V. Lawfulness of the PSA

A. The Purpose of the Commission v. The Purpose of the Bankruptcy Court

Before reviewing the specific legal issues, it is important to recognize the fundamental differences between the Commission and the Bankruptcy Court. The Commission regulates the relationship between public utilities and their ratepayers whereas the Bankruptcy Court is mostly concerned with the relationship between the debtor and its creditors.

As the California Supreme Court recently explained in Southern California Edison Co. v. Peevey, supra, 31 Cal. 4th at 792, the Commission's "authority derives not only from statute but from the California Constitution, which creates the agency and expressly gives it the power to fix rates for public utilities." The Supreme Court, in a prior decision, had declared that: The Commission was created by the Constitution in 1911 in order to "protect the people of the state from the consequences of destructive competition and monopoly in the public service industries . . . [The Commission] is an active instrument of government charged with the duty of supervising and regulating public utility services and rates." (Sale v. Railroad Commission (1940) 15 Cal. 2d 612, 617.) The Commission has legislative and judicial powers. (People v Western Air Lines (1954) 42 Cal. 2d 621, 630.) The fixing of rates is quasi-legislative in character. (Clam v. PUC (1979) 25 Cal. 3d 891, 909; Southern Pacific Co. v. Railroad Com. (1924) 194 Cal. 734, 739.) In addition, the California Legislature has provided that "all charges by a public utility for commodities or services rendered shall be just and reasonable (§ 451) and has given the commission the power and obligation to determine not only that any rate or increase in a rate is just and reasonable (§§ 454, 728), but also authority to `supervise and regulate every public utility in the State . . . '" (Camp Meeker Water System, Inc. v. Public Utilities Com. (1990) 51 Cal. 3d 845, 861-862.)

In contrast, the Bankruptcy Court operates under the authority of the Bankruptcy Code, and a central purpose of the Bankruptcy Code is to "provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy `a new opportunity in life . . . '" (Grogan v. Garner (1991) 498 U.S. 279, 286.) Put another way, the two overarching purposes of the Bankruptcy Code are: "(1) providing protection for the creditors of the insolvent debtor and (2) permitting the debtor to carry on and ... make a ` fresh start.'" (In re Andrews (4th Cir. 1996) 80 F.3d 906, 909.) (We note that PG&E is a solvent debtor.) PG&E's disclosure statement (Ex. 101b, p. 2) seconds this: "Under chapter 11, a debtor is authorized to reorganize its business for the benefit of itself, its creditors, and its equity interest holders."

The Bankruptcy Code, 11 U.S.C. § 1129(a)(6), explicitly recognizes that utility ratemaking is the province of governmental regulatory commissions, such as the Commission, rather than the Bankruptcy Court. As stated in In re Cajun Elec. Power Co-op., Inc. (5th Cir. 1999) 185 F.3d 446, 453, "[s}ection 1129(a)(6) of the Bankruptcy Code further provides that any rate change in a reorganization plan must be approved by governmental regulatory commissions with proper jurisdiction." The Court found no support for a narrow reading of § 1129(a)(6), because "such an argument ` ignores the reasons which mandate [public utility commission] regulation in the first instance. The [commission] is entrusted to safeguard the compelling public interest in the availability of electric service at reasonable rates. That public interest is no less compelling during the pendency of a bankruptcy than at other times.' "(Id., at 453, n. 11, quoting with approval Flaschen & Reilly, Bankruptcy Analysis of a Financially-Troubled Electric Utility, (1985) 59 Am.Bankr.L.J. 135, 144.)

Indeed, in an earlier phase of PG&E's bankruptcy proceeding, PG&E sought from the Bankruptcy Court a stay of the Commission's D.01-03-082 (the Accounting Decision). In finding that the public interest will not be served by issuing an injunction, the Bankruptcy Court declared that issuing a stay "would create jurisdictional chaos. The public interest is better served by deference to the regulatory scheme and leaving the entire regulatory function to the regulator, rather than selectively enjoining the specific aspects of one regulatory decision that PG&E disputes. PG&E has all the usual avenues for relief from the Accounting Decision, including appellate review and reconsideration by CPUC. These alternatives may be particularly apropos in the constantly-changing factual and regulatory environment." (In re Pacific Gas and Electric Company (2001) 263 B.R. 306, 323; 2001 Bankr. LEXIS 629 **38, appeal pending sub nom., Pacific Gas and Electric Company v. California Public Utilities Commission, et al., United States District Court for the Northern District of California No. C-01-2490 VRW.)

