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STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor
PUBLIC UTILITIES COMMISSION
505 VAN NESS AVENUE
SAN FRANCISCO, CA 94102-3298
December 4, 2003 Alternate to Agenda ID #2983
TO: PARTIES OF RECORD IN INVESTIGATION 02-04-026
Consistent with Rule 2.3(b) of the Commission's Rules of Practice and Procedure, I am issuing this Notice of Availability of the above-referenced proposed decision. The proposed alternate decision was issued by Commissioner Geoffrey Brown on December 4, 2003. An Internet link to this document was sent via e-mail to all the parties on the service list who provided an e-mail address to the Commission. An electronic copy of this document can be viewed and downloaded at the Commission's Website ( www.cpuc.ca.gov). A hard copy of this document can be obtained by contacting the Commission's Central Files Office [(415) 703-2045].
This is a proposed alternate decision to Administrative Law Judge (ALJ) Barnett previously served to you. It will be on the Commission's agenda on December 18, 2003, along with the proposed decision of ALJ Barnett. The Commission may act then, or it may postpone action until later.
When the Commission acts on the proposed decisions, it may adopt all or part of them as written, amend or modify them, or set them aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.
As set forth in Rule 77.6, parties to the proceeding may file comments on the enclosed alternate order no later than 5pm on December 11, 2003. An original and four copies of the comments with a certificate of service shall be filed with the Commission's Docket Office and copies shall be served on all parties on the same day of filing. Anyone filing comments shall electronically serve those on the service list who have provided electronic addresses. Parties shall also ensure that they electronically serve their comments on Commissioner Brown's energy advisor, David Gamson, at firstname.lastname@example.org and assigned ALJ Barnett, at email@example.com. For those who have not provided electronic addresses, printed copies of the comments shall be served by first class mail or another expeditious mode of delivery. Reply comments will be due no later than 12 noon on December 16, 2003.
/s/ANGELA K. MINKIN
Angela K. Minkin, Chief
Administrative Law Judge
Alternate Agenda ID 2983
Decision PROPOSED ALTERNATE DECISIONOF COMMISSIONER BROWN
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Order Instituting Investigation into the ratemaking implications for Pacific Gas and Electric Company (PG&E) pursuant to the Commission's Alternative Plan of Reorganization under Chapter 11 of the Bankruptcy Code for PG&E, in the United States Bankruptcy Court, Northern District of California, San Francisco Division, In re Pacific Gas and Electric Company, Case No. 01-30923 DM.
(U 39 M)
(Filed April 22, 2002)
TABLE OF CONTENTS
OPINION MODIFYING THE PROPOSED SETTLEMENT AGREEMENT OF PACIFIC GAS & ELECTRIC COMPANY, PG&E CORPORATION AND THE COMMISSION STAFF, AND APPROVING THE MODIFIED SETTLEMENT AGREEMENT 22
I. Procedural History 33
II. Description of the PSA Terms and Conditions 44
III. Standard of Review 1212
IV. Lawfulness of the PSA 1616
V. Whether the Proposed Settlement Agreement Is in the Public Interest 3333
VI. The TURN Dedicated Rate Component Proposal 6565
VII. Rulings of the Administrative Law Judge (ALJ) 7070
VIII. Comments on the Alternate Proposed Decision 7070
IX. Assignment of Proceeding 7070
Findings of Fact 7070
Conclusions of Law 7575
OPINION MODIFYING THE PROPOSED SETTLEMENT
AGREEMENT OF PACIFIC GAS & ELECTRIC COMPANY, PG&E CORPORATION AND THE COMMISSION STAFF, AND APPROVING THE MODIFIED SETTLEMENT AGREEMENT
This decision modifies and clarifies the Proposed Settlement Agreement (PSA) offered by Pacific Gas & Electric Company (PG&E), PG&E Corporation, and the Commission staff. We find that the settlement agreement, with these modifications and clarifications, is fair, just and reasonable and in the public interest. Therefore, we enter into the Modified Settlement Agreement (MSA).
