9. Assignment of Proceeding

Michael R. Peevey is the Assigned Commissioner and Timothy Kenney is the assigned ALJ in this proceeding.

Findings of Fact

1. PG&E is authorized by D.04-01-024 to issue $1.5 billion of short-term debt.

2. In A.04-05-041, PG&E requests authority to issue an additional $500 million of short-term debt, for total short-term debt authority of $2 billion, including amounts allowed by Section 823(c). PG&E proposes that the $2 billion be divided evenly between cash borrowing and collateral for energy procurement transactions. PG&E's request, if granted, would supersede PG&E's authority to issue short-term debt under D.04-01-024.

3. In A.04-05-041, as supplemented, PG&E proposes to use the requested $2 billion of short-term debt for the following purposes: (i) finance gas storage inventories at a level of $200 - $250 million; (ii) respond to contingencies such as temporary under-collections of balancing accounts; (iii) provide credit support for energy procurement; (iv) provide short-term bridge financing for infrastructure construction; (v) provide self-insurance collateral for workers' compensation; and (vi) general working capital.

4. Prior to the commencement of the energy crisis in late 2000 and PG&E's bankruptcy in early 2001, PG&E's outstanding short-term debt varied on a monthly basis between zero ($0) and $1.096 billion.

5. PG&E's existing authority to issue $1.5 billion of short-term debt is sufficient to satisfy PG&E's financial needs under normal circumstances.

6. PG&E may have a need to issue more than $1.5 billion of short-term debt if certain types of extraordinary circumstances occur, such as (i) a major natural disaster that disrupts PG&E's ability to bill and collect, and (ii) significant increases in the total cost to procure wholesale gas and/or electricity.

7. It is prudent for PG&E to maintain financial reserves to cope with extraordinary events like those identified in the previous Finding of Fact.

8. Authorizing PG&E to issue $500 million of short-term debt when extraordinary events occur will provide PG&E with adequate financial reserves to cope with many scenarios.

9. As PG&E's credit ratings improve, PG&E's need to provide collateral to support energy procurement transactions should decline.

10. In A.04-05-041, PG&E requests authority to issue $2 billion of long-term debt and $200 million of preferred stock.

11. PG&E has a reasonable need to issue $1.538 billion of long-term debt and preferred stock during 2004 - 2008 for the following purposes that are not reasonably chargeable to operating expenses or income: (i) finance capital expenditures; (ii) retire long-term debt; and (iii) redeem preferred stock.

12. PG&E has not demonstrated that it has a need to issue $662 million of long-term debt and preferred stock to finance (i) new generation, (ii) advanced metering infrastructure, (iii) expenditures that will be paid with the proceeds from PG&E's upcoming Energy Recovery Bonds, or (iv) anything else.

13. PG&E does not request evergreen authority to issue long-term debt and preferred stock.

14. In A.04-05-041, PG&E requests authority under Section 851 to (i) issue FMBs; (ii) issue contingent FMBs to secure the debt requested in A.04-05-041; and (iii) use its accounts receivable to secure its debt.

15. PG&E represents that it might be required by lenders to secure most of its debt issued pursuant to today's Opinion with a like amount of FMBs.

16. The following Commission decisions authorized PG&E to pledge its gas accounts receivable for the sole purpose of procuring gas supplies for PG&E's core customers, including flowing gas and storage gas: D.04-02-056, D.03-02-061, D.02-03-025, D.01-06-074, D.01-02-050, and D.01-01-062.

17. It was fortunate that PG&E's gas accounts receivable were available to be used as collateral for the procurement of gas for PG&E's customers during PG&E's bankruptcy. If PG&E's gas accounts receivable had already been pledged as collateral for other purposes, it is possible that PG&E would not have been able to procure adequate supplies of gas for its customers, thereby causing gas shortages with potentially disastrous consequences for California.

18. In A.04-05-041, PG&E requests authority to issue many different types of Debt Securities and preferred stock using a wide variety of means.