B. The Commission's Ability to Bind Future Commissions

The clause of the PSA requiring future Commissions to be bound is paragraph 21.

21. Validity and Binding Effect. The Parties agree not to contest the validity and enforceability of this Agreement, the Settlement Plan or any order entered by the Court contemplated by or required to implement this Agreement and the Settlement Plan. This Agreement, the Settlement Plan and any such orders are intended to be enforceable under federal law, notwithstanding any contrary state law. This Agreement and the Settlement Plan, upon becoming effective, and the orders to be entered by the Court as contemplated hereby and under the Settlement Plan, shall be irrevocable and binding upon the Parties and their successors and assigns, notwithstanding any future decisions and orders of the Commission.

There cannot be any doubt that under certain circumstances, the Commission can legally enter into settlements or contracts which would bind future Commissions.¹¹ In Southern California Edison Co. v. Peevey, supra, 31 Cal. 4^th at 792, the California Supreme Court relied upon the Commission's broad authority under Article XII of the California Constitution, sections 701 and 728 of the Public Utilities Code, and prior precedent to conclude that the Commission is a "state agency of constitutional origin with far-reaching duties, functions and powers whose `power to fix rates [and] establish rules' has been liberally construed.'" Because the Commission had not acted contrary to state law and in light of the Commission's inherent authority, the California Supreme Court upheld the Commission entering into a binding settlement with SCE in its federal district court case against the Commission. Id. at 805.¹²

It is true that in Diablo Canyon, D.88-12-083, 30 CPUC 2d 189, we held that we lack the power to approve settlements that bind future Commissions. We relied upon cases which hold that a legislative body cannot restrict its own power or that of subsequent legislative bodies, as well as §§ 728 and 1708, which provide that, after a hearing, the Commission may rescind, alter or amend previous decisions, or may declare rates are unjust and unreasonable and fix the just and reasonable rates to be thereafter observed and in force. (Id. at 223-225.)

The proponents of the PSA distinguish Diablo Canyon, because that case involved a settlement pending before the Commission, whereas the PSA would be entered into by the Commission itself to settle litigation in federal courts. The proponents claim that a decision of the Commission by itself may not bind future Commissions, but the Commission may execute a settlement agreement or a contract to bind future Commissions.

We agree with the proponents that a court-approved settlement would bind the Commission. There is a fundamental difference between the Commission's authority within the scope of its own proceedings, and the Commission's efforts to resolve litigation in courts. The Commission must abide by court orders and a subsequent Commission does not have the authority to ignore a court order approving a settlement to which the Commission is a party. Particularly here, where the public interest would be greatly served by getting PG&E out of bankruptcy, the Commission must have the ability to exercise its regulatory and police powers to resolve through a settlement the Bankruptcy Court litigation. Upon approval by the Bankruptcy Court of such a settlement agreement, there is no question that subsequent Commissions cannot disregard the court order approving the settlement agreement.

When entering into settlement agreements or contracts, however, the Commission may not act inconsistently with state law. As the Court declared in Southern California Edison Co. v. Peevey, supra, 31 Cal. 4^th at 792: "If PUC lacked substantive authority to propose and enter into the rate settlement agreement at issue here, it was not for lack of inherent authority, but because this rate agreement was barred by some specific statutory limit on PUC's power to set rates."

Similarly, in Southern California Edison Co. v. Lynch (9th Cir. 2002) 307 F.3d 794, 809, the Ninth Circuit held that if the Commission's settlement agreement violated state law, "then the Commission lacked capacity to consent to the Stipulated Judgment, and [the Ninth Circuit] would be required to vacate it as void. State officials cannot enter into a federally-sanctioned consent decree beyond their authority under state law." We therefore must determine that a settlement is consistent with state law before we can enter into the settlement. Paragraphs 21 and 32 of the PSA provide that the Parties agree that the settlement agreement, the settlement plan and any court orders are intended to be binding and enforceable under federal law, "notwithstanding any contrary state law." This is general language that does not specify the purportedly contrary state laws.

