plants, dams, pipelines, and nuclear reactors) and that in the Commission's view should 9 therefore remain subject to local oversight.

10 PG&E may contend that it has merely asked the Court to preempt the 11 Commission's regulatory authority to review the restructuring transactions, but that the 12 Commission will regain appropriate regulatory authority once the reorganization is complete.

13 That would be a legally insufficient response, and in any event would not be accurate. By 14 reorganizing in the manner contemplated, PG&E would transfer its "crown jewels" (the 15 generation and transmission operations) to entities that PG&E contends will never be regulated 16 by the Commission. PG&E would have permanently removed major portions of its business 17 from Commission regulation.

18 The Commission respectfully submits that Congress could not possibly have 19 intended section 1123(a)(5) to permit the result contemplated by PG&E here: the permanent 20 self-deregulation of the bulk of the operations of a state-created public utility, without an iota of 21 oversight by the Commission and against the sovereign will of the State. Under PG&E's 22 proposed plan. the reorganized entities will operate hydroelectric and nuclear plants in California 23 and transmit electricity and gas through a distribution network criss-crossing Califoriia; and the 24 State of California will have absolutely no power to regulate or oversee any of it. This is 25 especially objectionable in light of repeated Congressional indication that the states continue to 26 have a critical role in the regulation of public utilities, even in light of federal regulation of those 27 utilities, as we show immediately below.

28 0164 27 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENTj

3. The Preemptive Orders that PG&E Demands Would Frustrate Congressional I Intent to Delegate Regulatory Authority to the States, and Leave Dangerous 2 Gaps in the Regulatory Regime Applicable to the Reorganized PG&E Entities 3 To be sure, PG&E contends that the reorganized entities will remain subject to certain federal regulation, such as the Federal Power Act (the 'TPA") and Natural Gas Act 4

5 (the "NGA") which are overseen by FERC. See Am. Discl. St. at 126. Yet under PG&E's 6 construction, section 11 23(a)(5) must logically preempt (or at least be capable of preempting) all "nonbankruptcy" law, not just state law. Presumably, then, PG&E must believe that it could 7

seek to avoid federal regulatory laws as well, should it conclude that those federal laws would 8

make its proposed plan of reorganization more difficult. Some other debtor in some other state 9

may prefer that state's regulation over federal regulation. If section 1123(a)(5) means what 10 PG&E says it does, then such a debtor could use the section to avoid federal regulation. Indeed, because of the special presumptions insulating state law in areas of traditional state concern from 12 federal preemption, it would arguably be slightly more rational to seek to displace federal 13 regulation.

14 In any event, Congress cannot have intended to permit debtors to choose which 1s regulatory regime they prefer and to ignore the other, or for that matter to seek preemption of 16 both regimes. Federal law does not give a state-regulated public utility the right to restructure 17 itself, in violation of state law, by divesting itself of operations potentially subject to federal 18 regulation and placing those operations under actual federal, rather than state, regulation. To the 19 contrary, federal law preserves state regulation of such a restructuring. As we show below, 20 PG&E should not be able to achieve a different result by opportunistically exploiting its 21 bankruptcy to frustrate the policies of highly important and technically complex federal and state 22 regulatory law.

23 Furthermore, federal regulation is not an adequate substitute for state regulation 24 on many levels, because for example, state regulation provides greater access for local citizens, 25 businesses, and interest groups to participate in the process, and because the Commission's staff 26 and employees has greater local expertise. (Lynch Decl. ¶ 56-57.) What is more, the 27 preemptive relief PG&E demands would undermine Congressional intent to delegate 28 0165 28 THE COMMJSSION'S MEMORANDUM IN FURTWE SUPPRT OF ITS OBJECnION TO IROPOSED DISCLOSURE STATEMENT

1 enforcement authority to the states. Courts have repeatedly recognized the important role of 2 state regulation of public utilities, and that federal law was meant to supplement and not to 3 supplant state regulation of those utilities. The FPA and NGA were enacted to fill in the gaps 4 not covered by state regulation, not to preempt the state. Generally, federal regulation has 5 primarily if not solely concerned wholesale rates, leaving the remaining bulk of regulation to the 6 states. See Tracy, 519 U.S. at 290-292; Conn. Light & Power Co. v. FederalPower Comm n, 7 324 U.S. 515, 525 (1945) ("Progress of the [FPA] bill through various stages shows constant 8 purpose to protect rather than to supervise authority of the states."); Panhandle E. Pipe Line Co.

9 v. Pub. Serv. Commn, 332 U.S. 507, 517-518 (1947) (NGA "was drawn with meticulous regard 10 for the continued exercise of state power, not to handicap or dilute it in any way.").

11 The federal regulatory regime that PG&E suggests might suffice to protect the 12 public specifically depends on state regulation that would vanish under PG&E's plan.

13 Notwithstanding that Congress declined to supplant state regulation of public utilities, PG&E 14 would have this Court do just that.

15 The absence of state regulation would result in dangerous gaps'in the regulatory 16 regime applicable to the reorganized PG&E entities. To take but one example, PG&E is trying 17 to avoid the state environmental review that the Commission would conduct under the California 18 Environmental Quality Act ("CEQA"). Under Section 851 of the Public Utilities Code, PG&E 19 has to obtain state approval to sell, lease, or spin off its utility facilities. An application under 20 Section 851 triggers CEQA review. The massive reorganization contemplated by PG&E triggers 21 CEQA, particularly in connection with the spin-off of PG&E's hydroelectric and nuclear 22 facilities. PG&E owns the largest private system of hydroelectric facilities in the nation, 23 consisting of 250 dams and diversions, 99 reservoirs, 68 powerhouses, and 140,000 acres of 24 associated lands. (Lynch Dccl. j 9.) Moreover, the disaggregation of a vast hydroelectric 25 system raises significant environmental issues, many of which were identified in the draft 26 environmental impact report prepared when PG&E tried, prepetition. to divest its hydro assets.

27 (Id. ¶ 9 & Ex. A.) Similarly, pressing environmental concerns would be raised by PG&E's 28 0166 29 THE COMMISSION'S MEMORANDUM INFURTHIER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

1 proposed spin-off of its Diablo Canyon nuclear power plant. Under PG&E's Plan, however, 2 there would be no environmental review of the spin-off of either its hydro or nuclear generation 3 facilities.

4 Even if PG&E's proposed transactions were subject to federal regulation, that 5 regulation is less protective of local residents in many instances. For example, FERC uses a 6 "public interest" test that considers certain economic concerns, but not necessarily environmental 7 concerns. See AnL Discl. St. Ex. G at 1-2 (no mention of environmental review under FPA). In 8 addition, FERC review under the National Environmental Policy Act ("NEPA"), if it occurs, 9 would likely result in less environmental protection than Commission review under CEQA. See 10 City of Carnel-by-the-Sea v. U.S. Dep't of Transp., 123 F.3d 1142, 150 (9th Cir. 1997) (NEPA's 11 requirements are procedural whereas CEQA's requirements are both procedural and substantive).

12 And finally, PG&E's proposed spin-off of its utility-retained generation ("URG") into Limited 13 Liability Corporations creates an equally large regulatory gap. These new LLCs are removed 14 entirely from regulation. FERC does not regulate generation. See, e.g., San Diego Gas & Elec.

15 Co. v. Sellers ofEnergy & Ancillary Seims., 93 FERC ¶ 61,294 (2000).

16 Finally, the Commission has special authority that allow for diversion of gas 17 supplies to captive core customers in emergencies. See Cal. Pub. Util. Code. § 739. Such 18 emergency powers to protect the safety and welfare of California citizens would not be available 19 under FERC regulation. Furthermore, the intrastate gas transmission system is closely integrated 20 with the local gas distribution system, and under FERC regulation, this integration will be 21 seriously impaired, interfering with the Commission's ability to protect the health and safety of 22 captive core customers. California ratepayers have paid for the construction of PG&E's 23 intrastate gas transmission system which was built to serve California gas customers. PG&E has 24 an obligation to serve under Commission regulation. Under FERC regulation, there would be no 25 obligation to serve, and captive core customers would lose most of their current rights and 26 protections.

27 28 0167 30 If THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBjECTION TO PROPOSED DISCLOSURE STATEMENT

2 II.

3 PG&E'S PROPOSED PLAN IS UNCONFIRMABLE BECAUSE IT DEMANDS RELIEF AGAINST THE STATE OF 4 CALIFORNIA THAT IS BARRED BY THE ELEVENTH AMENDMENT AND RELATED PRINCIPLES OF SOVEREIGN IMMUNITY The doctrine of sovereign immunity embodied in the Eleventh Amendment forbids a federal court from exercising original jurisdiction over claims brought by private 7 plaintiffs against a state or its agencies. See Edelman v. Jordan,415 U.S. 651, 662-63 (1974).

8 Eleventh Amendment immunity "serves to avoid 'the indignity of subjecting a State to the coercive process of judicial tribunals at the instance of private parties."' Seminole Tribe v.

Florida, 517 U.S. 44,58 (1996) (citation omitted). The Eleventh Amendment absolutely bars an II action by a private plaintiff in federal court directly against an unconsenting state (or an 12 unconsenting state agency, such as the Commission) regardless of the relief requested.'3 13 PG&E demands sweeping and unprecedented declaratory, injunctive, and monetary relief that the Commission and the State of California cannot enforce, against PG&E, 15 not less than fifteen important state regulatory statutes aimed at promoting the safety and welfare 16 of California citizens. These demands are aimed specifically and purposefully at the 17 19 See PennhurstState Sch. & Hosp. v. Halderman, 465 U.S. 89, 100 (1984); Alabama v. Pugh, 438 U.S. 781 (1978) (per curiam); In re Lzar, 237 F.3d 967, 975-76 (9th Cir. 2001); Richard 20 H. Fallon et al., Hariand Wechsler's The Federal Courts and the FederalSystem 1073 (4th ed. 1996).

21 Section 106(a) of the Bankruptcy Code purports to abrogate state sovereign immunity with 22 respect to sections 105 and 362 of the Bankruptcy Code. Section 106(a) is unconstitutional in light of the Supreme Court's decision in Seminole Tribe that Congress may not abrogate a 23 state's Eleventh Amendment immunity from suit in federal court pursuant to Congress's powers under Article I of the Constitution. See Mitchell v. FranchiseTax Bd.,

24 209 F.3d 1111, 1119 (9th Cir. 2000) ("Section 106(a) has been viewed bymost courts addressing the issue as having been passed pursuant to the Bankruptcy Clause of Article 1"),

25 aflg 222 B.R. 877, 881 (9th Cir. BAP 1998) ("§ 106(a) is ineffective to abrogate the State's Eleventh Amendment sovereign immunity") (citation omitted; collecting cases); accord 26 Sacred HeartHosp. v. Pa. Dep't of Pub. Welfare, 133 F.3d 237, 245 (3d Cir. 1998); Dep't of Transp. & Dev. v. PNL Asset Management Co. LLC (In re Estate of Fernandez),

27 123 F.3d 241. 242 (5th Cir. 1997); Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C., Inc.) I 19 F.3d 1140, 1147 (4th Cir. 1997).

28 0168 31 THE COMMISSION'S MEMORANDUM INFURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I Commission and the State in their capacities as a sovereign regulator, not as ordinary creditors.

2 Moreover, PG&E's demands for relief seek to bar the Commission and the State from exercising 3 sovereign powers that are absolutely fundamental to the State's regulatory authority over PG&E, 4 a public utility, and consequently to the safety and welfare of the citizens of California. PG&E 5 demands that this Court authorize a fundamental and permanent restructuring of its business as a 6 public utility, without any oversight by the Commission or the State to ensure that the 7 restructuring is consistent with state law and appropriately protects public safety and welfare, as 8 those interests are defined under state law and enforced by the State and its agencies.

9 PG&E also asks for relief that would excuse it, after completion of the proposed 10 reorganization, from compliance with fundamental features of California regulatory law. In 11 particular, PG&E asks that this Court, in substance, enjoin the Commission and the State from 12 enforcing California law that requires PG&E to purchase electricity sufficient to serve consumers 13 in PG&E's service area. Instead, PG&E wants to use this Court to write a substitute statute 14 placing conditions and limitations without any basis in California law on PG&E's duty, as a 15 regulated utility, to serve. The Eleventh Amendment bars PG&E's effort to enjoin the State of 16 California from enforcing basic California regulatory law.

17 As we show below, the relief that PG&E seeks in its proposed plan against the 18 Commission and the State of California is barred by the Eleventh Amendment and related 19 principles of sovereign immunity.

20 A. The Court Should Look to the Substance of the Relief Sought by PG&E in its Plan to Deternmne Whether the Relief is a "Suit" 21 Against the State for Purposes of the Eleventh Amendment 22 PG&E chose to seek declaratory and injunctive relief against the Commission and 23 the State of California in a chapter II plan, rather than in an adversary proceeding. (As we show 24 below, PG&E also impermissibly seeks the functional equivalent of monetary relief.) Had 25 PG&E attempted to obtain the relief it now seeks in an adversary proceeding, that relief would 26 be barred by the Eleventh Amendment. See Mitchell v. FranchiseTax Bd., 209 F.3d 11 11, 27 11 16-17 (9th Cir. 2000). That relief is equally barred if sought by way of a plan. The Eleventh 28 0169 32 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENJT

1 Amendment prohibition on requests for relief against a State encompasses, but extends beyond, 2 requests contained in formal lawsuits or adversary proceedings against a State as a named party.

3 Rather, the Supreme Court has [broadly] defined a "suit" barred by the Eleventh Amendment as 4 "the prosecution, or pursuit, of some claim, demand, or request. . . in a court of justice."

5 Cohens v. Virginia, 19 U.S. (6 Wheat) 264,407 (1821) (emphasis added).

6 In keeping with the general rule that state sovereignty cannot be abrogated 7 through technical evasions and artful pleading, courts take a practical view of what constitutes 8 the prosecution or pursuit "of some claim, demand, or request" against a State. In making such a 9 determination, courts look to "'theessential nature and effect of the proceeding." FordMotor Co.

10 v. Dep't of Treasury, 323 U.S. 459, 464 (1945); accordIn re New York, 256 U.S. 490, 500 11 (1921). Cf. Ulaleo v. Pary, 902 F.2d 1395, 1399 (9th Cir. 1990) (court should look to "the 12 substance not the form of the relief"). If the "essential nature and effect of the proceeding" is the 13 pursuit "of some claim, demand, or request" against a State, then that proceeding is a "suit" 14 against the State for purposes of the Eleventh Amendment.

15 In the bankruptcy context, the Ninth Circuit has held that earmarks of a "suit" 16 include the application of coercive process and the attempt to invoke the court's in personam 17 jurisdiction over the state. See Goldberg v. Ellet (In re Ellett), 254 F.3d 1135. 1139 18 (9th Cir. 2001) (citing Mitchell, 209 F.3d at 1117). Similarly, the Fourth Circuit has articulated 19 the "test" in terms of both procedural and substantive elements, as follows:

20 As to the case's procedural posture, two issues are important: first, the degree of coercion exercised by the federal court in compelling the state to attend: and 21 second, whether the resolution, or the remedy, would require our jurisdiction over the state. The substantive consideration focuses upon whether the action was, as 22 stated by Chief Justice Marshall, "the prosecution of some demand in a Court of justice," as opposed to the orderly disposition of an estate, with the states' role 23 limited to that of any other creditor.

24 In re NVR. LP, 189 F.3d 442,452 (4th Cir. 1999) (citing Cohens, 19 U.S. at 407 and Ford 25 Motor, 323 U.S. at 464).

26 As we show below, the relief PG&E seeks against the State of California in its 27 bankruptcy plan would require the State to pay huge sums of money that PG&E should fund; is 28 33 0170 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT I

I specifically directed against the State of California as a sovereign regulator, and requires 2 exercise of in personamjurisdiction overthe State. The "essential nature and effect" of the relief 3 PG&E demands in its plan clearly constitutes the pursuit "of some claim, demand, or request" 4 against the State, and is therefore a "suit" barred under the Eleventh Amendment and related 5 principles of sovereign immunity.

6 B. The "Essential Nature and Effect" of the Relief Demanded by PG&E Involves the Pursuit of a "Claim, Demand, or Request" Against the State, 7 and Such Relief Is Therefore Barred by the Eleventh Amendment 8 1. The Relief that PG&E Requests Would Require Payment of Monev bv the State 9 The quintessential form of relief barred by the Eleventh Amendment, regardless 10 of whether that relief is sought in an adversary proceeding or in a plan, is relief that requires the I payment of money by the state. See Mitchell, 209 F3d at 1116-17.

12 Here, PG&E demands (among other things) that it be exempted from its statutory 13 obligation to fund the net open position to provide sufficient electric power to serve the public.

14 Under California law, an electric utility operating as a monopoly, such as PG&E, has a 15 fundamental "duty to serve" to provide electricity at all times to every ratepayer within its 16 service area. (Supra at 5 & n.2.) If demand for power by ratepayers exceeds a utility's 17 generation capacity, the utility must purchase and pay for that power from wholesale suppliers.

18 To avert a disastrous statewide power shortage, the State authorized DWR to purchase electricity 19 to cover the shortfall on behalf of PG&E, kmown as the "net open position," when PG&E became 20 unable to meet the needs of the customers in its service territory. The legislation authorizing 21 DWR to procure power to satisfy the net open position provides that *'nlothing in this division 22 shall be construed to reduce or modify any electrical corporation's obligation to serve." Cal.

23 Water Code § 80002. The cost to DWR to purchase this power and to fund the net open position 24 has run into the billions of dollars and is increasing. 1 4 25 26 14 The legislation permits DWR to recover those costs from ratepayers. See Assembly Bill ABXI 1, Stats. 2001, Ch. 4. as codified at Division 27 of the California Water Code, Section 27 80002 et seq. The administrative and financial burden on the State of having to procure power for PG&E's customers and to fund those activities are nevertheless substantial. In any 28 event, it makes no difference whether the State may ultimately be able to collect the 34 0171 THE COMMISSION'S MEMORANDUM IN rURTHER SUPPORT OF mfSOBJECTION TO PROPOSED DISCURU IA I1tMt I

I The obligation to purchase this power, and to pay for it, are obligations of PG&E 2 and should be borne by PG&E. They flow directly from PG&E's fundamental obligation as a 3 public utility to serve its customers. Nevertheless, DWR paid the bill for the additional power 4 and is still paying the bill for additional power. Even now, as power costs have relaxed to the 5 point where PG&E's revenues are again exceeding costs, PG&E seeks to avoid having to assume 6 the net open position. PG&E seeks relief in its proposed plan that would prevent PG&E from 7 assuming the net open position-and, as a practical matter, would thus require DWR to continue 8 paying-until PG&E's self-created "wish list" of conditions is met.

9 Not only is PG&E demanding that the Court usurp the sovereign regulatory 10 authority of the State to determine the nature and conditions of PG&E's fundamental state 11 obligation to serve, which is a violation of the Eleventh Amendment on its own, PG&E is 12 effectively trying to stick the State with a bill that PG&E, under California law, should have to 13 pay. To be sure, PG&E does not overtly demand that the State pay PG&E. Such a demand 14 would obviously be barred by the Eleventh Amendment. See Mitchell, 209 F.3d at I 116-17.

15 Rather, PG&E demands that the State pay third-party power generators on behalf of PG&E.

16 That is a distinction without a difference, and especially where the focus is on the substance and 17 not the form or technicalities of the relief requested.

18 PG&E attempts to phrase the relief it seeks in connection with the net open 19 position as an injunction against itself. According to PG&E, the Court should order that the 20 reorganized PG&E "will be prohibited from reassuming the net open position of its electric 21 customers until Icertain] conditions are met ... ." (Am. Discl. St. at 112.) But regardless of how 22 PG&E describes the relief requested-regardless, in other words, of whether PG&E asks the 23 Court to order the State to pay the costs of the net open position, or tries to obscure reality by 24 asking the Court to "prohibit" PG&E from complying with its duty under California law to fund 25 _ _ _ _ _ _ _ _ _ _ _ _ _

26 payments it has made in connection with the net open position, either from taxpayers, ratepayers, or some other entity. See Regents of the University of Cal. v. Doe, 519 U.S. 425, 27 431 (1997) ('The Eleventh Amendment protects the State from the risk of adverse judgments even though the State may be indemnified by a third party.").

28 35 0172 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

1 the position-the relief PG&E seeks would require the State to continue paying huge sums of 2 money for PG&E. PG&E's highly artificial formulation of the relief it demands only shows how 3 hard PG&E must struggle in its effort to obscure the utter incompatibility of its proposed plan 4 with the Eleventh Amendment.

5 2. PG&E Demands Affirmative Relief Specifically Directed Against the State of California As a Sovereign Rerulator 6 Whether or not a request for relief would require the payment of money by the 7 State, a request for relief against a State nonetheless constitutes a "suit" against the State for 9 purposes of the Eleventh Amendment if that request presents "some demand" against the State in any capacity other than as an ordinary creditor. See NVR, 189 F.3d at 452 (to determine whether 10 a demand for relief is a "suit" under the Eleventh Amendment, the court should consider whether II the demand is "'the prosecution of some demand in a Court of justice,' as opposed to the orderly 12 disposition of an estate, with the states' role limited to that of any other creditor") (quoting 13 Cohens, 19 U.S. at 407.

14 Here, PG&E makes just such -demands" against the Commission and the State of I5 California. In fact, the relief PG&E demands in its plan could not be any more specifically 16 directed against the State and its sovereign regulatory authority. As shown in the accompanying 17 Lynch Declaration, the state statutes, regulations, and regulatory authority that PG&E seeks to displace protect important state sovereignty interests in providing for the safety and welfare of 19 California citizens. (Lynch Decl. ¶¶ 25-55.) PG&E demands that the Court order that the 20 Commission and the State are barred from fulfilling their sovereign missions as public 21 regulators-both here and now during PG&E's bankruptcy and on an ongoing basis after PG&E emerges from chapter 11, should a plan ever be confirmed.

23 The Commission's position here is fully consistent with cases such as Texas v.

24 Walker, 142 F.3d 813 (5th Cir. 1998). There, a debtor obtained a discharge order, and the State 25 of Texas subsequently sued to collect a prepetition debt. The Fifth Circuit held that the Eleventh 26 Amendment did not bar the debtor from asserting the discharge order as a defense to the State's 27 claim. Walker carefully explained, however, that this result followed from the bankruptcy 28 36 0173 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF s OBJECTION TO PROPOSED DtSCLOSuRE STATEMENT

1 court's limited in rem jurisdiction over the bankruptcy estate. See id.at 822 (explaining that "the 2 power of the bankruptcy court to enter an order confirming a plan ... derives not from 3 jurisdiction over the state or other creditors, but rather from jurisdiction over debtors and their 4 estates") (quotations omitted). The Supreme Court has explained the limitations on the 5 bankruptcy court's in rem jurisdiction:

6 he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide by the consequences of that procedure. If the 7 claimant is a State, the procedure of proof and allowance is not transmitted into a suit against the State because the court entertains objections to the claim. The 8 Stae is seeking somethingfrom the debtor. No judgmenr is sought againstthe State. The whole process of proof, allowance, and distribution is, shortly 9 speaking, an adjudication of interests claimed in a res. It is none the less such because the claim is rejected in toto, reduced in part, given a priority inferior to 10 that claimed, or satisfied in some way other than payment in cash.

11 Gardnerv. New Jersey, 329 U.S. 565, 573-74 (1947) (citation ornitted, emphasis added); see 12 Goldberg, 254 F.3d at 1140-41.

13 PG&E's demands for relief against the Commission and State here are entirely 14 different. In the challenged provisions of the proposed plan, PG&E is not attempting to obtain a 15 general discharge order, pursuant to this Court's in rem jurisdiction, that might then affect some 16 claim for money by the Commission or the State against PG&E. It cannot be said here, as the 17 Supreme Court said in Gardner,that "[t~he State is seeking something from the debtor." Nor can 18 it be said here, as the Fourth Circuit said in describing certain permissible consequences of I9 reorganization plans, that "the [State's] role [is) limited to that of any other creditor." In re NVR, 20 189 F.3d at 452. Rather, PG&E is seeking something extraordinary against the State: affirmative 21 relief directed specifically againstthe Commission and the State as sovereigns that goes beyond 22 any reasonable understanding of this Court's in rem jurisdiction, and that purports to bar the 23 Commission and the State from exercising their regulatory authority over PG&E. Such a 24 demand for relief against an unconsenting State is barred by the Eleventh Amendment.

25 3. The Relief that PG&E Requests Would Require the Court to Exercise In Personam Jurisdiction Over the State of California 26 PG&E's demand for relief in its proposed plan is barred by the Eleventh 27 Amendment for a related but additional reason. A request for relief against a State constitutes a 28 0174 37 THE COMMISSION'S MEMORANDUM IN FURZTER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

I "suit" against the State for purposes of the Eleventh Amendment if adjudication of that request 2 requires the exercise of personal jurisdiction over the State. See Goldberg,254 F.3d at 1139; 3 Mitchell, 209 F.3d at 1117; NVR, 189 F.3d at 452. Here, the relief PG&E demands would 4 require the Court to assert personal jurisdiction over the State of California.

5 As explained above, the relief demanded by PG&E is not like the relief that may 6 be granted in connection with the bankruptcy court's in rem jurisdiction over PG&E's estate.

7 PG&E's demands for relief do not involve adjudication of any claim by the Commission or the 8 State as a creditorfor a share of the property of the estate. Rather, PG&E's demands are 9 specifically directed at the State as a sovereign and seek to adjudicate claims that PG&E 10 purports to have against the State. These demands do not involve the disposition of any property 11 of the estate in the sense of who gets what, or the adjustment of debtor-creditor relationships 12 with respect to that property. The demands are not primarily directed to adjudicating rights and 13 interests in property of the estate. For these reasons, the Court's in rem jurisdiction over the 14 property of the estate does not confer authority on the Court to order the State to take or not to 15 take certain actions in connection with its sovereign regulatory authority, as PG&E has 16 demanded. In order to bind the State in the way PG&E has demanded, the Court would have to 17 exercise personal jurisdiction over the Commission and the State.

18 The NVR case is instructive here. In that case, the Fourth Circuit held that a 19 motion for relief by contested matter was a "suit" against the State, and thus barred by the 20 Eleventh Amendment, because the relief requested would be little more than an advisory opinion 21 in the absence of personal jurisdiction over the State. See NVR, 189 F.3d at 453. As in NVR, 22 here "It]he real value of the judicial pronouncement-what makes it a proper judicial resolution 23 of a 'case or controversy' rather than an advisory opinion-is in the settling of some dispute 24 which affects the behavior of the [State] towards [PG&E]." Id. (quoting Hewitt v. Helms, 25 482 U.S. 755, 761 (1987)). Such a "judicial pronouncement" respecting the conduct of the State, 26 the NVR court held, is barred by the Eleventh Amendment.

27 28 0175 38 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

C. Neither the Commission Nor the State I Has Waived Its Sovereign Immunity 2 PG&E has not contended in this Court that the Commission or the State has 3 waived its sovereign immunity. PG&E, however, took the position during its appeal of this 4 Court's decision to dismiss its adversary proceeding against the Commission and its 5 Commissioners that the Commission has waived its sovereign immunity. PG&E is wrong.

6 On appeal, PG&E contended that the Commission had waived its sovereign 7 immunity because state agencies had filed proofs of claim in the bankruptcy proceeding and 8 because state agencies had "participated" in the chapter 11 case. If PG&E chooses to make those 9 arguments to this Court, they should be rejected for the reasons set forth in the Commission's 10 memorandum on appeal. (Ex. B hereto.)

11 CONCLUSION 12 For the foregoing reasons, the Commission respectfully submits that the Court 13 should not approve PG&E's proposed disclosure statement because the statement describes a 14 plan that is unconfirmable on its face.

15 Dated: January , 2002 16 Respectfully, 17 GARY M. COHEN OFFICE OF THE GENERAL COUNSEL, 18 CALIFORNIA PUBLIC COMMISSION 19 20 / ARYM.COHN 21-an-22 ALAN W. KORNBERG

1) WALTER REMAN 23 THOMAS M. KEANE 24 ERIC TWISTE MATTHEW J. PRESS 25 PAUL, WEISS, RIEKIND, WHARTON & GARRISON 26 Attorneys for Defendants/Appellees/Cross-Appellants 27 28 0176 39 THE COMMISSION'S MEMORANDUM IN FURTHER SUPPORT OF ITS OBJECTION TO PROPOSED DISCLOSURE STATEMENT

EXHIBIT A 0177

FROM (TUE 1i. a 02 11:00 ST 1O:'9 NO.48613856R3 P 2 EXHIBIT A LEGISLATIVE HISTORY APPENDIX 0178

iRoy TUEI 1. a 02 11 :00 ST. :0:5S NO.4861385643 P 4 96= CoQoas ] OUSE or REPRES ATIVE Rzm=

Ed Sts*ii j 1 No 1195 AN ACT TO CORRECT TECHNICAL ERRORS, CLARIFY AND MAKE MIlNOR SUBSTANTIVE CHANGES TO PUB.

LIC LAW 95-598 Jrtr 2&1U30O.n-C0Wtted to tee Committee at the Whole loue on the State of the Union ad rderedl to be orloted Mr. RoDixo, from the Committee On the Judiciur, submitted the following REPORT together with DISSENTING VIEWVS ITo aeompr

-The Committee on the Judiciary, to whom was rvferred the bill (S. 658) to correct technical errors. clarf y and make minor substan-tive changes to Public Law 95-98. avin considered the same, ftport favornbly thereon with an amendment and recommend that the bill as amended do pass.

The amendment to the text of the bill is a compkte substitute there for and appears in italic type in the reported bill.

IWMODVCnrO The Bankrupty Reform Aet of 1978 has now been in effect IlS than one year. It is clear even at this early time in the life of this lw that technical amendments are required. Errors in pnnting, spelling.

punctuation, grammar, syntax, and numerntion aros in the bill as enacted because of the last-minute process of change through which the bill went when considered at the closing sessions of the 95th Congsr lese sme last-minute changes als resulted in the enactment of a bill that contains incongruent. provisiaum; material that was removed from earlier versions remained as either cross-references or antecedent for provisions changed or instrted. And, material added often was not completely integrated into the total fabric of the bill us enteted.

05-m 0 0179

FROM (TUE) 1. a02 11:00 31 10:59 NO. 4861385643 P 5 122 FpdaapvedinrAsection (e) of.t-ie ction and after notice and

• heari, the court may for causo reduce or increase the 120-day peiod or the 160-day period refured to in this saction.

5111 Contents of pla (a)[ Notsni°utening any wtkeriue cppicabk nwnbunkruptry ow,a plans dAl (1) designate, subject to section 1122 of this title, classes of clams, other than claims of a kiid-specified in section 7(L)

(1), 507(a) (2), or 507(a)(6) of this title, and claes of inter-eta; (2) specify any cla of claim or interests that is not impairet under the plan; (3) Es64l] specify the trtatment of any class of claims or inter-ests tht is impaired under the plan; (4) provide the ame treatment for each claim or interest of :

particular class, unlets the holder of a particular clim or interest agrees to a 1t. favorable treatment of such prticular claimn or (5) providc adequate means for the plan's Euecution] umplo-mentgtwc. ucas-(A) retention by the debtor of all or any part of the prop-arty of the esta; (B) transfer of all or any part of the propertq of tlhe estate to one or more entities, whether orrized b tort after the confirmation of such plan; (C) merger or consolidation of the debtor with one <, n.ire persons; (D) sale of all or any part of the property of the esture.

either subject to or free of any lian, or the distribution of all or say part of the property of the etate among 1%0'*

having an interest in such property of the estate; tE) utisfction or modifiation of any lien:

(F) eslulltion or nmodification of any indenture or uim'i-(0) caring or waiving of any default; (3g) extnsion of a maturity date or.a chanei in an inttorest rate or other term of outstanding securities; (I) amendment of the debtor's charter; or (J) issuance of securities of the debtor. or of any entity referred to in subparagraph (B) or (C) of this parspniph.

for cash, for property, for existing securities, or in exchahge for claims or interests. or for any other appropriate purnose:

(6) provide for the inclusion in the charter of the debtoT. if the debtor ic a corporation, or of any corporation refered to in part-graph (5)(BI or (51 (C) of this subsetion, of a provision pro-hsbitine the issuance of nonvoting CEquity neuritiesl eomStmm atock and vroviding. as to the several clams of securities posse~-,

ing voting power, an appropriate distribution of such power among such clas.iucludinr. in the cILqe of anv clas of equity seurn.ities hning a prefcrence over another clas of equity C.-uri-0180

FROM (TUE1, I. 8 12 11 :01 3T. :0:5' NO. 49613385643 P 6 123 ties with !Wpect to dividends, adequate provisions for the elec.

tion of directors representing such prefirrd clans in thr event of default in the payment of such dividends; and (7) contain only provisions iliat are consistent with the inter.

ests of =tditor and equity Surity holders and with public policy with rpect to the manner of belection of any officer, director. or trustee 'ider the plan and any successsor to such officer, director, or trustee.

(b) Subject to subsection (a) of this section, a plan may-(1) impair or leave unumpaired any class of claims, secured or unscON I or of interesta; (2) subject to section 365 of this title, provide for the assump-tion tor rejectionn, vejiefion, or egsinmet of any executory con-tract or unexpired lease of the debtor not previously rejected wuder such section E36i of this title];

(3) provide for-(A) the settlement or adjustment of any claim or interest beJoging to the debtor or to th este; or (B) the retention and enforcement by the debtor, by the trustee, or by a reprtscaLative of the estate appointed for such purposc. of any such claim or interest; (4) provide for the sale of aIl or substantislly all of the prop-erty of the estate, and the distribution of the proceeds of sueh mir anong holders of clairs or interests; and (5) include any other appropriate provision not inronsiare:t1 with the applicable provisions of this title.

(e) In a ease concerning an individual, a plan proposed by an entity other than the debtor may not provide for the use. sale, or lease of property exempted under section 52 of this title. unleas the debtot consents to such use. sale. or lease.

. 1124. Impairment of claims or interests Except as provided in section 1123(a) (4) of this title, a clas of claims or interests is impaired under a plan unless. with ve.pet to each claim or interest in such clas, the plan-(1) leavs unaltered the lcsl. equitable, and contractual rurhL' to which such claim or interest entitles the holder of such claim or intemt; (2) notwithstandinr mnv contnetual provision or applicabie law that entitles the holder of such claim or interest to demnnd or receive accelerated pavment of such claim or interest after the occurrence of a default-(A) cures any such default a.3 t91t occurred befon. or Efte the eomm*tement of tM ce under tAiu title, othor than a default of a kind specified in section 365 Mb) (21 of this title [, that occurred before or after the commencement of the cae under this title];

(B) reinstates th. maturity of snch claim or interes JS such maturity existed before such default; (C) compensntes the holder of such claim or interest for any damages incurred as a result of any reaonable reliance by such holder on such contractual provision or such appli cable law; and 0181

FROV (TUDI 1. 3 C2 11: CI ST. 10: 39 EO 4861 385643 P ?

TAB 2 o082

(TtUE) 1. 3C2 11C I ST. 10:39 19O. 4861383643 P 8 96 Co~Arts I EOUSE OF EEPIIESENTATIVES Ru f&SCion 5 No. 9g-1195 AN ACr TO CORR'ECT TECH2lICAJ.I ERRORS, CAIrFY AND MAKE 11l1NOR SUBSTAN;TIVE CHANGES TO P17E-LIC LAW 95-598 Jinx 2S. 19O.- Comltted tn the Committee of the Wbolt House an th*

Steae of tie Union and ordered to be printed Mr. Romouo, from the Committet on tht Judiciary, submitted the following REPORT together with DISSENMTI(; VIEWS (To acompany S. 6S8)

Tlw Committee on the Judiciary, to whom was referred the bill (S. 656) to correct technical errors clarify and make mninor substan-tive changes to Public JAw 9.59S, having considered the same. report favorably thereon with an arnendmnent and recommend that the bill asamended do pas The amendment to thc text of the bill is a complete substitute there-for and appears in italic type in the reported bill.

INT3ODc22ow The Bankrupty Reform Act of 197S has now been in efect less thin one vear. It is clear eten at this early time in the life of this law tlat technical amendinwrts are roquired. Errors ia printing, spelling.

punctuation. grammar, syntax, and numeration arose in the bill as enacted because of the lasc-minute procss of change throug& which the bill went when considered at the closing sessions of the 9Mth Conrtss Theso same last-minute chang, also esulted in the enacrment oi a bill that eontains incongruent prorisions; material that was removed from earlier vraions remained as either cross refrencms or snteedents for provisions changed or inserted. And, material added often was not completely integrated into the total fabric of the bill is enacted.

05-46 o 0183

FROW (TUE) 1. 8 0i 11:-'I1 ST. 10:39 NO.4861385643 P 9 Section 100(a). This amendment makes several stylistic cis.

Subsection (b). This amendment makes it clear that the chnrcter of cause justifying the court's converting a cae under chapter 11 to a caso under chapwr 7 includes adenial of additional time for filinta plan wher such has been requested; and makes it clear that GUe imitations ra in a correlative not conjunctive relationship with eac other.

section 101(a). This amendment makes a stylistic change Subqection (b). This amendment makes it cicar that changes in the times for ling a plan under section 1121 (c) can be made by die court only if the request for such a chage made witi the time specified for each Crcumsaince.

Section 102(L). This amendment makes it clear that the rukls vor.

erning what is to be contained in the reorganization plan are tha specilled ir this section; deletes a redundant word; and makes bevera stylistic changes.

Subsection b). nThis amendment makes a conforming change: and dates a.redundant croas-reference.

Section 103. This amendment makes a stylistic change; and nuikes i!

clear tht tine period limitations are in a correlstive not conjunctivv rtiondlip with each other.

Section 104(a). This amendment makes it clear that the requirement of providing adequat. information about the plan does no; in. ude information about other plans which may be proposed; &admake-several Stylistic chaens.

Subsection (b). This amendment makes it clear that the disclosur-statement which is not subject to otherwise applicable nonbankruptey law is the statement required by this section; and that thb approval of such AStatement is not subject to reiew other than through the proces of ap Irov rsquirad hereunder.

Subseton (. This amendment snakes it lear that t oliciu that is protected by the safe harbor provision is that of accepLauem. and rejections of the plan.

Section 103(a). This amendment makes a ctylistic change.

Subsection (b). This amendment corrects an error in punctuation.

Subsection (c). This amendment corrects several errors in spellinz.

Subsection d). This amendment makes a stylitic chang Section 106(a). This amendment nakes several Stlistic hanges.

Subeection (b). This amendment makms a stylistic chape Section 10T(a). This amendment -a it clear tat &plan may not be confirmed unless it and its proponent corpyt with, inter aliz, all applicable provisions of title 11; makes severe] stylistic ehange-; and corrects a spelingand a punctuation error.

Subsection (1; . T7is amendment deletes an erroneous cross-reference; makes several stylistic changwi mikes it clear in the Lppli-cation of the ahsolute priority rule regardmg the holders of unwscud claims that junior claim or interest holders may not receive or retain property undr ter plan unless those senior to them have been appro-priately dealt with; and makes it clear that in determining the value of property interest holders must receive, such value may he as upon one or the other of the standards provided for in section 1129 (b) (2) (C) (i).

0184

FROM :TUE' i. 8 02 11:02 ST. 10:59 NO. 4861385643 P i0 TAB3 0185

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£mmls Sn memblar. 4M) of ombopenpsem (A)- land jim-TMZl 1-AMEM)~MO To TX?= ii 1or maz -wert1m at a, Mad. we~emd hi

,O UX" 0 BTA2U CODE eubtngeemb (A) I0Jr-i lieu thewrf; aeaU 80=3v L (& sectio& 101(2)o ( ofat tie (2) by Witlag Mewthe Oubject, Of Efud a IatOf e Ua11tat B~la Oode is amended by 110062SU 01141110htG O.34 <ue.

eaiogM out -or Onr Bminedzatwy after, buel. quireG to bt the Vaujet of a rqns8t.uof busy,. in lltu ttereof.

gl~~~~~~~eatament (53 Sectiock lolls) () at vue 31aCT the etin11atteiiO h gunted ftates Oode l Amended by Stri~d~g fk seto lotj bry IInofthefl Vatted Out t~al COlOZ at the end th~ereot en aw nintlg stw.Cdat perqndph (13 0800tftW 21Al (C) Section 210(a)43) Of attle It or asated, the, 100owing BLW wacempah!

Vntted BSteat Cafe Is samnded by Soas3ag -310 hIcidUdl the lxstrict of 03-

"HI 0). MIS 1) Ill.- Immedatlay &41eUz ivauba n ftero mUoeozpt kw the pur tion". ar -Vec. PM$ of ~who cur be a GSCur laider inhapter (4) vaction 301(14) of Uti 3 et th I e thia tite:..

Vnited st~ai Code 'I amended by AuwaAerl Statat coll. " to "deIgsigaed. ts amended fe) laCUOU 301(24) or trle it at tCM -(411 16t ko erOAW person-Vanitd State Cede la &0ended by stlikin -W wit "4c to Which there ILa Out Gt~dkbck~f""A nitinj *suwk. Custoer. Is detired In Sedtio 141 of Ui1a (2) GeCton lot(24) (a) of autl 11 at tam *fMI that It enpted In the butiftm of 8tain Codebemenae-Wailed fectlu trausaetfors Sin seecizuti-(I) In da61 (1). by Ottvang Out Sthe .- 1 Co? am ecount of Others; or lb £0 cbarpp #At(') Al -CU sith mwnewe of U-. Central Piabc.

PPP3VW GW SA beffUng -4 M~d tram or car such PC-so la eem Gemovit:-.1 up.nA~dt Bet uelp"& U £141)

) at Chia M Secaina 38(42) of titl Ii of the Pulswem: oecin Au" tbesuaf; Gad Vnited Utfte CMe. £8 so redestgnAtaid Is (2) Su a""(U) b3 strlkig Mu -"Pa antertded by sielklot out the WIOtd tand :

saf,PlesIt 44 pputsand seruma I. sand' in lieu therof.

"Zaprnafrtal~ inMin Gection 301 o UdstItei of Car Valtleo Spuph Ia) (111" SW thet 9 Mod: ed tbeMT0 tat iCUlwing over pagrmpw SIePct:e La Cubiuugsylpb (Aa o (A4 (13 ' I Uiulted StiLud. Wheft used lin a veo-lie".

200ru evplia .ens. Includes an1 locatioas whefte it) 11wtit 301 Of titl U Of the 10ithed lit tuEictal julfadIet~lyn of the, Vhuled Statift StII Cey dedpattmnsg auo. Intudlatai tewitoelas and 1Czfent7wM ww~pbf 43P9P (U) Of the 'United StAML.

(25. MI3.(43. M(0) lf PMa Ome 2. section 10213) of tiWe tierf the wep ). 14i (U). mad (42) Untied MSeaa Code Se eweqdt bvsu9tl~ng (1) 066112t000d661ay stWg WF'Pb 01 1lU theeo.

0 tomw amapeugmpb:

SeM sec. S. (se uection taste) aof r it1ato (U) 0012" dertag",as muleante Uatdteaolei ewis atne~eIbyetik-Av Of 2354 (II PRO. 104), Or Wh5 Elb) SectU= 103(d) C? Ut~tl 11 of tthe 01311 Is 01PRAV to I puserawms of Vaated OSteat Codos ankendued by stlkriig tue d fti C)~I13 WIMC vnt mW~ out aeiept with mpMe to jeCtio 746(c) tompdsetftJ . as deomed hi 66ctIOn wbleh arvilet to vn~nft~psymenix tra endby 0187

FROY :TUE£ I. 802 il:C2 ST. 1C:59 NO. 4861385643 P 13 198 Untd6a o.L Out UtAt5. SW and taserting mne m stia Ate and (3} inp h (3.

hwertlzt -or- Ca lotheeeot.

b taliout ia orhsto2IO moL Sc. 101. it) etwum in )( q) ot Utt it am so. bection 110(b) of ti. 11 Of tC of the Vilted Stat OJe 10 amended bT United Stae Cad# ISaiended by btt- striking out nha Clm or Inteests of wbft Ing . except to the eztent that the CoM rt e- mid Isertng Oa Claims or Interests ogdCe Othvvlae. ImmedisUly beau 0any tCat aa In lIeu therof.t obr'. . lb) &CUV Saille) Of ttSW it of the DM. S. Section 1107(g) Of tI 12 s the. MW , ,uIU " o7 t1O Valted States Coda U Amended by 1AMITURC *VM40 With~d theePOCtO P&ods 6POdCIA aeevig S aIcts. tInile tly rfis? I G to subaCtOs (cC Of ts ctun:' medl-trust". ately after 1 totg Etc. N. Sectlon 1106 of tle 1 Of ot the - 4il:03.4s) Section 1l33 (a) oZiJUll- of United Vata Code Ia amended by Mis m the VUnted States Code Is tJnende6- .

. on request of a party In intertt and Sttr . (lI by striking out "A and sertlag W ouf and a b*arng.- immediately after - tbtanding aJ otherse apptlabis "court" .onbankuptcy gmw. *'n Ilieu ftereot-Sec. OS. Section 11131b) of title St of the 10 Sap mr - t)b trt a o uited Sta6es Code Is amended to read se Inimedlmteiy attr "claseas of Claims and follows tomedIteiy ant"r Sis) (01 .4ffj-1 UUeI (b) (II ept Wh< Property or the (XI in pagrp (Si. by Stikn out I tatetat seomr s a clm 13 soad tubyet to -h"r-i sectton 3831k co this tlls. abandond un- to) so Paragrap (5). by sui ma out der cectlon 154 of this titlU. or murrendered eution- and istrutng Imptbroienutioa In o the aden of Such CLAIMS. Or Is to be lieu Thereof cold. abandoned. or riendered tmder the hIb in partgraph (5) (GI. by Inserting di ptUt- *tImaredlately after valving-" and "I ) a Claim secured by much Property IIin pararaph ISI. by striking out thall be allwed or disallowed urder section "oquity o~curlum- the st piace It appears 302 of tWi e V e tM ame as if the dolderan insern "common stock' In Iku ot Such claim.. t rteurse fagas the thereof.

debtor M Sacount of Inch CtLM. WhetZer lbb leetion 1121(b) (i or ttle 1sf thM or &ot8uch bolder bad Auc leoute. Wells Vnited States Code U amended by striklag the ClM Or which Such CAti lS a Part fleats. out -orrejection" and Itnerttoc . rejection.

br at leeta two-thirds In amt and non or anlguater in leu thereof an by gt"k-then 4r-batl in umber of allowd dbl. ing out -Uader secuan set ot this titis-of such elam. to be ow rned by eubparaph and Inserting "nder such eeuiu, in lieu

) of s - a maph: ad thereof.

"IS) uniem the swepte w1ve of the icc. 103. BectloU 1134 of titlt 21 of thu intsrcs In such peopeot, *f the boldem of UWnd Stsat Code ia ameded-seuth caims iUiaon aentLaL the Class may III by arandLog paraaph (21 (A) to

• ts M prolfied u=der 9Ubparaph (A) rco a faliows:

ofth~ aragrh aT. suc claims or inch 9 cures LOtrsuch default that occumtJI CaM. whether or not the holden of gueh before or after the commncement ot Mhe cIalMS had recoue apaint the idebtor sM ca unde tilUtle. other theA a default notwithunding section 50615) of this fitle. or a kind spowled in sectIon S65(b) (a) or arc "urd claiMs tI tIe lull gxttnt tbat S tuue.-. and such clims aft allwed. it) In paragnph (lbIlb CO. by sUtri-ig f) tbe prosulem etoparagraph (I) (A) of out -ad- MaG eting 'or' In lIu thereor.

this nbeKcOI Mt1limited to the PuipoM CC 5c. 14. la) Section 1125(a) of Uite 11 this MaOter and se paragraph ao not in or tM United a"ts Code Is amended-any other way alter. fect, or rut any (1) In paragraph (1). by Inserting -. but g right or IlablItty of any other entjt, - nede minclude such Infortlon about ot 6rc. 100. alt Sketio lliSa of tile U ot ay other pnel or Frpe pan"im- W -

the United States Code I amended- Sdstely after -pV"n 111 In paragraph (2). by srig out "it (3) i pataraph (1) (SI. by iitrttc an Involuntery came OTIgIJ commensed -"m- iMedIately fnet -With- ant wnder thAs Chapter and n-Aent 'tU-sasU (xi tn parapephb (2) (Gb. by Inseting wle oAmenced a an Involuntary am under -aor IMUMeialy ater boidde.

this Chapter"in lu thereoft and lb) SeoSue Il3ld) of ttle il of the ill In paraglrph (3;*by triktnGut Vanted States Coda is mended-Other then' aod Insart "other than on-In lewe tbetoof. (lb by InsetlAt required Under staerc-lb) Section 1112(b) of t~tle 11 of th Van (bC thif ectIon" tbmedatualy Iftr United Stares Cxde Is mendeod- sttevora the irst plum it appen: and (1b In praaph (6). by Inserting a To. (2) by tosetlig U.or othervuse seek s quest made for imeaMm ly betert "cddl. view of. IMMeMdlaJy awl e appe trom".

tonor': oar (c) Section 111(Sa) of title 11 of the 0188

FROM :TUE! 1. 8 02 11:03. ST. 10:59 NO. 4861385643 P 14 TAB 4 0189

FROM (TUE1 1. 8 02 1i:03 ST 10:59 NO.4861385643 P 15 96M ConGags I HOUSE OF EEPRESr1STATIME Rd Seme-in j I1 NO. 96-119i ALK ACT TO CORTREM TECHNICAL ERRIORS, CLARIFY AND MAKE MINOR SUBSTANTIVE CHANGES TO K-B.

LIC LAW 95-.59s Jrv., Wi. 1MO.-CommitteG to the Committee of the WMh tHouse on the State of the Uiraon and ordered to be printed Mr. RowIxo, from the Committee on the Judiciary, submitted the following RF P O R T together with DISSENTING VIEWS ITo aemotmny E. 2593 The Committte on the Judiciary, tno whom was referred thc bill (S. 65S) to correct technical errors, clarify arnd mAe minor substan-Live changes to Public LAw .-698, having considered the same. report favorably thereon with an amendment and recoomnend that the bill as amended do pus.

Th armendment to the text of the bill is a complete substitute there-for and appears in italic type in the reported bill.

IKTODUCcno The Banicrupty Reform Act of 1978 his now been in effect lese than one year. It is clear even at this erly time in the life of this law that technical amcndmentr are requiro . Errors in printing, spellina.

punctuation, grammar, syntax, nad numeration arose in the bill as enacted becauce of the last-minute proces of change through 'which the bill went wben considered at the closing sesions of the 95th Congess.

These same last-minute changes also resultad in the ennotment of a hill that contains incongmuent provisions; material that was removed from earlier versions remained as either cross references or #altecedents for provisions changed or inserted. And, material added often was not eonipletely integrated into the total fabrie of the bill as cnactkd.

f[3-"g 0 0190

FROV, ITUIE) 1. 8-C2 11 :C3 ST. 10:59 NO. 4861385643 P 16 2

Such mattecs consitute the vast mjon'ty of the subject of the Tech-Mieal IAmendments Act. In addition. howerer, theeh. ar wevierutl iters of a substantive nature which are included becmuse: (1) it was in-tended that the particular subject was to be dealt with ast the earlirst poisible time after the enatment of the Bankruptcy Ilefote .c in connection with whatever technical amendments would be considered:

(2) further eooforming changes wee found to be necessary to woti-plete the legislative work intended biy the Bankruptcy Refdrm Aet.

3) the treatnent of isubject in the Bankruptcy Reform Akct "as hound to tb incomplete; Or (4) there was overfooked sonz minot . t rele t matter. In tacht case tlhe change prolxsd is eonnstent nat Pohcies auopted by Congre; in its enactment of the lBannrut .