19. There are many types of debt and preferred stock available in global financial markets. Providing PG&E with discretion to choose among the many types and the many ways to issue debt and preferred stock will enhance PG&E's ability to obtain capital at the lowest possible cost to PG&E and its ratepayers.

20. In A.04-05-041, PG&E requests that credit enhancements not be counted against its authorized debt.

21. In the following decisions, the Commission did not count credit enhancements against authorized debt: D.04-01-009, D.03-12-004, D.03-07-029, D.03-07-008, and D.03-04-030.

22. In A.04-05-041, PG&E requests authority to use interest-rate caps, collars, swaps, hedges, and other financial instruments to manage the risks associated with interest rate volatility. PG&E also requests that its use of these financial instruments not be counted against its authorized debt.

23. In the following decisions, the Commission authorized utilities to use interest-rate caps, collars, swaps, hedges, and other financial instruments to manage interest rate risks: D.03-12-004, D.96-05-066, and D.95-09-023.

24. Under certain circumstances, PG&E is required by GAAP to report hedges on its balance sheet as assets and/or liabilities.

25. There is no double counting of debt when a hedge that is used to hedge risks associated with outstanding debt is reported as a liability under GAAP.

26. Resolution F-616 requires utilities to issue debt using competitive bids. The Resolution also provides for exemptions from the Competitive Bidding Rule for debt issues in excess of $200 million and debt that must be obtained on a negotiated basis such as variable-rate debt.

27. In the following decisions, the Commission granted exemptions from, and modifications to, the Competitive Bidding Rule: D.04-04-051, OP 4; D.04-01-009, OP 9; D.03-12-004, OP 11; D.03-11-018, OP 11; and D.03-09-020, OP 5. There is no evidence in this proceeding that these exemptions and modifications have caused any harm to utilities, ratepayers, or the public at large.

28. PG&E represents that granting the requested exemptions from, and modifications to, the Competitive Bidding Rule will enable PG&E to obtain debt in a manner that is advantageous to PG&E and its ratepayers.

29. PG&E requests authority to issue Debt Securities through an SPE when cost savings may be achieved by doing so. The SPE would be a wholly-owned by PG&E and similar to PG&E's existing SPEs.

30. GO 24-B requires utilities to submit a monthly report to the Commission that contains, among other things, the following information: (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.

31. To minimize administrative costs, PG&E requests permission to report to the Commission on a quarterly basis all the information required by GO 24-B for any debt and preferred stock issued by PG&E pursuant to this Opinion.

32. In recent years the Commission has routinely authorized utilities to report on a quarterly basis the information required by GO 24-B in order to reduce the utilities' administrative and compliance costs.

33. PG&E intends to use a portion of the long-term debt and preferred stock authorized by this Opinion to finance capital expenditures during 2005 - 2008.

34. PG&E represents that it cannot identify the specific capital projects that will be financed with debt and preferred stock issued pursuant to this Opinion.

35. A.04-05-041 does not propose, and today's Opinion does not authorize, any specific new construction or changes in use of existing assets and facilities.

36. Notice of A.04-05-041 appeared in the Commission's Daily Calendar. There were no protests or other responses to A.04-05-041.

37. In Resolution ALJ 176-3135 issued on June 9, 2004, the Commission preliminarily determined that this proceeding should be categorized as ratesetting and that hearings would not be necessary.

38. There are no contested factual issues.

39. PG&E represents that the additional debt and preferred stock requested in A.04-05-041 is not subject to the MSA approved by D.03-12-035 or PG&E's POR. PG&E also represents that it does not need to provide notice to, or obtain permission from, the Commission's Financing Team before PG&E issues any of the debt and preferred stock requested in A.04-05-041.

Conclusions of Law

1. This is a ratesetting proceeding.

2. There is no need for hearings.

3. PG&E's request to issue the types and amount of debt, preferred stock, and financial instruments identified in A.04-05-041 is subject to Commission approval under Sections 701.5, 816 et seq., and 851. The Commission has broad discretion under these statutes to approve, modify, or reject A.04-05-041.

