8. Assignment of Proceeding
Timothy Alan Simon is the assigned Commissioner and Seaneen M. Wilson is the assigned ALJ in this petition for rulemaking.
1. On January 15, 1946, the Commission issued D.38614 in response to its investigation into whether public utilities should be required to sell their debt and equity securities through a competitive bidding process. During the mid-1940s, the issuance of utility debt securities was transitioning from a negotiated basis to a competitive bidding basis. Testimony in that proceeding substantiated that while negotiated bids in extraordinary circumstances can be favorable, the public interest is best served when more than one investment banker is offered an opportunity to underwrite securities. Therefore, the Commission established a CBR for utilities issuing new securities, with certain exemptions. Since this CBR was established in 1946 it has been amended five times. The period between reviews has ranged from four to 25 years, and averaging 13 years.
2. The CBR was last amended by a Commission vote on October 1, 1986 in Resolution F-616. Since that time, the Commission has authorized individual utilities to deviate from the CBR so that the utilities could take advantage of market opportunities.
3. The Joint Energy Utilities filed a Workshop Report on January 20, 2012, which included a summary of the discussion at the January 9, 2012 workshop as well as a suggested rule for governing the issuance of long-term debt securities by utilities.
4. Various parties to R.11-03-007 filed comments to the questions posed in the rulemaking, participated in a PHC, filed Pre-Workshop Statements, participated in workshops and evidentiary hearings, and filed comments to the Workshop Report.
5. The purpose of the CBR and now the Financing Rule is to ensure that utilities incur the lowest financing cost available, which is then passed on to ratepayers.
6. Utilities have regularly requested authority to enter into debt enhancement arrangements in order to improve the terms and conditions of new issuances of debt securities and to lower the overall cost of money for the benefit of ratepayers. In particular, utilities have requested debt enhancements such as: put options, call options, sinking funds, swaptions, caps, collars, currency swaps, credit enhancements, capital replacement, interest deferral, special-purpose entity transactions, delayed drawdown, hedging strategies, treasury lock, various types of treasury options, and various types of interest rate swaps.
7. Utilities are regularly granted exemptions from the CBR, including but not limited to authority to: 1) issue debt securities in excess of $200 million via a means other than competitive bid, because the size or type of issuance does not lend itself to competitive bidding; 2) issue debt securities such as tax-exempt financing, foreign debt, government debt, privately placed debt, or debt issued through an affiliate, via means other than competitive bid; 3) be exempt from the Rule if the utility is a multi-state utility whose California operating revenue is 5% or less than the entire utility's total operating revenue; 4) be exempt from the CBR if the debt issues are $20 million or less; 5) permit competitive bidding via electrical means, such as e-mail, in lieu of telephonic bidding; and 6) waive the one day notification requirement of competitively bid offers.
8. When the increase in the CPI from 1986 through 2011 of 107% is applied to $20 million, it results in a figure of approximately $42 million.
9. GO 156 was established in 1988, subsequent to our last review of the CBR.
10. GO 156 governs the development, implementation, and reporting of programs to encourage, recruit, and increase the participation of WMDVBE in procurement of contracts from electric, gas, telephone, and water utilities with gross annual revenues exceeding $25 million.
11. Pursuant to Pub. Util. Code § 8281, which is one of the code sections on which GO 156 is based, it is the policy of the state to aid the interests of WMDVBEs and to ensure that a fair proportion of the total purchases and contracts or subcontracts for regulated public utilities are awarded to WMDVBEs.
12. Utilities are regularly granted authority to use requested debt enhancement features, including but not limited to put options, call options, sinking funds, swaptions, caps, collars, currency swaps, credit enhancements, capital replacement, letters of credit, standby bond purchase agreements, surety bonds and insurance policies; delayed drawdown; redemption provisions; tax exemption, warrants; encumbrance of accounts receivables interest deferral, special-purpose entity transactions, treasury lock, various types of treasury options, and various types of interest rate swaps.
13. Utilities are regularly granted authority to report on a quarterly instead of a monthly basis, as required by GO 24-B.
14. Competitive bidding in the financial markets refers to a process whereby an issuer solicits bids from a pre-selected group of underwriters for a proposed securities offering.
15. When debt securities are issued via a negotiated bid, the issuer selects one or more underwriters in advance of the financing and works with those firms to design, structure, size and otherwise determine the optimal financing terms.
