Federal bankruptcy Judge Dennis Montali has ordered a hearing to set up settlement talks between Pacific Gas & Electric Co. and the California Public Utility Commission in the PG&E utility’s $13 billion bankruptcy case. The judge said further delay in the case will lead to a “staggering expense” for all parties.

“The court is quite aware of the philosophical differences that separate the debtor [PG&E’s utility] and its parent from the CPUC and other non-private parties” that have objected to all or parts of the utility proposal, Judge Montali said in an eight-page order last week. However, he said, “There is little to be lost, and potentially much to be gained” by ordering a judicially supervised settlement conference.

At the request of some of the legal parties in a hearing earlier this month, the judge has ordered the parties to meet with another federal judge today (March 10) to see if settlement talks can get started. The two sides have been battling for nearly two-years over proposed reorganization plans. The closed-door, off-the-record meeting with another assigned judge and legal counsel for various parties is scheduled to take place in Oakland, CA.

The assigned settlement oversight judge, Randall L. Newsome, will determine after the meeting whether to proceed with a settlement conference. “If he makes that determination, he will then establish all procedures for submission of settlement conference statements, participation in further conferences by client representatives, the timing and the location of any such conferences,” Montali said. The settlement judge also will determine what other parties should be included in the talks.

Montali noted he will not participate in the hearings. He will be guided entirely by what the other judge determines. He added that parties and their lawyers should be ready to put in long hours and set aside routine family and business commitments. He did, however, specify which parties and which of their lawyers should attend Monday’s pre-settlement meeting.

The PG&E utility plan would spin off all of the wholesale electricity and natural gas operations into three separate merchant companies, leaving a distribution-only gas/electric utility, and its parent company CEO on an earnings call last Thursday became noticeably upset when financial analysts pressed him about resuming talks with the CPUC about a settlement. The CPUC has adamantly pushed a plan to keep the utility intact and sell some new stock to help pay off creditors.

PG&E has just as consistently argued that its plan is the only way to get the giant combination utility back to investment-grade credit status. However, a recently released preliminary assessment by Standard & Poor’s rating agency gave proposed new PG&E companies a bottom-rung investment grade rating prospectively given a number of conditions are met, one of which was the utility holding company selling up to $700 million in new shares. PG&E then amended its proposed reorganization plan last week, and the judge postponed the ongoing hearing schedule until April to allow more time for discovery for the parties involved.

During this lull, Montali is now calling for settlement talks. Credit Suisse First Boston’s Scott Pearl said in a report Wednesday he is “skeptical that a settlement will occur near term given the distance between the two sides,” but he views the judge’s action as a positive step in the overall process. Ultimately, Pearl thinks there will be a settlement.

“We maintain our belief that a settlement, based upon the economics of the Southern California Edison Co., is the most fair and reasonable solution,” said Pearl, noting that a PG&E-CPUC settlement is not likely to occur before the Edison-CPUC federal court settlement gets a California Supreme Court ruling on a consumer group appeal, and that is now targeted for this summer.

In rebuffing numerous questions about why PG&E was not pushing more for a settlement during last Thursday’s earnings conference call, PG&E CEO Robert Glynn repeatedly said he did not think the CPUC was willing to accept the “company’s reorganization plan structure or financing,” and he adamantly repeated the company’s claim that the regulators’ plan is unfeasible and maybe illegal.

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