V. Necessary Modifications to PSA Provisions

We now undertake to analyze the legal, regulatory, and financial underpinnings of the PSA. These components are integral to the settlement proposal before us.

A. illegal and unconstitutional restrictions on the Commission in the PSA.

1. Prohibition on Ceding Police Powers or Binding Future Commissions

"The regulation of utilities is one of the most important of the functions traditionally associated with the police power of the states." (Arkansas Electric Coop. v. Arkansas Pub. Serv. Comm'n (1983) 461 U.S. 375, 377.) This Commission's authority to regulate public utilities in the State of California is pursuant to the State's police power. (See, Motor Transit Company v. Railroad Commission of the State of California (1922) 189 Cal. 573, 581.) The California Supreme Court has held that "it is settled that the government may not contract away its right to exercise the police power in the future." (Avco Community Developers, Inc. v. South Coast Regional Com. (1976) 17 Cal. 3d 785, 800.)

The clause of the PSA requiring future Commissions to be bound is found at paragraph 21.

21. Validity and Binding Effect. The Parties agree not to contest the validity and enforceability of this Agreement, the Settlement Plan or any order entered by the Court contemplated by or required to implement this Agreement and the Settlement Plan. This Agreement, the Settlement Plan and any such orders are intended to be enforceable under federal law, notwithstanding any contrary state law. This Agreement and the Settlement Plan, upon becoming effective, and the orders to be entered by the Court as contemplated hereby and under the Settlement Plan, shall be irrevocable and binding upon the Parties and their successors and assigns, notwithstanding any future decisions and orders of the Commission.

The argument that the Commission would not be surrendering the State's police powers because the proposed settlement would only bind the Commission for nine years has no merit. 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. "The police power being in its nature a continuous one, must ever be reposed somewhere, and cannot be barred or suspended by contract or irrepealable law. It cannot be bartered away even by express contract." (Mott v. Cline (1927) 200 Cal. 434, 446 (emphasis added).)³²

In Re Pacific Gas and Electric Company (1988) D.88-12-083, 30 CPUC 2d 189 ("Diablo Canyon"), we held that we lack the power to approve settlements that bind future Commissions. We relied upon cases which hold that a legislative body cannot restrict its own power or that of subsequent legislative bodies, as well as §§ 728 and 1708, which provide that, after a hearing, the Commission may rescind, alter or amend previous decisions, or may declare rates are unjust and unreasonable and fix the just and reasonable rates to be thereafter observed and in force. (Id. at 223-225.)

An excerpt from Diablo Canyon sets forth the rationale and a solution.

"A major concern in this case is whether a future Commission will adhere to the terms of a settlement agreement which fixes the price to be paid for Diablo Canyon electricity for the next 28 years. The parties agree that we cannot bind future Commissions. PG&E: "Since ratemaking is quasi-legislative in nature, it is a general principle that a commission cannot bind the actions of a future commission" (Brief. p. 71); AG: "As a legal matter, the Commission cannot bind its successors as to policy matters" (Brief, p. 5); the DRA: "No order of the Commission is binding on future Commissions" (Brief, p. 7); TURN: "It is well-established that a decision made by the current Commission cannot bind a future Commission" (Brief, p. 15). And we have specifically held that we cannot bind the actions of a future Commission. (Re PG&E (1981) 6 CPUC 2d 739 (abstract), D.93497 in A.59537.)

* * *

The CPUC is both a court and an administrative tribunal. It exercises both judicial and legislative powers. (Re L. A. Metro. Transit Auth. (1962) 60 CPUC 125, 127.) The fixing of rates of public utilities is an example of its legislative powers. (People v. Western Air lines, Inc. (1954) 42 Cal. 2d 621, 630.)