Refon Art Even with these substantive matten included and aoting that Tihe:v art consistent with the Bankruptcy Reform Act, nevertheI1 it *i important to releat that thze AcL as ea entdted lav this bill czntinr:i t! represent a finely tuntil anl balanced tratnmint of tlhe pccrt interests of. debtoas and creditors. Every effort has been ninde :

nbstain fom Mractint, iehltively at erery casll for change satl .?

maintain existing policy intact. At this time, there are known ta+>

of Lankrnptcy actirit which give the Committc.P concern and -i:s  :.I the Commsittee intenis to monitor closely. However. it is also prcnv.--

tare to change a statute that hel,been in effect for such a short pernt-of time Where it is zint il'ally known to ichat exit- it thew c'innrfm a:

o:her tMan transitory.

B.-owturrcy Jtwoez R xr)ZYxT IR. 6200, as reported by the Committee during the 05th Congres-c contained provisions to reorgatize bankruptcy courts and include themi within the catgory of United States courts subject to the standitrs of Articlek of the Constitution. . 2266, the bill lised by the Senstr duing the 25th Congress, which eventually becare Public IsA. Y-5419 (the kmltruptc Reform Act of 1978), did not rontain such Isror:

sions. Xumbered among te provisions contained in H.R. WO war those wtich ould hae providedfor retirement of bankruptcy judge-When thisgenel ubjectas resolved between the Houseand ta ti Senate. the matter of banruptcy judge's retirement was efimxinat. I with the understandingtt at i earliest possible time it wou!d !i dealt with.

'l'here are two classes of United States judges: life tenure; ard fixed term tenure. Notwithstanding, all United States judges, for retirement purposes, participate in whit loosely may bt called 'judicial retire-1mt" Tll essential characteristics of this retirement system are: (I.

it is oncontributory; (2) eligibility for tetirement ut 100 perint of the salary a judge received at the time of retirement is based upon tlw reaching of seventy years of ag with 10 or more yeas of service.

or sixty-five yeurs of ge with 15 or mori years of se6rce; and, in th!

ecse of fixed term fudge, (3) provision for 100 percent or less benefits in the event of failure of rUppOintMenl Bankruptcy judges presently are participants in the Ciil serrfrr retirement system. The essential characteristics of this oysten, ar.

(1) it iscontributory; (2) benefits accrue at the rate of approxwistei-0191

FROM, (TUE) I. 8 O2 11 :04 ST. 10:'9 NO. 4861385643 P 17 TAB s 0192

FROM ITUE 1. C2 11 :C4 ST. 10:59 N0. 4861385643 P 18 Q

965 CoVroRM HOUSE OFP EPRESENTATIVEVS I 6Rs fU Scsion No. 9615 AN ACT TO CORRECT TCEINICAL EXROBtS, CL&RIPY AND MAKE MINOR SUBSTANMVE CHANGES TO PUB-LIC LAW e5-598 JULT 25. 19l--C_;mitted to the Committee of the Whole House en thc State of me rtoln and ordered to be ra~ted M1r. Ecolmo, from the Committee on the Ju&diciar, submitted the following REPORT together with DISSENTING VIEWS (To accompany S. C551 Thc Committee on the Judiciary, to whom was refernr the bill (S. 658) to correct technical errors, clarify and make minnr substan-tive changes to Public Law 95-i96, having considered the same, report fairambly thereon with an ameitdment and recommend that the bil!

as amended do pa The amendment to the text of the bill is a comple c substitute. there-for end appears in italic type in the reported bill.

IsmooUcnow The Bankrupty Reform Act of 1978 has now been in effect ku teas one year. It is clear even at this early time in the life of this law that technical amendments are required. Errors in printing, speling.

punctuation, gnmmnar, syntax. and numeration arose in the bill as Anacted because of the last-minute prucs of change through which the bill went when considered at the closing sessiow of the 95th CangTMS These same last-minute changes also resulted in thu eactmnetnt of a bill that contains incongruent provisions; material that was removed from earlier versions remained as either cross-referenres or antecedents for provisions changed or inserted. And, material added often was not completely integrated into the total fabric of the bill as enatted.

6.44e C' 0193

FR0U ITUE) 1. 8 02 11:04. ST. 10:59 N0.4861385643 P 19 2 percent per year for each year of service; (3) benefits are available only after the participant has ruched the ag of sixty-two years; and (4) there is 80Openct Cap GU the Ount of efit iblL The civil service retirement "ytemdow not provide an equitable basis for retminent for bankruptcy judges vis-a-vias other Uited Stases judg.

The civil serve Sstem is predicated upon an individualls oming to work for the Federal government at an early agc, usually mna persou's early twentiw. Thi average age of bankruptcy judges ascend-mng to the bench is forty-five.

The overwhelming opinion on this subject, including that of the Judicial Conference of the United States, is that bankruptcy judge.

shold participate in the judicl retirement system. Diferences of opinion exist rearding the exent to which credit for srvice should be given for service as a bankruptcy judge during the tranition period (tat time between the enastment of the Bankruptcy Reform Act and Ihe taking effect of the new bankrupty conit eated unde.r that Act) and for service as a rcferee in bankruptcy prior to the enstuieut of the Bankruptcy Reform Act. This bill striles a compronzixebetween the pusiLion of giving such judge iuO perent c1sdit for a1lsuch prior semee and only alloning tbo participation in the judicia: rietirewent system based upon service on the new court beginning Aprii 1,196.

A complicated formula with a number of conditions and limeitationz hau been created. The objective of this schtme is to not only proride La equitable travis for bankruptcy udacs' retirement. but aho to act as an incentive to keep on the bench the experience and ability of bankrptcy judges uresently sitting. It is also important to understand that the system Bankphich ba nkrupteo Ug ll be chsen his bee- chad by the Bankruptcy Refor-m kL This change will undoubtedly have an advers effect upon the ilit of bankruptcy courts to retair. some of the most knowledgeable a penced of th b qanruptcy judges.

Under tw law that was repealed by the Bankruptcy ITcfonn IcA bankruptcy judge. were selected by ihe judges of tug United Suta district court fur the dtrict wherein the nkuptey jcdge would serve. Under the Bankruptcy Reform Act, bankruptcy jude will be nominated by the President. This change should not. in the bt of all ioszible worlds, have the effect of displacing suck experienced and knowledgeable judgea. However, as this esn be the ese. enhlaneing ankruptcy judgesretirement will be an incentive for judles tn Weck presidential appointment and remain on the bench for a longer period of tins.

The nmiermtor for computing the amount of salary payable tn a judge. who i!; not reappointed at the end of his tcrm is chaned from Fisteen years to fourteen years to nonform to the tUrns (f ofice of a lankruptcy judge appointed Under the Bankruptcy Reform ACL Incsumhent bankruptcy judges are given full credit for 11 service prior to April 1, 19R4, for the purpose of determining ehiribility fur benezmt& but the rate of accrual of salary payable to a bnkriptcy judge upon relinquishing ofice y resignation or upon failure of reap-pointment is substantially leal for service prior to November S. Iq75.

tho date of enactment of the Bankruptcy Reform Act.

The formula for computig the rat, of accrual of Wlary payslo:t to a bankruptcy judge upon relinquishment of office, if he niois' the ag sund length of gerrice requirtmcnts for benefits, is ".2fnr service " a 0194

TROY:. (TUEI 1. 8 C2 II:C4 ST. 10:59.NO. 4861385643 P 20 bankrunty judge prior to November 4, 1978 and 1/14 for service " a bankruptcy judge on and after that data The dlfcruerce in the rate of accrual of benstita for servie a bankruptcy judge pnor to soeni-ber 6, 1978 and for such service thereafter is adopted in recogition of e fa that the duties and responibiles of the olics of bjnkrupwy judg e and the xaur and jurisdiction of the bankruptcy court were greatly enhanced by the Bankruptcy Reforzo Act of 1978. Tim 1 14 formula will apply to all sevice sa a bahlnkruptcy judge prior to April 1, 1984 by a bankruptcy judge who is ruapointed after tiat date if Mch a judge continues in service s a bankruptcy judge for a period of five Years after the date of his mappointment or untilthe atains the age of seventy years.

Upou enactment of this bill an incumbent bankruptcy judge who is or may becomtetl le for benefitsaunder section 37 of title 28 f the United Sates Code wsy elect coverage under that section, without irgard to the data of audi eligibility. To prvent soce double-dippir the election of benefits tinder section 373 voids the arnuitr right of . bankruptcy judge under any other Ftdte employee pc!%-

iaon plan.

Ain inuewabent bankrupty judge who bas elected the bcnebts of st4:

tion 373 of title 28 of the United States Code. but who his not at-tained the age of sixty-five years pror to April 1, 1984, foreits all rights to future payments under that aection usless such judt Lai filed with the Preisidezit. the President of the Senate, and the Dzrecun of the Aittinistuatire Olfice of the Unite Sitaes Courts before April :.

1984, a written notice agreeisig to accept appointment as a hsnkrupL judge after such date and, if oflered such appointment, accept.; uh tpPrintment.

ap 8 nightmof incumbent iudges wkrcy who meet the le th 6:

scrvCe requi3Wements of section 378 af tit 28 of the Unid Statics Code, to resign and receive payments under that section prior to April I, 1984. is mtzictd o two categories of jadges-(M thos judges who hve at ained the ae of seventy years and (2) anV judge who has attained thu age of sixty-live yers and provides the tbireetor of the Administratie Office af t~hu United States Courts a certificate of diability signed by the chief judge of the circuit Otherwisc, in-cumbent bnknipt" judkeg are preduded from ractiving bevcfit.L under the section pnor to Apnl 1,1984.

Upon enactment of Whis bill, incumbent bankruptcy jud~gs wi!

become judges of the United States, which would ordinarily make#

themi ineligible for continued coverage under the Civil Service Jnetire menit qystemn Iowever, the right of a bank ty judge continued in offict by section 40(b) of the Bankruptcy reform Aet of 1978 to retain coverag under the Ciril Servie Jtirewnt *Ystetn is pre-s9ved until such time as Its elects coverag under section 3-M of title 28 of the United States Code.

The term "Ubnkruptcy judge" is defined to include a refsra'e ii bankruptcy to make it clear that all service as a referee in bualn-uptC3 is includible for purposes of this section.

A definition of "reppointment" to include appointment to tlhe new

.lankruptcy urt which comes into existence on April 1, 1984, is neluded to make clear the fat that ineumbent bankruptcy judga.

.rhose terms expire at the end of the transtion period, who are 1o0 0195

FROM (TUE) 1. 8 02 11:05 ST. :0:55 NO. 4861385643 P 21 5

appointed to the new court by the President immediately followi the transition peod ae deemed to have failed of reappointment for the purposes of this section.

Ine word "retires" and "retirement" atc used in this sectio in a broad generic ems and art intended to include voluntary resignation or involuntary resignation because of failure of reappointment.

An incumbent bankruptcy judge who, after continuing to serve throughout the transition period, tails of reappointment, ald who at the time of relinquishing office his fourteen or more yua of scrvict as a. bankruptcy judge, is eligible to nceive benefits under this c-tion before &ttaining the age of t-five years Hoevrer. the salary payable to such juqge shall be reduced by one-sixth of ohe poreent Sor each full nonth such judge is under iity-five years of ag tht time he relinquishes office.

MuezXcAL zaFniaGcw In structuring the Bnkruptcy Morm Act one of the objecLims.

simplification, was ichieved by consolidating into one chapter .31) r number of the presiously separate pronrisions dealing with recrgan.-

zationL )Now,therm are only four distinct types of proceeding under tite 11: liquidation, under chapter 7; adjustment of debtt of a municipality, under chapter 9; reorgazization, under chapter i I: and adjustment of debts of individu&Us with regular inenme, under zhap-ter 23. Tins oigatizational arrangement, however. rquired tiat tne general provasions contained in chapters 1, 3, and 5 cather be mad4!

applicable or inapplicable, as was appropriate.

OUse such provisiou, contained in sction CS2, deals wit the post-petitinn efect of a securitY iaterect, a arriving at the treatment of this subject asit did, the Da uptcy Reform Act ezpresaed the gen-vrrl policy that upon tie filing of a petition in bankruptcy, except for 1rocecds, there vwold be no post-petition effect of a seeurtitv £nteruL.

l'e central fraizie of {refeene for this decision was comnrtciul transactions and the recognition and acceptance of after-actluire property Clauses by the Uniform Commercial Code (adopted ui.irer sally by thc States, with} the exception of Louisiiana). T16 prcra iuu was made applicab~le to a proceding under chapter 9.

After the enactment of the Baruptcy Reform At., Lucntion Was called to the fact of this applicability dthat as a result certain municipal bondholders' interests in ecific funds might be jeopar dized in the event of the filing ofI petition by the municipality !Rzdex chapter 9.Revenue honds issued by a municipality are in rifoet longe term secured obligation;, th security for which is a specinc fund (zs .

ThC bond indentur is the sescity acreement setting forth the secu-rity interest which, inva raby, contains aprovision for the repayiment of the bond obliguion from a specific fund(t) as such fund s) is gnerated from tune to timLe Thereforo, with section 552 pplw1ablo a chapter D proceding, upon the filing of a petitinn hr aMuni-cipality, bondholders' right to the specific fund(s) would be ima-paired S. 658 as enacted by the Senate contains a provision, a new section 928, designed to overcome the powatiaJ limiting effect section 55i Would have on municirmal mrnmie bonds in the ersnt of tilw Minre' ni 0196

FROM (TUE) 1. a8C2 11 :C5 ST. 10:59.WO. 4861385643 P 22 a *atitiom by a municipl isuer of such securities. Because this Sen-e-proposed sction 028 dls-only with traditial revenue bonds nd not other forms of nuaicipa1y imued secnuitim secured by sneCified funds, coneerm was mised that the Senate's sction 02 S.-was not adequatt. In seeking to elimiate s0ction S52'c limit.

mg elect upon anl municipalsecurities secured by speified funds.,

whether of the traditional rvenue bond type, or some other *Ypc.

tha Committe sought a way to do this without placing itself in the position of making any exprm representation to States and munici-palities regardin the character or quality of their mecuritis usander non-hbakruptcy law. The Comuittee believes that it VM not the intent of Con6 i the enactzuent of the Bankruptcy Refarnt ct of 1978 to mae any Such representations. Therefore, it has chosen to deal with the limiting ezfect of section 352 by deleting the refeivnce ta it from section 901, renoving from application in a chapter 0 pro.

eeding the operstion of thatsection.

Further, tte Committee believes that it was not the intent of Con-gress in the enatment of .,7fc) (3' to penalize holders of municipal securities which aire securtl b)y fature. receipts of the issuer. The deletion from wction 901 of the referenec to section 547(e) (3j won;lo aroid allowing sneh payuients to be clwified LS voidable prefirenez under s'etioan U7.

STocaaox=n;CoxgaoDron Batow LrQtrnjimms&

rrior to The ensetament of the lankruptcy Reforin Art. special provisions existed in the bankruptcy laws for liquidations of stock.

brokers. Much of this prior law served as the basis for what hat be come subchapter III of chapter.7 in the new Bankruptcy Code. The nW subehapter IV. dealing with commodity broker liquidations, iii new and not blted upon any prior treatment under the reptalzAl Bankruptcy Aet. Theie subchapters were intended to proviAc corn-parable treatment for atockbroker and commodity broker liquid:-

titns. Moreover, it also vras intended that in the event of a bankruptcy involving such an entity, the operuLioni of the rempetive wacuritier and commodities markets would be affeted only minimally, it., that the financial failure of any one suchEntity would not have such wi afect upon an entimr markAtplSce co as to pose the potential for a nuts-sive disruption of the entirt industry. However, quite soon after the enactment of the Bankruptcy Rafoen Act it was brought to tbe Committee's attention th.+/- the provisions in subwepters 111 gAll IV fell short of their intended mark. In sihort, tha inteGrity of the socuri-ties and commodities inatacets was not adequately protected; aund there was not comparability between the provisions of subchapther m nd IV.

There are a number of provisions in the bill which pertain to stock-broks, s ocurities clearinj ageneiec, commodity brok.zi and for-ward contmrct merchants. Thee an intended to clarify the applirM-tion to thee entities of certain provisions ountained in the Bankupwy Reform Act. The Bankruptcy Rform Act provides a number of protections to commoditv bkirers and commodity clea, 'mgorgania-tions, and several amendments hive been made to clarify that these 0197

FROM (TUE) 1.8 02 11:06 ST. IO:59 NO. 4861385643 P 23 7

stme protections ite intended to apply to stockbrokes and securities eluoveral prpose of thea provisions is toWpmc serve Uzc biaz inlegrity d the nation's commodity and securi-Provision wa also necessasy to clarify that the autematic stay pro-vision does not affect the stof of mutual debts arnt claims wh&ch relate to commodity contracts, forward conatrcts, leverage. U ac-tions or secunties contracts; nor does it prevant Aetoffs against cus-tomer property held by a commodity broker, forward contract mer-chmnt, stockbroker or secuntiox claring agency for claims which are margin or settlement payments.

Related amandmeits also preerve the contrctul rights af :ock-brokers, securities dcearng agencies, commodity brokers and forward contract merchants to liquidt a debtors account. not-with.atding the automatic stay of Section 362, or any other prorision of Frdera!

or State law or court order, unless the court order is uthorir.d under the Securiti.- Investor Protection Act of 1970 (l5 U.S.C. 7iaal et seq.j or is required because of a thrcat to the national W-Urtyv.

In Subchapter m. Section 7t4! has been amended to giva the Secur-ities and Exchange Commission the power to apprrne specifild trun-*

fox. so appro'vd may not be avoided by the trustae. This ?uthoriay corresposds to the authority given to the Commodity Futures Trmd-ing Comnmission in Stection 764 (b).

ln Suibchapter IV, the definition of 'custocr" has been tnencdeci to ddete the reference to debtor and subrtitute in itS plact a broader reference. Under thir pnevious definition, only an entity 'rhicl wa.%t a debtor could have a customer. Such a result wolda hire daefetet-the broad protections intended to be provided by 0,et Act- O)t!er clarifying amendments hive been made to several of the 6ir-nitions to be sure that if trading in commodity options is approved by tw CFTC, such trading rill be included within the scope of Subhiapter IV provions.

It is also madc clenr that the trustee may not avoid as a preference or fraudulent transfer, a margin payment, dtpoit or Uttlenient pumy-ment made by or to a ccnmodit broker, forward contact inert-hain.

mtnc-broker or securities clearing aency, unless the alynaent ir 1xbot madeand received with intent todefrWud.

Finally, Subchapter IV of chapter 7 hai been amendied -o clrrifv that the proprietary accounts of commodity brokers are not entiied to shire in any distribution from the customer property Pstnec wilif such time as all other customer net equity claims have bnwn paid in full.

Tax. Pzovwoxo&

The Bankruptcy Reform A.cts repeal of the former Bankruptcy Act removed from applicability the speia.1 provisions for treament Of tax consequences of transnctions arzispg in a bankruptcy nontext. 'This was done with the view that soon after the enactment of the Bank ruptcr Refonu Act there waould be eonsidered bankruptn y tax legislA-tion. However, to initiate the proom whereby auc; tasx legislatio.l would be considered, there was included in section 346 a numrrr of provisions designed to identify a basis upon which tax consequencsA could bo determined.

0198

FROM (TUE! 1. 8 02 11:06 OT 10:59 NO. 4861385643 P 24 With the consideration of the Tedinicl A wndments Act, this tax leIslaion bas not yet LeN= folly Considered and the p i of we.

tion 346, theref ore, exist in a vacuum These section 16 provisions are being removed withthe inuntion that (1) there should be a uniform treatmea of tar conwqunces a baaikruptcy under both Stats and federal Law, (2) federal tax legis tion should be considered at the earliest possible time, and (3) v=1 such legislation is enaeted it is most desirable that tax eonmequences of bankruptcy should be dealt with as they were under the former Bnk.

ruptCy Act.

SEX&zoXr-ar-Sznox Axrats UI~ra I Section 1(a). This amendment deletes a redundancy.

Subsection (b). This amendment corrects a typographical erroi.

Subsection(c). This amendment corrects the cross-reference; ider.

tifying the types of claims to be treated as pre-petition clainu t'o ijt-cdUdz certain preenversion and co-debtor claims.

Subsection(d). This amendument corrects an omission by providing the connective to assure that "entity" is defined to include all of thu types specified.

Subqi'4tion (e). This uimendmant corects a t mpogrphical enor.

Subsection (f). This amendment to the definition of "insolven-

-ith reference to a partnership clarifies that it is the gmeeral panrLt:

nonpartnership property that is the subject of valuation elimnati, the ambiguity presented by the use of the term sepanrter which ailo¶'

ed for the reference to noncommunity property in a community prop.

Crty stat; substitutes the indefinite artile with reference to the LvptW of property excluded from the valuation; and adds a crow-referene to Include all property appropriately to be excluded from the valustiar.

Subsection (g). This amendment rdesignates paragmaphs (35i.

(36), (37), (383, (39), and (40) to allow for the addition of two new defnitilons; and adds as one of the new paragphs a definitioz for "securities clearng agency" to facilitate the treatment of stocklbrokrr bankruptcies under subhLapter III of chapter 7.

Subseeatin (h). This amendment clarifies that ths term "security" is applicable to the designatd contract or interest if such is requir-i to be the subject of a Serititi Act regi on statement whdFetr ornot it is sosubject Subsection (i). This amendent corrects tht name of a type of co:.

tract excluded from the definition of Bswarity).

Subsetion (j). This amendment maes a stylistic change in the cross-rtference; end clarifies that the contact or certifcate excluded from t6 d ition of "security" is not required to be the subjed oi a Securities Act io n tAtement wrher or not it is so subjer'.

Subsection (k). this amendment adas a new parA9Mph Which pry.

Tides a dtfinitaou.or "Stake. primarily to asure that residcnts and dorniciliuries of Puerto Rico can beome debtrs under title 11.

Subsction (l). This amendment- a tylistic casgup Subsetion (m). This amendmwt mkes a dcAnge in punctuation to allow an additional paragraph to be added.

0199

FROM :TU 1. 8-02 11:06 ST. 10:59 NO.4861385643 P 25 TAB 6 0200

FROM ITUE) 1. 8 Oi 11 :07 ST. 10:39 NO. 4861385643 P 26 F

Calendar No. 102 ssu Couch=

ja Sacsi I SENAE I No. SH46S OMNIUS BANKRUPTCY IMPROVEMENTS ACr OF 1983 REPORT Or Tut COMMITTEE ON THE JUDICIARY UNITED STATES SENATE T. armpany S. 445]

(Togerher wih Additional Viseuq Or¶ered to be printed

%!.S IoVUsm"a flICY onryt

• f. no VWWt',.r*>N : 11 0201

FR0M (TUE) 1. a 02 11:07 ST. I:M9 NO. 4861385643 P 27 IS= CoNCz I SENATE Calendar No. RIWO 102 lt Swion No. 9S-S OmmBUS BANUPcy IMPROVEMES ACr OF 1983 A"IL 26,1963-Ordoed o be prntid Mr. TWu~mor, from the Committee on the Judiciary, submitted the following REPORT (To &==panyS. 445]

The Committee on the Judiciary, which considered the bill (S.

445) to make certain gubstantive changes to Public lAw 95-598. the Bankruptcy Reform Act of 1978. having considered tlie same. re-ports favorably thereon as amended and recommends that the bill as amended do paw.

1.FuRPOSE OFynm mruL The purpose of the bill is to make certain substantive changes in Public Law 95-598. the Bankruptcy Reform Act of 197B.

1I. IlfRODU=ON MDHISTORY OF T ZhE NfL On July 12, 197K the Committee on the Judiciary reported S 2226, the Senate version of the Bankruptcy Reform Act of 3978. On September 20, 1978, HR 8200, with further amendments. was passed azain by the House. On October 5, 1978. the Senate re-paed R.R. 8200, with additional amendments. Finally, on October 6,1978, the House accepted the final Senate changes and cleared the bill for signature by the President On November 6. 1978, Presi-dent Carter signed the bill end it becarne Public Law 95-59R. On October 1. 1979. Public Law 95-598. styled the Bankruptcy Reformi Act of 1978, went into effect.

In the 97th Congress, the Subcommittee on Courts, chaired by Senator D1le held general oversight hearing on the Bank~ruptcy Reform Act of 1978 on April 3 and 6. 1981. As a tesult of those hearings, numerous amendments, largely technitmi in nature, were proposed whih were pawed by the Senate as S. 863. the Bankrupt-cy Amendments Att of 1981 on July 17 of that year. Additional hearings were held on October 29,1981. During the course of these 0202

FROM, ITUE) I.8 C2 11:C7 ST. 10:59 WK. 4861385643 P 28 51 comparative performance of courts in cases riled under the respec.

tive chapters of the Code.

In an effort to begin compiling comprehensive comparative sta-fistws which would provide the Congress with more complete infor.

astion concerning the performance of the courts in the respective judicial districts, the bill containsS directive to the Director or the Administzative Office of the United States Courts to begin assem-byn information concerning assets and liabilities or debtom; amount of debt discharged in cam under each chapter of title 11; the total amount of disbursements to creditors by the bankruptcy courts. and time elapsed between cue filings and payments to creditors.

All of the information required to be collected under Subtitle If' of the bill would be available from records which will be avail-able in the bankruptcy courts from petition and motion filings, and it is the belief of the Committee that the compilations requested rill pose no unmanageable burden upon the Administrative Office.

The Director, of course, has complete discretion in establishing the procedures by which the information shall be gathered.

1. ECtHNJCAL AMENDMNrTS On July 12. 1976, the Committee on the Judiciary reported S.

2266, the Senate version of the Bankruptcy Reform Act of 1978. On September 7, 1978, the Senate took from the desk H.R. £200. the House version of the Bankruptcy Reform Act of 1978. struck the texct of the bill and inserted in its place the text of S. 226G and passed the bill as amended. On September 20. 1978. H.R. 8200. with further amendments was passed again by the House. On October 5.

1978, the Senate repassed H.R. 8200. with additional amendments.

Finally, on October 6, 1978, the House accepted the final Senate changes and deared the bill for signature. On November 6, 1978, the hill wra signed into law with the designation Public IAW 95-598, the Bankruptcy Reform Act of 1978.

Since the date of passage of the Act, judges. scholars. and bank-ruptcy, practitioners have reviewed its provisions and numerous technical amendnments and minor substantive changes have been suested to clarify the intent of Conges.

On March 14. 1979, Senator DeConcini introduced S. 6W8 which embodied many of those recommendations. After additional revi-non, S. 658 was reported out of the Judiciary Committee on August

3. 1979. passed by unasnimous consent of the Senate on September

7. 1979, and sent to the House. On September 22, 1980, the House with further amendments passed S. 658 by unanimous consent. On December 1. 1980, the Senate made additional amendments to the Houe-passed versaion of S. 658 and passed it by unanimous consent.

On December 3. 1980 the House with further amendments passed S. 658 by unanimous consent. On December 9, 1980, the Senate wi-hfurther amendments reintroduced the bill as S. 3259 and passed it by unanimous consent. Since the House during the re-mainder of the 96th Congress took no action on the final Senate changes, the bill was not enacted into law.

In the 97th Usgres. on April 2, 1981, Senator Dole, with Sena-tors Heflin and DeConcini as cosponsors, introduced S. SiQ. which 0203

FROWt JUE! I.8'02 11 :07 ST. I0:59 NO. 4861385643 P 29 52 embodied all of the provisions of S. 3259, as pawed by the Senate on December 1. 1980, with a few minor changes. On April i and 6, I981. gwpmrral overnight hearings on the Bankruptcy CodeW rre held by the Subcommittee an Courts, at which time testimon-y in sur-port of the bill's provisions was received.

On July 17, 1981, S. 863 was passed by the Senate. However. no action was taken on the bill by the House during the 97th Con*-

gress.

On January 24th, 1983, further hearings were held on needed amendments by the Judiciary Subcommittee on Courts. At the con-elusion of hearings. Senator Dole introduced the substance of s.

863, with additional provisions, as Subtitle I of the Committep bil:

Significant provisions of Subtitle I are discussed in the sc..tio.n;i analytsi which follows this summary of the bill contents.

IV.

SUMMARY

AND SZETONAL ANALYT3S or ?AL VILL A.

SUMMARY

The bill is divided into ten subtitees, the content of which xro ;s follows:

Subt. A: Consumer Credit Amcndmenas. Reformed proceduresa lating to consumer debtor cases.

Subit. B: Grain Eleuaor Bankruptcy Amendments. text '- erav. ii from S. 3037 in 97th Congress. Provides procedures for expediteA abandonment of grain from bankrupt elevators.

Subt. C Shopping Cente Bankruptcy Amendments S. 2!0i t 97th, S. 549 in 98th. Establishes a timetable within which trustee would have to accpt or reject leases on shopping center properict in bankruptcy, and other purposes.

Subt. D: Drnk Drivers' Nndischargeabtltyof dehbs. S 215 in 97th Congress. Prohibits debts incurred as a result of ar aIt of drunk driving from being discharged in bankruptcy.

Subt. E: Refcrews Salary and Expense Fund led.",r:.

(Drawn from S. 863 in 97th Congress). Corrects a drafting erroi an the 1978 Act whitl, requires a handful of corporate debtom :!'

bankruptcy to continue making payments to the ton extenxt funi Subt. F: Repurchase Agreements Amendments Proposal of Lhee Federal Reserve Board. which exempts repurchase agrrrenker..-

from the automatic stay in bankruptcy.

Subt. C: Timeshzring Agreements Amendments. S. 302' in :thl q7th Congress, S. 492 in the 98th. This subtitle provides that 1Wx-sons who hold timesharing agreements shall be granted s. fIen .n the property involved when the timesharing contractor goes bank-rupt and the trustee terminates the timesharing contr.a': .and other provisions.

Subt. H. Bankruptcy Ouersight. This subtitle directs the Ad':.sm trative Office to collect inforrnation on bankruptcy filings raga-rl ing levels of debtor income and assets, debtor living experses. anc total amounts recovered for creditors in proceedings under Chap-ters 7. 11, and 13. This information will assist Congress in -n% a-ing the functioning of the bankruptcy system.

Subt. 1: Technical and Clarifying Amendments Tht. hulk -it provisions in this subtitle are drawn from S. EC;3. which p..~.

0204

FROY CUE) 1. 8 02 :1: 08 ST. 10: 59 NO. 4861385643 P 30 TAB 7 0205

FRON (TUE) 1. 8a02 11:08 ST 10:59 NO.4861385643 P 3:

Calendar No. 192 S7T= Cowan SEATE RX r

)St &sasioe f 1 Wo. 97_1th0 BANKUPTCY AMENDMENTS ACT OF 19E1 JULT 10 I k;i~LUTIte day, JUST B). 19I1.-Odered to be vrlntod IJr. T Vairoxn, from the Commnaitlte on the Judiciary.

submitted the following REPORT (To accompar S.S S)

The Committee an the Judiciary, to which was referred the bill (S. 8U) to correc technical erros, clarify, and make minor substan-tivc changes to Public aow 95-598, tha Bankruptcy Reform Act of 1976, having considered tht same, reports favorably thereon withi atrmendments and recommends that thebill as amended do pass.

PUlP0or or -ntr AxrxDWM.-1r The amendment is an amendment in the natutre of a substitute and its purpose is identical to that of the bill as introduced: To correct technical errors, clarify and make minor substantive changes to Public JAW 95-598.

Pumoe or nu BILL The purpose of the bill is to correct technical errors, clarifr and nake rninor substantive chuinge in Public JAv 93549, the Bank-raptcy Reform Act of 1978.

IDmODuCTIOx On July 12, 1978. the Committee on the Judiciary reportedl S. 22GG.

the Sente version of the Bankruptcy Reform Act of 1978. On Sep-teimber 7, 9l8, the Senate took fro thedcsk IL 8200, thellouse ver-sion of the Bankruptcy Reform Act of 1978. struck the text of the bill amd inserted in its place the text of S. 2268 and pamed the bill as amended. On Sept r 20,1978, TLR 820, with further amend-ments was pussed gin by the House. On Octoekr 5. 197S. te Senutf repassed H.R. 820t, with additional amendmenL. Finally, on O)ctn-ber 6. 1976, the Rouse accepted the final Senmte changes and cklaed 0206

FRO.'r CTl.E) 1. a02 oa 1:1 C0: 9 NO. 48613856 3 P 32 2

the bl for sgture by hehesident On November C,1978, Prsident Cater signed the bill and it bemme Public Lai 9-598. Judge. scho!-

U5s and bankruptc practitioners have reviewed its provisions and nunmerous technial amendments and minor substantive changes to make lear the intent of Congs havp been suggested to the Comnuttee.

On Marh 14, 1979, Senator DeConeini introduced S.658 which ecm-bodied many of those recomnendations After additional revision.

S. 58 was repod out of the Judiciary Cominittfeon Lueyst ;a. 1P79.

passed by unanimous conent of the Senate on September . 1979. and sent to the House. On September 22, 1980, the House with furiter amendments passed S. 658 by unanimous consent On Dcmnber 1, 1980, the Senate made additional amendmentsto the Houwe-passed ver-sion of S. 658 and psused it by unanimous consent On Decenber S.

1980, the House wi further anendments passed S. 656 by unanimnin consent. On December 9, 1980, the Senate with further aimendmenuL reintroduced the bill as S. 3259 and passed it by unimous to'ient.

Since the House during the mmainder of the 96th Congress look no action on the final Senue changes, the bill es not anacted into law.

In the 97th Congres, on April 2, 19Sl, Senator Dole, waith Se.nawtrs Heflin and DeConcini as cosponsors, introduced S. SOa, wlhich errn bodied all of the provisions of S. 3259, as passed by the Senate nn December 1, 1980, with a few minor changm; On April 3 and C. 13v1.

general oversiget hearings on the Bankruptcy Code were he14 by h.

Subcommittee on Courts, at which time testimony in support of rht bill's provisions was rtceived.

S&ow-.-s cizox JiAwALrhs-Trmr I Tho amendments contained in title I makc amendments to title I of The Bankruptcy Reform Act of 1978, Public IAw 95-SMS ("the Reform Act"). In this title all section references within the section and subsection descriptionRs of the amendments will be to titl- T of the Reform Act unless otherwise indicated.

Section 3(L). This section delttes a redundtney. "Substntially all the property of the dibtor" includes all of the property of th; d&bt-r and all"can bc deleted Psredundant.

Subsection (b).This amendment corredts a typographical error.

Subsection (c). This amendment cross-references two addition:.;

Sections to complete the intent that claims fixed after the filing of the petitioi arn to be treated as prempetition claims, and deletr-the reference to present section 502(i), which is in effect repcei'r by section 80(g) of the bill.

Subsection (d). This amendment corrects a typographical err.,r in definition of "entity".

Subsection (e). This amendment corrects a typographical errtr in the definition of 'individual with rgular income".

Subsection (f).Thisamendment to the definition of "insolver t with respect to a partnership, clarifies that "useprate" as ased zo thM definition refers tothe gmeral patnersi 'onptftnershil prop erty, and removes the ambiguity that it might refer to hi,; nor.

community property in a Community property estate.

0207

FM (CE) 1. a 02 : 108 ST. I0: 59 NO. 4861385643 P 33 TABS 0208

FROM ITUE) I. a 02 11:09 ST I0:59 ?O. 4861385643 P 34 Calendar No. 192 07rx Co wau SNATE I RBft Jst Senon f No. 970-150 BANKRUPTCY AIYENDMENTS ACT OF 1981 J*LT 10 t leis~ti'e dCay. Jus. )1.S1 -Ordered t1 be Priated Mr. 32ztMiroxot, from the. Committee on the Judiciary, submitted the following REPORT To acompan S. 831 The Comznittee on the Judiciary, to which was referred the bill (S. 863) to correct technical errors. clarify, and make minor sub>tsn-tive thaes to Public Lot 05-598, the Bankruptcy RefotUJ Act of 1978, having considertd the same, reports favorably thereon with aintidments and recommends that. the bill is amended do pass.

Punpoac OF trur Axz*o-Dw=T The amendment is an amendment in the nature of a subbstitute and ikt purpose is idintical to that of the bill as introduced: To correec technical errors, clarify and mnake inor substantive changes to Public r&w 95.509 PWmros: or BUL The purpose of the bill is to correct technical errors. clarifty and nial minor substantive changps in Public Law 95-598, thf Bank ruptcy Reform Act of 1978.

I3TTO O Mw On July 12, 107R. the Committe on the Judiciary reported S. 2G.

the Senate version of the Bankruptc Reform Act of 1078. On Sep-tember 7.1978, the Senate took from tme deskHlI 8200, thalousever-ion of the Bankruptcy Reform Act of 198 struck the text of the bill and inserted in its plac the text of S. 2266 and paed the bill as amended. On September 20, 1978, IRL 8200, with further amend-ments was pased Win by the Houa. On October 5.1978, the Senate repessod H.R. 8200, with additional amendments. Finally. osn Octo-ber 6. 1978. the Rouse acempted thc final Senate chances and cleared 0209

FROVt (TUE) 1. 8 02 11 :09 oT. IO: 59 NO. 4861385643 P 35 15 standards of MUM3h) has meant sirnificant hardship to credilon in r~t ining the best, most informed counsel. Experience under the Code.

particulurly in rural am. has shown that the. enre for thc potential iflicl has been at ~mt eoss and is in al1 likelihod woroe than the disease. Present 1103(b) 6 art example of paternalism on the part of the Federal Government that is hardly needod in die contet, of chapter 11 bankruptcy proceedings between businessmen dealing at amn's lvnth.

As a result of oversight herings that dealt in part with this pro-vision, the committee concludes that 1103(b) Aould be modified. As presently written, 1103(b) (1) assuimes a conflict that usually does not ekist (and whicl professional rules of ethics alrtead ban); (2) ex.

cludes fom administration of the bankruptcy estate those profession-Ais Who arc most exper enced and knowledseble abonu the ustca ixe, those who arc already representing individual creditors); (3) inhibit cxpeditious bankruptcy adminittration and increases thcost of ad-ministration; and (4) may inhibit outtof-coun settlements which shnuld be encouraged.

'nit Committee feels the amendnicat adequately meets titesconcerns nf thse who sete a potential for conflict byl precluding dual represcnta-tint by those who havc an adverre interest. The courts am f ully capable of Makint this detennination. The Commit LIe abo feels that mere representstion by a person of one or more crlitors of the same class is arc represented byv creditors' committee alos represented bY that person shall not per se constitute the representation of an adrerse in t4,rt. The court should not presumC to know better thin (hse affected rreditors except in clear instances of potential impropriety.

Subsection (b). Paragraph (1) utakes clear that thit credit ors committee is not r"auired to make recominendtfions with ieWct to the plan and may solicit rejections as well as acceptancts. Pars-graph (_) deletes redundant language in section 11031c).

Section 93. This amendment nmakes a necessAry grammatical change.

S&ction 9G. This amendment givrs the court explicit power to regu-hatc the duties of An esaminer.

Seetion 97. This amendmert nakes clarifyingf changes.

Section 9R. This amendment makes a clarifying clanpe. The court may not cx part. order the trustee or debtor in powsession to ceaM opcr-sting the debtor's busine.

Section 99. Tlais amendment makes clear that a deficiency claim vrill bo eliminated only wlaen thb secured crtditor has bad an opportunity tY.

credit bid the claim. The amendment adds abandonment or surrcnder nf the collateral to the secured creditor as the po~ible evenatU that would alimintat the deficiency claim.

Section 100(a). 'This smendment makesa technies) clarifying chang'e and corrcts a typozraphical error.

Subetion (b). This amendment makes stylistic chanrgs Section 101 (a). This amendment makcs a grrmatical change.

Subsection (b). This amendment makes a technical stylistir changc.

Section IN (t). Paruerphs (1) through (5) maketcltcnical st)isti eltange. IJ'aragmpli (6) akes clear that preferred tok without vot-ing ri.hts can be issued under the plan and the prohibition agaiw4M isiing stock that cannot be voted extends only to common tock.

0210

FROM RTUE! 1. 8 02 11:09 ST. 10:59 NO. 4861385643 P 36 TAB9 0211

(ME) 1. 8a02 11:09 ST. 10:59 NO. 4861385643 P 37 rI Calendar No. 102 sm Coaucams 1 1 lNTERe 1: S.ass, I l I£ ?

No 9^ T5 OMNBUS BANKRUPTCY IMPROVEMENTS ACT OF 1983 REPORT OF TMK COMMITMEE ON THE JUDICIARY UNMIED STATES SENATE (rT Hominy S. 445I ova.ether wth Addtina ViHw)

Orderd to be prnted V.$ cOvERsj. n PRiTMMG Orntit Isis 0 WASKIJCOK I183 0212

FROY CTUE) 1. a 02 11:10 ST. 10:'9 NO. 4861385643 P 38 Caendar No. 102 OM CONc"MI SENATE REPo=

is Sio I N. 9865 OMNIBUS BANKRUPTCY IMPRDVEMENTS ACT OF 1989 Awz.L 26. 292-Ordend la be printed Mr. TwjIuwoNo, from the Committee on the Judiciary, submitted the following REPORT (To acompny S. 44]

The Committee on the Judiciary, which considered the bill (S.

445) to make certain substantive changes to Public law 95-598, the Bankruptcy Reform Act of 1978, having considered the same, re-ports favorably thereon as amended and recommends that the bill as amended do pass.

1. IUMPOSE 0? TUERUL The purpose of the bill is to make certain subtantive changes in Public Law 95-598, the Bankruptcy Reform Act of 1978.

IL IMlODUCON AMD WMUoLY or TKE RL On July 12, 1976. the Committee on the Judiciary reported S 2226, the Senate version of the Bankruptcy Reform Act of 1976. On September 20. 1978, H.R. 00. with further amendments, was pawed again by the House. On October 5, 1978. the Senate re-passed H.R. 8200. with additional amendments. Finally. on October

6. 1978. the House accented the final Senate changes and cleared the bill for signature by the President. On November 6,1978. Presi-dent Carter signed the bill and it beame Public law 95-598. On October 1. 1979. Public low 95-598, styled the Bankruptcy Reform Act of 1976, went into effect.

In the 97th Congres, the Subcommittee on Courts. chaired by Senator Dle, held general ovezght hanrings on the Bankruptcy Refortn Act of 1978 on Aril 3 nd 6, 1981. As a result of those hearingE, numerous ame nts, lagely technical in nature, were proposed which were passed by the Senate as S. 863, the Bankrupt-cy Amendments Act of 1981 on July 17 of that year. Additional hearings were held on October 29, 1931. During the course of these' 0213

(TUE) 1. 8 C2 11 :IC T. 10:59 l;0. 4861385643 P 39 2

hearin2g. judg, schola and bankuptcy practitioners testiriod a to the effectiveness of the new Code as it applies to consumer debt.

ram and suggested improvements. Commeute centered upon provi.

dons in Chapter; 7 and 1S governing redemption of collateral ral firmation agreements, Federal exemptions, preferential trers, and a number of additiona procedural sections of the Code. Wit neses also raised questions concerning the statutorfly maa criteria for determining eligbity for bankruptcy, and certain wit nmes requested committee consideration of various propls to require thle bankuptcr court to evauate the fiture earnings cap..

bility of consumer petitiones in determining eligibility for Chapter 7 relief, while others opned these propocals. At the hearings beld in October. 1981. the Su ramittee on.Courts explored the ramwi-cations of thse proposals on December lfi 1981. all of the Subcmittee membentm duced S. 2000, whi s favorably voted out of the Subcointtee on Courts, with a mendmeat in the nature of a substitute offered by Chairman Dole accepted thereto b a unanimous poll of Febru-ary 12, 1982 The bill was placed on thc Committee calendar earl in March and was before the committee for several weelks prior to vote, during which time committee staff conducted discussions en areas of conerm to members. As a result of these discussions. ;i number of amendments were accepted to & 20DO tith modifica-tions prior to final Oommittee action. The Committee appromed re-poring of the bill vith amendments by voice vote on Apri 20.

198. Senat on Kennedy and Mettenbaum requested thst their vrote be rcorded in the negative, and the clerk was so instructed.

No action was takrn by the tull &enateon S. 2000 during the 4.tl Congress On January 25. 1983, additional hearings were held and or: Feb-uary 3,1988. Senator Dole introduced S.-445, which contalned the provisionrof S. 2000, in addition to provisions addressing other areas of propmed substantive amendments. Further hearins werc held on S. 445 on April 6, 1983 After these heariiis*d as a result of further discussions *-none Committee membem S. 445 was amended in several important Mr Provisions requiring debir to file, with the court, state-ments of projected futuare earnins and expenses and authorizng the bankrutcy courts to dis s C~hapter 7 cam if debtora could a uable portion of their debts out of future income were delete& Provisins for debtor counseling by the court-appoaited trustee were added.&S. as atso amended to include lanrulfe authorizing courts-acting strictly on their o motion-to dismmL a Rue where the granting of Chapter 7 relief would represent a suabsttil u of that chapter. Further technical and clarifying amendments were made to cuions of the bill dea.inc with grain elevatoms shopping centers, and other technical mattens.

On April 19, 1981, the Judiciary Committee approved reportiar of the bill with the amendments agreed to.

During th core of Commite action on S. 445, Senatosm Dole, (Heflin,Metzenbaum ennedy, L yBBaucus and DeConcini each played a critical role in 6saping the legislation and in developing moderating language enhancing protections for debtors ,.fte:- -d by hbanges in the law provided for in the bill.

0214

FROW (TUE) 1. 8.02 11:10 T10:'59 NO.4861385643 P40 51 comparative performance of courts in cases filed under the rebpec-tivC chapters of the Code.

In an effort to begin compiling comprehensive comparative sta-tistics which would provide the Congress with more complete infor-mation concerning the performance of the courts in the respective judicial districts, the bill contains a directive to the Director of the Administrative Office of the United States Courts to begin assem-bling information concerning and liabilities of debtors; amount of debt discharged in cases under each chapter of title 11; the total amount of disbursements to creditors by the bankruptcy courts, and time elapsed between case flings and payncnts to creditors.

All of the information reuired to be collected under Subtitle

'W' of the bill would be available from records which will be avail-abic in the baikruptcy courts from petition and motion lingp. and it is the belief of the Committee that the compilations requested will pose no unmaraeable burden upon the Administrative Office.

The Director, of course. has complete discretion in establishing the procedures by which the information shall be gathered.

1. TECHMCAL AMrNaDUlNU On July 12, 1978, the Committee on the Judiciary reported S.

2266, the Senate version of the Bankruptcy Reform Act of 1978. On September 7, 1978, the Senate tool; fom the desk H.L 8200, the House version of the Bankruptcy Reform Act of 1978. struck the text of the bill and inserted in its place the text of S. 2266 and passed the bill as amended. On September 20. 1978. HR. 8200. with further amendments was passed again by the House. On October 5, 1978, the Senate repassed HIR 8200, with additional amendments Finally, on October 6, 1978, the House accepted the final Senate changes and cleared the bill for signature. On November 6, 1978.

the bill was signed into law with the designation Public Law 95-595. the Bankruptcy Reform Act of 1978.

Since the date of passage of the Act. judges, scholars, and bank-ruptcy practitioners have reviewed its provisions and numerous technical amendments and minor substantive changes have been suggested to clarify the intent of Congress.

On March 14, 1979, Senator DeConcini introduced S 658 which embodied many of those recommendations. After additional revi-sion, S. 658 was reported out of the Judiciary Committee on August

3. 1979. pumed by unanimous consent of the Senate on September

7. 1979. and sent to the House. On September 22, 1980. the House with further amendments passed S. 658 by unanimous consent. On December 1. 1980, the Senate made additional amendments to the House-passed version of S. 6S8 and passed it by unanimous consent.

On December 3, 1980 the House with further amendments passed S. 658 by unanimous consent. On December S. 1980, the Scnate wilhfuirther amendments reintroduced the bill as S. 3259 and passed it by unanimous consent. Since the House during the re-mainder of the 96th Congress took no action on the final Senate changes, the bill was not enacted into law.

In the 97th Qpagress. on April 2. 1981, Senator Dole, with Sena-tors Heflin and DeConcini as cosponsors, introduced S. 863, which 0215

FROMll (TIJE) 1.  :.52 l oT.

S1 10:59 NO. 4861385643 P 41 52 embodied all of the provisions of S. 3259, as passed by the Sena:e oan December 1. 1980, with a few minor chans. On April 3 and r.

1981, general oversight hearings on the Bankruptry rode werp hp!v by the Subcommittee on Courts, at which time testimony in, sur.

port of the bill's provisions was received.

On July 17. 1981. S. t163 was passed by the Senate. llowentr. n, action was taken on the bill by the House during the 97th Can.

Urrsm, On January 24th. 1983, further hearings were held on nred-ni amendments by the Judiciary Subcommittee on Courts. At the er.

clusion of hearings, Senater Dole introduced the substan:e of S.

B63. with additional provisions. as Subtitle I of the Committee bill.

Significant provisions of Subtitle I are discussed in the sectionz!

analysis which follows this summary of the bill cunteti6.

IV. SbVMMARY AND StCIONAL ANALYSIS OF flL 1u4.

A. SUMMAtY The bill is divided into ten subtitles. the content or which are at follows:

Subt. A- Consumer Credit Amendments. Reformed procvd -

lating to eonsurner debtor cases.

Subt. B: Grain Elevator Bankruptcy Amendments. Text is tra.% n from S. 3037 in 97th Congress. Provides procedures for expedied abandonment of grain from bankrupt elevators.

Subt. C: Shoppisg Ctnteis BanktrMptcy Amcndments S 24-1-, n 97th, S. 549 in 98th. Establishes a timetablc within which trust"e would have to accept or reject leases on shappitig center properti-*

in bankruptcy. and other purposes.

Subt. D: DruAIk Driaen' %ondischArgeabililv of debts S 25! r.

97th Congress Prohibits debtx incurred as a result of an ;aeM C drunl.driving frorn beinj discharged in bankruptcy.

Subt. E; Rcferees Salary and Expensc Fund Arnend'ird..

(Drawn from S. 863 in 97th Congress). Corrects a draftizg error .n the 1978 Act which requires a handful of corporate debtut ;ji bankruptcy to continue making payments to the non-exatent fur.d Subt. F: RepurcAase Agreements Amendmrnta Proposal :h Federal Reserve Roard. which exempts repurchase Waeements from the automatic stay in bankruptcy.

Subt. G: nmeshcring Agreemenft Amendments. S. 327 in the 97th Congress. S. 492 in the 98th. This subtitle provides that pXr-sons who hold timesharing agreements shall be granted u len un the property involved when the timesharing contractor goes banLik rupt and the trustee terminates the timesharing contrz:t. .;!'d other provisions.

Subt. RI Bankruptcy Overight. This subtitle directs the Adm'nis-trative Office to collect information on bankruptcy filings regard-ing levels of debtor income and assets, debtor living expensea, and total amounts recovered for creditors in proceedings under 6h-p ters 7, 11. and 13. This information will assist Congrcs,. it, ;int.%-

ing the functioning of the bankruptcy system.

Subt. 1- Technical and Clarifving Amenldmintis The hull. of te provisions in this subtitle arc drawn from S. MI whdi c 0216

FROY 'TUE) !. 802 11:11 ST. 10:59 NO.4861385643 P42 TAB 10 0217

• w:

-- I 0

I C,

V 0

w I

a4 a

5 a

iirIX la E

tirn In0 0

)-2 I -4 1-i 9

eq X 0-11 A m C-, '-I 0-G3 7-t4 tA.

0 0,

FROM (TUE) 1. 8c2 11 :11 ST. 10:59 O4861385643 O. P 44 2

hearing. judges, scholaem and bankruptcy practitioners tetfid gs to the effectiveness of the new Code as it applies to consumer debt, ars and suggeted improvements. Comments centered upon provi.

sons in Chapter 7 and 18 governing redemption of colliteraL re.

firmation agreement, Federal exemptions. preferential tranden.

and a n r of ad tional procedural sections of the Code. Wit.

nees also raised question concerning the statutorily mandated citeria for determining eligibility for bankruptcy, and certain w-nesses requested committee consideration of -_riousproposals to require the bankuptcy court to evaluate the future ear capa-bityof consumer etitioners in determining eligility for Chater 7eief, while others o~ppoed these proposals. At the heingheld in October. 1981, the Subcommittee on Courts explored thiWramnifi.

cations of these proposals.