16. The Private Placement of debt securities occurs when a utility issues debt securities directly to a lender.
17. Loans received through government entities, such as Safe Drinking Water Act loans and pollution control bonds, and Rural Utilities Service loans, are governed by their own sets of rules and regulations.
18. In 1984, the New York Department of Public Service gave utilities flexibility in selecting the method for issuing securities.
19. In 1985, the ICC repealed its competitive bidding requirement.
20. In 1994, the SEC rescinded its Rule 50, which required competitive bidding for the issuance of securities by a registered holding company or its subsidiary. By rescinding Rule 50, the SEC gave companies the independence to choose the marketing method with the most advantageous terms.
21. In 1995, the Federal Energy Regulatory Commission amended its policies to permit public utilities to "issue securities by either a competitive bid or negotiated placement."
22. In. D.88-04-062, we authorized an exemption for PacifiCorp from the provisions of the Public Utilities Code relating to stocks and securities transactions, and the encumbrance of utility property.
23. Pursuant to Pub. Util. Code § 829(b), debt issues for telephone utilities whose rates are subject to the URF, and whose rates are therefore not subject to rate of return regulation, are exempt from all other applicable provisions of Pub. Util. Code §§ 816-830.
24. The California Department of Water Resources requires utility recipients of Safe Drinking Water State Revolving Fund loans, which are repaid via a surcharge, to maintain separate bank accounts for these funds.
1. Allowing utilities to choose between competitive and negotiated bidding with the goal of achieving the lowest long-term cost of debt for ratepayers provides the utilities with the independence to manage how to issue their own debt, while ensuring that ratepayers pay the lowest cost of debt.
2. Since the cost of debt is reviewed as part of the utility cost of capital proceedings, the performance of a cost benefit study as part of a utility's request for financing authority would be duplicative of the review performed in the cost of capital proceedings in which the reasonableness of each component of the cost of capital, including common equity, preferred equity, and long-term debt is assessed for reasonableness. This duplication of effort would result in more work for the Commission and all parties involved.
3. Even though the new Financing Rule adopted herein allows a utility to choose the method by which it will issue debt, it includes other requirements regarding WMDVBEs and debt enhancements. Some types of utilities should not be subject to these requirements due to their size or the type of debt they issue, consistent with historical exemptions, however, such utilities are encouraged to employ GO 156.
4. Bond issues of $42 million or less in 2012, adjusted each year for the CPI found on the California Department of Finances' website or its successor, should be exempt from the Financing Rule.
5. Since government loans and tax-exempt debt are governed by their own set of rules and regulations, and may not be bid at all, we should exempt.
6. A utility whose California operations account for a small percentage of its total operations should be exempt from the Financing Rule adopted herein.
7. An affiliate of a utility that provides debt issuance services to the utility, where the utility's debt accounts for less than five percent (5%) of the affiliate's annual debt issuances, should be exempt from the Financing Rule adopted herein.
8. Given the authority granted to PacifiCorp in D.88-04-062 regarding exemption from the provisions of the Public Utilities Code relating to stocks and securities transactions and the encumbrance of utility property, we should not require PacifiCorp to provide proof of the applicability of such exemption from the Financing Rule.
9. Given that debt issuances governed by Pub. Util. Code § 829(b) are exempt from all other applicable provisions of Pub. Util. Code §§ 816-830, we should not require the affected telephone utilities to provide proof of the applicability of such exemption from the Financing Rule.
10. To the extent this decision comports with and compliments GO 156, we should encourage utilities to follow those principles in their issuance of long-term debt.
11. In order to officially encourage the use of WMDVBE firms we must apply the tenets of GO 156 to the issuance of debt. We should add a section to the Financing Rule adopted herein, which would promote additional opportunities for WMDVBE and emerging firms, to the ultimate benefit of the utilities' ratepayers and shareholders.
12. Since debt enhancements are regularly requested by utilities in their financing applications, and we currently do not keep track of the use of such debt enhancement features, we should include a section in the Financing Rule adopted herein, that addresses requests for debt enhancement features by requiring a description of and rationale for the potential debt enhancement feature being requested.
13. We should place the restrictions detailed in Section 5.4.2 of this decision on the use of swaps and hedges by utilities. We have authorized such restrictions for over a dozen years, and find them effective in controlling the risk of swap and hedge transactions.
