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THE GEE STRATEGIES GROUP Robert W. Gee President

ANOTHER “SURVIVOR” GAME: THE PUC’S ROLE IN A UTILITY BANKRUPTCY. THE GEE STRATEGIES GROUP Robert W. Gee President. NARUC SUMMER COMMITTEE MEETINGS Seattle, Washington July 17, 2001. THREE OBJECTIVES . Abbreviated Bankruptcy 101 Lesson Texas Experience Relate to Present Day.

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THE GEE STRATEGIES GROUP Robert W. Gee President

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  1. ANOTHER “SURVIVOR” GAME: THE PUC’S ROLE IN A UTILITY BANKRUPTCY THE GEE STRATEGIES GROUP Robert W. Gee President NARUC SUMMER COMMITTEE MEETINGS Seattle, Washington July 17, 2001

  2. THREE OBJECTIVES • Abbreviated Bankruptcy 101 Lesson • Texas Experience • Relate to Present Day THE GEE STRATEGIES GROUP

  3. The El Paso Electric Bankruptcy • Rates inadequate to meet escalating nuclear plant cost obligations • Filed January 1992 • Concluded Fall 1995 • Stand-alone Plan /Failed merger attempt • Rates: increased $25 million • Cost: $100 million in fees • Gee’s life shortened by 10 years THE GEE STRATEGIES GROUP

  4. Bankruptcy Court versus PUC Proceeding: Two Different Ballgames • Different Legal Standards and Policy Objectives • Sharply contrasting “ cultures” • Greater number of participants • Much higher level of public attention THE GEE STRATEGIES GROUP

  5. Bankruptcy Law and Policy Objectives • Chapter 11 bankruptcy: maximizes value of debtor’s estate to satisfy creditors’ claims • Rate increase: intended to boost estate value with other measures • Law: empowers Court to approve restructurings, but requires PUC to approve rate increase if part of reorganization plan or rate change expressly conditioned upon such approval THE GEE STRATEGIES GROUP

  6. State Utility Law and Policy Objectives • Law: May require PUC to preapprove utility consolidations and mergers • Rates: just and reasonable • Law mandates balancing utility’s (i.e., shareholders and bondholders) financial interests against that of ratepayers THE GEE STRATEGIES GROUP

  7. Preexisting relationships Want to preserve relationship beyond current case The “Culture” Clash Regulatory Counsel Bankruptcy Counsel • No prior relationships • One-shot deal/Play for keeps • Commissioner who? THE GEE STRATEGIES GROUP

  8. The Bankruptcy Proceeding: Who Participates? • More than in utility case • Creditors, Shareholder committees • Potential suitors (friendly or unfriendly) wanting to acquire bankrupt estate • Public Counsel, Cities, PUC (New Hampshire)or PUC Staff (Texas) • CA Bankruptcy Court: Ratepayers’ Committee rejected as party THE GEE STRATEGIES GROUP

  9. PUC-Bankruptcy Court Jurisdictional Question One • Q : Can the PUC continue setting rates during the bankruptcy proceeding? • A: Yes. If “normal ratemaking activities”, not subject to “automatic stay” under bankruptcy law (prevents commencement or continuation of actions against, enforcement of claims against, or actions to obtain property of debtor utility). • CA Bankruptcy judge: PG & E’s petition to enjoin PUC’s accounting order denied, citing “police and regulatory” exception to automatic stay. THE GEE STRATEGIES GROUP

  10. PUC-Bankruptcy Court Jurisdictional Question Two • Q: Who establishes rate path at the confirmation of reorganization plan? • A: PUC, if rate increase part of reorganization plan, but answer more complicated if restructuring (e.g., merger or consolidation) involved. THE GEE STRATEGIES GROUP

  11. The Bid for El Paso • El Paso accepted acquisition bid from Central & Southwest • Rejected acquisition bid by Southwestern Public Service • PUC Staff & Public Counsel agreed with SPS regarding acceptable rate path but not able to do same with CSW THE GEE STRATEGIES GROUP

  12. The “Preemption” Issue • Texas Law: PUC not required to preapprove mergers • But PUC required to determine whether CSW merger consistent with public interest and disallow rate affect if not (valuation issues affecting rate base) • Question: Would Bankruptcy Court’s merger approval preempt need for PUC’s “public interest” finding ? THE GEE STRATEGIES GROUP

  13. The Bankruptcy Court Decision • Approved El Paso’s Reorg Plan with CSW merger • Conditioned rate changes in plan or merger agreement on approvals by PUC • Found “preemption” issue not ripe w/ PUC Staff amendments • El Paso sought to enjoin PUC from addressing certain reorg issues, claiming Staff previously litigated same issues for PUC (doctrine of collateral estoppel) • Court: deferred resolution, but found Staff and PUC to be same party to determine whether relitigation being attempted • Bullet dodged when merger fell apart THE GEE STRATEGIES GROUP

  14. Lesson from Texas PUC Staff’s Intervention Original Intent Reality • A Resource to Court / Parties • To relate potentially acceptable rate paths PUC would accept • To preserve Commission independence • Lesson: no good deed goes unpunished • Despite repeated explanations, Court rejected distinction between PUC Staff and Commission THE GEE STRATEGIES GROUP

  15. Implications for PG &E Bankruptcy • If Bankruptcy court approves PG&E reorganization plan with restructuring of assets, will CPUC’s authority to establish rates be affected? • Can Court factor consumer/public policy interests absent Staff or PUC party intervention? Should it? • Are there alternative means of public policy input without intervention? THE GEE STRATEGIES GROUP

  16. Permits public policy input in shaping court’s order confirming plan Forestalls other parties from framing jurisdictional conflict in court’s order Risks being pulled directly into jurisdictional battle Risks blurring Staff/Commission distinction Collateral estoppel exposure A Tough Call: Should a PUC Get Further Involved? PROS CONS THE GEE STRATEGIES GROUP

  17. El Paso reorg plan: confirmed with fully integrated utility (TD&G) under COS No wholesale or retail power competition 10-year rate moratorium approved in plan PG&E: generation unbundled & “ring fencing” under attack Wholesale power priced at market Competition policies in flux FERC RTO decisions pending California  Texas THE GEE STRATEGIES GROUP

  18. Bankruptcy can bring chaos “under control” Regulators will eventually have a say in determining outcome Management is crying wolf when bankruptcy threatened Situation becomes highly unpredictable & more chaotic Utility Bankruptcy:Myth versus Reality • Utility will use bankruptcy process to gain leverage over regulators • Management will likely be ousted & utility will lose public goodwill THE GEE STRATEGIES GROUP

  19. Epilogue:Lessons Learned • To PUC’s: Carefully weigh manner of participation (by Staff, Commission, or otherwise) & avoid perception of playing “favorites” • To utilities: Manage problem of significant goodwill loss • To all: Brace for “culture” clash & prepare for the battle over jurisdiction THE GEE STRATEGIES GROUP

  20. For More Information Contact:The Gee Strategies GroupRobert W. GeePresident1954 N. Cleveland St.Arlington, VA 22201(703) 465-9181 (voice and fax)(703) 593-0116 (mobile)Email: racbud @ ix.netcom.com THE GEE STRATEGIES GROUP

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