We do not agree with the objections asserted to the phrase "notwithstanding any contrary state law" in Paragraphs 21 and 32. First, and most important, we have carefully considered all objections that provisions of the PSA are illegal under substantive California law, and we have found those objections to be lacking in merit. As the PSA is consistent with substantive California law, the challenged phrases do not constitute a departure from the principle, which we accept, that we may not enter into a settlement agreement that is illegal under valid California law.

Second, we do not believe that the argument set forth immediately above renders the phrase "notwithstanding any contrary state law" superfluous. Both phrases specifically refer to enforcement of the PSA (along with the Settlement Plan and certain orders of the Bankruptcy Court) under federal law. As a general matter, under Paragraph 32 the PSA is governed by California law.

The PSA is incorporated by reference in the Settlement Plan and is an exhibit thereto. It is contemplated that the Confirmation Order in PG&E's bankruptcy case will refer to the PSA. More broadly, a major purpose of the PSA is to provide a structure for PG&E's emergence from bankruptcy. In these circumstances, it is reasonable for the PSA to provide that it is intended to be enforceable under federal law, which we take to refer primarily to the Bankruptcy Code and to other bankruptcy-related sections of the United States Code. That is certainly the law under which the Confirmation Order and other orders of the Bankruptcy Court will be enforced; and the PSA is closely related to the Confirmation Order and to the Settlement Plan that the Confirmation Order will implement.

Paragraph 23 of the PSA provides that the Commission is to be subject to the jurisdiction of the Bankruptcy Court for all purposes relating to enforcement of the PSA. Federal law is the body of law that in the first instance confers powers on the Bankruptcy Court. As the Bankruptcy Court is given the power to enforce the PSA in Paragraph 23, Paragraphs 21 and 32 reasonably indicate that the PSA is intended to be enforceable under the body of law that gives that court its powers.

In light of the constitutional requirement that the Commission actively supervise and regulate public utility rates (Sale v. Railroad Commission (1940) 15 Cal. 2d 607 at 617) and the statutory requirements under the §§451, 454, 728 that the Commission ensure that the public utilities' rates are just and reasonable (Camp Meeker Water System, Inc. v. Public Utilities Com. (1990) 51 Cal. 3d 850 at 861-862), the Commission must retain its authority to set just and reasonable rates during the nine-year term of the settlement and thereafter.

"The regulation of utilities is one of the most important of the functions traditionally associated with the police power of the states." (Arkansas Electric Coop. v. Arkansas Pub. Serv. Comm'n (1983) 461 U.S. 375, 377.) This Commission's authority to regulate public utilities in the State of California is pursuant to the State's police power. (See, Motor Transit Company v. Railroad Commission of the State of California (1922) 189 Cal. 573, 581.) The California Supreme Court has held that "it is settled that the government may not contract away its right to exercise the police power in the future." (Avco Community Developers, Inc. v. South Coast Regional Com. (1976) 17 Cal. 3d 785, 800.)

The Commission cannot be powerless to protect PG&E's ratepayers from unjust and unreasonable rates or practices during the nine-year term of the proposed settlement. "The police power being in its nature a continuous one, must ever be reposed somewhere, and cannot be barred or suspended by contract or irrepealable law. It cannot be bartered away even by express contract." (Mott v. Cline (1927) 200 Cal. 434, 446 (emphasis added).)

Whether or not the Commission could enter into a settlement agreement without violating state law turns on whether the settlement agreement would surrender or suspend the Commission's exercise of its police powers for nine years or whether the settlement agreement is consistent with the Commission exercising its regulatory powers. In Santa Margarita Area Residents Together v. San Louis Obispo County Bd. of Supervisors (2000) 84 Cal. App.4th 221, 233, the Court found that notwithstanding a zoning freeze, the County's agreement had not surrendered its police powers, because under the agreement, the project had to be developed in accordance with the County's general plan, the agreement did not permit construction until the County had approved detailed building plans, and the agreement retained the County's discretionary authority in the future. In light of the above, we must review the PSA to ascertain whether the Commission would be exercising or surrendering its police powers by entering into the settlement.

