4. Approvals
PG&E's request to issue Debt Securities, including preferred stock, is subject to §§ 816, et seq. of the Public Utilities Code.1 The Commission has broad discretion under §§ 816, et seq. to determine if a utility should be authorized to issue debt and preferred stock. Where necessary and appropriate, the Commission may attach conditions to the issuance of debt and preferred stock to protect and promote the public interest.
4.1. Issuance of Debt Securities
PG&E has substantiated that its $4.0 billion Debt Securities request is necessary to satisfy its 2008 -2011 needs for financing capital expenditures, acquiring property, and retiring or refunding securities. These purposes are authorized by § 817 and, as required by § 818, are not reasonably chargeable to operating expenses or income. Therefore, we will grant PG&E authority under § 816, et seq. to issue to $4.0 billion of long-term debt and preferred stock for the aforementioned purposes, as detailed in the application.
Consistent with § 824, PG&E shall maintain records to identify the specific long-term debt and preferred stock issued pursuant to this Decision, and demonstrate that proceeds from such debt and preferred stock have been used only for the purposes authorized by today's Decision.
PG&E may allocate the authorized debt and preferred stock among the authorized purposes as PG&E deems necessary. PG&E may also issue any combination of long-term debt and preferred stock, as long as the total amount issued pursuant to this Decision does not exceed $4.0 billion.
4.2. Encumbrance of Utility Property
PG&E seeks authority to use its accounts receivable to secure Debt Securities. This request to encumber utility property is subject to § 851 which states, in relevant part, that no utility shall encumber any part 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 previous Commission decisions, we will authorize PG&E to encumber its accounts receivables to improve the terms and conditions of the Debt Securities and to lower PG&E's overall cost of money for the benefit of ratepayers.2
4.3. Swap and Hedging Requirements
PG&E seeks authority to use swaps and hedges to manage interest rate risk, by issuing fixed or floating rate debt and entering into one or a series of interest rate swap contracts to convert fixed interest payments into floating rate payments or vice versa, or to convert floating rate payments tied to one index (e.g., London Interbank Offer Rate into floating rate payments tied to another index (e.g., the Federal Reserve Composite Rate for Commercial Paper). When the resulting interest rate note is lower than PG&E could have obtained by issuing a comparable security directly, the result is a savings for ratepayers.
Swaps may be denominated in U.S. dollars or in a foreign currency. When PG&E enters into a swap denominated in a foreign currency, any exchange risk will be hedged through one or more forward contracts or through a currency swap. Swaps would be negotiated with a major financial intermediary (like a commercial bank) or directly with a principal seeking the other side of the swap transaction. The swap contract may specify that the exchange of interest payments will commence either immediately or at a future date.
Contract for hedging future issuances take various forms, including Treasury lock, cap, and collar agreements. Treasury lock agreements are used to "lock-in" the forward rate of a specified Treasury or other security on which a fixed rate debt financing will be priced at a specific date in the future. Treasury collars and cap agreements are used to limit the maximum interest cost of a debt instrument using the forward rate of a specified Treasury or other security on which a fixed rate debt issuance will be priced at a specified date in the future. In addition to these contracts which hedge the underlying Treasury rate or other index upon which debt issuances are priced, there are also contracts which hedge the overall cost of a debt issuance, not just the underlying index rate. These hedges are accomplished through the use of forward starting swaps, whereby an issuer contracts to pay a predetermined rate at a specified date in the future.
PG&E also requests that these swaps and hedges not be counted against its authorized debt, since these hedges would not affect the amount of the underlying debt issued.
The terms and conditions of swaps and hedges will be determined by PG&E based on market conditions at the time such transactions are negotiated. PG&E will enter into these swap and hedging contracts only when a future financing is clearly required, such as replacement of a maturing issue.
PG&E proposes to comply with the following restrictions regarding swap and hedging transactions entered into pursuant to this Application:
1. Separately report all interest income and expense (as recorded for ratemaking purposes) arising from all hedging transactions in its regular report to the Commission.
2. Swap and hedging transactions will not exceed at any time 20% of PG&E's total long-term debt outstanding.
3. All costs associated with swap or hedging transactions shall be subject to review in PG&E's cost of capital proceedings or other appropriate proceedings.
4. Swap and hedging transactions carrying potential counterparty risk must have counterparties with investment grade credit ratings.