On December 16, 1981, all of the Subcommittee inembers intr duced S. 2000, which was favorably voted out of the Subcommittee on Courts. with an amendment an the nature of a substitute offered by Chairman Dole accepted thereto by a wnanimous poll of Febru-ary 12, 1982- The bill was placed on the Committee calendar earl) in March and was before the committee for several weeks pncr ic vote, during whikh time committee staff conducted discussions or.

areas of conorn to mombiers. As a result of these disussions. s number of amendments were accepted to S. 2000 with modifitca-tions prior to final Committee action. The Committee approved we porting of the bill with ameidments by voice vote on April 20.

198 Senators Kennedy and Metzenbaum requesed that their vote be recorded in the negative, and the clerk was so instructed No action was taken by the full Senate an S. 2000 during the 9ith Congress.

On January 25, 1983, additional hearings were held and or. Feb.

r 3.1981, Senator Dole introduced S.44S, vWlITh confinei the provisionSof S. 2000, in addition to provisions addressing other aas of proposed substative amendments. Further hearings wert hedt on S. 445 on April 6, 1983.

After these hearings end es a result of further discussions among Committe members, S U45 was amended in several important re-spects. Provisions debtors to file, with the court. state Inents of projeoctd future eanins and expenses and authorizing tae bankruptcy ~ourts to dismiss Chapter I cases if debtors coula paY

• reasonale portion of thir debts out of future income were deletod. Prvisions for debtor counseling by the couri-appointed trustee were added. & 445 was also amended to include lacguagc authoriing courts-acting strictly on their own mnotion-to dismiss a cae granting of Chapter 7 relief would represent a subsantial abuse of that chapter. Murther technical and clarifying amendments were made to etions of the bill dealing with gruir elevators.sho PenteJM and other technical matters.

On Apri 1l Judiciary Committee approve red rin of the bill with the amendments agreed to.

During the course of Committee action on S. 445, Senators Dole.

Hefiin, Metzenbaum, Kennedy, Leshy, BauS and DeConcini each played a critial role in shaping the legislation and in developing moderating language enhancing protections for debtora affec l by

\thanges in the law provided for in the bill.

0219

FROW, 'TUE1 1. 8 02 11:12 ST. 10:59 NO. 4861385643 P 45 S1 comparative performance of courts in case filed under the respec-tive chapters of the Code.

In an effort to begin compiling comprehensive comparative sta-tistica which would provide the~Congress with more complete infor-mation concerin the performance of the courts in the respective judicial distct , the bill contains a directive to the Director of the Administrative Ofrlce of the United States Courts to begin assem-bling information concerning assets and liabilities of debtors amount of debt discharged in cases under each chapter of title 11:

the total amount of disbursements to creditors by the bankruptcy courts, and time elapsed between case filings and payments to creditors.

All of the information required to be collected under Subtitle "Er' of the bill would be available from records which will be avail-able in the bankruptcy courts from petition and motion filings. and it is the belief of the Committee that the compilations requested will pose no unmanageable burden upon the Administrative Office.

The Director, of course. has complete discretion in eablishing the procedures by which the information shall be gathered.

I. TECHMNCAL AbswNDwtma On July 12. 1978, the Committee on the Judiciary reported S.

226G6. the Senate version of the Bankruptcy Reform Act of 1976. On September 7. 1978, the Senate took from the desk H.R. 8200, the House version of the Bankruptcy Reform Act of 1918. struck the text of the bill and inserted in its place the text of S. 2266 and pased the bill as amended. On September 20, 1978. R.R. 8200. with further amendments was passed again by the House. On October 5.

1I97,the Senate repassed H.R. 8200, with additional amendments.

Finally, on October 6, 1978, the House accepted the final Senate changes and cleared the bill for signature. On November 6, 1978.

the bill was signed into law with the desigation Public Law 95-598. the Bankruptcy Reform Act of 1978.

Since the date of pass of the Act, judges, scholars, and bank-ruptcy practitioners have reviewed its provisions and numerous technical amendments and minor substantive changes have been ugested to clarify the intent of Congress.

On March 14, 1979, Senator DeConcini introduced S. 658 which embodied many of those recommendations. After additional revi-sion, S. 658 was reported out of the Judiciary Committee on August

3. 1979. passed by unanimous consent of the Senate on September 7.1979. and sent to the House. On September 22. 1980. the Roumc ith further amendments passed S. 658 by unanimous consent. On December 1. 1980, the Senate made additional amendments to the Housepassed version of S. 658 and passed it by unanimous consent.

On December S. 1980 the House with further amendments passed S. 658 by unanimous consent. On December 9. 1980, the Senate wiQrfirther amendments reintroduced the bill as S. 3259 and passed it by unanimous consent. Since the House during the re-nWinder of the 96th Congress took no action on the final Senate changer, the bill was not enacted into law.

In the 97th CQngress. on April 2. 1981, Senator Dole, with Sena-tors Heflin and DeConcini as cosponsors, introduced S. 6C3. which 0220

FROM (TUE) 1. 8'C2 11:12 ST. 10:59 NO. 4861385643 P 46 52 embodied all of the provisions of S. 3259, as passed by the Senate on December 1, 3980. with a few minor changes. On April 3 and 6.

19B1. general oversight hearings on the Bankruptcy Code were helM by the Subcommittee on Courts, at which time testimony in tu:

port of the bill's provisions was receivrd.

On July 17. 1981. S. 863 was passed by the Senate. However, no action was taken on the bill by the House duing the 97th Car.-

tress.

On January 24th, 1983, further hearinvu were held os. needed amendments by the Judiciary Subcommittee on Courts. At the con-clusion of hearings, Senator Dole introduced the substance of o.

863. with sdditiontl provisions. as Subtitle I of the Committee bi1 Significant provisions of Subtitle I are discussed in the anailysis which fallowx this summary of the bill cont'nts.

SectionL IV. SZVxm^Y AND S}ECTOAL ANALYSIS or THE Dil A. SUMMA&tT The bill is divided into ten subtitles. the content of which are :.

follouws:

Subt. A: Consumer Credit Amendmnentz. Reformed procedurm .

lating to consumer debtor cases.

Subt. B: Grain Elevator Bankruptcy Amendrents. Text iS drav. n from S. BoS7 in 97th Congress. Provides procedures for expedited abandonment of grain from bankrupt elevators.

Subt. C SlAoppig Cent rs Banknuptcy Armendments. S. 221i. .r.

97th. S. 549 in 8th. Establishes a timetable within which trus-c-would have to accept or reject leases on shopping center propertiee in bankrupty, and other purposes.

Subt. 1): Draunk Driuers' Nondischargebility of debt. S. 2!;5I -n 97th Congress. Prohibits debts incurred as a result of an ac .t drunk driving from being discharged in bankruptcy.

Subt. E: Refet rei Salary cad Erpenze u1nmd Amendinerae.

(Drawn from S. 863 in 97th Congress). Corrects a drafting error ;r the 1978 Act which requires a handful of nirporate debtorb in bankruptcy to continue making payments to the non-existent fund Subt. F: Repurchase Ageemets Amendmenia. Proposzi ot the Federal Reserve Board. which exempts repurchase agreemninti from the automatic stay in bankruptcy.

Subt. G: iYmesharing Arwments Amendments. S. 3027 in tac 97th Congress, S. 492 in the 98th. This subtitle provides :hatt VP soans who hold timesharing agreements shall be granted a h.en In the property involved when the timesharing contractor goe; birk-rup? and the trustee termi~nates the timesharing contrnct. xod other proviions.

Subt. H: Bankruptcy Quersight. This subtitle directs the Admtrms trative Office to collect information on bankruptcy filings reg.rd-isg levels of debtor income and assets, debtor living expenses. and total amounts recovered for creditors -in proceedings under Chap-ters 7, 11. and 18. This information will assist Cugress in .,n.z ing the functioning of the bankruptcy systern.

Subt. 1: Technicol and Clarifng Amendmne'ts The bulk ri h6 provisions. in this subtitle are drawn from S RAfr, which u. c 0221

FROM (TTIE 1. 8a02 11:12 #'T. :9:55 NO. 4861385643 P 47 53 Senate by unanimnous consent in 1981. The provisions correct gram-matical, punctuation, and spelling errors in the code. clarify the intent of the drafters in certain sections. and generally refine pro. I cedurft.

Subt. J: &uence clase. effeclu* date.

E. SMtMONJAL ANALYSIS 1.Sabtitle A Sec. 501: Title.

Sec. fOta)&(bI:k These sections amend sections 301 and 302 ef title 11 for the purpoe of creating a mechanism by which individual detors in bankruptcy can obtain the protections of the automatic stay pending the completion of debtor counseling as provided for in Section 20Mof the bill. Under the provisions of the bill, debtort would commence a case under Chapter 7 by filing a petitiont with the court which contains an initial designation of relief under that chapter. Upon the filing of such a petition, the debtor would have all the rights. including the right to the protections of the automat-ic stay, that would have been available under prior law anrd that would exist if the debtor wcre to make Chapter 7 his final designa-tion. Similarly, a debtor would commence a case under Chapter 13 by filing a petition with the initial designation that relief was sought under that. Chapter. and would have all the rights, includ-ing the right to the protections of the automatic stay, that would have been available under prior law and that would exist if the debtor were to inake Chapter 13 his fnal designation. The onI3 reason for referring to the initial designation as conditional is tn assure that debtors receive counseling before making a final deci-sion on whether to proceed under Chapter 7 or Chapter 13 in a*-

cordancz with the new 521(aYS) of title 11.

Sec. M~OWk This section authorizes a court to dismiss a case brought under Chapter 7 if the filing reprvesets a cubstantial abuse of that Chapter. Under this provision, the court may not dis-mJ a case in response tD a request or suggestion from any party in interest, nor may a party in interest amiae such a request or sug.

gestion. Instead, the case may be dismissed only where the court acting independently on its own motion, finds substantial abute.

and in such casc, the court must make an express finding or su.-

stantial abuse.

This provision represents a balancing of two inttrests. It pre-serves the fundamental concept embodied in our bankruptcy laws that debtors who cannot meet debts as they come due should be able to relinquish non-exempt property in exchange for a fre h start. At the same time, however, it upholds crediturs' intercb. i" obtaining repayment where such repayment would not be

) burden.

Crushing debt burdeni. snd severe financial problems place enor-j incus strains on borrowers and their families. Family life, persona-emotional health, or work productivity often suffers. By enablinr individuals who cannot meet their debt to start a new life, unbur-dened with debts they cannot pay, the bankruptcy laws allow trou bled borrowers to become productive members of their cornmuni-tics. Nothing in this bill denies such borrowers with unaffordable 0222

FROM 4861385643 P 48 ITUE) 1. 8 C2 11 :13. ST. 10:59 )O.

TAB 11 0223

FRO1f STUE) 1.8 02 11:13 ST. 10:59 NO. 4861385643 P 49 8ft CNCr SENATE Calendar No. Rep= 102 lat Srmin No. 98-45 OMNIBUS BANRUPTCY MPROVEMENS ACIr OF 1983 AT&. 26. 1913-0raxd to be priWme Mr. TUmabtoxD, from the Committee on the Judicmry, submitted the following REPORT rTn amemoany S. 443s The Committee on the Judiciary. which considered the bill (S.

445) to make certain substantive chanes to Public Law 95-598, the Bankruptcy Reform Act of 1978, having considered the same, re-ports favorably thereon as amended and recommends that the bill as amended do pass.

1. ?URPOSE or MhE SZ.L The purpose of the bill is to make certain substantive changes in Public Law 95498. the Bankruptcy Reform Act of 19TS I. MUICODUCUON AMD OtY OF E UIUM On July 12, 1978, the Committee on the Judiciary reported S.

2226, the Senate version of the Bankruptcy Reform Act of 1978. On September 20. 1978, IL 8200, with further amendments, was passed again by the House. On October 5, 1976, the Senate rc-passed H.R. S20 with additional amendments. Mally, an October 6, 1978, the House accepted the final Senate change and cleared the bill for signature by the President. On November 6, 1978, Presi dent Carter signed the bill and it became Public Law 95-598. On October 1.1979. Public Law 95-598. styled the Bankruptcy Reforar 1 Act of 1978. went into effect.

In the 17th Congress, the Subcommittee on Courts, chaired by Senator Da~e, held general oversight hearings on the Bankruptcy Reform Act of 1978 on April 3 and 6, 19B1. As a result of those-hearings, numerous amendments, largely technical in nature, were proposed which were passed by the Senate as S. 863. the Bankrupt-cy Aunendmenti Act of 1981 on July 17 of that year. Additional hearngs we2e held on October 29, 1981. During the course of these-0224

FROY' (TUE) 1. 8 02 11:13 ST. I0: 9 'N0. 4861385643 P 50 embodied all of the provisions of S 3259, as passed by the Senate on December 1,1980. with a few minor changes. On April Sand 6.

1981. general oversight hearings on the Bankruptly Code vere helo by the Subcommittee on Cours, at which time testimony in gup.

port of the bill'sc rovisions was received.

On July 17, 19 1, S. 63 was passed by the Senate. However, nc, action was taken on the bill by the House during the 97th Con-gress.

On January 24th. 1983, further hearings were held on oeeded amendments by the Judiciary Subcommittee on Courts. At thc con clusion of hearings. Senator Dole introduced the substance of .

B63, with additional provisions. as Subtitle I of the Committr bhd:

Significant provisions of Subtitle I are discussed in the sectionol analysis which follows this summary of the bill contents IV.

SUMMARY

AND =CI0AL £W&LV=s or THE U1UL A.. SUMMAXY The bill is divided into ten subtitles. the content ofrwhic h are :s fol~lows:

Subt. A: Co.ieumer Credit Amendinents. Reformed procedures 'e-lating to consumer debtor cases.

Subt. B: Grain Elevator Bankruptcy Amendments. Text is druan from S. 303' in 97th Congress. Provides procedures for expedired abandonment of grain from bankrupt elevators.

Subt. C: Shoppirsg Centers Bankruptcy Amendments. S. 1297 .n 97th, S. 549 in 98th. Establishes a timetable within whict trnstcc would have to acpt or reject leases on shopping center propertie in bankruptcy, and other turposes.

Subt. D: Drunk Driers Nondischargenbility of debtL. S. 215w in 97th Congress. Prohibits debts incurred as a result of an act of drunk driving from beig discharged in bankruptcy.

Subt. E: Referee' Saolry and Expense Fund Amn"adni:fts.

fDrawn from 5. 863 in 97th Congressi. Corrects a drafting Crror in the 197W Act which requires a handful of corporate debtors in bankruptcy to continue making payments to the nonexistenL fud.

Subt. F: Repurchase Agreemeab Amendments. Proposal of ihe Federal Reserve Board, which exempts repurchase agreemenu from the automatic stay in bankiruptcy.

Subt. G: 71msahonng Agreements Amendments. S. 302. in the 97th Congress, S. 492 in the 98th. This subtitle provides that rp:r.

sons who hold timesharing agreements shall be granted a ien on the property involved when the timesharing contractor goe. bj!r.-

rupt and the trurtfee terminates the timesharing contrsCt. .nid other provisions.

Subt. H: Bnkruptcy Oeryight. This subtitle directs the Adirir trative Office to collect information on bankruptcy filings reird-ing levels of debtor income and ascb, debtor living erpenses. nd total amounts recovered for creditors in proceedings under Chsp-ters 1. 11. and 13. This information will assist Congress in zn2'vx ing the functioning of the bankruptcy system.

Subt. I Technical and Clarifying Amendments. The bulk o' :he provisions in thi, bubtitle are drawn from S. b6.3, which r. ;ec thtn 0225

FROM' RTUE) 1. 8'02 11:14 ST. I2:59 NO.4861385643 P 51 53 Senate by unanimous consent in 1981. The provisions con gram-matical. punctuation, and spelling erors in the code, clarify the intent of the drafters in certain sections. and generally refine pro-!

cdures.,J Subt. J: Sewrance clause, effective date.

E. SECTTOXAL ANALYSIS

t. Subtitle A Sec. S0!: Title.

Sec. 2(&a)&tb): 1hese sections amend sections 301 and 302 of title 11 for the puipose of creating a mechanism by which individual debtors in banlruptcy can obtain the protections of the automatic stay pending the completion of debtor counseling as provided for in Section 203 of the bill. Under the provisions of the bill. debtors would commence a case under Chapter 7 by filing a petition with the court which contains an initial designation of relief under that chapter. Upon the riling of such a petition. the debtor would have all the rights, including the right to the protections of the uautozat-ic sty. that would have been available under prior law and that would exist if the debtor were to make Chapter 7 his final designs.

tion. Similarly, a debtor would commence a cane under Chapter 13 by filing a petition with the initial designation that relief was scoght under that Chapter. azd would have all the rights. includ-ing the right to the protectiona of the automatic say, that would have been aailable trunder prior law and that woud exist ir the debtor were to make Chapter 13 his final designation. The only reason for referring to the initl designation as conditional is to assure that debtors receive couseling bore making a final deci-sion on whether to proceed under Chaptr 7 or Chapter 13 in ac-cordance with the new 521(aX31 of title lt.

Sec. 2Ovel This section authories a court to dismiss a case brought under Chapter 7 if the filing represents a substantial abuse of that Chapter. Under this provision, the court may not dib-r miss a cmse in response to a request or suggestion from any party in interest, nor may a party in interest make such a request or aug-gestion. Instead, the case may be dismissed only where the court.

acting independently on it own motion. finds substantial abuse and in such case. the court must make an express finding of sub-stantial abuse.

Tis provision represents a balancing of two interests. lt pre serves the fundamental concept embodied in our bankruptcy laws that debtors who cannot meet debts as they come due should be able to relinquish nonexempt property in exchange for a fresh start. At the same time, however, it upholds creditors' interests 1n obtaining repayment where such repayment would not be a burden.

Cruching debt burdens and sevevr fi il prolems place enor-mous strains an borrowers and their failies. Famly life, persona!

( emotional health, or work productivity often suffers. By enabling individuals who cannot meet their debts to start a ncw life, unbur-dened with debts they cannot pay, the bankruptcy laws allow trou-bled borrowers to become productive members of their communi-ties. Nothing in this bill denies such borrowers with unaffordable I1 0226

FRO.M (TUEI 1. 8 02 11:1, ST IC::9 NO. 4861385643 P 52 84 and may soclict rejections as well as accptances. Paragraph e21 de-letes redundant language in section 1103(c).

Selts r 8edndTant a makesary grammatical change.

Sec. *99: This amendment gives the court explicit power to rcgu late the duties of an examiner.

Sec. 400 This amendment makes clarifying changes.

Set 401: This amendment makes a clafyng change. The ccun may not ex parte order the trustee or debtor in possesion to cease operating the debtor's business.

Sec. 4+/- This amendment makes clear that a deficiency claarr will be eliminated only when the secured creditor has had an op.

portuity to credit bid the claim. The amendment adds abandor.

iient or surrender of the collateral to the secured creditor as the possibl, events that would eliminate the deficiency claim.

Set 403: (a). This amendment makes a technical clxrifvin; change and corrects a typographical error.

Subsection (b). this amendment makes stylistic changes.

Sec 404: ta) This amendment makes a grammatical change.

Subsection (b). This amendment makes a technical styisti:

chan~e Sec. 4: (a. Paragraphs (1) through (5)make technical stylist::

changes.

Subsection (b). This amendment makes necessary itylisr' Changes.

Se. 406: This amendment makes stylistic changes.

SeC 407: a T'his amendment makes clariying amendments Subsection (b). This amendment makes clarifying aner.d ments.

Subsection (c). This amendment makes stylistic changes, Sc 408: (a). This amendment corrects a cros&-referencing error.

Subsection (b). This amendment makes a stylistic change.

Subsection Wcl This amendment makes typographical styils tic changes.

Subsection (d). This amendment makes a necessary clanfytn, chanje in section 1126(g).

Sea JO:(a). is amendment makes stylistic changes.

Susection (b). This amendment makes stylistic changes.

Sec. 410: (a). Pararphs (1)through (6)mdak clarifying ard sty-listic changes. Paragraph (7) makes a stylistic change. The Code :s keyed to "holders of claims" for style as opposed to "creditorn Parugraph (9) makes clear that a government taxing unit may be required to accept certain tax payments oer a period of biS i' years followint confirmstion of a plan of reorganization. The exten-sa provisions are broadened to include taxes that result trom the sale of a capital usset, the apture of an investment tax credt.

the recapture of depreciation, or a simihr event. This provision is particularly imortat in a reorganization plan where the debtor as for a peni atf years had substantial unrealized income &, a result of capital gain. This is common In the instance whemr 3 farmer seeks to reorgamze and use the salt of all or a majcr part of his (arm to pay the debts provided for under the plan of reora-nization. Without this sort of provision, the capital gains tare; due upon the sale or the farm are immediately due upon confirTnatrmn 0227

v ERol (TUE) I.8 02 11:00 3T. 10:59 NO.4861385643 P 3 TAB I 0228

FROY (TUE) 1. 8a02 11:14 ST. 10:59. NO. 4861385643 P 54 Page .

Cr.cation Search Result Rank(R) 4 of 14 Database A&P Sen. 445 OS/05/63 BANKR64 -LM Sen. 445, 98th Cong., lst Ses6.

(Cite as: ALP SIM. 44S)

Arnold & Porter Legislative History: P.L.98-353 BILLS IN THE HOUSE OF REPRESENTATIVES S. 445 AN ACT To amend title 1:l, United States Code, and for other purposes.

May 5. 1983 i1 1 Be it enacted by the Senate and House of Representa-2 tives of the United States of America in Congress assembled, 3 That this Act may be cited as the *Omnibus Bankruptcy Im-4 provements Act of 1983'.

S TITLE I-BANKRUPTCY CODE AMENDMENTS 6 Subtitle A-Consumer Credit Amendments 7 SEC. 201. This subtitle may be cited as the "Consumer 8 Debtor Bankruptcy Amendments Act of 1983".

9 SEC. 202. (a) Section 301 of title 11 of the United States Code. is amended-1 (1) by striking out "A voluntary" and inserting in 2 lieu thereof "(a) For a debtor who is not an individual, 3 a voluntary"; and 4 (2) by adding at the end thereof the following new S subsection:

6 "(b) with respect to an individual debtor or debtors, a 7 voluntary case under this title is commenced by the filing 8 with the bankruptcy court of a petition which conditionally 9 designates a chapter under which relief is sought. The filing 10 of such a petition shall constitute an order for relief under the 11 provisions of the chapter conditionally designated. A final 12 designation of the chapter under which relief is sought shall 13 be made within the time period specified in section 521 of 14 this title.".

15 (b) Section 302(a) of title 11, United States Code, is 16 amended to read as follows:

17 " (a) A joint case under this title is commenced by the 18 filing, with the bankruptcy court, of a single petition pursuant.

19 to section 301(b) by an individual and such individual's 20 spouse. The comnencement of a joint case under a chapter of 21 this title constitutes an order for relief under the chapter cz-n 22 ditionally designated in accordance with section 301 {b) . ".

23 SEC. 203. (a) Section 305 of title 11 of the United 24 States Code is amended by adding at the end thereof the 25 following new subsection:

1 'Id)(1) Subject to the provisions of paragraph (2), the court on its own motion according to procedures established 3 by rule, and not at the request or suggestion of any party in Copr. (C) West 2002 No Claim to Orig. U.S. Govt. Works Westiaw.aw 0229

FROM (TUE) I.8'02 11:15.3T 1O:9 NO. 4861385643 P 55 Page 55 Hi.o' Sen. 445 05/05/83 (cite as: a&P ORR. 445, i11) 17 thirds in amount and more than one-half in number of 1e allowed claims of such class, to be governed by subpar-19 agraph (B) of this paragraph; and 20 O(B) unless the aggregate value of the interests in 21 such property of the holders of such claims is inconse-22 quential, the class may elect, as provided under sub-23 paragraph (A) of this paragraph, that such claims of 24 such class, whether or not the holders of such claims 25 had recourse against the debtor and notwithstanding

'112 1 section 506(a) of this title, are secured claims to the 2 full extent that such claims are allowed.

3 "(2) The provisions of paragraph (1) of this subsection 4 are limited to the purposes of this chapter and such para-s graph shall not in any other way alter, affect, or create any 6 right or liability of or in any other entity who may be liable 7 with the debtor on a debt to which, the provisions of such E paragraph apply. "*.

9 SEC. 403. (a) Section 1112(a) of title 11 of the United 10 States Code is amended-11 (1) in paragraph (2), by striking out ois an invol-12 untary case originally commenced under this chapter"

-~ and inserting in lieu thereof originally was com-menced as an involuntary case under this chapter";

15 and 16 (2) in paragraph (3), by striking out won other 17 than' and inserting in lieu thereof "other than on".

18 (b) Section 1112(b) of title 11 of the United States Code 19 is amended-20 (1) in paragraph (5), by inserting "a request made 21 for, before additional; and 22 (2) in paragraph (8), by striking out "and" and in-23 nerting in lieu thereof For".

24 SEC. 404. (a) Section 1121(c) (3) of title 11 of the United 25 States Code is amended by striking out "the claims or inter-

• 113 1 ests of which are" and inserting in lieu thereof "of claims tr 2 interests that is'.

3 (b) Section 1121(d) of title 11 of the United States Code 4 is amended by inserting "made within the respective periods S specified in subsection (c) of this section" after 'interest".

6 SEC. 405. (a) Section 1123(a) of title 11 of the United 7 States Code is amended-6 (1) by striking out "A" and inserting in lieu 9 thereof "Notwithqtanding any otherwise applicable 10 nonbankruptcy law, at; 11 (2) in paragraph (1), by inserting commas after 12 "classes of claims" and after "507(a) (7) of this title";

13 (3) in paragraph (3), by striking out "shall";

(4) in paragraph (5), by striking out "execution"

- and inserting in lieu thereof *implementation"; and 16 (5) in paragraph (5)IG), by inserting "of" after Copr. (C) West 2002 No Claim to Orig. U.S. Govt. Works W sPlaw 0230

FROM (TUE) I.8C2 11:15 ST. 10:59 NO. 4861385643 P 56 Page 56 A&P Sen. 445 05/05/83 (Cite act A&P BEN. 445. *113) 17 "waiving".

18 (b) Section 1123(b) (2) of title 11 of the United States 19 Code is amended by-20 (1) striking out "or rejection" and inserting in lieu 21 thereof ", rejection, or assignment"; and 22 (2) striking out "under section 365 of this title" 23 and inserting in lieu thereof "under such section".

24 SEC. 406. Section 1124 of title 11 of the United States 25 Code is amended-

'114 1 (1) by amending paragraph (2) (A) to read as fol -

2 lows:

3 "(A) cures any such default that occurred before 4 or after the commencement of the case under this title, 5 other than a default of a kind specified in section 6 365(b) (2) of this title;"; and 7 (2) in paragraph (3)(0) i), by striking out Nands 8 and inserting in lieu thereof gore.

9 SEC. 407. (a) Section 1125(a) of title 11 of the United 10 States Code is amended-11 (1) in paragraph (1). by inserting ", but need not 12 include such information about any other possible or 13 proposed plan" after "plang; 14 (2) in paragraph (2) (B), by inserting "the" after is "with"; and 16 (3) in paragraph (2) (C), by inserting "of" after 17 "holders".

1e (b) Section 1125(d) of title 11 of the United States Code 19 is amended by-20 (1) inserting "required under subsection (b) of this 21 section" after "statement" the first place it appears; 22 and 23 (2) inserting N. or otherwise seek review of," after 24 "appeal from".

'115 1 (c) Section 1125(e) of title 11 of the United States Co&

2 is amended by-3 (1) inserting "acceptance or rejection of a plan" 4 after "solicits"; and 5 (2) inserting "solicitation of acceptance or rejec-6 tion of a plan or" after "governing".

7 SEC. 408. (a) Section 1126(b) (2) of title 11 of the a United States Code is amended by striking out "1125(a) (1)"

9 and inserting in lieu thereof "112S(a)".

10 (b) Section 1126(d) of title 11 of the United States Code 11 is amended by inserting a comma after "such interests" the 12 first place it appears.

13 (c} Section 1126(f) of title 11 of the United States Code 14 is amended by-15 (1) striking out "isdeemed' and inserting in lieu 16 thereof "o, and each holder of a r] aim or interest of 17 such class, are deemed";

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, A 0231 r . I r W SI W. 0231

FROM ITUEi 1. 8 02 11:16 ST. 10:59 KO. 4861385643 P 57 TAB 13 0232

FROM (TUE) 1.8a2 11:16 ST. 10:39 NO. 4861385643 P 58 Page I Location Search Result Rank(R) 4 ot 10 Database A&P H.R. REP.98-882 BANKR 84 - T*

H.R. Rep. No. 682, 98th Cong., 2d Sess. 1984 (Cite as: M? L.R. REP.98-882)

Arnold & Porter Legislative History: P.L.98-353 REPORTS Bankruptcy Amendments of 1984 June 29, 196I

[To accompany H.R. 5174]

• 1 Mr. Rodino. from the committee of conference, submitted the following CONFEYNCE REPORT The committee of conference on the disagreeing votes of the two Houses on the amendment of the Senate to the bill (H.R. 5174) to provide for the appointment of United States Bankruptcy judges under article III of the Constitution, LV' amend title 11 of the United States Code for the purpose of making certain changes in the personal bankruptcy law, of making certain changes regarding grain storage facilities, and of clarifying the circumstance which co] i ectiSe bargaining agreements may be rejected in cases under chapter 11, and far other

.poses. having met, after full and free conference, have agreed to recomurend 1 do recommend to their respective Houses as follows:

That the House recede from its disagreement to the amendment of the Senate tC the text of the bill and agree to the same with an amendment as follows:

In lieu of the matter proposed to be inserted by the Senate amendment inser-the following:

That this Act may be cited as the "Bankruptcy Amendments and Federal Judgezhip Act of 1984'.

TITLE I--BANKRUPTCY JURISDICTION AND PROCEDURE Sec. 101. (a) Section 1334 of title 28, United States Code, is amended to read as follows:

"s 1334. Bankruptcy cases and proceedings

,,(a) Except as provided in subsection (b) of this section, the district -carts shall have original and exclusive jurisdiction of all cases under title 11.

i2 (b) Notwithstanding any Act of Congress that confers exclusive ju-isdictiw.

on a court or courts other than the district courts,, the district rcurts Ehall have original but not exclusive jurisdiction of all civil proceedings srison7 under title 11, or arising in or related to cases under title 11.

"(c) () Nothing in this section prevents a district court in the irc-es.- z:

justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising unde- _t.e I.

arising in or related to a case under title 11.

i2) Upon timely motion of a party in a proceeding based upon a State -a :-:im or State law cause of action, related to a case under title :1 but n'ct arising Copr. (C) West 2002 No Claim to Orig. U.S. Govt. Works WeVtiaw. 0233

MY, ITlE) 1.a 02 11:16 ST. 10:59 NO.4861385643 P 59 Page 53 A&P H.It. REP.98-882 (Cite an: ASP H.R. REP.99-882, *55)

Sec. 500. (a) Section 1103(b) is amended by--

(1) inserting "having an adverse interest" after *entity'; and (2) adding at the end thereof the following: "Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest. ,.

(b) Section 1103(c) of title 11 of the United States Code is amended--

(1) in paragraph (3), by--

• S6 (A) striking out Orecomnendations' and inserting in lieu thereof "determinations'; and (B) inserting "or rejections, after "acceptances"; and (2) in paragraph (4). by striking out ", if a trustee or examiner, as the case may be. has not previously been appointed under this chapter in the case".

Sec. 501. Section 110S of title 11 of the United States Code is amended by striking out *estate, and" and inserting in lieu thereof 'estate and of the".

Sec. 502. Section 1106(b) of title 11 of the United States Code is amended Dy inserting n, except to the extent that the court orders otherwise," before "any other".

Sec. 503. Section 1107(a) of title 11 of the United States Code is amended by inserting "serving in a case" after "on a trustee".

Sec. 504. Section 1108 of title 11 of the United States Code is amended by inserting A. on request of a party in interest and after notice and a :heari-.'"

after "court".

Sec. 505. (a) Section 1112(a) of title 11 of the United States Code i. amended (1) in paragraph (2), by striking out "is an involuntary case originally commenced under this chapter" and inserting in lieu thereof "originally war commenced as an involuntary case under this chapter"; and (2) in paragraph (3), by striking out "on other than" and inserting in lieu thereof 'other than on".

(b) Section 1112(b) of title 11 of the United states Code is amended--

(1) in paragraph (5), by inserting "a request made for, before 'add tior.9.1":

and (2) in paragraph (8), by striking out "and' and inserting in lieu therecf "or".

Sec. 506. (a) Section 1121(c)(3) of title 11 of the United States Code is amended by striking out "the claims or interests of which are" and infsrrrtrc ir lieu thereof "of claims or interests that i.

(b) Section 1121(d) of title 11 of the United states Code is amended by inserting 'made within the respective periods specified in subsection c,;

this section" after interest".

Sec. 507. (a) Section 1123(a) of title 11 of the United States Code is amended-(1) by striking out "An and inserting in-lieu thereof "Notwithst.and.lng ,r.y otherwise applicable nonbankruptcy law, a";

(2) in paragraph (1), by--

(A) inserting a comma after 'classes of claims"; and (B) by striking out "507(a) (6) of this title" and inserting in lieu thereof "507(a) (7) of this title,";

(3) in paragraph (3), by striking out "shall";

(4) in paragraph (5), by striking out "execution" and inserting ir, 7.;el Copr. (C) West 2002 go Claim to Orig. U.S. Govt. Works V Vp S-'Wul-,W. 0234

FROM (TUE) 1.8 02 11:16 ST. 10:59 NO.48613856(3 P 60 Page 54 SAwP H.R. REP.98-882 MCite an: A&P .R. RZP.96-892, *56) thereof "implementation"; and (5) in paragraph (5) (G), by inserting oof after "waiving".

(bi Section 1123 (b) (2) of title 11 of the United States Code is amended by--

(1) striking out "or rejection, and inserting in lieu thereof *, refection, or assLgznment; and

• 57 (2) striking out "under section 36S of this title" and inserting in lieu thereof "under such section".

Sec. 506. Section 1124 of title 11 of the United States Code is anende~d--

(1) by amending paragraph (2)(A) to read as follows:

"(A) cures any such default that occurred before or after the commencement of the case under this title, other than a default of a kind specified in section 365(b) (2) of this title;"; and (2) in paragraph (3) (B)(i). by striking out "and" and inserting in Lieu.

thereof "or".

Sec. 509. (a) Section 1125(a) of title 11 of the United States Code is amrended-(1) in paragraph (1), by inserting ", but adequate information need not.

include such information about any other possible or proposed plan, af:er Oplan';

(2) in paragraph (2) (B), by inserting "the, after awith"; and (3) in paragraph (2) (C). by inserting sofI after "holders".

-1) Section 1125(d) of title 11 of the United States Code is amended :v-v (1) inserting "required under subsection (b) of this section" after "statement" the first place it appears; and (2) inserting ^, or otherwise seek review of," after "appeal from".

(c) Section 1125(e) of title 11 of the United States Code is amended k;v--

(1) inserting Racceptance or rejection of a plan" after "solicits; And (2) inserting "solicitation of acceptance or rejection of a plan or" afte, "governing".

Sec. 510. (a) Section 1126(b) (2) of title 11 of the United States Code is amended by striking out "1125(a) (1)" and inserting in lieu thereof "11 5ta(

(b) Section 1126 {d) of title 11 of the United States Code is amended ,y inserting a comma after "such interests" the first place it appears.

(c) Section 1126(f) of title 11 of the United States Code is amended ;-

(1) striking out "is deemed" and inserting in lieu thereof ", ant e.:e. e :n of a claim or interest of such class, are conclusively presumed";

(2) striking out "solicitation" and inserting in lieu thereof "solicitation"; and (3) striking out "interest" and inserting in lieu thereof "interest:-:

(d) Section 1126(g) of title 11 of the United States Code is amended ,'

striking out "any payment or compensation" and inserting in lieu the-e:..'

"receive or retain any property".

Sec. 511. (a) Section 1127(a) of title 11 of the United States Code is amended by--

(1) inserting "of a plan" after "After the proponent"; and (2) inserting "of such plan" after "modification".

(b) Section 1127(b) of title 11 of the United States Code is amended by

'iking out 'the court, after notice and a hearing, confirms *56 such vlar. as modified, under cection 1129 of this title, and circumstances warran-: _cn modification" and inserting in lieu thereof "circumstances warrant sc'-

Copr. (C) West 2002 No Claim to orig. U.S. Govt. Works Westaw- 0235

FROM ,TUE) 1. 8 02 11:17 ST. 10:59 NO. 4861385643 P 61 TAB 14 0236

(TUE) I.8 02 11:17 ST 10:59 10.4a613a563 P 62 LEGISLATIVE IUSTORY BAKUPTCY N)MT1 AMND FEDERAL JUGSHM ACT OF 198 P.L. U-M. e.e pcre 1 Stt. =

House Conference Report No.. 9842 June 29. 1994 [To accompany U.R. 5174]

Cong. Record Val. 110 (1984)

DATES OF CONSIDERATnox AND PASSAGE House March 21, June 25. 1584 Senate June 10. 29. 1OU No Senate Report or House Report was submitted with this egiuiation.

Ile House Conference Report did not contain a Joint Ixvlantory Statement. Statements by Leislative Leaders are set out.

STATEMENTS BY LEGISLATIVE LEADERS STATEMENT BY THE HON. PETER W. RODINO, JK.,

CHAIRMAN OF THE HOUSE COMMITTEE ON THE JUDICIARY, UPON THE CONSIDERATION OF THE CONFERENCE REPORT ON H.R. 5174.

130 Congressional Record H 7189. June 2Y. 19SS Mir. Speaker. todat, to ihe suprnbc. amaZL'neme and relieft*nr fla. I am surc, inot all. I rise to alkeup the result of the conlerence on M R.

3714. the bankrtiptcv amendmcnts and F.edcral Jludgrihip At tir Q1114.

Ixt me Uicklih- 0stline the prouisims of out agrecemen. As ill ot us ktow. that It a ver) compknx. complicated measure. Titlc I createi a nme-bankruptcy court arrangement to replace the pros-i.sions enarted in the Bankniptc, Reform Act of I978-Public Law 95-.938--hhich were found unconstituuional by the U.S. Supreme Court in the rav Ml

.vnrt~hn Pehnie v ./alatrn,, Puprltne U.. 458 U.S. 30 (1982).

The conferecm adopted most of the prowissaon ercatinK this .le%%

bankruptcy court arrangement that were contained in the bill passed bi this body Title 11 creates 85 additional district court sand court of appeal. article 111 judgeships. Fon) of these priations are to cak efTec In 1'384 and forty-five are to take elfcct in 1985.

Title Ill provides for certain amendments to title It of the United States Code which is the Bankruptcy Codc. This bndy and the other body agreed to thc amendments cintuined in subtitle A of tite Ill.

consmonlv reerred to as the consumer credit amendments. IdWnttal provisions were passed by both bodies, and the conferees did not alter the consumes credit amendments. These amcndiments are fair to both debtors and creditors, and contain no threshold or future income test.

Subtitle B of title Ill contains amendments relting to a gram storagi (acility bankruptcy. Each body passed very similar grain elevator provi-sions. The conferes adopted th other bodWt language.

576 0237

FROMK :TUE! 1. 8 02 11:17 ST. i'):59 NO.4861385643 P 63 TAB is 0238

FROM (TUE) 1. a C2 11 :17 ST. 10:59 KO. 4861383643 P 64 PUBLIC LAW W-3S3 PILL S611: JaW 10. ISU BAMCUPTCY AMENDMENTS AND FEDERAL JUDGESHIP ACT OF 1984 For Lepixkzi HihWM of Art See p. 57 AmiAn ft emWd Wk U of Iha .dNi-SW.e Cmd. mwduag ba ^~I O4646 , " dw ASWfl,Ia... A.as ~Sf#ekIt

_046no bsbwq 0:=b SIm. Cud..rm ot her uW-IIm.

Se it exacted by the Senate and HNM of Reprmnsatimes of the United State of Amerim in Coqgres3 assembled. Tht this Act may B-krntcy be cited as the "Bankruptcy Amendments and Federal Judgeship Act of 1984".

,I"tb l~~~~~~~~~~~d ederalAdt of Act of 1284". Mt~~~~~~~~~~~~~vdeship 1064.

TTLE I-BANKRUPTcy JuIISDICrION AND PROCEDURE 2tUSC I ml .

SE. 101. (a) Section 1334 of title 28. United Slates Code. is amended to read as follows:

1 1334. Bankruptcy caes and proceedings "tal Except as provided in subsection (b of this section. the district courts shall have original and exclusive jurisdiction of all cos under title 11. 11 USC 101t "ib) Notwithstanding any Act of Congress that confers exclusive 8 jurisdiction on a court or courts other than the district eourtz. tbe district courts shall have original but not exclusive jurisdiction or all civil proeeediyp arising under ttle 11, or *rising in or related to cases under ti~e 11.

"(Wc)l) Nothing in this section prevents a district coUt in the interest of justice, or in the interest of comity with State courts or respect for Suate law. from abstaining from hearing a particular proceeding anisg under title 11 or arising in or related to a case under title 11.

"02)Upin timely motion of a party in a proceeding based upon a State law claim or State law cause of action. related to a cae under title 11 but not arising under title t or arising in a ce under title 11, with respect to which an action could not have been comnienced in a court orthe United States absent jur~idiction under this section.

the district court shall abstain from hearing -uC

- -- i an action is commenced. ad can be tihnebr ajudictd in a Stat forum of apropriate Jurisdiction. Any deciion to 0asin made under this subsection is not reviewable by appeal or otberwue. This subsection sal not be construed to limit the appbcablt of the stay provided for by section 3W2 of title 13. Unted Sa de, a such n applies to an action affectiug the pOpe of testate in bankrupcy.

"Idl dit cort in which a case under title 11 i wmmenosd cGft en or is pending shall have exclusive jurisdiction of all of the proPerty, -Pt wherewr located, of the debtor a of the commencement at such case. and of the estate.".

Ib) The table f sections for chapter 85 of title 2B, United Statme Code, is amended by amending the item relating to section 1334 to read as follows:

'IM. aknkicupy cae e nd4 prondep.

98 STAT. 333 0239

FROM ITUE) I.a 02 ii:18 3T. 0:55. NO. 4861385643 P 65 Jily la DANKRUPTCY AMENDMENTS Or 19U P.L g-353 (1) in aragraph (2), by straik out 's n nvolunta ca originaLly caiunmced unader this do " aid inserting in lieu thereof `oiasj w= cazm = 5 an involuntaryca under this chapter '"and C2) in paragraph 434 by striking but "on other thane and ineting in lieu thereof "other than on".

4b) Section 1l12M) of title 11 of the United States Cade is amended-(1) in paragaph (51, by Werting "a request made for" before

'additional"; and (2) in paragraph(81by ttriking out 'and" and inserting in lieu thereor-*.

Sm 506. (a) Section 11212cX3)of title 11 of the United States Code is amended by striking out 'the claims or interets of which are" ad neti in lieu thereof "of claims or intests that ast.

( Section 1121(d) of title 11 of the United States Code ikamended by inseri "made within the rspeclive periods specified in subsec-tion clof t section" after "interest".

Stc 507. (a) Section 1]231a)of title 11 of the United States Code is amended-(1)by striking out "A" and inerting in lieu thereof "Notwith-standing any otherwise applicable nonbankruptcy law. e';

(2)in paragraph (M,by-(A) inserting a comma after "clams of claims". and (B) by striking out "507(aX6) of tis title" mnd inserting in lieu thereof "`071aJ(7of this title ";

(3) in paragraph IJ1 by striking out "shalV';

14) in paragraph (5) by striking out "execution" and inserting in lieu thereof "implemenwtation ; and (5) in paragraph (51XG) by inserting 'or' after "waiving".

lb) Section 1123(bWl of title 11 of the United States Code is amended by-(U striking out "or rejection" and inserting in lieu thereof.

rejection. er assignment 'and 121 strik~ig out "under ection 365 of this title" and inserting in lieu thereof"under such section".

St. 508. Section 1124 of title 11 of the United States Code is amended-(11 by amending paragraph (2XAl to read as follows:

"(A) cures any such default that ocurred Wfore or after the commencement of the case under this title. other than a default f a kind specified in section 3M5(bX2) of this ti~te,; Ante F and

12) in paragraph 13XBXil. by striking out "and" and inserting in lieu thereof "or".

Sm $09. (a) Section 1125(a) of title 13 of the United States Code is amended-(1)in pararaph (1), by sertg '. but adeQuate infoamtion need not include such intormation about any other pible Or pr ed plan" after 'Plan";

(21 in paragraph (2B1B. by inserting "the after "with"; and (3) in Praeraph M21MC. by inserting "o.1 after "holders".

lb)Section 1H2k of title 11 of the United Sates Code is amended by-(1) inserting "required under subsection (b) of this section" after "statement" the first place it appears; and 98 STAT. 385 0240

EXHIBIT B 0241

-0 i ,;4,9

• - . 4 GARY M. COHEN, SBN 117215 F AROCLES AGUILAR, SBN 94753 , : r- -.

2 MICHAEL M. EDSON, SBN 177858 Ci~~~~~~~~~~~~~~~~-

pi L CALIFORNIA PUBLIC UTILITIES COMMISSION 3 505 Van Ness Avenue San Francisco, California 94102 4 Telephone: (415) 703-2015 Facsimile: (415) 703-2262 5

ALAN W. KORNBERG 6 WALTER RIEMAN, SBN 139365 rl~~~~.

BRIAN S. HERMANN 7 ERIC TWISTE MARC F. SKAPOF PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 Avenue of the Americas 9 New York, New York 10019-6064 Telephone: 212-373-3000 10 Facsimile: 212-757-3990 Attorneys for Defendants, Appellees and Cross-Appellants 12 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 13 SAN FRANCISCO DIVISION 14 In re Case No. 01-2490 VRW (Bankruptcy Case No. 01-30923 DM; 15 PACIFIC GAS AND ELECTRIC COMPANY, Adv. Proceeding No. 01-3072 DM) a California corporation, 16 Chapter II Case Debtor.

17 Federal l.D. No. 94-0742640 18 PACIFIC GAS AND ELECTRIC COMPANY.

19 a California corporation, 20 Plaintiff. Appellant, and Cross-Appellee.

21 - against - CROSS-APPELLANTS' REPLY BRIEF 22 AND OPPOSITION TO SUPPLEMENTAL CALIFORNIA PUBLIC UTILITIES COMMISSION. REQUEST FOR JUDICIAL NOTICE BY 23 and LORETTA M. LYNCH. HENRY M. DUQUE. APPELLANT AND CROSS-APPELLEE RICHARD A.BILAS. CARL W. WOOD. and PACIFIC GAS AND ELECTRIC 24 GEOFFREY F. BROWN, in their official capacities as COMPANY Commissioners of the California Public Utilities 25 C.ommission.

26 I)Defendants. Appellees. and Cross-Appellants.

27 1 28 1 I RO)SS.Al11EiU.ANT-';o01TNIN(;HlIjlF AND)APPFLIJJ+5 OINKOIMIN II AITH A AN-% 01'A 0242

f TABLE OF CONTENTS l

Pa PRELIMINARY STATEMENT.....................................................................................................1.

3 STATEMENT OF FACTS ... 3.................

4 ARGUMENT .. 3.................

5 THE ELEVENTH AMENDMENT BARS THIS PROCEEDING.................................................

6 A. The Bankruptcy Court Incorrectly Determnined that PG&E's Claims Against the 7 Individual Commissioners Could Proceed Under the Doctrine of Ex Parne Young.

8 1. PG&E Did Not Seek Prospective Relief to Remedy Any Alleged Actual and 9 Ongoing Violation of Federal Law by the Commissioners.

10 2. The Bankruptcy Court Incorrectly Determined that There Was a Sufficient "Threat" that the Commissioners Would Take Action to Enforce the True-up.

3. The Young Doctrine Does Not Apply Because the Relief Requested by PG&E 12 Would Drastically Interfere with California's "Special Sovereignty Interest" in 13 Using its Police Power to Manage the Statewide Energy Crisis ........................... I 14 B. The Court Should Reject PG&E's Argument, Raised for the First Time on Appeal And Unsupported in the Appellate Record. That the Commission 15 Waived Its Sovereign Immunity in This Proceeding ................... ............................. I1 16 1. The Court Should Not Consider PG&E's Waiver Argument Because It Was Raised For the First Time On Appeal ......................... Il 17

2. PG&E's Request for Judicial Notice Should be Denied Because It Would 18 Create New Disputed Issues of Fact That Should Not Be Resolved by this 19 Appellate Court in the First Instance ......................... I 20 3. This Appellate Court Should Refrain From Undertaking in the First Instance the Highly Fact-Sensitive Inquiry Into Whether the Commission Waived Its 21 Sovereign Immunity ............. 3I 22 4. Even on the Merits, the Commission Did Not "Waive" Its Sovereign 23 Immunity In Connection With the Claims Asserted

_-3 By PG&E In This Proceeding ............. 14 24 CONCLUSION ............. 20 26 27

('ROS.-API'ti-L.ANI1'4 OPENING. IRIE)-AND APIPEIJ -ES OPPOSITION TO AKIF1. ANI'S(WE 0243

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I TABLE OF AUTHORITIES 2 CASES 3 ANR Pipeline Co. v. LaFaver, 150 F.3d 1178 (10th Cir. 1998) .................................................. 11 4 Agua CalienteBand of Cahuilla Indians v. Hardin, 223 F.3d 1041 (9th Cir. 2000),

5 -cen.denied, 121 S. Ct. 1485 (2001) ........................................................... 9,10,11 6 Booth v. Maryland, 112 F.3d 139 (4th Cir. 1997), cert. denied, 524 U.S. 905 (1998) .................. 3 7 Children'sHealthcareis a Legal Duty, Inc. v. Deters, 92 F.3d 1412 (6th Cir. 1996) ................... 9 8 Common wealth of Va. Dep t of Meed Ass't Servs. v. Shenandoah Realty Partners. L P.

9 (In re Shenandoah Realty Partners,LP.), 248 B.R. 505 (W.D. Va. 2000) .............. 17. 18, 10 ConfederatedTribes v. White (in re White), 139 F.3d 1268 (9th Cir. 1998) ........................ 17, 18, I Elliot v. Hinds, 786 F.2d 298 (7th Cir. 1986) ............................................................ 6 12 Exparne Young, 209 U.S. 23 (1908) ............................................................ passim 13 First Am. Title Ins. Co. v. Naegele, 35 F.2d 1072 (9th Cir. 1994) ................................................ 12 14 First Union Nat'l Bank v. MCA Fin. Corp. (In re MCA Fin. Corp.),

15 237 B.R. 338 (Bankr. E.D. Mich. 1999) ............................................................ 17, 18 16 Gardner v. New Jersey, 329 U.S. 565 (1947) ........................................................... 19 17 Hankins v. Finnel, 964 F.2d 853 (8th Cir. 1992) ........................................................... 17. 18 18 Hill v. Blind Industry & Services of Maryland, 179 F.3d 754 (9th Cir. 1999) ............ ................ 17 19 Idaho v. Coeur DAene Tribe, 52vU.S. 2. 261 (997) ................................................................... 11 20 21 Ken/on Prods. & Dev. Co. v. United States, 646 F.2d 223 (5"h Cir 1981) .12 22 Lazar v. California, 237 F.3d 967 (9th Cir. 2001) ................................... ........................ 3,14,15 23 Milliken v. Bradley, 433 U.S. 267 (1977) ............... 8 24 In re Mitchell, 209 F.3d 11 11 (9th Cir. 2000) .............................................................. 14,16,17 25 Nantucket Investors 11 v. Cal. Fed. Bank (inre Indian Palms Assocs., Ltd.).

26 61 F.3d 197 (3d Cir. 1995) . 12 27 Pap n v. Allain. 478 U.S. 265 (1986) ..........................

