California regulators last week interpreted a ruling by the bankruptcy judge in the Pacific Gas and Electric Co. case as affirming their authority to enter into a proposed reorganization agreement with the utility. The judge denied a motion by the utility to toss out the California Public Utilities Commission’s alternative Chapter 11 reorganization plan for the PG&E utility. Hearings continue in a San Francisco federal bankruptcy court on the joint proposal by the CPUC and the official unsecured creditors’ committee.

In a prepared statement following the ruling by Judge Dennis Montali, the CPUC said the judge confirmed that the state regulators have “authority to enter into a reorganization agreement with PG&E” under their alternate plan that calls for keeping the utility intact, rather than spinning off its wholesale electricity and natural gas operations as the utility proposes.

“Judge Montali noted that the commission could validly conclude that the reorganization agreement furthers its regulatory mission, particularly because it is being entered into to provide assurance to the financial markets that the CPUC won’t ‘change the rules of the game,’ and because PG&E’s bankruptcy plan would result in a far greater loss of the commission’s regulatory authority over PG&E,” the regulators’ prepared statement said. The CPUC also acknowledged that the judge specifically said that his dismissal of the utility motion did not mean he was approving, or “confirming,” the CPUC plan.

CPUC chief counsel Gary Cohen called the judge’s determination about the so-called reorganization agreement “enormously important” because one of the key issues raised by rating agencies and investors is “whether the court would make a determination that the agreement is valid and binding on the CPUC. Judge Montali has now made that determination.”

The state officials are also putting a positive spin on recent credit assessments of their alternate plan by two of the three major Wall Street credit-rating agencies. Nevertheless, PG&E’s utility has interpreted last week’s assessment by Standard & Poor’s (S&P) as supportive of its contention that the joint CPUC-unsecured creditors’ committee proposal is infeasible and perhaps illegal.

The CPUC’s Cohen cited the rating agency assessments and a “highly confident” letter from the commission’s financial consultant, UBS/Warburg LLC, as “tangible evidence” that the capital markets support the CPUC-creditors’ plan.

In direct contrast to the PG&E interpretation, Cohen said the S&P and Fitch Ratings’ assessments given to the bankruptcy court are “significant indications that the joint plan is feasible and that it should be confirmed. The plan represents the quickest way by far for PG&E creditors to be repaid, and for the company emerge from bankruptcy.”

Ratings by the agencies have not been given, but in their “assessments” they say the bulk of the proposed debt could be rated around the lower edges of investment grade. UBS/Warburg, as the placement agent for the CPUC’s joint plan, said that if the bulk of the proposed debt gets an investment-grade rating, it will sell, and the other proposed $1.9 billion of unsecured debt and preferred stock in the utility could be sold even without an investment-grade rating.

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