4. Discussion

PG&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.5 Those purposes not listed in Pub. Util. Code § 817 may only be paid with funds from normal utility operations. PG&E proposes that it will use: $3.15 billion of new financing for construction expenditures, acquisition of property, or to reimburse its treasury for money expended for those purposes; and $1.6 billion of new financing for the retirement, refunding, or reissuance of securities previously issued and upon which PG&E has previously paid the prescribed fees.

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. PG&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 PG&E's request is in compliance with Pub. Util. Code § 816 et seq., we 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.

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. In response to a request from the assigned ALJ, PG&E provided a confidential forecast of its sources and uses covering the three-year period of 2012-2014. Since we granted PG&E's motion for confidential treatment of its forecast of sources and uses statement (see Section 2 of this decision), this information is not included in this decision. Based on a review of this information to determine whether it supports PG&E's need for new financing authority, the assigned ALJ determined that PG&E's forecasted sources and uses net of existing financing authority approximates its request of $4.75 billion of new financing.

We therefore find that it is reasonable to authorize PG&E to issue $4.75 billion of new debt securities and new preferred or preference stock. This new financing will allow PG&E to fund its capital expenditure plans for the period 2012 through 2014, and for the other proper purposes discussed in Section 3 of this decision, to the extent authorized by Pub. Util. Code § 817(h). We find PG&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 PG&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 PG&E's forecasted projects for the period 2012 through 2014.

PG&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.) 08-10-013.6 Therefore, we will authorize PG&E to issue the types of debt securities detailed in Section 3 of this decision and enumerated in this order, except as noted herein. PGE& requested authority to include selected terms in its hybrid securities issuances (Footnote 3 of this decision) that would include "but not limited to" the terms listed in the application. We cannot authorize something that has not been identified. Therefore, we authorize PG&E to apply the specific terms to its hybrid securities enumerated in Footnote 3 of this decision and ordered herein.

PG&E 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.08-10-013.7 Therefore, we will authorize PG&E to issue the preferred or preference stock detailed in Section 3 of this decision and enumerated in the order herein. PG&E also requested authority to include selected terms in its preferred or preference stock (discussed in Section 3 of this decision) that would "include, but not be limited to" the terms listed in its application. We cannot authorize something that has not been identified. Therefore, we authorize PG&E to apply the specific terms enumerated Section 3 of this decision and ordered herein.

Also consistent with § 824, PG&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.

PG&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.08-10-013,8 we will authorize PG&E to encumber its utility property, including but not limited to its accounts receivables and utility plant.

Also consistent with D.08-10-013,9 we will grant PG&E authority to guarantee or to pledge its assets on behalf of regulated affiliates or regulated subsidiaries of PG&E with regard to both securities and interest rate hedges, which qualify to transact financing arrangements pursuant to Pub. Util. Code § 701.5.

Consistent with D.08-10-013,10 we will grant PG&E authority to issue debt securities through government entities to obtain tax-exempt status for the securities, whenever PG&E's facilities qualify for tax-exempt financing under federal or state law. In this structured financing, PG&E is authorized to unconditionally guarantee or otherwise secure the government entities' obligations to its debt holders. As a means of securing the government entities' obligations, PG&E may issue and pledge or deliver bonds in an equal principal amount to the government entities.

We also remind PG&E that when it issues debt through a regulated affiliate or subsidiary, it must remain in compliance with the Affiliate Transaction Rules adopted in D.06-12-029. In particular, Rule IX,11 which requires large California energy utilities and their holding companies to provide a non-consolidation opinion that demonstrates that the "ring-fencing"12 around the utility is sufficient to prevent it from being pulled into the bankruptcy of its parent/affiliate/subsidiary.13

PG&E sought authority to include certain securities enhancements, described in Section 3 of this decision, to improve the terms and conditions of PG&E's new issuances of debt securities, and to lower the overall cost of money for the benefit of the ratepayers.

We have previously granted PG&E authority, most recently in D.08-10-013:14 to use similar securities enhancements as requested in the current application; to not consider enhancements as separate debt for purposes of calculating its remaining financing authorization; and to comply with selected restrictions regarding swap and hedging transactions entered into. In the current application, PG&E requested "flexibility to enter into other hedging and interest rate swap arrangements not specifically described in this Application."15 We cannot authorize something that has not been identified.

We again authorize PG&E to use these previously approved forms of securities enhancements to lower the overall cost of money for the benefit of the ratepayers, including the requested separation from other securities and compliance with requested restrictions, but limit such authority to the specific types of enhancement features enumerated in Section 3 of this decision and ordered herein.