............................. .............. , 6,7, 8 28 Pitis v. (016 l)epartment of Taxation (In re Pitts), 241 B.R. 862 (Bankr. N.D. Ohio 1999) ...... 17 CfR(AS-APPEIj.ANTS' RF'.Y RRIFF ANDOPPOSnONTO RFQIIFr HtR I1111(IA 0244

Senminole Tribe of Florida v. Florida,517 U.S. 44 (1996) ....................................................... 19 Summit Med. Assocs. v. Pryor, 180 F.3d 1326 ( 11th Cir. 1999) ................................................. 10 3

United Mexican Slates v. Woods, 126 F.3d 1220 (9th Cir. 1997) .............................................. 1, 5 4

5 United Siates v. Patrin,575 F.2d 708 (9th Cir. 1978) ....................................................... 11 6 Waste Management Holdings, Inc. v. Gilmore, 252 F.3d 316 (4th Cir. 2001) ........................ 9, 10 7 Yakima Indian Nation v. Wash. Dep't ofRevenue, 176 F.3d 1241 (9th Cir. 1999) ..................... 14 8 STATUTES Fed. R. Evid. 201(b) .12 10 21 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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I PRELIMINARY STATEMENT 2 In its opening brief, the Commission showed that PG&E's claims against the 3 Commissioners do not fit within the narrow exception to Eleventh Amendment immunity created 4 by Ex pare Young, 209 U.S. 23 (1908). PG&E's opposition brief on appeal ("PG&E Br.")

5 offers no persuasive reason for this Court to reach any different conclusion.

6 1. Actual and Ongoing Violation. PG&E barely defends the Bankruptcy 7 Court's application of the "actual and ongoing violation" requirement of the Young doctrine.

8 Instead, PG&E tries to recast a lawful prepetition action by the Commission (the adoption of the 9 True-up), which the Commission did not take any postpetition action to enforce, into an actual 10 and currently ongoing violation of federal law. The attempt does not succeed.

11 PG&E first claims that "if [the True-up's] implementation or enforcement would 12 violate the automatic stay. [the True-up] necessarily violates federal law." (PG&E Br. at 19.)

13 This is plainly wrong. In order to have availed itself of the Young doctrine, PG&E must have 14 shown an actual and currently ongoing violation of law by the Commissioners at the time PG&E 15 filed its adversary proceeding, not at some hypothetical future time. Whether "implementation 16 or enforcement" of the True-up in the future, had it ever happened, might then have violated 17 federal law does not mean that the Commission had violated federal law at the time PG&E filed 18 its adversary proceeding. On that critical issue, PG&E has nothing to say.

19 PG&E next claims that a violation of federal law in the past is sufficient to trigger 20 the actual and ongoing violation requirement. Even if this were true, it would not matter in this 21 case because PG&E did not allege any violation of federal law by the Commissioners, either past 22 or present. But PG&E is also wrong on the law. A past violation of federal law is not sufficient 23 for purposes of the Young doctrine. (Comm. Br. at 16-18 & n.8; infra at 4-5.) The Young 24 doctrine does not apply where "federal law has been violated at one time or over a period of time 25 in the past." United Mexican States v. Woods, 126 F.3d 1220, 1223 (9th Cir. 1997).

26 Finally. PG&E suggests that the Commission violated federal law on an actual 27 and ongoing basis merely because the True-up "imposed a duty on PG&E." (PG&E Br.

2I8 CROSS-APPEMtAN I VRkt4' Y RRU-t- ANT) OPKOSfIT()N TOREQUFIST IOR JUDICIAt1 0246

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I at 19-20.) PG&E is wrong. PG&E does not cite a single case, and the Commissioners are not 2 aware of any, that found any "imposed" "unenforced" duty on the plaintiff sufficient to 3 establish an actual and ongoing violation by the defendant state officials. In all the cases, the 4 only question is whether the state officials are engaging in conduct that allegedly violates federal 5 law. Indeed, the cornerstone of the Young doctrine is the fiction that unlawfid conduct by staie 6 officials is not conduct of the state, and therefore is not shielded by the state's sovereign 7 immunity. Without any such unlawful conduct by state officials, there is no basis for application 8 of Young, regardless of any "imposed" or "unenforced" duties on the plaintiff.

9 Here, PG&E did not allege any unlawful conduct by the Commissioners. PG&E 10 alleged only that the automatic stay, once PG&E filed for bankruptcy, would have prevented 11 certain hypothetical postpetition actions by the Commissioners to 'implement or enforce" the 12 True-up. PG&E's allegation that the automatic stay would have prevented certain postpetition 13 actions to enforce the True-up did not make the True-up itself allegedly "illegal" in any sense.

14 Similarly, any supposed "duty" that the True-up imposed upon PG&E did not make the True-up 15 illegal or convert any lawful prepetition actions by the Commission into postpetition actions in 16 violation of the automatic stay. In the end, PG&E merely contends that a lawful prepetition act 17 by the Commission had continuing consequences for PG&E. The Supreme Court has held that 18 Young does not apply in such circumstances. (infra at 7.)

19 2. Waiver. PG&E contends, for the first time on appeal, that the 20 Commission has waived its sovereign immunity. The Court should reject that argument:

21 First, presumably because most of the acts constituting the alleged waiver had not 22 occurred at the lime of the Bankruptcy Court's decision, PG&E did not contend before the 23 Bankruptcy Court that the Commission had waived its sovereign immunity. This appellate Court 24 should not consider any issues that were not considered by the Bankruptcy Court in the first 25 instance. PG&E's proper remedy would have been to bring a motion before the Bankruptcy 26 Court, under Rule 60(b) of the Federal Rules of Civil Procedure as incorporated by Federal Rule 27 of Bankruptcy Procedure 9024, for example, respecting any claims that the Commission has 28 waived its sovereign immunity. Second. therc is no support in the record for any waiver by the C

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.f I Commission. PG&E seeks instead to base its waiver argument on over 70 new documents that 2 PG&E hopes to introduce by way of request for judicial notice. The Court should deny PG&E's 3 request for judicial notice, because it would introduce disputed issues of fact that have not been 4 developed nor considered by a trial court. Third, this Court should not undertake the highly fact-5 sensitive waiver inquiry without the benefit of consideration by the Bankruptcy Court in the first 6 instance, and without the benefit of a full factual record, developed in the context of adversarial 7 litigation before a trial court. And finally, PG&E's argument that the Commission waived its 8 sovereign immunity is incorrect on the merits.

9 STATEMENT OF FACTS 10 PG&E claims that the Commission has been "all over the lot" on whether the I Accounting True-up creates a "defense" to PG&E's Rate Case. (PG&E Br. at 16 n. 16.) The 12 Commission has maintained, from the beginning, that the question of what effect (if any) the 13 True-up has on the Rate Case is a question to be decided in the Rate Case. PG&E acknowledges 14 that the validity of the True-up is not an issue in this adversary proceeding. (PG&E Br. at 16).

15 ARGUMENT 16 THE ELEVENTH AMENDMENT BARS THIS PROCEEDING 17 PG&E claims that it brought this adversary proceeding to prevent the 18 Commission from asserting a "defense" to the Rate Case. (PG&E Br. at 16.) If that is true, then 19 this proceeding cannot proceed in light of the Eleventh Amendment. See Booth v. Maryland, 20 112 F.3d 139, 143 (4th Cir. 1997) ("fEinjoining a state from asserting a particular defense in 21 some future federal action would be precisely the sort of inroad on state sovereignty that the 22 Eleventh Amendment forbids."), cert. denied, 524 U.S. 905 (1998).

23 As the Commission pointed out-in its opening brief, the Court need not determine 24 whether the Commission or the Commissioners are entitled to assert sovereign immunity because 25 PG&E's appeal can be easily disposed of on its merits. (Comm. Br. at 12-13.)

26 27 28 K(MSS APPEI .LANTS-REP .V %RI+F+

AND OPPOSITIKN TO REQI IFST FOR It IM'INU/

0248

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I A. The Bankruptcy Court Incorrectly Determined that PG&E's Claims Against the Individual Commissioners 2 Could Proceed Under the Doctrine of Exr Parte Younr 3 1. PG&E Did Not Seek Prospective Relief to Remedy Any Alleged 4 Actual and Ongoing Violation of Federal Law by the Commissioners 5 > In its opening brief, the Commissioners showed that the Bankruptcy Court did not 6 properly apply the "actual and ongoing violation of federal law" requirement of Ex pane Young 7 and improperly permitted this action to proceed against the Commissioners. (Comm. Br.

8 at 16-18.) Rather than defend the Bankruptcy Court's application of Young, PG&E tries to 9

"reinvent" the adoption of the Accounting True-up-which PG&E acknowledges was a lawful 10 prepetition action by the Commission-into an "actual" and currently "ongoing" violation of federal law. PG&E fails.

I11 12 PG&E first claims that "if [the True-up's] implementation or enforcement would 13 violate the automatic stay, [the True-up) necessarily violates federal law." (PG&E Br. at 19.)

14 But that conclusion does not follow at all. PG&E's allegation that the automatic stay might have suspended enforcement of the True-up does not amount to an allegation that the True-up was 16 itself "illegal" by reason of the automatic stay. After all, the fact that the automatic stay may 17 operate to suspend a plaintiffs right to sue a bankrupt entity for breach of contract hardly means that underlying state contract law is "illegal" by reason of the stay. Furthermore, the Young 18 19 doctrine is not predicated on any "illegality" of a law in the abstract, but on the specific conduct 20 of state officials taken to enforce the law. Whether some hypothetical "implementation or enforcement" of the True-up by the Commission in the future might tilen have violated federal 21 22 law says nothing about whether the Commission had violated federal law at the rime PG&Efiled its adversanr proceeding.

23 PG&E next claims that the Eleventh Amendment "permits plaintiffs to bring an 24 25 action to redress an ongoing and prospective violation of rights caused by defendants' pre-26 litigation conduct." (PG&E Br. at 20.) Although PG&E cannot bring itself to state the 7 proposition openly, apparently PG&E is suggesting that a past violation of nghts can sufficC to e8stablish a presently ongoing violation for purposes of the Young doctinne. First of all, in thc CRO.S-APPE.lANTS' RtPIY BRIEF ANiOPPOSITIO)N ToREQUF.'II HNOWII/)iC/ 0249 1 ~~~~~~~~~~~~~~~~A

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I proceeding below PG&E did not allege even a past violation of rights by the Commissioners, so 2 whether or not a past violation is sufficient is irrelevant. As explained, PG&E did not contend 3 (and could not possibly have contended) that the prepetition True-up was unlawful under the 4 automatic stay, which is effective only postpetition. (Comm. Br. at 18-19.) PG&E is also wrong 5 on the law. A past violation of federal law is not a currently ongoing violation of law for 6 purposes of Young. (Comm. Br. at 14.) In the words of the Ninth Circuit, the Young doctrine 7 does not apply where "federal law has been violated at one time or over a period of time in the 8 past." United Mexican States v. Woods, 126 F.3d 1220, 1223 (9th Cir. 1997); accordPapasanv.

9 Allain, 478 U.S. 265, 277-78 (1986) ("Young has been focused on cases in which a violation of 10 federal law by a state official is ongoing as opposed to cases in which federal law has been 11 violated at one time or over a period of time in the past .... ").

12 Finally, PG&E suggests that the Commissioners are violating federal law on an 13 actual and ongoing basis merely because the True-up "imposed a duty on PG&E." (PG&E Br.

14 at 19-20.) According to PG&E, a "pending but unenforced duty" imposed upon PG&E is 15 sufficient to trigger Young. (PG&E Br. at 21.) But PG&E does not explain how any "duty" 16 imposed upon PG&E would be inconsistent with automatic stay, which generally bars an "action 17 or proceeding" against the debtor or an *"act" to exercise control over the debtor's estate.

18 (Comm. Br. at 34-43.) PG&E is wrong in any event. PG&E does not cite any authority, and 19 there is none, that an "imposed" or "unenforced" duty on the plaintiff is sufficient to establish an 20 actual and ongoing violation by the defendant state officials. The sole question is always 21 whether the state officials are engaging in conduct that allegedly violates federal law. As the 22 Commissioners have shown, the entire Young doctrine is predicated on the fiction that illegal 23 acts by state officials are not actions of the State, and therefore not protected by the State's 24 sovereign immunity. (Comm. Br. at 17-18.) In the absence of any such illegal conduct, the 25 actions by the state officials are fully protected by sovereign immunity, and there is thus no basis 26 to permit the officials to be sued in federal court. For this reason, any "duty" that may have been 27 imposed on PG&E is complctely irrelevant for purposes of Young. The critical inquiry is 28 1 R()KK Ai'MMI AMIR - uRt Y "IRIPF ANIltpFnITmNrtlhIIi:sliFnI1 0250

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I whether the Commission had taken any actual conduct that amounted to an ongoing violation of 2 federal law.

3 In the Bankruptcy Court. PG&E did not allege any such unlawful conduct. At 4 most, PG&E alleged that the automatic stay, once PG&E filed for bankruptcy, would have 5 prevented certain hypothetical postpetition actions by the Commissioners to "implement or 6 enfr~ee" the True-up. But just because the automatic stay might have prevented certain 7 postpetition actions to enforce the True-up did not make the True-up "illegal" or convert any 8 lawful prepetition actions by the Commission into postpetition actions in violation of the 9 automatic stay. Similarly, just because the True-up imposed some "duty" upon PG&E did not 10 make the True-up illegal or create a basis for finding that the Commission had engaged in a 11 continuing violation of the automatic stay. As the Supreme Court has indicated, a litigant cannot 12 come within Young by alleging merely (as PG&E does here) that a State official's act in the past 13 has continuing consequences for the plaintiff. (Infra at 7, discussing Papasan.)

14 The two "well-established examples" that PG&E relies on have no application 15 here. PG&E mentions habeas cases, which challenge a prison warden's continued confinement 16 of a prisoner by reason of an allegedly unlawful conviction. (PG&E Br. at 20.) There, the 17 alleged ongoing violation is the warden's affirmative and ongoing act of imprisoning a human 18 being. Similarly, an employee discharged in violation of federal law (the other example relied 19 upon by PG&E) can assert that the discharge 'is a continuing violation [because) as long as the 20 state official keeps him out of his allegedly tenured position the official acts in what is claimed to 21 be derogation of [plaintiffs] constitutional rights." Elliot v. Hinds, 786 F.2d 298. 302 22 (7th Cir. 1986) (cited by PG&E at 20). Here, in contrast, PG&E did not allege, and could not 23 have alleged, that the automatic stay imposed on the Commissioners any current parallel 24 obligation to take some affirmative step, and that that the Commissioners' failure to take that 25 affirmative step therefore constituted an ongoing violation of federal law.

26 The two cases that PG&E cites in a footnote (at 20 n. 19) not only fail to support 27 its theory. they show that PG&E did not allege any ongoing violation of federal law by the 28 Commissioners hcre. In Papasan, plaintiffs asserted two claims against State officials. The first Ix--' Iz]If-W- n1.1 nrlltCC t

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I claim rested on allegations that in the past, Mississippi officials had improvidently disposed of 2 federal trust lands to be used to support public schools, and that as a result, schoolchildren had 3 been deprived of adequate current school funding in violation of federal trust law. Plaintiffs 4 sought an injunction requiring Mississippi officials to meet an alleged continuing obligation to 5 provide adequate funding. The Supreme Court held that this claim was barred by the Eleventh 6 Amendment and did not fit within the Young exception. The Court explained:

7 We have ... described certain types of cases that formally meet the Young requirements of a state official acting inconsistently with federal law but that 8 stretch that case too far and would upset the balance of federal and state interests that it embodies. Young's applicability has been tailored to conform as precisely 9 as possible to those specific situations in which it is necessary to permit the federal courts to vindicate federal rights and hold state officials responsible to the 10 supreme authority of the United States. Consequently, Young has been focused on cases in which a violation of federal law by a state official is ongoing as II opposed to cases in which federal law has been violated at one time or over a period of time in the past, as well as on cases in which the relief against the state 12 official directly ends the violation of federal law....

13 Papasan,478 U.S. at 277-78 (internal quotations and citations omitted).

14 Based on these principles, the Court held that the Papasanplaintiffs' first claim, 15 although formally based on an alleged "continuing obligation on the part of the trustee" officials, 16 was really an action alleging "ongoing liability for past breach of trust," and therefore fell 17 outside Young. Id. at 280 (emphasis added).

18 Papasanthus demonstrates that a litigant cannot come within Young by alleging 19 merely (as PG&E does here) that a State official's act in the past has continuing consequences 20 for the plaintiff. What counts is whether the State official is actually committing a continuing 21 violation of federal law. This is why PG&E's insistence that the True-up imposed current and 22 future obligations on PG&E is, for purposes of Young, completely beside the point. PG&E 23 brought no claim in this action that the Commissioners acted unlawfully when they promulgated 24 the True-up, and PG&E did not coherently claim that the True-up "violated" federal law. PG&E 25 claimed only that "implementation" or enforcement of the Order was stayed by federal law, and 26 that claim cannot be cast as an accusation that the Commissioners were engaged in an ongoing 27 violation of federal law.

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2 In that claim, plaintiffs alleged that the defendant Mississippi officials were currently distributing 3 the income from certain lands and trusts unequally among Mississippi school districts, to the 4 detriment of schools in certain counties. This claim, the Supreme Court held, focused on "the 5 present disparity in the distribution of the benefits of state-held assets, and nor the past actions of 6 the State." 478 U.S. at 282 (emphasis added). PG&E therefore misdescribes this claim when it 7 asserts that the Court upheld a claim challenging disparate funding "due to State's sale of 8 property held in trust years earlier." (PG&E Br. at 20 n. 19.) Rather, the Court upheld the equal 9 protection claim because it challenged current school funding decisions by State officials as an 10 ongoing violation of federal law, and did not focus on the past sales of trust property.

11 PG&E also cites Milliken v. Bradley, 433 U.S. 267 (1977). Milliken, a school 12 desegregation case, does not support PG&E's position any more than Papasandoes. As a matter 13 of substantive federal equal-protection law, if a school district has imposed legally mandated 14 segregation by race, the school district has an affirmative, ongoing obligation to wipe out the 15 vestiges of that discrimination. The Supreme Court held that Young therefoe permitted a federal 16 court to order Detroit school officials to take prospective measures to remedy their ongoing and 17 continuing violation of their federal duty to desegregate:

18 The decree requires state officials ... to eliminate a de jure segregated school system. More precisely, the burden of state officials is that set forth in Swann-to 19 take the necessary steps 'to eliminate from the public schools all vestiges of state-imposed segregation." The educational components, which the District Court 20 ordered into effect prospectively, are plainly designed to wipe out continuing conditions of inequality....

21 Milliken, 433 U.S. at 289-90 (emphasis added, internal citations omitted).

22 Contrary to PG&E's suggestion, therefore, Milliken is not a case where a State 23 24 official merely took some past action that then disadvantaged plaintiffs in the present. The State 25 officials there were engaged, the Supreme Court held, in an ongoing violation of their substantive Constitutional duty to eliminate "continuing conditions of inequality."

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2. The Bankruptcy Court Incorrectly Determined that There Was a Sufficient I "Threat" that the Commissioners Would Take Action to Enforce the True-up 2 As the Commission has shown, the Bankruptcy Court improperly determined that 3 this action could proceed under Young based upon some "threat" that the Commission would 4 implement or enforce the True-up. (Comm. Br. at 20-21.) By that phrase, the Bankruptcy Court 5 did not mean that the Commissioners had actually threatened in any way to take enforcement 6 action arguably barred by the automatic stay. The Bankruptcy Court meant only that in the 7 nature of things, the Commissioners could or might enforce the True-up. That is insufficient.

8 See Comm. Br. at 20-21; Children'sHealthcareis a Legal Duty. Inc. v. Deters, 92 F.3d 1412, 9 1415 (6th Cir. 1996) ("Young does not apply when a defendant state official has neither enforced 10 nor threatened to enforce the allegedly unconstitutional state statute.") (citing voluminous 11 authority); Young, 209 U.S. at 155-56 ('JOIfficers of the state . . . who threaten and are about to 12 commence proceedings ... may be enjoined by a federal court.") (emphasis added).

13 PG&E relies on three cases, none of which is applicable here. First, PG&E cites 14 Agua Caliente Band of CahuillaIndians v. Hardin, 223 F.3d 1041, 1045 (9th Cir. 2000), cert.

15 denied, 121 S. Ct. 1485 (2001). The Commissioners distinguished that case in its opening brief.

16 (Comm. Br. at 21 n. I I & n. 12.) PG&E does not even attempt to explain in its appeal brief why 17 the Commissioners' treatment of Agua Caliente is wrong. PG&E claims only that Agua Caliente 18 suggests a "pending but unenforced duty" imposed upon PG&E is sufficient to trigger Young.

19 But the case suggests nothing of the sort. As the Commissioners have explained, Young was 20 triggered in Agua Caliente not by any "pending unenforced duty," but because the plaintiffs had 21 alleged an actual and ongoing violation of federal law, in that state officials had issued tax 22 assessments in alleged violation of federal law. Here, PG&E did not allege any similar unlawful 23 actions.

24 The other authority cited by PG&E is equally wide of the mark. In Waste 25 Management Holdings. Inc. v. Gilmore, 252 F.3d 316 (4th Cir. 2W I). there was no issue raised 26 concerning whether a "threat" of enforcement was sufficient under Young. And, in any event, 27 the content of the state statute at issue was allegedly itself contrary to federal law, just as in Agua 20 (iROM-APIPEU.ANTS REPLYV BIFF ANimpmsi~rioqioRwurQtI' i(* WIU(llcAl NMK~T 0254

I Caliente, whereas here PG&E did not make, and could not make. any similar allegation against 2 the content of the True-up.

3 The final case relied upon by PG&E is in Summit Med. Assocs. v. Pryor, 4 180 F.3d 1326 ( 1th Cir. 1999). That case is distinguishable on several grounds. First, in 5 Summit the state officials had affirmatively expressed, in writing, their intent to enforce the 6 statute against those violating it, and there was no question given the circumstances that the 7 officials would carry through on that threat. See id. at 1339. The narrow issue in Summit was 8 not whether a "threat" of enforcement was sufficient, because there clearly was such a threat, but 9 whether Young required the state official to threaten to enforce the statute against the specific 10 plaintiffs in the case. Here, the Commission did not express any intention to enforce the 11 True-up. (Comm. Br. at 19 n.IO & at 21 n.12.) Second, in Summit the content of a state statute 12 was itself allegedly contrary to federal law, as was true in Agua Calienteand Waste 13 Management, but as is not true here. Third, the statutes at issue in Summit were criminal 14 statutes, enacted in connection with abortion protests, which imposed severe penalties (up to ten 15 years in jail) for a violation. See id. at 133940.

16 3. The Young Doctrine Does Not Apply Because the Relief Requested by PG&E Would Drastically Interfere with 17 California's "Special Sovereignty Interest" in Using its 18 Police Power to Manage the Statewide Energy Crisis 19 PG&E understates the relief that this proceeding seeks. As explained in the 20 Commission's opening brief, the sweeping relief that PG&E seeks would upset the entire balance between competing interests that California has struck as a centerpiece of the statewide utility 21 22 deregulation. (Comm. Br. at 22-24.) In a very real sense, PG&E is asking the Court to displace the State's central judgments on this deregulation in favor of PG&E's own. The affront to 23 24 California's sovereignty is not just that the relief PG&E seeks "implicates" a core area of state 25 sovereignty, the regulation of public utilities, but that the relief implicates that core area of 26 sovereignty so intrusively that PG&E's action is effectively against California itself. Under 27 these circumstances. the relief PG&E requests in this proceeding would infringe upon California's "special sovereign interest" in a way comparable to the ininngement at issue in 28 CKOW~APPE ILANTS- RFPLY BlRIEF ANI) OPPOSiTON TO R~AFI H) 11111C1fAI NO 0255 IC)-

I Idaho v. Coeur D 'Alene Tribe, 521 U.S. 261, 270 (1997). See id. at 281-283, 289, 296 2 (O'Connor, J., concurring) (Young inapplicable where "it simply cannot be said that the suit is 3 not a suit against the state"); Agua Caliente, 223 F.3d at 1045-1048; ANR Pipeline Co. v.

4 LaFaver, 150 F.3d 1178, 1194 (IOth Cir. 1998).

5 B. The Court Should Reject PG&E's Argument, Raised for the First Time on Appeal And Unsupported in the Appellate Record, 6 . That the Commission Waived Its Sovereign Immunity in This Proceeding 7 PG&E contends that the Commission has waived its sovereign immunity. The 8 Court should reject that argument for several independent reasons:

9 First, PG&E did not raise any waiver contention in the Bankruptcy Court. Most 10 of the acts constituting the alleged waiver had not occurred at the time of the Bankruptcy Court's 11 decision. As we show below, this appellate Court should not consider any issues that the 12 Bankruptcy Court did not first consider. Second, there is no support in the record for any waiver 13 by the Commission. Knowing this, PG&E seeks to base its waiver argument on over 70 new 14 documents, totaling a thousand or so pages, that PG&E seeks to introduce by way of request for 15 judicial notice. As we show below, PG&E's request for judicial notice should be denied. Third, 16 this appellate Court should not undertake the highly fact-sensitive inquiry into whether the 17 Commission waived its sovereign immunity without the benefit of consideration by the 18 Bankruptcy Court, and without the benefit of a fully developed factual record. And finally, on 19 the merits PG&E's argument that the Commission waived its sovereign immunity is incorrect.

20 1. The Court Should Not Consider PG&E's Waiver Argument Because It Was Raised For the First Time On Appeal 21 22 "As a general rule, a federal appellate court does not consider an issue not passed 23 upon below."' UnitedStates v. Parrin, 575 F.2d 708, 712 (9th Cir. 1978) (internal quotations omitted). Although there are exceptions to this rule, none is applicable here.' PG&E should 24 25 i An appellate court may consider an issue raised for the first time on appeal where the new 26 issue "is purely one of law and either does not affect or rely upon the factual record developed by the parties or the pertinent record has been fully developed." Id. (citations 27 omitted). As PG&E's newly raised waiver argument is highly fact-sensitive, and no factual record has been developed at all, that exception cannot apply. An appcllatc court, if the 28 interests of justice so demand, also may consider anew issue where it *has first comc to light (continued on next page)

CROYSS APTEII.ANlSi-RUpI ItRIEFANOOlPO.SITIONORF 0RIIiS I HE MIII),I 0256

I have brought a motion before the Bankruptcy Court respecting any claims it may have that the 2 Commission has waived its sovereign immunity. PG&E does not dispute that its bankruptcy 3 case is still pending, and, therefore the Bankruptcy Court still has jurisdiction to hear any claims 4 to waiver.

5 2. PG&E's Request for Judicial Notice Should be Denied Because It Would Create New Disputed Issues of Fact That Should Not 6

• Be Resolved by this Appellate Court in the First Instance 7 The appellate courts generally deny requests for judicial notice that are designed 8 to support issues or legal theories that were not raised in the court below. See FirstAm. Title Ins.

9 Co. v. Maegele, 35 F.2d 1072 at **3 (91h Cir. 1994) (unpublished opinion).

10 Here, PG&E has brought just the sort of request for judicial notice that appellate 11 courts will deny: a request to introduce facts to support a new legal theory that was not 12 considered by the court below, and otherwise has absolutely no support in the record on appeal.

13 See id.; Nantucket Investors l v. Cal. Fed. Bank (In re Indian Palms Assocs.. Ltd.), 61 F.3d 197, 14 205 (3d Cir. 1995) (appellate court should not take judicial notice where "unfair to a party to do 15 so" and would "undermine the trial court's factfinding authority"); Kemlon Prods. & Dev. Co. v.

16 United States, 646 F.2d 223, 224 (5th Cir. 1981).

17 In addition, a court should take judicial notice only of facts which are "not subject 18 to reasonable dispute." Fed. R. Evid. 201(b); see Nantucket, 61 F.3d at 205. Here, while 19 perhaps the fact that a certain proof of claim was filed might not be subject to dispute, the waiver 20 inquiry requires consideration of facts and circumstances beyond just the face of the proof of 21 claim. As we show immediately below, the critical inquiry is whether the "aggregate set of 22 operative facts" of the proof of claim is the same set of aggregate facts of PG&E's claims in this 23 proceeding. The Commission disputes that these aggregate facts are the same, and would be 24 entitled to develop and submit its own evidence to support that contention. The practical effect 25 26 dunng the added). pendency PG&E does of notthe thatbecause appeal claim there hasofbeen a recent "recent in any change the lae change ... "law."

in the Id. (emphasis Although 27 PG&E claims that there have been some new factual developments, the exception does not cover new factual developments.

28 CROSS-AP'EJ.ANI V RFI'I.Y DRIFFI ANDOPPOSITION 10 REQIIEST FOR JUDICIAl. N0257

-12 -

f I of granting PG&E's request for judicial notice, therefore, would be to invite a dispute over 2 contested facts that the parties have not had any opportunity to develop, and that the Bankruptcy 3 Court has not considered in the first instance. The function of an appellate court is not as a trier 4 of fact, let alone a trier of facts that are not part of the record on appeal and have not been 5 developed by the parties.

6 3. This Appellate Court Should Refrain From Undertaking in the First Instance the Highly Fact-Sensitive Inquiry Into 7 Whether the Commission Waived Its Sovereign Immunity 8 PG&E has identified a number of purported proofs of claim filed by state 9 agencies, only one of which was filed by the Commission. These proofs of claim have nothing 10 to do with PG&E's claims against the Commission in the proceeding below, namely 11 "implementation or enforcement" of the True-up. PG&E suggests that because these claims 12 have been filed, the Commission has waived its sovereign immunity against any claim that 13 PG&E might bring. But filing a proof of claim will not "waive" sovereign immunity with 14 respect to any claim that the debtor might assert against the state. To the contrary, "when a state 15 files a proof of claim against a debtor, it waives its Eleventh Amendment immunity with respect 16 to the adjudication of that claim." Lazar v. California(In re Lazar), 237 F.3d 967,977 (9th Cir.

17 2001) (emphasis added). Moreover, a proof of claim filed by one state agency does not 18 automatically "waive" the sovereign immunity of another state agency. See id. at 979 n. 13.

19 The inquiry into whether a state agency has "waived" its sovereign immunity is 20 highly fact-sensitive. As the Ninth Circuit has held, when a state files a proof of claim in a 21 bankruptcy, "the state waives its Eleventh Amendment immunity with regard to the bankruptcy 22 estate's claims that arise from the same transaction or occurrence as the state's claim." Id.

23 at 979. In order to determine whether a claim arises from the same "transaction or occurrence."

24 the Court must apply the highly fact-sensitive "logical relationship" test:

25 A logical relationship exists when the [plaintiffs claim] arises from the same aggregate set of operative facts as the initial [proof of) claim, in that the same 26 operative facts serve as thc basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in 27 the defendant.

28 li. (citations omitted).

V Utb'Z1.AWPPi I ANI' 1 V1'I Vi RIFF ANTI) (WPfIMTIWlN I)KF.OtIEST F)R )I II)I AlI 0258 I The "logical relationship" test does not even end there. Since PG&E is arguing 2 that the Commission has "waived" its sovereign immunity primarily because other state agencies 3 have filed proofs of claim, the Court must also consider the relevant state laws concerning which 4 state agencies are authorized to submit which proofs of claim. See id. at 978 n. I 1, 979 n. 13.

5 Here, PG&E has not provided any information that would assist the Court in 6 applying the "logical relationship" test to determine whether the proofs of claim it has identified 7 arise out of the same "transaction or occurrence" as PG&E's claims against the Commission in 8 this proceeding. PG&E has simply listed a number of proofs of claim that state agencies have 9 purportedly filed, without anything more than vague descriptions of what those proofs of claim 10 are for. The proofs of claim on their face describe what they seek in only the most general terms.

11 PG&E has not provided any information on the state laws concerning which agencies may file 12 which proofs of claim. Apparently, PG&E leaves it to the Court to perform, all by itself, the 13 enormous task of reading through a thousand pages of proofs of claim, and researching the state 14 law on filing proofs of claim, to determine whether any of the more than 70 claims submitted by 15 more than 20 state agencies "arise[ I from the same aggregate set of operative facts" as PG&E's 16 claims against the Commission in this proceeding. The Commission respectfully submits that 17 this fact-sensitive inquiry should not be entertained for the first time on appeal, without the 18 benefit of consideration by the Bankruptcy Court in the first instance, and especially because 19 there is no factual record concerning these proofs of claim.

20 4. Even on the Merits, the Commission Did Not "Waive" Its Sovereign Immunity In Connection With the Claims Asserted By PG&E In This Proceeding 21 22 In any event, PG&E's waiver claim has no merit. In the Ninth Circuit, "the test 23 for determining whether a State has waived its sovereign immunity is a stringent one." In re 24 Mitchell, 209 F.3d 1111, 1117 (9th Cir. 2000) (quotations omitted). A state "must unequivocally 25 express its consent to federal jurisdiction." Id. (quotations omitted). "The state's consent ... is 26 effective only where stated by the most express language." Yakinia Indian Nation ha. Wash.

27 Dep't of Revenuc, 176 F.3d 1241, 1245 (9th Cir. 1999). Under this "stnngent" standard. thc 28actions by the Commission in the bankruptcy case, which were primarily directed at asserting its

('ROXS-APPFI ANTV RF'I Y RIEF AND OPPOSITION TO FFiFI FlHUWlilAI. N( 0259 14 -

I sovereign immunity, cannot possibly amount to the "unequivocal" expression of consent that is 2 required for a waiver. PG&E's contention to the contrary is further belied by the Commission's 3 Proof of Claim, which states unequivocally that its filing shall not be deemed or construed as a 4 waiver of, among other things, the Commission's nghts under the Eleventh Amendment or 5 related principles of sovereign immunity.

6 (a) The Commission Has Not "Waived" Its Sovereign 7 Immunity Through -the Filing of any Proofs of Claim As explained above, the state "waives" its Eleventh Amendment immunity only 8

with regard to the debtor's claims "that arise from the same transaction or occurrence as the 9

state's claim." Lazar, 237 F.3d at 979.

10 The proofs of claim that PG&E has identified will not meet this test. They clearly have nothing to do with the claim that PG&E asserts in this proceeding, against implementation 12 or enforcement of the True-up. See RKN Ex. IS (permits and certifications); RJN Ex. 22 (clean-13 up and closure costs for hazardous waste facility). RJN Ex. 25 (loan for improvements to certain 14 facilities); RJN Exs. 26, 40, 72 (corporate taxes). RJN Ex. 27 (unpaid taxes); RIN Exs. 28-38 15 (utility relocation costs); RJN Ex. 39 (costs for prison installation); RJN Exs. 41-43 (lease 16 easements); RIN Exs. 44-54 (costs incurred in fighting fires); (RJN Exs. 58-60 (remediation 17 costs at certain sites); RJN Exs. 61, 64-66 (fees for two timber harvest plants, costs for fish stocking program, and sea water monitoring services); RJN Ex. 62 (remediation costs at nuclear 19 plant); RJN Ex. 63 (fees for commercial coaches); RJN Exs. 67-71 (environmental clean-up 20 costs); RIN Ex.73 (clean-up costs). The only claims that are even conceivably connected, 21 however vaguely, to implementation or enforcement of the True-up are those few claims filed in 22 connection with the general electricity crisis. But even those proofs of claim hardly arise from 23 the same "transaction or occurrence" as implementation or enforcement of the True-up, unless 24 the Court were to stretch the test beyond recognition to include anything connected in some 25 general way to California's power crists.

26 In addition, virtually all of the state agencies that filed the proofs of claim clearly 27 havc nothing to do with PG&E's assault on the Commission's regulatory authority at issue in

( ROSS.APPEILLANTS- RFII YRSIFF AND(ProsI'I ION TO RFQJlSi IFORBJIDICIAL 0260

- 1S -

I this proceeding. See RJN Ex. 18 (Department of Justice); RJN Exs. 26.40, 72 (Franchise Tax 2 Board); RJN Ex. 27 (Board of Equalization); RJN Exs. 28-38 (Department of Transportation);

3 RJN Ex. 39 (Department of Corrections); RJN Exs. 4143 (Department of General Services);

4 RJN Exs. 44-54 (Department of Forestry and Fire Protection); RJN Ex. 57 (Regents of the 5 University of California); RJN Exs. 58-60 (Department of Toxic Substances Control); RJN Exs.

6 61, 64-66 (Department of Fish and Game); RJN Ex. 63 (Department of Housing and Community 7 Development); RJN Exs. 67-71 (Water Quality Control Boards); RJN Ex. 73 (Water Resources 8 Control Board).

9 As for the lone proof of claim submitted by the Commission, it does not have 10 anything to do with "implementation or enforcement" of the True-up. See RJN Ex. 56 (claims in 11 respect of California Environmental Quality Act, user fees, WomenfMinoritylDisabledlVeteran 12 Business Enterprise Programs and miscellaneous items).

13 (b) The Commission Has Not Waived Its Sovereign Immunity 14 Through Any "Participation" in PG&E's Bankruptcy Case PG&E also claims that the Commission has waived its sovereign immunity 15 because state agencies have "participated" in the main bankruptcy case. (PG&E Br. at 41.) This 16 claim is without merit. In order to present its argument, PG&E again relies on stacks of 17 materials that are not part of the record on appeal, and which PG&E seeks to introduce by 18 judicial notice. As explained above, that request should be denied, and the Court should refrain

'9 from considering the waiver argument in the first instance.

20 Even taking those materials on face value, PG&E's claim to "participation" is 21 rhetonc at best. According to PG&E, state agencies have "flex[edl their regulatory muscle" 22 (PG&E Br. at 41), "assertjed) their regulatory authority over PG&E" (at 42), "attended a 23 deposition" (at 42), and "become one of the most active critics of PG&E's Reorganization Plan."

24 (PG&E Br. at 42.) What PG&E does not claim, however, is that the Commission has 25 26"participated" in this adversaryproceeding, other than to resist PG&E's efforts to strip the 26 Commission of its sovereign regulatory authority, and to assert its sovereign immunity.

27 28 cROSS-APPIM.LAN1S' RFIM VYBRIEF ANI)DOPI'MTION 1() RF.QI WN I I-( )H 1 Il)1( gDl NfNl 0261 16 -

I PG&E recognizes, as it must, that the Commission has asserted its Eleventh 2 Amendment immunity in the Bankruptcy Court at every step. (PG&E Br. at 47.) This is 3 completely inconsistent with PG&E's contention that the Commission has "unequivocally 4 expressedi its consent to federal jurisdiction." Mitchell, 209 F.2d at 117.

5 PG&E relies heavily on Hill v. Blind Indus. & Servs. of Maryland, 179 F.3d 754 6 (9th Cir. 1999). That case is distinguishable. First, the state agency in Hill participated in 7 extensive pre-trial activities and discovery in the same action that the plaintiff had brought 8 against it, right up until the eve of trial, and therefore subjected itself to jurisdiction over the 9 claims in that case. Here, by stark contrast, the Commission has done nothing in this proceeding 10 other than to move to dismiss the action on the grounds of sovereign immunity, among other 11 grounds. Second, the state agency in Hill deliberately waited until the eve of trial to assert its 12 sovereign immunity, in order to improperly "hedge its bet" on the outcome of the trial. See Hill, 13 179 F.3d at 757-57. Here by contrast, and like the state agency found to have retained its 14 sovereign immunity in Mitchell, the Commission immediately asserted its immunity" to the 15 claims brought by PG&E. See Michell, 209 F.2d at 1118 (distinguishing Hill on this basis).

16 PG&E also relies on Pitts v. Ohio Department of Taxation (In re Pitts),

17 241 B.R. 862 (Bankr. N.D. Ohio 1999). That case, however, refutes rather than supports 18 PG&E's waiver contention. In Pitts, the court held that the state agency had not waived its 19 sovereign immunity in an adversary proceeding brought against the agency because, like the 20 agency in Mitchell, the agency "immediately raised" its sovereign immunity in that proceeding.

21 See id. at 878.

22 The-other cases relied upon by PG&E are equally wide of the mark. Although 23 PG&E suggests these cases found a wholesale waiver based upon some general "participation" 24 in a bankruptcy, the cases involve extensive, affirmative efforts by a state agency to collect on a 25 specific debt, or otherwise to further specific pecuniary interests the agency had in the debtors' 26 estate, in a proceeding that the agency then claims cannot bind it because of sovereign 27 28

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- 17 -

I immunity.2 In these cases, the state agency was not acting as a regulator, as the Commission is 2 here, but as a creditor of the estate seeking to collect on a debt or other pecuniary interest in 3 property of (he estate. These cases, therefore, merely stand for the general rule, discussed above, 4 that when a state agency files a proof of claim in a bankruptcy, it "waives" its sovereign 5 immunity with respect to adjudication of only that claim. Here, PG&E can point to no 6 affirmative actions by the Commission to present any debts or claims concerning the True-up for 7 adjudication by the Bankruptcy Court. To the contrary, the Commission has asserted from the 8 beginning that the entire adversary proceeding cannot proceed on the grounds of sovereign 9 immunity.

10 What is more, the cases cited by PG&E involve only limited waivers of sovereign 11 immunity in connection with the specific debt or proof of claim asserted, and not the wholesale 12 waiver of sovereign immunity on all aspects of PG&E's case that PG&E seeks here. 3 13 PG&E suggests that the Commission has "invoked the court's jurisdiction in 14 order to assert its regulatory interests in PG&E." (PG&E Br. at 46.) Not only is that suggestion 15 misleading as a matter of fact. the suggestion is legally irrelevant. On the f; cts, neither the 16 Commission nor any other state agency has "invoked" the jurisdiction of the Bankruptcy Court 17 to assert any regulatory interests. Rather, it was PG&E that sought to use the bankruptcy laws to 18 2 First Union Nat 'l Bank v. MCA Fin. Corp. (In re MCA Fin. Corp.), 237 B.R. 338, 34142 19 (Bankr. E.D. Mich. 1999) (state agency attempted to collect debtor's physical property and affirmatively sought adjudication in federal court that it had the right to collect the property);

20 Hankins v. Finnel, 964 F.2d 853, 858 (8th Cir. 1992) (state represented defendant at all stages of the litigation, agreed to indemnify him. and then tried to use its sovereign immunity 21 to "renege" on its promise to indemnify); Confederated Tribes v. White (in re White),

139 F.3d 1268, 1270-7 1 (9th Cir. 1998) (tribe affirmatively sought to collect on a debt by 22 filing the practical equivalent of a proof of claim); Commonwealth of Va. Dep't of Med. Ass't Servs. v. Shenandoah Realty Partners,LP. (In re Shenandoah Realty Partners,L.P.). 248 23 B.R. 505, 512 (W.D. Va. 2000) (state filed proof of claim and actively litigated that proof of claim, including extensive discovery and motion practice).

24 3 See First Union, 237 B.R. at 342 (state waived sovereign immunity only with respect to 25 "respective rights and interests in that property" the state attempted to collect from estate);

5Hankins, 964 F.2d at 858 ("the district court found a waiver only with respect to the narrow 26 facts of this case"); Caonfederazed Tribes, 139 F.3d at 1270-71 (waiver limited solely to adjudication of tribe's request to collect on a debt); Shenandoah, 248 B.R. at 512 (state 7waived sovereign immunity only with respect to right to collect on proof of claim it had

_ submitted in the bankruptcy) 28

~~

(ROSSCAIT i-.1 AN I; REITI.Y SKI" I D.me o ANDO(MINl] ION TO KhQIJES IrNK OI~JlaAl . r 0263 I divest the Commission of its sovereign regulatory authority. That the Commission resisted 2 PG&E's attempt by asserting its sovereign immunity as a state regulator, and by asserting that 3 the Bankruptcy Court has no jurisdiction to permit PG&E to divest the Commission of regulatory 4 authority, is hardly an unequivocal indication of "invoking" the Bankruptcy Court's jurisdiction.

5 If anything, the Commission has done exactly the opposite, and fought at every step efforts by 6 PG&E to manipulate the Bankruptcy Court proceedings in order to oust the Commission of its 7 regulatory jurisdiction. If PG&E were correct that the Commission has waived its sovereign 8 immunity by asserting its sovereign immunity, then the concept of sovereign immunity would be 9 meaningless.

10 The suggestion is also legally irrelevant. Although PG&E bases its contention on I Icases involving a state agency asserting a claim to property of the debtor's estate, as a creditor 12 would, there is a fundamental difference between a state attempting to collect property from the 13 debtor and a state attempting to retain its regulatory authority over a debtor. Bankruptcy law is 14 primarily concerned with the rights of debtors and creditors to a "res" (the debtor's estate) 15 subject to the bankruptcy court's jurisdiction. When a state seeks to collect money or property 16 from the debtor, the state assumes the role of creditor, and the courts have thus held that the state 17 is not insulated from the bankruptcy court's jurisdiction over that property:

I8 [H]e who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide by the consequences of that procedure. If the 19 claimant is a State, the procedure of proof and allowance is not transmitted into a suit against the State because the court entertains objections to the claim. The 20 State is seeking something from the debtor. No judgment is sought against the State. The whole process of proof. allowance, and distributionis, shortly 21 speaking, an adjudicationof interestsclaimed in a res. It is none the less such because the claim is rejected in toto, reduced in part, given a priority inferior to 22 that claimed, or satisfied in some way other than payment in cash.

23 Gardnerv. New Jersey, 329 U.S. 565, 573-74 (1947) (emphasis added).

24 In such circumstances, a bankruptcy court's jurisdiction flows from its 25 jurisdiction over the property of the estate in question, not from any jurisdiction over the state 26 itself. But when a state seeks to retain its regulatory authority over a debtor, the state is acting in 27 its public capacity as a sovereign. The stale is not claiming against property of the estate. and 28 thus there is no basis for the bankruptcy coun to assert junsdiction over the state. The statc (CRO)SS.AI'ELL.AN 1 RFH,'iY H II1l-ANOM I 'iON E10 ESr FORII Ilh('IA1 QTOll 0264

. , ~~~~~~~~~~~19

I retains its sovereign rights, and to permit a debtor to push aside those rights would be a gross 2 affront to the state's sovereignty. See Seminole Tribe of Floridav. Florida,517 U.S. 44, 58 3 (1996) (Eleventh Amendment immunity "serves to avoid the indignity of subjecting a State to 4 the coercive process of judicial tribunals at the insistence of private parties.").

5 CONCLUSION 6 - For the foregoing reasons, the Commission and the Commissioners respectfully 7 submit that PG&E's claims against the Commission and the Commissioners are barred in their 8 entirety by the Eleventh Amendment and related principles of sovereign immunity.

9 Dated: December 26, 2001 10 Respectfully, GARY M. COHEN 12 AROCLES AGUILAR MICHAEL M. EDSON 13 14 15 MICHAEL M. EDSON 16 CALIFORNIA PUBLIC UIIliES COMMISSION 505 Van Ness Ave., Room 5138 17 San Francisco, CA 94102 Phone: (415) 703-1086 and -

ALAN W. KORNBERG 20 WALTER REMAN BRIAN S. HERMANN 21 ERIC TWISTE MARC F. SKAPOF 22 PAUL WEISS, RIFKIND, WHARTON & GARRISON 23 Attorneys for Defendants, Appellees and Cross-Appellants 24 25 26 27 28 ~~~~~~~~~~~0265 Al'ITLI ANI CROK(}SS RFI'I Y RRIF.FAND OPPOSITioN1 (a R I -tEal 1)11. N I

I: .

. I~

GARY M. COHEN, SBN 117215 CALIFORNIA PUBLIC UTILITIES COMMISSION I C-505 Van Ness Avenue -1.

C.,

c San Francisco, California 94102 3 Telephone: (415) 703-2015 .9. ... ,-

Facsimile: (415) 703-2262 ,

4 ALAN W. KORNBERG 5 WALTER RIEMAN, SBN 139365 BRIAN S. HERMANN ERIC TWISTE MARC F. SKAPOF PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 Avenue of the Amiencas 8 New York, New York 10019-6064 Telephone: 212-373-3000 9 Facsimile: 212-757-3990 10 Attorneys for Defendants, Appellees and Cross-Appellants I11 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA 12 SAN FRANCISCO DIVISION 13 In re Case No. 01-2490 VRW (Bankruptcy Case No. 01-30923 DM; 14 PACIFIC GAS AND ELECTRIC COMPANY, Adv. Proceeding No. 01-3072 DM) a California corporation.

15 Chapter 11 Case Debtor.

16 Federal I.D. No. 94-0742640 PROOF OF SERVICE 17 PACIFIC GAS AND ELECTRIC COMPANY, 18 a California corporation.

19 Plaintiff. Appellant and Cross-Appellee, 20 - against -

21 CALIFORNIA PUBLIC UTLIT[ES COMMISSION.

22 and LORElTA M. LYNCH. HENRY M. DUQUE, RICHARD A. BILAS. CARL W. WOOD. and 23 GEOFFREY F. BROWN, in their official capacities as Commissioners of the California Public Utilities 24 Commission, 25 Defendants. Appellecs and Cross-Appellants.

26 27 28 0266 I xW Nf 6 I1 JA I I

PROOF OF SERVICE 2

3 1,MARTHA PEREZ, declare:

4 1. 1am not a party to this action, am over 18 years of age, and am employed by the California Public Ulilities Commission, 505 Van Ness Avenue, San Francisco, California 5 94102.

6 - 2. On December 26, 2001, I caused to be served via electronic mail and hand delivery copies of Cross-Appellants' Reply Brief And Opposition To Supplemental Request For 7 Judicial Notice By Appellant And Cross-Appellee Pacific Gas And Electric Company on the following:

8 Jerome B. Falk, Jr.

9 Amy E. Margolin Howard, Rice, Nemerovski, Canady, Falk & Rabkin 10 Three Embarcadero Center, 7" Floor San Francisco, California 94111-4065 11 Electronic Mail:

jfalk@hrice.com 12 amargolin@hrice.com Attorneysfor Plaintiff/Appellant/Cross-Appellee 13 Stephen Johnson 14 Office of the United States Trustee 250 Montgomery Street 15 San Francisco, California 94104 Electronic Mail:

16 stephen johnson2@usdoj.gov 17 Aforneyfor the Office of the United States Trustee 19E3. On December 26, 2001, I also caused to be served via electronic and overnight mail copies of the above-referenced court pleadings on the following:

19 Paul S. Aronzon 20 Michael H. Diamond Milbank, Tweed, Hadley & McCloy 21 601 Los South Figueroa Angeles, Street, California Suite 3000 90017 22 Electronic Mail:

paronzon@milbank.com v3 mdiamond@milbank.com 23 Atiorneysfor Intervenors The Official Committee 24 of Unsecured Creditors 25 26 217 28 ~~~~~~~~~~~0267

".b..&  %%... 1s

I 4. Finally, on December 26. 2001, 1also caused to be served via overnight mail 2 copies of the above-referenced court pleadings on the following:

D. Cameron Baker 3 Deputy City Attorney Office of the San Francisco City Attorney 4 1Dr. Carlton B. Godlett Place San Francisco! CA 94102-4682 5 Attorneysfor Amicus Curiae City and County of San Francisco 6

Steven H. Felderstein 7 Felderstein, Fitzgerald, Willoughby & Pascuzzi, LLP 400 Capital Mall, Suite 1450 8 Sacramento, CA 95814-4434 9 Attoneys for Amicus CuriaeState of California Margarita Padilla, Esq.

10 Deputy Attorney General State of California Department of Justice 11 1515 Clay Street, 2 0)h Flor Oakland, CA 94612-1413 12 Attorneys for Amicus CuriaeState of California 13 I declare under penalty of perjury that the foregoing is true and correct.

14 Executed on December 26, 2001, at San Francisco. California.

15 16 4 erez 17 18 19 20 21 22 23 24 25 26 27 28 0268

,..fN NIV. ..,,,.SIX I

EXHIBIT C 0269

COM/LYN/epg Mailed 1/1912001 Decision 01-01-046 January 19,2001 BEFORE THE PUBUC UTILTIES COMMISSION OF THE STATE OF CALIFORNIA Application of Southern California Edison Company (E 3338-E) for Authority to Institute a Application 00-11-038 Rate Stabilization Plan with a Rate Increase and (Filed November 16,2000)

End of Rate Freeze Tariffs.

