X. Assignment of Proceeding
Commissioner Michael R. Peevey is the Assigned Commissioner and Robert Barnett is the assigned ALJ in this proceeding.
1. The PSA is not in the public interest and must be modified.
2. On November 8, 2000, PG&E filed suit in the U.S. District Court for the Northern District of California against the five commissioners in their official capacity (the "Rate Recovery Litigation"). PG&E's complaint alleged that the Commission violated federal law by not allowing PG&E to collect in rates its costs of procuring wholesale energy. The Commission denied PG&E's allegations.
3. On April 6, 2001, PG&E filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and has been operating under Bankruptcy Court supervision and protection since that date.
4. On September 20, 2001, PG&E and PG&E Corporation, as co-proponents, proposed a plan of reorganization for PG&E in its Chapter 11 proceeding. That plan provided for the disaggregation of PG&E's historic businesses into four companies, three of which would be regulated by the FERC rather than this Commission, as a means of raising the money necessary to pay all valid creditor claims in full and exit Chapter 11.
5. On August 30, 2002, the Commission and the Official Creditors Committee filed a joint amended plan of reorganization for PG&E.
6. PG&E and the Commission have vigorously opposed and litigated against the plans proposed by each other.
7. Bankruptcy confirmation hearings on the competing plans of reorganization started on November 18, 2002, and were ongoing on March 11, 2003, when the Bankruptcy Court entered an order staying further confirmation and related proceedings for sixty days to facilitate a mandatory settlement process under the supervision of Bankruptcy Court Judge Randall Newsome. The stay was later extended to June 20, 2003.
8. PG&E is not authorized to reimburse PG&E Corporation or any other unit of PG&E for professional fees and expenses in connection with the Chapter 11 case, nor is PG&E authorized to charge ratepayers directly or indirectly for these costs.
9. On July 25, 2002 in PG&E's federal district court case against the Commission, U.S. District Judge Vaughan Walker denied the Commission's motion to dismiss and denied PG&E's and the Commission's motions for summary judgment. In the course of his ruling denying the motions, Judge Walker held that the federal filed rate doctrine applies to purchases of energy at market based rates, but he found that there were numerous factual disputes and he set the matter for trial. The federal district court case has been stayed by the US Court of Appeals for the Ninth Circuit pending the appeal by the Commission of the District Court's denial of a motion to dismiss.
10. In the PG&E's federal district court case and other proceedings, PG&E claims to be entitled to recover from ratepayers $11.8 billion of unrecovered costs of utility service. The Commission disputes this claim.
10. PG&E also claims to be entitled to retain $2.5 billion in wholesale power generation revenues collected from retail ratepayers for September 2000 through January 2001. The Commission disputes these claims.
11. In the ATCP, ORA claims that $434 million of costs of procuring power through the California Power Exchange should be disallowed as imprudently incurred. PG&E disputes ORA's claim.
12. On June 19, 2003, certain of the Commission's staff and PG&E announced that they had reached agreement on a proposed settlement that would resolve the competing plans of reorganization in the Bankruptcy Court, PG&E's case against the Commission in the U.S. District Court, and various pending Commission proceedings, all as set forth in the PSA.
13. There are substantial litigation risks to PG&E, the Commission, and ORA, and corresponding risks to ratepayers, in going to hearings on all issues and it is reasonable to approve a settlement that appropriately balances those risks.
14. PG&E has asserted claims, which total approximately $11.8 billion, and the ratepayer costs of the settlement ($7.2 billion), are about 60% of those claims. In addition there are direct, positive benefits ratepayers will obtain. Those benefits include immediate rate reductions; the ability of the Commission to regulate PG&E on an integrated, cost-of-service basis; and environmental betterments. The ratepayer dollar settlement is fair and reasonable when compared to the claims PG&E would waive and release.
15. It is in the public interest that PG&E emerge from bankruptcy promptly.
16. To emerge from bankruptcy PG&E should pay its creditors. All allowed claims should be paid in full. PG&E Corp. litigation costs should not be paid by ratepayers. The dollar amount of the modified settlement is a reasonable compromise of the differences between PG&E and the Commission. The headroom revenue is part of the total revenue package which we find reasonable and in the public interest.
