I.

PG&E'S DISCLOSURE STATEMENT
CONTAINS INADEQUATE INFORMATION

Despite its length, PG&E's Disclosure Statement is riddled with inadequacies. Meaningful and accurate disclosure is at the heart of the reorganization process. Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 417 (3d Cir. 1988), cert. denied, 488 U.S. 967 (1988); H & L Dev., Inc. v. Arvida/JMB Partners (In re H & L Dev., Inc.), 178 B.R. 71, 74 (Bankr. E.D. Pa. 1994). Effective disclosure requires the dissemination of "adequate information," Knupfer v. Wolfberg (In re Wolfberg), 255 B.R. 879, 883 (B.A.P. 9^th Cir. 2000), defined under the Bankruptcy Code to include:

information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan . . . .

11 U.S.C. § 1125(a)(1).

What constitutes adequate information varies from case to case. Texas Extrusion Corp. v. Lockheed Corp. (In re Texas Extrusion Corp.), 844 F.2d 1142, 1157 (5th Cir. 1988), cert. denied, 488 U.S. 926 (1988); In re Diversified Investors Fund XVII, 91 B.R. 559, 560 (Bankr. C.D. Cal. 1988); In re Reilly, 71 B.R. 132, 134-35 (Bankr. D. Mont. 1987). As a general rule, however, "[t]he [plan] proponent should be biased towards more disclosure than less." Official Comm. of Unsecured Creditors v. Michelson (In re Michelson), 141 B.R. 715, 720 (Bankr. E.D. Cal. 1992). In that vein, courts have established certain minimum disclosure requirements - information that must be contained in every disclosure statement - including the following:

(a) the events leading to the filing of the bankruptcy petition;

(b) a summary of the proposed plan of reorganization;

(c) a description of the available assets and their values;

(d) the condition and performance of the debtor while in chapter 11;

(e) information regarding claims against the estate;

(f) a liquidation analysis setting forth the estimated return that creditors would receive under chapter 7;

(g) the accounting and valuation methods used to produce the financial information in the disclosure statement;

(h) the collectability of any accounts receivable;

(i) any financial information, valuations or pro forma projections that would be relevant to determinations of whether to accept or reject the plan;

(j) information relevant to the risks being taken by the creditors and interest holders;

(k) the actual or projected value that can be obtained from avoidable transfers;

(l) the existence, likelihood and possible success of nonbankruptcy litigation;

(m) the debtor's relationship with its affiliates;

(n) the future management of the debtor;

(o) the source(s) of information stated in the disclosure statement;

(p) the scheduled claims;

(q) the estimated administrative expenses, including attorneys' and accountants' fees;

(r) the debtor's tax attributes; and

(s) the anticipated future of the company.

See, e.g., In re Dakota Rail, Inc., 104 B.R. 138, 142 (Bankr. D. Minn. 1989); In re Microwave Prod. of Am., Inc., 100 B.R. 376, 378 (Bankr. W.D. Tenn. 1989); Diversified Investors Fund XVII, 91 B.R. at 560; Reilly, 71 B.R. at 134; In re Jeppson, 66 B.R. 269, 292 (Bankr. D. Utah 1986).

In this case, PG&E's Second Amended Disclosure Statement clearly fails to satisfy at least items (c), (g), (j), (l), (m) (n), (o) and (q) of the foregoing list. PG&E's Disclosure Statement is deficient in numerous other respects as well, as described below.

A. PG&E'S DESCRIPTION OF THE FEBRUARY 7 DECISION IS
MISLEADING, INACCURATE AND MATERIALLY INCORRECT

(i) The Second Amended Disclosure Statement
Inaccurately Describes the February 7 Decision

In its description of the February 7 Decision, PG&E tries to minimize the set-back that decision represented to its plan of disaggregation. Although some spin by PG&E may be acceptable, PG&E's description of the February 7 Decision and the factual and legal requirements PG&E must meet in order to see its plan confirmed are materially misleading. Thus PG&E gives creditors the erroneous impression that the standards for implied preemption and waivers of sovereign immunity are easier to meet than the February 7 Decision suggests.

