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e· - FILED 

JAMES L. LOPES (No. 63678) 

JANET A. NEXON (No. 104747) 

GARY M. KAPLAN (No. 155530) 

MAR O 5 2002 

Ul/fTED STATES BANKRUPTCY CQVRf SAN FRANCISCO, CA 

HOW ARD, RICE, NEMEROVSKI, CANADY, 

FALK&RABKIN 

A Professional Corporation 

Three Embarcadero Center, 7th Floor 

San Francisco, California 94111-4065 

Telephone: 415/434-1600 

Facsimile: 415/217-5910 

Attorneys for Debtor and Debtor in Possession 

PACIFIC GAS AND ELECTRIC COMP ANY 

In re 

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

PACIFIC GAS AND ELECTRIC 

COMPANY, a California corporation, 

Case No. 01-30923 DM 

Chapter 11 Case 

Date: March 25, 2002 

Debtor. Time: 9:30 a.m. 

Place:- 235 Pine Street 

San Francisco, California 

Federal I.D. No. 94-0742640 

NOTICE OF MOTION AND MOTION BY PACIFIC GAS AND ELECTRIC 

COMPANY FOR ORDER (A) APPROVING SETTLEMENT AND SUPPORT 

AGREEMENT BY AND AMONG PLAN PROPONENTS AND SENIOR 

DEBTHOLDERS, (B) AUTHORIZING PAYMENT OF PRE-AND POSTPETITION INTEREST TO HOLDERS OF UNDISPUTED CLAIMS IN 

CERTAIN CLASSES, {C) AUTHORIZING PAYMENT OF FEES AND 

EXPENSES OF INDENTURE TRUSTEES AND PA YING AGENTS AND 

(D) AUTHORIZING DEBTOR TO ENTER INTO SIMILAR SETTLEMENTS; 

SUPPORTING MEMORANDUM OF POINTS AND AUTHORITIES 

[SUPPORTING DECLARATION OF KENT M. HARVEY FILED . . SEP ARA TEL Y] . 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT . 

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TABLE OF CONTENTS 

NOTICE OF MOTION AND MOTION 

MEMORANDUM OF POINTS AND AUTHORITIES 

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I. 

II. 

INTRODUCTION -

FACTUAL BACKGROUND 

A. General Background. 

B. The Settlement Agreement. 

III. ARGUMENT 10 

A. The Settlement Agre·ement Should Be Approved. 10 

1. The Probability Of Success On The Merits. 12 

2. Litigation Of The Disputed Issues Would Be Costly And 

Result In Delays In Administration Of Tp.e Estate. 1·4 

3. The Settlement Is In The Best Interests Of Creditors. 15 

B. This Court Should Authorize The Debtor To Make Payments 

Of Pre-Petition Interest And Post-Petition Interest To Holders 

Of Certain Undisputed Claims. 16 

1. This Court Has Statutory Authority And Equitable 

Power Under Sections 105(a) And 363(b) Of The 

Bankruptcy Code To Permit The Debtor To Make 

Interest Payments To Holders Of Undisputed Claims 

During The Chapter 11 Case. 16 

2. Early Payment Oflnterest To Holders Of Undisputed 

Claims Is In The Best Interest Of The Debtor's Estate 

And Creditors. 19 

3. Proposed Procedure For Making Interest Payments. 21 

C. Payment O:fThe Fees And Expenses Of Indenture Trustees 

And Administrative Bank And Other Paying Agents Should 

Be Approved. · 22 

D. The Debtor Should Be Authorized To Enter Into Substantially 

Similar Settlements Without Further Court Approval. 24 

CONCLUSION 25 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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1 TABLE OF AUTHORITIES 

2 Page(s) 

3 

4 Cases 

5 

Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 

F .2d. 1063 (2d Cir. 1.983) · 17 

6 

7 

DiStefano v. Stern (In re JFD Enters.), No. 99-2034, 2000 WL 560189 (1st 

Cir. May 1, 2000) · 17 

8 In re Chateaugay Corp., 80 B.R. 279.(Bankr. s.-D.N.Y. 1987) 19 

9 In re.Equalnet Communications Corp., 258 B.R. 368 (Ban1a. S.D. Tex. 2000) 19 

10 

In re Ernst Home Ctr., Inc., 209 B.R. 974 (Bankr. W.D. Wash. 1997) 17 

11 

In re Ionosphere Clubs, Inc., 98 B.R. 174 (Bankr. S.D.N.Y. 1989) 18 

12 

In re Purofied Down Prods. Corp., 150 B.R. 519 (S.D.N.Y. 1993) 11 

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_In.re-Structurelite Plastic Corp., 86 B.R. 922 (Ban1a. S.D. Ohio 1988) 18 

In re UNR Indus., Inc., 143 B.R. 506 (Bankr. N.D. UL 1992), rev'd on other 

grounds, 173 B.R. 149 (G.D. Ill. 1994) 18 

&RABKIN 

n,qd,,o,d-15 In re W.T. Grant Co., 699 F.2d 599 (2d Cir. 1983) 11 

16 Martin v. Kane (In re A & C Props.), 784 F.2d 1377 (9th Cir. 1986) 11, 12, 15 

17 

18 

Michigan Bureau of Workers' Disability Comp. v. Chateaugay Corp. (In re 

Chateaugay Corp.), 80 B.R. 279 (S.D.N.Y. 1987) ·16 

19 Myers v. Martin (In re Martin), 91 F.3d 389 (3d Cir. 1996) 10, 12 

20 Nellis v. Shugrue, 165 B.R. 115 (S.D.N.Y. 1994) 11, 12 

21 

22 

Official Unsecured Creditors' Comm. v. Pennsylvania Truck Lines, Inc. (Inre 

Pennsylvania Truck Lines, Inc.), 150 B.R. 595 (E.D. Pa. 1992), affd, 8 

F.3d 812 (3d Cir. 1993) - 11, 12 

23 Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. 

Anderson, 390 U.S. 414 (1968). 11 

24 

25 

. Vaughn v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham 

Lambert Group, Inc.), 134 B.R. 499 (Bankr. S.D.N.Y. 1991) 10, 11, 15 

26 

27 

28 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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11 u.s.c. 

§§101, et seq. 

§105(a) 

§105(b) 

§363 

§363(b) 

§1107 

§1108 

§1129(a)(7) 

Fed. R. Bankr. P. 

9019 

9019(a) 

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TABLE OF AUTHORITIES 

Statutes 

Page(s) 

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2, 10 

N.D. Cal. Local Bankr. R. 9014-l(c)(2) 2 

Other Authorities 

R. Eisenberg & F. Gecker, The Doctrine of Necessity and Its Parameters, 73 

Marg. L. Rev. 1 (1989) . 18 

2 Lawrence P. King, Collier on Bankruptcy 'i!105.0l (15th ed. rev. 2001) 17 

10 Lawrence P. King, Collier on Bankruptcy 'i!9019.03 (15th ed. rev. 2001) 24 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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NOTICE OF MOTION AND MOTION 

PLEASE TAKE NOTICE that on March 25, 2002, at 9:30 a.m., or as soon 

thereafter as the matter may be heard, in the Courtroom of the Honorable Dennis Mon tali, 

located at 235 Pine Street, 22nd Floor, San Francisco, California, Pacific Gas and Electric 

Company, the debtor and debtor-in-possession in the above-captioned case ("PG&E" or the 

"Debtor"), will and hereby does move the Court (the "Motion") for entry of an order 

(a) approving that certain Settlement and Support Agreement dated February 12, 2002 (the 

"Settlement Agreement"), by and among the Debtor, PG&E Corporation (the "Parent" and, 

together with the Debtor, the "Plan Proponents") and the Senior Debtholders, 1 

(b) authorizing the Debtor to make payments of Pre-Petition Interest2 and Post-Petition 

Interest to the holders of undisputed Claims in certain Classes under the Plan during the 

Chapter 11 Case, ( c) authorizing the Debtor to pay, on an on-going basis, the fees and 

expenses of certain indenture trustees and administrative bank or other paying agents who 

have a right to hold back or otherwise seek reimbursement of their fees and expenses from 

the beneficial holders of financial debt to whom they make distributions and'(d) authorizing 

the Debtor to enter- into additional settlement agreements with other holders of Class 5 

Claims on substantially similar terms as the Settlement Agreement, without the need for 

further Court approval. 