Resolution Number F-616, issued on October 1, 1986, requires utilities to issue debt using competitive bids. PG&E intends to competitively bid all underwritten public offerings of first and refunding bonds, intermediate- and long-term notes, and debentures (fixed rate bonds and debentures), of $200 million or less in principal amount (other than tax-exempt securities) that are sold publicly in the domestic market.

PG&E also seeks an exemption, similar to that authorized in D.08-10-013,16 from the CBR on issues in excess of $200 million to meet its financing requirements on more favorable terms. PG&E believes that competitively bidding larger debt issues may result in higher costs of funds to PG&E, less flexibility to adjust timing and terms of transactions, and fewer opportunities for firms owned by Diverse Business Enterprises (DBE), i.e., firms owned by women, disabled veterans and minorities to participate in transactions.

In a competitive bidding process, underwriters have limited market information; therefore they will add a risk premium to the price that they bid to the issuer. Once bidding is complete, if investor demand is greater than expected and pricing can be reduced, any price benefits accrue to the bidding firm rather than to the issuer. Alternatively, in a negotiated transaction, because a syndicate of underwriters is able to gauge investor demand, understand price sensitivity, and develop additional investor demand through marketing efforts, the issuer and ultimately the ratepayers benefit.

Negotiated transactions also provide greater flexibility to adjust the timing and terms of a proposed debt offering to meet changing market conditions, while competitive bidding does not allow for restructuring maturity schedules, sales date, or interest rates to adapt to market conditions after bids are submitted.

The secondary performance of prior issuances is also a factor that investors use to guide their decision to invest in new issuances. In a negotiated transaction, the underwriters have the ability to target high-quality, long-term investors to reduce volatility in the secondary market, given their ability to gauge investor demand. In a competitively bid issue, the bidding firm has an incentive to sell the bonds as quickly as possible to reduce its risk of interest rate and market changes, which may decrease investor demand, decrease investor quality, and increase the pricing since investors have less certainty that the securities will be placed with long-term investors at the same price.

In addition, competitive bidding has historically put women, disabled-veteran, and minority-owned firms at a disadvantage in bidding on a bond issue, due to their smaller size and capitalization including these historically underrepresented firms.

PG&E believes that competitively bidding of debt issues in excess of $200 million may result in, among other things, fewer opportunities for DBE to participate in finance issuances by PG&E. PG&E represents that since 2007, it has employed 11 DBE's as underwriter sand co-managers on 22 issuances, totaling $7.7 billion.

GO 156 was adopted by the Commission in 1986 to promote greater competition among utility suppliers by expanding the available supplier base and to encourage greater economic opportunity for women, minorities, and disabled veterans business enterprise (WMDVBE).  The Commission expects PG&E to continue to use their best efforts to include DBE firms such as these in its finance issuances, consistent with GO 156, and report such activity as required by GO 156. DBE's participation in a utility's issuances broadens its investor pool, reaching out to firms that are less capitalized and have more limited distribution capabilities than larger firms.

PG&E also requests that the following debt securities also be exempted from the CBR: notes sold through a placement agent on a reasonable efforts basis, which are analogous to commercial paper; trust preferred and hybrid securities sold through negotiated arrangements; accounts receivable financings; loans; variable or floating rate debt securities; overseas indebtedness; foreign currency securities; notes; tax-exempt securities, and interest-rate hedges. However, it will, pursuant to the CBR, offer through competitive bidding other fixed-rate debt securities in the form of first and refunding mortgage bonds, intermediate and long-term notes, and fixed rate bonds and debentures, of $200 million or less in principal amount (other than tax-exempt securities) that are sold publicly in the domestic market.17

To provide added flexibility to take advantage of market opportunities, PG&E requests that the Commission grant them an exemption from the CBR to permit PG&E to use the following procedures for those situations where the Rule remains applicable:

1. To shorten the time between the issuance of an invitation for bids and the scheduled receipt of bids to a period which is the shortest time reasonably required to obtaining a sufficient number of bids from underwriters or purchasers or groups thereof (which time period may be as short as a few hours).

2. To accelerate, postpone, or cancel the scheduled date and time for receipt of bids.

3. To reject all bids submitted.

4. To request the resubmission of bids.

5. To reschedule subsequent receipt of bids.

6. To vary the amount, terms, and conditions of the debt securities submitted for bids.

7. To waive the requirement for newspaper publication of the above items.

PG&E's request for the previously described exemptions from the CBR are granted on the basis that the Commission has routinely granted PG&E and other utilities similar exemptions18 with no discernable adverse impacts on the utilities, their customers, or the public at large; and on PG&E's representation that granting the exemptions will enable it to obtain debt in a manner advantageous to PG&E and its ratepayers. We make no finding regarding the reasonableness of the rates, terms, and conditions of debt issued by PG&E pursuant to the exemptions granted herein.

