The chances are good that a major constitutional question regarding whether federal bankruptcy laws trump a California state law restricting the sale of private-sector utility assets will emerge from the comprehensive Pacific Gas and Electric Co. bankruptcy case, in which the utility filed its reorganization plan last Thursday. Not withstanding this potential turn, a San Francisco bankruptcy attorney said Monday if it were not for the state-regulated utility assets involved, the PG&E reorganization plan would be “fairly typical in which certain assets are sold or otherwise financed to pay creditors.”

Although the prospect for sticking with PG&E’s optimistic timetable are unknown, the fact that the giant utility filed a plan with support of the official creditors’ committee in less than six months is a positive sign, said John Hansen, a bankruptcy expert with the San Francisco-based law firm, Nossaman, Guthner, Knox & Elliott.

“However, looking at the plan in the context of a regulated utility, (moving utility assets) raises a lot of red flags that are going to create a lot of problems in getting this plan approved,” said Hansen in an interview with NGI. “It basically takes huge portions of the utility out of the jurisdiction of the California Public Utilities Commission.”

To get the plan to the point of a confirmation hearing with the federal bankruptcy court judge in San Francisco could go beyond PG&E’s goal of the end of next year, said Hansen, adding that the hearing itself could be a long process. In the fine print of the PG&E disclosure statement there is an acknowledgement that it may be sometime in 2003 before a final plan is approved. And then, there could be the constitutional appeals, Hansen said.

The plan, which ultimately must be approved through a vote of the creditors that represents a majority in both monies owed and numbers of creditors voting, will first be subjected to challenges, Hansen said, in the so-called “disclosure statement process.” This is the equivalent of a financial disclosure statement on a proposed security prospectus, only in this case it provides the basis for financial assumptions and facts in the reorganization plan.

In the midst of last winter’s power crisis, the state legislature passed a law prohibiting any private-sector utility from selling generation and transmission assets. The law will be at the heart of the state’s opposition to PG&E’s reorganization plan, which was submitted jointly by the holding company and the utility.

“The plan is very clearly set up so they (utility and its parent) can argue that the federal bankruptcy code preempts state law,” said Hansen, who added that one of the attorneys listed as representing PG&E in its plan is a noted constitutional law scholar, Lawrence Tribe. “I assume they are gearing up for an argument to say it would be unconstitutional for the California to try to limit what a debtor can do as part of a bankruptcy reorganization plan, because the U.S. Constitution gives the Congress the exclusive power to pass bankruptcy laws.”

Hansen said it is not clear-cut that the utility will prevail in this case because the state law is already on the books; it did not pass a law after a reorganization plan was filed to block provisions of that plan. “That’s a little different question, and I don’t know how it might come out,” he said, noting that he is unaware of a similar issue arising in a bankruptcy case where a state law limited the transfer of assets.

“It will be an interesting issue, and I doubt if the bankruptcy court will have the last word on it.” Federal bankruptcy courts are a notch below U.S. district courts, so the first appeal goes to a U.S. district judge, then to a court of appeals and from there, potentially to the U. S. Supreme Court, all of which would likely be a very time-consuming process.

In contrast, bankruptcy courts usually “move along fairly quickly,” Hansen said. (Eighteen months would be fast; four years the extreme, and the average about two years.)

©Copyright 2001 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.