Electric Utility’s Customers Denied Official Committee Status in Chapter 11

Should ratepayers in the reorganization of a public utility be entitled to an official committee, since they will be funding any chapter 11 plan?

If Congress ever undertakes an overhaul of chapter 11, an opinion in the reorganization of Pacific Gas & Electric Co. shows why the question deserves study.

Saddled with liability for wildfires caused by its transmission lines, PG&E filed a chapter 11 petition early this year in San Francisco. Referring to themselves as ratepayers, PG&E customers filed a motion seeking appointment of their own, separate official committee.

The ratepayers argued that they were entitled to official representation because the utility bills they pay will fund any reorganization plan. They also argued that the official committee of unsecured creditors has an innate conflict because the official committee represents creditors and tort claimants.

Essentially because his hands were tied, Bankruptcy Judge Dennis Montali denied the motion in an opinion on May 28.

Section 1102(a)(1) requires the U.S. Trustee to appoint an official unsecured creditors’ committee and allows the trustee to “appoint additional committees of creditors or of equity holders as the United States trustee deems appropriate.” Section 1102(b)(1) and (2) requires that committee members be creditors or equity holders. In turn, a “creditor” is someone with a “claim.”

The ratepayers argued that they are creditors because they are entitled to annual credits from the auction of greenhouse gas allowances. Judge Montali explained that he had already authorized the payment of those credits.

The ratepayes are not creditors, Judge Montali said, because the creditors will be paid and the claims “will be gone very soon.”

Speaking to the idea that ratepayers will fund a plan, Judge Montali said that the Bankruptcy Code “does not provide for the creation of a separate committee to protect the interests of future consumers or customers of a debtor.”

“In addition,” Judge Montali said, ratepayers are protected by the condition to confirmation in Section 1129(a)(6) requiring regulatory approval of changes in rates. Ratepayers, he said, “would have the opportunity to be heard by the regulatory agency.”

Because the ratepayers had not shown why the official unsecured creditors’ committee “cannot represent whatever interest the ratepayers hold as unsecured creditors,” Judge Montali denied the motion for appointment of an official ratepayers’ committee.

Observation: When Congress adopted the Bankruptcy Code in 1978, few would have guessed that a giant public utility like PG&E would have filed to reorganize twice in chapter 11, affecting millions of customers both times. Do regulators and state officials adequately represent utility customers in a bankruptcy reorganization? Would the existence of an official customers’ committee hinder rather than promote reorganization?

Someday, the question deserves analysis by Congress.