The Proposed Settlement Agreement (PSA) between PG&E (hereafter generally referred to as PG&E), PG&E Corp. (hereafter referred to as Corp.) and our staff offers the promise of allowing PG&E to emerge quickly from bankruptcy protection in a proceeding now pending in the United States Bankruptcy Court for the Northern District of California as a financially strong utility subject to the directives in California laws and the continuing jurisdiction of this Commission. The timely resolution of PG&E's financial difficulties and the PSA come before this Commission pursuant to a background of unprecedented developments, and our careful consideration of their related consequences is of utmost importance to the ratepayers of PG&E and the citizens of California.
We intend to resolve the bankruptcy in partnership with PG&E and to resume a mutually supportive relationship between the regulatory bodies of California and the utility management of PG&E for the benefit of Northern California residents and businesses and investors in PG&E's utility businesses. This relationship must be based on openness and transparency of financial and operational dealings in order to insure their integrity, a commitment to prudent management of assets and resources entrusted to the utility, and an appreciation for the importance of sound earnings and credit for both the long and the short run. At the very outset we must also recognize the extremely heavy burden now being borne by ratepayers in Northern California, and take steps to reduce that burden, over both the short and the long term
The PSA contains a number of provisions that provide additional benefits to PG&E compared to the Commission's plan of reorganization (Commission POR) submitted by the Commission to the bankruptcy court. The most significant modifications compared to the Commission's POR are:
· Allowing PG&E to keep between $775 million and $875 million in headroom from 2003;
· Increasing the size of the regulatory asset from $1.75 billion to $2.21 billion.
· Eliminating a proposed $400 million disallowance against PG&E for imprudent procurement practices;
· Fixing PG&E's rate of return on equity at 11.22% for up to nine years;
· Allowing Department of Water Resources (DWR) contracts to be assigned to PG&E only after a very high credit rating is achieved by PG&E;
· Precluding the Commission from exercising its authority on a number of issues including PG&E's practices on taking money out of the utility in the form of dividends;
Overall, the PSA's changes from the Commission's POR give PG&E billions of dollars of additional benefits. In evaluating the reasonableness of the provisions in the PSA, we conclude that there are certain modifications that are necessary to the proposal to ensure that it is reasonable for ratepayers.
In particular, as discussed in detail below, we will not allow PG&E to recover from ratepayers $217 million for Corp's litigation costs, nor will we allow PG&E to recover from ratepayers $96 million in net costs PG&E asserts it incurred due to the premature termination of a gas hedging contract that benefited shareholders.
We also shorten the time frame for PG&E to recover the regulatory asset costs from 9 years to 5 years, thereby reducing PG&E's risk of recovery of these costs and improving PG&E's cash flows and creditworthiness metrics. By shortening the recovery period, the MSA also reduces ratepayer costs for interest by approximately $740 million as compared to the PSA.
The MSA also allows PG&E to keep $775 million of headroom from 2003, the lower amount of the $775 million to $875 million range described in the PSA. Any headroom above $775 million will be used to reduce rates further in 2004. In addition, we remove some of the proposed restrictions placed on the Commission's ongoing oversight of PG&E.
Even with these modifications, the MSA provides PG&E with billions more than our POR, and with reduced regulatory and financial risk compared to our prior plan. None of the changes contained herein result in a significant diminution of PG&E's creditworthiness as compared to the PSA, and we believe these changes are fully consistent with our policy of returning PG&E to a sound financial state as soon as possible. The MSA allows PG&E to recover 100% of its filed rate doctrine litigation claims from ratepayers as well as all other costs PG&E has asserted it should be compensated for with the exception of the two modifications discussed herein.