On a more fundamental note, PG&E does not accurately describe the test for implied preemption set forth in the Court's February 7 Decision and therefore misleads creditors and parties in interest in assessing the high hurdles its plan faces. At a minimum, PG&E needs to set forth its burden of proving that the application of numerous state laws and Commission decisions, rulings and orders "are economic in nature rather than directed at protecting public safety or other non-economic concerns, and that those particular laws stand as an obstacle to the accomplishment and execution of the purposes and objectives of Congress and the Bankruptcy Code." Mem. Dec. at 40-41. Moreover, PG&E should also disclose the Court's express ruling that in applying the implied preemption test in the context of a public utility, "the Court will start with the assumption that the historic police powers of the States were not to be superseded by the [f]ederal [a]ct unless that was the clear and manifest intent of Congress." Id. at 16. Finally, PG&E should disclose that its own public statements concede that it may not be able to meet the implied preemption test. See, e.g., PG&E's [Proposed] Final Order and Judgment re Express Preemption, dated February 21, 2002 at ¶ 2 ("Proponents may be unable to meet the evidentiary burden this Court has held Proponents must meet to justify implied preemption of any law or regulation"); Declaration of James L. Lopes in Support of Request for Entry of Rule 54(b) Judgment or, in the Alternative, Final Order at ¶ 2 ("The standard this Court has held PG&E must meet at confirmation to demonstrate implied preemption is different and more stringent than the standard PG&E would have had to meet if the Court had ruled in PG&E's favor on express preemption").

In addition to minimizing the burdens its plan faces, PG&E's selective quotations from the February 7 Decision on page 96, lines 2-8, need correction to place them in their proper context.⁴ Thus, at page 96, line 5, PG&E should insert the following quote from the February 7 Decision:

The Court believes, however, that for Proponents to preempt state law barring disaggregation, they will need to rely on more than just the general policy of Chapter 11 favoring reorganizations. They must show that enforcing such state law would be an `obstacle to the accomplishment and execution of the full purposes of the bankruptcy laws.'

Mem Dec. at 32 (citations omitted).

This change is necessary to provide creditors with a fair understanding of the February 7 Decision.

At lines 5-8 on page 96, PG&E ignores the introductory language to its quotation from the February 7 Decision. This omission could reasonably be construed to give the false impression that the standards for preemption are more relaxed than the ones set by the Court. Thus, the sentence starting at line 5 should read: "Although the court cannot agree that Section 1123(a)(5) is an "empowering" statute that explicitly preempts or overrides all contrary nonbankruptcy law, the court agrees that restructuring generally is a proper purpose of chapter 11 and that the Bankruptcy Code would seem to indicate at least some preemptive intent in favor of restructuring, which would preempt a state regulator's absolute veto power of bankruptcy restructuring." D.S. at 96 quoting Mem. Dec. at 30 (added language in italics).

(ii) In its Description of the February 7 Decision, PG&E Materially Mischaracterizes the Nature of Sovereign Immunity by Suggesting that such a Grant is a Discretionary Act of the Bankruptcy Court

On pages 96 and 97, PG&E purports to describe its ability to circumvent or otherwise avoid this Court's holding that any attempt on the part of the Proponents "to attempt to obtain declaratory or injunctive relief through the Plan confirmation process" implicates the Eleventh Amendment and related principles of sovereign immunity. In doing so, PG&E relates that "[a]lthough the Bankruptcy Court indicated its willingness to apply the sovereign immunity defense, it also indicated an equal willingness to enjoin actual or threatened violations by the State or its agencies of a confirmation order . . ." D.S. at 96, lines 24-26 (emphasis added).

Courts never "apply" sovereign immunity defenses. Rather, sovereign immunity is a bedrock principle of American law that antedates the Constitution. States (or their agencies) possess sovereign immunity as an inherent right subject only to express waiver or certain limited exceptions not relevant here. Accordingly, PG&E must amend its misconstruction of the Court's sovereign immunity holding in its Second Amended Disclosure Statement.

Finally, PG&E's summary of its Statement of Intent on page 99, lines 11-13, is inaccurate and deceptive in its affirmative statement that even if the Bankruptcy Court determines that the Commission and the State have not waived their sovereign immunity, the Court will still be able enforce the Confirmation Order. PG&E appears to reiterate this erroneous view on pages 193, lines 3-8 and 241, lines 2-5.⁵ These statements, however, rely on an ambiguity between the term "confirmation order" and "Confirmation Order" to manufacture an ex parte Young exception where none exists. In other words, PG&E deliberately conflates the Court's general discussion of the enforceability of a confirmation order in the February 7 Decision⁶ with the defined term "Confirmation Order" in the Plan and Disclosure Statement. The latter term, however, includes the declaratory and injunctive relief already prohibited by the February 7 Decision on sovereign immunity grounds. Accordingly, PG&E should disclose this distinction or replace "Confirmation Order" with "confirmation order" in the locations identified herein.