* * *

The Public Utilities Code strengthens the proposition that we cannot bind future Commissions. Section 1708 provides: "The commission may at any time . . . rescind, alter, or amend any order or decision made by it." Section 457 permits utilities to enter into an agreement for a fixed period for the automatic adjustment of charges for electricity with the caveat "Nothing in this section shall prevent the commission from revoking its approval at any time and fixing other rates and charges . . . ." Finally, Section 451 provides that "All charges demanded or received by any public utility . . . shall be just and reasonable" and Section 728 provides that if the Commission finds rates are unreasonable, "the commission shall . . . fix . . . the just, reasonable . . . rates . . . to be thereafter observed and in force." We have reviewed these statutes, which are familiar to all practitioners of public utility law in California, to impress upon the proponents of the settlement the limitations under which we act today. (Cf. FPC v. Sierra Pac. Power Co. (1956) 350 US 348, 100 L. Ed. 388.) And we deliberately refrain from commenting on the consequences of a future Commission's changing of the terms of the settlement. We believe the settlement is a fair compromise of a difficult, costly controversy and we intend that the terms and conditions of the Settlement Agreement and the Implementing Agreement shall be effective on the dates specified in the agreements. The proponents have prepared the following language to propitiate future Commissions, which we adopt.

To the extent permitted by law, the Commission intends that this decision be binding upon future Commissions. In approving this settlement, based on our determination that taken as a whole its terms produce a just and reasonable result, this Commission intends that all future Commissions should recognize and give all possible consideration and weight to the fact that this settlement has been approved based upon the expectations and reasonable reliance of the parties and this Commission that all of its terms and conditions will remain in effect for the full term of the agreement and be implemented by future Commissions."

Conclusion of Law 4 in Diablo Canyon held: "This Commission cannot bind future Commission in fixing just and reasonable rates for PG&E." We reaffirm that holding and will adopt the mitigating language set forth above, expecting future Commissions to abide by our approval of a settlement extending for a period of years.

The proponents of the PSA attempt to distinguish Diablo Canyon, because that case involved a settlement pending before the Commission, whereas the PSA would be entered into by the Commission itself to settle litigation in federal courts. The proponents claim that a decision of the Commission may not bind future Commissions, but the Commission may execute a settlement agreement or a contract to bind future Commissions. This distinction is absurd.

We do not doubt that under certain circumstances, the Commission can legally enter into settlements or contracts which would bind future Commissions.³³ However, when entering into the settlement agreements or contracts, the Commission may not act inconsistently with state law. In Southern California Edison Co. v. Peevey, (2003) 31 Cal. 4th at 792, the Court declared: "If PUC lacked substantive authority to propose and enter into the rate settlement agreement at issue here, it was not for lack of inherent authority, but because this rate agreement was barred by some specific statutory limit on PUC's power to set rates." Similarly, in Southern California Edison Co. v. Lynch (9th Cir. 2002) 307 F.3d 794, 809, the Ninth Circuit held that if the Commission's settlement agreement violated state law, "then the Commission lacked capacity to consent to the Stipulated Judgment, and [the Ninth Circuit] would be required to vacate it as void. State officials cannot enter into a federally-sanctioned consent decree beyond their authority under state law."

The PSA purports to bind the Commission for nine years. In light of the constitutional requirement that the Commission actively supervise and regulate public utility rates (Sale v. Railroad Commission (1940) 15 Cal. 2d 607 at 617) and the statutory requirements under Public Utilities Code §§451, 454, 728 that the Commission ensure that the public utilities' rates are just and reasonable (Camp Meeker Water System, Inc. v. Public Utilities Com. (1990) 51 Cal. 3d 850 at 861-862), we hold that the Commission has the authority to enter into settlements but does not have authority to limit or prevent future Commissions from determining whether or not PG&E's rates are just and reasonable.

2. Jurisdiction of the Bankruptcy Court

The PSA mandates the continuing jurisdiction of the Bankruptcy Court over all aspects of PUC decision making that could affect this plan, as set forth in paragraph 22.

22. Enforcement. The Parties agree that the Court shall retain jurisdiction over the Parties for all purposes relating to enforcement of this Agreement, the Settlement Plan and the Confirmation Order.

This paragraph is deleted in its entirety.

