XVI. Comments on Proposed Decision

The principal hearing officer's proposed decision on this matter was filed and served pursuant to Pub. Util. Code Section 311(d) and Rule 77.2 of the Commission's Rules. As part of their comments to the proposed decision, parties were invited to comment on our taking official notice of the significant changes in the California energy market and the downgrading of PG&E's credit rating to below minimum investment grade that occurred subsequent to the conclusion of evidentiary hearings and briefs.

Findings of Fact

1. PG&E is a public utility electric and gas corporation subject to the jurisdiction of this Commission.

2. PG&E seek authority to increase its authorized ROE for its electric and gas distribution systems in 2001.

3. PG&E provided notice of its cost of capital application to its customers, and to the cities, counties, and the state affected by its application.

4. The legal standard for setting the fair rate of return has been established by the United States Supreme Court in the Bluefield and Hope cases.

5. PG&E proposed to use the identical capital structure approved by the Commission in its prior year's cost of capital proceeding.

6. There is no dispute over the reasonableness of PG&E's proposed capital structure.

7. There is no dispute over the reasonableness of PG&E's proposed costs of preferred stock or long-term debt.

8. The ROE recommended by individual parties, as part of their prepared testimony, ranged from 10.40% to 12.40%.

9. CAPM, DCF, and RPM are the quantitative financial models commonly used as a starting point to estimate a fair ROE.

10. Although the quantitative financial models are objective, the results are dependent on subjective inputs.

11. The individual parties' use of quantitative financial models resulted in a broad range of ROE from 7.16% to 14.70%.

12. D.99-06-057 found no meaningful comparison between Great Britain electric utilities and United States electric utilities and no meaningful relationship between the deregulation of the telephone industry and the deregulation of the electric distribution industry.

13. PG&E places no reliance on its electric study results.

14. Various parties included an allowance for flotation cost in their financial models; however, D.92-11-047 found no merit to a flotation cost adjustment.

15. Although PG&E utilized a quarterly DCF financial model, it does not recommend the use of its quarterly DCF financial model results, and the Commission has previously rejected the use of quarterly DCF model results.

16. The use of daily betas in the CAPM financial model deviates from the traditional CAPM model.

17. The issue of betas is the subject of a workshop agreed to by all parties in PG&E's 1999 cost of capital proceeding, whom are also parties to this proceeding.

18. ROEs being recommended in this proceeding were not based on CAPM financial model that utilized daily betas.

19. We consistently consider the current estimate and anomalous behavior of interest rates when making a final decision on authorizing a fair ROE.

20. The DRI forecast for the 30-year Treasury bond increased approximately 140 basis points and the AA utility bond increased approximately 185 basis points from PG&E's 1999 cost of capital proceeding to its 2000 cost of capital proceeding.

21. The October 2000 DRI forecast being used in this proceeding show that interest rates are declining from the April 2000 DRI forecast used in PG&E's 2000 cost of capital proceeding. The 30-year Treasury bond forecast is approximately 20 basis points lower and AA utility bond forecast is approximately 20 basis points lower.

22. This proceeding was reopened to take official notice of the documents listed in Exhibit B.

23. PG&E's credit ratings have been downgraded twice since October, 2000, and as of January 16, 2001, are rated at below investment grade.

24. PG&E's next scheduled cost of capital application is due on May 8, 2001.

Conclusions of Law

1. PG&E's proposed capital structure, which is identical to that adopted for 2000, should be adopted for 2001.

2. PG&E's proposed long-term debt and preferred stock costs are reasonable and should be adopted.

3. It is the application of informed judgment, not the precision of quantitative financial models, which is the key to selecting a specific ROE.

4. The issue of flotation cost should not be litigated in future cost of capital proceedings unless the parties comply with the requirements set forth in D.92-11-047.

5. Quarterly DCF models should not be used in subsequent cost of capital proceedings.

6. We reject the use of a time-weighting factor in the DCF financial model at this time.

7. A ROE range from 10.76% to 11.25% is just and reasonable for PG&E.

8. A 11.22% ROE is just and reasonable for PG&E.

9. PG&E should defer the filing of its next cost of capital application.

10. The ROE being authorized by this decision satisfies the legal standard for setting the fair rate of return established by the United States Supreme Court in the Bluefield and Hope cases.

11. PG&E should not be authorized an adjustment in its ROE for flotation cost.

12. It is reasonable to take official notice of the items listed in Appendix B as evidence that the California energy market and PG&E's financial condition has changed subsequent to the submittal of this proceeding.

13. All parties should be offered an opportunity to comment on the inclusion of the item of which official notice has been taken in their comments to the proposed decision.

14. PG&E's annual cost of capital filing should not be replaced with an automatic trigger mechanism at this time.

15. The application should be granted to the extent provided for in the following order.

16. This order should be effective today.

ORDER

IT IS ORDERED that:

1. Pacific Gas and Electric Company's (PG&E) adopted cost of capital for 2001 is as follows:

2. The 11.22% authorized ROE results in a corresponding 9.12% return on rate base requiring no change in PG&E's electric or gas revenue requirement for test year 2001.

3. PG&E shall defer its May 8, 2001 cost of capital application until the earlier of May 8, 2002 or upon the assigned Commissioner directing PG&E to file.

4. Application 00-05-013 is closed.

This order is effective today.

Dated , at San Francisco, California.

APPENDIX A

TABLE OF ACRONYMS AND ABBREVIATIONS

(END OF APPENDIX A)

APPENDIX B

List of Official Notice Items

PG&E's 8-K Securities & Commission Filing of January 17, 2001

PG&E's 8-K Securities & Commission Filing of January 10, 2001

PG&E's 8-K Securities & Commission Filing of January 5, 2001

D.01-01-018 - Interim Opinion on PG&E's Emergency Rate Relief Request

PG&E's 8-K Securities & Commission Filing of January 2, 2001

(END OF APPENDIX B)

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