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Bankruptcy Judge Allows PG&E Suit

June 18, 2002

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SAN FRANCISCO (AP) _ California’s attorney general and the city of San Francisco can sue Pacific Gas and Electric Co.’s parent corporation for allegedly draining billions from the utility before PG&E declared bankruptcy, a federal bankruptcy judge ruled.

Attorney General Bill Lockyer and the city both are challenging the transfer of more than $4 billion in dividends and stock repurchases between 1997 and April 2001 by state-regulated PG&E to its unregulated holding company, PG&E Corp.

PG&E filed for Chapter 11 bankruptcy protection last year after soaring energy prices pushed it into debt. Its parent corporation wanted both fraud cases heard in bankruptcy court, which Lockyer and the city opposed.

U.S. Bankruptcy Judge Dennis Montali ruled Monday that the core of both fraud lawsuits _ which accuse PG&E Corp. of illegal business practices _ belong in state court. Both cases involve the state’s regulatory power to protect the public and fall under the state’s anti-fraud law, rather than the federal bankruptcy code, he said.

Both lawsuits allege PG&E Corp. promised the utility’s financial health would be its top priority when the state Public Utilities Commission approved the holding company’s formation in 1996 _ but broke that promise by paying dividends even as PG&E fell into debt.

Lockyer wants to return the money to the utility so it can pay its creditors, while the city wants to set it aside for ratepayers.

PG&E Corp. has denied the allegations and said a legislative committee and independent auditor appointed by the PUC found the challenged transactions were proper.

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