Under the PSA the Bankruptcy Court will be asked to determine such matters as a) whether the Commission discriminated against PG&E, see ¶ 2j; b) whether the Commission failed to act to maintain PG&E's investment grade company credit ratings, see ¶ 2g; or c) whether the Commission restricted the ability of PG&E to declare dividends or repurchase common stock, see ¶ 6; the PSA includes other provisions of a more general nature under which PG&E could request intervention by the Bankruptcy Court. Among many scenarios which might reasonably arise, we note three:

1. PG&E files an application for a 3% attrition increase. The Commission grants only 1% and places the entire increase on the large industrial customers. PG&E claims a violation of the PSA and seeks relief in Bankruptcy Court. Meanwhile, the industrial customers seek relief by appealing the Commission decision to the California appellate courts. The result would be a conflict of jurisdictions leading to conflicting decisions, delay, and increased expense.

2. On the facts above, the Bankruptcy Court orders PG&E to increase its rates by 2%, which it does without CPUC authorization; or the Bankruptcy Court orders the CPUC to raise PG&E's rates by 2% under threat of a contempt action.

3. The CPUC opens an investigation of PG&E seeking to reduce rates by a specific (or unspecific) amount. PG&E immediately moves the Bankruptcy Court for an injunction preventing the CPUC from proceeding with the investigation.

Appellate procedure to challenge the decisions of the Commission is clear. PU Code § 1759 states:

1759. (a) No court of this state, except the Supreme Court and the court of appeal, to the extent specified in this article, shall have jurisdiction to review, reverse, correct, or annul any order or decision of the commission or to suspend or delay the execution or operation thereof, or to enjoin, restrain, or interfere with the commission in the performance of its official duties, as provided by law and the rules of court.

(b) The writ of mandamus shall lie from the Supreme Court and from the court of appeal to the commission in all proper cases as prescribed in Section 1085 of the Code of Civil Procedure.

For this Commission to consent to a dilution of the power of the Supreme Court of California and the appellate courts to review our orders and decisions is contrary to the provisions of PU Code § 1759. We recognize that the Bankruptcy Court has the power to enforce its orders and nothing hold in this decision should be construed to deny that power. To consent to continuing jurisdiction of this Commission's every move for nine years goes far beyond the harmony envisioned between federal and state courts in the federal constitution and federal court statutory framework.

3. Conflict of Laws

The PSA's exposition of controlling law is explicit in its attempt to preempt applicable state law. Paragraph 21 (set forth above) states, in part: "This Agreement, the Settlement Plan and any such orders [entered by the Bankruptcy Court] are intended to be enforceable under federal law, notwithstanding any contrary state law."

Paragraph 32 states:

32. California Law. This Agreement shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of California, without giving effect to the conflict of law principles thereof, except that this Agreement, the Settlement Plan and any orders of the Court (including the Confirmation Order) are intended to be enforceable under federal law, notwithstanding any contrary state law.

The California Constitution expressly prohibits this Commission from agreeing to such preemption of state laws. As discussed above, this current Commission cannot lawfully enter into a settlement that may be contrary to state law (See, Southern California Edison co. v. Peevey (2003) 31 Cal. 4^th at 792; Southern California Edison Co. v. Lynch (9^th Cir. 2002) 307 F.3d 794, 809). Further, this Commission cannot limit the decisions and orders of a future Commission such that the Commission could no longer protect PG&E's ratepayers from unjust and unreasonable rates. Under the PSA we foresee the intricacies of Erie v. Tompkins (1938) 304 US 64, 114 ALR 1487, lurking in the details of determining just what California laws are to be enforced under which federal law, and more to the point, a reiteration of SCE v Lynch (9^th Cir. 2002) 307 F.3d 794, 812 with the federal court of appeals certifying questions of California law to the California Supreme Court. Thus, we have eliminated paragraph 32.