5 http://www.leginfo.ca.gov/cgi-bin/waisgate?WAISdocID=3261406119+1+0+0&WAISaction=retrieve.

6 See D.08-10-013 at 3 and Ordering Paragraph (OP) 1.

7 See D.08-10-013 at 3 and OP 1.

8 See D.08-10-013 at 3 and OP 2.

9 See D.08-10-013 at 3 and OP 3.

10 See D.08-10-013 at 3 and OP 3.

11 D.06-12-029, Appendix A-3, Rule IX: Protecting the Utility's Financial Health

A. Information from Utility on Necessary Capital:

Each utility shall provide to the Commission on the last business day of November of each year a report with the following information:

1. the utility's estimate of investment capital needed to build or acquire long-term assets (i.e., greater than one year), such as operating assets and utility infrastructure, over each of the next five years;

2. the utility's estimate of capital needed to meet resource procurement goals over each of the next five years;

3. the utility's policies concerning dividends, stock repurchase and retention of capital for each year;

4. the names of individuals involved in deciding corporate policies for the utility's dividends, stock repurchase and retention of capital;

5. the process by which corporate policies concerning dividends, stock repurchase and retention of capital are implemented; and

6. how the utility expects or intends to meet its investment capital needs.

B. Restrictions on Deviations from Authorized Capital Structure:

A utility shall maintain a balanced capital structure consistent with that determined to be reasonable by the Commission in its most recent decision on the utility's capital structure. The utility's equity shall be retained such that the Commission's adopted capital structure shall be maintained on average over the period the capital structure is in effect for ratemaking purposes. Provided, however, that a utility shall file an application for a waiver, on a case by case basis and in a timely manner, of this Rule if an adverse financial event at the utility reduces the utility's equity ratio by 1% or more. In order to assure that regulatory staff has adequate time to review and assess the application and to permit the consideration of all relevant facts, the utility shall not be considered in violation of this Rule during the period the waiver is pending resolution. Nothing in this provision creates a presumption of either reasonableness or unreasonableness of the utility's actions which may have caused the adverse financial event.

C. Ring-Fencing:

Within three months of the effective date of the decision adopting this amendment to the Rules, a utility shall obtain a non-consolidation opinion that demonstrates that the ring fencing around the utility is sufficient to prevent the utility from being pulled into bankruptcy of its parent holding company. The utility shall promptly provide the opinion to the Commission. If the current ring-fencing provisions are insufficient to obtain a non-consolidation opinion, the utility shall promptly undertake the following actions:

1. notify the Commission of the inability to obtain a non-consolidation opinion;

2. propose and implement, upon Commission approval, such ringfencing provisions that are sufficient to prevent the utility from being pulled into the bankruptcy of its parent holding company; and then

3. obtain a non-consolidation opinion.

D. Changes to Ring-Fencing Provisions:

A utility shall notify the Commission of any changes made to its ring-fencing provisions within 30 days.

12 Ring-fencing is defined as the action of a regulated public utility to financially separate itself from a parent/affiliate/subsidiary that engages in non-regulated business, primarily in order to protect ratepayers from financial instability or bankruptcy of the parent/affiliate/subsidiary.

13 See D.06-12-029,Appendix A-3, at 31-33, which in part states:

Ring-Fencing. Within three months of the effective date of the decision adopting this amendment to the Rules, a utility shall obtain a non-consolidation opinion that demonstrates that the ring fencing around the utility is sufficient to prevent the utility from being pulled into bankruptcy of its parent holding company. The utility shall promptly provide the opinion to the Commission. If the current ring-fencing provisions are insufficient to obtain a non-consolidation opinion, the utility shall promptly undertake the following actions:

1. notify the Commission of the inability to obtain a non-consolidation opinion;

2. propose and implement, upon Commission approval, such ring-fencing provisions that are sufficient to prevent the utility from being pulled into the bankruptcy of its parent holding company; and then

3. obtain a non-consolidation opinion.

14 See D.08-10-013 at 3 and OPs 4 and 5.

15 A.11-11-001 at 11.

16 See D.08-10-013 at OP 7.

17 Because the Competitive Bidding Rule applies only to utilities that have ratings of "A" or higher, PG&E does not intend to, necessarily, competitively bid such fixed rate bonds and debentures, until such time as it meets the minimum bond rating threshold.

18 See D.08-10-013 at 11 and OP 7.

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