I. Introduction and Background
To delve yet again into the facts and forces that led to the dysfunctional electricity market in California during the period from mid-2000 to early 2001 serves no purpose here. A succinct and readable summary of the market behaviors, and responsive actions taken by the California Legislature, as well as State and federal regulators, is contained in the recent opinion of the California Supreme Court in Southern California Edison Co. v. Peevey (2003) 31 Cal. 4th 781. We provide a condensed version of this summary in the background section herein. As noted in that opinion, this Commission deemed the energy crisis one that involved not only utility solvency but the very reliability of the State's electrical system. This Commission took an unprecedented step and increased retail electric rates twice in three months - once on January 4, 2001 and again on March 27, 2001 - in an amount that represented 4 cents per kilowatt hour on average, over $8 billion annually for the retail customers of the investor-owned utilities. By that time, PG&E and Southern California Edison had already been stripped of their cash and credit and were dependent on the State of California for supply of a significant portion of the electric energy needed to meet their retail loads, pursuant to state legislation.
A. Background - PG&E Bankruptcy
PG&E and SCE responded differently to the financial difficulties they faced. PG&E filed for Chapter 11 bankruptcy protection on April 6, 2001. Numerous creditors and other parties, including the Commission, appeared (in the Commission's case, subject to its sovereign immunity rights and defenses under the 11th Amendment of the U.S. Constitution and related principles). PG&E asserted that as a result of the energy crisis beginning in May 2000 and because its retail electric rates were frozen, it was unable to recover approximately $9 billion of electricity procurement costs from its customers, resulting in billions of dollars of defaulted debt and the downgrading of its credit ratings by all of the major credit rating agencies. PG&E's decision to seek Bankruptcy Court protection came in the wake of its earlier decision to sue this Commission in federal district court to recover these costs under a "filed rate doctrine" theory See PG&E v. Lynch, No. C-01-3023-VRW, N.D. Cal. (the "Rate Recovery Litigation"). The Commission vigorously defended this action, and a similar lawsuit filed by Southern California Edison Co. (SCE), on behalf of the customers of the two utilities. The costs and complexities of this litigation were tremendous. The outcome was far from certain.
On September 20, 2001, PG&E and PG&E Corporation, as co-proponents, filed a plan of reorganization (PG&E Plan) in PG&E's bankruptcy case. The PG&E Plan provided for the disaggregation of PG&E's businesses into four companies, three of which would have been regulated by the Federal Energy Regulatory Commission (FERC). The Commission and others opposed the PG&E Plan. The PG&E Plan was amended and modified a number of times.
It was an exceedingly bold proposal that went far beyond the traditional and usual purpose of resolving creditor claims and returning the utility to financial viability. As noted in the Commission staff's opening brief, PG&E's proposed plan of reorganization was expansive in the extreme, and threatened its ratepayers in three ways. First, it would have disaggregated the utility and would have divested this Commission of authority over significant aspects of PG&E's operations. Secondly, it had potentially disastrous environmental consequences. Finally, it locked in, for twelve years, power purchase costs that would have resulted in high retail rates, and then would have left PG&E's power purchase costs to the markets that were largely responsible for PG&E's financial predicament in the first place.
The Commission's formal response to PG&E's proposal in the Bankruptcy Court was strong and swift. As Commissioner Lynch noted in her declaration supporting our opposition:
"In its proposed plan, PG&E demands sweeping declaratory and injunctive relief against the Commission. The Commission believes PG&E's purpose is to carry out a frontal assault upon the State of California as a government and regulator, as PG&E seeks to preempt no fewer than 15 core statutes and laws essential to the health and safety of California's citizens." This strategy was referred to as "the regulatory jailbreak".
Specifically, the utility proposal would have removed PG&E's hydroelectric generation facilities, natural gas transmission assets and nuclear facilities from state regulatory control. That proposal raised the potential that the Commission would be unable to ensure the provision of basic service in case of an energy supply or capacity crisis; the potential that the pricing of service for captive customers would undermine the availability of affordable service for California citizens and necessitate the widespread use of alternative fuels, thereby creating adverse impacts on the environment; and adverse effects to the safety and welfare of California residents through the loss of local regulation.