4. PG&E should be authorized to issue $500 million of additional short-term debt, for total short-term debt authority of $2 billion, including the amount authorized by Section 823(c). Of this amount, $1.5 billion should be used for the purposes specified in A.04-05-041, as supplemented. The remaining $500 million should be used only for the following purposes:

i. Finance the procurement of natural gas and electricity for PG&E's utility customers when there is a spike in the total cost to procure gas and/or electricity, with a "spike" defined as an increase in the total monthly cost to procure gas and/or electricity that exceeds by 50% the monthly average of the preceding 12 months.

ii. Respond to major natural disasters or other cataclysms.

iii. Provide liquidity if there is a major disruption in PG&E's ability to bill, collect, and/or process utility customer bills.

5. PG&E should have authority to decide how to divide the $2 billion of short-term debt authorized by this Opinion between cash borrowing and collateral for energy procurement transactions.

6. PG&E should adjust its short-term debt facilities as PG&E's need to provide collateral to support energy procurement transactions declines over time due to improvements in PG&E's credit ratings.

7. PG&E's authority to issue short-term debt pursuant to this Opinion supersedes PG&E's authority to issue short-term debt pursuant to D.04-01-024.

8. Although PG&E may have debt outstanding for longer than one year under its existing R/C facility and A/R facility, it is appropriate to treat such debt as "short-term" for regulatory purposes for the reasons stated in the body of this Opinion.

9. PG&E should be authorized to issue $1.538 billion of long-term debt and preferred stock during 2004 - 2008 for the following purposes authorized by Section 817: (i) finance capital expenditures; (ii) retire long-term debt; and (iii) redeem preferred stock.

10. PG&E should be authorized to issue any combination of long-term debt and preferred stock for the purposes identified in the previous Conclusion of Law, subject to the condition that the selected combination results in a capital structure that complies, on average, with the Commission-adopted capital structure during the period the adopted capital structure is in effect.

11. Section 818 provides that no public utility may issue debt or equity unless it has first obtained from the Commission an order authorizing the issue, stating the amount thereof and the purposes to which the proceeds thereof are to be applied, and that, in the opinion of the Commission, the money, property, or labor to be procured or paid for by the issue is reasonably required for the purposes specified in the order, and that such purposes are not, in whole or in part, reasonably chargeable to operating expenses or to income.

12. The money, property, and/or labor to be procured by PG&E with the proceeds of the debt and preferred stock authorized by this Opinion are reasonably required for the purposes specified in this Opinion, and such purposes are not reasonably chargeable to operating expenses or income.

13. Section 818 requires that A.04-05-041 be denied to the extent it requests authority to issue $662 million of additional long-term debt and preferred stock. This is because PG&E has not demonstrated, as required by Section 818, that it has a reasonable need to issue $662 million of additional long-term debt and preferred stock.

14. Because this Opinion does not grant evergreen authority to issue long-term debt and preferred stock, PG&E will have to apply for appropriate authority to issue additional debt and/or equity when the long-term debt issued by PG&E pursuant to this Opinion matures and the preferred stock issued pursuant to this Opinion is redeemed.

15. Section 851 requires a public utility to obtain authority from the Commission prior to encumbering any utility property that is necessary or useful in the performance of the utility's duties to the public.

16. The purpose of Section 851 is to enable the Commission to review a proposed transaction, before it takes place, in order to take such action as the public interest may require.

17. PG&E's request for authority under Section 851 to issue FMBs, both as primary obligations and as a credit enhancement for other debt, is reasonable and should be granted. If a default occurs and title to any PG&E property, franchise, permit, or right that is necessary or useful in the performance of PG&E's duties to the public is transferred pursuant to FMBs, the thing transferred should continue to be used to provide utility services to the public until the Commission authorizes otherwise.