A copy of the Settlement Agreement is annexed as Exhibit "A" to the 

accompanying Declaration of Kent M. Harvey. This Motion is made pursuant to Sections 

105(a) and 363(b) of the United States Bankruptcy Code, 11 U.S.C. §§101, et seq. (the 

1The term "Senior Debtholders" means: State Teachers Retirement System of Ohio, 

DC Water and Sewer Authority, Chandler Asset Management, Franklin Mutual Advisers, 

LLC, King Street Capital, M.H. Davidson & Co., L.L.C., OZF Management L.P., OZ 

Management, L.L.C., Pacific Investment Management Company, L.L.C., Satellite Asset 

Management L.P., Security Benefit Life Insurance Co., Stark Investments, Angelo 

Gordon & Co., the State of Tennessee, Appaloosa Management LP, Deutsche Banc Alex. 

Brown, Inc., Bankers Trust Company, Halcyon Offshore Management Company LLC, and 

Halcyon/Alan B. Slifka Management Company LLC .. 

2Capitalized terms not defined herein have the meanings ascribed to them in the 

Settlement Agreement or in the First Amended Plan of Reorganization under Chapter 11 of 

the Bankruptcy Code for Pacific Gas and Electric Company, dated December 19, 2001 (as 

amended from time to time, the "Plan"). 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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"Bankruptcy Code") and Rule 9019(a) of the Federal Rμles of Bankruptcy Proc.edure (the 

"Bankruptcy Rules"), and is based on the facts and law set forth herein, the Declaration of 

Kent M. Harvey, the record of this case and any admissible evidence presented at or prior to 

the hearing on the Motion. 

PLEASE TAKE FURTHER NOTICE that pursuant to Rule 9014-l(c)(2) of the 

Bankruptcy Local Rules for the United States District Court for the Northern District of 

California, any written opposition to the Motion and the relief requested herein must be filed 

with the Bankruptcy Court and served upon appropriate parties (including counsel for each 

of the Debtor, the Senior Debtholders, the Office of the United States Trustee, and the 

Official Committee of Unsecured Creditors) at least five (5) days prior to the schedul~d 

hearing date. If there is no timely objection to the requested relief, the Court may enter an 

order granting such relief without further hearing. 

MEMORANDUM OF POINTS AND AUTHORITIES 

I. IN'J;'RODUCTION 

The Senior Debtholders are a group of creditors holding approximately $2 billion 

in General Unsecured Claims against the Debtor, inc1uding Commercial Paper Claims, 

Floating Rate Note Claims, Medium Term Note Claims, Senior Note Claims and Revolving 

Line of Credit Claims, each of which is classified as a Class 5 Claim under the Plan.3 Soon 

after the ~ling of the Plan, the Senior Debtholders communicated to the Debtor their strong 

disagreement with various aspects of the treatment to be afforded such Claims under the 

Plan. In particular, the Senior Debtholders disagreed with the Debtor regarding the 

appropriate rate of interest earned on their Claims, raised concerns regarding whether the 

Long-Term Notes to be issued to creditors under the Plan would have a market value of par 

and took the position-disputed by the Debtor-that they were entitled to exercise certain 

subordination rights against the holders of QUIDS Claims because they were not assured of 

payme:pt in full. 

3The evidentiary basis and support for the facts set forth in this Motion are contained in 

the Declaration of Kent M. Harvey filed concurrently herewith. 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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In an effort to avoid costly _and time~consuming litigation over these disputed 

issues, the Senior Debtholders and the Plan Proponents commenced good faith and armslength negotiations. After months of extensive and arduous negotiations, the parties reached 

a compromise regarding the treatment of Senior Indebtedness._ This compro~ise and 

settlement was memorialized initially in a stipulation and term sheet filed with the 

Bankruptcy Court on January 14, 2002, and subsequently in the Settlement Agreement for 

which the Debtor now seeks approval. 

In the Settlement Agreement (which is described more fully below), the Plan 

Proponents have agreed to fix the principal amount of the Senior Debtholders' Claims and to 

make certain amendments to the Plan after the Settlement Agreement becomes effective, · 

including, among other things, amendments relating to the rates of interest earned on Senior 

Indebtedness and altering certain terms of the Long-Term Notes to enhance their value.and 

transferab~lity. In addition, the Plan Proponents have agreed, subject to this Court's 

approval, to pay the reasonable fees and expen~es of the Senior Debtholders and to make 

payments of accrued and unpaid Pre~Petition Interest and Post-Petition Interest to the Senior 

Debtholders during the Chapter 11 Case. In consideration of the Plan Proponents' 

agreements, the Senior Debtholders have agreed to support confirmation of the Plan, 

including voting their Allowed Claims in favor of the Plan, subject to certain conditions. 

As noted above, the co~prornise m~morialized in the Settlement Agreement is 

the product of months of extensive negotiations among the parties. The settlement 

negotiations we~e difficult, not only because of the number of parties involved-18 creditors 

are party to the Settlement Agreement-but also because these creditors had diverse 

interests, depending upon the particular debt instrument(s) they hold. Notwithstanding these 

diverse interests, the parties were able to reach accord on the terms of a settlement, the 

benefits of which were intended for all holders of Senior Indebtedness and, in some cases, 

all holders of Class 5 Claims. Moreoyer, the Settlement Agreement now provides the 

:framework for additional settlements with other creditors. 

The Debtor has weighed carefu~ly the benefits afforded to the estate by the 

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settlement agai;nst the expense, risks an.d delays attendant to litigation over the interest rate 

and QUIDS Claim subordination issues and, in the exercise of its business judgment, has 

concluded that the settlement terms are fair and re·asonable and are in the best interest~ of the 

estate in that they reflect: 

a. the inherent risks oflitigation; 

b. the expense that would be incurred in protracted litigation 

between the Senior Debtholders and the Plan Proponents and the 

holders of QUID Claims over certain of these issues and the 

likely delays such litigation would cause in the administration of 

the estate and prosecution of the Plan; a1:1d 

c. the benefits that will be afforded to other creditors who are not 

parties to the Settlement Agreement but who will nevertheless 

receive favorable treatment based on th~ terms thereof, including 

the contemplated Plan amendments and the Debtor's proposal to 

make current interest payments to holders of certain undisputed 

Claims. 

The Debtor also seeks authorization froin this Court to make current interest 

payments to the ho~ders of undisputed Claims ( other than Administrative Expense Claims, 

Environmental, Fire Suppression and Tort Claims and Chromium Litigation Claims4) after 

the Settlement Agreement becomes effective.5 The Debtor submits that payment of PrePetition Interest and Post-Petition Interest is warranted under the exceptional circumstances 

of this Chapter 11 Case. The Debtor, a solvent entity, wjll have to make these payments 

eventually pursuant to a plan ofreorganization. Currently, the estate is inc:urri11-g 

unnecessary interest expense·because the rates at which the Debtor must accrue ~d 

compound accrued interest are significantly higher than the rates the Debtor can earn on its 

invested cash in today's financial markets. Payment of current interest to the.holders of 

undisputed Claims thus will have a twofold benefit: it will reduce thi~ negative arbitrage, 

4These Claims do not earn interest under the Plan. See Plan §4 .1. Accordingly, these 

Claims are not included in the Classes of Claims for which the Debtor seeks authorization to 

pay interest pursuant to this Motion. 

5There are three ~onditions to effectiven~ss of the Settlement Agreement: (a) Court 

approval of the Settlement Agreement, (b) Court approval of the Disclosure Statement and 

( c) entry into the Settlement Agreement or substantially similar agreements by the holders of 

at least $3 billion in Class 5 Claims. 

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thus enhancing the value of the estate, and at the same time relieve creditors of.some of the 

financial burdens they have suffered as a result of this bankruptcy. 

Finally, the Debtor seeks authorization to pay the fees and expenses ofcertain 

indenture trus_tees and administrative bank and other paying agents to ensure full payment, 

without holdback, is made to the beneficial holders of financial debt, and to enter into 

similar agreements with other creditors, without the need for further Court authorization. 