PG&E contends that on a going-forward basis, the PSA affects only approximately 5.4% of the electric bill, which is the impact from the Regulatory Asset. As explained below, we find that the proposed amount for and the regulatory rate treatment of the Regulatory Asset is just and reasonable. Moreover, the PSA did not address the ratemaking treatment or amounts going forward for the other 95% of PG&E's electric revenue requirements or what PG&E's overall retail electric rates should be during the next nine years. Therefore, we find that entering into the PSA, is fully consistent with the Commission's exercise of its ratemaking authority, because we find that the Regulatory Asset provision is just and reasonable and a necessary part of the settlement, and we will still decide the overall retail electric rates for PG&E's customers in pending and future proceedings.

Various parties have objected to PSA ¶ 6 ("Dividend Payments and Stock Repurchases"), principally on the ground that it leaves the Commission with insufficient discretion to deal with unexpected future circumstances. We do not agree. PSA ¶ 6 contains a precatory acknowledgement that PG&E and its Parent must be able to pay dividends and repurchase common stock "when appropriate." That sentence does not contain any acknowledgement that PG&E and its Parent must be able to pay dividends in all conceivable circumstances or in any particular amounts. The following sentence states that, subject to specified conditions, the Commission shall not restrict the ability of the boards of directors of either PG&E or PG&E Corporation to declare and pay dividends or repurchase stock. This sentence does not say, and we do not interpret it to mean, that the Commission has guaranteed to either PG&E or PG&E Corporation that the corporation will have sufficient available funds to pay dividends or repurchase stock at all, or to pay dividends or repurchase stock at particular levels. We interpret the sentence to mean only that, subject to the specified conditions, the Commission cannot order either corporation not to pay dividends or not to repurchase stock; and that, again subject to the specified conditions, the Commission cannot order either corporation not to declare or pay dividends exceeding a stated amount or not to expend more than a stated amount on stock repurchases.

When the paragraph is interpreted in this way, many of the objections to it disappear. It is said, for example, that the Commission must retain the flexibility to require that PG&E perform all of its public service obligations, even if performance of those obligations left PG&E temporarily unable to fund the payment of dividends or stock repurchases at all, or at the levels otherwise desired. Or, to provide a more concrete example, one might ask whether the Commission would retain the ability to order PG&E to expend funds on needed infrastructure repairs, even if the order would have the financial consequences just described.

The answer is that the Commission would retain the authority to take such a step. An order directing PG&E to perform specified public service obligations or to invest capital in needed infrastructure repairs would not be an order restricting the board of directors from declaring and paying dividends or from authorizing the stock repurchases. That is true even if the board of directors of PG&E found, after the required expenditure is made, that PG&E could not afford to fund dividend payments or stock repurchases at all, or at the levels the board might otherwise have desired.

Similarly, the Commission's disallowance of imprudently incurred costs would not be an order restricting the board of directors of PG&E from declaring and paying dividends or repurchasing stock. That, too, is true whether or not the cost disallowance might inhibit PG&E's dividend payments or stock purchases. After all, any order requiring PG&E to spend money for any purpose could, in principle, affect the ultimate amount of funds remaining for dividends and stock repurchases. PSA ¶ 6 could not reasonably be read to bar the Commission from issuing any order that requires PG&E to spend money for a designated purpose, and consequently we find the reading of the text adopted here to be reasonable and appropriate.

Other provisions of the PSA confirm this reading of PSA ¶ 6. As the PSA's "Statement of Intent" makes clear, under the PSA, "[t]he Commission intends to provide PG&E with the opportunity to recover all of its prudently incurred costs as well as a return of and return on its investment in utility plant." (PSA, ¶ 7) (emphasis added). As noted above, almost any cost disallowance could conceivably result in a potential reduction of the funds available for dividend payments or stock repurchases. The Statement of Intent, however, contemplates that the Commission will retain its traditional authority to disallow recovery of imprudently incurred costs. It follows that PSA ¶ 6 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 or stock repurchases. In addition, Paragraph 2.j. of the PSA provides that "[t]he Commission agrees that, in the absence of compelling evidence to the contrary, PG&E's expected regulatory outcomes and financial performance should be similar to those of other investor-owned energy utilities in California under similar circumstances." Id., ¶ 2.j. Paragraph 2.j. is obviously incompatible with a reading of PSA ¶ 6 that would guarantee the availability of funds at any level determined by the boards of directors of PG&E and PG&E Corporation (subject to the two specified conditions) for dividend payments or stock repurchases.