18. Payments by PG&E's customers should be used first and foremost for the procurement of gas and electricity provided to PG&E's customers.

19. PG&E's authority under Section 851 to pledge its gas customer accounts receivable should be limited to the sole purpose of procuring gas supplies for PG&E's customers, including flowing gas and storage gas. PG&E's authority to pledge its electric accounts receivable should be limited to the sole purpose of procuring electric power for PG&E's customers, including any gas and other fuels necessary for PG&E's retained generation plants.

20. The previous Conclusion of Law should not apply to the following: (i) the portion of PG&E's accounts receivable that are sequestered for other purposes pursuant to statutes or Commission orders (e.g., accounts receivable that have been or will be pledged to support PG&E's Rate Reduction Bonds or Energy Recovery Bonds), or (ii) PG&E's current credit facility of $650 million that is secured by PG&E's accounts receivable. PG&E should not renew this credit facility when it expires so that the accounts receivable supporting the credit facility can be used for the purposes authorized by today's Opinion (i.e., to serve as collateral for the procurement of gas and electricity for PG&E's customers).

21. PG&E should be granted authority under Sections 816 et seq., to issue the types of Debt Securities and preferred stock described in A.04-05-041 using the means identified in the Application.

22. Credit enhancements should not be counted against PG&E's authorized debt to the extent the credit enhancements do not increase the amount of debt owed by PG&E. Any credit enhancements that increase the amount of debt owed by PG&E should be counted against PG&E's authorized debt.

23. The following principles should apply to any hedges that PG&E enters into pursuant to this Opinion:

ii. Hedges recorded as a liability under GAAP (hedge liabilities) should not be counted against PG&E's authorized debt to the extent the hedge liabilities are deemed effective under GAAP in offsetting changes to the fair value or cash flows of the risks being hedged. Hedge liabilities should be counted against PG&E's authorized debt to the extent they are not deemed effective under GAAP in offsetting the changes to the fair value or cash flows of the risks being hedged.

24. For the following reasons, PG&E's request for the Competitive Bidding Rule exemptions and modifications identified in the body of this Opinion and A.04-05-041 should be granted: (i) the Commission has previously granted PG&E and other utilities similar exemptions and modifications with no discernable adverse impacts on the utilities, their customers, or the public at large; and (ii) PG&E's representation that the exemptions and modifications will benefit PG&E and its ratepayers by enhancing PG&E's ability to issue debt in an advantageous manner.

25. PG&E should be granted authority under Section 701.5 to issue Debt Securities authorized by today's Opinion through an SPE when doing so results in lower cost of debt for PG&E and its ratepayers.

26. As required by Section 701.5(a), the assets, liabilities, revenues, and expenses of any SPEs established by PG&E pursuant to today's Opinion should be used by the Commission in setting rates for PG&E. In addition, PG&E should have 100% ownership and control of the SPEs, and Commission must have full regulatory control over the assets, debt, equity, and activities of the SPEs through the Commission's oversight of PG&E's financing activities.

27. Except for an authorized return on PG&E's reasonable equity investment in the rate base of the SPEs, PG&E should not profit from any SPEs established pursuant to this Opinion.

28. PG&E should be authorized to report on a quarterly basis all the information required by GO 24-B regarding any debt and preferred stock issued pursuant to this Opinion, except that PG&E should report this information on a monthly basis if directed to do so by Commission staff.

29. The appropriate ratemaking treatment of the costs associated with the debt, preferred stock, and financial instruments authorized by today's Opinion should be decided by the Commission in PG&E's cost of capital proceedings or other appropriate proceedings.

30. PG&E is required by Sections 1904(b) and 1904.1 to pay a fee of $754,000 for the debt and preferred stock authorized by today's Opinion.

31. The authority granted by this Opinion should not become effective until PG&E has paid the fees prescribed by Sections 1904(b) and 1904.1.

