4. Discussion

4.1. Public Utilities Code Requirements
for Issuance of Securities

SDG&E's request is subject to Pub. Util. Code §§ 816, 817, and 818. The Commission has broad discretion under § 816 et seq. to determine if a utility should be authorized to issue debt. Where necessary and appropriate, the Commission may attach conditions to the issuance of debt and stock to protect and promote the public interest.

Pursuant to Pub. Util. Code § 817, a public utility may only issue and use financing for selected purposes.³ Those purposes not listed in Pub. Util. Code § 817 may only be paid with funds from normal utility operations. SDG&E stated that even though the term of its medium-term notes has a floor nine months, it does not plan to issue any debt with a term of less than 12 months based on the authority granted in the current application. We reiterate that Debt Securities issued pursuant to Pub. Util. Code §§ 817 and 818 must have a term of greater than 12 months.

Pub. Util. Code § 818 states that no public utility may issue notes or other evidences of indebtedness payable at periods of more than 12 months 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. Pub. Util. Code § 818 also requires the Commission, in issuing such an order, to find that the money, property, or labor to be procured or paid for with the proceeds of the debt authorized is reasonably required for the purposes specified in the order and, unless expressly permitted in an order authorizing debt, that those purposes are not, in whole or in part, reasonably chargeable to expenses or to income. These purposes are authorized by § 817 and, as required by § 818, are not reasonably chargeable to operating expenses or income. SDG&E has substantiated that its need for issuance of new Debt Securities and Preferred or Preference Stock are necessary and are for proper purposes, as discussed in Section 4.2 below.

Since SDG&E's request is in compliance with Pub. Util. Code § 816 et seq., we will grant it authority to issue new Debt Securities and Preferred or Preference Stock for the aforementioned purposes and terms, and for the amounts determined in the order of this decision.

4.2. Forecast of Sources and Uses

Utility applications seeking authority to issue debt or other securities are based, in part, on forecasted sources and uses of funds that illustrate the requested need for funding. SDG&E used a long-term forecast covering the three-year period of 2010-2012 to determine its future financings needs. SDG&E's forecast includes uses of funds such as capital expenditures, and sources of funds, such as cash from internal sources and issuance of short-term debt. We rely on SDG&E's forecast to determine the forecast of Sources and Uses set forth below in Table 1.

Table 1

Sources and Uses Statement for 2010-2012

SDG&E has total estimated existing financing authority of $1,310.61 million consisting of $569.25 million of Debt Securities, $413 million of Rollover Debt Securities, $252.36 million of Preferred Equity, and $76 million of Rollover Preferred Equity.⁵ After deduction of SDG&E's existing financing authority from the need of $2,410 million shown in Table 1, a need for funds of $1,099.39 remains. SDG&E proposes to use $800 million of Debt Securities and $150 million of Preferred or Preference Stock to offset this net need, resulting in a remaining need for funds of $149.39 million over the 2010-2012 period.

Given that the net need for funds is greater than the request, it is reasonable to authorize SDG&E to issue $800 million of new Debt Securities and $150 million of new Preferred or Preference Stock. This new financing will allow SDG&E to fund its capital expenditure plans for the period 2010 through 2012, and to reimburse SDG&E for money expended from income or treasury funds, to the extent authorized by Pub. Util. Code § 817(h). We find SDG&E's request to be reasonable and supported by the record.

Granting of financing authority to a utility does not obligate the Commission to approve any capital projects. This financing authority provides SDG&E with sufficient liquid resources to timely finance its upcoming public utility projects and to reimburse its treasury. Review of the reasonableness of capital projects occurs as needed through the regulatory process applicable to each capital project. Therefore, any approval of this financing request would not prejudge any of SDG&E's forecasted projects for the period 2010 through 2012.

4.3. Types of Securities to be Issued

SDG&E requested authority to issue new Debt Securities, described in Section 3 of this decision, that are similar to those types of Debt Securities authorized in Decision (D.) 08-07-029. Therefore, we will authorize SDG&E to issue the types of Debt Securities detailed in Section 3 of this decision and enumerated in the order herein.

SDG&E also requested authority to issue new par or stated-value Preferred or Preference Stock, described in Section 3 of this decision, that are similar to those types of Preferred or Preference Stock authorized in D.06-05-015. Therefore, we will authorize SDG&E to issue the Preferred or Preference Stock detailed in Section 3 of this decision and enumerated in the order herein.

Also consistent with § 824, SDG&E must maintain records to identify the specific securities issued pursuant to this decision, and demonstrate that proceeds from such securities have been used only for public utility purposes.

4.4. Encumbrance of Utility Property

SDG&E also sought authority to encumber its utility property, including but not limited to its accounts receivables and utility plant, as part of issuing secured Debt Securities. This request to encumber utility property is subject to § 851 which states, in relevant part, that no utility shall encumber any part of its plant, system, or other property necessary or useful in the performance of its duties to the public, or any franchise or permit or right there under without first having secured from the Commission an order authorizing it to do so. Consistent with D.08-07-029,⁶ we will authorize SDG&E to encumber its utility property, including but not limited to its accounts receivables and utility plant.

