In re Pacific Gas and Elec. Co.

• Decision Date: 30 August 2002
• Docket Number: Bankruptcy No. 01-30923 DM.,No. C-02-1550 VRW.,C-02-1550 VRW.
• Citation: 283 B.R. 41
• Parties: In re PACIFIC GAS AND ELECTRIC CO., Appellant, Cross-Appellee, Debtor and Debtor in Possession.
• Court: U.S. District Court — Northern District of California

283 B.R. 41

In re PACIFIC GAS AND ELECTRIC CO., Appellant, Cross-Appellee, Debtor and Debtor in Possession.

No. C-02-1550 VRW.

Bankruptcy No. 01-30923 DM.

United States District Court, N.D. California.

August 30, 2002.

ORDER

WALKER, District Judge.

PG & E appeals from a March 18, 2002, order of the bankruptcy court, entitled "Order and Judgment Disapproving Disclosure Statement; Rule 54(b) Certification" (bankruptcy order), which embodies a ruling issued on February 7, 2002, entitled "Memorandum Decision Regarding Preemption and Sovereign Immunity" (bankruptcy decision). Doc. # 1. On June 24, 2002, the court denied a motion to dismiss PG & E's appeal filed by The People of the State of California, the California Public Utilities Commission (CPUC) and the City and County of San Francisco (collectively, objectors). Doc. # 68. The court determined that the bankruptcy court's F.R.C.P. 54(b) certification was proper and, consequently, that appellate jurisdiction exists as of right, pursuant to 28 U.S.C. § 158(a)(1). In the alternative, the court granted PG & E's "protective" motion for leave to file an interlocutory appeal, pursuant to section 158(a)(3), determining that in the event the bankruptcy court's F.R.C.P. 54(b) certification was not proper, the court would still exercise its discretion to hear this appeal.

This appeal poses a discrete question of statutory interpretation of tremendous importance to one of the largest bankruptcies in United States history.

I

This matter, like many others currently in federal court and in this district, including an action filed by PG & E against the CPUC, is tied to California's attempt to restructure its regulatory scheme for the generation and sale of electricity. In PG & E v. Lynch, 216 F.Supp.2d 1016, 2002 U.S. Dist LEXIS 13895 (N.D.Cal.2002), the undersigned discussed at length California's statutory scheme implementing this restructuring, the energy crisis beginning in the summer of 2000 and the resulting effects on PG & E. The court will not repeat this discussion here, although it provides the backdrop for PG & E's bankruptcy and the instant appeal.

On April 6, 2001, claiming that the combination of the energy crisis and the retail rate freeze enacted as part of California's restructuring scheme had ruined its credit rating and led to "billions of dollars in defaulted debt and unpaid bills," PG & E Br. (Doc. # 14) at 5, PG & E filed a voluntary petition under chapter 11 of title 11 of the United States Code (bankruptcy code) in the United States Bankruptcy Court for the Northern District of California. On December 19, 2001, PG & E and its parent company filed their first amended plan (December plan) of reorganization and their first amended disclosure statement. See E.R. at 153, 207.

Central to the December plan is the disaggregation of PG & E, which involves the creation of three new limited liability companies and the separation of PG & E's operations into four lines of business, reflecting PG & E's historical functions: retail gas and electric distribution; electric transmission; interstate gas transmission and electric generation. As a result of the reorganization contemplated by the plan, four companies, all subsidiaries of PG & E's parent company, would emerge from bankruptcy: ETrans, containing PG & E's electric transmission assets; GTrans, PG & E's gas transmission assets; Electric Generation (Gen), PG & E's generation assets; and the Reorganized PG & E, which would continue in the retail sale and distribution of electricity and gas. According to PG & E, the entities involved in electric transmission, interstate gas transmission and electric generation will no longer be subject to the regulatory jurisdiction of the CPUC after reorganization, but will be under the exclusive ratemaking jurisdiction of the Federal Energy Regulatory Jurisdiction (FERC). The Reorganized PG & E would remain under the CPUC's regulatory jurisdiction, subject, however, to the limits imposed upon that jurisdiction by federal law. See PG & E v. Lynch, 216 F.Supp.2d 1016, 2002 U.S. Dist. LEXIS 13895.

