A series of decisions on Pacific Gas & Electric?s plans for post-bankruptcy reorganization this week filled the utility?s sails with the hope that its negotiated settlement with California Public Utilities Commission staff would carry as-is, but a federal court decision knocked the wind right out of it. The Ninth Circuit Court of Appeals ruled November 19 that PG&E?s bankruptcy reorganization plan cannot preempt state regulation. It followed on the heels of alternative draft rulings issued by the CPUC on the negotiated settlement. One CPUC proposal would reject major provisions of the PG&E-CPUC settlement and rewrite parts that trouble regulators. The second would adopt the deal as written, and a third would adopt it with one major revision. The court discovered that PG&E was relying on a part of the bankruptcy code that did not apply because it existed before the code was rewritten in 1984. When the relevant preemption language was eliminated in the 1984 revision, the Ninth Circuit said that it ?cannot be construed as evidence of a broad Congressional intent to preempt the state regulatory laws, even with respect to public utilities.? The CPUC was arguably given more room this week by the Ninth Circuit to cut and paste the pending settlement. The first alternative from CPUC administrative law judge Robert Barnett proposes to maintain the commission?s traditional role in cost-of-service ratemaking and ratepayer protections. But it risked losing regulatory control over PG&E, the largest utility in the nation. Until the Ninth Circuit?s ruling, the threat of PG&E rejecting substantial changes to the settlement and heading back to federal bankruptcy court was given more weight. The pending reorganization in the bankruptcy court attempts to knock out state regulatory control over most of the utility. The bankruptcy court ordered PG&E and the CPUC to try to hammer out a deal after more than two years of being entangled in a very costly court battle. While Barnett would not comment on the impact of the appeals court?s ruling rejecting PG&E?s claims that federal bankruptcy law trumped state law, it appears the risk he took by proposing changes and deleting parts of the settlement may have paid off. CPUC member Loretta Lynch gave much weight to the circuit court?s decision. ?We should go back to the drawing board to craft a plan that produces a financially healthy utility without unduly enriching utility shareholders and PG&E management,? she said. PG&E begs to differ. ?We do not view the ruling by a three-judge panel as having an impact on our plan to emerge from Chapter 11,? it stated. Facing the commission with its self-imposed December 18 deadline for a decision are three major questions: Should the CPUC risk PG&E?s rejection of its decision, sending it back into federal bankruptcy court, where the rules do not favor ratepayers? Should the commission bind itself to promoting PG&E?s financial health and its investors? income for nine years, even if the utility makes questionable decisions? Or should the commission pick one choice battle with the utility and alter the negotiated reorganization agreement in the hopes the utility agrees? The proposed decision by Barnett would reject or rewrite many of the settlement?s provisions, avoiding precedent-setting changes to the traditional role of regulation. ?We reject the [settlement], not because we have ?delved deeply? into its details, but because its defects are patent, obvious on the first reading,? wrote Barnett. His position risks the utility?s outright rejection, thus bringing the reorganization plan pending in federal court that would remove PG&E from state regulation back into major play. Commissioner Michael Peevey?s alternate draft decision would approve the deal as proposed. ?We will approve the [settlement] as we find that the settlement is fair, just and reasonable and in the public interest,? he said. A second alternate, also by Peevey, would make some adjustments to language. That alternate states, ?We will approve the [settlement] with certain modifications we believe are necessary in order to make the settlement fair.? The major differences among the three proposals are as follows: <b>Commitment:<\/b> PG&E has required that the commission?s decision bind future commissions for the nine-year duration of the settlement. Barnett?s decision says such a binding decision ?has no merit.? He adds, ?The commission cannot be powerless to protect PG&E?s ratepayers from unjust and unreasonable rates or practices during the nine-year term.? Peevey?s first alternate decision, accepting the agreement, and his second, modifying it, find that this commission can indeed bind future commissions for nine years and that it can continue to protect ratepayers from unjust practices. However, ?We must review the [settlement] to ascertain whether the commission would be exercising or surrendering its police powers by entering into the settlement,? he adds. <b>Ratings agencies:<\/b> PG&E maintains that the agreement must result in investment-grade ratings upon emergence from bankruptcy. Barnett found that commitments by ratings agencies are not necessary. ?Why this commission, or the bankruptcy court, should put approval by a rating agency as the sine qua non of PG&E emergence from bankruptcy escapes us.? Both of Peevey?s alternates support the commission?s facilitation of investment-grade ratings as good for California consumers. ?However, we do not interpret [it] to require the commission to guarantee such a credit rating when there are other causes, besides the commission?s actions (e.g. imprudent conduct resulting in a disallowance), which are responsible for any threats to PG&E?s investment-grade credit rating,? Peevey wrote in the alternate supporting the settlement as is. <b>Dividends:<\/b> PG&E suspended dividends for the first time when it declared bankruptcy, and the company seeks to reinstate them. Barnett interpreted that part of the deal as requiring the commission to set rates to enable dividends. ?For example,? he wrote, ?even if imprudent conduct, reckless conduct, or criminal conduct would otherwise limit PG&E?s ability to collect revenues necessary for dividends, the commission would be powerless to restrict PG&E?s dividend practices.? His decision would delete that provision. Peevey?s first alternate interprets the settlement as permitting the commission to impose disallowances for poor conduct. The settlement ?cannot possibly be interpreted to prohibit the commission from taking any action that might reduce or even eliminate the availability of funds for dividend payments,? Peevey wrote. Peevey?s second alternate would delete the part of the settlement on dividends, ?which we find is unreasonable and not in the public interest.? <b>Dedicated rate component:<\/b> The Utility Reform Network proposed issuing ratepayer bonds instead of a phantom regulatory asset to raise $2 billion for PG&E. Barnett said that since legislation would be required, the commission could not accept such a provision. Peevey?s alternates agree.