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9th Circuit Court Partly Reverses U.S. District Court Decision

Yesterday, the Ninth Circuit Court of Appeals partly reversed the August 2002 decision of the U.S. District Court that the bankruptcy reorganization plan of Pacific Gas & Electric Company (PG&E) could proceed to break up PG&E's assets, regardless of state laws requiring approval of the California Public Utilities Commission (CPUC) for the transfer of such assets.
NINTH CIRCUIT PARTLY REVERSES U.S. DISTRICT COURT DECISION ON BANKRUPTCY LAW PREEMPTION OF STATE UTILITY REGULATION

HOW THIS APPLIES TO PGE IN ENRON'S BANKRUPTCY

Yesterday, the Ninth Circuit Court of Appeals partly reversed the August 2002 decision of the U.S. District Court that the bankruptcy reorganization plan of Pacific Gas & Electric Company (PG&E) could proceed to break up PG&E's assets, regardless of state laws requiring approval of the California Public Utilities Commission (CPUC) for the transfer of such assets.

The full decision is available, temporarily, at:

 ftp://ftp.voters.net/urp/public/pgevcalif9th.pdf

The lower court decision, which was partly reversed, is available at:

 ftp://ftp.voters.net/urp/public/pgevcalifusdc.pdf

After going to an FTP site with your web browser, you may have to hit Refresh or Reload to make the list of files appear.

The U.S. District Court had ruled that PG&E could proceed with its plan to transfer all of its power plants and all of its transmission lines to separate subsidiaries, which would then not be subject to rate regulation by the CPUC. The Ninth Circuit described the PG&E plan:

Among other things, the Plan contains a proposal for the disaggregation of PG & E into four new corporations, each of which would be owned by PG & E's parent corporation. The four proposed corporations are: (1) Electric Generation LLC ("Gen"), which would own PG & E's generation assets; (2) ETrans LLC ("ETrans"), which would own PG & E's electric transmission assets; (3) GTrans LLC ("GTrans"), which would own PG & E's gas transmission assets; and (4) Reorganized PG & E, which would engage in retail distribution of electricity and gas. Pursuant to the Plan, Reorganized PG & E would remain subject to regulation by the California Public Utility Commission ("CPUC") after the proposed disaggregation. However, Gen, ETrans, and GTrans would not.

The CPUC staff and consumer groups estimated that the cost of this transfer to PG&E ratepayers would exceed $10 billion over the next 10 years, because PG&E ratepayers would have to pay more for power on the open market than the cost of power from PG&E's largely depreciated power plants.

The State of California and the CPUC challenged the PG&E plan in federal court, but the U.S. District Court rejected their challenge on August 30, 2002. Faced with losing regulatory jurisdiction over PG&E generation and transmission assets, the CPUC staff and PG&E agreed to advocate a "settlement," under which the assets would not be transferred out from under state rate regulation. In exchange, the CPUC would grant PG&E a rate increase quantified at between $7.5 and $8.9 billion over the next 10 years. The Commission itself has not yet approved the settlement.

Yesterday's Ninth Circuit decision holds that federal bankruptcy law does preempt the application of state laws or requirements which "relate to financial condition." It does not preempt state laws or requirements which do not "relate to financial condition," such as those establishing health or safety requirements. The Ninth Circuit stated:

We agree with the district court that a reorganization plan under Chapter 11 of the Bankruptcy Code expressly preempts otherwise applicable nonbankruptcy laws. However, we disagree with the district court as to the scope of that express preemption. We hold that the preemptive scope of a reorganization plan is stated in 1142(a). That section provides that a plan shall be implemented "notwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition." That is, under 1142(a), nonbankruptcy law is expressly preempted by a reorganization plan only to the extent that such law "relat[es] to financial condition."

The court continued:

We hold that the scope of preemption under the "notwithstanding" clause of 1123(a) is the same as under the "notwithstanding" clause of 1142(a), and that otherwise applicable nonbankruptcy laws "relating to financial condition" are expressly preempted under both 1123(a) and 1142(a). Neither the bankruptcy court nor the district court used the express preemption standard stated in the "notwithstanding" clause of 1142(a) and referred to in the "notwithstanding" clause of 1123(a). We reverse the decision of the district court. We remand to the bankruptcy court for a determination of whether the laws Proponents propose to preempt in their Plan come within the express preemption of 1123(a) and 1142(a). The question of implied preemption will also be before the bankruptcy court on remand.

"It is not clear to me whether the California state law prohibiting a regulated electric utility from selling its power plants, without CPUC approval, would fall into the category of a law `relating to financial condition,'" said Dan Meek, attorney for the Utility Reform Project (Utility Reform Project (URP). "The Oregon statute, ORS 757.511, which requires Oregon Public Utility Commission (OPUC) approval for the transfer of control over a utility, may or may not be considered one which relates to financial condition." The statute provides:

757.511 Application for authority to exercise influence over utility; contents of application; issuance of order; dissemination of information about acquisition.

(1) No person, directly or indirectly, shall acquire the power to exercise any substantial influence over the policies and actions of a public utility which provides heat, light or power without first securing from the Public Utility Commission, upon application, an order authorizing such acquisition if such person is, or by such acquisition would become, an affiliated interest with such public utility as defined in ORS 757.015 (1), (2) or (3).

(2) The application required by subsection (1) of this section shall set forth detailed information regarding:

(a) The applicant's identity and financial ability;

(b) The background of the key personnel associated with the applicant;

(c) The source and amounts of funds or other consideration to be used in the acquisition;

(d) The applicant's compliance with federal law in carrying out the acquisition;

(e) Whether the applicant or the key personnel associated with the applicant have violated any state or federal statutes regulating the activities of public utilities;

(f) All documents relating to the transaction giving rise to the application;

(g) The applicant's experience in operating public utilities providing heat, light or power;

(h) The applicant's plan for operating the public utility;

(i) How the acquisition will serve the public utility's customers in the public interest; and

(j) Such other information as the commission may require by rule.

(3) The commission promptly shall examine and investigate each application received pursuant to this section and shall issue an order disposing of the application within 19 business days of its receipt. If the commission determines that approval of the application will serve the public utility's customers in the public interest, the commission shall issue an order granting the application. The commission may condition an order authorizing the acquisition upon the applicant's satisfactory performance or adherence to specific requirements. The commission otherwise shall issue an order denying the application. The applicant shall bear the burden of showing that granting the application is in the public interest. . . .

One possible conclusion is that, if the OPUC seeks to impose conditions on the acquisition of PGE that the prospective new owner (Texas Pacific Group) does not like, the new owner can seek to bypass the OPUC entirely by claiming that the Oregon law "relates to financial condition" and is therefore preempted by federal bankruptcy law, which would apply if the sale of PGE stock to Texas Pacific Group were included in an amended Enron Plan of Reorganization (as it surely will be).

homepage: homepage: http://www.oppc.net