B. THE SECOND AMENDED DISCLOSURE STATEMENT IS RIFE WITH INACCURACIES, PARTIAL TRUTHS AND MATERIAL OMISSIONS IN ITS DESCRIPTION OF RELEVANT EVENTS BOTH BEFORE AND AFTER COMMENCEMENT OF THIS CHAPTER 11 CASE.

(i) The Second Amended Disclosure Statement Should be Amended to State Expressly that the Commission Disputes a Material Portion of PG&E's Description of the Events and "Facts" Surrounding PG&E's Chapter 11 Case

The Commission has insisted throughout the disclosure statement process that PG&E's descriptions of the events and circumstances leading to its chapter 11 filing lack any semblance of objectivity and constitute a diatribe against the Commission more suited to an adversary pleading than a disclosure statement. Accordingly, PG&E should, at a minimum, amend page 43, line 28 of the Second Amended Disclosure Statement to say "Some parties, including the CPUC, dispute a material portion of the Debtor's description of such events and facts." (added language in italics).

(ii) While PG&E may be Technically Correct in Noting that the Commission has Never Acted on its Request for Market Valuation of its Assets, such Valuations are no Longer Needed or Appropriate Under AB 6X

On page 73, lines 20-24, PG&E accuses the Commission of not acting on its request to market value its assets. While the Commission may have never formally denied PG&E's request, President Lynch, in an Assigned Commissioner's Ruling (the "ACR"), has stated she "intend[s] to recommend to my colleagues that the requirement to value generation-assets subject to valuation by December 31, 2001 has been superseded by AB 6X." Assigned Commissioner's Ruling Regarding Market Valuation, dated Dec. 21, 2001 (A.00-11-038, et al.) at 3. The ACR further ruled that PG&E and other parties shall file comments in respect of this recommendation for the Commission's review. Accordingly, PG&E should revise its Second Amended Disclosure Statement to reflect this fact.

(iii) PG&E Must Revise its Description of the Commission's January 9, 2002 Decision Regarding the First Priority Condition Because it is Inaccurate and Incomplete

On page 77, line 22, the sentence describing the Commission's approval of PG&E's holding company structure should be modified to say: "The 1996 CPUC approval authorizing the Debtor to form a holding company was granted subject to various financial conditions designed to maintain ratepayer indifference and protect the public interest." (additions in italics). Not only does the Commission use this language when referencing the conditions to approval, see, e.g., CPUC Dec. No. 02-01-037, dated January 9, 2002 at 5, it reinforces the fact that PG&E is emeshed in a web of regulations designed principally with the public welfare and not parochial economic interests in mind.

(iv) The Second Amended Disclosure Statement Fundamentally Mischaracterizes the Commission's Objection to PG&E's Motion to Extend Exclusivity

In order to bolster its argument asserting that the Commission has waived its sovereign immunity in the chapter 11 case, PG&E claims the Commission has asked "the Bankruptcy Court for affirmative relief in the form of the termination of [PG&E's] exclusivity period." D.S. at 189. However, it was PG&E who requested "affirmative relief" when it moved this Court to extend its exclusivity. Accordingly, this section needs to be amended to state that the Commission merely objected to PG&E's own motion, an act more defensive in character.

(v) PG&E Misstates the Bankruptcy Court's Direction to the Commission and Others to File a Brief in Respect of the Appealability or Non-Appealability of the February 7 Decision

At a hearing held on February 27, 2002, the Bankruptcy Court granted the Commission (and others) the right to file a brief contesting PG&E's position that the Court's holding in respect of express preemption is a final judgment for purposes of appeal. On lines 99-100 on page 99 of the Second Amended Disclosure Statement, PG&E states that the Commission will argue its "position that the February 7 Decision is a non-appealable interlocutory decision." D.S. at 99. A more accurate description would note that while the Commission believes the express preemption holding is interlocutory in nature, nothing prevents PG&E from seeking leave to appeal this ruling. Moreover, PG&E should note that the Commission and the City and County of San Francisco filed their joint Memorandum of the California Public Utilities Commission and the City and County of San Francisco in Opposition to Debtor's Requests for (1) Entry of Judgment Under Rule 54(b), Fed. R. Civ. P., and Bankruptcy Rules 7054 and 9014, Respecting the Court's Ruling on Express Preemption, and (2) Entry of Order for Interlocutory Appeal on March 17, 2002. Accordingly, line 20 should be changed to say "the February 7 Decision is not appealable as of right and may only be appealed if leave is granted by the District Court or the B.A.P." (suggested language in italics).

