Background
On July 8, 2008, PG&E's President and Chief Executive Officer (CEO), William Morrow, announced plans to leave his positions with PG&E, effective August 31, 2008. The Board of Directors of PG&E has passed a resolution expressing its intent to have Peter A. Darbee, the President and CEO of PG&E Corporation, serve concurrently as the President and CEO of PG&E as well, subject to the approval of this Commission.
Applicants recognize that a dual-hatted President and CEO is contrary to the express provisions of the Commission's Affiliate Transaction Rule V.E, as modified by Decision (D.) 06-12-029. On July 9, 2008, Applicants filed an application for a limited exemption from Rule V.E of the Commission's Affiliate Transaction Rules to allow Darbee, PG&E Corporation's President and CEO, to serve also as PG&E's President and CEO, while Applicants continue to share regulatory affairs, lobbying and legal services. Applicants seek authority to continue the exemption as long as PG&E Corporation does not have significant non-Commission-regulated subsidiaries. Because Applicants could not otherwise obtain final Commission action on this proposal before Morrow's departure, Applicants concurrently filed a motion, pursuant to Rule 11.1 of the Commission's Rules of Practice and Procedure, for an interim ruling granting Applicants a temporary waiver of Rule V.E. A temporary waiver would allow Darbee to assume the duties of the President and CEO of PG&E from
September 1, 2008, the day after Morrow's announced departure date, until the Commission rules on the Application.
Applicants claim that the temporary waiver will avoid PG&E having a period without any President or CEO. Under Applicants' proposed schedule, after the Commission issues its interim ruling, parties will have an opportunity to comment on the proposed interim decision, and to request evidentiary hearings on the application, if they deem hearings necessary.
In this Decision, we only address Applicants' motion seeking a temporary waiver of the Affiliate Transaction Rules by September 1, 2008, pending final disposition of Applicants' underlying proposal to extend the waiver indefinitely. We defer to a separate decision the disposition of Applicants' underlying proposal for an ongoing limited exemption of Rule V.E of the Affiliate Transaction Rules.
The Affiliate Transaction Rules, as initially adopted in D.97-12-088, serve as standards of conduct governing relationships between California natural gas or electric utilities and their affiliates. The Commission found these rules necessary because "the development of competitive markets would be undermined if the utility were able to leverage its market power into the related markets in which their affiliates compete."2 The adopted rules "generally require more separation between a utility and its affiliate, rather than rules that rely almost exclusively on tracking costs. The fewer the transactions between the utility and its affiliate, the greater confidence we have that the affiliate lacks market power."3
In October, 2005, the Commission issued its Order Instituting Rulemaking Concerning Relationship Between California Energy Utilities and Their Holding Companies and Non-Regulated Affiliates. (R.05-10-030.) The OIR stemmed from the repeal of the Public Utility Holding Company Act, and the fact that, since the utility holding companies were formed, "these companies have made significant investments in distribution and transmission lines, natural gas pipelines and terminals, powerplants, trading companies, marketing companies and other energy service companies (`energy infrastructure') both overseas and within the United States." (Id. at 1.) The OIR stated:
The Commission's goals remain the same: (1) to ensure that the utilities meet their public service obligations at the lowest reasonable cost and (2) to ensure that the utilities do not favor or otherwise engage in preferential treatment of their affiliates.
The Commission also needs to ensure that the California energy utilities retain sufficient capital and the ability to access such capital in order to meet their customers' needs. Additional rules or regulations may be necessary to address the potential conflicts between the utilities' ratepayers' interests and the parent holding companies' and affiliates' interests in order to ensure that these conflicts do not undermine the utilities' ability to meet their public service obligations at the lowest possible cost. (Id. at 2.)
The Commission amended its OIR in D.06-06-062, again emphasizing that its goal was "to ensure that the utilities meet their public service obligations at the lowest reasonable cost" and "to ensure that the utilities do not favor or otherwise engage in preferential treatment of their affiliates." (Id., mimeo. at 2.)
In D.06-12-069, the Commission adopted further revisions in the Affiliate Transaction Rules. Among these changes, Rule V.E provided the utility and its holding company with an election: either to (1) retain authorization to engage in sharing of all services permitted under Original Rules but eliminate any duplication of personnel among key corporate officers at utility and holding company, or (2) retain ability to name individuals to multiple key offices at utility and holding company but prohibit sharing of regulatory affairs, lobbying, and all legal services except those necessary to the provision of shared services that remain authorized.
Rule V.E created exceptions to allow utilities to share corporate support services with affiliates, provided such sharing did not give any affiliate an unfair competitive advantage. Thus, in order to share corporate support services with affiliates under Rule V.E, the utilities had to elect one of the following options, either: (1) eliminate shared "key officers" or (2) eliminate the sharing of regulatory affairs, lobbying and legal services. As a basis to qualify for the exception under Rule V.E, PG&E elected not to share "key officers."
By its motion, PG&E thus, seeks a temporary waiver from Rule V.E, precluding a sharing of "key officers" in order to allow Darbee to serve as President and CEO of both companies from September 1, 2008, until the date of a final Commission decision on the application.
Applicants argue that in PG&E's case, the rationale for the modified rule ("the likelihood for preferential treatment, unfair competitive advantage, or the sharing of competitively sensitive information within the party regulated, mostly unregulated corporate family and the consequences such competitive abuse poses for energy markets and captive ratepayers," D.06-12-029, mimeo. at 10) applied weakly, and was made applicable to Applicants because of the expectation that "in the future, PG&E will have unregulated affiliates again." (D.06-06-062, mimeo. at 9.) In the 18 months since Rule V.E was modified, PG&E has remained PG&E Corporation's only major subsidiary. As of March 31, 2008, PG&E accounted for 100% of PG&E Corporation's consolidated operating revenue, 99.1% of the total assets and 99.99% of the total physical assets. (See PG&E Corporation Form 10-Q, filed May 6, 2008 for the period ending March 31, 2008.)
Applicants claim that, given the limited nature of PG&E Corporation's non-utility business, the dangers Rule V.E was intended to protect against do not exist, and that strict application of the Rule to PG&E and PG&E Corporation does not serve its intended purpose.
PG&E currently has six Rule II.B affiliates, two of which are subsidiaries of PG&E (and thus not relevant to its motion), and four of which have no current operations (their entire business currently relates to the proposed Pacific Connector natural gas pipeline in Oregon).4 These affiliates generate no operating revenue, constitute less than 1% of PG&E Corporation's total assets and less than one hundredth of 1% of PG&E Corporation's physical assets.
Applicants argue that since PG&E remains PG&E Corporation's only significant subsidiary and PG&E Corporation does not have any significant unregulated business, allowing PG&E and PG&E Corporation to share a President and CEO would not undermine the purpose of the 2006 modification to Rule V.E. The Application therefore requests a temporary waiver of Rule V.E so that they may share a President and CEO, and continue to share regulatory affairs, lobbying and legal services, until such time as the Commission rules on the underlying application.
2 D.97-12-088 (December 16, 1997), 77 CPUC2d 422, 449, as amended by D.98-08-035 (August 6, 1998) 81 CPUC2d 607 and D.98-12-075 (December 17, 1998),
84 CPUC2d 155.
3 Id., 77 CPUC2d at 450.
4 A description of PG&E's Rule II.B affiliates is attached to its motion.
