By Dennis Pfaff -Daily Journal Staff Writer
SAN FRANCISCO - At some point very soon in the epic struggle over Pacific Gas & Electric Co.'s breath-taking debts, U.S. Bankruptcy Judge Dennis Montali will have to make critical decisions about how far his authority extends and how aggressively he is willing to wield his power.
In particular, Montali faces decisions in a pair of disputes that balance uneasily on the narrow line dividing the jurisdiction of state regulators and lawmakers and that of the federal judiciary. Montali's rulings may telegraph his willingness to tread on such traditional areas of state control as electricity rates and the utility's relationship with its suppliers.
PG&E filed its $9 billion Chapter 11 case April 6, launching one of the largest utility bankruptcies ever. Among other factors, the company found itself pinned between skyrocketing energy costs and state-imposed rate restrictions, which the company is fighting in a separate court case, that made it impossible to pass the costs on to customers.
The company has also been criticized for shielding many of its generating assets in its parent holding company and for handing out large bonuses to 6,000 employees shortly before making its filing.
Under the federal Bankruptcy Code, Montali has sweeping power to at least temporarily do almost anything to help PG&E. Whether and in what ways he is willing to use that authority, however, is another matter.
"Having the power to do a thing isn't necessarily the cause to do a thing," said Palo Alto bankruptcy expert Penn Butler.
But he cautioned that Montali is not intimidated by the authority he wields.
"He will exercise the power he believes he needs to exercise to accomplish the purposes of Chapter 11," said Butler, of Brooks & Raub, who frequently practices before Montali. "He will not do it lightly or arbitrarily."
At least two disputes that arose in the opening days of PG&E's bankruptcy more or less directly confront the issue of how much authority the state's primary regulatory agency, the Public Utilities Commission, will continue to wield.
Small electricity suppliers from whom PG&E buys a significant amount of power want Montali to release them from what they believe are ruinously unfavorable contracts with the utility. They argue that a recent PUC ruling virtually guarantees they cannot make money on the deals.
Bringing the rate issue into sharp focus, PG&E wants to delay the impact of a separate PUC ruling that changes accounting methods and has the effect of maintaining a customer rate freeze.
A third issue that may yet arise could force Montali to confront a state law specifically prohibiting the sale of generating facilities, including PG&E's highly prized hydroelectric properties, which dot the mountains from Bakersfield to Redding. That law, however, might not be enough to prevent the sales of those lands, bankruptcy experts said.
Last week, as hearings on the bankruptcy case began in earnest, Montali offered few clues to his thinking, except to express a desire for more time to consider his options.
"The entire energy community has been dealing with this problem for a year," he said almost plaintively at one point. "I've been dealing with it for six days."
Montali put off until May 10 consideration of the electricity suppliers' request, despite their warnings that they were facing potential disaster without some answer before that. The four companies, which burn natural gas to produce electricity and steam, collectively supply about 148 megawatts to PG&E and are owed about $60 million.
The four companies are only the tip of a much larger iceberg. PG&E has contracts with about 300 other small electricity suppliers and owes them more than $1 billion, according to the utility's chief bankruptcy attorney, James Lopes.
The companies must decide by April 23 whether to purchase more natural gas to run their turbines, said their attorney, Bruce Leaverton, of Seattle's Lane Powell Spears Lubersky. But he contended a recent PUC ruling assures that the companies would have to sell their electricity at a loss.
"We cannot commit to supplying power at a rate that doesn't cover our costs," Leaverton said. Without being able to operate, the companies cannot "aid the reorganization" of PG&E, Leaverton said.
Lopes said that what the companies really want to do is challenge the PUC decision governing small producers in bankruptcy court.
"They are not satisfied with the amounts the PUC has ordered," said Lopes, of Howard, Rice, Nemerovski, Canady, Falk & Rabkin. "This [Montali's] is not the court to do that."
Lopes also helped give Montali some breathing room on the issue by informing the judge that PG&E would start making substantial payments to the companies this week. A PG&E spokesman said the utility on Tuesday paid $34.6 million to more than 250 energy suppliers, including the four involved in the bankruptcy court case, for electricity supplied since April 6.
The companies have already appealed the PUC decision to the Federal Energy Regulatory Commission. Montali, without ruling on the substance of the companies' case, let them know there are limits to what he feels he can do.
"If what you're telling me is [that] I am going to be a kind of a pretend appellate court, I can't help you," he said.