Furthermore, PSA ¶ 6 does not affect the applicability of California law apart from Commission decisions, including California statutes and common law governing and restricting dividend declarations and payments and stock repurchases. Under PSA ¶ 6, PG&E will remain subject to, inter alia, the requirement in Decision No. 96-11-017, section 7.10, that its dividend policy "be established by PG&E's Board of Directors as though PG&E were a stand-alone utility company." These principles would prevent many of the hypothetical abuses raised by objectors, such as the payment of dividends in furtherance of a fraud or crime, or the payment of inappropriately large dividends by P&E as the result of control exercised by PG&E's parent.

In the exercise of our regulatory authority, adopting the reading set forth above of PSA ¶ 6, we do not mean to imply that PG&E or PG&E Corporation are likely, during the term of the PSA, to be financially unable to pay dividends or to repurchase stock. To the contrary, a fundamental principle of the PSA is a return to traditional cost-of-service ratemaking principles. Under those principles, PG&E has historically paid dividends; and PG&E's ability to pay dividends is, of course, a key component of its ability to attract and retain equity investment, which in turn benefits ratepayers.

Historically, under traditional cost-of-service ratemaking, regulated utilities are provided the opportunity to earn a return on their investment, and have traditionally issued dividends or repurchased common stock under authorized capital structures approved by their regulators. Assuming that a utility is responsibly meeting its obligation to serve, the Commission does not micromanage the utility in its carrying out of its obligations and responsibilities and financial management practices. Indeed, PG&E witness and CFO Kent Harvey testified that prior to the energy crisis, PG&E was one of the healthiest energy utilities in the country, and enjoyed strong investment grade credit ratings and consistently paid dividends to its shareholders. (Ex. 103: 2-1, PG&E/Harvey ). PG&E Witness and CEO Gordon Smith testified that until recently, (i.e., since the energy crisis) PG&E did not miss a single quarterly dividend since it began paying quarterly dividends in 1916. PG&E was able to do so while maintaining its authorized capital structure. (RT: p. 696). We would therefore anticipate PG&E will return to this historical practice under the PSA.

Many parties have expressed their opposition to Paragraph 2.g. of the PSA, which would require the Commission "to act to facilitate and maintain Investment Grade Company Credit Ratings for PG&E." The statutory requirements under sections 454 and 728 of the Public Utilities Code are that the rates must be just and reasonable (see Camp Meeker Water System, Inc. v. Public Utilities Com., 51 Cal. 3d at 862), and the opponents have argued that the investment grade requirement would supplant the just and reasonable standard. As discussed in more detail below, however, we believe that we can clarify this commitment in a way that is consistent with our statutory responsibility to ensure that PG&E's rates are just and reasonable.

Our commitment will remain, as provided in Paragraph 2.g., to act to facilitate and maintain the investment grade credit ratings. However, we do not interpret Paragraph 2.g. to require the Commission to guarantee such a credit rating when there are other causes, besides the Commission's actions (e.g., PG&E's imprudent conduct resulting in a disallowance), which are responsible for any threats to PG&E's investment grade credit rating. Therefore, under the PSA, PG&E's ratepayers will still be protected from unjust and unreasonable rates.

In setting just and reasonable rates, in addition to protecting the consumers, we also must consider the financial health of the public utility. Indeed, we view this commitment to act to facilitate and maintain investment grade credit ratings as essentially doing what we have always done under cost-of-service regulation: provide just and reasonable rates and authorize a reasonable capital structure that maintains the fiscal integrity of the utility. As already discussed, our traditional regulation resulted in high investment grade ratings of our energy utilities.

In the balancing of interests of the utility and its ratepayers that we undertake in setting rates, a major factor is the utility's financial integrity. There should be enough revenue for all of the utility's prudently incurred costs or operating expenses, investments and costs of debt. See Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 310; FPC v. Hope Natural Gas Co., supra, 320 U.S. at 603. We are therefore exercising our regulatory authority in agreeing with this commitment in Paragraph 2g., as clarified above, because we find as part of our regulatory responsibilities, that it is in the public interest to get PG&E out of bankruptcy and restore its investment grade credit ratings.