32. The Commission is required by CEQA and Rule 17.1 to consider the environmental consequences of projects that are subject to its discretionary approval. Thus, in deciding whether to approve A.04-07-032, the Commission must consider if doing so will alter an approved project, result in new projects, change facility operations, etc., in ways that have an environmental impact.

33. The CEQA guidelines recognize that the timing of the environmental review involves a balancing of competing factors, and that such review should occur as early as feasible in the planning process to enable environmental considerations to influence project design, yet late enough to provide meaningful information for environmental assessment.

34. There is insufficient information at this time to conduct a meaningful CEQA review. This is because PG&E represents that it cannot provide basic details of the projects that may be funded with the debt and preferred stock authorized by this Opinion, such as the location and design of the projects.

35. PG&E should not use the proceeds from the debt and preferred stock authorized by this Opinion to fund capital projects until PG&E has obtained any required Commission approvals for the projects, including any required environmental review under CEQA.

36. PG&E should maintain records pursuant to Section 824 and GO 24-B that (i) identify the specific short-term debt, long-term debt, and preferred stock issued pursuant to this Opinion, and (ii) demonstrate that the proceeds from such debt and preferred stock have been used only for the purposes authorized by this Opinion.

37. The following Order should be effective immediately so that PG&E may issue as soon as possible the debt and preferred stock authorized herein.

ORDER

IT IS ORDERED that:

1. Except as described in the following Ordering Paragraphs, Application (A.) 04-05-041 is granted pursuant to Pub. Util. Code §§ 701.5, 816 - 830, and 851.

2. Pacific Gas and Electric Company (PG&E) is authorized to issue $2 billion of short-term debt, including the amounts authorized by Section 823(c). Of this amount, $1.5 billion shall be used for the purposes specified in A.04-05-041. The remaining $500 million shall be held in reserve to be used only for the following purposes:

i. Finance the procurement of natural gas and electricity for PG&E's utility customers beginning in months when the total monthly cost to procure gas and/or electricity exceeds by 50% the monthly average of the preceding 12 months.

ii. Respond to major natural disasters or other cataclysms.

3. PG&E is authorized to issue $1.538 billion of new long-term debt and preferred stock to (i) finance capital expenditures, (ii) refinance maturing bridge loans, and (iii) redeem preferred stock.

4. PG&E may issue any combination of long-term debt and preferred stock for the purposes identified in the previous Ordering Paragraph, subject to the condition that the selected combination results in a capital structure that complies, on average, with the Commission-adopted capital structure during the period the adopted capital structure is in effect for ratemaking purposes.

5. This Order does not grant evergreen authority to issue long-term debt and preferred stock. PG&E will have to apply for authority to issue additional debt and/or equity when the long-term debt issued by PG&E pursuant to this Order matures and the preferred stock issued pursuant to this Order is redeemed.

6. PG&E is granted authority under Section 851 to issue First Mortgage Bonds (FMBs) as security for debt issued pursuant to this Order. If a default occurs and title to any PG&E property, franchise, permit, or right that is necessary or useful in the performance of PG&E's duties to the public is transferred pursuant to FMBs, the thing transferred shall continue to be used to provide utility services to the public until the Commission authorizes otherwise.

7. Except as noted in the next Ordering Paragraph, PG&E is granted authority pursuant to Section 851 to (i) pledge its gas accounts receivable for the sole purpose of procuring gas supplies for PG&E's customers, including flowing gas and storage gas, and (ii) pledge its electric accounts receivable for the sole purpose of procuring electric power for PG&E's customers, including any gas and other fuels necessary for PG&E's retained generation plants.

8. The previous Ordering Paragraph does not apply to the following: (i) the portion of PG&E's accounts receivable that are sequestered for other purposes pursuant to statutes or Commission orders, or (ii) the $650 million credit facility that PG&E currently has in place that is secured by PG&E's accounts receivable. PG&E shall not renew the $650 million credit facility when it expires so that the accounts receivables supporting the credit facility can instead be used for the purposes authorized by today's Order (i.e., to serve as collateral for the procurement of gas and electricity for PG&E's customers).