C. THE SECOND AMENDED DISCLOSURE STATEMENT INSUFFICIENTLY DESCRIBES PG&E'S SECOND AMENDED PLAN OF REORGANIZATION.

(i) The Second Amended Disclosure Statement Does not Provide the Requisite Specificity in Detailing how the Reorganized Debtor Will be Prohibited from (a) Assuming the Net Open Position (the "NOP") and (b) Accepting an Assignment of the DWR Contracts. In addition, PG&E does not Disclose why the Commission's Affiliate Transaction Rules will not Apply to the Separation Agreements

As a public utility with a statutory duty to serve its customers, PG&E must service the NOP. In its First Amended Disclosure Statement and Plan, PG&E sought a declarative ruling from this Court that as a condition precedent to the effectiveness of its Plan, the Reorganized Debtor be prohibited from assuming the NOP. The February 7 Decision ruled that absent a waiver of sovereign immunity by the Commission and/or the State, such declaratory relief was unavailable. Despite this ruling, on page 141, lines 13-17, PG&E states "The Reorganized Debtor will be prohibited from assuming the [NOP] of its electric customers. . ." PG&E, however, does not provide any explanation for this assertion. Presumably, it premises its contention on a theory of implied preemption. If this is so, PG&E must disclose the laws it seeks to preempt and the legal authority for preemption. If PG&E does not base its position on the NOP on the basis of preemption, its Plan is proposed in violation of state law and unconfirmable as a matter of law pursuant to Section 1129(a)(3) of the Bankruptcy Code.

Similarly, on page 53, lines 24-26, PG&E claims that it will be prohibited from accepting, indirectly or directly, an assignment of the DWR Contracts. Therefore, it must again disclose any laws it seeks to preempt, or explain why its Plan does not violate Section 1129(a)(3) of the Bankruptcy Code. Finally, PG&E asserts that the Commission's affiliate transaction rules will not apply to any of the agreements to be entered into by Gen, ETrans and GTrans governing shared administrative and general services. In light of the above-discussion, PG&E also must disclose the authority for this contention.

(ii) In the Guise of Adequate Disclosure, the Valuation Analyses Provided by PG&E in the Second Amended Disclosure Statement is Confusing and Ultimately Unintelligible

Throughout the entire Disclosure Statement and Plan process the Commission and numerous other creditors and parties in interest have made a simple request of PG&E to (a) disclose the market values of the assets it seeks to transfer to each of ETrans, GTrans and Gen (and their respective subsidiaries and affiliates) and (b) the precise consideration to be received by the Reorganized Debtor in exchange therefor. The reasons for these related requests are basic and straight-forward: a comparison of the market values and the consideration to be paid for such assets is necessary so that PG&E's creditors will be able to make informed decisions about whether the contemplated transfers are fair and reasonable or, alternatively, whether they reflect sweetheart deals between PG&E and its Parent.

In "response" to these basic concerns, the Second Amended Disclosure Statement contains six pages of nearly unintelligible regulatory accounting jargon that still leaves unanswered the fundamental question of what consideration the Reorganized Debtor is to receive for its assets. At the most basic level, PG&E continues to duck the question of which entity gets what assets and at what price. The only clear signal that emerges through the fog is PG&E's continued reluctance to provide accurate and intelligible figures. For example, PG&E claims a $2 billion difference in debt carrying capacity between the status quo value of the Gen assets and their value under a disaggregation plan. However, the status quo estimate uses a book value estimate of $1.217 billion while the disaggregation plan relies on a market value estimate of the very same assets of $5.284 billion to support PG&E's claim. In essence, PG&E can only explain the difference in valuation based on the assumptions used, not on any objective criteria. Equally important, PG&E does not disclose what entity verified or accepted its mark-up of assets based on FERC ratemaking standards. At a minimum, PG&E should disclose its basis for relying on these valuations.

Other aspects of the valuations contained in the Second Amended Disclosure Statement are equally confusing. For example, let us assume PG&E is correct in assigning a value of $1.217 billion to the Gen assets under a status quo plan and $5.284 billion under a disaggregation plan. From these sums, one can assume that somehow the status quo impairs the Gen assets by $4.067 billion. On page 151, line 10, however, PG&E claims that AB 6X has caused the Gen assets to suffer at least $4.3 billion in damages due to that Bill's repeal of the provisions of AB 1890 that provided that the generation facilities of investor-owned utilities would be exempt from Commission regulation no later than December 31, 2001. Given that PG&E's own valuations on page 110 only reveal an impairment of approximately $4 billion, where does the approximately $300 million difference come from?

Accordingly, PG&E should substantially revise its valuation section to provide clear and intelligible valuation for each asset transferred and the consideration to be received. Unless and until PG&E provides this critical information, the Second Amended Disclosure Statement should not be approved.