Also consistent with D.08-07-029,⁷ we will grant SDG&E authority to guarantee or to pledge its assets on behalf of regulated affiliates or regulated subsidiaries of SDG&E acting as SPE's, who qualify to transact financing arrangements pursuant to Pub. Util. Code § 701.5.

Consistent with D.08-07-029,⁸ we will grant SDG&E authority to issue Debt Securities through one or more political subdivisions (Authority) to obtain tax-exempt status for the securities, whenever SDG&E's facilities qualify for tax-exempt financing under federal or state law. In this structured financing, SDG&E is authorized to unconditionally guarantee or otherwise secure the Authority's obligations to its debt holders. As a means of securing the Authority's obligations, SDG&E may issue and pledge or deliver bonds in an equal principal amount to the Authority.

4.5. Securities Enhancements

SDG&E sought authority to include certain securities enhancements, described in Section 3 of this decision, to improve the terms and conditions of SDG&E's new issuances of Debt Securities and Preferred and Preference Stock, and to lower the overall cost of money for the benefit of the ratepayers. The Commission has previously allowed SDG&E authority to use these securities enhancements, most recently in D.08-07-029⁹ and D.06-05-015.¹⁰ We again authorize SDG&E to use these previously approved forms of securities enhancements to lower the overall cost of money for the benefit of the ratepayers.

4.6. Competitive Bidding Rule

Resolution No. F-616, issued on October 1, 1986, requires utilities to issue debt using competitive bids. SDG&E intends to competitively bid all underwritten public offerings of fixed -rate debentures and First Mortgage Bonds of $200 million or less.

4.6.1. Telephonic Bidding

Consistent with the available use of telephonic bidding, SDG&E requests that the Commission authorize SDG&E to utilize electronic means other than telephone, such as e-mail: 1) for the invitation of bids; 2) for the receipt of bids from two or more underwriters or underwriting syndicates; 3) to accelerate, postpone or cancel the scheduled date and time for the receipt of bids and/or vary the terms and provisions of the Debt Securities submitted for bid; and 4) to reject all bids and request resubmission of bids. Other electronic means such as e-mail, are consistent with the Resolution F-616 authorization of telephonic bidding. We have authorized the use of other electronic means such as e-mail in D.08-07-029,¹¹ and do so again here.

4.6.2. Debt Securities in
Excess of $200 Million

SDG&E intends to competitively bid all underwritten public offerings of fixed- rate debentures and First Mortgage Bonds of $200 million or less. However, it seeks an exemption, similar to that authorized in D.08-07-029,¹² from the CBR on issues in excess of $200 million to meet its financing requirements on more favorable terms. Among the relevant factors here are:

1. Competitive bidding of larger issues may result in higher costs due to the fragmenting of the investment banking community into competitive bidding syndicates and the increased risk thereby assumed by each of them.

2. There has been considerable consolidation in the financial services sector resulting in the existence of fewer and larger investment and commercial banks and bidding syndicates, both domestically and globally.

3. A negotiated transaction involves a single underwriting syndicate with typically more participants than a bidding syndicate, which disperses underwriting risk, provides a superior assessment of market demand, and results in a reduction in the number of bonds each syndicate member must resell under a competitive bid process.

We have authorized similar exemptions in the past, and do so again here.

4.6.3. Securities Not Applicable
to Competitive Bidding

SDG&E explains that certain of the Debt Securities requested in A.10-05-016 do not lend themselves to competitive bidding, regardless of the size of the issue. For example, competitive bidding is not presently available in European or Japanese markets. Also, tax exempt pollution control bonds are not conducive to competitive bidding because they require considerable work in advance of the actual financing to determine the financing structure and terms and to identify what facilities qualify under the tax laws for tax-exempt financing. Similarly, variable interest rate debt is normally completed on a negotiated basis.

It is because those Debt Securities that do not lend themselves to competitive bidding that SDG&E seeks an exemption from the CBR to provide it with added flexibility to take advantage of market opportunities. Specifically, SDG&E seeks authority to enter into negotiated transactions with respect to Debt Securities other than domestic fixed-rate debentures and First Mortgage Bonds, including without limitation: medium-term notes, foreign debt, long-term loans, Debt Securities issued in conjunction with tax-exempt financings, subordinated debt, and special-purpose entity transactions. Similar authority was provided to SDG&E in D.08-07-029.¹³ We will not authorize a request "without limitation"¹⁴, though, because this would mean authorizing something that has not been identified. Therefore, we will only authorize SDG&E exemptions for the specific types of debt referred to above and enumerated in the order herein.

