II. Background
The Commission opened Order Instituting Investigation (I.) 02-07-015 for the purposes of authorizing and directing PG&E to issue such preferred stock and long-term debt instruments as deemed appropriate to finance only the Commission's proposed Plan of Reorganization (POR). On November 7, 2002, the Commission granted conditional authority for PG&E in D.02-11-030 to issue up to $9.5 billion of additional preferred stock and long-term debt,1 only to implement the California Public Utilities Commission's and the Official Committee of Unsecured Creditors' First Amended Plan of Reorganization proposed by the Commission and the Official Committee of Unsecured Creditors (Amended Plan) as amended, modified or supplemented from time to time.
On July 25, 2003, PG&E filed a Petition for Modification of D.02-11-030. In its Petition, PG&E requests that the Commission modify the decision as soon as possible to authorize PG&E to enter into forward rate agreements, options, and floors, as well as the previously authorized swaps, caps and collars (collectively, the "interest rate hedges") for debt issued to implement any Bankruptcy Court2 approved plan of reorganization, immediately upon issuance by the Commission of its decision on this petition.
PG&E pointed out that three proposed plans of reorganization are pending in PG&E's Chapter 11 case: PG&E's plan of reorganization, the Commission's Amended Plan, and the proposed settlement agreement between the Public Utilities Commission and PG&E (the "Proposed SA").3
A. Shortened Time on Comments and Public Review
PG&E asked under Rule 47(f) that the Commission reduce the time for interested parties to respond to the motion from 30 days to 10 days, citing the uncertainty of the financial market's current low interest rates remaining available when the time comes to finance whatever POR is authorized by the Bankruptcy Court. PG&E also asked that the 30-day public review and comment period required by Pub. Util. Code § 311(g)(2) and Rule 77.7(g) be waived or reduced to 10 days. Because we could not be certain how long existing market interest rates would remain available to finance a POR as economically as possible, the assigned Administrative Law Judge (Judge) on July 29, 2003 reduced the time to respond to the Petition to August 8, 2003, and inquired whether the public review and comment period should be reduced to 10 days. The ruling was also served on parties to I.02-04-026,4 the Commission's investigation into the ratemaking implications for Pacific Gas and Electric Company (PG&E) that will result from the Bankruptcy Court's confirmation of a Plan of Reorganization. Any party to I.02-04-026 who filed responses to the Petition will be added to the I.02-07-015 service list.
B. Overview and Discussion of PG&E's Request
PG&E states in its petition that it will be required to issue significant amounts of debt as part of its implementation financing under any of the plans of reorganization that have been submitted to the Bankruptcy Court. The aggregate of fixed rate long-term debt levels proposed in each of the three plans ranges from approximately $7.4 billion to $8.2 billion, because PG&E will be refinancing almost all of its debt and creditor obligations. PG&E pleads that obtaining low interest rates for this massive amount of debt is highly desirable for the efficacy of any confirmed plan of reorganization, for customers and PG&E. Locking in the benefits of the current low interest market could provide long-lasting benefits to PG&E's customers.
Consistent with our own findings in cost of capital proceedings,5 the interest rate on PG&E's long-term debt issuances will likely be determined in the market-place by adding together the yield on a comparable maturity U.S. Treasury note or bond, which reflects the time-value of money (risk free rate), and a credit-spread, which reflects a premium for the company's credit risk. In this case, that credit risk will be affected no doubt by the outcome of the bankruptcy proceeding and an ongoing stable regulatory environment pledged by this Commission.6 We expect to revisit PG&E's cost of capital upon its emergence from Bankruptcy.7
1 Long-term debt is any debt that has a maturity of 12 months or more when issued. 2 United States Bankruptcy Court for the Northern District of California (Case No. 01-30923 DM.) 3 The Proposed SA is currently the subject of I.02-04-026 discussed further below. 4 Order Instituting Investigation into the ratemaking implications for Pacific Gas and Electric Company (PG&E) pursuant to the Commission's Alternative Plan for Reorganization under Chapter 11 of the Bankruptcy Code for PG&E, in the United States Bankruptcy Court, Northern District of California, San Francisco Division, In re Pacific Gas and Electric Company, Case No. 01-30923 DM. Investigation 02-04-026 (Filed April 22, 2002). 5 The last two cost of capital decisions for PG&E were D.00-06-040 dated June 8, 2000 and D.02-11-027 dated November 7, 2002. In both proceedings, the Commission relied on DRI interest rate forecasts to adopt a reasonable estimate of debt costs for PG&E. (See D.02-11-027, mimeo. p. 14.)6 See for example the three energy agencies' Energy Action Plan. The goal of the Energy Action Plan is to: "Ensure that adequate, reliable, and reasonably-priced electrical power and natural gas supplies, including prudent reserves, are achieved and provided through policies, strategies, and actions that are cost-effective and environmentally sound for California's consumers and taxpayers." (Adopted by the Commission on May 8, by the California Energy Commission on April 30, 2003, and the California Power Authority on April 18, 2003. (mimeo., p. 2, http://www.cpuc.ca.gov/word_pdf/REPORT/26305.doc).)
7 "It is appropriate and necessary to retain PG&E's currently authorized capital structure and to keep its application open to true up that capital structure and associated costs with changes resulting from it implementing the financing contemplated by the Chapter 11 plan approved by the Bankruptcy Court." Decision 02-11-027, dated November 7, 2002. (Mimeo., p. 10.)