· The Debtor respectfully urges this Court to approve the settlements embodied in 

the Settlement Agreement and grant the related relief described herein as fair and equitable 

and in the best interests of this estate and its creditors. 

II. FACTUAL BACKGROUND 

A. General Background. 

On April 6, 2001, PG&E filed a voluntary petition for relief under Chapter 11 of 

the Bankruptcy Code. PG&E continues to manage and operate its businesses and properties 

as a debtor-in-possession, pursuant to Sections 1107 and 1108 of the Bankruptcy Code. 

On December 19, 2001, the Plan Proponents filed the Plan. The General. 

Unsecured Claims which are classified in the Plan as Class 5 Claims include, among others, 

Commercial Paper Claims, Senior Note Claims, Medium Term Note Claims, Floating Rate 

Note Claims and Revolving Line of Credit Claims, also referred to herein as "Senior 

Indebtedness." The Plan, as it has been subsequently amended, currently proposes to pay 

each holder of an Allowed Class 5 Claim: (a) Pre-Petition Interest and Post-Petitio:n, Interest 

accrued and unpaid up to the Effective Date, (b) Cash equal to 60% of the ;remaining 

Allowed Claim after the payment of Pre-Petition Interest, (c) Long-Term Notes equal to 

40% of the remaining Allowed Claim, and (d) a pro rata share of a $40 million placement 

fee (equal to approximately 1.5% of the Long Term Notes to be issued under the Plan) to be 

divided among the holders of Allowed Claims in certain Classes. Plan, §4.14. The Plan 

further states that, unless otherv,rise provided in the Pl!ffi, Post-Petition Intere~t on Allowed 

Claims entitled to such interest under the Plan will be calculated and paid at the lowest nondefault rate and in accordance with the terms specified· in the applicable indenture or 

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instrument governing ~he Allowed Claims, or i.f no instrument exists or if the applicable_ 

instrum~nt does not specify a non-default rate of interest, at the Federal Judgment Rate in 

existence as of the Petition Date. Plan, §4.1. 

As noted above, the Senior Debtholders, who hold approximately $2 billion in 

Class 5 Claims (primarily Senior Indebtedness), disagreed with the interest rates proposed to 

be paid on Senior Indebtedness and other.elements of the treatment of these Claims under 

the Plan. Although the parties began good faith settlement discussions shortly after the . 

original version of the Plan was filed on September 20, 2001, they were not able to-reach an 

immediate agreement. On November 27, 2001, the Senior Debtholders filed an objection to 

approval of the. Disclosure Statement in which they cha~lenged, among other things, the 

interest rates to be paid under the Plan, expressed concern about the value of the Long-Term 

Notes and asserted that they were entitled to exercise certain subordination rights against the 

holders of QUIDS Claims. On January 10, 2002, the Senior Debtholders filed a second 

objection to the Disclosure Statement. 

The Plan Proponents and the Senior Debtholders continued negotiations and 

ultimately reached an agreement in principle. On January 14, 2002, the parties executed and 

filed with the Court a Stipulation (including a term sheet attached· thereto), pursuant to which 

the Senior Debtholders withdrew their objections to the Disclosure Statement, subject to the 

parties entering into a definitive settlement agreement incorporating thy terms of the 

settlement. 

B. The Settlement Agreement. 

On February 12, 2002, the Plan Proponents entered into the Settlement 

Agreement. The Settlement Agreement, which is th~ result of months of extensive, good 

faith negotiations among the parties, resolves· a number of disputes regarding the Senior 

Debthcilders' Claims, including, among others, disputes over (a) the pri~cipal amount of the 

Class 5 Claims held by the Senior Debtholders, (b) the rate of interest earned on such 

Claims, (c) the amount of the placement fee to be distributed to holders of Allowed Claims 

in certain Classes under the Plan (inclu~ing the Senior Debtholders), (d) the Cash payments 

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Under the Settlement Agreement, 6 the principal amount of the Class 5 Claims 

held by the Senior Debtholders will be fixed at the full face amount of the underlying 

financial instruments that they h.old. Settlement Agreement, § 1. 7 Upon the effectiveness of 

the Settlement Agreement, the ·Plan Proponents have agreed to amend the Plan to provide 

that the interest rate for Class 5 Claims will be the interest rate applicable to such Claims on 

the Petition Date.8 Id., §2(a). In addition, the Plan Proponents have agreed to make the 

following amendments to the Plan: 

a. Step-up Interest Rates. The base interest rates earned on 

Senior Indebtedness will increase on a going-forward basis if the Plan 

does not become effective by certain dates, as follows: (i) 37.5 basis 

points on February 15, 2003; (ii) an additional 37.5 basis points on 

September 15, 2003; and (iii) an additional 37.5 basis points on 

March 15, 2004. The Debtor is not required to accrue or pay any 

increased interest rates for any interest accruing prior to February 15, 

2003. Settlement Agreement, §2(b ). · · 

b Placement Fee. The placement fee to be distributed on~ 

pro rata basis on the Effective Date to holders of Allowed Claims in 

Class 5 and the holders of Allowed Claims in certain other Classes (as 

6 A general description of the Settlement Agreement follows. For a more detailed 

understanding of all of the terms of the settlement, reference should be made to the 

Settlement Agreement, a copy of which is attached as Exhibit "A" to the Harvey 

Declaration. 

7The Settlement Agreement provides that the amount of each Senior Debtholder's 

Allowed Claim will be stated on Schedule A-1 to the Settlement Agreement, and will be 

treated as confidential, with certain exceptions. ·Settlement Agreement §1. The Schedule 

will be prepared no later than three days prior to the hearing on this Motion, and will set 

forth the Senior Debtholders' Claims as of the date thereof. Debtor will separately bring a 

motion seeking to file Schedule A-1 under seal, pursuant to the procedures set forth in the 

Court's Case Management Order (revised June 14, 2001). 

8For example, the base interest rates earned on the following types of Class 5 Claims 

will be fixed at the contract rate in existence for such Claims on the Petition Date, as 

follows: (i) Commercial Paper Claims-7 .466% per annum; (ii) Floating Rate Note 

Claims-7.583% per annum (calculated on an actual days elapsed over 360 days, with an 

iI!lplied yield of 7.6~0%); (iii) _Medium Term Note Clai!Ils-5.~1 % to 8.45% per 3:nnum or 

htgh~r, as provided m ~e appl~cable doeu~ents governmg the issuance of the parttc~lar . Medmm Term Notes; (1v) Semor Note Claims~9.625% per annum; and '(v) Revolvmg Lme 

of Credit Claims-8.0% per annum. Interest on such Class 5 Claims will be compounded 

quarterly, with the exception that the Medium Term Note Claims and the Senior Note 

Claims will be compounded semi-annually (all in accordance with the indenture or other 

documents governing the indebtedness). See Settlement Agreement, §2(a). 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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and to the extent pr,ovided in the Plan) will be increased to 2.5% of.the 

~ggregate amount ofLong-!_erm Notes i~sue~ purs~ant to the Plan and 

mcreased further by an addition.al 50 basis pomts with respectto any 

Long-Term Notes issued by ETrans and GTrans with a maturity of 

greater than ten years. Id., §5. 

c. Effective Date Payments. Each holder of an Allowed 

Class 5 Claim will receive on the Effective Date of the Plan the 

following distributions: (1) a Cash payment equal to 60% of its 

remaining Allowed Class 5 Claim (after deducting any payments made 

to such holder prior to the Effective Date); (ii) a pro rata share of 

certain 'Excess Cash, 9 if any, to be distributed to holders of Allowed 

Claims in Class 5 and holders of Allowed Claims in such other 

Classes, as and to the extent the payment of Excess Cash to such 

Classes is provided for in the Plan; and (iii) Long-Tenn Notes equal to 

the balance .of such Allowed Class 5 Claim after deducting the Cash 

payments made pursuant to clauses (i) and (ii). hl., §4. 

d. Long-Term Notes. At least 50% of the Long-Tenn Notes 

issued by ETrans and GTrans will have a maturity often years. The 

interest rates on the Long-Term Notes and the New Money Notes 

issued by Gen, ETrans and GTrans will increase in an amount equal to 

the increase in the Option Adjusted Spread, quoted in the Lehman 

Brothers Electrical Utility Corporate Bond Index, over a defined 

period of time and subject to a maximum increase of 25 basis points. 

hl., §§6-7. 