Emergency Application of Pacific Gas and Application 00-11-056 Electric Company to Adopt a Rate Stabilization (Filed November 22,2000)

Plan. (U 39 E)

Petition of THE UTILITY REFORM NETWORK Application 00-1D-028 for Modification of Resolution E-3527. (Filed October 17,2000)

INTERIM OPINION AFFIRMING THE OBLIGATION TO SERVE AND ISSUING TEMPORARY RESTRAINING ORDER

1. Summary In this interim decision, we are issuing a temporary restraining order (TRO) preventing Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (Edison) from refusing to provide adequate service to all of their customers. We issue this TRO to maintain the status quo so as to avoid further degradation of provision of electric service and to avoid the irreparable harm to the public health and safety that would be caused by further degradation of service. We affirm that regulated California utilities must serve their customers. This requirement, known as the "obligation to serve" is 88122 1 0270

A.00-11-038 et al. COM/LYN/epg mandated by state law. A utility's obligation to serve is part and parcel of the entire regulatory scheme under which the Commission regulates and controls utilities under the Public Utilities Act.

A bankruptcy filing or the threat of insolvency has no bearing on this aspect of state law. Even utilities that file for reorganization must serve their customers: The public's safety, and the economy's health will be impaired if utilities avoid their obligation to serve. We will take all action necessary to enforce this obligation, while regulating and controlling utilities in a manner consistent with state law, and make the following orders:

11. Background In Decision (D.) 01-01-018, we adopted an immediate, interim surcharge for PG&E and SCE, subject to refund and adjustment.' This surcharge is in effect for 90 days from the effective date of D.01-01-018. As stated in that decision, the increase is a temporary surcharge to improve the ability of the applicants to cover the costs of procuring future energy in wholesale markets that they cannot produce themselves to serve their loads. We determined that this expedited action was necessary to fulfill our statutory obligations to ensure that the utilities can provide adequate service at just and reasonable rates. Emergency hearings were held in late December 2000 and additional hearings are planned for February.

In D.01-01-018, we state that we do not yet have the facts to evaluate the utilities' claims of their dire circumstances. We have called for an audit and must await the independent auditors' report. Moreover, we do not have all of the facts

' Those customers eligible for the California Alternative Rates for Energy (CARE) program are exempt from this surcharge. The surcharge applies to all other customers, including direct access customers.

0271

A.00-11-038 et al. COM/LYN/epg related to the parent companies, the utilities, the affiliates, and the flow of funds among these entities. The independent auditors will also consider these questions in their reports. We must consider the overall financial position of the utilities and will do so expeditiously.

Further, in D.01-01-018 we state:

We are very troubled by the utilities' assumption that ratepayers must bear the burden of significant rate increases without the shareholders sharing in the pain. The utilities and their shareholders have received significant financial benefit from restructuring thus far. For example, PG&E and Edison have each received the benefit of over $2 billion in cash proceeds from rate reduction bonds. As reported in the monthly TCBA reports, PG&E has received over $9 billion in headroom and other transition cost revenues and Edison has received over $7 billion in such revenues.

As revealed in cross-examination of PG&E witness Campbell, disbursements from PG&E to the parent company, PG&E Corporation (PG&E Corp.) during the transition period were approximately $9.6 billion. Out of this total, PG&E Corp. issued dividends (both common and preferred stock) of approximately

$1.5 billion. PG&E also repurchased stock in the amount of approximately $2.8 billion and retired approximately $2.8 billion of debt. PG&E recognized that market problems were beginning to occur in June of this year, but decided to declare a third-quarter dividend. PG&E did not consider establishing a contingency fund or retaining cash to cushion its risk, because it believed that "its generally conservative financial profile and financing practices would adequately provide cushion against ... a reasonable range of contingencies." (TR: 409.)

Now that such contingencies are outside the reasonable range, the utilities turn to the ratepayers for relief. It is decidedly not business as usual and the utilities need to realize that ratepayers are not the only answer to their dilemma. For example, parties have only just begun to explore the ability of the utilities' holding companies to participate in the solution. While the cash on hand in the holding companies may be insufficient when compared with the going-

-311- 0272

A.00-11-038 et al. COM/LYN/epg forward costs of procuring power, we are convinced that other potential solutions should be explored. (Id. rnimeo. at pp. 15-16.)

Ill. Discussion Since mid-June, we have seen prices in the wholesale electricity market skyrocket to staggering levels as a result of the severe dysfunction of the California wholesale electricity market. As a result, several deleterious consequences have occurred. Ratepayers in San Diego Gas & Electric Company's (SDG&E) service territory saw their electric bills double and triple over the summer. PG&E and Edison have defaulted on payments. Stage 1, 2, and 3 emergencies have occurred with alarming regularity, and indeed, rolling blackouts occurred in Northern California on January 17 and 18, 2001. The Governor, Legislature, and this agency are actively seeking solutions to the energy crisis confronting us. The Federal Energy Regulatory Commission (FERC), despite finding that wholesale electric rates are not just and reasonable, chose to lift price caps, and to refrain from devising a remedy under Section 206(a) of the Federal Power Act (16 USC Section 824e(a)), 2 while making a number of other changes that add to the complexity and uncertainty of the commercial relationships. As we explained in D.01-01-018, these actions have 2 This statute provides in pertinent part:

Whenever the Comnmission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Comunission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order.

0273

A.OO-11-038 etal. COM/LYN/epg left California's utilities and ratepayers prey to wholesale electricity sellers who immediately quadrupled and quintupled their prices above already unprecedented levels.

In the hearings we held on financial issues in December and early January, a representative of Edison indicated that in the event that Edison could not purchase power in excess of the 7 cents per kilowatt-hour available in retail revenues to pay for power, Edison would request to be relieved of its obligation to serve. (TR: 755)

On January 18, we received a declaration from Gary Heath, Executive Director of the Electricity Oversight Board (EOB) regarding PG&E's assertion to the Deputy Director Raymond Hart of the California Department of Water Resources (CDWR). Mr. Hart informed Mr. Heath that PG&E stated that beginning January 20,2001, PG&E would schedule only its own generation and would not purchase additional needed generation to serve remaining customer load. Mr. Heath verified this assertion with PG&E Vice President Dan Richard at 2:15 p.m. on January 18. Mr. Richard confirmed that PG&E would only serve its customers through its own generation, and therefore would not schedule the resources secured by the CDWR for PG&E's remaining load. Mr. Heath states that PG&E cannot rely on its own generation to meet its obligations to serve all the customers in its service territory. If PG&E does not obtain additional generation, reliability of service to PG&E customers will be "seriously jeopardized." (Declaration of Gary Heath, Attachment 1.)

Also on January 18, we received affidavits from Terry Winter, the President and Chief Executive of the California Independent System Operator (ISO) and Ziad Alaywan, Managing Director of the ISO. Mr. Winter declares that Harold Ray, a senior vice president of Edison, stated in a 4:15 p.m. telephone call that Edison plans to continue to act a scheduling coordinator for all of Edison's 0274

A.00-11-038 et al. COM/LYN/epg non-direct access customers. Mr. Ray stated that there is not an intent to abandon any of its customers. At 4.20 p.m., Mr. Winter had a telephone conversation with Mr. Richard of PG&E and Bruce Worthington, General Counsel of PG&E. Mr. Richard stated that PG&E would not change its scheduling responsibilities at this time and that there was a misunderstanding of the scheduling coordination responsibilities regarding the CDWR's role as a conduit to serve some of PG&E's customers. Mr. Winter then declares that "Mr. Richards [sic) advised me that while the company does not intend to change its scheduling coordination role for all its non-direct access customers at this time, the company will continue to review its scheduling coordination responsibilities to its non-direct access customers as the situation unfolds."

(Affidavit of Terry Winter, Attachment 2.)

Mr. Alaywan declares that he participated in two conference calls with personnel from PG&E, Edison, and CDWR, which took place at approximately 8:00 a.m. and 2:00 p.m. on January 18, 2001. During the morning call, all participants agreed that PG&E and Edison would continue to act as scheduling coordinators for all their non-direct access customers, even though some customers would be served by generation provided by CDWR. PG&E and Edison agreed to undertake an inter-scheduling coordinator trade with CDWR in accordance with prescribed ISO processes. During the afternoon call, a PG&E director indicated that it no longer wished to act a scheduling coordinator for non-direct access customers served by generation provided by CDWR. The PG&E director stated that "PG&E does not wish to shirk its responsibilities, but stated again that another entity should serve as scheduling coordinator for customers served by CDWR generation." (Affidavit of Ziad Alaywan, Attachment 3.)

0275

A.00-11-038 et al. COM/LYN/epg We also received a declaration, dated January 18, 2001, from Peter Garris, employed by the CDWR as Chief Water and Power Dispatcher. Mr. Garris confirms the 2:00 p.m. January 18 conference call described by Mr. Alaywan.

Mr. Garris specifically states that Claudia Grief, Director of PG&E Scheduling, informed the participants that PG&E would not be the scheduling coordinator for load that could not be served by its own resources. Mr. Garris also participated in a 4:45 p.m. conference call with Ms. Grief, PG&E Vice President Roy Kuga, other CDWR staff, and individuals from the ISO and Power Exchange. Mr. Garris confirms that during this call, Mr. Kuga indicated that PG&E would not take scheduling coordinator trades from CDWR after Saturday, January 20,2001, for energy acquired by CDWR for PG&E's load that is not served by PG&E's own generation. Mr. Garis states that PG&E lacks sufficient resources to meet its native load without securing energy from other sources; if this is left unresolved, PG&E's customers will experience adverse reliability problems.

IV. Obligation to Serve State law clearly requires utilities to serve their customers, and a threatened bankruptcy filing or threat of insolvency does not change that obligation. Similarly, the financial distress of one utility cannot be used as an excuse by another utility to avoid its obligation to serve. As we stated in D.01-01-018, we have a duty to assure that the utilities are able to continue to procure and deliver power for their customers. This duty applies even if the utilities under our jurisdiction have filed for bankruptcy or are on the brink of petitioning for such relief. Our basic obligation under the Public Utilities Act is 0276

A.00-11-038 et al. COM/LYN/epg to assure the people of California adequate service at reasonable rates.

Section 4513 provides, in relevant part:

All charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable. Every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful. Every public utility shall furnish and maintain such adequate, efficient, just and reasonable service, instrumentalities, equipment and facilities as are necessary to promote the safety, health, comfort and convenience of its patrons, employees, and the public.

We therefore issue this decision to affirm that PG&E and Edison must continue to provide reliable, safe, and adequate service to all Californians at just and reasonable rates, including continuing to enter into and maintain any current and future low-cost contracts to procure power. Our actions are consistent with the Legislature's intent, as stated in §§ 330(g), 330(h) and 391 (a),

part of Assembly Bill (AB) 1890 (Stats. 1996, Ch. 854), which provide in relevant part:

330(g): Reliable electric service of utmost importance to the safety, health, and welfare of the state's citizenry and economy.

330(h): It is important that sufficient supplies of electric generation will be available to maintain the reliable service to the citizens and business of the state.

391(a): Electricity is essential to the health, safety, and economic well-being of all California consumers.

All statutory references are to the Public Utilities Code, unless otherwise noted.

0277

A.00-11-038 et al. COM/LYN/epg In addition, §§ 761-788 give the Commission broad authority to issue orders controlling the equipment, practices and facilities of regulated utilities.

For example, § 761 gives the Commission authority to order the "service, or methods to be observed, for] furnished" by California Utilities. Section 761 also provides that utilities must furnish their commodities, or render their services according to the rules and orders of the Commission, so long as a customer makes "proper demand and tender of rates."

In relevant part, § 762 requires that:

Whenever the conumission, after a hearing, finds that additions, extensions, repairs, or improvements to, or changes in, the existing plant, equipment, apparatus, facilities, or other physical property of any public utility or of any two or more public utilities ought reasonably to be made, or that new structures should be erected, to promote the security or convenience of its employees or the public, or in any other way to secure adequate service or facilities, the commission shall make and serve an order directing that such additions, extensions, repairs, improvements, or changes be made or such structures be erected in the manner and within the time specified in the order.

Furthermore, § 768 provides, in relevant part:

The commission may, after a hearing, require every public utility to construct, maintain, and operate its line, plant, system, equipment, apparatus, tracks, and premises in a manner so as to promote and safeguard the health and safety of its employees, passengers, customers, and the public.

Section 770 provides, in relevant part:

The commission may, after a hearing:

Ascertain and fix just and reasonable standards, classifications, regulations, practices, measurements, or service to be furnished, imposed, observed, and followed by all electrical, gas, water, and heat corporations.

0278

A.00-11-038 etal. COM/LYN/epg Section 701 gives the Commission power to undertake all necessary actions to properly regulate and supervise California utilities. In Consumers Lobby Against Monopolies v. Public Utilities Commission (1979) 25 Cal.3d 891, 905, the California Supreme Court declared:

The commission is a state agency of constitutional origin with far-reaching duties, functions and powers. (Cal. Const., Art. XII §§ 1-6.)

The Constitution confers broad authority on the commission to regulate utilities, including the power to fix rtes, establish rules, hold various types of hearings, award reparation, and establish its own procedures (Id., §§ 2, 4, 6.) ...

Pursuant to this grant of power, the Legislature enacted Public Utilities Code section 701, conferring on the commission expansive authority to 'do all things, whether specifically designated in [the Public Utilities Act] or addition thereto, which are necessary and convenient' in the supervision and regulation of every public utility in California. (Italics added.) the commission's authority has been liberally construed. (Consumers Lobby Against Monopolies at 905.)

The California Supreme Court has further found that "the commission often exercises equitable jurisdiction as an incident to its express duties and authority. For example, the commission may issue injunctions in aid of jurisdiction specifically conferred upon it." (Id. at 907.)

Therefore, under our plenary powers and until this crisis is resolved, we intend to closely monitor and supervise the actions and expenditures of the investor-owned utilities under our regulation to ensure that service is provided.

While we are dismayed that the energy crisis has escalated to the point that such tight control by the State is required, we intend to exercise the required control.

We recognize that hearings are required and will provide for these, as we discuss below. Today we issue a temporary restraining order in order to avoid irreparable harm to public health and safety, to maintain the status quo, and to ensure that PG&E and Edison continue to schedule generation through the ISO 0279

A.00-11-038 et al. COM/LYN/epg to serve all customers with adequate, reliable service, consistent with their obligation to serve.

A TRO serves the purpose of preventing the actions of a party from causing irreparable harm to another party, pending a hearing on the need for a preliminary injunction. We are issuing this TRO on our motion and on an ex parte basis because we are convinced that if adequate service were not maintained, great or irreparable harm would result before the matter could proceed to a hearing. A TRO has the same force and effect as a preliminary injunction and remains in effect until an order can be issued granting or denying a preliminary injunction.

We therefore order PG&E and Edison to appear at an evidentiary hearing scheduled for January 29,2001 at 10-00 a.m. to show cause as to why a preliminary injunction should not be issued.

We expect the utilities to fully comply with our orders. We have previously stated that nothing in AB 1890 relieves the existing utilities of their obligation to serve all customers in their service territories under their respective tariffs (D.97-09-047, mrnimeo. at p. 44.). In PG&E's holding company decision, D.98-04-068, the Comnmission specifically found that: "The capital requirements of PG&E, as determined to be necessary and prudent to meet the obligation to serve or to operate the utility in a prudent and efficient manner, shall be given first priority by PG&E Corporation's Board of Directors." (Id., at 98.) The Commissions' holding company decision clearly affirms the continuing obligation to serve.

V. Unforeseen Emergency Situation Government Code § 11125.5 and Rule 81 of our Rules of Practice and Procedure allow the Commission to take action more quickly than would be permitted if advance publication were made on the regular meeting agenda. An 0280

A.00-11-038 et al. COM/LYN/epg example of such an unforeseen emergency situation are those activities that severely impair or threaten to severely impair public health or safety.

As underscored by Governor Gray Davis, who declared a state of emergency, this is such a situation. If PG&E and Edison were to rely only on their own generation to meet their obligations to serve all customers in their service territory, reliability of service would be severely undermined.

Draft decisions are generally subject to a 30-day review and comment period (§ 311(g)(1)). However, § 311(g)(2) provides that this 30-day period may be reduced or waived in an unforeseen emergency situation. We have determined that this situation exists and therefore waive the public review and comment period on this draft decision. (See also Rules 77.7(f0(1), 77.7(f0(9) and 81.)

Findings of Fact

1. On January 3,2001, in final oral argument before the Commission on the proposed decision of ALJ Minkin in this proceeding, attorney Henry Weissmann, representing Edison, stated that if the Commission's decision prevented Edison from obtaining additional financing, it would not be able to buy power to meet its customers needs. He requested the Commission relieve Edison of the obligation to serve to the extent it cannot purchase power in excess of the 7 cents per kilowatt hour available in retail revenues to pay for power.

2. In D.01-01-018, we state that the interim surcharge of 1 cent per kilowatt hour, subject to refund and adjustment, is adopted to improve the ability of PG&E and Edison to cover the costs of procuring future energy in wholesale markets that they cannot produce themselves to serve their loads.

3. In D.01-01-018, we find that the utilities understood the risks AB 1890 and electric restructuring imposed. In addition, while the cash on hand in the holding companies may be insufficient when compared with the going-forward 0281

A.00-11-038 et al. COM/LYN/epg costs of procuring power, we are convinced that other potential solutions should be and are currently being explored.

4. The evidence obtained at hearing in this proceeding does not support a finding that PG&E or Edison cannot continue to provide service unless there are substantial rate increases. Instead, we called for an audit and must await the independent auditors' report. Moreover, we do not have all of the facts related to the parent companies, the utilities, the affiliates, and the flow of funds among these entities. The independent auditors will also consider these questions in their reports.

5. On January 18, we received a declaration from Gary Heath, Executive Director of the EOB regarding PG&E's assertion to the Deputy Director Raymond Hart of the CDWR.

6. Mr. Hart informed Mr. Heath that PG&E stated that beginning January 20, 2001, PG&E would schedule only its own generation and would not purchase additional needed generation to serve remaining customer load. Mr. Heath verified this assertion with PG&E Vice President Dan Richard at 2:15 p.m. on January 18, 2001.

7. Mr. Heath states that PG&E cannot rely on its own generation to meet its obligations to serve all the customers in its service territory. If PG&E does not obtain additional generation, reliability of service to PG&E customers will be jeopardized.

8. We also received affidavits on January 18, 2001 from Terry Winter, the President and Chief Executive of the ISO and Ziad Alaywan, Managing Director of the ISO.

9. Mr. Winter declares that Harold Ray, a senior vice president of Edison, stated in a 4:15 p.m. telephone call on January 18, 2001, that Edison plans to continue to act as scheduling coordinator for all of Edison's non-direct access 0282

A.00-11-038 et al. COM/LYN/epg customers. Mr. Ray stated that there is not an intent to abandon any of its customers.

10. At 4:20 p.m. on January 18,2001, Mr. Winter had a telephone conversation with Mr. Richard of PG&E and Bruce Worthington, General Counsel of PG&E.

Mr. Richard stated that PG&E would not change its scheduling responsibilities at this time aiid that there was a misunderstanding of the scheduling coordination responsibilities regarding the CDWR's role as a conduit to serve some of PG&E's customers.

11. Mr. Winter declares that Mr. Richards then advised the ISO that PG&E "will continue to review its scheduling coordination responsibilities to its non-direct access customers as the situation unfolds."

12. Mr. Alaywan declares that he participated in two conference calls with personnel from PG&E, Edison, and CDWR, which took place at approximately 8:00 a.m. and 2:00 p.m.

13. During the morning call, all participants agreed that PG&E and Edison would continue to act as scheduling coordinators for all their non-direct access customers, even though some customers would be served by generation provided by CDWR. PG&E and Edison agreed to undertake an inter-scheduling coordinator trade with CDWR in accordance with prescribed ISO processes.

14. During the afternoon call, Mr. Alaywan states that a PG&E director indicated that PG&E no longer wished to act as a Scheduling Coordinator for non-direct access customers served by generation provided by CDWR.

15. The same participants took part in a 3:00 p.m. conference call on January 18,2001, in which Edison now indicated that it was taking the same position as PG&E as to scheduling coordinator responsibilities. Mr. Ziad understands from conversations with Mr. Winter that PG&E and Edison have currently indicated that they will serve as scheduling coordinators for all their non-direct access 0283

A.00-11-038 et al. COM/LYN/epg customers in accordance with the process agreed to during the January 18, 2001 morning call.

16. The January 18, 2001 declaration of Peter Garris of the CDWR confirms the 2:00 p.m. phone call described by Mr. Alaywan. Mr. Garris also participated in a 4:45 p.m. conference call with Ms. Grief Director of PG&E Scheduling, PG&E Vice President Roy Kuga, other CDWR staff, and individuals from the ISO and Power Exchange.

17. During this call, Mr. Garris confirms that Mr. Kuga indicated that PG&E would not take scheduling coordinator trades from CDWR after Saturday, January 20,2001, for energy acquired by CDWR for PG&E's load that is not served by PG&E's own generation.

18. Mr. Garris states that PG&E lacks sufficient resources to meet its native load without securing energy from other sources; if this is left unresolved, PG&E's customers will experience adverse reliability problems.

Conclusions of Law

1. State law clearly requires utilities to serve their customers, and a threatened bankruptcy filing or threat of insolvency does not change that obligation.

2. As we stated in D.01-01-018, we have a duty to assure that the utilities are able to continue to procure and deliver power for their customers. This duty applies even if the utilities under our jurisdiction have filed for bankruptcy or appear to be threatened with insolvency. Our basic duty under the Public Utilities Act is to assure the people of California adequate electric service at just and reasonable rates.

3. Under Public Utilities Code sections 451, 761, 762,768, and 770, PG&E and Edison have an obligation to provide full and adequate service to all of their customers, including continuing to enter into and maintain any current and future low-cost contracts to procure power.

0284

A.O0-11-038 et al. COM/LYN/epg

4. Electricity is essential to the health, safety, and economic well-being of all California consumers.

5. Customers of PG&E and Edison would suffer irreparable harm if the utilities did not maintain adequate service to all customers.

6. In order to ensure full and adequate service to all customers of PG&E and Edison, the Commission should issue a Temporary Restraining Order preventing the utilities from refusing to provide adequate service to all of their customers.

This restraining order should specifically prevent the utilities from refusing to act as scheduling coordinator with the California Independent System Operator to serve all of their non-direct access customers.

7. A TRO serves the purpose of preventing the actions of a party from causing irreparable harm to another party, pending a hearing on the need for a preliminary injunction.

8. We are issuing this TRO on our own motion and an ex parte basis because we are convinced that if adequate service were not maintained, great or irreparable harm would result before the matter could proceed to a hearing.

9. A TRO has the same force and effect as a preliminary injunction and remains in effect until an order can be issued granting or denying a request for a preliminary injunction.

10. A hearing should be held expeditiously to require PG&E and Edison to show cause as to why a preliminary injunction should not be granted.

11. Nothing in AB 1890 relieves the existing utilities of their obligation to serve all customers in their service territories under their respective tariffs.

12. Consistent with Government Code § 11125.5 and Rule 81, immediate action is required because PG&E and Edison's potential failure to serve all non-direct access customers is an unforeseen emergency situation that threatens to severely impair public heath and safety.

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A.00-11-038 et al. COM/LYN/epg

13. Because this is an unforeseen emergency situation, the 30-day public review and comment period is waived, consistent with § 311(g)(2).

14. This order should be effective today, so that a temporary restraining order may be issued expeditiously.

INTERIM ORDER IT IS ORDERED that:

1. Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (Edison) shall continue to provide full and adequate service to all their customers.

2. PG&E and Edison are temporarily restrained from refusing to provide adequate service to all customers, including refusing to act as scheduling coordinators to serve all their non-direct access customers with the California Independent System Operator.

3. PG&E and Edison shall appear for an evidentiary hearing on January 29, 2001 at 10:00 AM at the Commission's San Francisco Courtrooms to show cause why the Commission should not proceed to issue a preliminary injunction and to take legal action against PG&E and Edison for their actions.

This order is effective today.

Dated January 19, 2001, at San Francisco, California.

LORETTA M. LYNCH President CARL W. WOOD Commissioner Commissioner Richard A. Bilas is necessarily absent.

0286

A.00-11-038 et al. COM/LYN/epg I will file a dissent.

/s/ HENRY M. DUQUE Commissioner 0287

A.-0011-038 et al. COM/LYN/epg ATTACHMENT I DECLARATION 1,GARY HEATh, declare:

1. 1am employed by the Electricity Oversight Board as the Executive Director. I have personal knowledge of the facts stated herein except as to matters stated upon information and belief, and as to those matters, I believe them to be true. If called upon to testify, I could and would competently do so.

2. Today, I received a telephone at about approximately 2:00 p.m. from Deputy Director Raymond Hart of the California Department of Water Resources.

3. Mr. Hart informed me that starting Saturday, January 20,2001, Pacific Gas and Electric Company ("PG&E") told him that it would only schedule its own generation, and would not purchase additional needed generation to serve remaining customer load.

4. I verified this information from Mr. Hart by contacting PG&E Vice President Dan Richard, at approximately 2:15 p.m. today. Mr. Richard confirmed that PG&E would only serve its customers through its own generation, and therefore would not schedule the resources secured by the California Department of Water Resources for PG&E's remaining load.

5. PG&E cannot rely on its own generation to meet its obligations to serve all the customers in its service territory. PG&E must obtain additional generation; otherwise, reliability of service to PG&E customers will be seriously jeopardized.

I declare under penalty of perjury that the foregoing is true and correct.

Executed this 18' day of January, 2001, at Sacramento, California.

/S, GARY HEATH Gary Heath (END OF ATTACHMENT 1) 0288

A.00-11-038 et al. COM/LYN/epg ATTACHMENT 2 AFFIDAVIT OF TERRY WINTER I, Terry Winter, declare as follows:

1. I am the President and Chief Executive of the California Independent System Operator. I have personal knowledge of the matters set forth below and can testify thereto if called as a witness.

2. At approximately 4:15 on January 18, 2001, 1 had a telephone conversation with Harold Ray, a senior vice president of Southern California Edison Company (SCE) concerning that company's plans for acting as scheduling coordinator for all SCE non-direct access customers. Mr. Ray advised me that SCE is planning to continue to act as scheduling coordinator for all SCE non-direct access customers. Mr. Ray further advised me that any confusion on this point was due to some uncertainty as to how responsibilities for acting as scheduling coordinator would be allocated between the California Department of Water Resources and SCE. He advised me that there was no intent on the part of SCE to "abandon" any of its customers.

3. At approximately 4:20 on January 18, 2001, 1 had a conversation with Dan Richards, a senior executive of Pacific Gas and Electric Company (PG&E) and Bruce Worthington, General Counsel of PG&E, concerning that company's plans for acting as scheduling coordinator for all PG&E non-direct access customers. Mr. Richards advised me that PG&E would not change its scheduling coordinator responsibilities at this time. Mr. Richards further advised me that any confusion on this point was due to a misunderstanding of the scheduling coordination responsibilities of PG&E in light of the Governor's statement regarding the role of the Califomia Department of Water Resources as a conduit to serve some of PG&E customers. Mr. Richards advised me that while the company does not intend to change its scheduling coordination role for all its non-direct access customers at this time, the company will continue to review its scheduling coordination responsibilities to its non-direct access customers as the situation unfolds.

Declared under penalty of perjury by:

/S/ TERRY WINTER Terry Winter (END OF ATTACHMENT 2) 0289

A.00-11-038 et al. COM/LYN/epg ATTACHMENT 3 AFFIDAVIT OF ZIAD ALAYWAN 1,Ziad Alaywan, declare as follows:

1. 1am a Managing Director at the California Independent System Operator. I have personal knowledge of the matters set forth below and can testify thereto if called as a witness.

2. On January 18, 2001, 1 participated in two conference calls with personnel from Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE) and the Californib Department of Water Resources (CDWR), which took place at approximately 8-00 AM and 2:00 PM. These conference calls related to the mechanics for scheduling of non-direct access customers of PG&E and SCE.

3. During the morning call it was agreed that PG&E and SCE would act as scheduling coordinators for all their non-direct access customers, although some such customers would be served by generation provided by CDWR. PG&E and SCE would undertake an inter scheduling coordinator trade with CDWR to account for the generation to be provided by CDWR, in accordance with the ISO process for inter scheduling coordinator trades, which requires confirmation from both scheduling coordinators entering into a transaction.

4. During the 2:00 PM call, a PG&E director indicated that PG&E did not wish to act as scheduling coordinator for non-direct access customers served by generation provided by CDWR. This director stated that another entity should be used to act as scheduling coordinator for these customers. The CDWR representative asked whether PG&E was shirking its responsibilities as a utility. The PG&E director stated that PG&E does not wish to shirk its responsibilities, but stated again that another entity should serve as scheduling coordinator for customers served by CDWR generation. Since it appeared that the entities on the phone had reached an impasse, we agreed to try speaking again at 3:00 PM.

5. After the 2:00 PM call, I called another PG&E representative to get confirmation of the PG&E position. I was told that this person could not help me. I therefore informed the ISO President and Chief Executive Officer, Terry Winter, of the development.

6. The group (representatives from PG&E, SCE, CDWR and myself) reconvened for a call at 3:00 PM. During this call, the SCE representative indicated that it was taking the same position as PG&E as to scheduling coordination responsibilities, in light of issues that needed to be resolved, including for example the $100 penalty for underscheduling.

7. I understand from conversations with Mr. Winter that at this time PG&E and SCE have indicated that they will serve as scheduling coordinators for all their non-direct access customers in accordance with the process agreed to during the 8:00 AM call this morning.

Declared under penalty of perjury by:

/s! ZIADALAYWAN Ziad Alaywan (END OF ATTACHMENT 3) 0290

A.00- 1-038 et al. COM/LYN/epg ATTACHMENT 4 DECLARATION 1,PETER GARRIS, declare:

1. I am employed by the California Department of Water Resources ("CDWR") as Chief Water and Power Dispatcher. I have personal knowledge of the facts stated herein except as to matters stated upon information and belief, and as to those matters, I believe them to be true. If called upon to testify, I could and would competently do so.

2. At approximately 2:00 p.m. today, I participated in a teleconference meeting with representatives from Pacific Gas and Electric Company ("PG&E"), Southern California Edison Company, the California Independent System Operator ("ISO") and the California Power Exchange ("PX"). During this meeting, Claudia Grief, Director of PG&E Scheduling, informed us that PG&E would not be taking "scheduling coordinator to scheduling coordinator trades" from CDWR to PG&E, as of Friday, January 19,2001, for energy that would flow on Saturday, January 20,2001. She also informed us that PG&E would not be the scheduling coordinator for load that could not be served by its own resources.

3. At approximately 4:45 p.m., I participated in a teleconference meeting with PG&E Vice President Roy Kuga and Ms. Grief. The meeting was attended by other CDWR staff, and individuals from the ISO and the PX. During this meeting, Mr. Kuga indicated that PG&E would not take "scheduling coordinator to scheduling coordinator trades" from CDWR after Saturday, January 20,2001, for energy acquired by CDWR for PG&E's load that is not being served by PG&E's own generation.

4. PG&E lacks sufficient generating resources to meet its native load without securing energy from other sources, including CDWR. If the resource deficiency is unresolved, this will result in adverse reliability problems for PG&E customers.

I declare under penalty of perjury that the foregoing is true and correct.

Executed this 18' day of January, 2001, at Sacramento, California.

/s/ PETER GARRIS Peter Garris (END OF ATTACHMENT 4) 0291

A.00-11-038 et al D.01-01-046 Commissioner Duque, dissenting:

These are dearly stressful times. The Commission, and each Commissioner, wishes to do whatever we can to reduce the rolling blackouts that Californians are now facing. Nevertheless, I cannot support today's decision of the majority that adopts a Temporary Restraining Order (MRO) against SCE and PG&E.

A careful review of each of the affidavits attached to today's order of the majority belies the need for the issuance of a TRO. The affidavits document an understandable confusion on the part of SCE and PG&E concerning the new role of the California Department of Water Resources in buying power. More importantly, the affidavits show an underlying commitment by SCE and PG&E to honor their obligation-to-serve Californians. In particular, consider attachment 2, point 2 "there is no intent on the part of SCE to 'abandon' any of its customers." Furthermore, consider attachment 3, point 7

". . . at this time, PG&E and SCE have indicated that they will serve as scheduling coordinators for all their non-direct access customers. . ." The affidavits demonstrate that there is no threat by either utility to deny their obligation-to-serve Californians. If there were such a threat by utilities to abrogate their obligation to serve, I would support the order of the majority. The evidence before the Comnmission, however, does not justify the issuance of a TRO.

It is also wise to ask what the adoption of this order will accomplish. The obligation-to-serve is already dear in California law, and the TRO adds nothing to that obligation. Moreover, the order may simply poison the atmosphere between government and the utilities, thereby making communications even more difficult in this time of crisis. Thus, the order of the majority is unwise, with potential risks and costs exceeding any benefits.

Finally, in the few minutes before this meeting, I called Gordon Smith, the CEO of PG&E. He stated that PG&E has no intention to abrogate its obligation-to-serve. I also called John Bryson, the Chairman of SCE, who said the same thing. These verbal commitments only confirm my reading of the affidavits and my conclusion that there is no need for today's order.

For these reasons, I respectfully dissent from today's order of the majority.

/s/ HENRY M. DUOUE Henry M. Duque January 19, 2001 San Francisco, California 0292

(TUE) 1. 8 C2 11:14 ST. 10:59 NO.4861385643 P 53 FROM TAB 12 0293

EXHIBIT D 0294

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Pacific Gas and Electric Company, PG&E Corporation Docket Nos. EC02-31 -000 On Behalf of its Subsidiaries EL02-36-000 Electric Generation LLC, CP02-38-000 ETrans LLC and GTrans LLC MOTION FOR

SUMMARY

DISPOSITION, OR IN THE ALTERNATIVE, PROTEST AND REQUEST FOR CONSOLIDATION AND HEARING, OF THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Pursuant to Rules 211, 212, and 217 of the Rules of Practice and Procedure ("Rules") of the Federal Energy Regulatory Commission ("FERC"), the Public Utilities Commission of the State of California ('CPUC"), hereby protests the filing made in the above-referenced dockets, and moves for the summary disposition of the application ("the section 203 application"). In the alternative, if the application is not summarily rejected, the CPUC requests that the application be consolidated with related filings discussed below, and set for consolidated hearing. The CPUC is a constitutionally-established agency charged with the responsibility for regulating natural gas and electric corporations within the State of California. In addition, the CPUC has a statutory mandate to represent the interests of natural gas and electric consumers throughout California in proceedings before the Commission. The CPUC previously filed a Notice of Intervention in these proceedings on December 14, 2001.

I 2655 -eA p.

UZU0

1. THE SECTION 203 APPLICATION On November 30, 2001, Pacific Gas and Electric Company ("PG&E") and PG&E Corporation ("Parent") on behalf of its subsidiaries. Electric Generation LLC ("Gen"), ETrans LLC ("ETrans") and GTrans LLC ("GTrans") (collectively, "PG&E" or the "Applicants") filed an application with the FERC, pursuant to Section 203 of the Federal Power Act ("FPA") and related declaratory orders under Sections 201 and 305 of the FPA and Section 12 of the Natural Gas Act ("NGA") for authorization of a disposition of jurisdictional facilities (for convenience the application will be referred to herein as "the Section 203 Application"). Applicants state that this filing has been filed in connection with PG&E's proposed "Plan of Reorganization under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company" ("Plan") jointly filed by PG&E and its Parent with the Bankruptcy Court on September 20, 2001. Applicants request approval for various transactions in connection with a proposed reorganization of PG&E that would result in the corporate unbundling of certain of PG&E's operations and spin-off of PG&E (as a retail gas and electric distribution company) from the Parent. PG&E states in its application that it does not expect to seek approval of the Transaction by the CPUC.

Specifically, PG&E is seeking FERC approval in the instant application for:

• Transfer of transmission-related assets and wholesale and transmission contracts to Gen, the GenSub LLCs and ETrans and for the Spin-Off of a Reorganized PG&E from its Parent pursuant to FPA Section 203.

• Assignment of the beneficial interest in the Nuclear Decommissioning Trust associated with PG&E's Diablo Canyon Power Plant Nuclear Decommissioning Trust associated with PG&E's Diablo Canyon to Diablo Canyon LLC.

• A declaratory order that the GenSubs LLCs, will not be deemed "public utilities" under Section 201 (3) of the FPA, 16 U.S.C. § 824(3) (2000).

• A ruling that the declaration of a dividend to effectuate the transfer of Gen, the GenSub LLCs, ETrans and GTrans from PG&E to its Parent, distribution of a stock dividend by PG&E to its Parent, and the Parent's subsequent distribution to its shareholders of its shares of common stock of Reorganized PG&E, do not 2 0296

violate the prohibitions set forth in Section 305(a) of the FPA, or Section 12 of the NGA.

• Confidential treatment to unredacted files that contain privileged or propriety material.

• Concurrent approvals with the FERC under Sections 8, 204 and 205 of the FPA, and Section 7 of the NGA, to implement specific aspects of the Bankruptcy Plan.

• A Final Order Approving PG&E's Application by the end of July 2002.

On December 12, 2001, the FERC issued its "Notice of Filing," setting until January 30, 2002, for the filing of interventions and protests in these dockets. The filing of the Section 203 Application is one part of a complex series of filings ("November 30 Filings") made by PG&E before the FERC as part of the implementation of PG&E's Plan. These filings are voluminous in nature-by PG&E's estimate, 20,000 pages.

The Plan was jointly filed by PG&E and the Parent with the Bankruptcy Court on September 20, 2001. PG&E's Plan involves a complex disaggregation of various businesses within PG&E and the spin-off of its distribution business to a Reorganized PG&E, which will be a separate company that will no longer be affiliated with the remainder of the disaggregated businesses. In effect, the current vertically-integrated PG&E will become a distribution company only and its generation, electric transmission and gas storage and transmission operations will be unbundled into separate companies that remain affiliated with one another under the Parent, but unaffiliated with Reorganized PG&E.

Under this Plan, only Reorganized PG&E will be subject to CPUC regulation. Indeed, as the CPUC has recently stated in its November 27, 2001 bankruptcy filing in response to PG&E's proposed disclosure statement:

Through its Plan and Disclosure Statement PG&E seeks to affect a regulatory jailbreak unprecedented in scope in bankruptcy annals.

Under the guise of section I1 23(a)(5) of the Bankruptcy Code and through a misapplication of the debtor protection provisions of chapter I 1, PG&E seeks sweeping preemptive relief primarily in 3 0297

the form of no fewer than fifteen affirmative declaratory and injunctive rulings, each designed to permanently dislocate various state and local laws and regulations affecting PG&E's operation of its public utility. (Fn omitted). PG&E's Plan is concerned only secondarily with adjusting debtor-creditor relations and restoring its utility operations to financial health. To be sure, if those were PG&E's primary concerns, then it would have proposed a much more straightforward reorganization strategy. PG&E has as its own agenda an escape from CPUC and State regulation.'

If. THE STATUS OF THE BANKRUPTCY PROCEEDINGS Pursuant to an order of the Bankruptcy court, on December 19, 2001, PG&E filed its First Amended Disclosure Statement For First Amended Plan Of Reorganization ("Am. Discl. St."),

describing the extent to which the Plan relies on preemption of state law and regulation. The CPUC filed its brief on preemption with the Bankruptcy Court on January 8, 2002, and the CPUC's brief on preemption was attached as Exhibit B to the "Joint Parties' Motion To Dismiss Applications, Or In The Alternative To Hold Applications In Abeyance And For Extension Of Time To Intervene, Protest, And Comment, And For Expedited Action And Shortened Response Time" ("Joint Motion") filed on January 22, 2002 in Docket Nos. ER02455-000 et. al.

PG&E's Am. Discl. St. makes an extraordinarily broad claim of preemption, touching on fundamental aspects of century-old utility law regulation. PG&E asserts that:

[tihe preemptive effect of the [proposed) Confirmation Order extends to all statutes, rules, orders and decisions of the CPUC otherwise applicable to the Restructuring Transactions and the implementation of the Plan. In the Proponents' view, the Confirmation Order supersedes any statute, rule, order or decision that the CPUC might interpret to otherwise apply to the Restructuring Transactions and the implementation of the Plan whether specified here or not.

'See p. 3 of "California Public Utilities Commission's Objection to Proposed Disclosure Statement for Plan of Reorganization Under Chapter II of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by Pacific Gas and Electric Company and PG&E Corporation." filed November 27. 2001. In re Pacific Gas and Electric Companv. United States Bankruptcy Court Northern District of California. San Francisco Division . Case No. 01-30923 DM.

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Am. Discl. St.-at 129.

Specifically, PG&E asserts preemption of, among others, the following statutes, rules, decisions and regulations, which form the foundation of any state public utility code:

• Public Utilities Code §377: As amended in January 2001, § 377 requires the CPUC to "regulate the facilities for the generation of electricity owned by any public utility ... until the owner of those facilities has applied to the commission to dispose of those facilities and has been authorized by the commission under Section 851 to undertake that disposal" and provides that "no facility for the generation of electricity owned by a public utility may be disposed of prior to January 1, 2006. The commission shall ensure that public utility generation assets remain dedicated to service for the benefit of California ratepayers."

• Public Utilities Code §451: Like § 205 of the FPA, requires utility rates to be just and reasonable, and provides that "Every public utility shall furnish and maintain such adequate, efficient, just, and reasonable service, instrumentalities, equipment, and facilities. . . as are necessary to promote the safety, health, comfort, and convenience of its patrons, employees, and the public."

• Public Utilities Code §453: Provides in relevant part that "No public utility shall, as to rates, charges, service, facilities, or in any other respect, make or grant any preference or advantage to any corporation or person or subject any corporation or person to any prejudice or disadvantage."

• Public Utilities Code §701: Provides that: "The commission may supervise and regulate every public utility in the State and may do all things, whether specifically designated in this part or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction."

• Public Utilities Code §701.5: Provides for CPUC regulation of certain public utility financing arrangements.

• Public Utilities Code §702: Provides that "Every public utility shall obey and comply with every order, decision, direction, or rule made or prescribed by the commission in the matters specified in this part, or any other matter in any way relating to or affecting its business as a public utility, and shall do everything necessary or proper to secure compliance therewith by all of its officers, agents, and employees."

• Public Utilities Code §728: Similar to § 206 of the FPA, provides that "Whenever the commission, after a hearing, finds that the rates or classifications, demanded, observed, charged. or collected by any public utility for or in connection with any service, product, or commodity, or the rules, practices, or contracts affecting such rates or classifications are insufficient, unlawful, unjust, unreasonable, discriminatory, or preferential, the commission shall determine and fix, by order, the just, reasonable, or sufficient rates, classifications, rules, practices, or contracts to be thereafter observed and in force."

• Public Utilities Code §761: Along with §§ 762 and 768, provides for basic health, safety and reliability regulation of public utilities. The CPUC may order construction or modification of facilities or equipment. and changes to rules or services, in order to address "unjust, unreasonable. unsafe, improper. inadequate, or insufficient" utility rules, practices, equipment. appliances, facilities or service. Pub. Util. Code §§ 761. 762, 768. The 0299

Commission may order changes in a utility's facilities to promote the security or convenience of employees or the public. Pub. Util. Code § 762. It may fix the utility's rules, practices, and service to promote safety, reliability, and other goals. Pub. Util. Code § 761. It may direct a utility to use particular safety devices (Pub. Util. Code § 768). The Commission may fix standards and services to be furnished by utilities. Pub. Util. Code § 770.

• Public Utilities Code §816-830: These sections govern the issuance by a public utility of debt or equity securities, among other things requiring the approval of the CPUC prior to the issuance.

• Public Utilities Code §851: Similar to § 203 of the FPA, provides that CPUC approval is required for any public utility to "sell, lease, assign, mortgage, or otherwise dispose of or encumber" its property, including certificates of public convenience and necessity.

• CPUC Resolution L-244: Issued in 1994, this CPUC decision prohibits PG&E from "taking any action that would alter the jurisdictional status of PG&E or any division of PG&E or of the rates, services or facilities of PG&E's natural gas transmission system or storage system without first obtaining the Commission's approval."

As the CPUC's President Lynch has stated to the Bankruptcy Court, these laws and regulations "establish the fundamental relationship between the State of California and its regulated public utilities," including the "the utilities' basic obligation to provide electric and gas service to every California customer on a fair and non-discriminatory basis." See e.g. Order Instituting Investigation Into the Power Outage et al., D.99-09-028, 1999 Cal. PUC LEXIS 635,

• 8-26 (1999). As discussed in the Joint Motion, the CPUC, the State of California representing other state agencies, and others have objected that PG&E's unlawful misuse of the Bankruptcy Code renders the Plan unconfirmable on its face. That is, under existing law, the Bankruptcy Court cannot lawfully approve the Plan as proposed. In particular, the Ninth Circuit has held in Baker & Drake Inc. v. Public Service Commission of Nevada, 35 F.3d 1348 (9th Cir. 1994), that the Bankruptcy Code does not preempt state statutes or regulations intended to protect the public safety and welfare. According to the Ninth Circuit, state statutes may be preempted by the Bankruptcy Code only if. at a minimum, they are directed narrowly and solely at economic regulation. and if certain other factors apply. The provisions of the Public Utilities Code that PG&E secks to preempt protect the public safety and welfare, and accordingly preemption 6

0300

cannot occur. That is true even if enforcement of the challenged provisions of state law would make a bankruptcy reorganization more difficult, or even impossible.

In addition, the CPUC has developed and is prepared to file in short order an Alternative Plan of Reorganization ("Alternative Plan"). Unlike the PG&E Plan, the Alternative Plan does not require disassembling the nation's largest public utility, and does not require either the Bankruptcy Court or FERC to reject the application of century-old state regulatory statutes critical to health, safety, and welfare of thirty million citizens. The Bankruptcy Court provided the CPUC until February 13, 2002 to provide the Bankruptcy Court with a term sheet demonstrating that the CPUC's proposed Alternative Plan is feasible. Upon review of the term sheet, the Bankruptcy Court will rule on whether the CPUC will be permitted to file the Alternative Plan.

A hearing on the preemption issues was held on January 25, 2002. The Bankruptcy Court has taken the matter under submission.

III. OVERVIEW OF PLEADING The CPUC moves to dismiss the Section 203 Application, and protests each of the requested authorizations at issue in the section 203 application. Dismissal is sought on the grounds that, inter alia: (I) the Section 203 Application is premature; (2) the transactions for which authorization is sought in the Section 203 Application and the related November 30 Filings contravene the public interest or otherwise violate the law, among other things violating fundamental provisions of state law and creating significant regulatory gaps; (3) PG&E has failed to comply with applicable FERC regulations, including 18 C.F.R. 33.2(e)(3); (4) serious environmental issues are implicated by the transfer of PG&E's hydroelectric facilities to non-7 0301

regulated limited liability companies-, (5) FERC cannot lawfully authonze the requested assignment of the Nuclear Decommissioning Trusts; and (6) the proposed Transactions violate

§ 305 of the FPA In the event that dismissal is not granted, the CPUC moves to consolidate the November 30 Filings, and that the consolidated proceedings be set for hearing. As the various dockets commenced by means of the November 30 Filings constitute interrelated parts of a single Plan, consolidation is warranted. In addition, significant issues having been raised in the instant pleading and the CPUC's contemporaneously filed pleadings in each docket, in the event that the proceedings are not simply dismissed hearings are necessary to fully evaluate whether PG&E's proposals are in the public interest and are otherwise lawful.

IV. MOTION FOR

SUMMARY

DISPOSITION The CPUC submits that the section 203 application must be summarily rejected in its entirety. First, the CPUC renews the arguments made in the Joint Motion for dismissing the Gen application as premature, or alternatively, holding this proceeding in abeyance, and incorporates the Joint Motion herein by this reference. 3 Second, the Section 203 Application must be summarily dismissed on the merits, because the transactions detailed in the Plan, which are proposed to be implemented in part through the 2 PG&E owns the largest private system of hydroelectric facilities in the nation. Consisting of 250 dams and diversions. 99 reservoirs with 2.3 million acre-feet of storage capacity and 200.000 acre-feet of consumptive water rights, and 68 powerhouses with 3.896 megawatts of generation capacity. the system controls Sierra and other rivers from Mt. Shasta to the Kings River Basin near Bakersfield. In addition, it includes 140,000 acres of associated lands.

3PG&E argues. in effect, that although its plan currently seeks to violate state law in numerous ways, it will become lawful if the Bankruptcy Court confirms the plan, including PG&E's request for a declaration that all applicable state law is preempted. This argument. if accepted, merely demonstrates why this application should be dismissed as premature. PG&E's own timetable does not contemplate execution of the plan for at least another eleven months.

And even if the Bankruptcy Court does ultimately confirm the plan. its legality still will be subject to years of appeals. At the present time. it is indisputable that the object of this application is unlawful, and unless and until the Bankruptcy Court states otherwise. and the judgment of the Bankruptcy Court is affirmed. PG&E's claims concerning the legality of this application are hypothetical and speculative at best.

8 0302

Section 203 Application, are contrary to the public interest, as expressed in both state and federal law and regulation. The purpose of the transactions at issue here is, inter alia, to allow PG&E to transfer its generation, electric transmission, and natural gas transportation assets to affiliates of PG&E Corporation, currently PG&E's parent. As to the electric generation assets, the proposed transactions directly violate both California statutory law and clearly expressed federal policy.

Both the California Legislature and FERC have recognized that the particular circumstances that obtain in California's energy markets at this time strongly dictate against a utility divesting itself of all of its own generation assets, as this application seeks authorization to do. As to the natural gas transportation assets, the proposed transactions similarly violate state law. In addition, the PG&E Plan violates numerous other state laws, both substantive and procedural. Moreover, the federal statutes under which these transactions are proposed demonstrate a keen respect for state regulation of public utilities, and cannot be utilized in the manner proposed herein.

In January 2001, the California State Legislature enacted Assembly Bill (AB) Xl 6, which prohibits California's investor-owned utilities, including PG&E, from disposing of generation facilities that they own before January 1. 2006, providing in relevant part:

"Notwithstanding any other provision of law, no facility for the generation of electricity owned by a public utility may be disposed of prior to January 1, 2006." Cal. Pub. Util. Code § 377.

The application at issue here seeks FERC approval of transactions for the purpose of violating that statute, and numerous others. Accordingly, the object of the transactions that PG&E asks FERC to authorize in this proceeding is patently unlawful. Moreover, PG&E concedes that it has not and will not seek any authorizations from the CPUC. A partial list of the statutes that its plan violates is set forth above, including Cal. Pub. Util. Code § 851 (similar to FPA § 203, requiring CPUC approval for any disposition of utility property). Not mentioned in the PG&E 9 0303

plan, though equally critical, is the attempted circumvention of the California Environmental Quality Act ("CEQA") Cal. Pub. Res. Code § 21000, et. s., which is triggered under CPUC § 851 reviews. California has a strong interest in ensuring compliance with CEQA in order to weigh the potential environmental impacts of a proposed utility transaction and by doing so, ensure that the State protects its environment and inhabitants from unnecessary harm. PG&E's preemption claim attacks California's basic power to protect the public against the danger that a utility will fail to carry out its duties, or the danger that a utility transaction will have an adverse impact on the environment.

FERC has previously reached a conclusion similar to that reached by the California Legislature last January. In an order dated December 15, 2000, FERC noted that utility retained generation was an important factor in mitigating wholesale power costs, and thus in ensuring utilities' ability to provide required services. San Diego Gas & Electric Company. et al., 93 FERC ¶ 61,294 (2000) at 62,001 (As a result of the order, "the IOUs will be able to provide power from their own resources to serve their own load .... The best way to mitigate cost exposure is for the IOUs to cease selling and repurchasing what they already produce"). FERC thus ordered PG&E to utilize its retained generation to serve its native load. Id. PG&E's Plan, in contrast, would effectively reverse this aspect of the December 15 Order, and leave the nation's largest utility virtually devoid of generating facilities.