17. If this MSA is implemented, the initial revenue reduction in 2004 is projected to be approximately $670 million.
18. Paragraph 6 of the PSA is unreasonable and not in the public interest, because it requires the Commission not to restrict PG&E from paying dividends or repurchasing common stock, regardless of the circumstances, evidence or merit of any challenges to PG&E's dividend practices.
19. The presence and involvement of Commission staff in negotiating the PSA was adequate. The motives, independence, and professional competence of the governmental representatives in the negotiations are beyond dispute. The ratepayers had adequate representation in the settlement process.
20. The MSA will result in a feasible plan to permit PG&E to emerge from bankruptcy.
21. The MSA is fair, just and reasonable and in the public interest. First, it adopts the regulatory asset and the cash allowances of the PSA, and therefore will pay creditors in full, improving PG&E's credit metrics. Second, the MSA calls for the amortization of the regulatory asset "mortgage style" over nine years. Third, it offers the State significant environmental benefits. Fourth, it provides for reduction of the regulatory asset by any refunds obtained from energy suppliers. Finally, it contains PG&E's commitment not to unilaterally disaggregate for the life of the plan.
22. On September 9, 2003, the ALJ encouraged the parties to resolve their differences with respect to the Land Conservation Commitment in Paragraph 17 and Appendix E to the PSA.
23. On September 25, 2003, PG&E, California Resources Agency, ORA, Association of California Water Agencies, California Farm Bureau Federation, California Hydropower Reform Coalition, Regional Council of Rural Counties, State Water Resources Control Board, Tuolumne Utility District, U.S. Department of Agriculture-Forest Service and non-parties California Forestry Association, California Wilderness Coalition, Central Valley Regional Water Control Board, Mountain Meadows Conservancy, Natural Resources Defense Council, Northern California Council Federation of Fly Fishers, The Pacific Forest Trust, Inc., Planning and Conservation League, Sierra Club California, Sierra Foothills Audobon Society, Sierra Nevada Alliance, Trust for Public Land and U.S. Department of Interior-Bureau of Land Management presented to the Commission a Stipulation Resolving Issues Regarding The Land Conservation Commitment (the "Land Commitment Stipulation") that implements Paragraph 17 and Appendix E of the PSA and constitutes an enforceable contract among those parties.
24. The Land Conservation Commitment Stipulation is reasonable in light of the whole record, consistent with law, and in the public interest.
25. Under the LCC, no lands will be transferred or encumbered unless PG&E first applies for and obtains approval from the Commission pursuant to § 851.
26. It is in the public interest for PG&E to provide $30 million for environmental enhancements benefiting ratepayers in its urban areas in addition to the $70 million of environmental enhancements, which PG&E has provided in the PSA (¶ 17) for rural areas.
27. It is in the public interest for PG&E to provide $30 million for clean energy technology.
28. TURN's proposal to use a securitized financing supported by a dedicated rate component cannot feasibly be done without express enabling legislation. To wait for legislation would entail unreasonable delay in resolving PG&E's Chapter 11 proceeding. Most of the savings claimed by TURN result from requiring PG&E to pay the taxes due on collections from ratepayers in violation of normal ratemaking principles.
29. A properly constructed securitized financing, if authorized by legislation that complies with normal ratemaking principles regarding taxation, has the potential to save ratepayers money over the longer term.