14. We should streamline and update the GO 24-B reporting process in order to save both utility and Commission staff work, and to consider current banking practices.
15. We should adopt the updated list of information (Attachment B to this decision), which utilities are required to report pursuant to GO 24, given the manner in which securities transactions are now recorded by utilities as required by other regulatory entities, such as the Depository Trust Corporation.
16. Except as discussed herein, we should eliminate the requirement in GO 24 that a utility maintain a separate bank account to record money derived from the sale of securities. Utilities should continue to ensure that proceeds from securities issued by them are used for proper purposes pursuant to Pub. Util. Code § 817.
17. In instances where the Commission specifically designates what the proceeds can be used for, such as for a specific construction project, we should require a utility to maintain a separate bank account to record money derived from the sale of such securities, in order to make it easier for the Commission to track these funds and preserve a strong audit trail.
18. Since the California Department of Water Resources requires utility recipients of Safe Drinking Water State Revolving Fund loans, which are repaid via a surcharge, to maintain a separate bank account for these funds, we should require a utility to maintain a separate bank account to record money derived from the sale of such securities.
19. The Financing Rule attached to this decision (Attachment A) should be adopted, and replace the existing CBR adopted in Resolution F-616.
20. The new GO 24-C attached to this decision (Attachment B) should be adopted, and replace the existing GO 24-B.
21. We should confirm all rulings made by the assigned ALJ.
22. Rulemaking 11-03-007 should be closed.
IT IS ORDERED that:
1. The Financing Rule attached to this decision (Attachment A) is adopted and replaces the Competitive Bidding Rule adopted in Resolution F-616.
2. The new General Order 24-C attached to this decision (Attachment B) is adopted, and replaces the existing General order 24-B.
3. We confirm all rulings made by the assigned Administrative Law Judge in the current proceeding.
4. Rulemaking 11-03-007 is closed.
This order is effective today.
Dated June 7, 2012, at San Francisco, California.
MICHAEL R. PEEVEY
President
TIMOTHY ALAN SIMON
MICHEL PETER FLORIO
CATHERINE J.K. SANDOVAL
MARK J. FERRON
Commissioners
Attachment A
Final Competitive Bidding Rules
Financing Rule
Preamble
In Decision (D.) 38614, dated January 15, 1946, the California Public Utilities Commission (Commission) adopted the Competitive Bidding Rule (CBR), which required California public utilities to issue security debt using competitive bids. The Commission's goal in adopting the CBR was to reduce the cost of debt for utilities, and ultimately reduce costs to utility ratepayers.28 From time to time, the Commission has reviewed its policy regarding the CBR based on prevailing circumstances and has subsequently amended the CBR in D.49941 (1954), D.75556 (1969), D.81908 (1973), Resolution No. F-591 (1981), and Resolution No. F-616 (1986). On March 10, 2011, the Commission initiated a rulemaking to reexamine its policy regarding competitive bidding to determine the effectiveness and adequacy of the CBR for issuance of debt and equity securities and to consider the associated impacts on General Order (GO) 24-B. Based on opening and reply comments filed in the proceeding, as well as statements made at the pre-hearing conference, filed pre-workshop statements, and discussions at the January 9, 2012 workshop, there is a consensus amongst parties that competitive bidding is no longer the market standard and that the CBR is outdated and should be replaced with a new rule that reflects current financial market best practices and conditions. In addition, parties present at the workshop agreed that any new rule should promote utility efforts to include the participation of Women-, Minority-, Disabled Veteran-Owned Business Enterprises (WMDVBEs) in financing transactions. Finally, there was general agreement among parties present at the workshop that GO 24-B reporting requirements should also be revised to reflect current financial reporting and cash management standards and practices.
Pursuant to D.________ in R.11-03-007, the Commission adopted a revised Financing Rule which replaces the existing CBR, as well as an updated GO 24. The new Financing Rule 1) reflects current market practices and standards, 2) provides utilities flexibility to take advantage of market opportunities and adjust pricing, in order to obtain low-cost debt financing, 3) allows utilities to take better advantage of market competition, and 4) facilitates utility efforts to provide WMDVBEs with meaningful opportunities to participate in utility financing transactions. The new Financing Rule also reflects advances in information technology. The new GO 24 reporting requirements: 1) extends the time by which utilities must file GO 24 statements with the Commission to coincide with the utilities' SEC disclosure filings; 2) modifies language to reflect current market terms, practices and standards; and 3) modifies language to reflect current utility record maintenance practices.
