3. PG&E's Petition to Modify D.04-10-037

PG&E requests four modifications to D.04-10-037. Each of the requested modifications is addressed below.

i. Compliance with the Authorized Capital Structure

Decision 04-10-037 authorized PG&E to issue $1.538 billion of long-term debt and preferred stock, in any combination, as long as the selected combination results in a capital structure that complies, on average, with the Commission-adopted capital structure during the period the adopted capital structure is in effect.2 PG&E requests that this condition be rescinded.

PG&E asserts that conditioning its authority to issue debt and equity on compliance with the Commission-adopted capital structure creates the possibility that securities issued in compliance with D.04-10-037 might subsequently fall out of compliance due to unexpected events.3 As a result, PG&E may not be able to obtain the required legal opinions regarding "due authorization" and "validity" that are necessary for securities to be sold to the public.

PG&E also observes that under § 825, utility debt and equity may be deemed void if it does not comply with a Commission order.4 PG&E represents that it will have to disclose to potential investors the risk that debt and equity issued pursuant to D.04-10-037 might fall out of compliance and be deemed void. PG&E believes this risk will cause investors to demand a higher return, thereby resulting in higher costs for PG&E and its ratepayers.

We agree with PG&E that investors might interpret the specific financing order condition in D.04-10-037 that PG&E remain in compliance with its authorized capital structure as requiring that long-term debt and preferred stock issued pursuant to the Decision be deemed void if PG&E fails to maintain its capital structure in accordance with Commission requirements. The possibility that long-term debt and preferred stock might be deemed void could increase investors' perception of risk, thereby resulting in higher cost of capital for PG&E and its ratepayers with no offsetting benefit. To foreclose this possibility, we will modify D.04-10-037 by removing the condition so that it is clear that long-term debt and preferred stock issued pursuant to the Decision will not be deemed void if PG&E fails to maintain its capital structure in accordance with Commission requirements.5

ii. Authorized Uses of Long-Term Debt and Preferred Stock

Decision 04-10-037 authorizes PG&E to issue $1.538 billion of long-term debt and preferred stock for three purposes: finance capital expenditures, retire bridge loans, and redeem preferred stock. PG&E requests that D.04-10-037 be modified to allow PG&E to use the long-term debt and preferred stock authorized by the Decision for every purpose listed in § 817.6

PG&E argues that its request is consistent with Commission precedent for PG&E and other utilities. PG&E contends that if the Commission intends to implement a new and more restrictive approach, it should do so in a rulemaking proceeding and apply it to all utilities.

PG&E also claims that limiting its use of long-term debt and preferred stock may have unintended consequences. For example, PG&E might miss an opportunity to refinance existing debt if PG&E must apply for authority to use the $1.538 billion for other purposes. PG&E also notes that it often uses short-term debt to temporarily fund some of its capital expenditures, and then replaces the short-term debt with long-term financing. However, the restrictive purposes for which long-term debt and preferred stock may be issued under D.04-10-037 would not allow PG&E to do this.

We grant PG&E's request to modify D.04-10-037 to allow PG&E to use the long-term debt and preferred stock authorized by the Decision for every purpose listed in § 817. The adopted modification is consistent with Commission precedent, and we see no reason to depart from precedent here.

iii. Authority to Encumber Accounts Receivable

PG&E has a $650 million accounts receivable (A/R) facility that provides for the continuous sale of PG&E's accounts receivable and functions as a line of credit. The A/R facility expires in 2007. Decision 04-10-037 denied PG&E's request for general authority to issue debt secured by its accounts receivable and ordered PG&E not to renew its A/R facility when it expires in 2007.7

In its petition, PG&E asks the Commission to modify D.04-10-037 to allow PG&E to (1) issue debt secured by its accounts receivable, and (2) renew its A/R facility when it expires in 2007. PG&E represents that its A/R facility is currently PG&E's least expensive short-term debt facility. PG&E also argues that because other utilities have been authorized to use accounts receivable to secure debt, it is unfair to withhold the same authority from PG&E.

We grant PG&E's request to modify D.04-10-037 to allow PG&E to (1) issue debt secured by its accounts receivable, and (2) renew its A/R facility when it expires in 2007. We do so with the expectation that the modification will enable PG&E to issue debt at the lowest possible cost for its ratepayers. We also agree with PG&E that because other utilities have been authorized to use their accounts receivable to secure debt, PG&E should be granted the same authority.

iv. Modification of Ordering Paragraph 6

Finding of Fact (FOF) 14 and Conclusion of Law (COL) 17 of D.04-10-037 indicate that PG&E should be granted authority under § 851 to issue First Mortgage Bonds (FMBs) as both primary obligations and as security for other debt. However, Ordering Paragraph (OP) 6 only provides authority to issue FMBs as security for other debt. PG&E requests that OP 6 be modified to provide PG&E with authority to issue FMBs as primary obligations.

It was our intent in D.04-10-037 that PG&E should be authorized to issue FMBs as primary obligations and as security for other debt. Our intent is properly reflected in FOF 14 and COL 17. However, OP 6 only provides authority to issue FMBs as security for other debt; OP 6 inadvertently omits authority to issue FMBs as primary obligations. Therefore, we will modify OP 6 to provide PG&E with authority to issue FMBs as primary obligations.

2 D.04-10-037, mimeo., p. 16 and OP 4.

3 For example, the Financial Accounting Standards Board could adopt a new accounting standard that alters PG&E's capital structure.

4 Section 825 states, in relevant part, as follows: "All [stock and debt]...of a public utility, issued without an order of the commission...or not conforming...to any of the provisions which it is required by the order of authorization to contain, is void."

5 Our decision to hold investors harmless is consistent with § 825 which states, in relevant part, as follows: "No failure in any other respect to comply with the terms or conditions of the order of authorization of the commission shall render void any [long-term debt or preferred stock]...except as to a corporation or person taking it otherwise than in good faith and for value and without actual notice."

6 Under § 817, the Commission may authorize a public utility to issue long-term debt and preferred stock for the following purposes: (a) acquire property; (b) construct, complete, extend, or improve its facilities; (c) improve or maintain its service; (d) discharge or lawfully refund its obligations; (e) finance the acquisition and installation of electrical and plumbing appliances and agricultural equipment which are sold by other than a public utility, for use within the service area of the public utility; (f) reorganize or readjust its debt or capitalization upon a merger, consolidation, or other reorganization; (g) retire or replace outstanding debt or equity; and (h) reimburse previous expenditures for the aforesaid purposes, except maintenance of service and replacements, where the money for such expenditures was not secured by or obtained from the issuance of stocks or debt.

7 D.04-10-037, mimeo., pp. 20 - 21.

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