5. PG&E will provide the following to Commission staff within 30 days of a request: (i) all terms, conditions, and other details of swap and hedge transactions; (ii) rationale for the hedge transactions; (iii) estimated costs for the "alternative" or unhedged transactions; and (iv) copy of the swap and/or hedging agreements and associated documentation.
Consistent with previous Commission decisions,3 we will authorize PG&E to use swaps and hedges subject to the above agreed upon conditions. We also conditionally grant PG&E's request to not count hedges as outstanding debt.4 Specifically, we will not count hedges against PG&E's authorized debt to the extent the hedges are both recorded as a liability in accordance with generally accepted accounting principles (GAAP), and deemed effective under GAAP in offsetting changes to the fair value or cash flows of the risks being hedged. On the other hand, hedges will be counted against PG&E's authorized debt to the extent they are recorded as liability in accordance with GAAP, but are not deemed effective under GAAP in offsetting changes to the fair value or cash flows associated with the risks being hedged.
4.4. Competitive Bidding Rule Exemption
Resolution No. F-616, issued on October 1, 1986, requires utilities to issue debt using competitive bids. The purpose of this requirement, known as the Competitive Bidding Rule, is to reduce the cost of debt issued by utilities. The Resolution also provides for utilities to seek an exemption from the Competitive Bidding Rule for debt issues in excess of $200 million. An exemption request will only be granted upon a compelling showing by a utility that because of the size of the issues, an exemption is warranted.
PG&E seeks an exemption from the Competitive Bidding Rule on the basis that:
1. Competitively bidding 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. The competitive bidding process is fundamentally designed for highly rated, well-known issuers who do not need to avail themselves of the opportunities for communicating to, and receiving market intelligence from, the investment community in order to achieve a successful offering.
3. Competitive bidding may leave PG&E limited and undesirable options for obtaining needed financing.
PG&E requests that the following Debt Securities also be exempted from the Competitive Bidding Rule because they are typically issued through negotiated arrangements: notes sold through a placement agent on a reasonable efforts basis; trust preferred and hybrid securities; accounts receivable financings; overseas indebtedness; foreign currency securities; notes; tax-exempt securities, and interest-rate hedges. However, it will, pursuant to the Competitive Bidding Rule, offer through competitive bidding other fixed-rate Debt Securities in the form of First and refunding mortgage bonds, intermediate and long-term notes, and debentures of $200 million or less in principal amount (other than tax-exempt securities) that are sold publicly in the domestic market.5
To provide added flexibility to take advantage of market opportunities, PG&E requests that the Commission grant them an exemption from the Competitive Bidding Rule 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 Competitive Bidding Rule is granted on the basis that the Commission has routinely granted PG&E and other utilities similar exemptions6 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.
4.5. Reporting Requirement
GO 24-B requires utilities to submit a monthly report to the Commission that contains, among other things: (i) the amount of debt and preferred stock issued by the utility during the previous month; (ii) the total amount of debt and preferred stock outstanding at the end of the prior month; (iii) the purposes for which the utility expended the proceeds realized from the issuance of debt and preferred stock during the prior month; and (iv) a monthly statement of the separate bank account that the utility is required to maintain for all receipts and disbursements of money obtained from the issuance of debt and preferred stock.
PG&E seeks authority to report quarterly, instead of monthly, the information required by GO 24-B in order to reduce its administrative cost of complying with the GO and to conform to past practice. This reporting request is reasonable and consistent with past Commission practice.7 PG&E may report quarterly to the Commission the information required by GO 24-B.
1 All statutory references are to the Public Utilities Code unless otherwise stated.
2 See, for example, D.05-04-003 (2005) mimeo., p. 10, Ordering Paragraph 4.
3 See, for example, D.95-09-023, D.96-05-066, and D.03-12-004.
4 Consistent with D.02-11-030, Footnote 13, any debt issued by PG&E as part of a transaction involving an interest-rate swap shall be used to determine the amount of authorized and outstanding debt.
5 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.
6 See, for example, D.04-10-037 (2004) mimeo., pp. 50-51; and D.03-12-004, mimeo., pp. 32-33.
7 See, for example, D.04-10-037 (2004) mimeo., p. 51; and, D.03-12-052 (2003) mimeo., pp. 11-12.