SDG&E also requests that the Commission re-confirm that the authority to effect financings involving preferred or preference stock and hybrid capital without competitive bids, granted in D.08-07-029,¹⁵ remain in force as long as any unused portion of such authority exists. Since this exemption has been previously authorized, we re-confirm such authorization here.

4.6.4. One-Day Notice Period

SDG&E seeks authority to eliminate the one-day notice requirement referred to in Resolution F-616. SDG&E seeks this exemption on the basis that the Securities and Exchange Commission's self registration procedure enables it to price an offering when market conditions appear most favorable. It is advantageous, therefore, to be able to minimize the period of time between the issuance of an invitation for bids and the scheduled receipt of bids, and to have the ability to make adjustments in the size or terms of an offering up to the last moment in response to current market conditions. SDG&E goes on to state that given the near instantaneous communication and real-time transacting that today's technology provides, prospective bidders no longer require 24 hours notification in order to respond to invitations for bids or adjustments to available terms. We have previously authorized a similar exemption in D.08-07-029,¹⁶ and do so again here.

4.6.5. Diverse Business Enterprises

SDG&E represents that competitive bidding of financing offerings of more than $200 million may have the unwanted effect of limiting the participation of Diverse Business Enterprises (DBE) in SDG&E's financing activities. Since 2004, SDG&E and its utility affiliate Southern California Gas Company have actively sought to include DBE underwriting firms in their First Mortgage Bond offering, employing ten DBE's as underwriters, in 12 offerings totaling $3 billion in aggregate. In its May 10, 2010 bond offering, SDG&E employed a DBE firm as lead underwriter and assigned two other DBE firms as co-managers.

The DBEs' participation in SDG&E's offerings broadens its investor pool. The Commission has authorized this same exemption from the Competitive Bidding Rule in other recent energy utility financing decisions.¹⁷ Nevertheless, we expect SDG&E to continue its efforts to add DBE underwriters to its syndicates in all future debt issuances, and we will monitor SDG&E's progress in doing so, in accordance with General Order 156.

4.6.6. Conclusion

SDG&E's request for the previously described exemptions from, and modifications to, the Competitive Bidding Rule, as detailed in the order of this decision, is granted on the basis that the Commission has routinely granted SDG&E and other utilities similar exemptions and modifications¹⁸ with no discernable adverse impacts on the utilities, their customers, or the public at large; and on SDG&E's representation that granting the exemptions and modifications will enable it to obtain debt in a manner advantageous to SDG&E and its ratepayers. We make no finding regarding the reasonableness of the rates, terms, and conditions of debt issued by SDG&E pursuant to the exemptions and modifications granted herein.

³ 817. A public utility may issue stocks and stock certificates or other evidence of interest or ownership, and bonds, notes, and other evidences of indebtedness payable at periods of more than 12 months after the date thereof, for any one or more of the following purposes and no others:

(a) For the acquisition of property.

(b) For the construction, completion, extension, or improvement of its facilities.

(c) For the improvement or maintenance of its service.

(d) For the discharge or lawful refunding of its obligations.

(e) For the financing of the acquisition and installation of electrical and plumbing appliances and agricultural equipment which are sold by other than a public utility, for use within the service area of the public utility.

(f) For the reorganization or readjustment of its indebtedness or capitalization upon a merger, consolidation, or other reorganization.

(g) For the retirement of or in exchange for one or more outstanding stocks or stock certificates or other evidence of interest or ownership of such public utility, or bonds, notes, or other evidence of indebtedness of such public utility, with or without the payment of cash.

(h) For the reimbursement of moneys actually expended from income or from any other money in the treasury of the public utility not secured by or obtained from the issue of stocks or stock certificates or other evidence of interest or ownership, or bonds, notes, or other evidences of indebtedness of the public utility, for any of the aforesaid purposes except maintenance of service and replacements, in cases where the applicant has kept its accounts and vouchers for such expenditures in such manner as to enable the commission to ascertain the amount of money so expended and the purposes for which such expenditure was made.

⁴ Surplus (deficit) equals total financial requirements less total source of funds.

⁵ See A.10-05-016, Table 1.

⁶ See D.08-07-029 at Ordering Paragraph (OP) 2.

⁷ See D. 08-07-029 at OP's 2 and 3.

⁸ See D.08-07-029 at OP 1.

⁹ See D.08-07-029 at OP 3.

¹⁰ See D.06-05-015 at 14-15 and OP 1.

¹¹ See D.08-07-029 at OP 4.

¹² See D.08-07-029 at OP 6.

¹³ See D.08-07-029 at OP 7.

¹⁴ A.10-05-016 at 27.

¹⁵ See D.08-07-029 at OP 7.

¹⁶ See D.08-07-029 at OP 8.

¹⁷ See, for example, D.09-09-046 at 10.

¹⁸ See, for example, D.08-07-029 at OP 4 through 8; D.04-10-037 at 50-51; and D.03-12-004 at  32-33.