Utility Long-Term Debt Financing Rule
1. Public utility long-term debt issues shall be conducted in a prudent manner consistent with market standards that encompass competition and transparency, with the goal of achieving the lowest long-term cost of capital for ratepayers.
2. Public utilities shall determine the financing terms of their debt issues with due regard for their financial condition and requirements, and current and anticipated market conditions.
3. Utilities with $25 million or more of annual California operating revenues, requesting financing authority, shall use their best efforts to encourage, assist, and recruit Women-, Minority-, Disabled Veteran-Owned Business Enterprises (WMDVBE)29 in being appointed as lead underwriter, book runner, co-manager, or in other roles in the issuance of debt securities offerings.
a. Utilities shall report on their efforts in their General Order (GO) 156 Annual Reports, including but not limited to:
i. Number of WMDVBE firms that have been appointed as lead underwriter, co-manager, or other roles in debt securities offerings within the reporting period.
1. The position(s) held by the WMDVBE firms.
2. The percentage of each debt issue allocated to each WMDVBE firm.
3. The dollar amount of these debt securities issuances.
b. Appointment of WMDVBE as lead underwriter, book runner, co manager, or other role shall be evaluated on a cost effective basis.
c. Consistent with Section 6 of GO 156, utilities shall retain the authority to use their legitimate business judgment in selecting firms for a particular debt securities offering.
4. Pursuant Public Utilities (Pub. Util). Code § 829(b), debt issues for telephone utilities whose rates are subject to the Uniform Regulatory Framework (URF),30 and whose rates are therefore not subject to rate of return regulation, are exempt from the Financing Rule, and all other applicable provisions of Pub. Util. Code §§ 816-830. Given that such debt issuances are governed by Public Utilities Code, we do not require the affected telephone utilities to provide proof of the applicability of such exemption from the Financing Rule. However, in accordance with GO 156, these utilities are encouraged to make best efforts to engage WMDVBE booking firms.
5. In D. 88-04-062, we authorized an exemption for PacifiCorp from the provisions of the Public Utilities Code relating to stocks and securities transactions and the encumbrance of utility property. Given this authority, we do not require PacifiCorp to provide proof of the applicability of such exemption from the Financing Rule.
6. Debt Enhancement Features shall only be used in connection with debt securities financings, and may include but are not limited to: put options, call options, sinking funds, swaptions, caps, collars, currency swaps, credit enhancements, capital replacement, interest deferral, special-purpose entity transactions, delayed drawdown, treasury lock, treasury options, and interest rate swaps.
a. For each Debt Enhancement Feature requested in a financing application, the utility shall provide a brief description and rationale for the potential use of a debt enhancement or the risk management properties associated with the potential use of a derivative instrument to hedge risk exposures.
b. Debt Enhancement Features are not considered as separate debt for purposes of calculating a financing authorization.
c. Swap and hedging transactions are restricted as follows:
i. Utilities shall separately report any interest income and expense arising from all swaps and hedging transactions in their annual GO 24-C reports to the Commission.
ii. Swap and hedging transactions shall not exceed 20% at any time of a utility's total long-term debt outstanding.
iii. All costs associated with hedging transactions are subject to review in a utility's next regulatory proceeding addressing its cost of capital.
iv. Hedging transactions carrying potential counterparty risk must have counterparties with investment grade credit ratings
v. If a utility elects to terminate a swap or hedging transaction before the original maturity or the swap or hedging partner terminates the agreement, all costs associated with the termination are subject to review in a utility's next regulatory proceeding addressing its cost of capital.
Utilities shall provide the following to Commission Staff within 30 days of receiving any written request: (i) all terms, conditions, and other details of swap and hedge transactions; (ii) rationale(s) for the swap and hedge transactions; (iii) estimated costs for the "alternative" or un-hedged transactions; and (iv) copy of the swap and hedge agreements and associated documentation
Exemptions:
The exemptions listed below will only be granted upon a compelling showing by a utility in an application for financing authority, that the terms of such exemption are applicable to the utility, for the proposed debt issuance:
1. Bond issues of $42 million or less, adjusted each year for the Consumer Price Index (CPI) found on the California Department of Finances' website or its successor, are exempt from the Financing Rule. Therefore, the current baseline of $42 million in 2012 must be increased each year by the most recent CPI.