4. Requiring Rate Reductions and All Regulatory Actions to be Contingent on Rating Agency Actions

PG&E says that it is essential that PG&E's credit be rated investment-grade upon emergence from bankruptcy.³⁴ It believes that it is these entities' blessing of the plan, through the assignment of investment-grade credit ratings, that is crucial to feasibility. Its witnesses testified: "It is critical for PG&E to meet at least minimum investment-grade ratings"³⁵ if emergence is to take place at all. "PG&E needs access to the liquidity and efficiency of the investment grade debt market in order to raise the approximately $8 billion required to emerge from Chapter 11."³⁶

To be "investment-grade" is to be assigned credit ratings at or above a certain level. Credit ratings matter because they determine the breadth and depth of markets that are accessible to a borrower, and because they determine the cost of debt that a borrower will pay. They also provide an important benchmark for the bankruptcy court in determining the feasibility of any plan of reorganization.

PSA ¶ 16 states:

16. Conditions Precedent to Effective Date. Among other conditions to be contained in the Settlement Plan, the following shall be conditions precedent to the Effective Date:

a. S&P and Moody's shall have issued investment grade company credit ratings for PG&E.




b. The Commission shall have given final, nonappealable approval for all rates, tariffs and agreements necessary to implement the Settlement Plan. The PG&E Proponents shall have the right to waive this provision with respect to any appeal from the Commission's approvals.

This paragraph gives S&P and Moody's veto power over any settlement adopted by the parties and a veto over when PG&E emerges from bankruptcy. No witness from either rating agency testified. There is no assurance that approval of the PSA as written would satisfy them. In fact, there is evidence that the PSA does not fulfill all of S&P's requirements.

The witness for CCSF testified:

Additionally, the PG&E Plan may be infeasible due to the difficulty of obtaining investment grade ratings for the debt securities to be issued under that Plan. By letter dated February 19, 2003, Standard & Poor's (S&P) listed many conditions that would have to be met for PG&E to achieve an investment-grade rating. Several of the conditions laid out by S&P cannot be assured. These include a provision that the Commission will continue to act consistent with AB 57, even after the law expires; that the Commission will allow, "in a timely manner that does not compromise cash flow" many gas and electric procurement-related costs; that the utility's distribution operation will earn its "contemplated rate of return without any material deviation from projected results"; that PG&E will be able to recover costs to replace QF power that "will be consistent with those forecast in the [company's] Model; and that "the CPUC will permit as a ministerial matter the recovery of the distribution company's costs of securing risk management tools and also permit the recovery of costs associated with that portion of the power and fuel portfolio that is not hedged." (Exhibit 138 at 10 (discussing S&P February 19, 2003 letter to PG&E re the ratings for the amended Plan, which letter is Exhibit 149).)

Why this Commission, or the Bankruptcy Court, should put approval by a rating agency as the sine qua non of PG&E's emergence from bankruptcy escapes us. Should the rating agencies not approve we would expect PG&E to request from us additional economic enhancements. There is no evidence in this record to show that an investment grade credit rating is necessary for PG&E to emerge from bankruptcy, while there is overwhelming evidence that utilities have emerged from bankruptcy without investment grade credit ratings. Nor can we overlook the fact the Edison was capable of providing safe, reliable electric service at reasonable rates without having an investment grade credit rating.

Thus we delete paragraph 16 and substitute a representation and warranty that the parties intend for this plan to meet the objective investment grade creditworthiness criteria as established by the dominant rating agencies.

5. Release of PG&E Corporation

Paragraph 10 of the PSA states in part: "PG&E and PG&E Corporation, on the one hand, and the Commission on the other, will execute full mutual releases and dismissals with prejudice of all claims, actions or regulatory proceedings arising out of or related in any way to the energy crisis or the implementation of AB 1890 listed on Appendix C hereto." CCSF says the release language should be modified to exclude PG&E Corporation. It believes there is no need for any release of claims against PG&E Corporation in this proceeding, because such claims have nothing to do with helping PG&E resolve its bankruptcy. More importantly, it contends, the Commission currently has no pending proceedings against PG&E Corporation and certainly none that are listed in Appendix C. Nor has PG&E Corporation any claims against the Commission. CCSF argues that this release goes not to the Commission's claims, but to the pending actions against PG&E Corporation brought by the California Attorney General and the City and County of San Francisco in the Superior Court.