(iii) The Disclosure Statement's Description of the Role the Reorganized Debtor will Play in the Procurement and Distribution of Gas to its Core Customers Needs Clarification

The Second Amended Disclosure Statement asserts that the Reorganized Debtor "will continue to conduct the local electric and gas distribution operations and associated customer services as of and after the Effective Date." D.S. at 101. Almost immediately following this statement, however, PG&E has struck out a provision requiring the Reorganized Debtor to continue to procure natural gas on behalf of its core customers Id. For the Reorganized Debtor to serve the gas needs of its core customers, it must first procure that gas. Accordingly, PG&E's Second Amended Disclosure Statement must confirm whether the Reorganized Debtor will procure gas on behalf of its core customers, and, if not, explain why this is so and how core customers will be assured of a regular and reliable supply of gas.

(iv) CEQA

On pages 180 n. 45 and 127, PG&E claims that it if succeeds on its implied preemption argument, it will be able to transfer its generation assets to Gen and its subsidiaries and affiliates in contravention of Section 851 of the Public Utilities Code. Moreover, PG&E claims that such transfers will be immune from Commission review pursuant to the California Environmental Quality Act ("CEQA") because the Commission's authority to conduct a CEQA review of a discretionary sale of assets is derivative of Section 851. In other words, PG&E's Plan calls for the implied preemption of CEQA through the backdoor of Section 851. If PG&E wants to avoid application of CEQA to the transactions contemplated in its plan, it should follow the Court's directive to identify CEQA as a statute to be impliedly preempted and explain in sufficient detail why CEQA is impliedly preempted by the Bankruptcy Code.

On page 174, PG&E discusses what non-Commission "health and safety" regulations will continue to govern the operations of the Reorganized Debtor, ETrans, GTrans and Gen. What PG&E does not mention, however, is whether CEQA will apply to the these entities. If CEQA will apply, PG&E should say so. Conversely, if CEQA will be inapplicable, PG&E should state the reasons for that conclusion.

(v) PG&E's Disclosures of the Federal Regulatory Approvals Necessary for its Plan are Incomplete and Inaccurate

On pages 117, 120, 126 and 132, PG&E describes the actions it will take with FERC as a prerequisite to the effectiveness of its Plan. In disclosing that certain parties, including the Commission, have filed motions for dismissal, hearing or affirmative relief at the FERC, PG&E inaccurately notes that these motions demonstrate that no cause has been shown for dismissal, hearing or other similar relief. This, of course, is merely PG&E's opinion and not that of the FERC. Accordingly, PG&E should insert the phrase "in the Debtor's belief" immediately after the phrase "demonstrating that" on pages 114, 120, 126 and 132.

D. THE AMENDMENTS PROPOSED BY PG&E TO MEET THE REQUIREMENTS OF THE COURT IN THE FEBRUARY 7 ORDER ARE INADEQUATE AND RIDDLED WITH INACCURACIES.

PG&E has substantially rewritten the section entitled Regulatory Impact of the Plan to comply ostensibly with the February 7 Decision. However, PG&E materially misstates the test set forth by this Court for establishing preemption. In addition, PG&E takes an unjustifiably narrow view of those sections of the Public Utilities Code it seeks to preempt, characterizing them as almost exclusively economic in nature in a cramped and materially misleading interpretation. The Commission also disagrees with PG&E's discussion of the Commission and the State's ostensible waiver of sovereign immunity.⁷ Although the Commission believes its positions will be validated if and when a confirmation hearing on PG&E's Plan is conducted, it also strongly believes that the Court, creditors and other parties in interest should be apprised of the frivolous nature of many of PG&E's contentions. Finally, the Commission requests that PG&E preface this entire section with the following statement: "The following discussion contains the proponent's arguments to support the relief they request in the Plan. Other parties, including the State and the CPUC dispute the accuracy and completeness of these statements. Whether or not the Proponents are entitled to the relief requested in the Plan will be determined by the Bankruptcy Court at the Confirmation hearing."

(i) PG&E's Discussion of the Commission's Position on the Recovery of Procurement and other Utility Costs and the Purported Failure of the Commission's Term Sheet to Address PG&E's Need for an Investment Grade Rating are False and Inaccurate

On page 165, line 27, PG&E asserts that the Commission has not provided the capital markets with any assurances that it will change its regulatory polices to help restore PG&E to an investment grade rating. As a threshold matter, this is a statement of opinion and not fact, and PG&E should insert the phrase "The Debtor believes that" immediately before the sentence beginning "The CPUC has not changed . . ." In addition, PG&E excoriates the Commission's term sheet for its ostensible failure to address these concerns. While entitled to its opinion, PG&E should disclose that the Commission's term sheet is a work in progress and that the Commission has committed itself to proposing an alternative plan that returns PG&E to investment grade without the preemption and protracted litigation envisioned by PG&E's Plan.