Similarly, well-established California law and regulations prohibit the changes in status sought in Docket Nos. CP02-38-000 et al. for PG&E's natural gas transportation facilities in the absence of CPUC approval. CPUC Resolution L-244, issued in 1994, prohibits PG&E from

' Decisions of the CPUC have the force of state law. Dvke Water Co. v. Public Utilities Corn. (1961) 56 Cal.Md 105, 123 (CPUC rule "had the force and effect of a statute"); Colich & Sons. et al. v. Pacific Bell (1988) 198 Cal.App.3d 1225. 1232. citing Dollar-A-Day Rent-A-Car System. Inc.. v. Pacific Tel. & Tel. Co. (1972) 26 Cal.App.3d 454.

457.

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"taking any action that would alter the jurisdictional status of PG&E or any division of PG&E or of the rates, services or facilities of PG&E's natural gas transmission system or storage system without first obtaining the Commission's approval." Resolution L-244 was premised on the CPUC's concern that such an action by PG&E "may engender significant adverse impacts on California citizens," including "the possibility that the Commission will be unable to ensure the provision of gas to homes, schools, and hospitals in the case of a supply or capacity crisis" and "the possibility that the pricing of gas service for captive customers will undermine the universal availability of affordable gas service for California citizens." PG&E has neither sought nor obtained CPUC approval for such a change.

PG&E acknowledges that the Plan violates state law. The Section 203 Application states, for instance, that:

"If the Debtor were not subject to the jurisdiction of the Bankruptcy Court, under the Public Utilities Code the approval of the CPUC would be required to transfer the generation assets from the Debtor to Gen and its subsidiaries or affiliates and to otherwise effect the Restructuring Transactions. In addition, Section 377 of the California Public Utilities Code states that the Debtor is required to retain its remaining generation assets through 2005.

Am. Discl. St. at 100.

The relief PG&E demands not only violates state law and FERC's December 15 Order, but would undermine Congressional intent to preserve the traditional police power of the states to the greatest extent Constitutionally permissible. Courts have repeatedly recognized the important role of state regulation of public utilities, and that federal law was meant to supplement and not to supplant state regulation of those utilities. The FPA and NGA were enacted to fill in gaps not covered by state regulation, not as a mechanism for avoiding state regulation of public utilities. In enacting Part II of the Federal Power Act, Congress did not purport to exercise all of the authority it might have exercised under the Commerce Clause, 0305

because its intention was to preserve, not override, state regulatory jurisdiction. Conn. Light &

Power Co. v. Federal Power Comm'n, 324 U.S. 515, 529-30 (1945). To implement this intent, the "limitations established on [federal commission] jurisdiction ... were designed to coordinate precisely with those [the Attleboro line] constitutionally imposed on the states." United States v.

Public Utils. Comm'n of California, 345 U.S. 295, 311 (1953) ("U.S. v. CPUC"); Conn. Light &

Power, 324 U.S. at 525 ("Progress of the [FPAJ bill through various stages shows constant purpose to protect rather than to supervise authority of the states."); Panhandle E. Pipe Line Co.

v. Pub. Serv. Comm'n, 332 U.S. 507, 517-518 (1947) (NGA "was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way."); FPC v.

Southern California Edison Co., 376 U.S. 205, 213 (1964) ("The premise was that constitutional limitations upon state regulatory power made federal regulation essential if major aspects of interstate transmission and sale were not to go unregulated").

Both the FPA and the NGA are replete with provisions that demonstrate the Congressional concern that federal regulation not be used as a mechanism to avoid state regulation of public utilities. Section 201 of the FPA, for instance, is the basic provision providing for federal regulation of electricity. Section 201(a) provides that "the transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce is necessary in the public interest, such Federal regulation, however, to extend only to those matters which are not subject to regulation by the States." Section 201 thus explicitly provides for the continued exercise of traditional regulatory authority by the States. 5 See Conn.

Light & Power, 324 U.S. at 529-30.

FH'A Sections 19 and 20 contain similar provisions. See also Section 204(ft 12 0306

Similarly in enacting the NGA, Congress created a dual regulatory scheme which "carefully divided up regulatory power over the natural gas industry." Northwest Central Pipeline Cori. v. State Corp. Comm'n, 489 U.S. 493, 510 (1989). Congress "prescribe~d] not only the intended reach of the [federal power]," but also 'specifie[d] the areas in to which this power was not to extend." Id.; Kentucky West VirRinia Gas Co. v. Pennsylvania Public Utility Commission, 650 F. Supp. 659,667 (M.D.Pa 1996). For instance, in § I(b) Congress specifically stated that federal regulation "shall not apply . .. to the local distribution of natural gas." Northwest Central, 489 U.S. at 511 (Congress places express jurisdictional limits on federal powers in § 1(b) of NGA). Under Section 1(c), known as the Hinshaw Amendment, Congress similarly fenced off from federal regulation "any person engaged in the transportation in interstate commerce or the sale in interstate commerce for resale of natural gas received by such person from another person within or at the boundary of a state if all the ... gas... is ultimately consumed within such State." Congress expressly "declared [such regulation] to be matters of primarily of local concern and subject to regulation by the several States." 6 In the same vein is § 32 of the Public Utility Holding Company Act ("PUHCA"), enacted as part of the Energy Policy Act of 1992, 15 U.S.C. § Sec. 79z-5a(c). This section of the Energy Policy Act provides that:

If a rate or charge for, or in connection with, the construction of a facility, or for electric energy produced by a facility (other than any portion of a rate or charge which represents recovery of the cost of a wholesale rate or charge) was in effect under the laws of any State as of October 24, 1992, in order for the facility to be considered an eligible facility, every State commission having jurisdiction over any such rate or charge must make a specific ePG&E has continuously been a Hinshaw pipeline since 1954 and subject to CPUC regulation. PG&E is a local distribution company of natural gas regulated by the CPUC. See Cal. P.U. Code §§ 451. 454. 785.5. PG&E's sales are sales tor ultimate consumption by California consumers. As such. PCG'&E's sales and rates are exclusively regulated by the CPUC. See also the CPUC's contemporaneous filing in Docket Nos. CPO2-39-000 el al.

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determination that allowing such facility to be an eligible facility:

(1) ill benefit consumers, (2) is in the public interest, and (3) does not violate State law.

Section Sec. 79z-5a(c) not only contemplates recognition of state interests, but enshrines in federal law the principle that the state must affirmatively give its consent in order for a utility to effectuate a change in status of the kind sought here of any rate-based electric generating facility.7 Here, of course, not only has PG&E not sought such consent, it seeks to transfer its generating facilities out of state regulation over the objection of its state regulator, and in the face of state law prohibiting the transaction.

Bankruptcy law in the Ninth Circuit, moreover, does not countenance the flouting of state law inherent in PG&E's Plan. The Ninth Circuit has held in Baker & Drake Inc. v. Public Service Commission of Nevada. 35 F.3d 1348 (9 th Cir. 1994), that the Bankruptcy Code does not preempt state statutes or regulations intended to protect the public safety and welfare. According to the Ninth Circuit, state statutes may be preempted by the Bankruptcy Code only if, at a minimum, they are directed narrowly and solely at economic regulation, and if certain other factors apply. As discussed above, the provisions of the Public Utilities Code that PG&E seeks to preempt protect the public safety and welfare, and form the foundation of any system of public utility regulation. See also Northeast Utilities Service Company v. FERC, 993 F.2d 937, 945-46 (Ist Cir. 1993) ("there is no evidence that the state regulators would have approved a plan to allow PSNH to emerge from bankruptcy that included only the first 'stand alone' step"); Inre Nitec Paper Corp., 43 B.R. 492 (S.D.N.Y. 1984) ("a reorganization must be formulated within the bounds of existing state and federal law").

7In apparent recognition ofthis fact. PG&E does not seek EWG status for the GenSub LLCs.

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In sum, state law prohibits implementation of some of the transactions proposed in the Section 203 Application (and the related November 30 Filings) outright, and requires CPUC approval for others (which PG&E has not sought and says it will not seek). Federal public utility law recognizes the continued importance and vitality of state regulation, and requires FERC to consider the expressed interest of the state in any determination that it makes. Federal bankruptcy law similarly forbids debtors and courts from overriding the state's expressed interest. Finally, FERC itself is on record as determining that PG&E's retained generation must be used to serve native load. These factors lead ineluctably to the conclusion that the transactions proposed PG&E's Section 203 Application are not in the public interest, and the Application should be dismissed.

V. ALTERNATIVE MOTION TO CONSOLIDATE NOVEMBER 30 FILINGS FOR HEARING The CPUC seeks dismissal of the Section 203 Application as set forth above, and seeks dismissal, on various grounds set forth in pleadings filed contemporaneously with the instant pleading, of each of the proceedings arising from the November 30 Filings. If the Section 203 Application is not dismissed, it and any of the other proceedings arising from the November 30 Filings which are not summarily dismissed should be consolidated and set for hearing.9 The November 30 filings are interrelated pieces of a single coordinated program, intended to implement PG&E's Plan. No single docket among the November 30 Filings can be evaluated in isolation, any more than the various aspects PG&E's Plan could be evaluated singly.

s The dockets as to which dismissal. or in the alternative. consolidation and hearing. are sought are: ER02-455-000 (ETtrans). ER02-456-000 (Gen); CP02-39-000, CP02-40-000, CP02-41-000, CPO-242-000 (GTrans et al.); EC02-31-000, EL02-36. CP02-38-000 (Section 203); ESO2-17 (Section 204): Project Nos.77-116.96-031. 137-031. 175-018. 178-015. 233-082.606-020.619-095. 803-055, 1061-056. 1121-058. 1333-037, 1354-029. 1403-042. 1962-039. 1988-030. 2105-087. 2106-039. 2107-012.2130-030. 2155-022,2310-120.2467-016. 2661-016. 2687-022, 2735-071. 233-081. 1354-005. 2107-010. 2661-012. 2687-014. 2118-006. 2281-005, 2479-003. 2678-001. 278 I-004. 2784-001.4851-004. 5536-001.5828-003.7009-004. and 10821-002 (Section 8).

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For instance, to fully evaluate the ETrans application in Docket No. ERO2-455-000 consideration must also be given to the transfer of transmission assets and contracts proposed in the Section 203 Application. The contracts for which approval is sought in the ETrans Application flow from the dispositions proposed in the Section 203 Application. Similarly, the PSA proposed in the Gen Application cannot be fully evaluated without consideration of issues raised in the instant proceeding, since it is by means of this proceeding that PG&E proposes to transfer certain jurisdictional facilities necessary to support the PSA. Moreover, it is in this proceeding that the issue of whether PG&E's proposed transactions provide adequate compensation to PG&E will be raised.

Likewise, while the Section 8 Applications address only the requested approval to transfer hydroelectric project licenses, the Section 203 Application contains the associated request to transfer to Gen and its subsidiaries certain hydroelectric assets. That application additionally requests a disclaimer by the FERC of any jurisdiction under the FPA over the LLCs which are to hold the hydroelectric FERC licenses. Section 203 Application at 82-83. The Section 204 and 305 Applications request approval regarding the issuance of securities and the assumption of liability by Gen in connection with the transfer.

These applications will require coordinated review and scrutiny to adequately evaluate the difficult legal issues they raise and in order to ultimately determine whether PG&E's filings are in the public interest. Indeed, PG&E asks for "concurrent approvals" of its various November 30 Filings. Accordingly, the November 30 Filings should be consolidated. See Northeast Utilities Service Company v. FERC, 993 F.2d 937,945-46 (Ist Cir. 1993) ("like the state regulators who approved the two-step plan, the Commission evaluated the plan as a whole").

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FERC precedent supports setting related dockets of similar magnitude for consolidated hearing. See Northeast Utilities Companv, 50 FERC ¶ 61,266 (1990) (establishing consolidated hearing procedures for several related proceedings proposed to implement a bankruptcy Plan of Reorganization for Public Service of New Hampshire). The CPUC has raised serious issues regarding whether, for instance, the contracts filed in the ETrans and Gen applications may be considered just and reasonable. Moreover, FERC's policy is to set § 203 proceedings for hearing if issues are raised by a state commission regarding the effect of the proposed transaction on state regulation. See es Ohio Edison Company, 95 FERC ¶ 61,178 (2001) (hearing not necessary because Ohio Commission had jurisdiction over the transaction and did not raise concerns about the effect on regulation); Meraer Policy Statement, 77 FERC ¶ 61,263 (1996); Revised Filing Requirements Under Part 33 of the Commission's Regulations, 93 FERC I 61,164 (2000). As set forth above, PG&E contends that the preemptive force of the Bankruptcy Code deprives the CPUC of the authority it would otherwise have over the transactions proposed in the November 30 Filings. And, as discussed in detail below, the Section 203 Application has serious detrimental impacts on both state and federal regulation, creating a significant regulatory gap with respect to, inter alia, PG&E's generation facilities. Accordingly, although the CPUC disputes PG&E's contention as to the preemptive force of the Bankruptcy Code, the CPUC does seek significant relief herein. Consequently, the November 30 Filings should be set for a consolidated hearing with attendant discovery opportunity and procedures consistent with Northeast Utilities Companv. 50 FERC ¶ 61,266 (1990).

VI. THE AUTHORIZATIONS SOUGHT IN SECTION IV OF THE APPLICATION CONTRAVENE THE PUBLIC INTEREST The transactions proposed in the Section 203 Application raise serious concerns with respect to each of the three factors traditionally considered by FERC in a § 203 proceeding, 0311

producing detrimental effects on competition and rates, and creating substantial regulatory gaps.

San Diego Gas & Electric Co. 79 FERC ¶ 61,372 (1997) ("SDG&E'). In addition, other factors relevant in this matter to any public interest determination weigh heavily against approval of the authorizations sought by PG&E. 18 C.F.R. 2.26(b). The Section 203 Application proposes that PG&E divest itself of its most valuable assets for a fraction of their value, while retaining billions of dollars worth of liabilities. Moreover, adequate protection of the public interest requires that the environmental implications of the proposed transactions be fully considered.

Finally, approval of the Section 203 Applications is inconsistent with the prompt emergence from Bankruptcy of PG&E. As in the SDG&E case, FERC must act in partnership with the state to assure that the public interest is fully protected. Each of these issues is discussed in greater detail below.

A. The Standard of Review FERC analyzes proposed dispositions under § 203 to determine whether they are "consistent with the public interest." Section 203 provides in relevant part:

(a) Authorizations No public utility shall sell, lease, or otherwise dispose of the whole of its facilities subject to the jurisdiction of the Commission, or any part thereof of a value in excess of $50,000, or by any means whatsoever ... merge or consolidate such facilities or any part thereof with those of any other person ... without first having secured an order of the Commission authorizing it to do so. Upon application for such approval the Commission shall give reasonable notice in writing to the Governor and State commission of each of the States in which the physical property affected, or any part thereof, is situated, and to such other persons as it may deem advisable. After notice and opportunity for hearing, if the Commission finds that the proposed disposition, consolidation, acquisition, or control will be consistent with the public interest, it shall approve the same.

I0

> ~~~~~~~0312

lb) Orders of Commission The Commission may grant any application for an order under this section in whole or in part and upon such terms and conditions as it finds necessary or appropriate to secure the maintenance of adequate service and the coordination in the public interest of facilities subject to the jurisdiction of the Commission. The Commission may from time to time for good cause shown make such orders supplemental to any order made under this section as it may find necessary or appropriate.

FERC primarily examines three factors in analyzing whether a proposed transaction is consistent with the public interest: (1) the effect on competition, (2) the effect on rates, and (3) the effect on regulation. FERC "may also consider other factors" in determining whether a proposed transaction is in the public interest. 18 C.F.R. 2.26(b).

FERC's discussion of these factors in the SDG&E/Enova-Pacific Enterprises merger proceeding is instructive. See San Diego Gas & Electric Co. 79 FERC 1 61,372 (1997)

("SDG&E"). In the SDG&E case, the holding companies of two of California's largest public utilities (SDG&E and Southern California Gas Co.) proposed to merge. FERC expressly referenced the CPUC's authority in considering each public interest factor. Under the first factor, "effect on competition" FERC looked at both vertical and horizontal market power.

FERC stated that "vertical mergers raise three types of general competitive concerns: (1) denying rival firms access to inputs or raising their input costs; (2) increased anticompetitive coordination; and (3) regulatory evasion." FERC concluded that the merger could have impacts on competition, and further concluded that most of the mitigation measures it thought necessary were within the CPUC's jurisdiction. Thus FERC conditioned its approval of the merger on the adoption by the CPUC of certain mitigation measures. Id. at 62,565. As to horizontal market power, FERC noted that consolidation of retail gas services of SDG&E and SoCalGas due to the merger could reduce competition, but held that "the California Commission. which also has 19 0313

jurisdiction over this transaction, can adequately address this issue and has not requested our assistance in this regard."

Under the second fact, "effect on rates," FERC noted that the only issue appeared to relate to retail rates, a matter "more appropriately addressed by the California Commission." Id.

at 62,566.

Under the third factor, "effect on regulation," FERC's Merger Policy Statement discusses concerns relating to (1) creation of a regulatory gap as a consequence of a corporate realignment, or (2) shifts of regulatory authority between FERC and state commissions or the Securities and Exchange Commission (SEC). FERC found it dispositive in the SDG&E proceeding that "the California Commission has not raised concerns regarding impairment of its regulatory authority and will be able to approve or disapprove the merger. Therefore, regulatory authority would not be impaired by virtue of the proposed disposition of facilities." Id. at 62,566-67.

In the instant case, the CPUC's otherwise applicable authority to review the transactions proposed in the Section 203 Application and the related November 30 Filings has been challenged by the applicant, PG&E, which seeks to preclude the exercise of the CPUC's authority. Accordingly, the CPUC must seek the assistance of FERC. Under the circumstances, FERC cannot assume that the CPUC will be free to exercise its otherwise applicable authority to review the transactions and address effects on competition, rates, and regulation. Accordingly, FERC's review of the proposed transactions must be particularly searching.

In addition to providing a full and fair evaluation of whether PG&E's proposals are in the public interest under the FPA, FERC can, and should, help to ensure that all of the public interest considerations at issue here are fully evaluated. Section 203(b) empowers FERC to issue orders authorizing disposition of jurisdictional property "upon such terms and conditions as it finds 20 0314

necessary or appropriate to secure the maintenance of adequate service and the coordination in the public interest." In this matter, FERC should expressly condition any approvals it may issue herein on similar approval by the CPUC of transactions within the CPUC's jurisdiction pursuant to the California Public Utilities Code.

Finally, in addition to the three traditional factors addressed in any § 203 proceeding, FERC should in this matter consider several other factors which bear on whether the transactions proposed herein are in the public interest. Those factors are:

(I) the failure of consideration embodied in these transactions; (2) the environmental impacts of the proposed transactions; and (3) whether approval of this Application is consistent with PG&E's prompt emergence from bankruptcy.

B. Effect on Competition The proposed transactions raise both vertical and horizontal market power issues. While arguing to the contrary, PG&E implicitly acknowledges as much-it places in a footnote the disclosure that its horizontal and vertical competitive screen analyses submitted with the Section 203 Application attribute 7,100 MW of generation facilities not to Gen, the proposed holder of those facilities in PG&E's brave new world, but to Reorganized PG&E. PG&E seeks to justify this treatment by asserting that the market power of Gen will be mitigated by the Purchase and Sales Agreement ("PSA") at issue in ER02-456-000. But, as PG&E surely realizes, the PSA is for twelve years, while the loss to PG&E of its hydroelectric and nuclear generating facilities under the Plan is forever. PG&E's competitive market screen analyses are invalid on their face, and cannot support PG&E's claims that the transactions will not have a detrimental effect on competitions The CPPUC will address the competitive market screen analyses in greater detail in discovery and testimony should this matter be set for hearing. See also the CPUC's contemporaneous filing in Docket No. ERO2-456-000 (Gien).

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As one of the largest holders of natural gas transportation assets, electric generation assets, and electric transmission assets in the western United States, PG&E's corporate parent will be in a prime position to exercise market power both vertically and horizontally. In the upstream delivered gas market, as in the SDG&E case, PG&EIGTrans would control access to the natural gas necessary for gas-fired generating companies which will compete with PG&E/Gen, and will have access to potentially sensitive market information regarding those competing generators' costs and fuel usage. SDG&E, 97 FERC at 62,562. And Gen, which will control 7,100 MW of generation (roughly 40% of the generation in the oft-constrained PG&E service territory), will clearly have market power in the California wholesale electric markets.

See the CPUC's contemporaneous pleading in ER02-456 for a more detailed discussion of Gen's market power.

In addition, FERC has previously addressed this issue, and held that the sale and purchase of PG&E's generation in the wholesale market had a detrimental effect on competition.

Accordingly, FERC ordered PG&E to use its retained generation resources-the same resources that it will "spin off' to its corporate parent in the proposed transactions-to serve its native load. San Diego Gas & Electric Company. et al., 93 FERC ¶ 61,294 (2000) at 62,001 (As a result of the order, "the IOUs will be able to provide power from their own resources to serve their own load .... The best way to mitigate cost exposure is for the IOUs to cease selling and repurchasing what they already produce").

C. Effect on Rates The Merger Policy Statement explains that the protection of wholesale ratepayers and transmission customers is FERC's primary, but not sole, concern regarding the effects of a section 203 proposal on rates. Merger Policy Statement. at 30,123. Section 2.26 of FERC's regulations provides. under Effect on Rates. that 'Ialpplicants should propose mechanisms to 0316

protect customers from costs due to the [transaction]." The PG&E Plan will, by design, have a significant impact on both wholesale and retail.electric rates. For instance, under the PSA proposed in Docket No. ER02-456-O00, Gen will charge unjust and unreasonable wholesale rates to Reorganized PG&E, which proposes to pass the rates through to its retail ratepayers pursuant to the filed rate doctrine. Reorganized PG&E will be stuck with a long-term contract at above market rates. See the CPUC's contemporaneous pleading in ER02-456-000, incorporated herein by this reference, for a more detailed discussion of this issue. Retail ratepayers will be stuck paying passed-through wholesale rates approaching double the otherwise applicable retail rate for the same energy from the same power plants.

-The "stable" rates which PG&E promotes as a virtue of its plan may have serious long term effects on California ratepayers and the California economy. These "stable" rates will result in overall retail rates over the next decade that rival those of the early 1990s, which engendered industrial users to begin the push for electric restructuring. Along with the above-market CDWR contracts against which the PSA is "benchmarked," these "stable" rates will threaten the state with recession as large users leave the state or decline to enter it. The "stable" above-market rates of the PSA thus threaten residential ratepayers with the prospect of paying an ever-increasing share of the "sunk" costs of the PSA.

Accepting as true for the purposes of argument PG&E's contention that its current wholesale customers will be protected from the costs of the transactions. Reorganized PG&E itself will be a new wholesale customer as a result of the transactions, and the purported cost protection provided to existing wholesale customers is noticeably not provided to Reorganized PG&E. To the contrary, Reorganized PG&E will be subject to the overpriced PSA, and as discussed in greater detail in the CPUC's contemporaneous pleading in Docket No. ER02-455 23 0317

(ETrans), Reorganized PG&E will be saddled with the worst of PG&E's existing transmission contracts, while profitable contracts are transferred to ETrans. In addition, the high rates which Reorganized PG&E is committed to pay under the PSA detrimentally affect its ability to resume serving its "net short" load, and increases the likelihood of further retail rate increases in order for Reorganized PG&E to do so.

D. Effect on Regulation PG&E's Plan and its implementation by means of the Section 203 Application would create very significant "regulatory gap[s] as a result of a corporate realignment," as well as "shifts of regulatory authority between the Commission and state commissions." Merger Policy Statement, at 30,124-25. Generally, federal regulation has primarily if not solely concerned wholesale rates, leaving the remaining bulk of regulation to the states. Gen. Motors Corp. v.

Tracy, 519 U.S. 278, 290-92 (1997). The most significant of the regulatory gaps which would result if PG&E's Plan were accepted include: (1) the proposed creation of a new interstate pipeline with contractual obligations to customers and vendors, but which eliminates the obligation to serve California retail customers, and eliminates health, safety and welfare regulation over these facilities;' 0 (2) the creation of new entities owning 7,100 MW of California generation facilities which would be entirely unregulated, either by the FERC or by the CPUC, and the attendant elimination of health, safety, and welfare regulation over these facilities; (3) the elimination of regulation and oversight over PG&E's Nuclear Decommissioning Trust Funds, resulting in the potential for underfunding in one or more of the trusts, and compromising the safety of PG&E's nuclear facilities."

See the CPU's contemporaneous pleading in Docket Nos. CPO2-39-000 et al.. incorporated herein by this reference. for a detailed discussion of this issue.

" See discussion infra.

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FERC has consistently held that the elimination of state regulation which proceeds from a proposed transaction constitutes a regulatory gap affecting the public interest. Merger Policy Statement, 77 FERC 91 61,263 (1996) ("commenters generally argue that it is important for the Commission to continue to look at the effect of a merger on the effectiveness of state and Federal regulation"); Enron Corporation. 78 FERC ' 61,179 (1997) (because "state and federal jurisdiction will remain static" pursuant to transaction, deferring action until after Oregon Commission has acted unnecessary); Niagara Mohawk Power Corporation, 89 FERC 91 61,124 (finding that "the proposed transaction will not adversely affect state regulation"); Niagara Mohawk Holdings. Inc., 95 FERC 161,381 (2001) ("we are also concerned with the effect on state regulation where a state does not have authority to act on a merger and has raised concerns about the effect on its regulation of the merged entity").

As the gas and nuclear issues are discussed extensively elsewhere (see footnotes 10 and 11), this section will focus on the regulatory gap with respect to PG&E's generating facilities.

PG&E asserts that as a result of the proposed transactions the GenSub LLCs will not be public utilities under either state or federal law, and will thereby entirely unregulated. PG&E's claim that the GenSub LLCs will not be public utilities under federal law is addressed further infra.

PG&E's contention that the GenSub LLCs will not be public utilities under state law apparently depends on the contention that by means of the proposed transactions the generating facilities-which will be used in the same manner that they have traditionally been used, if PG&E is to be believed, and to serve the same customers with the same energy-will no longer be dedicated to public use.' 2 Currently, PG&E's generating facilities are subject to the full range of state rate,

':See Cal. Pub. Util. Code § 216; Richfield Oil Corp. v. Public Utilities Commission (1960 54 Cal.2d 419. 426-31.

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health, safety,-welfare and reliability regulation. All safety and reliability regulation over the PG&E generating facilities would thus be lost if PG&E's Plan is implemented.

Furthermore, while Gen itself will be a public utility under federal law, under PG&E's Plan PG&E Gen would not be a public utility under state law. Accordingly there will be no regulatory body with health, safety, and welfare jurisdiction over the generating facilities. And while FERC would have a measure of regulatory authority over Gen's rates, the transformation from a vertical entity making retail sales to wholesale seller also entails a regulatory gap. The CPUC performs cost of service ratemaking, which FERC has held to be valuable in the December 15 order, while FERC generally does not.

- Finally, although the CPUC would retain jurisdiction over the distribution facilities and retail rates of the resulting Reorganized PG&E, by wholly separating generation from load (promoted as another virtue of its Plan by PG&E), the Plan and this Section 203 Application would seriously undermine PG&E's ability to reliably serve its load, and wholly undermine the CPUC's ability to ensure that PG&E do so, at least in the short term.

E. The Failure of Consideration PG&E's Section 203 Application is both incomplete for its failure to comply with Section 33.2(e)(3) of FERC's regulations, 18 C.F.R. § 33.2(e)(3), and, substantively, is not in the public interest because PG&E proposes to strip itself of its most valuable assets for insufficient consideration, to the detriment of both the resulting Reorganized PG&E and its ratepayers.

Section 33.2(e)(3) of FERC's regulations requires an applicant to discuss in a § 203 application "the consideration for the transaction." PG&E contends that "because this Transaction is not a sale of assets but rather a reorganization, the concept of consideration is not applicable." Application at 20. But PG&E provides no support for this contention, and FERC's regulations make no such exception. To the contrary, prior case law addressing transactions 26 0320

related to bankruptcy reorganization have expressly addressed the consideration issue. See El Paso Electric Company, 68 FERC 61,181 (1994) at 61,893,61,918. While PG&E has provided an Exhibit describing "the various financial transactions" associated with is Plan, PG&E fails to provide a narrative discussion of the transactions or their implications. For instance nowhere in PG&E's several thousand page filing does PG&E provide a single number indicating the value of the cash and notes to be provided to Reorganized PG&E as a result of the transactions.' 3 PG&E's application is thus incomplete, and may be rejected on this basis alone.

An examination of the application reveals that the Section 203 Application and related Bankruptcy Court filings proposes transactions that fail to provide consideration to PG&E that can be considered in the public interest. The table below estimate the value of the assets to be transferred out of the PG&E utility under the Plan. No market valuation of the electric or gas transmission facilities have been made in Commission filings, but applying discounted cash flow valuation techniques and the plan's assumptions regarding net revenues to be derived from these assets, we obtain the following estimates:

1 PG&E states that Gen will provide Reorganized PG&E with $2.4 billion in exchange for transfer of the generating facilities, and numbers tor the amounts to be provided by GTrans and ETrans are provided separately. but no total figure is provided.

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Comparison of Estimated Values of Transferred Assets and Consideration to PG&E

($ billion)

Type of Asset Net Book Market Value Amount Returned to Loss to Utility Value Estimate Utility by Mortgaging Assets'4 Hydro Generation 0.59 2.8 -4.1 16 Nuclear Generation 0.0 1.417 All Gen 0.5915 4.2 - 5.5 2.4 1.8- 3.1 Electric Trans 1.519 2.5 1.05 1.45 Gas Trans 1.720 1.519 0.9 0.6 TOTALS 3.79 8.2 -9.5 4.35 3.85 - 5.15 As these figures demonstrate. PG&E proposes to divest itself of its gas transportation, electric transmission, and electric generating facilities for amounts that approximate the book value of the facilities. Although the corporate parent proposes to capitalize the new entities based on the market value of the facilities, and charge market-based rates to Reorganized PG&E under the PSA, the proposed consideration to PG&E for the facilities approximates half of their 14 PG&E Amended Disclosure Statement. Exhibit E., 12/19101.

"' PG&E IO-Q dated August 2.2001 p. 25; value as of June 30,2001.

16 Market value of 2.8 fixed by settlement agreement between PG&E. TURN. and other parties in A.99-09.053.

Market value of 4.1 estimated by PG&E in A.00- 11-056. the rate stabilization proceeding.

17 Based on an average price per kW for the recent sales of the Nine Mile Point Unit 2. Indian Point Unit 2, and Millstone Units 2 and 3.

IsPG&E FERC Form 1.Vol. 1. 2000.

19 "Market values" for electric and gas transmission are estimated using discounted cash flow analysis over 25 years of service at an assumed discount rate of 8%. Net income estimates from Attachment C of the 8-K issued with the Plan. Note that the value of the gas transmission assets derived from this method suggests that the value to investors is approximately the net book value of the assets.

20 A.97-12-020 and PG&E FERC Form 1.Vol. 2. 2000.

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market value, and results in a staggering loss to Reorganized PG&, on the order of $4 to $5 billion dollars.

Even this calculation, however, understates the loss to Reorganized PG&E. In addition to the gas transportation, electric transmission, and electric generating facilities, PG&E proposes to transfer to its parent tens of thousands of acres of watershed and forest land associated with its hydroelectric facilities which are not encompassed within the FERC-licensed projects (the "non-project hydro land"). This non-project hydro land is located primarily in the growing foothill regions of the Sierra Nevada, and will be subject to intense pressure for development (raising serious environmental concerns, as addressed in the CPUC's contemporaneous filing in the Section 8 applications, P-77-116 et al.). They are extremely valuable. Yet, apparently, Reorganized PG&E will receive nothing for the loss these lands, which will, in addition, be freed from CPUC regulation.

In addition, PG&E proposes to transfer its existing proprietary telecommunications network to ETrans or a subsidiary of ETrans called "Telco." See Application at 21; Exhibit I at 1-4. The proposed transfer includes "related controls and intellectual property rights... used to transport voice and data information." Id. These assets probably include existing wire and fiber optic cables, rights of way, and wireless licenses. Such assets all hold the potential to become highly valuable on the open market; the licenses in particular my prove to be highly lucrative, as the radio band they use has recently been made commercially viable for cellular telephone service. PG&E's belief in the commercial value of its telecommunications assets is demonstrated L.g. in Pacific Gas & Electric Company, 90 FERC ¶ 61,314 (2000). Moreover, after the separation some of the telecommunications assets will then be leased back to Reorganized PG&E in whole or in part for profits at ratepayer expense.

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On the other side of the ledger, the Section 203 Application proposes that Reorganized PG&E retain liabilities which logically would be transferred to ETrans. Reorganized PG&E is slated to hold the lion's share of PG&E's Existing Transmission Contracts ("ETCs"), and the ETCs assigned to Reorganized PG&E will be the most underperforming of the lot - including WAPA Contract 2948A, which PG&E has elsewhere alleged will cost PG&E on the order of

$1.8 billion before its 2004 termination. 21 The ETC allocation proposed in the Section 203 application, and the related "Back-to-Back agreement" proposed in Docket No. ER02-455-000 simply facilitate PG&E Corp.'s culling of the transmission wheat from the chaff, with the chaff falling to Reorganized PG&E while ETrans makes off with the wheat.

Ratepayers have funded, through the ongoing recovery in rates, depreciation, etc. under the benefits of monopoly regulation, the acquisition and construction of all of these assets. It fundamentally contravenes the public interest for PG&E to transfer these assets to its to-be-unregulated corporate parent without assuring that ratepayers receive fair value in return, whether the transaction is proposed in the context of a Bankruptcy reorganization plan or in any other context. This Plan most assuredly does not provide ratepayers, or Reorganized PG&E, with fair consideration, and the Plan must be rejected as contrary to the public interest.

F. NEPA Review is Required for the November 30 Filings Adequate protection of the public interest requires FERC to conduct environmental review of the proposed hydroelectric project license transfers, and the related transfers proposed herein, under the National Environmental Policy Act ("NEPA") 42 U.S.C. Section 4332(2)(C). 2 2 21See letter dated March 27, 2001 to the FERC in Pacific Gas and Electric Company. FERC Docket ER01-1639-000. in which PG&E sought to amend, inter alia. Contract No. 2948A.

22 Environmental issues are discussed in greater detail in the CPUC's "Motion To Dismiss. Or In The Alternative.

Protest. Request For Consolidation And Request For Hearing Of The Public Utilities Commission Of The State Of California". Project Nos.77-116 et al. ("the Section 8 protcst"). filed contemporaneously. protesting PG&E's Section 8 Applications which seek the transfer of PG&E's twenty six hydroelectric project FERC licenses to newly 30 0324

Although FERC regulations typically exclude from NEPA review applications under Sections 8.

203, 204, and 205 (18 C.F.R. Section 380.4(a)(15)& (16)), NEPA review is specifically warranted here by special circumstances recognized under 18 C.F.R. § 380.4(b)(2), and 40 C.F.R. § 1508.4.

Underlying the CPUC's contention that FERC should undertake NEPA review related to PG&E's Section 8 Applications is a Draft Environmental Impact Report (DEIR) prepared by the CPUC pursuant to the California Environmental Quality Act, Cal. Pub. Res. Code Sections 21000 et seq., in conjunction with PG&E's 1998 application before the CPUC to sell all of its hydroelectric assets and associated lands. While the DEIR reaches conclusions specific to transfer scenarios involving the hydroelectric projects, the CPUC's Section 8 protest notes the relationship between the Section 8 and Section 203, 204 and 205 applications which similarly warrant NEPA consideration.

The transactions contemplated in connection with the Section 203, 204, 205,and 8 applications at issue here are not typical or simple ownership transfers. Instead, the changes in ownership contemplated by, or inextricably intertwined with, these applications are massive, and it is reasonably foreseeable that these proposed transactions will have significant environmental consequences.

The separate applications in the November 30 Filings deal with separate but interrelated transactions, all of which are portions of a single overarching Plan of Reorganization. FERC is required to address them together in assessing the need for NEPA review. CEQ regulations provide that in preparing an EIS, all connected actions should be considered in one document.

40 C.F.R. § 1508.25. Actions are considered connected if they "cannot or will not proceed formed individual Limited Liability Company's ("LLCs'). and the subsequent lease of project properties to the newiv formed LLCs parent company. GEN. The CPUC incorporates the Section 8 protest herein by this reference.

31 0325

unless other actions are taken previously or simultaneously" or are "independent parts of a larger action and depend on the larger action for their justification." Id. Under this standard, that PG&E's Section 8 applications, and indeed all of the November 30 Filings, are all connected for the purpose of NEPA review is beyond dispute. CEQ regulations further provide that in determining the significance of an action, "significance cannot be avoided by ... breaking Ian action] down into small component parts." 40 C.F.R. Section 1508.27(b)(7). See also Blue Mountains Biodiversity Proiect v. Blackwood, 161, F.3d 1208 (9th Cir. 1998) (Forest service was required to prepare single EIS that addressed cumulative effects of five salvage logging projects proposed for same watershed.)

In view of the above-stated considerations, the transfers proposed by PG&E in its Section 203 Application warrant and must be considered in the context of NEPA evaluation by the FERC.

G. Emergence From Bankruptcy PG&E contends that its prompt emergence from bankruptcy is in the public interest.

With this the CPUC agrees. This principle does not, however, support PG&E's request for hasty approval of the Section 203 Application. The Section 203 Application will not facilitate PG&E's prompt emergence from bankruptcy, since it attempts to implement a plan that, even if confirmed by the Bankruptcy Court, will inevitably be but the first step in lengthy litigation. To the contrary, the most likely means to PG&E's prompt emergence from bankruptcy, and restoration to creditworthiness, is embodied in the CPUC's proposed Alternative Plan. As discussed above, the CPUC will provide additional information to the Bankruptcy Court regarding the Alternative Plan on February 13, 2002, after which the Bankruptcy Court will determine whether to permit the filing of the Alternative Plan.

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While emergence from bankruptcy is clearly in the public interest, PG&E's Plan is not.

The Plan is simply too costly, in every sense of the word. It is too costly to PG&E's ratepayers, who will pay close to double the otherwise applicable rates under the PSA for the same energy from the same plants. See the CPUC's contemporaneous pleading in ER02-456-00 (Gen). It is too costly to Reorganized PG&E, stripped of its most valuable assets but saddled with liabilities its parent no longer wants. See the CPUC's contemporaneous pleading in ER02-455-000 (ETrans). It is too costly to the State of California, which would be stripped of basic tools necessary to protect the public health safety and welfare of its citizens (and potentially bereft of funds necessary to ensure the safe decommissioning of two nuclear power facilities).

Haste in these proceedings, then, will not facilitate PG&E's prompt emergence from bankruptcy. For that, PG&E will be required to work with the state, rather than continuing to work against it.

VII. THE REQUEST FOR AUTHORIZATION TO TRANSFER NUCLEAR DECOMMISSIONING TRUST FUNDS MAY NOT LAWFULLY BE APPROVED BY FERC PG&E's request that FERC authorize the assignment of 100% of its beneficial interest in those portions of the CPUC Qualified and Nonqualified Nuclear Decommissioning Trusts (the "Trusts") "associated with" the Diablo Canyon Power Plant ("DCPP") to Diablo Canyon LLC cannot lawfully be approved by FERC. FERC should reject this request for the following reasons, each of which is discussed more fully below: (I) FERC does not have jurisdiction over these Trusts and accordingly cannot authorize their assignment; (2) to the extent that there is any FERC jurisdiction over the Trusts, the proposed assignment cannot be accomplished without approval of the CPUC. (3) to the extent that there is any FERC jurisdiction over the Trusts, it would be unjust and unreasonable to the California ratepayers who have funded these Trusts to authorize their assignment to a holding company that has no explicit obligation to those 33 0327

ratepayers and that could loot or exploit the Trusts' assets to its own advantage, and to the ratepayers' disadvantage; and (4) to the extent that there is any FERC jurisdiction over the Trusts, the Trusts provide funds for the eventual decommissioning of other PG&E assets-specifically, Humboldt Bay Nuclear Unit No. 3 ("HB-3")-which will be retained by PG&E, as well as for the eventual decommissioning of DCPP; thus, on purely practical grounds, the proposed assignment will create serious difficulties and potential inequities in terms of allocating the Trusts' assets as between the needs of DCPP and those other assets.

A. FERC Lacks Jurisdiction to Authorize Any Assignment of PG&E's Interests in the Trusts Because the Trusts are not FERC-jurisdictional agreements, FERC has no authority to approve the transfer proposed by PG&E. PG&E asserts that the Trusts "consist of both CPUC jurisdictional and FERC jurisdictional trusts." However, PG&E provides no support for this assertion, either by reference to the Trusts themselves or in any other manner. To the contrary, PG&E apparently acknowledges the lack of FERC jurisdiction over the proposed transfer, stating that "[tlo the extent the Commisison may deem the transfer of such beneficial interest to be jurisdictional, Applicants are seeking Commission approval .... " Application at 73. The Trusts were developed in a vertically integrated environment in which PG&E's nuclear facilities provided energy at retail to California consumers, under CPUC regulation. The Trusts themselves provide that they were established pursuant to the regulatory authority of the CPUC and the Nuclear Regulatory Commission ("NRC"). See also Cal. Pub. Util. Code §§ 8321 -

8330 (California Nuclear Decommissioning Act of 1985). The Trusts are not "facilities subject to the jurisdiction of the Commission" to which § 203 has any application. Cf. Enova Corp. and Pacific Enterprises, 79 FERC ¶ 61,107 (1997) at p. 61.489; Conoco. Inc. v. FERC, 90 F.3d 536 0328

(D.C. Cir. 1996). Rather, any disposition of the Trusts must be pursuant to CPUC order, and to the extent applicable, NRC order.

PG&E claims that FERC authorization of the assignment of PG&E's beneficial interests in the portions of the Trusts associated with DCPP is "an essential element of the Transaction because it is necessary to permit Diablo Canyon LLC to become the owner of DCPP under the AEA [Atomic Energy Act, 42 USC § 2011 et M.) and the NRC's implementing regulations ...

." Application at 74. PG&E is correct, of course, that the assignment of the DCPP portion (whatever that is) of PG&E's interests in the Trusts may be necessary under the Atomic Energy Act and NRC regulations to effectuate the transfer of DCPP to Diablo Canyon LLC, but FERC certainly does not have the authority to enforce the Atomic Energy Act or the NRC's regulations.

Nor does FERC have authority to "authorize" the assignment of PG&E's interests in the DCPP portion of these trusts to Diablo Canyon LLC or to any other entity.

This is true regardless of any order the Bankruptcy Court may or may not issue. In a footnote, PG&E indicates that it will ask the Bankruptcy Court to "compel" the CPUC to approve the transfer or to "deem" the approval to have been granted by the CPUC. Application at 74. n.57. However, the funds contained in the Trust are not subject to creditors' claims (except, of course, for claims relating to decommissioning activities for which a proper Disbursement Certificate is submitted to the Trustee)2 3 and are therefore outside the purview of the Bankruptcy Court. The Bankruptcy Court therefore has no authority to "break" the contact as part of its approval of a reorganization plan. See In re Nitec Paper Corp. 43 B.R. 492 (S.D.N.Y. 1984) (district court reversed order of Bankruptcy Court permitting the debtor to assign a contract in violation of both state and federal law). In any event, even if the Bankruptcy 2'See discussion infra.

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Court may or indeed does issue an order of the type contemplated by the PG&E footnote, such an order would in no way increase FERC's jurisdiction, or change the non-jurisdictional status of the Master Trust Agreements. Accordingly, this portion of the Section 203 Application must be dismissed for lack of jurisdiction.

B. No Transfer of the Trusts May Be Accomplished Without the Approval of the CPUC The Master Trust Agreements that govern the management of the Trusts are contracts between the CPUC, PG&E and the Trustee, Mellon Bank, N.A. The Master Trust Agreements are, by their terms, irrevocable and not transferable. Section 2.07 of the Master Trust Agreement for the Qualified Decommissioning Trust (the larger of the two in terms of asset value) provides as follows:

'The interest of the Company [PG&E] in the Master Trust is not transferable by the company, whether voluntarily or involuntarily, nor subject to the claims of the creditors of the Company, provided, however, that any creditor of the Company as to which a Disbursement Certificate has been properly completed and submitted to the Trustee may assert a claim directly against the Master Trust in an amount not to exceed the amount specified on such Disbursement Certificate.

Nothing herein shall be construed to prohibit a transfer of the Company's interest in the Master Trust upon sale of all or part of the Company's ownership interest in any Plant or Plant's; provided, however, that any such transfer shall be subiect to the prior approval of the CPUC."

Section 2.06 of the Master Trust Agreement for the Qualified Decommissioning Trust sets forth identical language.

This Master Trust Agreements thus explicitly deny PG&E the authority to transfer its interest in the Trusts either voluntarily or involuntarily. The only exception is in connection with a sale of PG&E's ownership interest in the plant. However, in such a case, the Master Trust Agreement specifically provides that "any such transfer shall be subject to the prior approval of the CPUC." Thus. PG&E's effort via the Section 203 filing to request FERC to assign its interests in the Trusts to Diablo Canyon LLC, without first seeking the approval of the CPUC on 36 0330

its face violates the terms of its contractual agreement and is accordingly a void and unlawful act.

Ultimately, PG&E's request that FERC "authorize" its assignment of its DCPP-related interests in the Trusts to Diablo Canyon LLCF is an idle and futile exercise. The one leading authority cited in section V of its Application, which deals with this issue, Niagara Mohawk Power Corp., 89 FERC ¶ 61,124 (1999) in no way supports PG&E's "authorization" request with respect to assignment of PG&E's DCPP-related interests in the Master Trust Agreements.

Indeed, if anything, the Niagara Mohawk decision undermines the basis for PG&E's request.

In Niagara Mohawk, the co-tenants of the proposed transferee of a majority interest in the Nine Mile Point 11 power plant protested the proposed transfer based on concerns that the proposed transferor might have insufficient funds to meet its portion of eventual decommissioning expenses, and complained in this regard that the transferor failed to seek FERC approval for the transfer of nuclear decommissioning funds. In its decision, the Commission found that there was no need to separately address whether such authorization was needed in that case, and noted that the financial ability of the proposed transferee to fund nuclear decommissioning was a matter to be addressed in an NRC proceeding. Moreover, in Niagara Mohawk, the Commission explicitly recognized that the proposed transaction was "subject to review by the New York State Commission, and no state commission has argued that the proposed transaction would impair state regulation." See 89 FERC, at 61,347. Thus, PG&E's citation to this Commission decision attempts to turn the plain language of the decision inside out. PG&E is attempting to use a finding that holds that the specific authorization of the transfer of decommissioning funds is a matter, not requiring specific FERC approval, for other agencies 37 0331

(the NRC and presumably also the state) to decide into a pretext for de facto preemption of the state's clear contractual right to make that policy judgment.

C. Assignment of the Trusts' Assets Would Not Be in the Public Interest PG&E contends, without any evidentiary support or analysis, that the assignment of its beneficial interests in the portions of the Trusts associated with DCPP "is consistent with the public interest and is in the public interest." Application at 74. In fact, the opposite is closer to the truth. For instance, the U.S. General Accounting office has just released a report (GAO 048, January 2002) finding that the NRC has been approving licensing transfers and related decommissioning efforts even though new owners and operators are unable to assure regulators that the money for decommissioning will be there when reactors are ready for burial.

The specific question of whether the transfer of a nuclear decommissioning fund would be in the public interest, was examined in detail by the CPUC several years ago in a case, A.97-12-039, involving the application of San Diego Gas and Electric Company (SDG&E) for authority to sell its share of the San Onofre Nuclear Generating Station ("SONGS"). There, even SDG&E's partner in SONGS, Southern California Edison Co. ("Edison") expressed concern regarding the proposed transfer, questioning how ratepayers can be assured of protection if the decommissioning trust fund is dissipated by the new, non-utility owner after the transfer. (See RT of October 21, 1999 hearing in CPUC Docket A-97-12-039, at 22.) That question, an answer to which is not even suggested by PG&E in its voluminous Section 203 filing, is as cogent today in the context of the transfer that PG&E is requesting the Commission to authorize as it was 21/2/2 years ago in that SONGS proceeding. On November 5, 1999, SDG&E withdrew its request to divest its interest in SONGS. See In the Matter of the Application of San Diego Gas & Electric Company (U-902-E) for Authority to Sell Electrical Generation Facilities et al., D.00-10-054, 2000 Cal. PUC LEXIS 760 (2000).

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It should also be noted that California's decommissioning law is stricter than required by the NRC. Pursuant to the California Nuclear Facility Decommissioning Act of 1985 (Pub. Util.

Code sections 8321 through 8330). California's nuclear power plants generally have considerably more money in the decommissioning trust funds than in most other states, which typically comply only with NRC rules. Under this law, not only must more money be put into such funds (the maximum contribution allowed pursuant to section 468A of the U.S. Internal Revenue Code, and applicable regulations adopted pursuant thereto), but also California has the oversight authority to make sure that the decommissioning work gets done in a timely fashion.

Under CPUC oversight, to date, PG&E has been a good steward of the Trusts.

However, there is absolutely no guarantee that a Diablo Canyon LLC or some other entity that is not regulated by the CPUC would maintain that stewardship, and yet, the transfer of PG&E's "beneficial interest" in the portions of the Trusts associated with DCPP will effectively put much of the Trusts assets in the hands of such a less reliable and less trustworthy entity, over which, in PG&E's view, neither FERC nor the CPUC would have regulatory authority. Such an unregulated entity would have the incentive to delay performing the decommissioning as long as possible, in order to make as much money for itself, using ratepayer provided funds. It would not be in the public interest, and it would be unjust and unreasonable to PG&E's ratepayers, who have footed the bill for the eventual decommissioning of DCPP, to allow such a situation to arise.

D. The Impracticality of Assigning the Trusts' Assets Based on information contained in the most recent annual report (for calendar year 2000) from PG&E's Nuclear Facilities Decommissioning Master Trust Committee ("NFDMTC-), there is currently a total of some $1.462 billion of assets in the Trusts. It is important to note, however. that the Trusts are intended to cover decommissioning costs for the shut down ol both 39 0333

HB-3 and the DCPP units. By their terms, the Trust documents do not allocate any given amount of the funds controlled by the Trusts to either plant.

PG&E attempts to sweep this serious problem under the rug by blithely asserting in a footnote (at App. 73 n.56) that all of the funds in the Trusts associated with HB-3will be "segregated" from the DCPP components of the Trusts as part of the larger transaction that PG&E is requesting the Commission to approve. Unfortunately, nothing in PG&E's Section 203 filing indicates how this "segregation" will take place. Nor does PG&E explain how such a

".segregation" is consistent with, or permitted by, the Trust documents.

Even if it is both lawful and achievable to so segregate the Trust funds, given the unpredictable nature of decommissioning activities, it would be unreasonable and impractical to attempt to allocate the Trusts into separate HB-3 and DCPP components without a detailed study of the likely scope of the decommissioning effort required for each facility. Such a study would be a lengthy, complicated and expensive endeavor. However, without a proper allocation of Trust assets to HB-3 and DCPP based on a prudent and thorough analysis of the likely costs of decommissioning for both facilities, there is a significant likelihood that one or the other of the facilities would have too little funds to properly complete decommissioning, thereby resulting, especially in the case of HB-3, in an unnecessary. unjust and unreasonable adverse impact on PG&E's ratepayers, and potential health safety and welfare concerns for California citizens.

Thus, assuming arguendo that FERC had the authority to divide the corpus of the Trusts and to assign some share of the Trusts' assets that would be allocated to DCPP to Diablo Canyon LLC (which, as we point out above, FERC clearly does not have the authority to do), it would be improper, imprudent and impractical for the Commission to do so absent the results of a detailed study which has not yet even been commenced.