2. Tax exempt or government debt issues are exempt from the Financing Rule
3. Debt issues, such as the Safe Drinking Water Bond Act loans, Rural Utility Service loans, and pollution control loans, are exempt from the Financing Rule.
4. Debt issues made through an affiliate that provides debt issuance services to all affiliates of the same parent are exempt from the Financing Rule if such debt accounts for less than five percent (5%) of the financing affiliate's annual issuances.
5. For multi-state utilities operating in California, if the operating revenues from California operations represent less than five percent (5%) of the entire utility's total operating revenues for the most current calendar year, the utility is exempt from the Financing Rule.
(End of Attachment A)
Attachment B
General Order 24-C
GENERAL ORDER No. 24-C
Public Utilities Commission of the
State of California
IN THE MATTER OF THE PREPARATION OF REPORTS SHOWING RECEIPTS AND DISBURSEMENTS FROM THE SALE OF STOCKS, BONDS AND OTHER EVIDENCES OF INDEBTEDNESS OF PUBLIC UTILITIES, WHICH HAVE BEEN AUTHORIZED TO BE ISSUED BY THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA, UNDER SECTION 824 OF THE PUBLIC UTILITIES CODE.
I. For the first year after authorization of this General Order (GO), on or before 60 days following each calendar quarter, the information required by Sections A and B in the preceding period, certified by an authorized representative of the corporation issuing stocks, bonds or other evidences of indebtedness, or by the partnership or individual authorized to issue bonds or other evidences of indebtedness shall be filed with the Commission.
II. For the second year after authorization of this GO and for every year thereafter, on or before 60 days following June and December of that year, the information required by Sections A and B in the preceding period, certified by an authorized representative of the corporation issuing stocks, bonds or other evidences of indebtedness, or by the partnership or individual authorized to issue bonds or other evidences of indebtedness shall be filed with the Commission.
III. If a utility has no reportable transactions for the applicable period (quarterly/semi-annually), it may state such as its GO 24 C report for that period.
The Commission Staff may request such information on a monthly basis.
A. RECEIPTS
1. A description of the stock issued during the period detailed above under the authority of the Commission, including:
a. The principal amount of the issuance;
b. The number of shares issued;
d. The par value, if any, of each share;
e. The commissions paid; and
f. The total proceeds received.
2. The total amount of stock issued under the order of the Commission and outstanding at the end of the period detailed above, which shall show:
a. The total number of shares issued; and
c. The total par value, if any, of such shares.
3. A description of the bonds or other evidences of indebtedness, issued during the period detailed above, under the authority of the Commission, including:
a. The principal amount of the issuance;
b. The commissions paid; and
c. The total proceeds received.
4. The total bonds or other evidences of indebtedness issued under the order of the Commission and outstanding at the end of the period detailed above, which shall show the principal amount of such bonds or other evidences of indebtedness issued.
B. DISBURSEMENTS
Each utility authorized to issue stock, bonds or other evidences of indebtedness shall file a report for the period detailed above, showing the purposes for which it expended the proceeds realized from the sale of said stock, bonds or other evidences of indebtedness. The expenditures shall be set forth in such manner as will enable the Commission to ascertain the utility's compliance with Public Utilities Code § 817 and with the related authorizing decision.
C. MAINTENANCE OF RECORDS
Utilities shall maintain records and accounts consistent with current accounting and internal control standards in a manner that demonstrates the appropriate use of funds in compliance with Public Utilities Code § 817 and any related financing authorization. Utilities shall make these records available to Commission Staff upon written request.
D. SPECIFIC REQUIREMENT FOR SEPARATE BANK ACCOUNT
In instances where the Commission specifically designates what the proceeds can be used for, such as for a specific construction project, a separate bank account will make it easier for the Commission to track these funds, preserve a strong audit trail, and the additional record keeping is not burdensome. In addition, the California Department of Water Resources requires utility recipients of Safe Drinking Water State Revolving Fund loans, which are repaid via a surcharge, to maintain separate bank accounts for these funds. Therefore, in instances where the Commission specifically designates what the proceeds can be used for, or in the instances where the loan will be repaid by surcharge, we continue to require those utilities to maintain a separate bank account for recording of the proceeds.