PG&E also claims on page 169, lines 7-10, that the Commission's term sheet does not propose any "structural regulatory reforms" to sustain PG&E's continued economic viability under Commission regulation and instead "proposed that the debtor's retail rate revenues be intentionally held below even minimal cost of service retaking levels for a period of time in order to pay past debts." This statement mischaracterizes in a material way the Commission's term sheet. First, the Commission believes that by "structural regulatory reforms," PG&E means market-valuing its generation assets. As described above in Section I. B(ii), such market valuations may be not necessary due to AB 6X. Accordingly, PG&E should disclose whether "structural regulatory reforms" refer to market valuations. If they do not, PG&E should disclose what exactly it means by "structural regulatory reform."

Second, PG&E accuses the Commission of proposing that "the debtor's retail rate revenues be intentionally held below even minimal cost of service retaking levels for a period of time in order to pay past debts." This statement is false. In fact, the Commission's term sheet proposes to set rates above cost-of-service requirements to generate sufficient headroom for PG&E to pay off its creditors. The Commission suspects that PG&E's statement refers to the alleged reduced rate of return to the Parent proposed in the Commission's term sheet. Accordingly, PG&E should disclose whether the Commission's interpretation is correct, and, if so, state why a potential dispute between the Parent and the Commission is relevant to PG&E's plan.

(ii) PG&E's Statement in Respect of the Natural Gas Act (the "NGA") and the Hinshaw Amendment Thereto is Misleading and Inaccurate

On page 171, lines 11-15, PG&E states that the NGA precludes the Commission from prohibiting GTrans from applying to the FERC for authority to provide interstate natural gas services. In the Commission's view, PG&E is asking this Court to "preempt" federal law because pursuant to the NGA the Commission has exclusive regulatory jurisdiction over PG&E and its facilities. Accordingly, PG&E should (i) admit that its Plan calls for the displacement of federal as well as state law and (ii) disclose the legal authority that permits the Bankruptcy Code to "preempt" other federal laws. PG&E should also disclose that its attempt to have this Court set aside other federal laws must satisfy the same strict standards for implied preemption set forth in the February 7 Decision.

(iii) PG&E's Accusation that the Assignment of the DWR Contracts to the Reorganized Debtor Constitutes a Taking Misstates the Relevant Legal Standard

PG&E claims the Commission lacks any authority under state or federal law to "confiscate" its property by forcing it or the Reorganized Debtor to assume the DWR contracts. Although the Commission will not address the legal merits of this contention (which the Commission disputes) in its Objection, PG&E should at least set forth the proper legal standard. Accordingly, on page 173, line 4, PG&E should insert the phrase "without just compensation" immediately after the word "confiscation."

(iv) PG&E Must Disclose the Authority for its Proposition that the Commission will no Longer Retain its Authority to Administer the Standards Imposed by the Federal Pipeline Safety Act

On page 174, lines 20-25, PG&E asserts that in the case of safety regulation of the natural gas transmission and storage system, the substantive standards currently delegated to the Commission by the Department of Transportation ("DOT") will be exercised directly by the DOT. What PG&E does not disclose or explain is how and why this delegation is "lost" under its Plan. Accordingly, PG&E should disclose the legal and factual support for this contention.

(v) PG&E fails to Explain how the Bankruptcy Code can Impliedly Preempt the Holding Company Conditions Imposed on the Parent by the Commission when the Parent is not a Chapter 11 Debtor

On pages 178-179, PG&E claims that the Bankruptcy Code somehow impliedly preempts the Commission's Holding Company Decisions because they would prevent or nullify portions of the Plan in respect of the Reorganized Debtor Spin-Off transactions. However, PG&E fails to provide any a reason why the Bankruptcy Code permits the Parent to disobey valid California law. The Parent is not currently a debtor subject to the protections and benefits afforded by the Bankruptcy Code. Accordingly, PG&E should explain why the Parent should be excused from compliance with the Holding Company Decisions.

(vi) PG&E's Interpretation of the Commission's Regulatory Authority over the Disposition of its Assets is Misleading .

