IV. Order Instituting Investigation

This Commission has jurisdiction over respondents by virtue, inter alia, of their acceptance of those conditions that governed the formation of the respective holding companies. In addition, many provisions of the Public Utilities Code give the Commission broad authority to act to protect ratepayers in a variety of circumstances, to enforce the Constitution, statutes, and the Commissions rules, orders, and decisions, and to remedy violations thereof. These provisions include, but are not limited to, Public Utilities Code § 451 [requiring public utilities to furnish and maintain adequate, efficient, just and reasonable service as necessary to promote the safety, health, comfort, and convenience of its patrons, employees and the public]; § 701 [Commission may do all things necessary and convenient to exercise its power and jurisdiction to regulate public utilities]; § 761 [Commission may adopt order or rule to remedy unjust or unreasonable practices of a public utility]; § 798 [provides for remedies against a utility that makes imprudent payments to its holding company]; and §§ 2101 - 2113 [authority to enforce Constitution, statutes, and violations of Commission order, rules, and decisions].

Common law also provides the Commission with authority to disregard corporate forms in a variety of circumstances in order to carry out the Commission's responsibilities. See, e.g., General Telephone Co. v. P.U.C., 34 Cal. 3d 817 (1983).

Finally, under Pub. Util. Code § 1708, upon proper notice to the parties and with opportunity to be heard as in the case of complaints, the Commission may rescind, alter, or amend any order or decision made by it. The Commission has so recognized this authority in the context of its holding company decisions. For example, in PG&E Authorization II, the Commission noted its authority to impose additional conditions if necessary, and specifically provided that parties could raise the need for additional conditions in the future. See PG&E Authorization II, 194 P.U.R.4^th 1, 12-13 (April 22, 1999).

A. Investigation into past violations

1. Infusions of capital

Available information suggests that at no time since wholesale energy prices started rising in the summer of 2000, while the utilities were increasingly strident in their claims of worsening financial condition, imminent bankruptcy, and the consequent threat to their ability to fully meet their obligation to serve, did any of their respective holding companies provide an infusion of capital to address the utilities' capital needs as detailed above. We will investigate whether this apparent failure to infuse capital violates the condition in our holding company decisions that the holding company give "first priority" to the capital needs of its utility subsidiary to meet its obligation to serve.

Accordingly, respondent holding companies are directed to demonstrate why their evident failure to provide sufficient capital to their utility subsidiaries to alleviate or mitigate the subsidiaries' need for capital during that time period did not violate, and does not continue to violate, the "first priority" condition cited above. Similarly, respondent utilities are directed to demonstrate that they made demands on their respective holding companies to infuse needed capital, and if they cannot so demonstrate, why their failure to make such demands did not violate, and does not continue to violate, Section 451 of the Public Utilities Code. As part of our investigation, respondents are directed to produce the information and documents specified in Attachment A hereto.

2. Ring fencing

As described above, starting in December 2000, PG&E Corporation took steps to "ring fence" several of its unregulated subsidiaries, and has stated that as a result of this ring fencing, the assets of those subsidiaries are no longer available to assist PG&E. In addition, although the organizational documents PG&E has provided the Commission to date do not so indicate, news reports suggest that the ring fencing transactions restrict the payment of dividends by one or more of the ring fenced entities to PG&E Corporation, thus decreasing PG&E Corporation's available cash to directly assist the utility.

Similarly, as described above, in or about December 2000 EIX took steps to ring fence its unregulated subsidiary, Edison Mission Energy (EME), apparently rendering EME's assets unavailable to assist Edison in times of financial need. In addition, the ring fencing transactions restrict the payment of dividends by EME to EIX, thus apparently decreasing EIX's available cash to directly assist Edison in times of need.²⁵

We will investigate whether these actions violate the "first priority" condition described above. Accordingly, respondent holding companies are directed to produce information and documents, and to demonstrate why the ring fencing actions described above do not violate the "first priority" condition.

3. Payment of dividends at time of financial distress

As noted above, all three utilities paid dividends to their parent holding companies in the third quarter of 2000. PG&E and Edison did so despite having growing undercollections, at a time when they were repeatedly and publicly announcing their precarious financial condition, as detailed above. Not long after the payment of the dividends, Edison announced that it was in imminent danger of bankruptcy, cut back on maintenance and construction, and later suspended payments on a variety of obligations. PG&E similarly began to defer or default on outstanding liabilities, and began to defer construction and maintenance projects.

SDG&E paid third quarter 2000 dividends despite the recent imposition of a rate ceiling, the dramatic rise in wholesale energy costs, and SDG&E's accumulation of debt, which SDG&E stated would adversely affect its ability to meet its obligation to serve.

We will investigate whether these dividend payments violated, inter alia, the condition imposed in our holding company decisions that the utility maintain a dividend policy "as though it were a comparable stand-alone utility company,"²⁶ and/or Sections 451 and 798 of the Public Utilities Code. Accordingly, the three respondent utilities are directed to produce the documents and information specified in Attachment A hereto, and to demonstrate why their payment of third quarter dividends under such circumstances did not violate the statutes and conditions cited above.

4. Other violations

The investigations described above are not exclusive, and if evidence comes to light of any additional suspected violations of any provision of the Constitution or law, or of any order, decision, rule, regulation, direction, demand, or requirement of the Commission or any commissioner, these proceedings may be expanded to include investigation of those violations as well.

B. Investigation into needed changes going forward

The events and potential violations described above suggest that it is time to re-examine, inter alia, the current adequacy of the conditions contained in the holding company authorization decisions cited above. Accordingly, in this proceeding, we will determine whether, in light of events and/or changed circumstances since the issuance of the holding company authorization decisions, additional rules, conditions, or other changes are needed to protect ratepayers and the public from dangers of abuse of the holding company structure. Specifically, we will investigate whether we should modify, change or add conditions to the holding company decisions, make further changes to the holding company structure, alter the standards under which we determine whether to authorize the formation of holding companies, otherwise modify the decisions, or recommend statutory changes to the Legislature.

By way of example only, and without limitation on the ability of the Commission or any party to these proceedings to propose other conditions, rules, or changes, we will consider:

* Changes or additions to reporting or approval requirements regarding changes in the structure of the holding company systems, such as "ring fencing."

* Changes or additions to reporting or approval requirements regarding the distribution or transfer of funds or other assets from the holding companies to their unregulated subsidiaries.

* Changes or additions to reporting or approval requirements regarding the distribution or transfer of funds or other assets from the utilities to the holding companies.

* Restrictions on the holding companies' assumption of debt for purposes unrelated to strengthening their regulated utility subsidiary.

* Modification of the provisions for comprehensive audits of the entire holding company system, as found in the PG&E and SDG&E holding company decisions, to permit the same audits on a regular, recurring basis, and to extend those provisions to apply to Edison and its holding company system as well.

* Changes to the standard of review to impose on holding company formation, requirements, and oversight.

It is now time to raise these issues.²⁷ Not only is it important to determine whether any prior violations of our holding company decisions or other laws have occurred, but it is also critical to take steps to ensure that healthy utility companies can continue to function in a way that balances both ratepayer and shareholder interests.