The Commission's legal positions have been largely vindicated by events. The Ninth Circuit Court of Appeals has firmly rejected the sweeping approach to pre-emption of state regulatory laws on which PG&E's disaggregation proposal depended. Pacific Gas and Electric Company v. People of the State of California, Nos. 02-16990 and 02-80113, issued November 19, 2003. On July 8, 2003, PG&E's subsidiary PG&E National Energy Group filed for bankruptcy in a Maryland federal court. In connection with that filing Corp. has abandoned its investment and ownership rights in National Energy Group, which makes the proposal infeasible. After these events, the PG&E Proposed Plan could not be the basis for rehabilitating PG&E under any set of circumstances, as the Commission has long contended. These events provide the context and backdrop for our approval of the MSA.
In response to the PG&E Proposed Plan, on April 15, 2002 the Commission authorized the filing of its original plan of reorganization for PG&E (Original CPUC Plan). It was crafted to permit PG&E to emerge from bankruptcy by repaying creditor claims in full while avoiding the negative consequences of the PG&E plan. Among other things, the Original CPUC Plan would have raised funds to pay PG&E's creditors through "headroom" revenues1 and the issuance of new debt and equity securities, while at the same time maintaining PG&E as a vertically integrated utility subject to regulation by the Commission. Subsequently, the Commission and the Official Creditors Committee (OCC) filed an amended plan of reorganization for PG&E, dated August 30, 2002 (as amended, Joint Amended Plan) (supplemented by a "Reorganization Agreement" to be entered into by the Commission and PG&E).
The Joint Amended Plan created a regulatory asset of 1.75 billion dollars which -- when added to the significant profits provided by high retail rates through the end of 2002 (both authorized earnings and headroom) - raised sufficient funds to pay PG&E's allowed claims after reinstatement of mortgage debt. The Joint Amended Plan was not well received by PG&E, and thus the battle over the business structure of a PG&E yet to be restored to financial viability was launched on a second major front, with legions of lawyers and financial experts poised to do battle before the Bankruptcy Court to prove the relative merits and flaws of the two competing plans. Lengthy and contentious trials proceeded on the plans.
Bankruptcy Court confirmation hearings on the competing plans of reorganization started on November 18, 2002. On November 21, 2002, during the trial on the Joint Amended Plan, PG&E made a motion for judgment against the Joint Amended Plan, on the grounds, inter alia, that the Reorganization Agreement proposed by the Commission would violate California law because it would bind future Commissions in a manner allegedly contrary to the Public Utilities Code and decisions and regulations of the Commission. On November 25, 2002, the Bankruptcy Court denied PG&E's motion, finding that the Commission did have the authority to enter into the Reorganization Agreement and to be bound by it under California and federal law. (Ex. 122, CPUC Staff/Clanon, Exhibit C.)
It was against this backdrop that the Bankruptcy Court ordered the initiation of a judicially supervised settlement conference between PG&E and the Commission staff in March of this year. On March 11, 2003, the Bankruptcy Court entered an order staying further confirmation and related proceedings to facilitate a mandatory settlement process. Pursuant to orders by the bankruptcy judge, parties to the settlement discussions are prohibited from disclosing information regarding or relating to the settlement discussions.
That effort produced the PSA that is now before us for evaluation. On June 19, 2003, as a result of the settlement process, PG&E and the Commission staff announced agreement on a Proposed Settlement Agreement which would form the basis of a new plan of reorganization to be filed by PG&E in the Bankruptcy Court that embodies the terms and conditions contained in the PSA (the Settlement Plan).2 PG&E, PG&E Corporation, and the OCC as co-proponents filed the Settlement Plan and disclosure statement for the plan with the Bankruptcy Court. The PSA constitutes an integral part of the Settlement Plan and is incorporated in the plan by reference. The Bankruptcy Court has stayed all proceedings related to the Commission's Joint Amended Plan and the PG&E Plan, until a confirmation hearing on the Settlement Plan. The procedural history below details the interaction between the Bankruptcy Court and this Commission in considering the completeness and balancing of competing interests embraced by the PSA.