Pages 179-184 of the Second Amended Disclosure Statement recite in detail PG&E's frivolous position that various provisions of the Public Utility Code are strictly economic in character and not concerned with health or safety. PG&E presumably makes this argument to illustrate that its proposed restructuring satisfies the test for implied preemption set forth in the February 7 Decision. However, PG&E's strained effort to distance these provisions from "health and safety" does not accomplish this task. A careful reading of the February 7 Decision establishes that the relevant test for implied preemption requires PG&E to prove the relevant sections of the Public Utilities Code "are economic in nature rather than directed at protecting public safety or other non-economic concerns, and that those particular laws stand as an obstacle to the accomplishment and execution of the purposes and objectives of Congress and the Bankruptcy Code." Mem. Dec. at 40-41 (emphasis added). Accordingly, the standard for implied preemption as set forth in the Court's February 7 Decision is narrower than PG&E describes in its Second Amended Disclosure Statement. Because the litigation risks of PG&E's Plan are of paramount importance to creditors in this case, PG&E should be required to conform the description of the standard for implied preemption to that found in the Court's February 7 Decision.

Viewed through the lens of the standard set forth immediately above, the following selective example demonstrates the extremely slim chance of PG&E prevailing on its implied preemption claims:

PG&E claims that Section 851 of the Public Utilities Code (the "PU Code"), which governs the disposition of public utility property under California law, does not mention "safety" or "health" in any respect. D.S. at 180. Of course PG&E fails to mention that Section 851 requires Commission approval of any transfer of any utility "property necessary or useful in the performance of its duties to the public." D.S at 179-181 (emphasis added).

Inexplicably, PG&E contends that Section 377 of the PU Code, as amended in 2001, is exclusively economic in nature. That section, adopted at the height of the energy crisis, in the midst of blackouts, provides for a moratorium on the sale of retained generation facilities until 2006, to assure that generation from those plants will be available to serve customers in the State. The provision of reliable electric services is indisputably a matter of public welfare. To transform this piece of emergency legislation into a purely economic regulation is nonsense.

(vii) Sovereign Immunity Deficiencies

In Section I. B(ii) of this Objection, the Commission has detailed the material deficiencies presented by PG&E's summary of the February 7 Decision's discussion of sovereign immunity. In addition to the fundamental flaws already described therein, PG&E mistakenly claims that the State or the Commission have already lost their sovereign immunity through participation in this chapter 11 case. This, however, is a confirmation issue. Therefore PG&E must disclose that the State and the CPUC enjoy sovereign immunity pending a ruling from this Court that says otherwise. Accordingly, the Commission requests that PG&E amend page 190, line 1, to delete the word "have" and change the word "possessed" to "possess."

E. DISPUTED CLAIMS RESERVE.

(i) The Mechanics of the Disputed Claims Reserve Require Additional Disclosure to Ameliorate Ambiguities

On pages 236-239, PG&E sets forth the structure and mechanics of the reserve for Disputed Claims. On page 238, PG&E explains that in the event the Cash or Long-Term Notes deposited in the disputed claims reserve are insufficient to make the required payments once Disputed Claims become Allowed Claims, the Reorganized Debtor will pay the holder of the Allowed Claim Cash necessary to meet the Cash shortfall. In addition, ETrans, GTrans and Gen will be required to deliver additional Long-Term Notes to the Reorganized Debtor for delivery to the holder of the Allowed Claim. But PG&E does not disclose which entity reimburses the Reorganized Debtor if a shortfall in Cash ensues. Do all of the LLC's contribute on a pro rata basis? Is the Reorganized Debtor liable for the full shortfall, and, if so, why?

In addition, "[a]ny deficiency in the amount of Cash or Long-Term Notes deposited in the [disputed claims reserve] shall not limit the obligations of the Reorganized Debtor, ETrans, GTrans and Gen to satisfy Disputed Claims which subsequently become Allowed Claims, and the Reorganized Debtor, ETrans, GTrans and Gen shall remain liable to satisfy such Allowed Claims pursuant to the Plan."" D.S. at 238 (strike-through in original). PG&E needs to explain why the three LLC's were eliminated from possible liability from the First Amended Plan to the Second Amended Plan.

F. THE SECOND AMENDED DISCLOSURE STATEMENT DOES NOT
ADEQUATELY DISCLOSE INFORMATION PERTAINING TO THE PARENT

In its First Disclosure Statement, PG&E failed to identify significant claims PG&E's chapter 11 estate may have against third-parties. The Second Amended Disclosure Statement still contains material omissions in respect of claims against the Parent. In addition, the Second Amended Disclosure Statement fails to provide a scintilla of support for the estimated $120 million to $150 million the Parent seeks for reimbursement of its fees and expenses.