Additional material terms of the Settlement'Agreement are: 

a. Payment of Interest and Fees and Expenses. The Debtor 

has agreed, subject to the approval of the Bankruptcy Court, to make 

an initial payment to the Senior Debtholders of accrued and unpaid 

Pre-Petition Interest and Post-Petition Interest through the last day of 

the calendar month immediately preceding the date on which the 

S.ettlement Aw.eement is approved, in arrears, no later than ten days 

after all conditions to effectiveness of the Settlement Agreement have 

been satisfied; and payments of Post-Petition Interest thereafter in 

quarterly installments, with the last such payment to occur on the 

Effective Date. Such interest payments are subject to re- · characterization as a partial payment of principal in the unlikely event 

that the Debtor is determined by a final non-appealable order of the 

Bankruptcy Court to be insolvent on a balance sheet basis or the 

Chapter 11 Case is converted to a case under chapter 7. The Debtor 

also has agreed, in consideration of the efforts of the Senior 

Debtholders in negotiating and compromising the disputes as 

memorialized in the Settlement Agreement and subject to the approval 

of the Bankruptcy Court, to pay certain reasonable fees and expenses 

9The "Excess Cash" to be distributed on the Effective Date, if any, will equal the 

amount (if any) by which the Debtor's cash balance on its last month-end' closing balance 

'sheet preceding the date of the preliminary prospectus for the New Money Notes, less the 

sum of certain of the Debtor's cash requirements (all as more particularly set forth in the 

Settlement Agreement), exceeds $500 million. See Settlement Agreement, §4. 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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of the Seni9r Debtholders. Settlement Agreement, §§2(c)-(e), 19. 

b. Senior Debtholders' Plan Suwort. The Senior Debtholders 

have agreed to support confirmation of the Plan. Subject to the 

Settlement Agreement becoming effective and the receipt by the 

Senior Debtholders of a Plan and Disclosure Statement mcorporating 

the terms of the Settlement Agreement and other solicitation materials 

approved by the Bankruptcy Cou.rt, each Senior Debtholder has agreed 

to (a) vote its Allowed Class 5 Claim(s), currently held and any 

acquired in the future, 10 in acceptance of the Plan, (b) fully support 

confirmation of the Plan, (c) not consent to, vote for, or otherwise 

support or encourage any plan of reorganization other than the Plan, 

(d) not take any actions to develop or formulate an alternative plan of 

reorganization, ( e) not solicit or meet with other parties to develop or 

formulate an alternative plan of reorganization, and (f) not object to, 

delay or impede or otherwise oppose or object to the Plan or 

Disclosure Statement. Id., §13. 

c. Termination Events. The obligations of the Senior 

Debtholders may only be terminated upon the occurrence of: (a) a 

material breach of the Settlement AS'1:eement by the Plan Proponents, 

(b) a re-characterization of Post-Petition Interest payments as partial 

payments of principal, ( c) the failure of the Debtor to make timely 

mterest payments, ( d) a determination by the Bankruptcy Court that 

the Debtor is insolvent on a balance sheet basis or the conversion of 

the Chapter 11 Case to a case under Chapter 7, ( e) the failure of the 

Plan to become effective on or before June 1, 2003, (f) the voluntary 

withdrawal of the Plan by the Plan Proponents, or (g) _the entry of an 

order by the Bankruptcy Court findi:p.g that the Plan is not confinnable 

(each, a "Creditor Termination Event"). The obligations of the Plan 

Proponents may only be terminated upon the occurrence of (a) a 

determination by the Bankruptcy Court that the Debtor is insolvent.on 

a balance sheet basis ·or the conversion of the Chapter 11 Case to a 

case under Chapter 7, (b) the rejection of the Plan by holders of 

Allowed Class 5 Claims, ( c) as to an individual Senior Debtholder, a 

breach by such Senior Debtholder of its obligation to support the Plan, 

and ( d) as to all Senior Debtholders, if a breach or breaches by Senior 

Debtholders of their support obligations under the Settlement 

Agreement results in the remaining non-breaching holders of Allowed 

Class 5 Claims who are parties to the Settlement Agreement or 

substantially similar agreements constituting less than the Required 

Holders (as defined below) (each, a "Plan Proponent Termination . Event"). Id., § 14. 

d. Survival of Certain Obli~ations. The Debtor is required to 

accrue interest at the rates set forth m the Settlement Agreement unless 

(i) an event occurs giving rise to the re-characterization of PostPetition Interest payments as partial payments of principal; (ii) a 

Senior .Debtholder breaches its support obligations prior to a Creditor 

Termination Event (in which case the Debtor may cease accruing 

inte_rest at the agreed rates only with respect to the breaching Senior 

10 Any additional Class 5 Claims acquired by the Senior Debtholders will be subject to 

the Settlement Agreement. See. Settlement Agreement, § 14. 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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Debtholder), or (iii) as a result of breaches of the support obligations 

by one or more Senior Debtholders prior to a Creditor Tennination 

Event, the Required Holders constitute less than $3 billion in A11owed 

Claims.that currently are Class 5 Claims (in which case the Debtor 

may cease accruing interest at the agreed rates for all Senior 

Debtholders). The Debtor, however, may terminate payment of 

interest: (i) if an event occurs giving rise to the re-characterization of 

Post-Petition Interest payments as partial payments of principal, (ii) if 

a Senior Debtho]der breaches its support obligations prior to a 

Creditor Termination Event (in which case the Debtor may terminate 

payment of interest only with respect to the breaching Senior 

Debtholder), (iii) if, as a result of breaches of the support obligations 

by one or more Senior Debtholders prior to a Creditor Termination 

Event, the Required Holders constitute less than $3 billion in Allowed 

Claims that currently are Class 5 Claims (in which case the Debtor 

inay terminate payment of interest as to all Senior Debtholders), (iv) 

any other Plan Proponent Termination Event occurs, or (v) as to any 

Senior Debtholder, if such Senior Debtholder does not support a 

subsequent plan ofreorganization filed by the Plan Proponents. Id., 

§§2, 14 and 25. · 

e. Nomination of Underwriters. Subject to the right of the 

Debtor to exclude ariy underwriter that refuses to enter into an 

appropriate underwriting agreement, the Senior Debtholders, in 

consultation with the Committee, have the right to nominate 5 

underwriters to participate in the marketing of the New Money Notes 

that correspond by issuer and maturity dat~ or principal payment dates 

with the Long-Term Notes. 14:, §11. 

The Settlement Agreement will become effective only if (a) the Disclosure 

Statement is approved by this Court, (b) the Settlement Agreement is approved by this Court 

and ( c) holders of Class 5 Claims, including each Senior Debtholder, holding at least $3 

billion in the aggregate in Allowed Class 5 Claims have entered into the Settlement 

Agreement or substantially similar agreements (the "Required Holders"). Id., §21. 

III. ARGUMENT 

A. The Settlement Agreement Should Be Approved. 

Bankruptcy Rule 9019(a) empowers a bankruptcy court to approve any settlement 

or compromise related to a reorganization or liquidatio~. 11 Myers v. Martin (In re Martin), 

91 F.3d 389,393 (3d Cir. 1996); Vaughn v. Drexel Burnham Lambert Group, Inc. (In re 

11Bankruptcy Rule 9019(a) simply states, in part, that"[ o]n motion by the trustee and 

after notice and a hearing, the court may approve a compromise or settlement." Fed. R. 

Bankr. P. 9019(a). 

MOT .. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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- -- Drexel Burnham Lambert Group, Inc.), 134 B.R. 499,505 (Bankr. S.D.N.Y. 1_991), Indeed, 

compromises and settlements are a common and favored occurrence in bankruptcy cases 

because they allow a debtor and its creditors to avoid the financial and other burdens . ' 

associated with litigation over contentious issues and expedite the administratio:p of the 

bankruptcy estate. Protective Comm. for Indep. Stockholders ofTMT Trailer Ferry, Inc. v. 

