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California and the West | THE CALIFORNIA ENERGY CRISIS

PUC Not Ready to Concede Its Rate-Setting Authority to Judge

Energy: PG&E hopes the Bankruptcy Court will take that power, but state panel seeks to retain jurisdiction.


SAN FRANCISCO — California's utility regulators, refusing to relinquish any jurisdiction over Pacific Gas & Electric Co., are jockeying in Bankruptcy Court to maintain their electricity rate setting authority.

The legal maneuvering is so sensitive that lawyers have advised state agencies not to submit claims in federal Bankruptcy Court for money the gigantic Northern California utility owes them until further study is done. The state fears that entering the Chapter 11 case as a creditor might bring it under the jurisdiction of the Bankruptcy Court.

Although the state Public Utilities Commission customarily has authority over what PG&E can charge customers, the bankruptcy judge will call the shots in PG&E's reorganization, the third-largest bankruptcy filing in U.S. history.

The uncertainty centers on what happens when the federal judge's lines of authority intersect with the regulatory commission's powers.

"If you are regulated by a state body, you can't use bankruptcy to throw off the shackles of regulation," said Alan W. Kornberg, a New York lawyer who is representing the PUC in the case.

PG&E is not trying to escape regulation, its lawyers say, but believes the bankruptcy judge should make the calls when the jurisdictions of the PUC and the judge collide.

"The bankruptcy judge will be able to decide where the line has to be drawn," said Christopher J. Warner, a regulatory lawyer for PG&E.

Many lawyers say PG&E filed for bankruptcy April 6 in an effort to use the court to squeeze concessions from the state after unsuccessful negotiations with Gov. Gray Davis. By overcoming the regulatory authority of the state, the bankruptcy judge could create a situation that could "essentially compel a rate increase," said Beatus Morris, a senior assistant attorney general.

The first legal showdown in Bankruptcy Court is set for May 14, when PG&E will ask U.S. Bankruptcy Judge Dennis Montali to block a PUC-ordered accounting change.

PG&E says the accounting change illegally extends a rate freeze and prevents the utility from recovering the full costs of buying power.

The lawsuit is viewed by lawyers in the case as a "test shot" by PG&E to determine whether the court will use its leverage to force a state agency into submission.

PG&E wasted no time in taking on the PUC in court. After filing for bankruptcy on a Friday, a lawyer for the firm marched into court the next Monday with a thick lawsuit to block the PUC's accounting order.

"When you go into bankruptcy, you need to protect the property of the debtor" PG&E's Warner said. "So we felt we had no choice but to go in and say, under bankruptcy law, this is stayed."

Lawyers for the state assert that the commission has sovereign immunity under the 11th Amendment, which says a state may not be sued in federal court by citizens of the state.

Gary Cohen, the PUC's general counsel, said Montali could rule in the state's favor in a "limited way, in which case the issue could come up again."

"I suspect that if we get a ruling in our favor on this motion, it doesn't necessarily mean that PG&E will not try again and again in some other context to argue that [Montali] should exercise jurisdiction over us."

Montali's response to PG&E will be closely watched because it will "give a pretty good indication of what his intentions are," Cohen said.

Lawyers following the case said Montali is in a tough spot because most bankruptcy judges want to maintain as much control over the process as possible.

"If he rules in favor of the PUC, he is sending a message that he is going to take kind of a back seat in some aspects of this case, which is not what PG&E wants," said a lawyer whose firm represents a creditor in the case. "PG&E is counting on the court to bully the state a little."

Several bankruptcy experts said in interviews that the law favors the PUC's position, and some said flatly that the judge is not empowered to raise electricity rates during the case.

"Bankruptcy judges don't have the power to set utility rates," said Harvard law professor Elizabeth Warren, a bankruptcy specialist.

But the judge can approve a final organization that includes large rate increases. The regulatory commission would be under strong pressure to agree to them.

By remaining outside the jurisdiction of the Bankruptcy Court, the utility regulators also would retain their authority over what assets PG&E will be allowed to sell.

The utility has listed several state agencies, including the PUC, as creditors. The agencies have 180 days from the filing of bankruptcy to file a claim for the money owed.

But entering the case as a creditor could be tantamount to waiving the state's assertion of immunity, state lawyers and legal experts in bankruptcy said. At the same time, by not filing claims, the state risks not getting paid millions of dollars.

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