In Southern California Edison Company v. Peevey, supra, 31 Cal.4^th at 791, the California Supreme Court explicitly recognized that the Commission's settlement with SCE was intended to "restore SCE's creditworthiness and avoid further instability and uncertainty for the company and consumers." The Court not only upheld the Commission's authority to enter into the settlement, it also confirmed the Commission's "duty and authority to guarantee that the electric utilities would have the capacity and financial viability to provide power to California consumers." Id. at 793.

Just as the Court found in Santa Margarita Area Residents Together v. San Louis Obispo County Bd. of Supervisors, supra, 84 Cal. App.4^th at 233, that the County had not surrendered its police powers, because in entering the agreement, the County had exercised its regulatory powers and retained the County's discretionary authority in the future, the Commission would not be surrendering or suspending its police powers, because the PSA, as clarified by this decision, is a reasonable exercise of those police powers based upon the record in this proceeding. The Commission has retained its discretionary authority over PG&E's overall retail electric rates, and, after considering all of the evidence and positions of the parties in this proceeding, we find that the provisions concerning the regulatory asset, which will comprise approximately 5.4% of PG&E's retail electric rates, are just and reasonable.

As Southern California Edison Co. v. Peevey, supra, 31 Cal.4th at 792 makes clear, we have the inherent authority to enter into binding settlements where we are not limited by state law. The Commission's settlement with SCE was approved by a federal district court's stipulated judgment, and the California Supreme Court upheld our right to enter into and be bound by the settlement even without hearings, a written decision with findings, and a vote in a public meeting. Id. at 805.¹³

In the present case, the PSA is consistent with state law. We have held a hearing, issued a written decision with findings, voted in a public meeting and clarified provisions in the PSA in reaching our finding that the PSA is fair, just and reasonable and in the public interest. Accordingly, we find that we can enter into the PSA and bind future Commissions.

C. Jurisdiction of the Bankruptcy Court

The clause of the PSA regarding the jurisdiction of the Bankruptcy Court is paragraph 22.

22. Enforcement. The Parties agree that the Court shall retain jurisdiction over the Parties for all purposes relating to enforcement of this Agreement, the Settlement Plan and the Confirmation Order.

The present case is not the usual case where the Commission issues its decisions involving public utilities' rates. We are in an extraordinary situation involving PG&E's bankruptcy. Under sections of the United States Code and Bankruptcy Code, 28 U.S.C. §§ 157(b), 1334, and 11 U.S.C. § 1129, the Bankruptcy Court has jurisdiction over the plan of reorganization, which must be confirmed in order to get PG&E out of bankruptcy. By agreeing to this PSA, it is our intent to present the Bankruptcy Court with a plan that is lawful under state law and that the Court will be able to confirm.

We also recognize that the Bankruptcy Court must have jurisdiction over the parties to enforce the agreement, the settlement plan and the Court's own confirmation order. Under sections of the United States and Bankruptcy Code, 28 U.S.C. §§ 157(b), 1334, and 11 U.S.C. § 1142, the Bankruptcy Court has jurisdiction over the implementation of the bankruptcy plan. As discussed above, we find that the PSA is consistent with state law and is just and reasonable. Having done so, we may bind the Commission to an agreement that is part of the settlement plan before the Bankruptcy Court. Just as the Commission was bound by the settlement with SCE and the federal district court can enforce the stipulated judgment (which adopted the settlement), the Bankruptcy Court can enforce the PSA to the extent that it becomes part of the settlement plan approved by the Bankruptcy Court's confirmation order.

Contrary to the views of opponents of the PSA, the Bankruptcy Court's potential enforcement of the PSA, the settlement plan incorporating the PSA and the Court's confirmation order, in no way means that the Bankruptcy Court will be deciding PG&E's rates or services for the next nine years or supplant the California appellate courts from their judicial review of Commission orders involving PG&E. As discussed above, the PSA will result in the Commission retaining authority over PG&E's rates and services subject to judicial review in the California appellate courts. Except for its enforcement of the specific provisions in the PSA, the Bankruptcy Court will not be supervising the Commission's determinations as to PG&E's rates and services.