Absent preemption, state law poses a formidable obstacle to the execution of several of the central transactions required to carry out the plan. For example, a critical feature of the plan is the transfer of PG & E's retained generation to the new limited liability company, Gen. According to the CPUC, however, such a transfer of generation assets would be illegal under California Public Utilities Code § 377, enacted in January 2001, which prohibits an owner of electric generation facilities from disposing of any such facilities until January 1, 2006. The CPUC also contends that several of the critical transactions proposed in the plan require state regulatory review and approval under state health, safety, welfare and environmental statutes, including the California Environmental Quality Act (CEQA). Under California Public Utilities Code § 851, for example, PG & E would ordinarily be required to obtain state approval to sell, lease or spin off its utility facilities. According to the CPUC, an application for such approval requires an environmental review under CEQA.

As noted in this court's June 24 order, the CPUC objected to PG & E's disclosure statement in the proceedings below. The CPUC asserted that the proposed reorganization (1) impermissibly sought to preempt state and federal law not subject to preemption and (2) sought declaratory and injunctive relief against California in violation of principles of sovereign immunity. In response to the former objection (the latter is not at issue in this appeal), PG & E asserted that all state — and most if not all other non-bankruptcy — laws are expressly preempted by § 1123(a)(5) of the bankruptcy code insofar as they purport to prohibit, veto or nullify transactions necessary to implement the restructuring proposed in the plan. Pursuant to § 1123(a)(5), PG & E asserted that a confirmation order approving its plan and authorizing the transactions contemplated by the plan would:

preempt "otherwise applicable nonbankruptcy law" in the following areas: (1) any approval or authorization of the CPUC or compliance with the California Public Utilities Code or CPUC rules, regulations or decisions otherwise required to transfer public utility property (including authorizations to construct facilities), issue securities and implement the Plan; and (2) the exercise of discretion by any other state or local agency or subdivision to deny the transfer or assignment of any of the Debtor's property, including existing permits or licenses, or the issuance of identical permits and licenses on the same terms and conditions as the Debtor's existing permits and licenses where both the Reorganized Debtor and one or more of ETrans, GTrans and Gen requires such permit or license for their post Effective Date operations.

First Am. Disc. Statement (ER 346).

Notably, PG & E contends that the preemption authorized by § 1123(a) occurs "at the time the Plan is implemented." Id. In other words, PG & E does not contend that its reorganization plan has the effect of preempting application of nonbankruptcy law that would apply to the reorganized PG & E and the new entities after reorganization. Rather, PG & E explicitly concedes that the four companies emerging from bankruptcy will be subject to all applicable state and federal law on a going-forward basis. Moreover, PG & E states that it intends to follow "the established procedures for the transfer of most permits and licenses," as many of these procedures are "ministerial or governed by objective criteria that make it unlikely that the agency or subdivision could act or fail to act in a way that would interfere with consummation of the Plan." Id. PG & E seeks to be free only from nonbankruptcy requirements that threaten the reorganization provided for in the plan. To be sure, PG & E's concern that, absent some form of preemption, state actors such as the CPUC could exercise a veto over PG & E's proposed reorganization is not without basis. Throughout its brief filed in this matter, the CPUC makes clear its displeasure not just with PG & E's attempt to evade state regulatory processes, but with the goal PG & E is pursuing and, in particular, the transfer of regulatory control from the state to FERC over several of PG & E's lines of business. According to the CPUC this is not a desirable outcome, as "federal regulation is not an adequate substitute for state regulation on many practical levels." CPUC Br (Doc. # 78) at 13.

On February 7, 2002, the bankruptcy court issued its memorandum decision regarding preemption and sovereign immunity, rejecting PG & E's "across-the-board, take-no-prisoners" claim that § 1123(a)(5) allows it to "disaggregate with unfettered preemption of any contrary nonbankruptcy law." Bankr. Dec. (ER 863) at 46, 40. In a lengthy decision, the bankruptcy court rejected

the notion that Congress, without a hint in the legislative history in a section of the Bankruptcy Code entitled "Contents of Plan," and using words calling for "adequate means for the Plan's implementation," intended to permit a debtor's plan — confirmed by a bankruptcy judge (not by legislative act, as in most preemption situations) — to obliterate a whole area of jurisdiction and authority traditionally left to state law.

Id. at 22-23.

Although rejecting PG & E's claim that nonbankruptcy laws otherwise applicable to the restructuring transactions proposed in the plan were expressly preempted by the bankruptcy code, the bankruptcy court did not, however, finally determine that state laws operating as impediments to PG & E's proposed reorganization could not be preempted under principles of implied preemption. Indeed, the bankruptcy court expressed its "belie[f] that the Plan could be confirmed if Proponents are able to establish with particularity the requisite elements of implied preemption;" and noted that "[i]f...