3. Discussion
The Commission has broad discretion to determine if a utility should be authorized to issue short-term debt pursuant to Pub. Util. Code § 816, et seq.1 The primary standard used by the Commission is whether a utility has demonstrated a reasonable need to issue short-term debt for proper purposes.2 Where necessary and appropriate, the Commission may attach conditions to the issuance of short-term debt in order to protect and promote the public interest.
We conclude that granting PG&E the requested authority for additional short-term debt up to $1.5 billion is reasonable. With the additional capacity to borrow $1.5 billion of short-term debt, PG&E should be able to maintain sufficient financial reserves to cope with events that temporarily reduce cash remittances from customers. Because the frequency and magnitude of such events is inherently uncertain, we must use our experience and judgment to determine the amount of slack financial capacity. In this particular situation, we conclude that the additional short-term debt borrowing capacity should provide an adequate financial cushion for many scenarios.
PG&E claims additional short-term debt capacity is needed to provide cash collateral to counterparties in connection with various energy procurement transactions, including electric power and natural gas hedges, electric power and gas purchases, and power plant tolling contracts. Since 2006, when PG&E's previous short-term financing authority was granted in D.06-11-006, PG&E has executed financial swaps to hedge a portion of its power portfolio in addition to the existing gas-related hedges for core gas and electric procurement. Consequently, the amount of collateral required to meet potential collateral calls has increased, in part, because of the added power hedges. PG&E's potential collateral requirements have also been impacted by price volatility. Forward prices for natural gas and power increased in the first half of 2008, but then decreased quickly and significantly in the second half of 2008, resulting in significant cash outflow to meet collateral requirements. PG&E states that such extreme movements in forward prices can have potential collateral requirement impacts well over $1 billion.
PG&E is also requesting an increase in its short-term borrowing authorization partially because of its large anticipated capital spending program over the next several years. Subject in part to regulatory approval, PG&E intends to invest more than $9 billion over the next three years in replacing and improving aging infrastructure and other capital investments.
PG&E uses short-term debt to temporarily bridge long-term financings in support of capital expenditures. In general, it is easier and more cost-effective to finance accumulating capital needs with short-term debt until they reach a level that is more efficient for sizing and pricing of a long-term financing.
The additional short-term borrowing authority will also provide PG&E with flexibility to avoid issuing long-term securities on onerous terms and will allow PG&E to withstand longer periods of time when the bond markets may be inaccessible. Similarly, debt maturities, opportunities to redeem or repurchase securities at low cost, changes in cash flows, or other unexpected events also may make it necessary or desirable for PG&E to increase its short-term borrowing temporarily to meet cash needs. Short-term borrowing would be reduced when practicable.
Without this additional short-term borrowing authority, PG&E could be forced to lock in higher interest rates for longer terms than necessary simply because it would not have sufficient authority to borrow the funds for a short time period until lower interest rates could be obtained. In such a situation, PG&E and its customers would bear higher borrowing costs than necessary. PG&E could also be unable to obtain funds to finance its capital spending program at the time such funds are needed, which could result in decreased reliability and/or reduced customer service.
Accordingly, we hereby authorize PG&E to issue up to an additional
$1.5 billion of short-term debt, including the amount authorized by § 823(c).
1 All statutory references are to the Cal. Pub. Util. Code.
2 The term "proper purposes" refers to expenditures that are necessary or proper to promote legitimate objects of a public utility of the type concerned. (207 Cal 630 (1929).)