E. INCORPORATION BY REFERENCE
Any of the information required by Sections A, B, or C above may be incorporated by reference to offering documents provided to investors in connection with the relevant securities issuance.
(End of Attachment B)
Attachment C
Glossary of Selected
Financing Terms
Glossary of Selected Terms
1. Call Options: From time to time a utility may retain the right to partially or fully retire a debt security before the scheduled maturity date. This is commonly referred to as "calling" the security. The chief benefit of such a feature is that it permits a utility, should market rates fall, to replace the security with a lower-cost issue, thus producing a positive net benefit to ratepayers.
2. Capital Replacement: A utility may specify that it intends to replace a debt security when redeemed with replacement securities having either similar, or more equity-like, characteristics. Capital replacement refers to an issuer's (utility's) declaration of intent, or in some cases its covenant, to replace a debt security with new securities that receive a similar or better equity rating from a credit rating agency.
3. Caps and Collars: In order to reduce ratepayers' exposure to interest rate risk on variable-rate securities, a utility may negotiate some type of maximum rate, usually called a cap. In that case, even if variable rates increase above the cap (or ceiling) rate, the utility would only pay the ceiling rate. In addition to the ceiling rate, sometimes a counterparty will desire a "floor" rate. In the event that the variable rate falls below the floor rate, a utility would pay the floor rate. The combination of a floor and a ceiling rate is called an interest-rate "collar" because the utility's interest expense is restricted to a band negotiated by the utility and the counterparty.
4. Counterparty: A counterparty is the other party to a financial transaction; for example, when a utility issues (or sells) debt securities, the buyer of the debt securities would be considered the counterparty to that transaction.
5. Credit Enhancements: A utility may obtain credit enhancements for debt securities, such as letters of credit, standby bond purchase agreements, surety bonds or insurance policies, or other credit support arrangements. Such credit enhancements may be included to reduce interest costs or improve other credit terms; and the cost of such credit enhancements would be included in the cost of the authorized debt securities.
6. Currency Swaps: Currency swaps are useful in the management of exchange risk and are used to hedge exposures created by debt securities denominated in a foreign currency. A currency swap is an arrangement between two parties, in which one party agrees to make periodic payments on a debt security in its domestic currency, based on either fixed or floating interest rates, to a counterparty, who in turn makes periodic payments to the first party in a different currency. The payments are based on notional principal amounts that are fixed at the initiation of the swap.
7. Delayed Drawdown: A utility may enter long-term loans or issue debt securities where the full principal amount is not borrowed immediately, but over time in a series of disbursements which drawdown the funding over a period of time.
8. Encumbrance of Accounts Receivables: A utility may issue debt securities secured by a pledge, sale or assignment of its accounts receivable, as opposed to securing a loan through the encumbrance of utility assets.
9. Hedging Strategies: Hedging strategies gives a utility the ability to enter financial markets at times when interest rates or other circumstances appear most favorable.
10. Interest Deferral: A utility may issue subordinated debt securities that permit discretionary interest payment deferral during an extension period. The extension period may specify a period wherein the issuer is not required to take any action. The deferral period would not extend beyond the maturity date of the series of debt securities. A utility may be obligated to pay any such accrued interest at the end of the extension period; however, in certain cases, claims for deferred payments may be waived in part or in whole.
11. Letters of Credit: A letter issued by a financial institution that serves as a guarantee for payments made by a specified entity.
12. Long Hedges: A utility establishes a long hedge by issuing securities today and investing the proceeds in United States Treasury securities (Treasury) of a comparable maturity. If interest rates subsequently decline, the gain in the value of the Treasury portfolio will compensate the utility for the lost opportunity to finance at lower rates. On the other hand, if rates rise, the interest expense savings realized by issuing immediately will be offset by the decline in value of the Treasury portfolio. Thus, the Treasury component of the utility's effective borrowing cost will be determined by the Treasury rates prevailing when it chooses to unwind the hedge; the credit spread is determined at the time of issuance.
13. Put Options: Grants the owner of a debt security the right to require the borrower to repurchase all or a portion of the securities issued by that borrower. Owners of a debt security would be willing to accept a lower interest rate in exchange for the protection against rising interest rates offered by a put option.
