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Jul. 24, 2002
PUC Plan Near Death as Montali Denies Fee Payment
SAN FRANCISCO - A federal bankruptcy judge sounded what may be the death knell for the state's alternative plan to lift Pacific Gas and Electric Co. out of bankruptcy Monday by refusing to authorize payment of $8 million in fees to an investment firm willing to raise $7.5 billion to repay creditors.
The state Public Utilities Commission asked Judge Dennis Montali to approve the initial payment of fees to UBS Warburg, a global investment firm. An attorney for the U.S. trustee's office has said those fees could grow to $176 million if Warburg successfully arranges the sale of bonds, notes and stock to raise $7.5 billion for the reorganization.
If the PUC is not able to come up with the money on its own, the plan could die, as Montali himself acknowledged.
Without the PUC plan in play, the only alternative would be the PG&E's own plan to break up the company into three independent companies not subject to state regulation and one remaining retail utility to supply the power to customers. That plan faces a mountain of legal challenges, even if creditors in voting currently under way confirm it.
The PUC would raise money through the sale of stock and bonds to repay the creditors and keep the utility under state regulation.
At the close of a two-hour hearing on the Warburg fees, Montali said, "I think I owe you an answer. This is a very difficult question. I think I am required to deny the motion."
He said, "The way I see it, the payment can only be made after the fact," meaning after PG&E's bankruptcy estate receives some benefit from Warburg's work.
PUC attorney Alan Kornberg said Warburg was offering to put its own wealth on the line by promising it could sell the $7.5 billion in debt on the public market. If it failed to sell the debt, Warburg would put up its own money for the amount of debt left unsold.
"UBS Warburg is committing itself to buy what the market doesn't," said Kornberg, of Paul, Weiss, Rifkind, Wharton & Garrison in New York.
Creditors' committee attorney Robert Moore said PG&E's 20 major creditors supported the payment to Warburg as a prudent expense to keep a competing plan viable.
Montali expressed discomfort with the PUC's failure to tell him in January that it could not pay for the Warburg fees but would ask PG&E to pick up the tab for the competing plan. The PUC's attorneys have argued that the fees should qualify as administrative expense claims.
"There was not one word to let the court know," Montali said. "Frankly, you are asking the PUC's enemy to finance the opposition plan. You should have let me know in January."
It was fair to expect PG&E to pay, retorted Kornberg. "This corporation chose to go into Chapter 11."
"For $8 million, Warburg is committed to buy $7.5 billion in securities. This is the best deal in town and [PG&E] should jump at it," Kornberg said.
PG&E attorney James Lopes strenuously objected to the plan. It would be unprecedented for PG&E to bail out an alternative reorganization plan by paying the fees, he said. He said he doubted this would kill the PUC plan. "They will find some way to persevere," he said.
He complained that the PUC had known for a long time it could not pay the initial fees sought by Warburg but waited until one week after the two competing plans were mailed to creditors for a vote to seek court permission to bill PG&E for the fees.
Montali asked whether PG&E wouldn't be worse off if the PUC plan is killed and the utility's own plan is then found to be illegal. Two years into the case there might still be no reorganization in sight.
Ultimately, though, Montali ruled that to grant fees in advance of showing a benefit to the estate was too much of a stretch for the bankruptcy code.
A Warburg executive and his lawyers left abruptly at the close of the session and refused to comment on the decision.
Pamela Mac Lean
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