In November, the Attorney General sent a letter to each of the five commissioners joining in CCSF's request. The Attorney General's letter pointed out "serious concerns regarding the apparent intention of PG&E, PG&E Corporation and its directors to improperly use the Proposed Settlement Agreement ... as a basis to undermine the respective law enforcement actions file against them by me on behalf of the People of the State of California and by the City and County of San Francisco."

The Commission should not provide PG&E Corporation with this very significant release as PG&E Corporation is not providing any consideration for the proposed release. We will agree with CCSF's request.

6. Dividends

6. Dividend Payments and Stock Repurchases. The Parties acknowledge that, for the Parent, as PG&E's shareholder, to receive the benefit of this Agreement, both PG&E and its Parent must be able to pay dividends and repurchase common stock when appropriate. Accordingly, the Parties agree that, other than the capital structure and stand-alone dividend conditions contained in the PG&E holding company decisions (D.96-11-017 and D.99-04-068), the Commission shall not restrict the ability of the boards of directors of either PG&E or PG&E Corporation to declare and pay dividends or repurchase common stock.

This paragraph is unacceptable and is stricken. We interpret the "shall not restrict" PG&E from paying dividends or repurchasing common stock language to mean that for nine years this Commission must set rates so that PG&E shall be able to pay dividends. Not only is there no amount specified, there is no limit to the amount of dividends PG&E would be entitled to declare. Should we reduce PG&E's rates that could "restrict the ability," of PG&E to declare dividends of its choosing and should we fail to grant a PG&E requested rate increase, that too, would restrict its ability to pay out dividends of its choosing. Paragraph 6 would divest the Commission for nine years of any authority under Sections 451, et seq., 701, and 728 to find PG&E's dividend practices unreasonable, both impermissibly tying the hands of future Commissions and ceding its regulatory authority to the bankruptcy court and the regulated entity.

For example, even if imprudent conduct, reckless conduct, or criminal conduct would otherwise limit PG&E's ability to collect revenues necessary for dividends, the Commission would be powerless to restrict PG&E's dividend practices. If PG&E no longer has sufficient funds to perform its public service obligations due to an unreasonable dividend practice or common stock repurchase practice, we would be powerless to restrict the practice. Under cost-of-service ratemaking PG&E should be able to provide dividends or repurchase common stock, but we cannot guarantee that it will always be reasonable for PG&E to do so. There is no legal basis for us to strip the Commission of its statutory and constitutional authority to supervise PG&E's rates and practices in this regard.

Most importantly, to impose this limitation on our power to fix just and reasonable rates for PG&E, would require us to impose this limitation for all utilities under our jurisdiction. Should we deny the benefits of paragraph 6 to SCE or SDG&E, or any utility, arguably we would be discriminating against them in favor of PG&E. This Commission cannot grant a preference to any utility (§ 453(a), § 728). Paragraph 6 does not comport with PU Code §§ 453(a) and 728. It is not in the public interest.

In conformity with striking paragraph 6, we also strike the last sentence of paragraph 3b.

7. Financing

We have stricken the sentence in paragraph 13 b.

"The financing of the Settlement Plan shall not include any new preferred or common stock."

Issuing stock is a matter for PG&E and the bankruptcy court to determine in the first instance. There is no need to narrow either's options.

8. PSA's Definition of Headroom Endangers Bond Indenture

Paragraph 7aof the PSA states

The Commission acknowledges and agrees that the Headroom, surcharge, and base revenues accrued or collected by PG&E through and including December 31, 2003 are property of PG&E's Chapter 11 estate, have been or will be used for utility purposes, including to pay creditors in the Chapter 11 Case, have been included in PG&E's Retail Electric Rates consistent with state and federal law, and are not subject to refund.