Andersm:1:, 390 U.S. 414,424 (1968); Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 

1380-81 "(9th Cir. 1986). 

In reviewing proposed settlements, the bankruptcy court's inquiry focuses only 

upon whether the compromise is fair and equitable and in the best interest of the estate. 

TMT Trailer, 390 U.S. at 424; A & C Props., 784 F.2d at 1380-81; Nellis v. Shugrue, 165 

B.R. 115, 121 (S.D.N.Y. 1994). In making this qetermination, however, the bankruptcy 

court is not required to conduct a mini-trial on the merits of the underlying dispute or an 

~ndependent investigation into the reasonableness of the settlement. Blair, 538 F.2d at 851; 

see also In re Purofied Down Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993); Drexel 

Burnham, 134 B.R. at 505. 

Rather, the standards for such approval have been described as lenient and 

intended to encourage approval of settlements in bankruptcy cases. See Purofied Down, 150 

B.R. at 5i2-23. The bankruptcy court need only canvass the legal and factual issues 

' ' 

underpinning the compromise to ensure that the proposed settlement does not fall "'below 

the lowest point in the range ofreasonableness."' Nellis v. Shugrue, 165 B.R: at 121-22 

(quoting In re W.T. Grant Co., 699 F.2d 599, 609 (2d Cir. 1983)); Purofied Down, 150 B.R. 

at 522; Official Unsecured Creditors' Comm. v. Pennsylvania Truck Lines, Inc. (In re 

Pennsylvania Truck Lines, Inc.), 150 B.R. 595, 598 (E.D. Pa. 1992), affd, 8 F.3d 812 (3d ·. 

Cir. 1993); Drexel Burnham, 134 B.R. at 505. In making this determination, significant 

deference may be given to the informed judgment of the debtor-in-possession and its counsel 

that a proppsed compromise is fair and equitable. Martin, 91 F.3d at 395; Neilis v. Shugrue, 

165 B.R. at 122; Purofied Down, 150 B.R. at 522-23; Drexel Burnham, 134 B.R. at 505. 

Over the years, four significant criteria have been developed by the courts for 

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1 consideration in dete17Dining whether a proposed settlement falls below the lowest point in 

2 the range of reasonableness: 

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1. the probability of success on the merits; 

2. the difficulties, if any, to be encountered in the matter of collection; 

3. the complexity of the litigation involved, and the expense, inconvenience 

6 · and delay necessarily attending it; and 

7 4. the paramount interest of the creditors and a proper deference to their 

8 reasonable views. 

9 A & C Props., 784 F.2d at 1381; see also Martin, 91 F.3d at 393; Nellis v. Shugrue, 165 B.R. 

10 at 122; Pennsylv~nia Truck Lines, 150 B.R. at 598. As demonstrated below, each of the 

11 applicable criteria is satisfied here. 12 

12 1. The Probability Of Success On The Merits. 

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16 discussed below in detail-include the amount of the Senior Debtholders' Class 5 Claims 

17 and the appropriate interest rate to be paid mi such Claims, the Senior Debtholders' 

18 contention that the Plan may afford them less than full payment of their Claims, apd the 

19 Senior Debtholders' assertion that they are entitled to exercise certain subordination rights 

20 against _the holders of QUIDS Claims. 

21 Although the Debtor believes that its positions have considerable merit and that, 

22 iflitigated, the Debtor would have prevailed on the issues in dispute, no litigation is without 

23 risk. Further, certain of the iss:ues raised by the Senior Debtholders have not been 

24 conclusively decided and, in some cases, have not been considered within the Ninth Circuit. 

25 Accordingly, how the Court ultimately would have ruled on these disputes is uncertain, and 

26. by resolving the di~putes, the Debtor and the Senior Debtholder~ recognize the inherent risks 

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28 . 12The second factor typically considered by courts--difficulty associated with 

collection-is not applicable here. · 

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of litigation aI1d the benefits of reaching a compromise, including the avoidance of 

significant expense and time associated with litigation. · 

The first accommodation embodied in the settlement relates to the amount of the 

Senior Debtholders' Claims and the interest rate to be paid on such Claims. Each of the 

Senior Debtholders' Allowed Class 5 Claims will be fixed at the full face am011nt of the 

underlying debt instrument. The Settlement Agreement also resolves the dispute among the 

parties regarding the rate of interest accrual on the Senior Indebtedness. The Senior 

Debtholders have asserted that they are entitled to be paid interest at the rate of 10% per 

annum, the legal rate specified under California state law for breach of contract. The Debtor 

believes, however, that the trend in bankruptcy cases in the Ninth Circuit is to award PostPetition Interest at the Federal Judgment Rate as of the Petition Date (here, approximately 

4% ), but provided in the Plan that Post-Petition Interest would accrue at the lowest nori- .. 

default rate of interest in the agreement or instrument governing the particular Claim (rates 

that are generally higher than the Federal Judgment Rate as of the Petition Date) and, in the 

absence of such a document ( or provision therein), at the Federal Judgment Rate as of the ~ 

Petition Date. The Settlement Agreement reflects the parties' compromise-interest will 

accrue at the contract rate, fixed as of the Petition Date,. with a potential for certain increases 

in the interest rate if the Plan does not become effective by certain dates. 

The dispute over whether the treatm_ent under the Plan affords payment in full to 

the Senior Debtholders also has been fully resolved. Although the Debtor firmly believes 

that the Plan provides for the payment in full of all Allowed Claims, the increase in interest 

rates and the agreed-upon mo¢lification of certain terms of the Long-Term Notes 13 puts this 

13 Among the other amendments intended to enhance the value and transferability of the 

Long-Term Notes, the Plan Proponents have agreed that distributions to holders of Allowed 

Class 5 Claims will include a pro rata share of Excess Cash, if any, thus potentially reducing 

the amount of Long-Term Notes issued to creditors; that at least 50% of the Long-Term 

Notes to be issued to ETrans and GTrans will have a maturity often years; and that the 

interest rates on the Long-Term Notes and the Corresponding New Money N"otes issued by 

Gen, ETrans and GTrans will increase in an amount equal to the increase in the Option 

Adjusted SJ;>read, quoted in the Lehman Brothers Utility Corporate Bond Index over a 

defined penod of time and subject to a maximum increase of25 basis points. 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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issue-.to rest without the need.for extensive litigation between the Plan Proponents arid the 

Senior Debtholders. The foregoing compromise-under which the Senior Debtholders no 

longer contend that they will receive less than full payment on their Claims-also forecloses 

' the need to litigate with the Senior Debtholders regarding the subordination issues related to 

the QUIDS Claims. The Senior Debtholders had asserted that unless and until their claims 

ar.e paid in full, the holders of QUIDS Claims, which are contractually subordinate? to the 

Claims of the Senior Debtholders, cannot receive any recovery on their claims. Although 

the Debtor beli~ves that the ~eatment of the QUIDS Claims in the Plan is appropriate, this 

compromise settles the controversy with the Senior Debtholders without the need for costly 

and distracting litigation involving multiple parties. 

2. Litigation Of The Disputed Issues Would Be Costly And Result In Delays 

In Administration Of The Estate. 

As set forth above, the Settlement Agreement resolves numerous complex issues 

between the Debtor and eighteen creditors holding approximately $2 billion in Class 5 

Claims. 14 In agreeing to the settlement embodied therein, the Debtor has made what it 

believes is an economically prudent business judgment that the estate's assets are better ' 

utilized in facilitating a settlement rather than prosecuting litigation. 

The disputes at issue go to the heart of the Chapter 11 Case and, if left 

unresolved, would have resulted in extensive and costly litigation 15 in various contexts 

throughout the Chapter 11 Case, including objections to the Disclosure Statement, objections 

to the Senior Debtholders' Claims aI_ld ultimately, objections to confirmation of the Plan. 

Already, the negotiations between the Debtor and the Senior Debtholders have resulted in 

the filing of the Stipulation and the withdrawal of their objections to the Disclosure 

14The Settlement Agreement will become effective only if $3 billion in Class 5 Claims 

have entered into the Settlement Agreement or similar agreements. 