14. Redemption Provisions: An issue of debt securities may contain a provision allowing it to be redeemed or repaid prior to maturity. An early redemption provision may allow the debt securities to be redeemed or repaid at any time, or only after a certain period. In either case, the debt securities would be redeemable at par, at a premium over par, or at a stated price.
15. Sinking Funds: The cost of debt securities may be reduced by the use of a sinking fund. A sinking fund normally operates in one of two ways: (1) a utility may set aside a sum of money periodically so that, at the maturity date of the bond issue, there is a pool of cash available to redeem the issue, or (2) a utility may periodically redeem a specified portion of the bond issue.
16. Special-Purpose Entity Transactions: A special-purpose entity is a regulated affiliate or subsidiary of a utility that issues securities and commits the proceeds from the issuance of such to a utility. These securities may be guaranteed by a utility.
17. Standby Bond Purchase Agreements: An agreement between the issuer of a debt security (utility) and its underwriter, in which the underwriter agrees to purchase any unsold new debt security that it has not been able to place with investors. By this agreement, the issuer of a security transfers the risk of any unsold new debt securities to the underwriter. To account for this transfer of risk, the underwriter normally charges a fee for participating in the Standby Bond Purchase Agreement
18. Surety Bonds: A bond issued by an entity on behalf of an issuer of debt securities (utility), guarantees that the utility will discharge its obligation pursuant to the debt security to the investor that has purchased the debt security. In the event that the obligations are not met, the investor holding the utility's debt security will recover its losses from the entity that issued the Surety Bond.
19. Swaptions: Option of the borrower to enter into a swap.
20. Tax Exemption: The cost of debt securities may be reduced by issuing them through a governmental body, political subdivision, or other conduit issuer, thereby obtaining tax-exempt status for the securities. A utility would normally use this tax-exempt option whenever its facilities, such as pollution control, sanitary, solid waste disposal, or other eligible facilities qualify for tax-exempt financing under federal law and it can obtain the necessary State approvals for the issuance of tax-exempt debt.
21. Treasury Lock: This feature locks in the Treasury component of a utility's borrowing cost. A utility can delay securities issuance and capture the current Treasury yield by selling short Treasury securities (i.e., selling Treasury securities that it does not own) of a maturity comparable to that of the contemplated debt security. If interest rates rise, the utility will cover its short Treasury position at a profit, which will be offset by the higher interest cost of the newly issued securities. If interest rates decline, the utility will cover its short Treasury position at a loss, but this will be offset by the lower cost on the newly-issued securities.
22. Various Types of Interest Rate Swaps: An interest rate swap is a contractual agreement between two parties to exchange a series of payments for a stated period. In a typical interest rate swap, one party issues fixed-rate debt while another issues floating rate debt, and the two swap interest payment obligations are based on a notional principal amount (the principal itself is not exchanged). Swaps are generally used to reduce either fixed-rate or floating-rate costs, or to convert fixed-rate borrowing to floating.
a. Fixed Rate Payer Swap: A forward-starting interest rate swap allows a utility to delay a securities issuance and capture current yields. As the fixed-rate payer in an interest rate swap, the utility hedges its borrowing cost: if interest rates rise, unwinding the swap at a profit offsets higher borrowing costs. Conversely, if rates decline, lower borrowing costs offset the loss caused by unwinding the swap.
b. Floating-Rate Payer Swap: A forward-starting interest rate swap allows a utility to issue securities immediately and benefit from a subsequent fall in interest rates. As the floating-rate payer in an interest rate swap, a utility hedges its borrowing cost: if interest rates decline, unwinding the swap at a profit will compensate a utility for the lost opportunity to finance at lower rates. Conversely, if rates rise, the interest expense savings realized by issuing immediately will be offset by the loss caused by unwinding the swap.
