II. FACTS/BACKGROUND

On April 4, 2001, the Commission initiated an investigation into the three major California investor-owned energy utilities and their holding companies. On January 11, 2002, the Commission issued interim opinion D.02-01-039, which provided an initial interpretation of a provision that requires that the utilities be given first priority in the holding company systems. The "first priority" condition appeared originally in SDG&E's initial holding company proceeding that commenced in 1985. ¹ The first priority condition, as it appeared in SDG&E's holding company decision, is the precursor of other such conditions in subsequent holding company decisions. In SDG&E's case, the first priority condition provides as follows:

The capital requirements of SDG&E, as determined to be necessary to meet its obligations to serve, shall be given first priority by the Board of Directors of Parent and SDG&E.²

SDG&E decided not to form its holding company system with Sempra at that time, but later reapplied for holding company authorization. It was granted in D.95-05-021, 59 CPUC2d 697 (May 10, 1995)(SDG&E Authorization 1). A second authorization was granted in D.95-12-018, 62 CPUC2d 626 (Dec. 6, 1995)(Authorization 2). On March 26, 1998, the Commission granted ENOVA Corp., SDG&E's former holding company, authority to merge with Pacific Enterprises to form Sempra in D.98-03-073, 184 P.U.R.4^th 417.

PG&E's first priority condition differs slightly from the others. It first appeared in PG&E's holding company decision in D.96-11-017, 69 CPUC2d 167, 201 (Nov. 6, 1996)(PG&E Authorization 1) as follows: "The capital requirements of PG&E, as determined to be necessary to meet its obligations to serve, shall be given first priority by the Board of Directors of PG&E's parent holding company and PG&E." In the

second authorization, PG&E's first priority condition provides as follows:

The capital requirements of PG&E, as determined to be necessary and prudent to meet the obligation to serve or to operate the utility in a prudent and efficient manner, shall be given first priority by PG&E Corporation's Board of Directors.³

SCE was granted holding company authorization in D.88-01-063, 27 CPUC2d 347 (Jan. 28, 1988). Its first priority condition is as follows:

The capital requirements of the utility, as determined to be necessary to meet its obligation to serve, shall be given first priority by the Board of Directors of SCE's parent holding company and SCE.⁴

By Assigned Commissioner's Ruling (ACR) of April 30, 2001, the parties were permitted to file opening and reply briefs on the legal issues surrounding the first priority condition, including the issue of under what circumstances, if any, does the first priority condition require a holding company to infuse money into its utility subsidiary. Opening briefs were filed on May 17, 2001, and reply briefs on May 23, 2001.

On December 26, 2001, the Draft Decision was issued. Comments were due on January 4, 2002. Reply comments were not permitted. Following the issuance of the Interim Opinion, D.02-01-039, on January 11, 2002, on February 11, 2002, the Applicants submitted rehearing applications. PG&E and SCE and their respective holding companies filed separate applications, while Sempra and SDG&E (Sempra/SDG&E) filed a joint application. Applicants opposed the Interim Opinion on numerous grounds, including the following: 1) the decision's expansive interpretation of the first priority condition is contrary to its plain meaning and purpose; 2) definition of "capital" would conflict with ratepayer indifference standard; 3) "capital requirements" refers to equity investment; 4) the decision violates the ratepayer indifference standard by guaranteeing cash infusions; 5) the interpretation of the condition calling for an infusion of capital would effect an unconstitutional taking in violation of Cal. Const. Art I, §19 and the Fifth Amendment of the U.S. Constitution; 6) due process is violated; 7) there is no majority decision as to the meaning of the first priority condition; 8) the expansive reading of the first priority condition violates PU Code § 451; 9) the decision is a revision of the first priority condition in violation of PU Code § 1708; and 10) the decision violates California Corporations Code § 300. PG&E reserved its rights to argue its federal claims in the appropriate federal forum. In addition, PG&E Corp. & PG&E filed requests for official notice of various documents.

On February 26, 2002, The Utility Reform Network (TURN) filed its response to the rehearing applications. TURN made numerous arguments, including the following: the first priority condition is a requirement, not a suggestion or statement of discretionary policy; the condition does not violate the California Corporations Code, as Sempra alleged; Commissioner Brown's concurrence does not void the core holding of the decision; the principles of compensatory ratemaking do not guarantee full recovery, and a full return, on all shareholder dollars; and the definition of capital is necessarily broad.