As written, Paragraph 7a affects the commitments that this commission has with regard to the energy bonds sold by DWR in the Rate Agreement it signed with the California Department of Water and Power in February, 2002. This definition is inconsistent with the definitions in the Rate Agreement which specify that Power Charges and Bond Charges accrue to DWR in specified ways, in specified time frames. The Bond Indenture that DWR signed in reliance upon the Rate Agreement tracks the relevant language and definitions in the Rate Agreement with respect to these monies. PG&E has been a vociferous opponent of the Commission's decisions that segregated a portion of the rate stream for the benefit of and as the property of DWR. PG&E has mounted numerous challenges to this regulatory and legal firewall erected for the benefit of DWR.

Paragraph 7a appears to be another attempt by PG&E to change the deal made by this Commission pursuant to its AB1x statutory authority and mandates. That paragraph, as written, changes the legal definitions of that portion of funds collected by PG&E to be transmitted to DWR as its property, pursuant to AB1x and the commission's orders giving effect to AB1x and the DWR power purchase program, to become the property of PG&E. In so doing this paragraph may affect the flow of monies that underlies the bonds. If so, the indenture would be violated and this Commission, DWR and the State could be subject to the full range of penalties and litigation outlined in the indenture, as well as pursuant to all relevant laws. This potentially enormous legal liability would operate to impose considerable delay on the emergence of PG&E from Chapter 11 reorganization as well.

Pursuant to the expedited consideration of this settlement and the apparent lack of analysis by Commission or DWR bond counsel or financial advisors as to the effect of Paragraph 7a on the Rate Agreement or the Bond Indenture, the prudent and in fact necessary step this Commission must take is to strike this paragraph in its entirety.

B. Financial Terms of the PSA

1. The Size and Structure of the PSA's Regulatory Asset is Not in the Public Interest.

The regulatory asset has been described above. It is $2.21 billion amortized over nine years. It was sized to provide for the revenue, cash flow, and capital structure requirement that will enable PG&E to emerge from bankruptcy as an investment grade company. This asset, when combined with the headroom, provides a $7.2 billion ratepayer contribution. (Ex. 122, p. 8.) As we have discussed above, this is an unreasonable compromise of the economic differences of the proponents of the PSA.

Because the proposed settlement amount is unreasonable, we shall "delve deeply" within its components and modify the financial component of the settlement plan.

The size and structure of the $2.21 billion regulatory asset, as described in the proposed settlement is unreasonable. As described above, after taking PG&E's 2001 and 2002 headroom into account, the regulatory asset in the proposed settlement would require a ratepayer contribution of $3.2 billion (in net present value) to settle $2.1 billion in claims.

2. Headroom

The PSA's definition of headroom is found in Paragraph 1y:

"PG&E's total net after-tax income reported under Generally Accepted Accounting Principles, less earnings from operations, plus after-tax amounts accrued for bankruptcy-related administration and bankruptcy. - related interest costs, all multiplied by 1.67, provided that the calculation will reflect the outcome of PG&E's 2003 general rate case (A.02-09-005 and A.02-11-067)."

The Commission's definition of headroom is found in Re Proposed Policies, etc., (1996) D.96-12-076, 70 CPUC 2d 207:

"Freezing rates stabilizes collected revenues (subject to sales variation), and declining costs create "headroom," i.e., revenues beyond those required to provide service, that can be applied to offset transition costs. The utilities' reasonable costs of providing service are currently identified as their authorized revenue requirements. (70 CPUC 2d at 219.)

"In general, headroom revenues consist of the difference between recovered revenues at the frozen rate levels (including the reduced rate levels for residential and small commercial customers beginning in 1998) and the reasonable costs of providing utility services, which for convenience we refer to as the authorized revenue requirement." (70 CPUC 2d at 223.)

Clearly, the PSA definition is not the same as the CPUC definition. As ORA cogently observes:

"PG&E's definition of headroom raises more basic questions than it answers. PG&E has not clearly or unambiguously defined or explained "earnings from operations," or "after-tax amounts accrued for bankruptcy-related administration and bankruptcy-related interest costs." Nor has PG&E defined how "the calculation will reflect the outcome of PG&E's 2003 general rate case." Because these key terms remain undefined and unexplained, they will be subject to varying interpretations that can benefit PG&E shareholders, especially before the bankruptcy court. It will be very difficult and contentious for the Commission to audit 2003 headroom to make sure that it falls within the $775 million - $875 million range specified by the PSA.