15Certain of the disputes with the Senior Debtholders might have required ·extensive 

discovery. Not only would such discovery have been expensive, it would have distracted the 

Debtor from, and delayed, its reorganization efforts. The Settlement Agreement resolves all 

of these issues and obviates the need for litigation that would likely delay administration of 

this estate. 

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1 . Statement, thus saving the estate considerabl~ litigation expenses. The Settlement · 

2 Agreement resolves all outstanding issues between the Debtor and the Senior Debtholders, 

3 and commits the Senior Debtholders to support the Plan. 

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3. The Settlement Is In The Best Interests Of Creditors. 

· The last criteria considered by bankrup~cy courts reviewing a proposed settlement 

is the paramount interes~ of creditors, with a deference to their reasonable views. A & C 

Props., 784 F.2d at 1381;·Drexel Burnham, 134 B.R. at 505-06. While a creditor's objection . . 

to a proposed settlement must be given deference, it is not controlling and will ·not bar 

approval of settlements that "do not fall below the lowest point in the range of 

reasonableness." A & C Props., 784 F.2d at 1382; Drexel Burnham, 134 B.R.. at 505. 

HOWARD 13 

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The compromises reached in the Settlement Agreement will result--0nce the 

Settlement Agreement is effective-in amendments to the Plan th~t will benefit all holqers -

of Senior Indebtedness and, in certain respects, substantially all unsecured creditors. For 

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b. certain creditors will benefit from the increased placement fee; 

c. certain creditors will benefit from the enhanced terms of the 

Long-Term Notes; and 

d. all creditors entitled to Pre-Petition Interest and Post-Petition 

Interest under the Plan will benefit from the current payment of 

interest. · 

21 The Settlement Agreement also ·benefits the estate and its creditors because it lays 

22 the framework for future settlemen~s with other creditors and advances the administration of 

23 the Chapter 11 Case and the ultimate confirmation of the Plan. The principal objective of a 

24 Chapter 11 case is the confirmation and consummation of a plan, and the settlement with the 

25 Senior Debtholders furthers that goal. 

26. The Debtor has carefully considere~ the risks, complexity and expense associated 

27 with litigation with the Senior Debtholders regarding their Claims and the treatment afforded 

28 to them under the Plan and the delays that would be occasioned by such litigation. In the 

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Debtor's sound business judgment~ these factors-when considered with the benefits ' ' . ' . 

afforded the estate and its creditors by the settlement-tip the scale heavily in favor of 

approval of the proposed settlement as fair, reasonable and equitable and in the best interests 

of the estate and its constituencies. ·-For these reasons, the Debtor believes that the 

Settlement Agreement should be approved. 

B. This Court Should Authorize The Debtor To Make Payments Of Pre-Petition 

Interest And Post-Petition Interest To Holders Of Certain Undisputed Claims. 

In consideration oflhe compromises reached and because it is in the best interest 

of the estate, the Debtor agreed in the Settlement Agreement to pay all accrued and unpaid 

Pre-Petition Interest and Post-Petition Interest to the Senior Debtholders and to continue to 

pay Post-Petition Intere~t in arrears on a quarterly basis during the Chapter 11 Case. By this 

Motion, the Debtor seeks authorization to provide this same benefit to all holders of Claims 

( other than holders of Administrative Expense Claims, Environmental, Fire Suppression and 

Tort Claims and Chromium Litigation Claims) to which no objection is pending. 16 

1. This Court Has Statutory Authority And Eduitable Power Under Sections 

105(a) And 363(b) Of The Bankruptcy Co e To Permit The Debtor To 

Make Interest Payments To Holders Of Undisputed Claims During The 

Chapter 11 Case. · 

Sections 105(a) and 363(b) of the Bankruptcy Code provide the statutory 

authority for the payment of Pre-Petition Interest and Post-Petition Interest to holders of 

undisputed Claims, as contemplated herein. 

Section 363(b) provides that "[t]he trustee, after notice and a hearing, may use, 

sell, or lease, other than in the ordinary course of business, property of the estate." Under 

Section 363(b), the Court·may authm.jze a proposed use of property if it finds that the 

transaction represents a reasonable business judgment by the debtor. See Michigan Bureau 

of Workers' Disability Comp. v. Chateaugay Corp. (In re Chateaugay Corp.), 80 B.R. 279, 

282 (S.D.N.Y. 1987).(authqrizing pre-confi~ation distribution under Se~tions 105(b) and 

16The Debtor reserves its right to object to any Claim on any available ground,· 

notwithstanding the prior payment of interest to the holder of such Claim. · 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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363(b)); see also Committee of Equity Sec. Holders v:. Lionel Corp. (In re Lionel Corp.), 722 

F.2d. 1063, 1070-71 (2d Cir. 1983); In re Ernst Home Ctr., Inc., 209 B.R. 974,979 (Banlcr. 

W.D. Wash. 1997) (approval of non-ordinary course of business transaction appropriate 

where debtor has "articulated business justification''. for the transaction). In considering a 

proposed use of estate property outside the ordinary_ course of business, the debtor's business 

judgment is subject to "great judicial deference." See DiStefano v. Stern (In re JFD Enters.), 

No. 99-2034, 2000 WL 560189, at *5 (1st Cir. May 1, 2000). 

There are sound and practical business reasons for the Debtor's current payment 

of interest during the Chapter 11 Case. The Chapter 11 Case presents fairly exceptional 

circumstances. Tue Debtor is solvent. Thus, to satisfy the "best interests" test of Section 

1129(a)(7) of the Bankruptcy Code and confirm a plan of reorganization, the:Debtor must 

pay post-petition interest to holders of Allowed Claims. Because, absent Court 

authorization, the Debtor is prohibited from making such payments during the Chapter 11 

· Case, the Debtor must compound aqcrued unpaiq. interest at rates that are significantly higher 

than the interest the estate can earn on its cash investments in today's economic climate--

thus creating a negative arbitrage to the Debtor. On the other hand, current payments of 

interest would inure to the benefit of the estate and its creditors and prejudice no one. The 

Debtor has sufficient funds on hand to make the interest payments; creditors will be brought 

current on interest payments and paid int~rest on a going-forward basis; the unnecessary cost 

to the estate caused by this negative arbitrage will be eliminated; and in the unlikely event 

that the Debtor ~ere determined to be insolvent, the Post-Petition Interest payments would 

be re-characterized as partial payments of principal. 

In addition, Section 105(a) of the Bankruptcy Code grants this Court broad 

equitable power to "issue any order, process, or judgment that is necessary or appropriate to 

carry out the provisions ·of this title." The purpose of Section 105(a) is "to assure the 

bankruptcy c9μrts power to take wh1;1tever action is approp:pate or necessary in ai4 of the 

exercise of their jurisdiction." 2 Lawrence P. King, Collier on Bankruptcy ,1105.01, at 105-6 

(15th ed. rev. 2001). 

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Pursuant to Section 105(a), bankruptcy courts are granted.broad authority and 

discretion to enforce the provisions of the Bankruptcy Code, either pursuant to specific 

statutory fiat or equitable common law principles. Under ~e doctrine of necessity, a 

banlcruptcy court may exercise its equitable powers to authorize a debtor to pay certain prepetition claims, even though such payment is not explicitly authorized under the Bankruptcy 

Code. As the court stated in In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. 

S.D.N.Y. 1989): 

"The ability of a Bankruptcy Court to authorize the payment of pre-· 

petition debt when such payment is needed to facilitate the 

rehabilitation of the debtor is not a novel concept. It was first 

articulated by the United States Supreme Court in Miltenberger v. 

Logansport, C.&S.W.R. Co., 106 U.S. 286, 1 S.Ct. 140, 27 L.Ed. 117 

(1882), and is commonly referred to as either the 'doctrine of 

necessity' or the 'necessity of payment' rule." (I!h at 175-76) 

The court in that case recognized a bankruptcy court's authority under Section 105(a) to 

authorize payment of certain pre-petition debt to avoid economic sanctions against the 

debtor that would result from nonpayment. Id. 