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VIII. THE PLAN VIOLATES SECTION 305 OF THE FEDERAL POWER ACT The Spin-Off transactions proposed in the instant application (the "Spin-Off") violate § 305 of the FPA. 24 Accordingly, FERC cannot lawfully approve the Spin-Off, and the application should be summarily rejected. Section 305(a) provides:

It shall be unlawful for any officer or director of any public utility to receive for his own benefit, directly or indirectly, any money or thing of value in respect of the negotiation, hypothecation, or sale by such public utility of any security issued or to be issued by such public utility, or to share in any of the proceeds thereof, or to participate in the making or paying of any dividends of such public utility from any funds properly included in capital account.

The last clause of § 305(a) prohibits the payments of dividends by public utilities (and § 12 prohibits such dividends by natural gas companies) from any funds properly included in a capital account. There are two elements to the unlawful act: (1) payment of dividends; and (2) from funds properly included in a capital account. PG&E concedes that the Spin-Off satisfies both elements, and thus that its proposal violates sections 305 and 12. PG&E concedes that the Spin-Off includes the payment of dividends. See Application at 75 ("These dividends consist of

."). PG&E further concedes that the proposed dividends "must necessarily be deemed to be from a capital account." Application at 80.

Despite conceding that its proposal violates these strictures of the FPA, PG&E argues that FERC should not enforce the law against PG&E because the Congress did not mean what it said. Such a position cannot be countenanced. A federal agency does not have the luxury of ignoring the plain language of a federal statute. Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001). The "plain" in "plain meaning" means that a court looks to the actual language used in a 24 In addition. to the extent that PG&E is or becomes a natural gas company as a result of its applications in CP02-39-000 et al. thus making section 12 applicable to the Spin-Off. the Spin-Off violates section 12 for the same reasons as set forth in the text. As PG&E acknowledges, § 305 of the FPA and § 12 of the NGA are virtually identical See Inexco Oil Co.. 17 FERC9 61,310 at 61.610 (1981). See also the CPUC's contemporaneous filing in Docket Nos. CP02-39-000 cl al.

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statute, not to the circumstances that gave rise to that language. CBS Inc. v. Primetime 24 Joint Venture, 245 F. 3d 1217 (I Ith Cir. 2001) If the meaning of the rule is perfectly plain from its language, that ends the inquiry. United States v. Alvarez-Sanchez, 511 U.S. 350, 356 (1994)

("When interpreting a statute, we look first and foremost to its text"); see also United States v.

Ron Pair Enterprises, Inc.-489 U.S. 235, 241-243 (1989; United States v. Bost, 87 F. 3d 1333, 1335 (D.C. Cir. 1996); Harbor Gateway Commercial Propergv Owners' Association v. United States EPA, 167 F. 3d 602, 606 (D.C. Cir. 1999).

PG&E argues, for instance, that the "intent" of § 305 was to prevent the failure to clearly identify the sources from which dividends were paid, and to prevent the payments of "excessive" dividends by holding companies on the securities of their operating companies. Application at

79. Whatever the merits of these assertions, what is clear is that that is not what the statute says.

Both sections 305 and section 12 of the NGA are clear and unambiguous on their face. The Congress prohibited the payment of dividends from funds properly included in any capital account. It is neither necessary nor permissible for courts, or in this case, FERC, to look behind the plain language of such a statute to discern a purportedly more relaxed "intent." The Supreme Court has made it clear that "given [a] straightforward statutory command, there is no reason to resort to legislative history." United States v. Gonzales, 520 U.S. 1,6 (1997); accord Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001); CBS Inc. v. Primetime 24 Joint Venture, 245 F. 3d 1217 (I Ith Cir. 2001); Pair, sunra, 489 U.S. at 241 ("where, as here, the statute's language is plain, 'the sole function of the courts is to enforce it according to its terms"'). Where there exists "straightforward language [the court] cannot read the lack of specific legislative history confirming one possible application of a single provision in an enormous statutory structure to signify Congressional intent to exclude such an application." Blue Cross and Blue Shield of 42 0336

Alabama v. Weitz, 913 F.2d 1544. 1549 (I Ith Cir. 1990). The reason is that "it is ultimately the provisions of our laws rather than the principal concerns of our legislators by which we are governed." Oncale v. Sundowner Offshore Serns., Inc., 523 U.S. 75, 79 (1998).

Here, the statutory language is unambiguous, and PG&E does not contend otherwise.

The statute prohibits public utilities from paying "an dividends from funds (not solely cash dividends) properly included in capital accounts. This ends the inquiry. While the legislative history discussed in the application provides examples of abuses which § 305 may have been intended to address, that legislative history is entirely consistent with enforcement of the plain language of the statute, and can by no means "signify Congressional intent to exclude" enforcement of the plain language of the statute. Blue Cross and Blue Shield of Alabama v.

Weitz, 913 F.2d 1544, 1549 (11th Cir. 1990).

Prior FERC case law is of no assistance to PG&E. To the extent that such cases in fact decline to enforce the plain meaning of § 305 against filing utilities, they are wrongly decided, and should not be followed here. The CPUC is aware of no court case which has affirmed a FERC decision declining to enforce § 305. Even on their face, however, the cases cited by PG&E are distinguishable on their facts.

In Citizens Util. Co., 84 FERC 161,158 (1998) FERC approved a proposal to separate Citizens' communications business from its utility business. A stock dividend was involved.

Importantly, no intervenor challenged either the proposed transaction or the method by which Citizens proposed to accomplish the transaction.2 5 Citizens' asserted that: (I) it was not proposing to make a dividend from funds properly included in a capital account; (2) it had 25 The Vermont Department of Public Service filed a protest "urgi ing] the Commission not to approve the transaction unless it is clear that utility ratepayers would not be disadvantaged.' but did "not object to the spin-off per se." Idi.

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"accumulated sufficient undistributed earnings in its Proprietary Capital accounts, to support the proposed distribution;" and (3) "the proposed separation does not involve any of the financial abuses that section 305(a) was intended to prevent, i.e., misleading shareholders or raiding the company's earnings for the benefit of a holding company." FERC examined the legislative history of § 305, and concluded that none of the problems that reportedly led to the enactment of

§ 305 were present in that case.

Here, by contrast, none of the critical factual predicates which Citizens established are present. To the contrary, the problems which FERC concluded in Citizens had led to the enactment of § 305 are clearly present here. PG&E concedes that its proposed dividend is from a capital account. Application at 80. PG&E further concedes that it has "no retained earnings from which to 'pay' a dividend." Application at 80. Furthermore, this case does involve "raiding" the company's assets for the benefit of the holding company. PG&E's Plan of Reorganization, of which its corporate parent PG&E Corporation is a co-sponsor, and which would be implemented in part by the proposed Spin-Off, proposes to transfer critical utility assets to the holding company for a fraction of their value. See discussion, supra. Unlike Citizens, in which there was "nothing to indicate, and Vermont DPS has not alleged, that any dividends paid will be excessive," in this matter it is clear beyond dispute that the proposed "dividend" will far exceeds the value which Reorganized PG&E will receive in return, and are excessive as a matter of law. See also Delmarva Power & Light, 91 FERCI 61,043 (2000). In Delmarva, FERC approved a similar transaction, but expressly limited its approval to "the circumstances of this case." Id. No party protested the application or even sought to intervene.

FERC found that the proposed dividend was not excessive.

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Nor is Public Service of New Mexico, 93 FERC 61,213 (2000) of any help to PG&E. In PSNM, "a corporate separation [was) being performed to comply with a requirement of state law." No party protested the application. Here, by contrast, PG&E proposes the Spin-Off in direct defiance of, among other things: (I) state law prohibiting the disposition of utility-owned generation assets prior to 2006; (2) long-standing CPUC regulation (which has the force of law) prohibiting PG&E from taking action which would alter the jurisdictional status of its natural gas transmission and storage systems; and (3) state law requiring CPUC approval in the public interest of any proposed disposition of utility assets.

In what is apparently the only prior case in which the applicants' proposed interpretation of § 305 was challenged by intervenors, FERC refused to grant the application as proposed. In Niagara Mohawk Holdings. Inc., 95 FERC 61, 381 (2001) rejected applicants proposal which would not have "limit[edJ dividend payments to just the balance of retained earnings that will be transferred to capital accounts." Id. FERC's concern was premised on its conclusion that "dividends could exceed the balance in the retained earnings account." Id. FERC conditionally approved the proposal, but required applicants to make a compliance filing limiting the payment of dividends to the amount of retained earnings. Id. In PG&E's case there are no retained earnings at all.

IX. THE REQUEST FOR DISCLAIMER OF JURISDICTION OVER THE GENERATION LLCS SHOULD BE DENIED, AS THEY DO NOT QUALIFY FOR PASSIVE INVESTOR STATUS PG&E's attempt to avoid FERC public utility status under § 201 for the GenSub LLCs must be denied. As structured by PG&E, the relationship between Gen and the GenSub LLCs, fits no fact pattern under which FERC has disclaimed jurisdiction. Here, it is proposed that the GenSub LLCs own the hydro facilities, and hold the licenses. It is proposed that Gen "lease" the facilities-from subsidiaries Gen controls-and operate the facilities. PG&E cites no case where 45 0339

FERC disclaimed jurisdiction under § 201 of the FPA of a wholly owned subsidiary acting as a passive investor/lessor that holds (1) Part I licenses for Projects, and (2) holds title to the generation facilities. FERC has disclaimed jurisdiction in cases where an LL-C was created solely for the purpose of holding property, but not where the LLC held both the property and Part I licenses.

A request for disclaimer of FERC jurisdiction over entities taking title to jurisdictional facilities by way of sale and leaseback transaction was addressed in Pacific Power and Light ComRany. 3 FERC ¶ 61,119 (1978).26 In Pacific Power, the Commission established a two-step analysis for determining whether holding a financial interest in jurisdictional facilities constitutes ownership resulting in public utility status under the FPA. See Allegheny Energy Supplv Comjany. LLC, 97 FERC ¶ 61,377 (2001); City of Vidalia, 52 FERC P61,199 (1990). Under that analysis, FERC must determine first whether the purported "passive participants" will operate the facilities. Second, FERC must be assured that a "passive participant" is not in the business of producing or selling electric power. In Pacific Power, FERC concluded that because the passive participant held mere equitable or legal title to the subject electric facilities and were clearly removed from the actual operation of the facilities and the sale of power, the passive participants were not public utilities for the purpose of § 201(e) of the FPA. See Pacific Power.

at 61,377.

PG&E's GenSub LLCs fail both prongs of the Pacific Power test. First, each of the GenSub LLCs is to be controlled entirely by Gen. As to each of the GenSub LLCs, Gen is the "sole member" of the LLC. PG&E concedes that Gen will be a public utility under federal law.

26 There, the Commission granted a request for waiver of jurisdiction over financial institutions which took title to facilities as part of a leveraged lease transaction. The Commission found that the titleholders: (I) would not operate or control the operation of the jurisdictional facilities and (2) were not otherwise engaged in the business of selling or producing electric power, and that their principal place of business activity was other than that of a public utility.

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The GenSub LLCs are no more than sham paper entities, entirely controlled by a public utility.

Effectively. Gen is the GenSub LLCs. Moreover, the lease agreements between Gen and each of the GenSub LLCs contain a "savings provisions" entitling the GenSub LLCs to take action at any time to assure compliance with FERC license conditions. Application at 83.27 Thus, it cannot be said that the purportedly passive participant is sufficiently remote from the operation or control of the facilities to meet the Pacific Power standard.

PG&E fails the second prong of the Pacific Power test as well, as the GenSub LLCs cannot be said to be "not in the business of producing or selling electric power." PG&E's reliance on Green Mountain Power Cor., 53 FERC ¶ 61,035 (1990) is misplaced. In Green Mcuntain, the "passive investor" was IBM. IBM was not in charge of operating or controlling the facilities and was not in the business of selling or producing power. See Pacific Power, 3 FERC at 61,337. Unlike IBM, which has a large and well known business unrelated to electric generation, the GenSub LLCs have no other business and no other purpose. Nor are the GenSub LLCs a bank which happens to have an ownership interest in a power plant. Moreover, the GenSub LLCs relationship to the facilities is not limited to "mere equitable or legal title to the subject electric facilities" nor are the GenSub LLC's "clearly removed from the actual operation of the facilities and the sale of power," since the GenSub LLCs will also hold the FPA Part I licenses. Gulf States Util. Co., 54 FERC ¶ 61,826 (1991), also relied on by PG&E, is similarly distinguishable on its facts.

Because the proposal fails both prongs of the Pacific Power test, PG&E's request for a disclaimer of jurisdiction over the GenSub LLCs should be denied. However, if FERC were to 27 Moreover. PG&E takes an inconsistent position in the Section 8 Applications, asserting that the lease agreements proposed therein should be approved because the "savings provision" gives the licensee sufficient control over operations to qualify as a licensee. See, es, Sec. 8 App. for P-2687 at 10.

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disclaim jurisdiction over the LLCs, it should require that Gen be made a co-licensee of each applicable project."

X. CONCLUSION For the foregoing reasons, the CPUC submits that the Section 203 Application should be summarily rejected in its entirety. The proposal is inconsistent with the public interest.

Moreover, even if the proposals could be considered in the public interest, critical portions of the proposed transactions-such as the proposed dividend discussed above-simply violate federal law, rendering the entire proposal infirm. Finally, if the Section 203 Application is not dismissed, PG&E's package of November 30 Filings intended to implement (or such of the proceedings which survive dismissal) should be consolidated and set for hearing.

Respectfully submitted, GARY COHEN AROCLES AGUILAR SEAN GALLAGHER IDA M. PASSAMONTI PAM NATALONI TODD 0. EDMISTER LARRY CHASET MICHAEL EDSON By:

SEAN G*LAGPER Staff Counsel Attorneys for the Public Utilities Cormmission of the State of California 505 Van Ness Ave., Rm. 5124 San Francisco, CA 94102 January 29, 2002 Phone: (415) 703-2059 2 See the CPUC's contemporaneously filed pleading in the Section 8 proceeding, P-77-116 et al. That FERC require the LLCs and Gen to be co-licensees is consistent with City of Vidalia 52 FERC ¶ 61,199 (1990) and Oglethorpe Power Corp., 77 FERC ¶ 61,334 (1996). where both the "passive investors" and the lessees were co-licensees.

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CERTIFICATE OF SERVICE I hereby certify that I have this day caused the foregoing document to be served upon all known parties in this proceeding by mailing by first-class mail a copy thereof properly addressed to each such party.

Dated at San Francisco, California, this 29th day of January, 2002.

Sean Gallagher/

0343

EXHIBIT E 0344

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Pacific Gas and Electric Company, Docket No. ES02-17-000 PG&E Corporation On Behalf of its Subsidiaries Electric Generation LLC, ETrans LLC and GTrans LLC MOTION TO DISMISS, OR, IN THE ALTERNATIVE, PROTEST AND REQUEST FOR HEARING, AND COMMENTS OF THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Pursuant to Rules 211, 212 and 217 of the Rules of Practice and Procedure ("Rules") of the Federal Energy Regulatory Commission ("FERC"), the Public Utilities Commission of the State of California ("CPUC") hereby moves to dismiss the application for lack ofjurisdiction. In the alternative, if the application is not dismissed, the CPUC protests the filing made in the above-referenced docket, provides comments, and requests that FERC set the matter for hearing.

The CPUC is a constitutionally-established agency charged with the responsibility for regulating natural gas and electric corporations within the State of California. In addition. the CPUC has a statutory mandate to represent the interests of natural gas and electric consumers throughout California in proceedings before the Commission. The CPUC previously filed a Notice of Intervention in these proceedings on December 14, 2001.

110577 0345

I. THE SECTION 204 APPLICATION On November 30, 2001, Pacific Gas and Electric Company ("PG&E") and PG&E Corporation ("Parent"), on behalf of its subsidiaries, ETrans LLC ("ETrans") and Electric Generation LLC ("Gen") (collectively, the "Applicants"), tendered a filing in the above-referenced docket, seeking authorization under Section 204 of the Federal Power Act ("FPA") to issue a variety of securities and assume a variety of liabilities, and for a waiver of the Commission's competitive bidding and placement regulations. PG&E is a debtor pursuant to Title 11 of the U.S. Code. Applicants state that this filing has been filed in connection with PG&E's proposed "Plan of Reorganization under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company" ("Plan") jointly filed by PG&E and its Parent with the Bankruptcy Court on September 20, 2001. PG&E states in its application that it does not expect to seek approval of the Transaction by the CPUC.

On December 12, 2001, the FERC issued its "Notice of Filing," setting until January 30.

2002, for the filing of interventions and protests in these dockets. The filing of the Section 204 Application is one part of a complex series of filings ("November 30 Filings") made by PG&E before the FERC as part of the implementation of PG&E's Plan. These filings are voluminous in nature-by PG&E's estimate, 20.000 pages.

The Plan was jointly filed by PG&E and its Parent with the Bankruptcy Court on September 20, 2001. PG&E's Plan involves a complex disaggregation of various businesses within PG&E and the spin-off of its distribution business to a Reorganized PG&E. which will be a separate company that will no longer be affiliated with the remainder of the disaggregated businesses. In effect. the current vertically-integrated PG&E will become a distribution company only and its generation. electric transmission and gas storage and transmission operations will be 0346

unbundled into separate companies that remain affiliated with one another under the Parent, but unaffiliated with Reorganized PG&E.

Under this Plan, only Reorganized PG&E will be subject to CPUC regulation. Indeed, as the CPUC has recently stated in its November 27, 2001 bankruptcy filing in response to PG&E's proposed disclosure statement:

Through its Plan and Disclosure Statement PG&E seeks to affect a regulatory jailbreak unprecedented in scope in bankruptcy annals.

Under the guise of section 1123(a)(5) of the Bankruptcy Code and through a misapplication of the debtor protection provisions of chapter I1, PG&E seeks sweeping preemptive relief primarily in the form of no fewer than fifteen affirmative declaratory and injunctive rulings, each designed to permanently dislocate various state and local laws and regulations affecting PG&E's operation of its public utility. (Fn omitted). PG&E's Plan is concerned only secondarily with adjusting debtor-creditor relations and restoring its utility operations to financial health. To be sure, if those were PG&E's primary concerns, then it would have proposed a much more straightforward reorganization strategy. PG&E has as its own agenda an escape from CPUC and State regulation.'

II. THE STATUS OF THE BANKRUPTCY PROCEEDINGS The status of the PG&E bankruptcy proceeding is discussed in the CPUC's contemporaneously filed pleading in Docket Nos. EC02-3 1-000 et al.. and incorporated herein b%

this reference.

111. FERC LACKS JURISDICTION TO APPROVE THE APPLICATION, AND THEREFORE SHOULD DISMISS THE APPLICATION.

Pursuant to section 204(f) of the FPA. FERC lacks jurisdiction to authorize the issue ol securities or the assumption of liabilities by a public utility where the utility's security issues are

'See p. 3 of "California Public Utilities Commission's Objection to Proposed Disclosure Statement for Plan of Reorganization Under Chapter I I of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by Pacific Gas and Electric Company and PG&E Corporation," filed November 27. 2001. In re Pacific Gas and Electric Company. United States Bankruptcy Court Northern District of California. San Francisco Division. Case No) ( 1-30923 W)M.

0347

regulated by a state commission. 16 U.S.C. § 824c(f); Kansas City Power & Light Co., 53 FERC

¶61,097, at p. 61,280 n.54. Here, applicant PG&E is a public utility organized and operating under the laws of the State of California. Applicants ETrans and Gen also will be public utilities under state law, once they commence operations. 2 Section 818 of the California Public Utilities Code vests in the California Public Utilities Commission authority to regulate Applicants' security issues, providing:

No public utility may issue stocks and stock certificates, or other evidence of interest or ownership, or bonds, notes, or other evidences of indebtedness payable at periods of more than 12 months after the date thereof unless, in addition to the other requirements of law it shall first have secured from the commission an order authorizing the issue, stating the amount thereof and the purposes to which the issue or the proceeds thereof are to be applied, and that, in the opinion of the commission, the money, property, or labor to be procured or paid for by the issue is reasonably required for the purposes specified in the order, and that, except as otherwise permitted in the order in the case of bonds, notes, or other evidences of indebtedness, such purposes are not, in whole or in part, reasonably chargeable to operating expenses or to income.

FERC, accordingly, lacks jurisdiction over this application, and must dismiss the proceeding.

The CPUC hereby moves for such dismissal.

In a footnote in its application ("App."), PG&E acknowledges this jurisdictional barrier.

but argues that section 204(f) does not apply here because it has asked the bankruptcy court to declare preempted any and all state laws that might impede PG&E's reorganization plan. App. at 2 See Cal. Pub. Util. Code §§ 216. 217. 218.

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6 n.9. 3 This argument lacks merit for at least two reasons.

First, unless and until the bankruptcy court grants PG&E's request regarding preemption, there is valid, enforceable state law regulating PG&E's security issues, and under section 204(f),

FERC simply lacks jurisdiction to grant or consider PG&E's application at this time.

Second, even if the bankruptcy court were to determine that there is an irreconcilable conflict between the Bankruptcy Act and state law, and accordingly declares state law preempted.

such a declaration would have no effect on the Federal Power Act. It is axiomatic that the FPA was designed to supplement, not to supplant, state law, and reflects a clear Congressional preference for state regulation of utilities. See, e.g. Connecticut Light & Power Co. v. FPC, 324 U.S. 515, 525-26 (1945). Section 204(f) embodies an explicit expression of Congressional intent that this Commission not act to regulate utility security issues where state law governing them exists. That the bankruptcy court might determine that there is a conflict between the Bankruptcy Act and state law - such that for the purposes of its bankruptcy jurisdiction state law is unenforceable - can have no bearing on the express statement of Congress in the Federal Power Act that public utilities seeking to issue securities must obtain permission from state commissions to do so, where the state has enacted legislation giving those commission authority to so regulate.

This Commission is governed by, and obtains its authority from. the Federal Power Act.

not the Bankruptcy Act or the bankruptcy court. Where Congress has spoken. FERC cannot 3 We note that Section 34.3(g) of the Commission's regulations requires an applicant for the issuance of securities to provide a statement as to whether or not any application with respect to the transaction or any part thereof is required to be filed with any State regulatory body. In Section G of its application (App. at 22-23), PG&E has blatantly misstated the relevant facts.

As noted above, Section 818 of the California Public Utilities Code unquestionably requires CPUC approval of the transaction. However, in note 9. PG&E waves off this indubitable fact of State jurisdiction over the transaction in question by a bald assertion that the Bankruptcy Court will rule in its favor on the very complex preemption issues that are currently before it.

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ignore the mandate. Bankruptcy courts themselves recognize this important distinction. In In re:

Cajun Elec. Power Coop., 230 B.R. 715 (M.D. La. 1999), for example, part of the debtor's reorganization was to obtain Exempt Wholesale Generator ("EWG") status for some of its generation. Indeed, the bankruptcy court referred to this feature of the plan as "a strong condition precedent" to its consummation. Id. at 746. Normally, to acquire EWG status for certain facilities, the Public Utility Holding Company Act ("PUHCA"), 15 U.S.C. § 79z-5a, requires an applicant to obtain certain certifications from relevant state commissions. The debtor argued that because obtaining EWG status was a central feature of its reorganization plan, federal bankruptcy law should trump other federal law, and no state commission certification should be required.

230 B.R. at 746. The bankruptcy court disagreed, holding that where Congress, in PUHCA, had expressly conditioned obtaining EWG status on also obtaining state commission certifications, the debtor had to seek and obtain such certifications, even if that meant that its plan might not be feasible (if the state commission withheld its certification). Id at 746-47.

Exactly the same reasoning applies here. Regardless of what the bankruptcy court says about state law in PG&E's proceedings there, this Commission cannot ignore the jurisdictional requirement of section 204(f).

IV. THE APPLICATION SHOULD BE DENIED ON THE MERITS.

If FERC declines to dismiss for lack of jurisdiction. it should deny the application on its merits. Under section 204, FERC can approve the application only if it determines that the securities issue or liability assumption: "(a) is for some lawful object, within the corporate purposes of the applicant and compatible with the public interest, which is necessary or appropriate for or consistent with the proper performance by the applicant of service as a public utility and which will not impair its ability to perform that senrice. and (b) is reasonably 6

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necessary or appropriate for such purposes." 16 U.S.C. 824c(a). Here, PG&E's application fails virtually every prong of this standard: It is not for a lawful object, it is not compatible with the public interest, it will impair PG&E's ability to serve as a public utility, and the entire underlying transaction is neither necessary nor appropriate for the purposes to which PG&E points.

The purpose of the transactions at issue here is, inter alia, to allow PG&E to transfer its generation assets to an affiliate of PG&E Corporation, currently PG&E's parent. App. at 22. In January 2001, the California State Legislature enacted Assembly Bill (AB) XI 6, which prohibits California's investor-owned utilities, including PG&E, from disposing of generation facilities that they own before January 1, 2006, providing in relevant part: "Notwithstanding any other provision of law, no facility for the generation of electricity owned by a public utility may be disposed of prior to January 1, 2006." Cal. Pub. Util. Code § 377. The application at issue here seeks to have this Commission approve the issue of securities and assumption of liabilities for the purpose of violating that statute. Accordingly, the object of the transactions that PG&E asks FERC to authorize in this proceeding is patently unlawful, and the application must be denied.'

PG&E argues that the transactions will not impair its ability to perform its function as a public utility, because separation of generation, transmission and distribution businesses "has been approved by FERC because it furthers objectives related to competition." App. at 24.

However, the decisions cited in PG&E's application do not stand for the sort of radical unbundling of ETrans and Gen that PG&E seeks to accomplish through the November 30

' PG&E argues, in effect, that although its plan currently seeks to violate state law in numerous ways, it will become kawfi the Bankruptcy Court confirms the plan, including PG&E's request for a declaration that all applicable state law is preem App. at 23. This argument, if accepted, merely demonstrates why this application should be dismissed as premature. PG, own timetable does not contemplate execution of the plan for at least another eleven months. App. at 30. And even if thc Bankruptcy Court does ultimately confurm the plan, its legality still will be subject to years of appeals. At the present tim.

is indisputable that the object of this application is unlawful, and unless and until the Bankruptcy Court states otherwise. a the judgment of the Bankruptcy Coun is affirmed. PG&E's claims concerning the legality of this application are hypotheii and speculative at best.

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Filings. FERC has stated, e.g., that "we ... encourage utilities to explore whether corporate unbundling or other restructuring mechanisms may be appropriate in particularcircumstances."

See id. at 24 n.55 (emphasis added) (quoting Order 888). This does not say, and does not mean that all unbundling of utility assets will either "further objectives related to competition" or be in the public interest.

Applicants suggest that divestiture of generation and transmission assets from the utility is "encouraged by the Commission." App. at 24. Applicants point to an application by Southwest Gas Corp. 43 FERC 1 61,257 ("Southwest") (App. at 24 n.55) as evidence of the Commission's interest in such divestiture. Contrary to Applicants' suggestion, however, the Southwest decision had to do with regulatory jurisdiction, not with the wisdom of asset divestiture. A careful review of the Commission's decision in the Southwest case shows that it bears no resemblance to the present case. For example, in its Southwest decision, the Commission stated: "Reorganization would remove the possibility of dual regulatory authority over Southwest and would enhance the operation and delivery of services for the benefit" of its customers. (Emphasis added.) 43 FERC, at 61,709. Note that Applicants in this case make no claim, and can make no claim, of enhanced service as a result of its proposed divestiture. Thus.

Applicants' reliance on the Southwest decision is misplaced.

The Applicants also point to this Commission's Order No. 888 as support for the Applicants' assertion that utility asset divestiture is encouraged by the Commission. In fact.

Order No. 888 does not encourage such actions by utilities, but, instead. discusses the desirability of achievingfunctional unbundling of wholesale services in order to "implement non-discriminatory open access transmission." FERC Stats. and Regs.. at 31.654. Functional unbundling refers to the creation of separate tariffs for wholesale generation. transmission, and 8

0352

ancillary services; the separation of transmission employees from those involved in wholesale power merchant functions; and the use of the same information system as its transmission customers use when buying or selling power.

In Order No. 888, the Commission said that other mechanisms, such as divestiture, "may be appropriate in particular circumstances." Id., at 31,656. However, Applicants in this case have not identified why these particular circumstances requires the "intrusive and potentially more costly mechanism" of divestiture. Id., at 31,655. Contrary to the implication urged by Applicants, in Order No. 888, the Commission stated "that corporate unbundling should not now be required." (Emphasis added.) Id As both the California Legislature and FERC have recognized, the particular circumstances that obtain in California's energy markets at this time strongly dictate against a utility divesting itself of all of its own generation assets, as this application seeks authorization to do. The California Legislature recognized as much when it enacted ABXl 6, prohibiting utilities from disposing of their remaining generation. FERC reached the same conclusion, when in an order dated December 15, 2000, it noted that utility retained generation was an important measure to be taken in mitigating wholesale power costs, and thus in ensuring utilities ability to provide required services. San Diego Gas & Electric Company. et al.. 93 FERC 161,294 (2000) at 62.001 (As a result of the order. "the lOUs will be able to provide power from their own resources to serve their own load . . . The best way to mitigate cost exposure is for the lOUs to cease selling and repurchasing what they already produce").

Moreover, the financial data submitted by applicants to support their contention that these transactions will leave them financially sound is wholly inadequate. It is not a coincidence that the vast majority of electric utilities are integrated, using the utility s own generation, 9

0353

transmission and distribution assets. Such vertical integration has been found to yield beneficial economies in the provision of electric services. These are often referred to as economies of scope or economies of diversification. 5 Sources of such economies are usually from the sharing of centralized functions such as management, planning, engineering, information technology, and general and administrative overhead. Section 854 of the California Public Utilities Code recognizes such economies and, in the case of the merger of utilities, requires that such economies be identified and quantified so that ratepayers might share in the savings engendered by the merger.

The quantification of the scope economies lost due to the divestiture of assets, especially assets that were designed and developed especially to work together efficiently to deliver services to a specific customer base, is difficult to analyze prior to the actual separation. Applicants have not submitted any cost studies or estimates covering the independent operation of the assets to be divested, if such studies or estimates have even been made. However, the Applicants propose to have the reorganized post-bankruptcy PG&E enter into a contract with Gen for the purchase of electric generation over the next twelve years. The price called for in this contract is 4.6 cents per kWh for the first year, and 5.1 cents per kWh on average for subsequent years. 6 Applicants estimate 33,000 GWh output for this contract in 2003. PG&E projects a total income from this contract of $1,471.5 million for the first year. However, the cost of producing the energy for this contract is only 2.5 cents per kWh, according to Applicants' own figures. See the CPUC's contemporaneous pleading in Docket Nos. EC02-31-000 et al. This represents an excess of nearly $700 million that Gen will receive over its costs for the first year. Assuming that 5 See for instance William G. Shepherd, The Economics ofIndustrial Organi:aiion. Prentice Hall, fourth ed., 1997, p. 152:

Michael A. Crew and Paul R. Kleindorfer, The Economics orf Phblic Lrilit) Regulation. MIT Press, 1986, pp. 22-25.

"PG&E Disclosure Statement for the First Amended Plan of Reorganization, p. 106.

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ratepayers will pay 5.1 cents per kWh for years 2004 -2013, Gen will receive a surplus approximating $768 million per year or $8.3 billion for the first I I years of the contract. This surplus represents a gigantic windfall to Gen at the expense of PG&E and its ratepayers.

Much of this difference between the average costs now experienced by the still-intact utility is undoubtedly due to market power that will be exercised by Gen; however, market power may not explain a price differential of 89%. It is likely that a portion of this difference is due to increased average cost, due mainly in turn to a loss of scope economies when the assets are divested by the utility. It is also true that some of this difference could be due to increased transaction costs engendered by the Plan, including the additional legal costs of obtaining authorizations from several overseeing and regulatory bodies. However, these transaction costs should be one-time and not reflected in out-years. Nevertheless, such costs are a measure of the inefficiency of the Plan and, combined with the additional market power and loss of scope economies, contribute to the conclusions that (1) the transfer of assets from the utility to Gen works against the public interest, and (2) there can be no basis for the Commission to find that the proposed transaction will leave the reorganized post-bankruptcy PG&E financially sound.

Applicants state that the reorganized utility and new companies Gen and ETrans "will be on a sound financial footing after the reorganization," and point to Exhibits C-2, D-2. and E-2 -for proof of this assertion. However. these tables are very assumption laden. as Applicants acknowledge in Attachment 2 to the application. For example, p. 6 of Attachment 2 addresses expected operating expenses for Gen following execution of the Plan. Item 2.b states: "'Normal expenses are based on the Company's historic level of spending prior to the passage of

[California Assembly Bill] 1890." However, this assumption ignores the loss of scope economy and the additional transaction costs (discussed above) due to the transfer of assets required by I0 0355

Applicants' Plan. Note that on page 6 of Attachment 2, Applicants provide only a definition of M&O and A&G expenses and do not provide the assumptions on which these numbers and projections are based in Exhibit D-2. Thus, even if these numbers are based upon an assumption of "normalcy" or linear projection from before the California restructuring legislation was passed, such assumptions ignore certain realities regarding costs resulting from the divestiture of assets from the utility.

Applicants state that "the Plan will improve the ability of Applicants to access capital markets. . ." App. at 25. Given the flaws indicated here regarding Applicants' projections of costs, it is impossible for Applicants to make such a claim. If profits are affected significantly.

Applicants access to capital markets may be seriously flawed. In fact, given such flaws, it is likely that the alternate plan offered by the CPUC would provide more access to capital markets than the Plan proposed by the Applicant.

Of interest in this regard is the debt to equity ratio projected by the Applicants in Exhibit C-2. The second table entitled "Projected Balance Sheet of Reorganized PG&E" indicates that the projected debt to equity ratio is 56:44 at the end of 2002. It was reported recently at Bloomberg.com that "'Anenergy company's debt should not outweigh its equity, if the business holds an investment grade credit rating. . ." according to Moody's analysts.7 "The sensitivity and volatility of the power markets and the financial markets as a result ol what has happened in the sector have made us more sensitive and made us take a second look." Id. This suggests, contrary to the Applicants' assertions, that the Plan advanced by the Applicants would not leave the reorganized utility with significant access to capital.

.'Moody's Says Energy Company Leverage should be Less than 500o D." Terence Flanagan. Illhumberg. December 20. 2001.

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PG&E next claims, "Each of the Applicants will continue to be subject to regulation with respect to its rates, financing, and disposition of facilities, either by the CPUC . . . or by this Commission." This statement is far from true. Under PG&E's plan, Gen will not own any generation facilities itself; individual LLC subsidiaries of Gen will. PG&E has specifically requested that this Commission find that the individual LLCs will not be public utilities subject to FERC's jurisdiction. This request suggests that if one of the LLCs wants to dispose of the facility it owns, it, along with Gen, will argue that that disposition is not subject either to section 203 of the FPA, or to section 851 of the California Public Utilities Code. Furthermore, three of the hydropower facilities that these applications propose to transfer (namely, the Hamilton, Lime Saddle, and Coal Canyon facilities) currently are subject only to CPUC regulation, and do not possess FERC licenses." If these transactions are approved, the three facilities in question will be subject to no regulation whatsoever.

V. THE AUTHORIZATIONS REQUESTED IN THE APPLICATION CONTRAVENE THE PUBLIC INTEREST Finally, these transactions are patently not in the public interest. The transactions proposed in Applicants' Section 204 Application will produce detrimental effects on competition and rates, and will create substantial regulatory gaps. San Diego Gas & Electric Co. 79 FERC ¶11 61.372 (1997) ("SDG&E"). ln addition, other factors relevant in this matter to any public interest determination weigh heavily against approval of the authorizations sought by PG&E. 18 C.F.R. 2.26(b). In its related Section 203 Application. PG&E proposes to divest itself of its most valuable assets for a fraction of their value, while retaining billions of dollars worth of liabilities.

Moreover, adequate protection of the public interest requires that the environmental implications

'See pages 6-7 of the Executive Summary of the Draft Environmental Impact Report. which is attached to the cMuC's contemporaneously filed pleading in Project No.77-116. et al.

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of the proposed transactions be fully considered. Finally, approval of this Section 204 Application and the related November 30 Filings would be inconsistent with the prompt emergence from Bankruptcy of PG&E. As in the SDG&E case, FERC must act in partnership with the state to assure that the public interest is fully protected. Each of these issues is discussed in greater detail in section VI of the CPUC's contemporaneously filed pleading in EC02-3 1-000 et al., the substance of which is incorporated herein by this reference.

VI. APPLICANTS' REQUEST FOR A WAIVER FROM THE COMPETITIVE BIDDING REQUIREMENTS SHOULD BE DENIED Finally, Applicants have requested an exemption from the competitive bidding requirements imposed by 18 C.F.R. § 34.2. Section 34.2 of the Commission's regulations requires that securities authorized under Section 204 of the FPA be issued through either a competitive bid or a negotiated placement. Competitive bids require at least two "prospective dealers, purchasers or underwriters," while negotiated offers require at least three such agents.

Applicants request waiver of these requirements. 9 However, such an exemption is unnecessary and is not sufficiently justified by Applicants.

Applicants assert that if they are required to put the securities that are the subject of this application out to competitive bid, they will lose control of the timing of these offerings, causing potential buyers to require a risk premium to be added to the price. This is exacerbated by the structural complexity of the transactions proposed by the Applicants Plan. See App. at 10. The Applicants want to be authorized to choose the method and specific underwriters appropriate to the "market conditions and other factors so as to maximize their access to capital markets and minimize their cost of funds." App. at I1l.

9 Applicants refer only to "competitive bid requirements., without specific reference to the negotiated offers option. We assume that the Applicants consider both to be competitive and are asking for exemption from both.

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However, Applicants have ignored that the purpose of Section 34.2 is to encourage the use of financial markets and competition to attempt to get the best price and terms for the utility.

To suggest that a private deal would yield a lower price and superior terms than a competitive process has not been supported by Applicants. Generally, financial markets are considered highly efficient, as long as entry is not impaired. It is not necessary to seek out "a small number of sophisticated investors" (App. at 12), as the financial market already relies on such sophistication and information, as well as on that provided by a large number of other analysts, to determine the correct and efficient price of an asset. This correct and efficient price is the price that will satisfy Section 34.2(3)(i) and (ii).

Moreover, the Applicants also do not explain why the timing of the offerings would result in a higher risk premium demanded by lenders. Other factors, such as the unrecognized additional costs to implement the Plan identified in this filing, may increase the risk in the eyes of the market, but the timing of the offering should not be one of them.

If there are underwriters familiar "with Applicants' financial situation and the energy industry. . ." (p. 11), they will come forward in the competitive process. If the Plan is "structurally complex," it is safer to rely on the discipline of the market to anticipate and discount problems than to expect management that has, with all due respect, an uneven record at best, to do a better job. We are left with the Applicants' unsubstantiated claim that they will make sure that the fees, commissions and expenses are comparable to market-determined costs (App. at 12).

The Commission should accordingly deny Applicants' request for an exemption from the competitive bidding requirements imposed by 18 C.F.R. § 34.2.

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VII. CONCLUSION For all of the foregoing reasons, the application filed herein should be dismissed for lack of jurisdiction or, in the alternative, denied on the merits.

Dated: January 29, 2002 Respectfully submitted, GARY M. COHEN AROCLES AGUILAR MICHAEL M. EDSON LAURENCE G. CHASET By: /s/ MICHAEL M. EDSON MICHAEL M. EDSON Attorneys for the Public Utilities Commission of the State of California 505 Van Ness Ave., Room 5035 San Francisco, CA 94102 Phone: (415) 703-1697 16 0360

EXHIBIT F 0361

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Electric Generation LLC Docket No. ER02-456-000 MOTION FOR

SUMMARY

DISPOSITION, OR IN THE ALTERNATIVE, PROTEST AND REQUEST FOR CONSOLIDATION AND HEARING, OF THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Pursuant to Rules 211, 212, and 217 of the Rules of Practice and Procedure

("Rules") of the Federal Energy Regulatory Commission ("FERC"), the Public Utilities Commission of the State of California ("CPUC"), hereby protests the filing made in the above-referenced docket, and moves for the summary disposition of the application ("the Gen application"). In the alternative, if the Gen application is not summarily rejected, the CPUC requests that the proceeding be consolidated with PG&E's related November 30 Filings and set for hearing. The CPUC is a constitutionally-established agency charged with the responsibility for regulating natural gas and electric corporations within the State of California. In addition, the CPUC has a statutory mandate to represent the interests of natural gas and electric consumers throughout California in proceedings before the Commission. The CPUC previously filed a Notice of Intervention in this proceeding on December 14, 2001.

I. THE GEN APPLICATION On November 30, 2001, Electric Generation LLC ("Gen") filed an application with the FERC pursuant to Section 205 of the Federal Power Act, and Part 35 of FERC's 114610 0362

regulations, an application for acceptance of a power sales agreement and interim code of conduct and grant of various waivers. Gen is currently a subsidiary of Pacific Gas &

Electric Company (PG&E). The filing of this application is one part of a complex series of filings ("November 30 Filings") made by PG&E before the-FERC as part of the implementation of PG&E's proposed "Plan of Reorganization under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company" ("Plan") jointly filed by PG&E and its Parent with the Bankruptcy Court on September 20, 2001.

As detailed elsewhere,' PG&E's Plan proposes to transfer PG&E's electric generation, electric transmission, and natural gas transportation facilities to PG&E's Parent, PG&E Corporation, leaving a Reorganized PG&E to emerge from bankruptcy as an underfiuded distribution-only utility possessing only assets and liabilities not desired by the corporate parent. Included is a proposal to transfer all of PG&E's hydroelectric and nuclear generation facilities to Gen, and then to transfer Gen to the corporate Parent by means of an unlawful stock dividend in violation of § 305 of the FPA.2 Should the various proposed transactions culminating in the proposed "Spin-Off' be approved, PG&E proposes that Gen enter into a proposed Purchase & Sale Agreement ("PSA")

with Reorganized PG&E which is the subject of the instant proceeding. Under the PSA Gen proposes to sell all of the output of the (former) PG&E generation facilities to Reorganized PG&E for an eleven year period at an unjust and unreasonable price, approaching double the rates PG&E would receive for the output of the facilities in the absence of the proposed transactions, and justified only by the need to service the eSeeCPUC pleadings filed contemporaneously inDocket Nos. ECO2-3 1-000 et al.. ER02456-000.

ES02-17-000, CP02-39-000 et al. and P 77-116 et al.

2See CPUC pleading filed contemporaneously in Docket Nos. EC02-3 1-000.

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unnecessary debt which Gen proposes to incur upon receipt of the facilities (the PSA includes a twelfth year for approximately half of the facilities' output). 3 Under this Plan, only Reorganized PG&E would be subject to CPUC regulation.

Indeed, as the CPUC has recently stated in its November 27, 2001 bankruptcy filing in response to PG&E's proposed disclosure statement:

Through its Plan and Disclosure Statement PG&E seeks to affect a regulatory jailbreak unprecedented in scope in bankruptcy annals. Under the guise of section I I 23(a)(5) of the Bankruptcy Code and through a misapplication of the debtor protection provisions of chapter 11, PG&E seeks sweeping preemptive relief primarily in the form of no fewer than fifteen affirmative declaratory and injunctive rulings, each designed to permanently dislocate various state and local laws and regulations affecting PG&E's operation of its public utility. (Fn omitted). PG&E's Plan is concerned only secondarily with adjusting debtor-creditor relations and restoring its utility operations to financial health. To be sure, if those were PG&E's primary concerns, then it would have proposed a much more straightforward reorganization strategy. PG&E has as its own agenda an escape from CPUC and State regulation.4 On December 13, 2001, the FERC issued its "Notice of Filing," setting until January 30, 2002, for the filing of interventions and protests in this docket. On January 22, 2002, the CPUC on behalf of Joint Parties including the California Electricity Oversight Board, the People of the State of California, and the California Resources Agency filed a Joint Motion seeking to have the November 30 Filings dismissed, or in the alternative, held in abeyance pending certain rulings of the Bankruptcy Court ("Joint 3See "Joint Parties' Motion to Dismiss et al." filed January 22, 2002, setting forth the outlines of the CPUC's proposed Alternative Plan for PG&E to emerge from bankruptcy without dismantling the utility.

4See p. 3 of "California Public Utilities Commnission's Objection to Proposed Disclosure Statement for Plan of Reorganization Under Chapter I I of the Bankruptcy Code for Pacific Gas and Electric Company Proposed by Pacific Gas and Electric Company and PG&E Corporation," filed November 27, 2 0 0 1, In re Pacific Gas and Electric Comamn, United States Bankruptcy Court Northern District of California, San Francisco Division. Case No. 0 1-30923 DM.

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Motion'). The Joint Motion requested that FERC issue a ruling granting the motion by January 25, 2002.

II. THE STATUS OF THE BANKRUPTCY PROCEEDINGS The status of the PG&E bankruptcy proceeding is discussed in the CPUC's contemporaneously filed pleading in Docket Nos. EC02-3 1-000 et al., and incorporated herein by this reference.

III. PROTEST AND MOTION FOR

SUMMARY

DISPOSITION, OR IN THE ALTERNATIVE, TO SET THE PROCEEDING FOR HEARING The CPUC protests the Gen application and each of the authorizations and approvals requested. The CPUC's preliminary review of the Gen application discloses strong indications that the pricing, terms and conditions of the PSA are not just and reasonable, as discussed further below. The CPUC accordingly requests that the Gen application be dismissed. In addition, with additional time and formal discovery rights, the CPUC is likely to be able to identify additional issues not expressly discussed below.

Accordingly, if the Gen application is not dismissed, FERC should set this matter for hearing without limiting parties to any other issues which may be raised. In addition, FERC should consolidate PG&E's November 30 Filings for hearing.

A. The Gen Application Should be Dismissed The CPUC renews the arguments made in the Joint Motion for dismissing the Gen application as premature, or alternatively, holding this proceeding in abeyance, and incorporates the Joint Motion herein by this reference. In addition, the Gen application should be dismissed pursuant to § 35.3(a) of FERC's regulations. Section 35.3(a) requires that rate schedules be tendered no more than 120 days prior to the date on which service is to commence. Inthe instant proceeding, PG&E has tendered the PSA as a rate 4

0365

schedule thirteen months prior to the earliest date on which it anticipates service may commence. While FERC has on occasion waived the 120 day requirement, good cause for waiver is not present in this matter. To the contrary, and as set forth in greater detail in the Joint Motion, the Gen application is premature and should be dismissed in order to avoid the expenditure of very substantial resources both by the parties and FERC, all of which may be rendered moot by rulings of the Bankruptcy Court expected in fairly short order.

Moreover, the substantive issues raised below support summary rejection of the Gen application. PG&E has wholly failed to meet the standards applicable to power sales agreements between affiliates. Under the circumstances here, the applicable standards must be applied with extraordinary scrutiny. The PSA was not reached at arm's-length by entities with competing interests, but rather were developed by the same counsel working simultaneously for all the (affiliated!) parties, one of which is essentially non-existent. PG&E concedes that the PSA was developed, on behalf of both the "buyer" and "seller" by a single "Team [which] developed the price, terms and conditions of the PSA." Ex Gen-I (Kuga Testimony) at 11.

Finally, the PSA proposed in this docket is part and parcel of a coordinated set of applications which in whole and in part are contrary to the public interest as expressed in both state and federal law. For the reasons set forth in greater detail in the CPUC's contemporaneous pleading in Docket Nos. EC02-3 1-000 et al., the Gen application must be dismissed on this basis as well.

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B. The Rates in the Proposed PSA Are Unjust and Unreasonable to Reorganized PG&E and its Retail Customers Who Will Foot the Bill The heart of the Gen application is PG&E's contention that the rates in the proposed PSA are just and reasonable to Reorganized PG&E on the basis of a

'benchmark" analysis conducted by witness Meehan. As set forth in detail below, PG&E's "benchmark" analysis misses the mark. First, the rates in the proposed PSA must properly be evaluated not against other long-term power transactions, but rather against the rates which PG&E would receive in the absence of the proposed Spin-Off and related transactions. That is, the proposed PSA rates must be compared against the CPUC's rates for Utility Retained Generation. Second, even if it is appropriate to measure the proposed PSA against "comparable" wholesale transactions, PG&E's benchmark analysis fails to establish that the proposed PSA rates are just and reasonable.

Third, PG&E fails to provide a cogent analysis of its market power. Consequently, PG&E fails to establish that the price and non-price terms and conditions of the PSA are just and reasonable, and that the PSA is not fatally tainted by self-dealing.

1. The Proposed PSA Rates Must be Evaluated in Comparison with Otherwise Applicable Rates Under PG&E's proposal, Gen will sell the output of the electric generation facilities currently owned and operated by PG&E to Reorganized PG&E, which would in turn resell the facilities' output to its retail customers. In the absence of the transactions proposed in PG&E's Plan, PG&E would retain the electric generation assets which it proposes to transfer to Gen and the GenSub LLCs, and would continue selling the output 6 0367

of the generation facilities directly to its retail customers. 5 Under either scenario PG&E's retail customers will receive the same energy and Ancillary Services from the same facilities. Thus, the appropriate comparator against which to measure the PSA is the utility-retained generation ("URG") component of PG&E's retail rates.

Under current California law and CPUC policy, such rates are determined on a traditional cost-of-service basis. See eg. Application of San Diego Gas & Electric Comnanv et al., D.01-12-015, 2001 Cal. PUC LEXIS 1072, *7 ("We intend to apply cost-based ratemaking to all of SDG&E's retained generation assets ... which we believe is consistent with ABXI 6"); Application of Southern California Edison Comvanv et al.,

D.01-01-061, 2001 Cal. PUC LEXIS 30 ("PG&E, SDG&E and Edison shall establish a cost-based rate for URG"). The CPUC has expressly rejected PG&E's request to set its URG revenue requirement based on market valuation rather than cost-of-service.

Application of Southem California Edison Comvanv et al., D.01-10-067, 2001 Cal. PUC LEXIS 959 ("We determine that market valuation does not apply to setting a prospective revenue requirement for PG&E's URG assets").

PG&E's witness Meehan states that the levelized price over the twelve-year period of the PSA is approximately S52.29/MWh. Application at 4. Elsewhere PG&E asserts that the average price under the contract over the life of the contract is approximately 5.1 cents/kWh ($5 1/MWh). Application at 3. That the contract costs are unjust and unreasonable as to Reorganized PG&E (and to its retail ratepayers) is confirmed by PG&E's own numbers. In its Plan, PG&E projects revenues under the 5 As discussed in greater detail in the Joint Motion and in the CPUC's contemporaneously-filed pleading in Docket Nos. EC02-31-000 et al., the CPUC has formulated an Alternative Plan under which PG&E would be able to emerge from bankruptcy without disposing of its electric generation assets.

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contract of approximately S1.5 billion annually. For calendar year 2003, PG&E projects revenues under the contract of $1,471,500,000. See Exhibit A hereto (Ex C. to Plan, at 10). Based solely on the numbers presented by PG&E in its Plan, PG&E's revenue requirement based on traditional cost-of-service principles would be approximately

$790.4 million for 2003-about half of PG&E's projected revenues. This translates to an illustrative rate of approximately 2.5 cents/kwh.6 This calculation proceeds as follows: PG&E's Plan projects total operating expenses for Gen in 2003, including depreciation, of $759.7 million. From this figure is subtracted "other income" of $88.9 million, leaving net operating expenses of $670.8 million. To this is added a rate of return and taxes of $119.6 million, calculated utilizing PG&E's projected 2003 net plant shown in the Plan of Reorganization for the nuclear and hydro assets of $913.8 million and PG&E's rate of return grossed up for income tax authorized by the CPUC of 13.09?/c.' This results in an illustrative cost-of-service revenue requirement for Gen, using PG&E's own figures, of $790.4 million for 2003.

The illustrative cost-of-service revenue requirement of $790.4 million is 53.7% of the proposed revenues PG&E would receive under the PSA in 2003 of $1,471.5 million.

