PG&E's Regulatory Jailbreak

By J.A. Savage, AlterNet. Posted September 12, 2002.

Not that there are too many big companies right now with shaky financials or anything -- big energy companies like say, Enron, whose operations entail certain environmental consequences -- but just say there are a few. Say, like Enron, they are seriously considering declaring Chapter 11 bankruptcy reorganization to protect them from their creditors. Now add to that financial grasping and gasping a federal judicial decision that just handed those companies a way to duck California environmental regulations, allowing the economic necessity of paying back creditors to trump the state's environment regulation, damn the societal consequence.

A little-noticed ruling in Pacific Gas & Electric's bankruptcy court case on Aug. 30 could mean that any financially shaky company can try to fix its economic problems without interference from pesky environmental laws, like the California Environmental Quality Act. It is a big victory for PG&E, and corporations in general. It's a sore loss for Californians who support environmental regulation to stave off corporate behavior that plunders and pollutes natural resources.

It started in Courtroom 22 of Federal Bankruptcy Court on Pine Street in San Francisco, just down from the former Pacific Stock Exchange in the Financial District. PG&E's bankruptcy plans include spinning off its vast hydroelectric system cobwebbed throughout northern California, as well as its Diablo Canyon nuclear plant, to limited liability corporations that would not operate under state law, only federal regulation, like the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission.

PG&E brought well-known Harvard law professor Laurence Tribe to Courtroom 22 to argue that paying back PG&E's creditors by allowing the utility to pursue its spinoff plan is supported by federal law and federal law only. Tribe maintained there is no health and safety consideration strong enough to allow California law to interfere with federal bankruptcy law -- in which paying back the creditors is all that matters. "If state and local laws that are said to obstruct this plan ... are preempted, [the company] does so with full authority of Congress," said Tribe.

Calling PG&E's spinoff plans "a regulatory jailbreak," the California Public Utilities Commission retorted in court that the so-called federal "preemption" does not have a precedent. U.S. Department of Justice lawyer, Karl Fingerhood, who represents the Environmental Protection Agency, said that if PG&E were allowed to get around state environmental law, "it would make bankruptcy court a haven for environmental scofflaws."

Indeed, in February, Bankruptcy Court Judge Dennis Montali agreed that state environmental law cannot be overridden so easily by having a corporation simply declare bankruptcy. His decision "rejects outright [PG&E's] across-the-board, take-no prisoners preemption strategy. PG&E's full-scale attack on any state law that interferes with the [spinoff] plan is anything but subtle."

U.S. District Court Judge Vaughn Walker entered the fray and declared Montali wrong. Walker's decision made new federal precedent by siding with PG&E. The utility, or any other corporation declaring bankruptcy, can now make its plans without consideration of local planning laws, state environmental laws, the Coastal Commission and any number of other agencies that would otherwise be involved with a sale or transfer of assets, like a nuclear power plant, that might have social and environmental impact.

"PG&E's interpretation" of bankruptcy law "comports more closely with the purposes of Chapter 11," wrote Walker, adding the precedent language from a 1989 case. "The paramount policy and goal of Chapter 11, to which all other bankruptcy policies are subordinated, is the rehabilitation of the debtor."

Without regulatory preemption, Walker wrote, "State law poses a formidable obstacle to the execution of several of the central transaction required to carry out (PG&E's) plan." And that "state regulators could thwart otherwise adequate means of reorganization."

In other words, all those years of scraping and fighting for local environmental law goes down in flaming defeat when the stock market comes into play.

For instance, the state has argued that the California Environmental Quality Act would apply to a change in ownership of PG&E's dams and adjacent forest lands due to the potential environmental effect of the switch. That would mean that an enormous new Environmental Impact Report would have to be prepared and vetted -- a process that takes years. Another state law that would otherwise apply is one that prevents spinning off power plants until 2006.

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