. Courts have established that "the Necessity Doctrine may also be used, however, 

to justify post-petition payment of a wide variety of other types of pre-petition claims, as 

long as payment of those claims will help to 'stabilize [the] debtor's business relationships 

without significantly hurting any party."' In re UNR Indus., Inc., 143 B.R. 506, 519 (Bankr. 

N.D. Ill. 1992) (quoting R. Eisenberg & F. Gecker, The Doctrine of Necessity and Its 

Parameters, 73 Marq. L. Rev. 1', 2 (1989)), rev'd on other grounds, 173 B.R. 149 (C.D. Ill. 

1994). In that case, the court authorized the debtor to pay pre-petition workers' 

compensation claims which it found were necessary to enable the debtor to maintain its selfinsurance privileges, where such self insurance would be less expensive than purchasing 

insurance from a third party. The court accordingly determined that such payments were in 

the best interests of the estate and were authorized under the necessity doctrine. See also In 

re Structurelite Plastic Corp., 86 B.R. 922,931 (Bankr. S.D. Ohio,1988) ("a bankruptcy . 

·court may exercise its equity powers under section I05(a) to authorize payment of prepetition claims where such payment is necessary to 'p~rmit the greatest likelihood of 

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survival of the debtor and payment of creditors in full or at least proportionately"') (citing In 

re Chateaugay Corp., 80 B.R. 279, 287 (Bankr. S.D.N.Y. 1987)); In re Equalnet 

Communications Corp., 258 B.R. 368, 369 (Bankr. S.D. Tex. 2000) ("[i]n certain cases, 

courts in this district have found exception to [the] general rule of nonpaym_ent [ of prepetition claims]. These exceptions arise primarily out of common sense and the presence of 

legal or factual inevitability of payment"). Indeed, this Court recognized its ability to 

authorize the payment of pre-petition claims when it used its equitable powers to authorize 

the Debtor to make, inter alia, certain payments of pre-petition employee-related expenses. 

-See,~, Order Granting Motion for Authority to Pay Pre-Petition Compensation and 

Benefits, dated April 6, 2001. 

2. Early Payment Oflnterest To Holders Of Undisputed Claims Is In The 

Best Interest Of The Debtor's Estate And Creditors. 

The Debtor has made a sound business judgment that early interest payments 

constitute a.prudent and justified use of estate assets. As noted above, this is based on 

exceptional circumstances. The·"Debtor is solvent. Payment of post-petition interest to 

.creditors is inevitable, as it will be required to confirm a pJan of reorganization. As reflected 

in its Monthly Operating Reports filed herein, the Debtor has sufficient funds on hand to 

make payments of Pre-Petition Interest and Post-Petition Interest to holders of undisputed 

Claims. 17 

Significantly, the Debtor's inability to make current interest payments has 

resulted (and will continue to result) in a significant cost to the estate. The Debtor's ca~h 

currently is primarily invested in money market funds, which experienced an average annual 

17The initial interest payments on PG&E's financial debt ("Financial Debt") are 

estimated to aggregate approximately $477 million, and projected subsequent quarterly 

interest payments on such Financial De:bt through December 31, 2002 are estimated to 

aggregate approximately $313 million. The initial interest payments on PG&E's nonfinancial debt (''Non-Financial- Debt") are estimated to aggregate approximately $157 · million and projected subsequent quarterly interest paym~nts on such Non-Financial Debt, 

through December 31, 2002, are estimated to aggregate ap:p_r~ximately $57 millio~. As of 

December 31, 2001, the Debtor's cash balance was $4.22 billion, more than sufficient funds · to make the proposed interest payments. · 

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1 return of2.15% during the month of December, 2001 and an average annual return of2.00% ' ' ' ' 

2 during the month of January, 2002. At the same time, the average interest rate on Financial 

3 Dt:bt is approximately 7.9%, and the average interest rate on Non-Financial Debt is 5.5%. 

4 Because the Debtor cannot pay this interest on a current basis absent Court approval, it_ must 

5 accrue and compound the accrued interest at these significantly higher rates. 

6 As of March 31, 2002, the Debtor estimates that it will have accrued 

7 approximately $477 million in interest on Financial Debt alone. Because of the 

8 compounding of interest, a nine-month delay, through December 31, 2002, in the payment of 

9 interest on Financial Debt will increase the Debtor's interest payments by approximately $35 

10 million. At the same time, the interest PG&E will likely earn on its investment of the cash 

11 that would be used to pay accrued interest, during the period from March 31, 2002 through 

12 December 31, 2002, would offset these increased interest expenses by only an estimated $6 

HONARD 13 million. Thus, unless PG&E is allowed to make interest payments on its Financial Debt 

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16 interest payments to the holders of Non-Financial Debt during the six month period from 

17 July 1, 2002 through December 31, 2002, PG&E will avoid incurring another $2 million in 

18 unnecess.ary interest expense. 18 Accordingly, the early payment of interest will result in 

19 savings of approximately $31 million during the nine-month period ending December 31, 

20 2002. 

21 Significantly, since all holders of.undisputed Claims in the Classes entitled to 

22 receive interest will benefit from the early interest payments, the policy concern underlying 

23 the general prohibition of pre-confirmation distributions-i.e., disparate treatment of 

24 creditors-is not implicated here. In addition, .these payments do not pose any risk of harm 

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18As set forth below, PG&E proposes to commence interest pa)'!Dents on NonFinancial Debt no later than July 30, 2002. PG&E requi_res this additional time to reconcile 

and determine which Claims based on Non-Financial Debt are disputed before commencing 

interest payments on these Claims. Interest would- c0ntinue to accrue on these Claims untilpaid. 

MOT. FOR ORDER APPROVING SETTLEMENT & SUPPORT AGMT 

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1. to the estate. In the unlikely event that the Debtor were ever adjudged insolvent, the Post2 Petition Interest payments would be re-characterized as _partial payments of principal. Thus, 

3 there is no danger that any one creditor would receive more than its pro rata payment on 

4 account of its Allowed Claim. 

5 For these reasons, the Debtor respectfull:y submits that early interest payments 

6 constitute a sound use of the Debtor's assets under Section 363 of the Bankrupt~y Code· and 

7 should be authorized on that basis, and pursuant to Section 105(a) of the Bankruptcy Code. 

8 3. Proposed Procedure For Making Interest-Payments. 

9 The Debtor proposes to make the initial interest payments to holders of Financial 

10 Debt who hold undisputed Claims Uncluding the Senior Debtholders) within ten days after 

11 all conditions to the effectiveness of the Settlement Agreement have been satisfied. 

12 Subsequent interest payments in respect of such Claims will be made in arrears on a 

HONARD 13 quarterly basis on the first Business Day of the next calendar quarter. 

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,__ 15 payments in respect of undisputed Claims by the later of (a) July 30, 2002 and (b) ten 

16 Business Days after the entry of an order approving the Disclosur~ Statement. The Debtor 

17 requires this time to determine which of the thousands of claims filed in the Chapter 11 Case 

18 should be subject to objection and to prepare objections accordingly, a process that must be 

19 substantially completed before interest payments can commence. 19 In addition, this time 

20 wjll allow the Debtor to establish the administrative procedures necessary to compute the 

21 amount of Pre-Petition Interest and Post-Petition Interest that is owed and to facilitate 

22 payments to thousands of creditors.20 Post-Petition Interest will continue to accrue on 

23 Allowed Claims until payments are made. Subsequent interest payments will be made 

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19 As stated in the Disclosure Statement, the Debtor anticipates filing all of its 

objections to Disputed Claims by June 30, 2002. . 

20Because payments to holders of Financial Debt are ~ade through an indenture trustee 

26 · or administrative bank or other paying agent, this additional time is not required to make . payments to the holders of Financial Debt. Thus, the Debtor has agreed, under the 

Settlement Agreement, to make the initial payment of Pre-Petition Interest and Post-Petition 

Interest to the Senior Debtholders within ten Business Days after all conditions to 

effectiveness of the Settlement Agreement have been satisfied. 

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quarterly in .arrears within thirty days following the end of e.ach calendar quarter. 