23. Various Types of Treasury Options:
a. Treasury Put Options: The purchase of Treasury put options is an alternative to the Treasury lock. In this transaction, a utility would purchase put options entitling it to sell Treasury securities of a maturity comparable to that of the contemplated security issuance at a specified yield (the "strike yield") at any time before the option's expiration date. If interest rates rise above the put's strike yield, the utility will exercise the put and the resulting profit offsets the increased cost of borrowing. If interest rates decline, the utility will let the option expire as worthless and issue securities at prevailing lower rates.
b. Treasury Call Options: The purchase of Treasury call options is an alternative to the long hedge. With this approach, the utility would issue securities today and purchase call options on Treasury securities of a comparable maturity. Such a call option allows the holder to purchase Treasury securities at a specified yield (the "strike yield") anytime before the expiration date. If rates decline below the strike yield, exercising the option produces a gain used to offset the interest cost of the securities issued today. If interest rates rise above the strike yield, the option will expire unexercised. In this case, the utility benefits from the lower borrowing rate.
24. Warrants: The cost of debt may be reduced by attaching warrants to such securities. Each warrant would entitle the holder to purchase an additional bond, note or debenture or a share of capital stock. The debt security to be issued upon exercise of a debt warrant would bear interest at a pre-established rate and would mature at a pre-established time.
(End of Attachment C)
28 In support of the Rule, the Commission cited In Re Competitive Bidding in the Sale of Securities, 257 I.C.C. 129, an Interstate Commerce Commission (ICC) decision, issued on May 8, 1944, which required railroad companies to competitively bid bonds. However, in 1985, the ICC repealed the competitive bidding requirements promulgated in In Re Competitive Bidding in Sale of Securities, finding that "the need for our oversight of railroad securities has decreased as a result of changed circumstances and recent Congressional action." Exemption of Railroads from Securities Regulation under 49 U.S.C 11301, 1985 ICC LEXIS 492, at *2 (April 1, 1985). The Commission also cited to Rule U-50 of the Securities and Exchange Commission (SEC) Public Utility Holding Company Act of 1935, adopted April 7, 1941, which required registered holding companies and their subsidiaries to use competitive bidding in the issuance or sale of securities. However, the SEC, in 1994, rescinded Rule U-50 based on its opinion "that the rule is no longer necessary in view of the extensive reporting requirements imposed by the Public Utility Holding Company Act and other federal securities laws." Public Utility Holding Company Act Rules, SEC Release No. 35-26031, 1994 SEC LEXIS 1176 at *20 (April 20, 1994).
29 Pursuant to General Order 156 and Decision 11-05-019, definitions of Women, Minority, and Disabled Veterans Owned Business Enterprises are as follows:
1.3.2. "Women-owned business" means (1) a business enterprise (a) that is at least 51% owned by a woman or women or (b) if a publicly owned business, at least 51% of the stock of which is owned by one or more women; and (2) whose management and daily business operations are controlled by one or more of those individuals.
1.3.3. "Minority-owned business" means (1) a business enterprise (a) that is at least 51% owned by a minority individual or group(s) or (b) if a publicly owned business, at least 51 % of the stock of which is owned by one or more minority groups, and (2) whose management and daily business operations are controlled by one or more of those individuals. The contracting utility shall presume that minority includes, but is not limited to, Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and other groups, as defined herein.
1.3.4. "WMBE" means a women-owned or minority-owned business enterprise; under these rules, the women and/or minorities owning such an enterprise must be either U.S. citizens or legal aliens with permanent residence status in the United States.
1.3.5. Black Americans - persons having origins in any black racial groups of Africa.
1.3.6. Hispanic Americans - all persons of Mexican, Puerto Rican, Cuban, South or Central American, Caribbean, and other Spanish culture or origin.
1.3.7. Native Americans - persons having origin in any of the original peoples of North America or the Hawaiian Islands, in particular, American Indians, Eskimos, Aleuts, and Native Hawaiians.
1.3.8. Asian Pacific Americans - persons having origins in Asia or the Indian subcontinent, including, but not limited to, persons from Japan, China, the Philippines, Vietnam, Korea, Samoa, Guam, the U.S. Trust Territories of the Pacific, Northern Marianas, Laos, Cambodia, Taiwan, India, Pakistan, and Bangladesh.
1.3.9. Other groups, or individuals, found to be disadvantaged by the Small Business Administration pursuant to Section 8(a) of Small Business Act as amended (15 U.S.C. 637 (a)), or the Secretary of Commerce pursuant to Section 5 of Executive Order 11625.
1.3.10. Disabled Veteran - a veteran of the military, naval or air service of the United States with a service-connected disability who is a resident of the State of California.
30 See D.06-08-030.
