8. Short Term Debt Limited to 12-Month Term Except for Commission Authorization
The Commission has long held that the period for short term debt is a maximum of 12 months. Sections 817, 818, 821(d), and 830 clearly restrict the issuing of short-term debt to a 12-month period. In particular, Section 818 states:
"No public utility may issue stocks, and stock certificates, or other evidence of interest or ownership, or bonds, note, or other evidences of indebtedness payable at periods of more than 12 months after the date thereof unless, in addition to the other requirements of law it shall first have secured from the commission an order authorizing the issue, stating the amount thereof and the purposes to which the issue or the proceeds thereof are to be applied, and that, in the opinion of the commission, the money, property, or labor to be procured or paid for by the issue is reasonably required for the purposes specified in the order, and that, except as otherwise permitted in the order in the case of bond, notes, or other evidences of indebtedness, such purposes are, in whole or in part, reasonably chargeable to operating expenses or to income."
Deviations from the 12-month maximum period identified in the Code require a significant showing or evidence that such deviations are necessary and justified. Although the Code does not provide guidance explaining the use of a 12-month period for short term debt, an obvious reason is that current expenses, including debt, should be matched with current revenues. This matching occurs in annual reports which by definition are based on 12-month periods. Therefore, to maintain the distinction between short term debt and long term debt the maximum short term debt period would be 12 months.
In the instant proceeding, CalWater states that it will use Credit Agreement financing for cash flows for the WRAM and MCBA balancing accounts, as well as capital project costs. CalWater explains that current internally generated cash flows are insufficient to cover operations, maintenance and Commission-approved capital programs.12 As the WRAM and MCBA represent operating expense accounts the use of Credit Agreement financing for these operating expense purposes is one indication that the period for Credit Agreement financing should be a maximum of 12 months.
CalWater also argues that authorization to extend the Credit Agreement terms up to 24 months from 12 months is necessary to reduce the risk of credit costs due to interest rate changes. As one means of evaluating the volatility of interest rates, CalWater's July 2, 2010 Response included a graph showing the interest spread between investment bond yields and 10-year U.S. Treasury bonds.13 Although this graph indicates that significant interest rate spreads occurred beginning in September, 2008, it also demonstrates that current interest spreads are less than or equal to interest rate spreads before September, 2008.14 Thus, while CalWater may be correct that there have been volatile interest rates between September 2008 and September 2009, the most recent interest rate spreads appear to have returned to spreads existing prior to September 2008. Despite the recent economic crisis, there is little indication that anticipated interest costs will significantly fluctuate in the near future.
Finally, CalWater states that it has not had difficulty obtaining short-term debt, and no bank or other sources of financing have stated that they will not provide CalWater with short-term unsecured debt.15
Although CalWater requests it be authorized to extend the 12-month period in the Credit Agreement to 24 months, there is little indication that this change is supported by the information provided or is necessary at this time, and therefore that request is denied, without prejudice to reconsideration in a future proceeding.
12 CalWater indicates that capital costs are over $100 million annually. (June 18, 2010 Response.)
13 July 2, 2010 Response.
14 The graph indicates that in June 2008, the interest rate spread was approximately
200 basis points, and in June 2010, the spread is approximately 172 basis points.
15 June 18, 2010 Response.