PG&E, which objected to the suppliers' broaching of state regulatory authority in the bankruptcy case, is itself attempting to stall the effect of a PUC order issued in March that would effectively extend a rate freeze imposed as part of utility deregulation.
In a hearing scheduled for May 14, the utility will ask Montali for an injunction to halt the effect of the decision. In its filing with the bankruptcy court, PG&E argued that enforcement of the order would violate the so-called automatic stay on claims that is imposed when a bankruptcy is filed to give the company breathing space.
Quoting the bankruptcy code, the utility also argued that the PUC order constitutes an act "to exercise control over the property of the estate."
Asked about the seeming contradiction in the utility's position regarding challenging PUC decisions in bankruptcy court, Lopes tersely responded that "we're the debtor." Later, PG&E spokesman Ron Low said the company believes the bankruptcy stay "applies to the commission's order and any other order that's pending."
The PUC's chief counsel, Gary Cohen, said that the utility's position directly confronts the issue of who can determine rates.
"What they say they're doing is applying the automatic stay," said Cohen. "I think the implications go beyond that."
Cohen said it is clear that the utility intends "to present a reorganization plan that would provide for a rate increase." He said he knows of no precedent that would allow a judge to set rates.
However, under the bankruptcy code, Montali has extensive authority to take short-term action. Section 105 of the code allows a judge to "issue any order, process or judgment that is necessary or appropriate to carry out the provisions" of Chapter 11.
"The power of the court to enter such orders is pretty extravagant," said Butler. However, the section is sometimes derided as the "refuge of scoundrels," because it is cited by attorneys who can't find any other provision of the law to help them, he said.
While Montali could theoretically do almost anything, including raise rates, under the section, his power to permanently impose such a solution is limited by other sections of the bankruptcy code. One, in particular, requires regulatory approval for rate changes that are included in a final reorganization plan.
"In the meantime, PG&E could come in and say we're never going to get that far because we're being forced to sell way below what we have to pay," said John Hansen, a bankruptcy expert for Nossaman, Guthner, Knox & Elliott in San Francisco. Hansen represents retired PG&E executives in the bankruptcy.
Hansen said the company could also marshal other arguments against restrictions on rates, including making a case that the current structure is an unconstitutional "taking" of its property. "Nobody has ever made those arguments before to the point it's been ruled upon," he said. "So nobody knows how it's going to come out."
PG&E spokeswoman Staci Homrig appeared to acknowledge the continuing authority of the PUC, although she said the judge will ultimately have to determine the boundaries between his power and that of state regulators.
"We believe the bankruptcy court will have to work with the regulatory authority to fashion a solution going forward," said Homrig.
Meanwhile, the fate of the hydroelectric properties is even less clear. In January, state lawmakers passed AB 6x, prohibiting PG&E and other utilities from selling any of their generating assets until at least 2006.
That law would theoretically block any sale of PG&E's highly valued hydroelectric system, composed of 174 dams and 68 power plants, plus possibly more than 100,000 acres of prized mountain property near the reservoirs. Together, the hydroelectric assets have been valued at at least $2.8 billion, while some believe the total value is as high as $4 billion.
While there is some question about whether the law prohibits the sale of the land as well as the dams and powerhouses, environmentalists are clearly worried. PG&E has traditionally allowed the public virtually unfettered access to the lands.
However, the company as recently as 1999 formally proposed to auction off the lands as part of the deregulation process, alarming environmental and recreation organizations.
The bankruptcy could once again put those assets back on the block, some worry. "The potential that the hydro plants and the hydro lands could pass completely unencumbered into other hands is worrisome," said Nancy Ryan, an economist for Environmental Defense in Oakland.
PG&E, while suggesting that it believes the law covers the land as well as the generation capacity, gave few clues as to its ultimate intentions. "We're currently not in the process of divesting the hydro lands at all," said Homrig. "In fact, state law prohibits it."
But Homrig said the divestiture of any land would have to go before the bankruptcy court.
There may be nothing to prevent the bankruptcy court from forcing such a sale, notwithstanding the state law.
Fred Tung, a University of San Francisco Law School bankruptcy expert, said the bankruptcy code does not give a debtor any greater property rights than it has under state law outside of bankruptcy. However, he said, the company, if it wanted to sell the lands, could also argue that the state law prohibition effectively nullifies the bankruptcy process.
In the end, Tung said, federal bankruptcy power may well trump state law. "Any sort of blanket state law prohibition addressed to that one situation - my intuition is that's not going to fly," he said.