For the most part, after the Bankruptcy Court confirms the plan of reorganization, the Bankruptcy Court no longer supervises or protects the debtor. See Southwest Marine Inc. v. Danzig (9th Cir. 2000) 217 F.3d 1128, 1140. As the Bankruptcy Court stated with regard to the Commission's plan of reorganization, the Bankruptcy Court "is being asked to enforce the reorganization agreement. Nothing more... I see this Court's role as more limited than PG&E's counsel predicts". The Bankruptcy Court gave limited examples where it could find the Commission would be in breach of the reorganization agreement, but the Court recognized the Commission's " historic practice for [authorizing the] recovery of prudently incurred costs," and stated that only a departure from this practice for the "recoverable costs in the agreement" could be a breach. (Exhibit No. 122, Exhibit C, pp. 6-10-6-11.)

PG&E concedes that the PSA would not result in the Bankruptcy Court sitting as a super appellate court over the Commission decisions affecting PG&E. Under these circumstances, it is justifiable for the Commission to agree to the enforcement provisions in paragraph 22, and for the Bankruptcy Court to have jurisdiction to enforce the PSA, the settlement plan incorporating the PSA, and the Court's confirmation order.

D. Consistency with Assembly Bill 1890 and § 368(a)

At one time there was uncertainty as to whether AB 1890 had limited the Commission's authority to allow PG&E to recover all of the wholesale power costs it had booked into its Transition Revenue Account (TRA), or all of its uneconomic generation-related costs in its TCBA. The uncertainty was due to the AB 1890 provision (i.e. § 368(a)) putting the utilities at risk for those costs not recovered by the time that the AB 1890 rate freeze ended (i.e., no later than March 31, 2002).

All parties recognize that there no longer is any uncertainty about the Commission's authority to allow PG&E's recovery of its TCBA balance because AB 6X restored the Commission's ratemaking authority over generation-related facilities owned by the public utilities under our jurisdiction. As the California Supreme Court held in Southern California Edison Company v. Peevey, supra, 31 Cal.4^th at 793, "after the enactment of AB 6X in 2001,...PUC was authorized to approve rates allowing SCE to recover the costs...." Referring to AB 6X as a "major retrenchment from the competitive price-reduction approach of AB 1890," the Court found that AB 6X reemphasized "PUC's duty and authority to guarantee that the electric utilities would have the capacity and financial viability to provide power to California consumers."

The Commission has the authority to allow the utilities to recover their prudently incurred generation-related costs, because AB 6X eliminated AB 1890's market valuation requirement for the utilities' retained generation assets and AB 6X "allowed PUC to regulate the rates for power so generated pursuant to ordinary `cost-of-service' ratemaking." (Id. at 795.) Due to the restoration of the Commission's ratemaking authority over these assets, AB 6X "largely eliminated the category of `uneconomic' generating asset costs" and, therefore the limit in § 368(a) "no longer applies to the generation-related costs of the utilities." Id.

In view of the California Supreme Court's recent decision finding that AB 6X made § 368(a) inapplicable to the utilities' unrecovered costs, it is clear that the Commission's authority to allow PG&E to recover the balance in its TCBA is not limited by AB 1890.

TURN argues that under basic principles of utility ratesetting, ratepayers cannot be forced to contribute capital to a utility and utilities are not entitled to earn a return on their expenses. (TURN Op. Br. p. 11-13.) We do not agree that that principle applies to this settlement. In Diablo Canyon, (1988) 30 CPUC 2d 189, and subsequent decisions for the nuclear powerplants owned by PG&E, SCE, and SDG&E, the Commission approved incremental cost incentive pricing that allowed the utility to recover its operating expenses on the basis of operating performance rather than actual cost, thus allowing the utility to recover more than its actual operating expenses if performance exceeded benchmarks. As we discussed above, in Southern California Edison Co. v Peevey, supra, 31 Cal. 4^th at 793, the Court reemphasized the Commission's duty and authority to guarantee that the electric utilities would have the capacity and "financial viability to provide power to California customers." (Emphasis added.)