PG&E's Regulatory Jailbreak

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.

PG&E replies that any spun-off subsidiary would still be under the watchful eyes of the Federal Energy Regulatory Commission (FERC) for the hydroelectric dams, and the Nuclear Regulatory Commission (NRC) for the nuclear plant.

California government has had its problems with FERC for the last couple years, as politicians blame the commission for not stepping in to moderate high electric prices during last year's blackouts. As far as the dams go, FERC has endless re-licensing hearings on them, but state water quality law, forestry regulation and fish and wildlife are tangential to FERC's interest. The NRC is wholly uninterested in environmental issues, like the billions of gallons a day of water that Diablo Canyon uses for cooling and then releases back into the ocean at a higher temperature, thus harming aquatic life.

Also regarding Diablo, there's the safe burial issue. If Diablo Canyon is transferred to federal control, the fate of its decommissioning fund is questionable. Currently, California -- unlike any other state -- requires ratepayers to contribute to a fund to eventually dismantle and bury the nuke that is separate from the utility. The utility cannot get its hands on the money and use it for any other activity, and it is managed by an appointed trust. If allowed to be transferred to NRC control, the hundreds of millions of dollars in the fund would be transferred out of state oversight. Activists worry that the NRC's less-exacting financial standards could mean Diablo would not be buried safely or that the unregulated company could simply run away with the fund.

"NRC's regulations allow companies to make minimal financial commitments. The NRC does not consider what would be a financial backstop," noted Ed Smeloff, former Sacramento Municipal Utilities District board member, now head of the San Francisco Public Utilities Commission. PG&E's bankruptcy plan would not only transfer dams and the nuke to state-unregulated companies, it would make those receiving companies "limited liability" companies, or LLCs. Smeloff said his experience with transferring nuclear plant licenses to Entergy in the Northeast allowed that company to set up limited liability corporations -- as PG&E proposes -- with little financial resources. "They are shell corporations backed by letters of credit," said Smeloff. In other words, if something goes wrong with the nuke or the dams, the company set up by PG&E would have little wherewithal to do anything about it.

The state plans to appeal the U.S. District Court decision. The California Public Utilities Commission's general counsel, Gary Cohen, said he fears that any company could use bankruptcy court as a "safe haven for companies wanting to violate the law in order to get out of financial difficulty. Any company that wants to evade state regulation or sell off its publicly paid-for assets can simply file for bankruptcy and walk away from its commitments and with the money." The PUC, the organization most involved in PG&E's bankruptcy case, has its own plan to reorganize PG&E that would keep the utility under regulatory control.

Meanwhile, PG&E is gloating. PG&E president and chief executive officer Gordon Smith told investors on Sept. 5 that the ruling means "not having to justify every law that needs to be overturned as we exit the bankruptcy process. Federal bankruptcy law supersedes state law is all that's required."

But bankruptcy scholar Lynn LoPucki thinks the gloating will be short term. Using the example of a bankrupt private company selling its water rights -- water that currently has some downstream benefit to a state-protected fish or wildlife species -- to another company for another use, the sale of assets in bankruptcy itself would cause harm. The Walker decision does not contemplate such an outcome.

"That hypothetical beats Walker. I think Judge Montali is correct and this opinion will be reversed if appealed," surmised UCLA law professor LoPucki. "It's just a mistake,"


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