B. Background - The SCE Settlement
We do not undertake our consideration of the PSA against a blank slate. In conducting their settlement negotiations, our staff and PG&E were clearly aware of the settlement we entered into with SCE to restore that utility's financial viability and end its litigation against the Commission, as well as our proposed plan of reorganization for PG&E.
Under the terms of the Edison settlement, the Commission committed to keeping in effect the elevated rates first approved in March 2001 until Edison's energy crisis-related debts have been paid. Edison committed to applying all cash above cost of service (operating expenses and after tax return on rate base) to payment of its debts, which were collected in the Procurement Related Obligations Account (PROACT). The settlement placed significant limits on Edison's approved capital spending and suspended common and preferred dividends until the PROACT was paid. The settlement made no other changes to Edison's corporate or capital structure. Edison paid off the PROACT in July 2003 (after 21 months) and has received investment grade credit ratings from rating agencies. The Edison settlement was entered into as a settlement of federal court litigation between Edison and the Commission; the authority of the Commission to enter into the settlement under state law was confirmed by the Califiornia Supreme Court on August 26, 2003, following approval of the settlement under federal law by the 9th Circuit in November 2002.
The basic structure of the Edison settlement is one benchmark against which we evaluate the PSA and the basis for the modifications to the PSA which we approve today. The Edison settlement applied a rigorous cost of service methodology to Edison's operations and utilized all of the revenue generated by rates in excess of cost of service to pay Edison's energy crisis-related debts and restore its credit. Through a mutual regime of economic and financial discipline on the part of Edison, and an unswerving commitment to maintain rates at the level needed to pay off Edison's debt, the Commission and Edison cooperatively restored Edison's credit and financial metrics in less than two years. This included financing Edison's capital program through revenues from current rates without resort to the capital markets and provided sufficient earnings to enable Edison to significantly exceed the targeted equity ratio for cost of service ratemaking. At the end of July 2003, Edison reduced its rates by an average 13% across its entire system and will reduce them further as it recovers refunds from merchant generators and other malefactors.
PG&E has had the benefit of the same high rates as Edison. By resorting to voluntary bankruptcy, PG&E has erected additional obstacles to restoration of its credit over and above those faced by Edison. Nevertheless, PG&E has managed to finance its entire capital program and to retire more than a billion dollars in mortgage debt while amassing a significant cash reserve. The high rates approved by the Commission in March 2001 have done their job for both Edison and PG&E. The question now is how to bring PG&E along the final steps to emerge from bankruptcy, restore its credit and reduce its rates. In approving the MSA, we recognize that we will have to do more for PG&E, and that PG&E will have to do more for the people of California.
C. Background - Basic Concerns
In reaching our decision approving the MSA, we are informed by a complete record developed by the efforts of a number of parties during eight days of hearing in this proceeding. These parties directed their showings to the overall issue to whether the PSA is fair, just and reasonable, and in the public interest. In assessing these presentations, we pay particular attention to the following goals that have been at the heart of our opposition to PG&E's plan of reorganization:
1. Does the PSA result in PG&E abandoning its effort to evade adherence to state laws and our jurisdiction?
2. Does the PSA resolve energy crisis-related litigation between PG&E and the CPUC?
3. Does the PSA result in lower rates for PG&E's ratepayers?
4. Does the PSA result in PG&E's creditors being paid in full and restoration of PG&E's credit as investment grade ?
The MSA provides satisfactory answers to each of these questions.
1 "Headroom" is defined below. 2 The PSA and the Settlement Plan are two different documents. The PSA is provided in Appendix A.