IV. Parties' Responses to the Petition

The ALJ asked parties to address the following in their responses to the Petition to Modify D.02-11-030:

1. The merits of granting the regulatory relief sought by PG&E to enter into the interest rate hedges as described in the Petition;

2. Modifications to the described interest rate hedges, including a thorough justification of any modifications;

3. The merits of the ratemaking treatment of the costs of interest rate hedges as described in the Petition;

4. Modifications to the described ratemaking treatment of the costs of interest rate hedges, including a thorough justification of any modifications;

5. Support or opposition for either the waiver or reduction, or both, of time for public comment on the draft decision under Rule 77.7(g); and

6. Any other comments relevant to the specific relief sought by the Petitioner.

A. Comments in Support

1. The Utility Reform Network

The Utility Reform Network (TURN) submitted a timely response to the Petition. TURN conditionally supported the PG&E Petition, if it was modified by the Commission in the following manner:

· PG&E authorized to execute forward interest rate hedges in an amount not to exceed $4.5 billion, with no more than $750 million executed on any single day.

· PG&E to obtain prior approval from the Energy Division on the notional amount, tenor and forward term of each hedge.

· PG&E to obtain at least two bids from qualified parties for each contract.

With respect to these conditions, as discussed elsewhere in this decision, we require that PG&E act in conjunction with the existing Financing Team, which in effect includes prior approval of Energy Division as a part of the Financing Team. TURN's discussion highlighted both the potential benefits and risks associated with interest rate hedges. TURN pointed out that hedges can reduce volatility and lock-in rates. The concerns led to the suggested restrictions. TURN did not specifically explain its proposed $4.5 billion cap or the daily transaction limit of $750 million. They are implicit in TURN's concerns that large transactions can in fact influence market prices. While these are valid considerations, we will defer these detailed management decisions to PG&E and the Financing Team.

TURN did not comment on the petition's ratemaking proposal.

TURN did agree to waive the public review and comment period on a draft decision.

2. Office of Ratepayer Advocates

The Office of Ratepayer Advocates (ORA) filed a timely response and supported the petition with suggested modifications.

ORA proposed a Financial Hedging Review Group (Review Group) and proposed the Energy Division, ORA, TURN and UBS Warburg, LLC¹⁴ for membership. The Review Group as proposed by ORA would function much like the procurement review groups established in the electric procurement Rulemaking (R.) 01-10-024. This would be a larger and possibly slower process than we adopt herein where we require PG&E to work concurrently with a small Commission bankruptcy Financing Team. We decline to expand the participation in the decision-making process. ORA also proposed that PG&E should submit a hedging plan in an advice letter to the Commission. Our advice letter process is not always speedy, and we did not accept PG&E's four-day after-the-fact filing proposal. By including the General Counsel and Director of Energy Division directly in the negotiation and decision-making process, submitting a formal plan for approval is not necessary.

ORA proposed a wider array of hedging options than the instruments requested by PG&E. Mindful that the Proposed SA only contemplates the hedges requested by PG&E and that this decision already extends authority to hedge for any plan approved by the Bankruptcy Court, we decline to consider these other instruments at this time.

ORA supported PG&E's proposed ratemaking treatment. As discussed elsewhere, we will not intrude on the scope of the post-bankruptcy true-up ordered in D.02-11-027 in A.02-05-022, or the bankruptcy settlement review in I.02-04-026.

ORA did not agree to waive the reduced 10-day public review and comment period on a draft decision.

B. Comments in Opposition

The City and County of San Francisco (San Francisco) filed a response opposing the Petition and offered five comments to support its opposition.

First, San Francisco objected that PG&E did not disclose the anticipated cost of the interest rate hedges. We are concerned that this asks for the impossible; until PG&E and the Financing Team negotiate with counter-parties there is no certainty that there will be any viable offers. If PG&E provided a budget for parties to review and approve, as proposed by San Francisco, then lenders are very unlikely to offer significantly lower prices than that budget.

San Francisco objected that the duration of the hedges is unknown and that they may be rolled over (extended) at further cost. We cannot withhold authority because we cannot foresee the future, we must rely upon the expert judgment of the decision making process we adopt to allow PG&E and the Commission's Financing Team the necessary discretion to act.

In D.02-11-030, we allowed an exemption to competitive bidding rules and we extend that exemption to the hedges. San Francisco's third objection to the exemption states its belief that its experience in issuing municipal bonds shows competitive bids are cheaper. But hedges are not long-term municipal bonds and we are not persuaded by San Francisco in the absence of hard data to support its belief. San Francisco reads too much into the Proposed SA at Section 13.d., where the PG&E advisor, Lehman Brothers, and the Commission's advisor, UBS Warburg LLC, are designated to arrange all financing. San Francisco is concerned that Lehman Brothers and UBS Warburg LLC would "be the exclusive hedging providers of all financings"¹⁵ and that this would pre-approve a portion of the Proposed SA, which is the subject of I.02-04-026. We disagree; D.02-11-030 already vested authority in the Financing Team and PG&E to negotiate and issue certain financial instruments related to the bankruptcy. This decision only extends that authority to other potentially useful instruments and allows these new hedging instruments to apply to the three pending plans; it does not prejudge the Commission's consideration of the Proposed SA in I.02-04-026.

San Francisco's fourth objection was that PG&E's shareholders would benefit from a lower cost financing for the bankruptcy. This position reflects a flawed understanding of the ratemaking process. Under any of the three pending plans of reorganization, ratepayers will only pay the reasonable costs of all long-term debt financing (with or without the use of hedges) and a reasonable return on the equity portion of PG&E's new capital structure. No matter what the debt costs are, with or without hedges, shareholders will only have an opportunity to earn the authorized equity return.

The fifth comment from San Francisco is that this hedging authority should be limited to only the Proposed SA. This restriction would perversely require that should either the company's POR or the Amended Plan prevail in Bankruptcy Court instead of the Proposed SA, they would not have the benefit of hedges to mitigate interest costs. San Francisco does not say who it believes would bear the costs of hedges for the Proposed SA should one of the alternates emerge as the final outcome. We decline to restrict the scope of the hedges to one plan.

C. Motion for Leave to File Reply Comments

On August 14, 2003, PG&E filed a Motion for Leave to File Reply Comments. That motion is denied. When PG&E filed its Petition, it made a compelling argument for expediting the review process and shortening time for public review and comment. ALJ Ruling on July 30, 2003 adopted the scope and schedule without replies comments. PG&E had not sought a reply in its urgent petition and we find no need of a reply at this time.