30. It is a condition precedent to the Commission's executing the MSA that PG&E agree in writing, that, after effectuating the Settlement Plan of Reorganization and exiting from Chapter 11, PG&E will seek as expeditiously as practical to refinance the unamortized portion of the Regulatory Asset and associated federal and state income and franchise taxes using a securitized financing supported by a dedicated rate component, provided the following conditions are met: (a) authorizing legislation satisfactory to the Commission, TURN and PG&E is passed and signed into law allowing securitization of up to the full unamortized amount of the Regulatory Asset and associated federal and state income and franchise taxes, and providing for the collection in PG&E's rates of any portion of the associated tax gross-up not securitized; (b) the Commission determines that, on a net present value basis, the refinancing will save ratepayers money compared to the Regulatory Asset over the term of the securitized debt; (c) the refinancing will not adversely affect PG&E's company and debt credit ratings; and (d) PG&E obtains, or determines it does not need, a private letter ruling from the Internal Revenue Service that neither the refinancing nor the issuance of the securitized bonds is a presently taxable event. PG&E may accomplish the securitization in up to two tranches up to one year apart, and should issue sufficient callable or short-term debt as part of its Chapter 11 exit financing to accommodate the refinancing using a dedicated rate component. The cost of the callable or short-term debt will be recovered in rates in accordance with paragraph 13f of the MSA. The provisions of paragraph 13d will not apply to the refinancing. PG&E will proceed with the first tranche as expeditiously as practical after the passage of authorizing legislation and will pursue the refinancing in good faith. The first tranche will be no less than the full unamortized balance of the Regulatory Asset. The second tranche will be for the remaining associated federal and state income and franchise taxes; provided that, in the event sufficient generator and energy supplier refunds have not yet been received, PG&E will not be required to securitize more than $3 billion in total in both tranches. PG&E will use the securitization proceeds to rebalance its capital structure to maintain the capital structure provided for under the Settlement Agreement. PG&E will report to the Commission on the progress of its securitization efforts every 60 days following the effective date of the authorizing legislation.
31. Both TURN and PG&E have agreed that the authorizing legislation attached as Appendix E is acceptable and, if enacted by the Legislature, would satisfy condition (a) in Finding of Fact 30.
32. It is a further condition precedent to the Commission's executing the MSA that PG&E Corporation agree in writing that it will not seek reimbursement in the Bankruptcy Court for any of its professional fees and expenses incurred in connection with PG&E's Chapter 11 proceeding."
1. The PSA offered by PG&E and the Commission staff is unreasonable and not in the public interest unless it is modified.
2. When entering into the settlement agreements or contracts, the Commission may not act inconsistently with state law.
3. The Commission must strike the phrase "notwithstanding any contrary state law" in Paragraphs 21 and 32 of the PSA that provide that the Parties agree that the settlement agreement, the settlement plan and any court orders are intended to be binding and enforceable under federal law notwithstanding any contrary state law, because we can only enter into a settlement if it is consistent with state law.
4. In light of the constitutional requirement that the Commission actively supervise and regulate public utility rates and the statutory requirements under the §§451, 454, 728 that the Commission ensure that the public utilities' rates are just and reasonable, the Commission must retain its authority to set just and reasonable rates during the nine-year term of the settlement .
5. The Commission cannot be powerless to protect PG&E's ratepayers from unjust and unreasonable rates or practices during the nine-year term of the proposed settlement.
6. The government may not contract away its right to exercise the police power in the future.
7. Entering into the Modified Settlement Agreement (MSA) is fully consistent with the Commission's exercise of its ratemaking authority, because we find that the regulatory asset provision is reasonable and a necessary part of the settlement, and we will still decide the overall retail electric rates for PG&E's customers in pending and future proceedings.
8. Paragraph 6 of the PSA is unreasonable and contrary to the public interest, because it would restrict the Commission from ruling against PG&E concerning allegations of unreasonable dividend or stock repurchasing practices even though we do not have a record in this proceeding to support whether future dividend practices or stock repurchasing practices are reasonable or unreasonable.
8a. Paragraph 15 of the PSA should be modified to delete the words "PG&E Corporation and" from the first sentence and the entire last sentence."
9. Paragraph 2.g.'s commitment that the Commission will act to facilitate and maintain the investment grade credit ratings does not guarantee such a credit rating when there are other causes, besides the Commission's actions (e.g., PG&E's imprudent conduct resulting in a disallowance), which are responsible for any threats to PG&E's investment grade credit rating.