PG&E asserts that rates under the PSA in 2003 would be approximately 4.6 cents/kWh.

Since, as PG&E asserts, revenues of $1,471.5 million equates to 4.6 cents/kWh on 6This pleading does not purport to determine the rate which the CPUC would actually set for PG&E's URG for any particular customer or class of customers, but simply utilizes figures provided by PG&E to provide, for illustrative purposes, a rough calculation of a cost-of-service rate based on such figures.

PG&E's Plan shows higher figures for return, interest expense, and taxes, totaling S800.8 million, because the figures reflect and are being used to support the borrowing of over $2 billion to help pay off creditor claims. The $1 19.6 million in the calculation above includes interest expense on the net plant of S913.6 million, as it is based on a 13.09% weighted average rate of return that includes interest and taxes. See PG&E work papers submitted in CPUC Docket No. A.00-1 1-038, Scenario 1.

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average, the cost-of-service revenue requirement is approximately 2.5 cents/kWh on average (.537 x 4.6 cents/kWh) for 2003.8 While a rate of 2.5 cents/kWh is low compared to recent prices for gas-fired generation, the rate reflects the resource mix utilized for the PSA and PG&E's actual costs-not including the cost of unnecessarily borrowing over $2 billion. PG&E's hydroelectric resources are highly depreciated. PG&E's nuclear and hydro pumped storage resources have been subject to accelerated depreciation during the transition period established under California's deregulation law. Ratepayers have paid several billion dollars of accelerated depreciation through California's Competitive Transition Charge, and would be losing a good portion of what they paid for under PG&E's Plan of Reorganization. See also the proposed decision addressing PG&E's revenue requirement for utility-retained generation ("the URG PD") recently issued by a CPUC ALJ (a proposed decision has a status somewhat analogous to a FERC AU's Initial Decision). 9 While these figures may be subject to some refinement, this illustration demonstrates that the PSA is grossly overpriced. If the PSA were approved as proposed, PG&E's ratepayers would make some $700 million in excess payments to Gen over and above the otherwise applicable rate for the same energy from the same facilities in 2003.

Over the life of the PSA, the overpayments approximate $8 billion.

'A recent report issued by the consumer group TURN estimates the "Expected Price Under Regulation" at approximately 2.5 cents/kWh in 2003, and 2.9 cents over the term of the PSA. See "Highway Robbery:

Unmasking the PG&E Bankruptcy Plan's Financial Impact on California Consumers," available at http:/Iwww.turn.org/turnarticles/PG&E reMort.pdf.

' California law generally requires the CPUC's proposed decisions to be released for comment prior to a Commission vote. See Cal. Pub. Util. Code § 31 I(d), (g). The URG PD is available from the CPUC's web site, at httv:/iwww.cpuc.ca.eov/oublished/comment decisionI 2655.htm. An alternate proposed decision of Commissioner Lynch is available at httn://www.cpuc.ca.pov!published/A1,enda decision/12659.htm.

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2. PG&E's Benchmark Analysis is Invalid Assuming arguendo that the benchmark analysis utilized by FERC in connection with previous affiliate tansactions is applicable, PG&E's benchmark analysis, supported by the testimony of witness Meehan, is invalid for a number of reasons, discussed below.

FERC has articulated standards pursuant to which it will accept power sales contracts between affiliates in a series of three orders over the past ten years. Boston Edison Co. Re: Edgar Electric Energy Co., 55 FERC ¶ 61,382 (1991) ("Edgar"); Ocean State Power B, 59 FERC $61,360 (1992), reh'g denied, 69 FERC ¶j 61,146 (1994)

("Ocean State"); Ameren Energy Mktg. Co., 96 FERC ¶ 61,306 (2001) ("Ameren"). In Edgar FERC stated that such arrangements will be permitted if two conditions are satisfied. First, FERC requires a showing that there exists no potential abuse of self-dealing or reciprocal dealing. Second, if there has been a showing of no potential abuse of self-dealing or reciprocal dealing, FERC has found that market-based rates may be acceptable if the seller can also demonstrate that it lacks market power (or has adequately mitigated its market power), under familiar principles. Edgar, 55 FERC at 62,167.

As PG&E recognizes, the potential for self-dealing is present here, where the seller under the proposed PSA is essentially non-existent, and the terms and conditions of the PSA were developed by a single entity acting on behalf of both the putative seller and buyer. The risk of self-dealing is at its height in this transaction, in which the buyer under the proposed PSA would, if PG&E's Plan is confirmed, be stripped of all of its most valuable assets and the affiliate relationship then terminated.

FERC has articulated three means by which lack of self-dealing or reciprocal dealing may be shown, to ensure that an affiliated "buyer has chosen the lowest cost supplier from among the options presented, taking into account both price and nonprice 10 0371

terms (i.e., that it has not preferred its affiliate without justification"). Edgar, 55 FERC at 62,168. PG&E has chosen to present "benchmark evidence" of market value, i.e.

evidence of other relevant power sales agreements between non-affiliates, which it claims demonstrates that the PSA is not unreasonable. See Application at 14 ff. Under the Edgar line of cases, the benchmark sales must be: (1) transactions in the relevant market; and (2) should be contemporaneous with; and (3) involve service that is comparable to, the instant transactions. In addition, FERC requires that the benchmark analysis examine nonprice as well as price terms, and assumptions used in comparing the various projects should be explained with respect to both price and nonprice terms. Finally, the applicant must demonstrate that the benchmark evidence was not distorted by exercise of market power by the seller or its affiliates. Ocean State, 59 FERC at 62,333. FERC has observed that it must "take into account the evolving nature of our analyses of market-based affiliate transactions," including changes to the national generation market. Ocean State, 59 FERC at 62,332.

PG&E contends that the relevant market is "the market for firm, long-term baseload and peaking capacity and energy for a duration of approximately 10-15 years with a start date expected near January 2003," and that the relevant region must be limited to suppliers which can deliver energy to PG&E. Application at 17. PG&E contends that the relevant "contemporaneous" period is May 2000 through November 2001. Application at 18. By so attempting to confine the analysis, PG&E contends that the appropriate benchmark sales are nine long-term contracts entered into by the California Department of Water Resources ("DWR") during 2001.

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PG&E's Reliance on DWR Contracts In confining its benchmark comparison to the DWR contracts, PG&E has sought to define as the relevant period precisely the same period in which the California wholesale electricity markets exhibited extreme dysfunction. PG&E has previously characterized this as a period of "massive market failure and upheaval in the regulatory regime that has led to billions of dollars in overcharges since May 2000."'° Similarly, PG&E has attempted to confine its benchmark comparison to DWR contracts, the negotiation of which PG&E has previously contended were subject to the exercise of market power, and as to which PG&E has contended FERC ought to order refunds." As PG&E stated in its Request for Rehearing of FERC's July 25, 2001 order (San Diego Gas

& Electric ComRanv. et al., 97 FERC 61,275 (2001), filed in Docket No. ELOO-95 on August 24, 2001, at 12:

the DWR bilaterals ... have drawn the most attention.

These transactions are not bilateral purchases in the conventional sense with a willing buyer and a willing seller. Rather, they reflect the state stepping into the shoes of insolvent utilities as the default buyer of power in order to backstop the ISO's efforts at maintaining reliability in a dysfunctional market."

PG&E's reliance on the DWR contracts for its benchmark analysis is fatal. The DWR contracts were negotiated and executed during a period of extreme exercise of market power, as FERC has acknowledged on repeated occasions. FERC has expressly recognized that the exercise of market power in the spot markets extended to the forward

'° See PG&E's Request for Rehearing of FERC's July 25, 2001 order (San Diego Gas & Electric CompanY.

et al., 97 FERC 61,275 (2001), filed in Docket No. ELOO-95 on August 24, 2001, at 19.

" FERC has not found any specific DWR contracts to be "just and reasonable." See, es, GWF Ener , 97 FERC 61,297 (2001). slip op. at pp. 3-4.

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markets during the time period to which PG&E seeks to confine the analysis."2 Thus, the DWR contracts cannot be relied on to be a benchmark of market value in a competitive market, and cannot be relied on to demonstrate that the PSA reflects a competitive market value.' 3 The Relevant Market In Ocean State FERC indicated that a benchmark analysis should consider as the geographic market suppliers that can supply the relevant product to the buyer. Ocean State, 59 FERC at 62,333. However, FERC also expressly stated that its analysis and holding in Ocean State were confined to the facts of that proceeding. Ocean State, 59 FERC at 62,338 n. 117. In this proceeding, it is inappropriate to consider only a geographic market centered on PG&E's service territory. First, as discussed above, an analytic limitation to contracts in PG&E's California service territory focuses the analysis on an environment of acknowledged market power.

Second, a broader geographic market is appropriate in this case due to the nature of the PSA. The PSA is a long-term agreement with a delayed implementation date.

Developed in 2001, it is proposed that the PSA run from January 2003 through 2014.

The market for such contracts is decidedly national, not regional. That is, a seller need not be physically located in California in 2001 in order to provide power under a 12 year contract commencing in 2003. Because of the long duration and delayed implementation date, a seller would have sufficient time to build new facilities to satisfy all but the 12 San Diego Gas & Electric Company. et al., 93 FERC ¶61,121 (2000) at 61,358 ('higher spot prices in turn affect the prices in forward markets"); San Diego Gas & Electric Companv. et al., 95 FERC ¶ 61,418 (2001), at 62,556 (expanded spot market mitigation plan "will, over time, impact bilateral and forward markets as well"); see also AEP Power Marketing. Inc., 97 FERC ¶ 61,219 (2001).

3 Only a competitive market value is relevant to a section 205 just and reasonable analysis, as "t1he prevailing price in the marketplace cannot be the final measure of 'just and reasonable' rates mandated by the Act." FPC v. Texaco, 417 U.S. 380, 397 (1974).

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earliest segments of the twelve year period. Certainly long-term capital markets are national, as are long-term natural gas markets.

That the long term market for electric generation is essentially national rather than regional is confirmed by an examination of regional pricing for forward electricity contracts. During the height of the Califomia crisis western forward prices were substantially higher than forward contracts at other national trading hubs-as much as an order of magnitude higher. Since FERC's summer 2001 orders restored a measure of stability to western markets, however, forward contract prices at various regional hubs have tended to converge. For instance, as of December 12, 2001 (when the notice was issued in this proceeding) the simple average of reported futures prices for calendar year 2002 were $30.66 for the California-Oregon border ("COB"), $34.25 for PJM, and

$30.80 for Cinergy.14 Longer term prices should show similar convergence-a point which the CPUC will develop should this proceeding be set for hearing. As the relevant market for products similar to the PSA is a national rather than regional market, and PG&E analyzes only a corrupted regional market, PG&E's benchmark analysis fails to satisfy the "relevant market" prong of the benchmark analysis.

Contemporaneousness PG&E's benchmark analysis similarly fails to satisfy the "contemporaneous" prong articulated in FERC's prior cases. PG&E examined only contracts "entered into between May 2000 and the date of this Application." Application at 18. Witness Meehan's benchmark analysis focuses on nine contracts entered into between February and August 2001 as his "comparison group." Application at 21-22. As discussed above.

14 See www.enerfax.com. By late January 2002, prices in all three markets had declined.

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this is precisely the period in which all energy transactions in the California markets were tainted with market power. It is patently unreasonable to consider only such contracts.

Moreover, this period is not contemporaneous with the period in which the PSA was developed. PG&E filed its Plan with the Bankruptcy Court on September 20,2001. It filed the instant application on November 30, 2001. The key event in this scenario is the order issued by FERC on June 19, 2001, which quickly restored a semblance of stability to the California markets. All of the contracts in witness Meehan's "comparison group" were either executed or had an executed letter of intent no later than June 22, 2001.15 That is to say, the negotiation of all of the comparison group contracts took place in the market power period. By the fall of 2001 when the PSA was developed, forward contract prices in California had already begun to converge with forward prices in regional markets across the country, at prices well below the prices in the PSA. PG&E has thus failed to examine Mgy contemporaneous contracts in its benchmark analysis.

In Ocean State FERC approved a benchmark analysis which considered as the relevant period late 1987 into 1989, "reflecting the period during which the purchasers made their decisions to contract with Ocean State I." Ocean State, 59 FERC at 62,334.

PG&E provides no similar justification for the period it has chosen. Certainly PG&E makes no claim that that the roughly eighteen month period it has selected for examination represents the only, or even the most relevant, time period in which buyers seeking energy for the 2003-2014 period would have, or did, engage in negotiations.

The CPUC has no principled objection to a "contemporaneous" period of roughly eighteen months. But PG&E has disingenuously selected the precise 18 months in which 1 See California State Auditor, "California Energy Markets: Pressures Have Eased. But Cost Risks Remain." 193-195, Table 10. The report is available at httD:/lwww.bsa.ca aov/bsalndfs!2001009.Ddf Us 0376

the California market was at its most dysfunctional. Were there no long-term power contracts entered into in the western United States in the first quarter of 2000? In the last quarter of 1999? Or, for that matter, in the truly contemporaneous period-third and fourth quarter 2001? The "contemporaneous period selected by PG&E is invalid on its face, particularly when coupled with the limited geographical market also selected by PG&E. Rather, FERC must acknowledge changing market conditions. Any valid benchmark analysis must, if not be limited to, certainly include an examination of contracts executed during a period of relative market stability. Such a period could include, for instance portions of 1999 and 2000, and the latter third of 2001. Evidence as to whether and to what extent buyers sought long-term contracts for period comparable to the PSA during these periods can be presented at hearing.

Comparability As PG&E observes, FERC has held that benchmark evidence must encompass "similar services when compared to the instant transaction." Edgar, 55 FERC at 62,129; Ocean State at 62,333. PG&E's benchmark analysis fails this requirement as well. Inthe instant case, the PSA provides for capacity and energy from approximately 7,100 MW of hydroelectric and nuclear power plants. The size of the PSA alone disqualifies each of the purported "comparison group" contracts from consideration as comparable. Witness Meehan admits that he must treat each of the comparison group contracts as "infinitely scalable" in order to make a comparison. Application at 27; Ex Gen-2 (Meehan Testimony) at 16.

In Ocean State the applicant provided comparison evidence relating to 33 projects. FERC confined its analysis to the ten projects which were '"comparable to 16 0377

Ocean State II with respect to size and technology." Ocean State, 59 FERC at 62,334.

Similarly, in Edgar, FERC rejected a benchmark showing in part due to the applicant's failure to evaluate the proposed rates against truly comparable projects. Edgar, 55 FERC at 62,169 ("Boston Edison's comparison of projects [against a 306 MW combined-cycle generating unit] includes projects as small as 0.7 MW and powered by wind, wood, waste, peat and hydropower"). Here, of course, the facilities proposed to support the PSA are exclusively hydroelectric and nuclear generating plants. The "comparison group" contracts, to the extent that they have any specific source of generation attached to them, are exclusively natural gas-fired units. The PSA is for some 7,100 MW. Only one of the comparison group contracts is within the same order of magnitude. The comparison group contracts are comparable in neither size nor technology to the PSA.'6 Price The foregoing establishes that PG&E's benchmark analysis fails to establish the absence of self-dealing in the development of the PSA. As such, the PSA may not be accepted. Edgar, 55 FERC at 62,170. Moreover, the proposed rates in the PSA are simply too high to be considered just and reasonable. For instance, the capacity charges in the first year of the PSA amount to $I70.75/kW-year. Ex Gen- I (Kuga Testimony) at

6. Specifically, the capacity charges are $20.50/kW-mo for the peak months of July and August, S15.25/kW-mo for June, September, and October, and $12/kW-mo for November through May. The capacity payment is paid on a portfolio of 7.100 MW of capacity. Id. at 5. Thus the capacity payments alone under the PSA, in the first year,

"' PG&E declines to provide benchmark evidence regarding "buy-back" agreements executed in recent years in connection with sales of nuclear facilities in New York, or with fairly large hydroelectric portfolios elsewhere in the U.S.

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amount to over $ 1.2 billion, and escalate to nearly $1.5 billion in year eleven. Ex.

Gen-1-1 .

FERC recently addressed another power sales agreement between affiliates in Ameren Energy Mktg. Co., 96 FERC ¶ 61,306 (2001) ("Ameren"). The contract is for a minimum of 350 MW of capacity and energy per hour from June 2001 through May 2002. In the affiliate contract at issue in Ameren, the maximum capacity charge is

$4/kW-mo. The minimum capacity charge in PG&E's PSA exceeds that by 300 per cent.

The CPUC will address additional specific price terms in the PSA in testimony should this matter be set for hearing."7 Non-Price Terms and Conditions The CPUC will address specific non-price terms and conditions in the proposed PSA in testimony should this matter be set for hearing, and expects to raise issues relating to water risk, availability, and dispatchability, among others.

At this juncture, however, one point should be made. The value of PG&E's Plan to Gen exceeds simply the revenues that Gen would receive under the PSA. Under the Plan, Gen will receive not only S52.29IMWh for twelve years, but in addition, Gen will receive virtually all of PG&E's electric generation assets for a fraction of their value.

Gen will effectively pay reorganized PG&E $2.4 billion for PG&E's hydroelectric and nuclear assets. Application at 2 (upon receiving the generating facilities from PG&E "Gen will then transfer cash and notes to PG&E amounting to $2.4 billion').

'7 Witness Kuga's testimony at Ex Gen-1-33 and 44 is inconsistent with the chart at Ex Gen-1-3 as to Diablo Canyon availability. The testimony says that Diablo Canyon reliability figures are based on the most recent five years, while the chart includes lengthy 1994 outages. According to the chart, the average Diablo Canyon refueling outages over the last five years are less than the 42 days asserted in the testimony.

For the years 1996-2001 the average is 38.8 days. For the years 1997-2001 the average is 37.2 days.

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As we have shown elsewhere (! the CPUC's contemporaneous pleading in Docket Nos. EC02-31-000 et al.), Gen thus proposes to acquire the hydro and nuclear assets for less than PG&E has previously proposed as the market value for the hydro facilities alone. The market value of the hydro facilities was set at $2.8 billion in a settlement agreement proposed by PG&E, TURN, and other parties in CPUC Docket No.

A.99-09-053, but which was not approved by the CPUC. PG&E subsequently proposed a market value of $4.1 billion for the hydroelectric facilities alone in CPUC Docket No.

A.00-1 1-056.

These facts demonstrate that the PSA cannot appropriately be considered in isolation. Any substantive evaluation of the PSA must consider related issues including the value to Gen of obtaining the PG&E generating facilities for a fraction of their PG&E-proposed market value.

3. PG&E's Market Power Analysis is Woefully Insufficient The Edgar line of cases requires an applicant in an affiliate sales case to make two separate market power showings. First, PG&E must demonstrate that "the benchmark evidence was not distorted by exercise of market power by the seller or its affiliates."

Ocean State, 59 FERC at 62,333. In this regard, FERC is concerned that, "If the seller or any of its affiliates has exercised market power and thus kept prices high in the relevant market, the benchmark evidence would be skewed in favor of the seller and thereby allow the affiliated buyers to give an undue preference to the sellers." Ocean State, 59 FERC at 62,337. In this proceeding, FERC must address not only whether PG&E has exercised market power and thus skewed the benchmark evidence, but rather whether any party exercised market power in connection with the benchmark evidence. That is, a proper market analysis in this proceeding must consider whether the benchmark evidence was 19 0380

skewed by the exercise of market power. As discussed above, there is no doubt that it was. Accordingly, the benchmark evidence is invalid, and cannot be used to support the PSA. Moreover, the issue of whether PG&E in fact exercised market power to the detriment of DWR's contracting options or decisions is an issue of fact which should (if the application is not rejected outright) be set for hearing, where the testimony submitted by PG&E on this subject may be subject to discovery and examination. For instance, PG&E's utilization of its generation resources may have affected the size of the "net short" position which DWR was attempting to cover through its contracting, and consequently the pricing and terms of the DWR contracts.

Second, if there has been a showing of no potential abuse of self-dealing or reciprocal dealing, FERC has found that market-based rates may be acceptable if the seller can also demonstrate that it lacks market power (or has adequately mitigated its market power), under familiar principles. Edgar, 55 FERC at 62,167. As PG&E requests acceptance of the PSA as market-based rate," PG&E must satisfy this standard (although, set out above, PG&E has not demonstrated the lack of abuse of self-dealing).

PG&E currently possesses in excess of, and Gen proposes to acquire, 7,100 MW of generation. PG&E's contention that a supplier of such magnitude in frequently-constrained Northern California does not have market power fails the straight face test.

Indeed, PG&E has been among the loudest voices arguing that suppliers with much smaller portfolios have both possessed and abused market power. See eg.. "Late Motion to Intervene and Protest of Pacific Gas & Electric Company and Southern California Edison Co." in Docket No. ER99-1722-004, filed April 3, 2001. at 7 ("because the l Application at 14 n. 13.

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premises on which Williams based its market power analysis are no longer valid, and because of the clear evidence that Williams can exercise market vower in the WSCC, the Commission's review should lead to a suspension of Williams' market-based rate authority') and "Testimony of James Wilson for PG&E" in Docket No. ELOO-95-000 at 10-16 and Figures 1, 2 and 5 (unrebutted testimony demonstrating that conditions in the California marketplace have permitted the exercise of market power, bidding without adequate competition by pivotal suppliers, and existence of Cournot pricing conditions during potentially 4000 hours0.0463 days <br />1.111 hours <br />0.00661 weeks <br />0.00152 months <br /> in 2001).

Whether measured by the now-disregarded hub-and-spoke methodology or the Supply Margin Assessment ("SMA") screen established in AEP Power Marketing. Inc.,

97 FERC ¶ 61,219 (2001) ("AEP"), PG&E indisputably possesses market power. At best, PG&E's showing-i.e. that it is a net purchaser rather than a net seller of electricity, and that its generation resources are currently required both by state and federal regulation to be devoted to native load-demonstrates that under current circumstances it has little incentive to exercise the market power it possesses. Application at 34-35. All this of course, will change should PG&E's Plan be implemented. Gen would become a stand-alone merchant seller with the largest single generation portfolio in California, and one of the largest generation portfolios in the country. Moreover, although the Gen application is a new market-based rate application submitted after the announcement of the SMA screen in AEP, PG&E has failed to perform an SMA analysis. Nor has PG&E submitted a hub-and-spoke analysis.

In sum, there can be no question that a supplier with a generation portfolio of the magnitude at issue here in Northern California possesses market power.

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4. In Light of the Inadequacies of PG&E's Showing, and the Unique Aspects of the Proposed PSA, Only Cost-based Rates May be Accepted as Just and Reasonable PG&E's Gen application wholly fails to satisfy the applicable standards necessary to support the rates in the proposed PSA, or any market-based rates. Due to the unique nature of both the proposed transaction and the magnitude of the generation portfolio supporting it, it is unlikely that PG&E could make a showing that satisfies the benchmark standards and effectively rebuts the presumption of self-dealing which must be drawn from the facts at issue here. Consequently, if this application is not dismissed outright, it should be set for hearing to determine lawful cost-based rates.

• PG&E has asserted that other suppliers in California should be subject to cost-based ratemaking. For instance, in PG&E's Request for Rehearing of FERC's July 25, 2001 order (filed August 24, 2001), PG&E asserted that "cost of service rates [are] the only legally appropriate baseline given the fact that the California wholesale markets have been found to be unable to yield just and reasonable rates in all hours." Id. at 2.

Similarly, PG&E's Rehearing Request states that, "As PG&E has previously stated in these dockets, absent a properly functioning market sellers should be permitted to collect no more than their cost of service, which would include a reasonable return on equity."

PG&E is entitled to no more. As the example set out above illustrates, a lawful cost-of-service rate for the portfolio supporting the PSA is on the order of 2.5 cents/kWh for 2003-roughly half of the rate proposed by PG&E.

5. At a Minimum, the November 30 Filings Should be Consolidated and Set for Hearing PG&E's request to accept the PSA without a hearing must be denied. The CPUC has identified a multitude of legal and factual issues, and is prepared to address additional 22 0383

issues at hearing. Moreover, the PSA cannot be evaluated or accepted in isolation. Any hearing must consolidate all of the November 30 Filings for a full consideration of the issues (should the applications not simply be rejected outright). FERC precedent supports setting related dockets of similar magnitude for hearing. See Northeast Utilities Comnanv, 50 FERC ¶ 61,266 (1990) (establishing consolidated hearing procedures for several related proceedings proposed to implement a bankruptcy Plan of Reorganization for Public Service of New Hampshire). While PG&E has submitted testimony with its application, which it asserts supports acceptance, that testimony has not either been subject to discovery or tested by cross-examination.

C. PG&E Acknowledges that the True Justification for the Rates Proposed in the PSA is to Service the Debt to be Incurred by Gen Under the Plan Further evidence that the rates proposed in the PSA are justified neither by truly comparable benchmark sales in a competitive environment, nor by any other measure of just and reasonable pricing, is provided in statements in the Application which reveal the true justification for the proposed rates. For instance, at 41-42 the Gen application states that "it would not be possible for Gen to assume this substantial portion of Exit Financing Debt without the PSA." That is, the rates in the PSA were determined by reference solely to the amount of financing which PG&E anticipates that Gen will incur after taking possession of the generating assets, and by the cash flow necessary to support that debt.

If PG&E thought it could raise additional debt, the rates in the PSA would have been higher. If it had to finance the true market value of the facilities, the rates under the PSA would have to be substantially higher.

In fact, neither the income stream under the PSA nor the PSA itself are necessary for PG&E to emerge from bankruptcy. See eg Application at 42. Nor will PG&E's 23 0384

Plan provide, as PG&E asserts, a quick route out of bankruptcy. The legal infirmities of PG&E's Plan are so extensive (and PG&E apparently so determined to press on with its Plan despite its legal infinnities) that years of litigation over the plan are almost inevitable. Rather, as discussed in the Joint Motion, the CPUC has formulated an Alternative Plan, to be outlined in greater detail to the Bankruptcy Court on February 13, which would enable PG&E to promptly emerge from bankruptcy with a minimum of litigation, without dismantling the company, and without the need to charge PG&E ratepayers the egregious rates proposed in the PSA.

IV. CONCLUSION For the foregoing reasons, the CPUC requests that the application be dismissed.

In the alternative, the CPUC protests the Gen application, requests consolidation of the November 30 Filings, and requests that FERC set the consolidated proceedings for hearing.

Respectfully submitted.

GARY COHEN AROCLES AGUILAR SEAN GALLAGHER By: JZ SEAN GALLAGHER Staff Counsel Attorneys for the Public Utilities Commission of the State of California 505 Van Ness Ave., Rm. 5 124 San Francisco, CA 94102 January 29, 2002 Phone: (415) 703-2059 24 0385

EXHIBIT A 0386

w an ISMiitions) _

12131102 12131103 12131/04 1Z131/05 INCOME STATEMENT Total peratng Revenues 1471.5 1488.8 1504.Q Operatin E~ienses: __ _

Total Cost d Energy 95.i 89. 93.5 M&O and AMG Costs 5512 589.0 539.0 Depreciation 49.4 52.7 62.5 Property &Other Taxs 63.4 63.0 65.1 Total Operat Epenses 759.7 795.1 760.3 Opatig income 711.8 693.7 744.7 Total Interest hncome 0.0 0.0 0.0 Total Interest Expnese 194.1 188.6 163.1 Other Incofe 88.0 94.5 100.5 Pretax Income 606.7 599.6 662.0 Total Booked incone Taxes 245.8 242.9 268.3 Preferred Didend Req 0.0 0.0 0.0 Total Earnigs Avail for 360.9 356.7 393.7 Common BALANCE SHEET 12131102 12131103 11211104 1213105 Assets:

Plant in Service 9489.6 9603.5 9703.4 9912.0 Accumutated Depr (6640.3) (689.6) (6742.5 (8804.f)

Net Plant e49.3 913.8 960.9 1107.0 Construction Work in Progress 1.0 25.3 66.5 0.0 Other Noncurent Assets 1572.2 1661.1 1755.7 1656.2 Total Long-term Assets 2422.5 2600.2 2763.1 2963.2 Current Assets:

Short-erm Inwestments (Net) O.0 0.0 0.0 0.0 Accounts Reivabe 199.3 181.4 183.5 185.5 Invento -M&S 66.0 66.0 660 66-.0 Other Current Assets 0.0 0.0 0.0 0.0 Total Current Assets 265.3 247.4 249.5 251.5 Deferred Charges 0.0 0.0 00 00.

ERROR! UNKNOWN DOCUMENT PRtOPERTY NAME. 1 10 0387

EXHIBIT G 0388

DECLARATION OF DAVID R. EFFROSS I, David R. Effross, declare as follows:

1. I am employed as a Public Utilities Regulatory Analyst by the California Public Utilities Commission ("CPUC"). In that capacity, I am responsible, among other things, for analyzing the technical and financial aspects of filings made by electric generation and transmission companies in order to determine whether those filings are sound, just and reasonable.

2. My educational background is as follows. I received an A.B. degree in Politics from Princeton University in 1987. 1 went on to study business management at the Sloan School of Management at the Massachusetts Institute of Technology, and received a Master of Science in Management degree in 1989. In 1994, 1received a Mastere Specialisi en Politique et Gestion de l'Energie from the Ecole Nationale Supdrieure du Pdtrole et des Moteurs ("ENSPM") of the Institut Frangais du Pdtrole ("IFP") in Reuil-Malmaison, France. I also hold a Master of Science degree in Energy Management and Policy, which I received in 1994 from the Center for Energy and the Environment of the University of Pennsylvania.

3. Prior to coming to the CPUC, I worked as an energy analyst for PWI Energy, an energy services company in Philadelphia, Pennsylvania.

4. I have thoroughly reviewed the filing made by Pacific Gas and Electric Company ("PG&E') in Nuclear Regulatory Commission Dockets 50-275 and 50-323, in which PG&E seeks approval for a license transfer tor its Diablo Canyon Power Plant (-DCPP-) Units I and 2 te a new generating company named 0389

Electric Generation LLC ("Gen") and, in turn, to a new, wholly owned subsidiary of Gen named Diablo Canyon LLC "Diablo").

5. The license for DCPP should not be transferred to Gen, because Gen's finances are highly questionable. It is uncertain that Gen will have the resources to carry out the critical plant maintenance and public safety-related functions that will enable DCPP to continue to meet the Commission's rigorous regulatory requirements.

6. As part of the Reorganization Plan it has submitted in connection with its bankruptcy filing, PG&E would divest most of its generation assets, including DCPP, to Gen, and would then enter into a Purchase & Sale Agreement

("PSA") to buy back the power output of DCPP for the next twelve years. This PSA has been submitted to the Federal Energy Regulatory Commission ("FERC")

for approval. However, the rates proposed in the PSA are unjust and unreasonable, and FERC should accordingly not approve it.

7. Assuming that FERC properly determines that Gen should only be allowed to collect cost-based rates for DCPP, there will simply not be enough money coming in to Diablo both to operate the plant properly. and to service the debt to be incurred under the bankruptcy reorganization Plan. Under such circumstances, Gen and Diablo will be in no position to satisfy the requirement of the NRC's regulations that a non-utility applicant (such as Gen would be) must have reasonable assurance of obtaining the funds necessary to cover the plant's estimated operating costs.

0390

8. Under the PSA, Gen proposes to sell all of the-output of the (former)

PG&E generation facilities, including DCPP, to Reorganized PG&E for an eleven year period at an unjust and unreasonable price, approaching double the rates PG&E would receive for the output of the facilities in the absence of the proposed transactions, and justified only by the need to service the unnecessary debt which Gen proposes to incur upon receipt of the facilities (the PSA includes a twelfth year for approximately half of the facilities' output).

9. The purported financial viability of Gen and Diablo depends wholly on FERC approval of the PSA. However, PG&E has wholly failed to meet FERC's standards applicable to power sales agreements between affiliates. Under the circumstances here, the applicable standards must be applied with extraordinary scrutiny. The PSA was not reached at arm's-length by entities with competing interests, but rather was developed by the same counsel working simultaneously for all the (affiliated!) parties, one of which is essentially non-existent.

10. At the heart of PG&E's application to FERC that seeks approval of the PSA is the contention that the rates in the proposed PSA are just and reasonable to Reorganized PG&E on the basis of a "benchmark" analysis conducted by PG&E's witness Meehan.

11. However, this "benchmark" analysis misses the mark. First, the rates in the proposed PSA must properly be evaluated not against other long-term power transactions. but rather against the rates which PG&E would receive for the 0391

power output of DCPP and the other PG&E generation assets in the absence of the proposed Spin-Off. That is, the proposed PSA rates must be compared against the CPUC's rates for Utility Retained Generation. Second, even if it is appropriate to measure the proposed PSA against "comparable" wholesale transactions, PG&E's benchmark analysis fails to establish that the proposed PSA rates are just and reasonable. Third, PG&E fails to provide a cogent analysis of its market power.

Consequently, PG&E fails to establish that the price and non-price terms and conditions of the PSA are just and reasonable, and that the PSA is not fatally tainted by self-dealing.

12. Under PG&E's proposal, Gen will sell the output of the electric generation facilities currently owned and operated by PG&E to Reorganized PG&E, which would in turn resell the facilities' output to its retail customers.

However, in the absence of the transactions proposed in PG&E's Plan, PG&E would retain the electric generation assets that it proposes to transfer to Gen and to the subsidiaries of Gen, including, in this case, to Diablo Canyon LLC, and would continue selling the output of these facilities directly to its retail customers. Under either scenario, PG&E's retail customers will receive the same energy and Ancillary Services from the same facilities. Thus, the appropriate comparator against which to measure the PSA is the utility-retained generation ("URG')

component of PG&E's retail rates. Under curreai California law and CPUC policy, such rates are determined on a traditional cost-of-service basis. The CPUC has expressly rejected PG&E's request to set its IJRG revenue requirement based 4

0392

on market valuation rather than cost-of-service.

13. PG&E's witness Meehan states that the levelized price over the twelve-year period of the PSA is approximately $52.29fMWh. Elsewhere, PG&E asserts that the average price under the contract over the life of the contract is approximately 5.1 cents/kWh ($5 1/MWh). That the contract costs are unjust and unreasonable as to Reorganized PG&E (and to its retail ratepayers) is confirmed by PG&E's own numbers. In its Plan, PG&E projects revenues under the contract of approximately $1.5 billion annually. For calendar year 2003, PG&E projects revenues under the contract of $1,471,500,000. Based solely on the numbers presented by PG&E in its Plan, PG&E's revenue requirement based on traditional cost-of-service principles would be approximately $790.4 million for 2003-about half of PG&E's projected revenues. This translates to an illustrative rate of approximately 2.5 cents/kWh.

14. This calculation proceeds as follows: PG&E's Plan projects total operating expenses for Gen in 2003. including oepreciation. of $759.7 million.

From this figure is subtracted other income"' of $88.9 million. leaving net operating expenses of $670.8 million. To this is added a rate of return and taxes of

$119.6 million, calculated utilizing PG&E's projected 2003 net plant shown in the Plan of Reorganization for the nuclear and hydro assets of $913.8 million and PG&E's rate of return grossed up for income tax authorized by the CPUC of 13.09%. This results in an illustrative cost-of-service revenue requirement for Gen, using PG&E's own figures. of $790.4 nmillon for 2003.

5 0393

15. The illustrative cost-of-service revenue requirement of $790.4 million is 53.7% of the proposed revenues PG&E would receive under the PSA in 2003 of $1,471.5 million. PG&E asserts that rates under the PSA in 2003 would be approximately 4.6 cents/kWh. Since, as PG&E asserts, revenues of $1,471.5 million equates to 4.6 cents/kWh on average, the cost-of-service revenue requirement is approximately 2.5 cents/kWh on average (.537 x 4.6 cents/kWh) for 2003.

16. While a rate of 2.5 cents/kWh is low compared to recent prices for gas-fired generation, the rate reflects the resource mix utilized for the PSA and PG&E's actual costs-not including the cost of unnecessarily borrowing over $2 billion. Moreover, PG&E's hydroelectric resources are highly depreciated, and PG&E's nuclear and hydro pumped storage resources, including DCPP, have been subject to accelerated depreciation during the transition period established under AB 1890, California's electric utility restructuring law. Ratepayers have paid several billion dollars of accelerated depreciation through California's Competitive Transition Charge, and would be losing a good portion of what they paid for under PG&E's Plan of Reorganization.

17. While these figures may be subject to some refinement, this illustration demonstrates that the PSA is grossly overpriced. If the PSA wvere approved as proposed, PG&E's ratepayers would make some $700 million in excess payments to Gen over and above the otherwise applicable rate for the same energy from the same facilities in 2003. O(ver the lille ofthe PSA. the 6

0394

overpayments approximate $8 billion.

18. PG&E's benchmark analysis, supported by the testimony of its witness Meehan, is invalid for a number of reasons. First, FERC requires a showing that there exists no potential abuse of self-dealing or reciprocal dealing.

Second, if there has been a showing of no potential abuse of self-dealing or reciprocal dealing, FERC has found that market-based rates may be acceptable if the seller can also demonstrate that it lacks market power (or has adequately mitigated its market power).

19. As PG&E recognizes, the potential for self-dealing is present here, where the seller under the proposed PSA is essentially non-existent, and the terms and conditions of the PSA were developed by a single entity acting on behalf of both the putative seller and buyer. The risk of self-dealing is at its height in this transaction, in which the buyer under the proposed PSA would, if PG&E's Plan is confirmed, be stripped of all of its most valuable assets and the affiliate relationship then terminated.

20. In its unsuccessful attempt to demonstrate a lack of market power, PG&E contends that the relevant market is "the market for firm. long-term baseload and peaking capacity and energy for a duration of approximately 10-1 5 years with a start date expected near January 2003," and that the relevant region must be limited to suppliers which can deliver energy to PG&E. PG&E also contends that the relevant "contemporaneous' period is May 2000 through November 2001. By so attempting to confine the analysis. PG&E contends that 7

0395

the appropriate benchmark sales are nine long-term contracts entered into by the California Department of Water Resources ("DWR") during 2001.

21. In confining its benchmark comparison to the DWR contracts, PG&E has sought to define as the relevant period precisely the same period in which the California wholesale electricity markets exhibited extreme dysfunction.

PG&E itself has previously characterized this as a period of "massive market failure and upheaval in the regulatory regime that has led to billions of dollars in overcharges since May 2000." Similarly, PG&E has attempted to confine its benchmark comparison to DWR contracts, the negotiation of which PG&E has previously contended were subject to the exercise of market power, and as to which PG&E has contended FERC ought to order refunds.

22. PG&E's reliance on the DWR contracts for its benchmark analysis is fatal. The DWR contracts were negotiated and executed during a period of extreme exercise of market power, as FERC has acknowledged on repeated occasions. FERC has expressly recognized that the exercise of market power in the spot markets extended to the forward markets during the time period to which PG&E seeks to confine the analysis. Thus, the DWR contracts cannot be relied on to be a benchmark of market value in a competitive market, and cannot be relied on to demonstrate that the PSA reflects a competitive market value.

23. However, in connection with the PG&E bankruptcy reorganization Plan, it is inappropriate to consider only a geographic market centered on PG&E's service territory. First, as discussed above. an analvtic limitation to contracts in 8

0396

PG&E's-Califomia service territory focuses the analysis on an environment of acknowledged market power. Second, a broader geographic market is appropriate to consider in this case due to the nature of the PSA. The PSA is a long-term agreement with a delayed implementation date. Developed in 2001, it is proposed that the PSA run from January 2003 through 2014. The market for such contracts is decidedly national, not regional. That is, a seller need not be physically located in California in 2001 in order to provide power under a 12-year contract commencing in 2003. Because of the long duration and delayed implementation date, a seller would have sufficient time to build new facilities to satisfy all but the earliest segments of the twelve year period.

24. That the long-term market for electric generation is essentially national rather than regional is confirmed by an examination of regional pricing for forward electricity contracts. During the height of the recent California energy crisis, western forward prices were substantially higher than forward contracts at other national trading hubs-as much as an ordLr of magnitude higher. Since FERC's summer 2001 orders restored a measure of stability to western markets, however, forward contract prices at various regional hubs have tended to converge. For instance, as of December 12, 2001 (when the notice was issued in this proceeding) the simple average of reported futures prices for calendar year 2002 were $30.66 for the California-Oregon border ("COB"), $34.25 for PJM, and

$30.80 for ClNergy. Longer-term prices should show similar convergence. As the relevant market for products similar to the PSA is a national rather than 9

0397

regional market, and PG&E analyzes only a corrupted regional market, PG&E's benchmark analysis fails to satisfy the "relevant market" criterion on which a proper benchmark analysis must be based.

25. PG&E's benchmark analysis similarly fails to satisfy the "contemporaneous" criterion on which a proper benchmark analysis must be based. PG&E examined only contracts "entered into between May 2000 and the date of this Application." Meehan's analysis focuses on nine contracts entered into between February and August 2001 as his "comparison group." As noted above, this is precisely the period in which all energy transactions in the California markets were tainted with market power. It is patently unreasonable to consider only such contracts. Moreover, this period is not contemporaneous with the period in which the PSA was developed. PG&E filed its Plan with the Bankruptcy Court on September 20, 2001; however, the key event in this scenario is the order issued by FERC on June 19, 2001, which quickly restored a semblance of stability to the California markets. All of the contracts in witness Meehan's comparison group" were either executed or had an executed letter of intent no later than June 22, 2001. That is to say, the negotiation of all of the comparison group contracts took place in the market power period. By the fall of 2001 when the PSA was developed, forward contract prices in California had already begun to converge with forward prices in regional markets across the country. at prices well below the prices in the PSA. PG&E has thus failed to examine any contemporaneous contracts in its benchmark analysis.

I ()

0398

26. PG&E provides no justification for the period it has chosen.

Certainly, PG&E makes no claim that that the roughly eighteen month period it has selected for examination represents the only, or even the most relevant, time period in which buyers seeking energy for the 2003-2014 period would have, or did, engage in negotiations.

27. The CPUC has no principled objection to a "contemporaneous" period of roughly eighteen months. But PG&E has disingenuously selected the precise 18 months in which the California market was at its most dysfunctional.

The "contemporaneous" period selected by PG&E is invalid on its face, particularly when coupled with the limited geographical market also selected by PG&E. Any valid benchmark analysis must, if not be limited to, certainly include an examination of contracts executed during a period of relative market stability.

Such a period could include, for instance portions of 1999 and 2000, and the latter third of 2001.

28. Benchmark evidence must also encompass "similar services."

However, PG&E's benchmark analysis fails this requirement as well. The proposed PSA provides for capacity and energy from approximately 7,100 MW of hydroelectric and nuclear power plants. The size of the PSA alone disqualifies each of the purported "comparison group" contracts from consideration as comparable. Meehan admits that he must treat each of the comparison group contracts as infinitely scalable" in order to make a comparison. Here, the facilities proposed to support the PSA are exclusively hydroelectric and nuclear 11 0399

generating plants. However, the "comparison group" contracts, to the extent that they have any specific source of generation attached to them, are exclusively natural gas-fired units. The PSA is for some 7,100 MW. Only one of the comparison group contracts is within the same order of magnitude. The comparison group contracts are comparable in neither size nor technology to the PSA.

29. Moreover, the proposed rates in the PSA are simply too high to be considered just and reasonable. For instance, the capacity charges in the first year of the PSA amount to $170.75/kW-year. Specifically, the capacity charges are

$20.50/k W-mo for the peak months of July and August, $1 5.25/kW-mo for June, September, and October, and $12/kW-mo for November through May. The capacity payment is paid on a portfolio of 7,100 MW of capacity. Thus the capacity payments alone under the PSA, in the first year, amount to over $1.2 billion, and escalate to nearly $1.5 billion in year eleven.

30. The value of PG&E's Plan to Gen exceeds the revenues that Gen would receive under the PSA. Under the Plan, Gen will receive not only

$52.29/MWh for twelve years, but in addition, Gen will receive virtually all of PG&E's electric generation assets for a fraction of their value. Gen will effectively pay reorganized PG&E $2.4 billion for PG&E's hydroelectric assets and DCPP. Gen thus proposes to acquire the hydro and nuclear assets for less than PG&E has previously proposed as the market value for the hydro facilities alone.

It follows from this that the PSA cannot appropriately be considered in isolation.

12 0400

Any substantive evaluation of the PSA must also consider related issues, including the value to Gen of obtaining the PG&E generating facilities for a fraction of their PG&E-proposed market value.

31. An applicant in an affiliate sales case such as this one must make two separate market power showings. First, PG&E must demonstrate that the benchmark evidence was not distorted by exercise of market power by the seller or its affiliates. However, PG&E must also show whether any party exercised market power in connection with the benchmark evidence. That is, a proper market analysis must consider whether the benchmark evidence was skewed by the exercise of market power. As discussed above, there is no doubt that it was.

Accordingly, the benchmark evidence is invalid, and cannot be used to support the PSA. Second, if there has been a showing of no potential abuse of self-dealing or reciprocal dealing, FERC has found that market-based rates may be acceptable if the seller can also demonstrate that it lacks market power (or has adequately mitigated its market power). Since PG&E requests acceptance of the PSA as market-based rate, PG&E must satisfy this standard (although, as is noted above, PG&E has not demonstrated the lack of abuse of self-dealing).

32. PG&E currently possesses in excess of, and Gen proposes to acquire, 7,100 MW of generation. PG&E's contention that a supplier of such magnitude in frequently constrained Northern California does not have market power fails the straight face test. Indeed. PG&E has been among the loudest voices arguing that suppliers with much smalle- portfolios have both possessed 0401

and abused market power.

33. PG&E indisputably possesses market power. At best, PG&E's showing -- i.e. that it is a net purchaser rather than a net seller of electricity, and that its generation resources are currently required both by state and federal regulation to be devoted to native load -- demonstrates that under current circumstances it has little incentive to exercise the market power it possesses. All this, of course, will change should PG&E's Plan be implemented. Gen would become a stand-alone merchant seller with the largest single generation portfolio in California, and one of the largest generation portfolios in the country. In sum, there can be no question that a supplier with a generation portfolio of the magnitude at issue here in Northern California possesses market power.

34. PG&E has wholly failed to satisfy the applicable standards necessary to support the rates in the proposed PSA, or any market-based rates. Due to the unique nature of both the proposed transaction and the magnitude of the generation portfolio supporting it, it is unlikely that PG&E could make a showing that satisfies the benchmark standards or effectively rebut the presumption of self-dealing which must be drawn from the facts at issue here.

35. PG&E has itself, however, asserted that other suppliers in California should be subject to cost-based ratemaking. For instance, in one FERC proceeding, PG&E has asserted that "cost of service rates [arel the only legally appropriate baseline given the fact that the California wholesale markets have been found to be unable to vield just and reasonable rates in all hours." Similarly.

14 0402

PG&E has stated that, "As PG&E has previously, stated in these dockets, absent a properly functioning market sellers should be permitted to collect no more than their cost of service, which would include a reasonable return on equity."

36. PG&E is entitled to no more than it has asserted other suppliers to be entitled to. As the above example illustrates, a lawful cost-of-service rate for the portfolio supporting the PSA is on the order of 2.5 cents/kWh for 2003 -- roughly half of the rate proposed by PG&E.

37. The rates in the PSA were determined by reference solely to the amount of financing which PG&E anticipates that Gen will incur after taking possession of the generating assets, including DCPP, and by the cash flow necessary to support that debt. If PG&E thought it could raise additional debt, the rates in the PSA would have been higher. If it had to finance the true market value of the facilities, the rates under the PSA would have to be substantially higher.

38. In fact, neither the income stream under the PSA nor the PSA itself is necessary for PG&E to emerge from bankruptcy. Nor will PG&E's Plan provide, as PG&E asserts, a quick route out of bankruptcy. Rather, the CPUC has formulated an Alternative Plan, to be outlined in greater detail to the Bankruptcy Court on February 13, 2002, which would enable PG&E to promptly emerge from bankruptcy with a minimum of litigation, without dismantling the company, and without the need to charge PG&E ratepayers the egregious rates proposed in the PSA.

39. For all the foregoing reasons. Gen cannot by any stretch of the 15 0403

imagination be deemed to satisfy the financial responsibility requirement of the NRC's regulations. Moreover, there is a reasonable alternative plan, sponsored by the CPUC, under which PG&E will continue to operate DCPP under cost-of-service rates, that does provide reasonable assurance of more than adequate funding for all of DCPP's plant operational and maintenance-related needs, thereby assuring protection of public health and safety. For all these reasons relating to the lack of financial responsibility of the proposed transferee of DCPP, the NRC should reject PG&E's request for a license transfer. -

I declare under penalty of perjury that the foregoing is true and co4ect to the best of my knowledge.

Executed this 5t day of February, 2002, at San FC cisco, Ca ia 1 6 16 0404

EXHIBIT H 0405

NUw terror attacks on U.S. predicted documents, diagrams and com-Nudear reactor seen puters In Afghanistan showing as possible target al-Qalda's apparent Interest in producing a nuclear weapon or By Thomas Frank in possibly attacking a nuclear NEWSDAY reactor or other major facility, WASHINGTON -'Officials The CIA said In a report stepped up warnings Wednesday that it had found Thursday of a potential new rudimentary diagrams of nu-terrorist attack on the United clear weapons Inside a sus-States, possibly against a nu. pected al-Qalda safehouse in clear power plant or water fa- Kabul." The threat of terrorists cility, or Involving nuclear using chemical, biological, radi-weapons. ologieal and nuclear appears The warnings came as De- to be rising - particularly since fense Secretary Donald Rums- the Sept. 11 attacks:"the CIA feld said attacks against the added.

nation 'could grow vastly An FBI bulletin Wednesday more deadly tann the Sept. said that al-Qaida members ap-11 hljackings that killed more parently were studying water-than 3.000. supply systems and sewage The new concerns were spurred by the discovery of Please see Attack, NEWS-9 SMITH GARSON -Amssumaed Pre U"LLERY DEFENSE Secretary Donald Rumsfeld, accompanied by Gen. Tommy Franks, issues terror warning Thursday during a news conference in Washington.

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Aet 0406

Attack:FBI alerted police Jan. 16 of possible attacks Continued fromNEWS-1 Homeland Securli t" spokesman Gordon Johndroe:

plants in -the United States. said he believed It was the fBrat.

Someone indirectly linked to alert issued specifically cover :

Osama bin Laden showed an such facilities. although four:

apparent Interest In the design general alerts have been made of dams, the FBI added, relying since October, most recently on on infom on.from that per- Jan. 2.

son's computer. Reports of new threats came And the Nuclear Regulatory after President Bush's warning Commission reportedly warned Tuesday in his State of the the natIon's 103 nuclear power Union address about more ter-plants of a possible airplane at- rorist attacks. Bush said U.S.

tack, but an FBI official said the officials found 'dlagrams of nu-NIWC relied on dated Informa- clear power plants and public tion Ithat) is uncorroborated." water facilities, detailed Instruc- '

The FBI has said the Informant tons for making chemical who described the purported at- weapons, surveillance maps oi tack Is an al-Qalda operative American cities and thorough who has not been credible In the descriptions of landmarks in' past, a source said. America, and throughout the But the Office of Homeland world.'

Security said Thursday that the FBI Director Robert Mueller FBI had alertedjocal police on said Thursday that the nation I::

Jan. 16 of possible attacks on still in a high state of alert and energy facilities, reservoirs and will be for some time."

damss. nuclekr and gas facilities and storage sites for highly en- Dist-ibuted by the Los An-riched uranium, the key Ingre- geles imes-Washington Post dient In nuclear weapons. Newus Service.

Strike threat looms at refineries SAY OY NEWS and the oil industry are taking place at the national level In MARTINEZ - As a strike Nashville, Tenn.

deadline that would affect oil re- Negotiations are also taking fineries nationwide approaches, place at the local level. where:.

union representatives held a the unions say the refineries' news conference In Martinez should increase the nationals Thursday to announce their po- baseline offerings to the 2.500; sitions if a contract doesn't get union refinery workers In the:

signed. Bay Area due to the hig cost of' Negotiations between unions -lvlng In the region.

0407