"The PSA's reference to modifying headroom according to generally accepted accounting principles (GAAP) presents a large substantive problem. To ORA's knowledge, no Commission's decision authorizes PG&E to modify its regulatory accounts by "generally accepted accounting principles" that are not explicitly stated in its tariffs." (ORA, Opening Brief, p.5.)

We agree with ORA's analysis, and are concerned by the complications that are likely to arise in determining the amount of headroom for PG&E, should we diverge from standard regulatory practice, and entertain PG&E's use of GAAP accounting. Therefore, for the modified PSA, we strike the definition of headroom in Paragraph 1(y) and replace it with the Commission's own definition of headroom from D.96-12-076. This change in headroom definition would also clarify that ratepayers shall not be saddled with PG&E's bankruptcy-related costs, and would requires modification of PSA Paragraph 15 ("Fees and Expenses").

We can foresee numerous complications that could arise from this shift from normal regulatory accounting to GAAP. PG&E would be able to pre-pay for work scheduled for the first quarter of 2004, thereby earning a double-benefit: 1) this would reduce the amount of headroom available to reduce PG&E's undercollections, and 2) the pre-paid amount would be a windfall in 2004, because PG&E would receive revenues from ratepayers to pay for the costs that had already been recouped. In addition, PG&E could pay for items that have not been authorized by this Commission, such as paying its legal fees associated with the bankruptcy, including reimbursements of PG&E Corporation for its bankruptcy-related costs, with ratepayer dollars. In sum, PG&E could use this definitional change to recover all manner of costs not approved by the Commission.

3. Credit Rating

PSA paragraph 2g. states:

g. The Commission recognizes that the establishment, maintenance and improvement of Investment Grade Company Credit Ratings is vital for PG&E to be able to continue to provide safe and reliable service to its customers. The Commission further recognizes that the establishment, maintenance and improvement of PG&E's Investment Grade Company Credit Ratings directly benefits PG&E's ratepayers by reducing PG&E's immediate and future borrowing costs, which, in turn, will allow PG&E to finance its operations and make capital expenditures on its distribution, transmission, and generation assets at a lower cost to its ratepayers. In furtherance of these objectives, the Commission agrees to act to facilitate and maintain Investment Grade Company Credit Ratings for PG&E.

We strike paragraph 2g. in its entirety. It is not in the public interest to "facilitate and maintain" an investment grade company credit rating for PG&E. The reasons stated above regarding restricting the ability of PG&E's to declare dividends are equally applicable to the requirement to "maintain" PG&E's credit ratings.

If we were to commit to PG&E that we would take action to guarantee to maintain its investment grade credit ratings for nine years, we predict that other public utilities under our jurisdiction would soon be requesting similar guarantees. The Commission does not operate in a vacuum. Our decision in one case is often cited as precedent in other cases. We stated, in a different context, "we believe the ramifications on the rate design of all water utilities by setting this new trend must be addressed. The requested separate rate district would set a precedent for future litigants to follow. "(Re Apple Valley Ranchos Water Company (1990) D.90-02-045, 35 CPUC2d 535, 545.) In the present case, we find that it is not in the public interest to tilt the ratemaking balance so heavily in PG&E's favor and against the ratepayers' interest or to set a precedent by guaranteeing PG&E that regardless of circumstances, we would effectively insulate PG&E from financial risks for the next nine years. Nor do we desire to open the floodgates for other utilities to demand such guarantees as they refer to this decision in future applications.

Because we find that the requirement to maintain an investment grade credit is not in the public interest, we modify the Statement of Intent paragraph (5) and (7) to conform to this finding.

However, we do find that reasonable rates for Northern California, as well as a solid credit rating for PG&E are goals that PG&E's management, along with the Commission, should strive to maintain. For this reason we shall open a new proceeding to determine an appropriate mechanism to limit executive salaries, and make bonuses contingent upon low rates as well as PG&E's overall credit rating.