9. PG&E may issue the types of short-term debt, long-term debt, and preferred stock identified in A.04-05-041.

10. Credit enhancements of short-term or long-term debt authorized by this Order shall not count against the amount of debt authorized by this Order so long as there is no possibility that such credit enhancements will ever increase the amount of PG&E's debt obligations. Any credit enhancements that increase the amount of debt owed by PG&E shall count against PG&E's authorized debt.

11. PG&E may enter into interest-rate caps, collars, swaps, hedges, and other financial instruments to manage interest rate risks (collectively, "hedges") subject to the following conditions:

i. PG&E shall comply with the conditions enumerated in the body of this Order.

ii. Hedges recorded as a liability under generally accepted accounting principles (GAAP) shall not be counted against PG&E's authorized debt to the extent the hedge liabilities are deemed effective under GAAP in offsetting the changes to the fair value or cash flows of the risks being hedged. Hedge liabilities shall be counted against PG&E's authorized debt to the extent that such liabilities are not deemed effective under GAAP in offsetting the changes to the fair value or cash flows associated with the risks being hedged.

12. The following types of debt issued by PG&E pursuant to this Order are exempt from the Competitive Bidding Rule set forth in Resolution F-616: debt with a principal amount greater than $200 million, variable-rate debt securities, and negotiated debt transactions.

13. PG&E is authorized to do the following in those situations where the Competitive Bidding Rule remains applicable:

i. To shorten the time between the issuance of an invitation for bids and the receipt of bids to a period that is the shortest time reasonably required to obtain a sufficient number of bids from underwriters, purchasers, or groups thereof.

ii. To accelerate, postpone, or cancel the scheduled date and time for receipt of bids.

iii. To reject all bids submitted.

iv. To request the resubmission of bids.

v. To reschedule subsequent receipt of bids.

vi. To vary the amount, terms, and conditions of the Debt Securities submitted for bids.

vii. To waive the requirement for newspaper publication of the above items.

14. PG&E may issue the Debt Securities authorized by this Order through a special purpose entity (SPE) when doing so results in lower cost of debt for PG&E and its ratepayers. The assets, liabilities, revenues, and expenses of any SPEs established by PG&E pursuant to this Order shall be used by the Commission to set rates for PG&E. The SPEs shall be treated as "regulated subsidiaries" for the purpose of applying the Commission's rules for affiliate transactions. PG&E shall have 100% ownership and control of the SPEs. The Commission shall have regulatory control over the SPEs and access to the books and records of the SPEs. PG&E shall not make any profit from the SPEs, except for an authorized return on PG&E's reasonable equity investment in the SPEs.

15. PG&E may report on a quarterly basis all the information required by General Order (GO) 24-B with respect to debt and preferred stock issued pursuant to this Order. PG&E shall report this information on a monthly basis if directed to do so by Commission staff.

16. Pursuant to Sections 1904(b) and 1904.1, PG&E shall remit to the Commission's Fiscal Office a check for $754,000. The decision number of this Order shall appear on the face of the check.

17. The authority granted by this Order shall not become effective until PG&E remits $754,000 to the Commission's Fiscal Office.

18. PG&E shall comply with all applicable environmental laws and regulations when planning and implementing any capital expenditure programs that are financed, in whole or in part, with the proceeds from the debt and preferred stock authorized by this Order.

19. Pursuant to Section 824 and GO 24-B, PG&E shall maintain records that (i) identify the specific debt short-term debt, long-term debt, and preferred stock issued pursuant to this Order, and (ii) demonstrate that the proceeds from the debt and preferred stock issued pursuant to this Order have been used only for the purposes authorized by this Order.

20. This proceeding is closed.

This order is effective today.

Dated October 28, 2004, at San Francisco, California.

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