Rolling blackouts of a year ago seem all but
forgotten as the Bankruptcy Court for the Northern District of
California grapples with issues raised by the Chapter 11 plan proposed
by PG&E. On Feb. 7, 2002, in a lengthy Memorandum Decision,
Bankruptcy Judge Dennis Montali rejected the legal basis supporting
the debtor's plan. The court also considered objections to the plan
filed by creditor groups and the California Public Utility Commission
The PUC objected to the plan, claiming that by
seeking preemption of some 37 state laws, PG&E is attempting to
use the Bankruptcy Code to escape state regulation and shift
regulatory control to the Federal Energy Regulatory Commission (FERC).
FERC is arguably less consumer friendly and a more lenient regulatory
authority for PG&E.
Seizing upon the language of 11 U.S.C. §1123(a)
of the Bankruptcy Code, the debtor's plan seeks, among other things,
to employ the bankruptcy reorganization to extricate itself from much
of the oversight of the PUC. PG&E, in a bold interpretation of
bankruptcy law, contends that Chapter 11 grants the debtor express
preemption from a myriad of state laws. Section 1123(a) provides in
part, "Notwithstanding any otherwise applicable non-bankruptcy law,
a plan shall . . . ."
Judge Montali rejected the debtor's theory of
express preemption which would "eviscerate state laws" and
"obliterate whole areas of jurisdiction and authority traditionally
left to state law."
Judge Montali cites the lack of legislative
history regarding the "notwithstanding" clause as support for the
conclusion that §1123(a) is "directive not empowering." Had
Congress considered the language as "revolutionary" as PG&E
contends, a richer Congressional record would have accompanied the
amendment. A wholesale disregard for state law was not the intention
of the 1978 code and 1980 amendment to §1123(a).
In the decision, the court proceeds to balance
the overreaching interpretation of the debtor with evidence of the
intent of Congress to loosen the absolute power of regulators over
public utilities. Interest-ingly, prior to the Bankruptcy Reform Act
of 1978, public utilities were required to obtain the approval of
state regulatory commissions of plans of reorganization.
Congress later considered amending the code to
require approval by regulatory commissions of plans of public
utilities but no amendment was passed. State regulators therefore no
longer have absolute veto power of a plan.
The court recognized that some measure of
preemption of state laws may be required for effective restructuring,
and thus some preemptive intent can reasonably be implied in the code.
Judge Montali insisted, however, that the nature of any preempted law
ought to be economic in nature rather than relating to public safety
or a non-economic concern. Secondly, the law must impede the purposes
and objectives of Congress and the Bankruptcy Code.
Before the court will apply federal preemption,
PG&E must show that the state law prohibition effectively
nullifies the bankruptcy process. Compromise and cooperation will be
necessary to confirm a plan because, clearly, this court will not
allow PG&E or the regulators to monopolize all the power.
Barbara Gordon is a northern California bankruptcy attorney.