STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

September 22, 2004 Agenda ID #3925

Ratesetting

TO: PARTIES OF RECORD IN APPLICATION 04-05-041

This is the draft decision of Administrative Law Judge (ALJ) Kenney. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. The Commission may act then, or it may postpone action until later.

When the Commission acts on the draft decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the draft decision as provided in Article 19 of the Commission's Rules of Practice and Procedure (Rules). These rules are accessible on the Commission's Website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages. Finally, comments must be served separately on the ALJ and the Assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service.

/s/ ANGELA K. MINKIN___

Angela K. Minkin, Chief

Administrative Law Judge

ANG:hkr

Attachment

ALJ/TIM/hkr DRAFT Agenda ID #3925

Ratesetting

Decision DRAFT DECISION OF ALJ KENNEY (Mailed September 22, 2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Pacific Gas and Electric Company to issue, sell, and deliver one or more series of Debt Securities and to guarantee the obligations of others with respect to the issuance of Debt Securities, the total aggregate principal amount of such long-term indebtedness and guarantees not to exceed $2 billion; to execute and deliver one or more indentures; to sell, lease, assign, mortgage, or otherwise dispose of or encumber utility property; to issue, sell and deliver in one or more series, an aggregate amount not to exceed $200 million par or stated value of First Preferred Stock -- $25 Par Value; to issue an aggregate $2 billion of short-term debt obligations; to utilize various debt enhancement features; enter into interest-rate hedges; and for an exemption from the Commission's Competitive Bidding Rule. (U 39 M)

Application 04-05-041 (Filed May 27, 2004)

OPINION AUTHORIZING THE ISSUANCE OF DEBT AND PREFERRED STOCK

TABLE OF CONTENTS

Title Page

OPINION 2

1. Summary 2

2. Procedural Background 4

3. PG&E's Current Financing Arrangements 4

4. PG&E's Application to Issue Debt and Preferred Stock 5

A. Short-Term Debt 5

i. PG&E's Request 5

ii. Discussion 8

B. Long-Term Debt & Preferred Stock 12

i. PG&E's Request 12

ii. Discussion 13

C. Encumbrance of Utility Property 17

i. PG&E's Request 17

ii. Discussion 17

D. Types of Debt and Preferred Stock 20

i. PG&E's Request 20

ii. Discussion 23

E. Interest-Rate Caps, Collars, Swaps, and Hedges 24

i. PG&E's Request 24

ii. Discussion 24

F. Exemption from the Competitive Bidding Rule 26

i. PG&E's Request 26

ii. Discussion 28

G. Use of Subsidiaries 28

i. PG&E's Request 28

ii. Discussion 29

H. General Order 24-B 31

i. PG&E's Request 31

ii. Discussion 31

I. Matters Not Addressed 32

5. Fees 32

6. California Environmental Quality Act 34

7. Category and Need for Hearings 36

8. Comments on the Draft Decision 37

9. Assignment of Proceeding 37

Findings of Fact 37

Conclusions of Law 42

ORDER 49

Exhibit A: PG&E's Authorized and Outstanding Debt and Equity

Exhibit B: Projected Uses and Sources of PG&E's Cash

OPINION

1. Summary

In Application (A.) 04-05-041, Pacific Gas and Electric Company (PG&E) requests authority to issue $2.7 billion of short-term debt, long-term debt, and preferred stock. In response to A.04-05-041, this Opinion authorizes PG&E to do the following pursuant to Pub. Util. Code §§ 701.5, 816 - 830, and 851¹:

1. Issue $2 billion of short-term debt. Of this amount, $500 million may only be used for the following purposes:

a. Procure natural gas for PG&E's utility customers during price spikes.

b. Procure electric power for PG&E's utility customers during price spikes.

c. Respond to major natural disasters or other cataclysms.

d. Provide liquidity during a major disruption of PG&E's ability to bill, collect, and/or process utility customer bills.

2. Issue $1.453 billion of long-term debt and $85 million of preferred stock for the following purposes:

a. Finance capital expenditures.

b. Retire long-term debt.

c. Redeem preferred stock.

3. Issue contingent mortgage bonds as security for other debt.

4. Pledge gas and electric accounts receivable for the purpose of procuring gas and electricity for PG&E's customers.

5. Issue a wide variety of short-term debt, long-term debt, and preferred stock.

6. Exclude from the determination of PG&E's outstanding debt any credit enhancements (e.g., letters of credit, mortgage bonds, bond insurance, etc.) that do not increase the amount of debt owed by PG&E.

7. Utilize interest-rate caps, collars, hedges, and other financial instruments for the purpose of managing interest rate risks.

8. Issue all Debt Securities² without obtaining competitive bids, except fixed-rate Debt Securities in the form of mortgage bonds, intermediate and long-term notes, and debentures of $200 million or less in principal amount that are sold publicly in the domestic market.

9. Issue Debt Securities through regulated subsidiaries and governmental agencies when doing so results in lower cost of debt for PG&E and its ratepayers.

10. Guarantee the Debt Securities of regulated subsidiaries and governmental agencies that issue securities on behalf of PG&E.

11. Report the information required by General Order 24-B on a quarterly basis instead of monthly as required by the General Order.

This Opinion denies A.04-05-041 to the extent the Application requests authority to issue $547 million of long-term debt and $115 million of preferred stock because PG&E has not demonstrated that it has a need to issue this long-term debt and preferred stock. This Opinion also denies A.04-05-041 to the extent it requests that all hedges be excluded from the determination of PG&E's outstanding debt. Hedges recorded as a liability shall be counted as outstanding debt to the extent that such hedges are not offset by changes to the fair value or cash flows associated with the risks being hedged.