The Debtor requests that the Court establish a record date of June 30, 2002 for the 

initial interest payments to the holders of undisputed Claims arising out of Non-Financial 

Debt and the l_ast Business Day of each calendar quarter as the re~ord date for subsequent 

interest payments to such holders. The Debtor further requests that the Court order that 

interest payments be made only to the record holders of such Claims on the applicable 

record date. 

C. Payment Of The Fees And Expenses Oflndenture Trustees And Administrative 

Bank And Other Paying Agents Should Be Approved. 

Under tlie Settlement Agreement, the Debtor agreed to use its reasonable best 

efforts to ensure that the Senior Debtholders receive a full distribution on account of their 

Claims, with no deduction or holdba,ck by any indenture trustee or paying agent. See 

Settlement Agreement, §16(a). To satisfy this obligation, the Debtor agreed, subject to the 

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approval of the Bankruptcy Co~rt, to pay all costs and expenses necessary to ensure that a 

full distribution is made to Senior Debtholders. Id. Rather than limit this benefit to the 

Senior Debtholders, the Debtor seeks, subject to the procedures described below, to pay the 

fees and expenses of all indenture trustees and paying agents21 which have a right, under 

21The indenture trustees or other paying agents whose fees and expenses would be paid 

are: (a) Wilmington Trust"Company (successor-in-interest to The Bank of New York), as 

indenture trustee for the Floating Rate Notes, the Medium Term Notes and the Senior Notes, 

all issued under the indenture dated as of September 1, 1987 between the Debtor and The 

Bank ofNew York, as amended and supplemented (the "1987 Indenture'.'); (b) The Bank of 

New York, the former indenture trustee under the 1987 Indenture; (c) Bankers Trust 

Company (Deutsche Bank), in its capacity as trustee for the 1992 Series A Pollution Control 

Bonds, 1996 Series C Pollution Control Bonds, 1996 Series E Pollution Control Bonds, 

1996 Series F Pollution Control Bonds and 1997 Series B Pollution Control Bonds; (d) U.S. 

Bank Trust, N.A. in its capacity as trustee for the 1992 Series B Pollution Control Bonds, 

1993 Series A Pollution Control Bonds, and 1993 Series B Pollution Control Bonds; 

(e) Bank One Trust Company, N.A. (successor-in-interest to The First National Bank of 

Chicago), as property trustee under the amended and restated trust agreement dated as of 

November 28, 1995 among the Debtor, The First National Bank of Chicago, a Delaware 

Trustee and certain Administrative Trustees; (f) National City Bank oflndiana (successorin-interest to Bank One Trust Company, N.A.), indenture trustee for the QUIDS, issued 

under the indenture dated November 28, 1995, as supplemented as of November 28, 1995 

and March 25, 1996; and (g) Bank of America National Trust and Savings Association, as. 

administrative agent and documentation agent for the Debtor's Revolving Line of Credit. 

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governing agreements or instruments, to deduct their fees and expenses from distributions to 

beneficial holders or otherwise to seek reimbursement from the beneficial holder of 

Financial Debt, so that all such creditors ~ill receive full payment. 

Unless the Debtor agrees to pay such costs, each of the paying agents and trustees 

. would likely deduct their costs and expenses from the amounts which will be paid to holders 

of undisputed Financial Debt. Given the relatively modest cost of.cqvering these fees and 

expenses-current outstanding amounts are estimated to be approximately $3 million-the 

Debtor seeks the Court's authorization to pay thesy fees and expenses. The Debtor also 

requests that it be authorized to continue to pay such fees and expenses on an on-going basis. 

The Debtor propose~ that the same procedures established for the payment of fees 

and expenses ofBNY Western Trust Company, as .indenture trustee for certain mortgage 

bonds, in the Cash Collateral Stipulation, approved by this Court on May 9, 2001, be utilized 

in connection with payme:p.ts to indenture trustee~ and other paying agents as w~ll as for 

payment of the fees and expenses of the Senior Debth~lders, as provided in the Settlement 

Agreement: 

(1) Any indenture trustee, administrative bank, other paying agent or 

Senior Debtholder seeking reimbursement of its fees and 

expenses will be required to serve copies of its invoices and the 

invoices of any frofessionals it has retained upon the Debtor, its 

counsel, counse to the Committee and the United States 

Trustee's Office: 

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(3) 

If any such party believes that all or a portion of the amo.unts 

reflected in any invoice are unreasonable (an "Objecting Party"), 

such Objecting Party will be required to provide written notice 

thereof to such Senior Debtholder, indenture trustee,-

administrative bank or other paying agent, or the applicable 

professional, within 20 days of the recei:{Jt of the invoice in 

question (with a copy to the Debtor and its counsel). 

Promptly after the expiration of such 20-day period, the Debtor 

will pay any undisputed portion of such invoices, and retain the 

balance thereof pending resolution of any dispute with an 

Objecting Party, or, if any such dispute cannot be consensually 

resolved, upon approval of any disputed portion by this Court. 

( 4) The _payment of any fees and expenses of any ind~nture trustee, 

admmistrative bank, other paying agent or Senior Debtholder 

will be expressly subject to d1sallowance by the Court. 

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1 The Debtor respectfully submits that the payment of fees. and expenses of Senior 

2 Debtholders, indenture trustees, administrative bank or other paying agents as provided 

3 herein should be authorized as a necessary corollary to the payment of interest. 

4 

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D. The Debtor Should Be Authorized To Enter Into Substantially Similar 

Settlements Without Further Court Approval. 

· 6 Finally, the Debtor seeks authorization to enter into additional settlement 

7 agreements with other holders 'of Allowed Class 5 Claims on substantially the same terms as 

8 the Settlement Agreement, 22 without the burden and expense of seeking further Court 

9 approval of such settlements. 

10 It is well-established that where numerous settlements are anticipated, the court in 

11 its discretion may grant the debtor~in-possession authority to settle under Rule 9019(b) 

12 within appropriate parameters without requiring that each and every potential settlement be 

H<mAAD 13 set for hearing. See 10 Collier on Bankruptcy, supra, if9019.03, at 9019-5 to 9019-6. 

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14 Indeed, this Court recognized its authority to authorize settlements without having each 

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16 settlements of disputed Claims within certain parameters. See Order on Debtor's Motion for 

17 Authorization to Settle Certain Pre-Petition Claims, dated January 3, 2002. 

18 Absent advance approval by the Court to enter into additional agreements with 

19 creditors that are su~stantially similar to the Settlement Agreement, the Debtor would be 

20 required under Bankruptcy Rule 9019 to seek,this Court's approval of each such subsequent 

21 settlement. The Debtor submits that it would be wasteful for the Debtor and burdensome for 

22 the Court to review repeated motions seeking approval of settlements that are on 

23 substantially the same terms already approved by this Court. To avoid this waste of estate 

24 and judicial resources, the Debtor respectfully requests that the Court authorize the Debtor to 

· 25 enter into future settlements on substantially the same terms as the Settlement Agreement 

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22 A condition to effectiveness of the Settlement Agreement is that holders of Allowed 

Class 5 Claims aggregating at least $3 billion must be party to the Settlement Agreement or 

substantially similar agreements. Settlement Agreement, §21. 

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1 without further Court approval. 

2 CONCLUSION 

3 For all the foregoing reasons, the Debtor respectfully requests that this Court 

4 make and enter an order that ( a} approves the Settlement Agreement, (b) authorizes the 

5 payment of Pre-Petition Interest and Post-Petition Interest to the holders of undisputed 

6 Claims specified herein, ( c) authorizes the D1/btor to bring current an,d to pay, on an· on7 · going basis, the fees and expenses of indenture trustees and paying agents specified herein 

8 and ( d) authorizes the Debtor, without further approval from this Court, to enter into future 

9 settlement agreements with other creditors on substantialJy similar terms as the Settlement 

10 Agreement. 

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DATED: March S", 2002. 

Respectfully, 

HOWARD, RICE, NEMEROVSKI, CANADY, 

FALK & RABKIN 

A Professional Corporation Bero(_·~ _·JAMES~ 

Attorneys for Debtor and Debtor in Possession 

PACIFIC GAS AND ELECTRIC COMP ANY 

28 WD 030502/F-l419913Nl/977963/v6 

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