(i) Claims against the Parent

PG&E's estate holds certain claims against its Parent which could prove to be a valuable source of recovery for its creditors. The Commission is aware of at least two types of such claims:⁸ (i) claims that the Parent violated the "first priority" rule ordered by the Commission when it approved PG&E's holding company structure;⁹ and (ii) avoidance actions for dividend and other payments made by PG&E to its Parent while PG&E may have been insolvent.¹⁰ Disclosure of these (and other) claims not only is required under the case law cited above, but is essential, for instance, for creditors and others to value the release to be provided to the Parent under Article 11.5(b) of the Second Amended Plan.¹¹

In response to this concern, PG&E and the Parent represented to the Bankruptcy Court that PG&E would disclose that it and its bankruptcy counsel believe that, after an independent review by such counsel, there are no claims against the Parent.¹² See Transcript of Disclosure Statement Hearing held on February 7, 2002 at 101, 102. The Second Amended Disclosure Statement does not contain such representations. Accordingly, page 248, lines 7-15, of the Second Amended Disclosure Statement should contain a statement of independent review and be amended to read as follows:

Such released claims of the Debtor shall also include any claims allegedly arising under the "First Priority Rule" discussed in Section IV.B.9 of the Disclosure Statement because (a) the Debtor and its counsel do not believe there is any merit to such claims and (b) the Debtor and its counsel do not believe that the pursuit of such claims, if any should exist, could result in the payment of any money to the Debtor. In addition, such included released claims allegedly arising under Section 17200 of the California Business and professional Code . . . as well as any other claims based upon alleged violations of state or federal statutes or other common law doctrines, because the Debtor and its counsel do not believe that any such claims have merit or are of value to the Debtor. (emendations in italics)

D.S. at p. 248.

(ii) Reimbursement of the Parent's Fees and Expenses

Page 252 of the Second Amended Disclosure Statement notes that PG&E estimates its reimbursement obligations to the Parent and the Parent's bankruptcy professionals at an astounding $120 to $150 million. Unlike PG&E's own professionals who are required to file detailed fee applications with the Court on a regular basis, the Parent and its Professionals have operated throughout this case without disclosure of such matters. Parties in interest simply do not know what kind of work these professional have performed, when they commenced work on this case or whether they have duplicated the efforts made by PG&E's professionals. Accordingly, PG&E should amend the Second Amended Disclosure Statement to substantiate this extraordinary request for payment of the Parent's fees and expenses so that creditors and other parties in interest in this case may arrive at an independent determination of their value.

G. CORPORATE GOVERNANCE.

(i) PG&E's Description of the Number of Authorized Board Members is Inaccurate and it needs to Define what it means by a "Constituency Provision" in the Proposed Articles of Incorporation and By-Laws of the Reorganized Debtor

The phrase "or greater" on page 130, line 21 should be deleted and the phrase "six (6)" replaced with "five (5)" to reflect the proposed amendments to the Articles of Incorporation and By-laws. In addition, PG&E says it will "incorporate a constituency provision that would authorize the Board of Directors to give due consideration to all factors considered relevant, including the interest of constituencies, when evaluating business combinations involving the Reorganized Debtors . . ." What exactly does PG&E mean by a "constituency provision" and who are these "constituents"? At a minimum, PG&E should make these disclosures so creditors are adequately informed of how the post-restructuring Reorganized Debtor will be governed.

[a]s of the Effective Date, the Debtor releases the Parent from any and all Causes of Action held by, assertable on behalf of, or derivative from, the Debtor, in any way relating to the Debtor, the Debtor-in-Possession, the Chapter 11 Case, the Plan, negotiations regarding or concerning the Plan, the ownership, management and operation of the Debtor, and any transactions or transfers between the Parent and the Debtor, including but not limited to, any Cause of Action arising under Chapter 5 of the Bankruptcy Code or any state fraudulent conveyance statute.

Second Amend. Plan Art. 11.5(b).

Mr. Hermann (for the Commission): No, I mean independent [review]-independent of the views of whatever the parent might think of the causes of action.

The Court: Well, I mean, Mr. Kessler [counsel for the Parent] . . . I believe it's proper for the disclosure statement to say that the debtor's counsel has determined such and such, or hasn't determined it.

Mr. Lafferty (counsel for PG&E): No, I understand.

. . . .

The Court: Would you [Mr. Lafferty] object . . . [to saying that] . . . debtor and its counsel do not believe there is any merit.

Mr. Lafferty: I think we can.

. . . .

The Court: But I want an independent [assessment]-that's why you're [Howard, Rice] disinterested counsel.

Mr. Lafferty: I understand.

Transcript at 101, 102.