10. The Bankruptcy Court has jurisdiction over the plan of reorganization and over the parties to enforce the settlement agreement, settlement plan and the Court's own confirmation order, as well as jurisdiction over the implementation of the bankruptcy plan.
11. AB 6X made § 368(a) inapplicable to the utilities' unrecovered costs, and it is clear that the Commission's authority to allow PG&E to recover the balance in its TCBA is not limited by AB 1890.
12. The Commission and ratepayers had adequate representation in the settlement process.
13. TURN's proposed securitization financing cannot be achieved without legislation. However, if legislation satisfactory to the Commission, TURN and PG&E is enacted, then the Commission will have sufficient authority to implement securitization financing to allow PG&E to refinance the unamortized portion of the Regulatory Asset under the MSA subsequent to the effectuation of the Settlement Plan of Reorganization and PG&E's emergence from bankruptcy.
14. The MSA does not release any claims, which are held by parties other than PG&E and the Commission, against PG&E Corporation or its directors, through the dismissal of PG&E Corporation from Commission proceedings (e.g., the Holding Company OII) or otherwise. The Commission's dismissal and release of PG&E Corporation in no way affects the Business and Professions Code §17200 Law Enforcement Actions brought by the California Attorney General and CCSF and these actions are not "derivative" of the Commission's rights.
15. The definition of "Headroom" in the MSA is not intended to and does not affect DWR's rights under Assembly Bill (AB) 1X or the Rate Agreement, including DWR's property rights to all revenue collected and remitted by PG&E for DWR's Power Charges and Bond Charges in accordance with Commission orders.
16. The MSA (the "Settlement Agreement" in Appendix C of this order) is not contrary to state law and is fair, just and reasonable and in the public interest; therefore, it should be approved and adopted.
17. The rulings of the presiding Administrative Law Judge are affirmed, except that the testimony of Peninsula Ratepayers' Association is admitted and Peninsula Ratepayers' Association is authorized to seek intervenor compensation.
18. The Commission has inherent authority under the California Constitution and Public Utilities Code §§ 451 and 701 to enter into and execute a settlement agreement.
19. The Commission has authority under Public Utilities Code § 701 and Rule 51 to approve the Land Conservation Commitment (LCC) Stipulation.
20. Under the LCC, the Commission retains its existing authority under § 851 to approve or disapprove of any proposed disposition or encumbrance of PG&E's property.
21. Should PG&E agree to the Modified Settlement Agreement and the Bankruptcy Court approve it as part of the settlement plan, the Modified Settlement Agreement will be binding upon future Commissions. The modifications and clarifications in this decision must be considered part of the Settlement Plan and reflected in the Confirmation Order, in order for the Commission to enter into the MSA consistent with state law. Therefore, any references in the MSA to the "Settlement Plan"or "Confirmation Order" are references to the Settlement Plan and/or Confirmation Order, which adopt, incorporate or reflect the MSA.
IT IS ORDERED that:
1. The Proposed Settlement Agreement offered by PG&E and the Commission staff is modified by deleting Paragraph 6 ("Dividend Payments and Stock Repurchases"), deleting the phrase "notwithstanding any contrary state law" in Paragraphs 21 and 32, adding $30 million of environmental benefits for PG&E's urban ratepayers, and adding $15 million to assure adequate planning and funding of clean energy technology.
2. We require as a condition to our entering into the MSA that this decision (without any concurrences, dissents, or its appendices) be attached to the MSA as an appendix and that Paragraph 27 of the PSA be modified to explicitly state that the attached Commission decision reflects the understanding of the parties to the settlement.
3. At the time that there no longer is any outstanding balance for the regulatory asset (e.g., after the nine-year amortization or earlier if it is replaced with a dedicated rate component), PG&E must make a compliance filing for the Commission to determine how PG&E shall refund or credit to the benefit of its ratepayers any further refunds, claim offsets or other credits from generators and other energy suppliers (e.g., El Paso Natural Gas Company) to the extent that PG&E subsequently receives or realizes these refunds, claim offsets or other credits or has not otherwise credited them against the regulatory asset.
4. For purposes of calculating the headroom for 2003 (including the amount beyond the $875 million cap) , in no event may the litigation costs, bankruptcy-related costs or any other costs of PG&E Corporation or of any other PG&E affiliate be included in the determination of the headroom amount nor may any retention bonuses of PG&E's directors, officers, managers or any other employees be included in such a determination.
5. The Settlement is also modified by deleting authorization for PG&E to reimburse PG&E Corporation for professional fees and expenses in connection with the Chapter 11 case. As a condition precedent to the Commission executing the Settlement Agreement, PG&E Corporation should agree in writing that it will not seek reimbursement of such professional fees and expenses through the Bankruptcy Court.
6. The Land Conservation Commitment Stipulation in Exhibit 181 is approved and adopted.
7. The Modified Settlement Agreement (the "Settlement Agreement" in Appendix C) is approved and adopted by the Commission.
8. The rulings of the Presiding Administrative Law Judge are affirmed, except that the testimony of Peninsula Ratepayers' Association is admitted and Peninsula Ratepayers' Association is authorized to seek intervenor compensation.
9. It is a condition precedent to the Commission's executing the MSA that PG&E agrees, in writing, that after effectuating the Settlement Plan of Reorganization and exiting from Chapter 11, PG&E will seek as expeditiously as practical to refinance the unamortized portion of the Regulatory Asset and associated federal and state incomes and franchise taxes using a securitized financing supported by a dedicated rate component, provided the following conditions are met: (a) authorizing legislation satisfactory to the Commission, TURN and PG&E is passed and signed into law allowing securitization of up to the full unamortized amount of the Regulatory Asset and associated federal and state income and franchise taxes, and providing for the collection in PG&E's rates of any portion of the associated tax gross-up not securitized; (b) the Commission determines that, on a net present value basis, the refinancing will save ratepayers money compared to the Regulatory Asset over the term of the securitized debt; (c) the refinancing will not adversely affect PG&E's company and other debt credit ratings; and (d) PG&E obtains, or determines it does not need, a private letter ruling from the Internal Revenue Service that neither the refinancing nor the issuance of the securitized bonds is a presently taxable event. PG&E may accomplish the securitization in up to two tranches up to one year apart, and should issue sufficient callable or short-term debt as part of its Chapter 11 exit financing to accommodate the refinancing using a dedicated rate component. The cost of the callable or short-term debt will be recovered in rates in accordance with paragraph 13f of the MSA. The provisions of paragraph 13d will not apply to the refinancing. PG&E will proceed with the first tranche as expeditiously as practical after the passage of authorizing legislation and will pursue the refinancing in good faith. The first tranche will be no less than the full unamortized balance of the Regulatory Asset. The second tranche will be for the associated federal and State income taxes and franchise taxes; provided that, in the event sufficient generator and energy supplier refunds have not yet been received, PG&E will not be required to securitize more than $3 billion in total in both tranches. PG&E will use the securitization proceeds to rebalance its capital structure to maintain the capital structure provided for under the Settlement Agreement. PG&E will report to the Commission on the progress of its securitization efforts every 60 days following the effective date of the authorizing legislation.
10. It is a further condition precedent to the Commission executing the MSA that PG&E Corporation agree in writing that it will not seek reimbursement in the Bankruptcy Court for any of its professional fees and expenses incurred in connection with PG&E's Chapter 11 proceeding.
11. Upon PG&E's and PG&E Corporation's written consent to the conditions precedent in Ordering Paragraphs 9 and 10, the Commission authorizes the Executive Director to sign the Modified Settlement Agreement ("Settlement Agreement" in Appendix C) on behalf of the Commission.
This order is effective today.
Dated December 18, 2003, at San Francisco, California.
MICHAEL R. PEEVEY
President
GEOFFREY F. BROWN
SUSAN P. KENNEDY
Commissioners
I will file a concurrence.
/s/ GEOFFREY F. BROWN
Commissioner
I will file a dissent.
/s/ LORETTA M. LYNCH
Commissioner
I will file a dissent.
/s/ CARL W. WOOD
Commissioner
