II. Background

In the 1980's and 1990's, respondent utilities - Pacific Gas and Electric Company (PG&E), Southern California Edison Company (Edison), and San Diego Gas & Electric Company (SDG&E) - sought the Commission's permission to change their corporate structure and become part of a holding company system. The Commission has issued the following decisions approving the formation of PG&E Corporation, Edison International (EIX), Enova Corporation, and Sempra Energy as holding companies:

PG&E- D.96-11-017, 69 CPUC2d 167 (Nov. 6, 1996) (PG&E Authorization I); D.99-04-068, 194 P.U.R.4^th 1 (April 22, 1999) (PG&E Authorization II);

SDG&E- D.95-05-021, 59 CPUC2d 697 (May 10, 1995) (SDG&E Authorization I); D.95-12-018, 62 CPUC2d 626 (Dec. 6, 1995) (SDG&E Authorization II); and D.98-03-073, 184 P.U.R.4^th 417 (March 26, 1998) (Sempra Merger Authorization); and

Edison- D.88-01-063, 27 CPUC2d 347 (Jan. 28, 1988) (Edison Authorization).

Because of the potential for abuse arising from the holding company structure,² the Commission's authorizations for the formation of respondent holding companies depended on respondents' compliance with a set of carefully considered conditions. The utilities and/or parent companies were required to pass, and file with this Commission, board resolutions agreeing to the conditions as a prerequisite to the Commission's permission to form the holding company structure.³ The parties executed these agreements as required.

Among the conditions we imposed, of particular relevance to this proceeding are the following:

- The holding company must give "first priority" to the capital needs of its utility subsidiary to meet its obligation to serve;⁴

- The utility must maintain a dividend policy "as though it were a comparable stand-alone utility company."⁵

The SDG&E and PG&E decisions also give the Commission authority to conduct comprehensive audits of the entire holding company system at shareholder expense to verify compliance with the conditions imposed by the decisions, as well as other rules and regulations. Similarly, the Commission has general authority to audit Edison's holding company system under Sections 314 and 797 of the Public Utilities Code. This proceeding does not take the place of the comprehensive audits referred to above, and the Commission anticipates initiating such audits during the timeframe set out in the decisions.

² See generally, section 1 of the Public Utility Holding Company Act (PUHCA), 15 U.S.C. § 79a (detailing potential abuses); SDG&E Authorization II, D.95-12-018, 62 CPUC2d at 634. The three respondent holding companies presently are exempt under section 3(a)(1), 15 U.S.C. § 79c(a)(1), from most of PUHCA's provisions. ³ See Edison Authorization, 27 CPUC2d at 376, Ordering Paragraph 2; SDG&E Authorization II, 62 CPUC2d at 651-652, Ordering Paragraph 14; PG&E Authorization I, 69 CPUC2d at 202, Ordering Paragraph 25; see also Re Pacific Enterprises, 184 P.U.R.4th at 498, Ordering Paragraph 4. ⁴ PG&E: "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." PG&E Authorization II, 194 P.U.R.4^th at 45, Ordering paragraph 8, 1999 Cal. PUC LEXIS 242, at 151. See also PG&E Authorization I, 69 CPUC2d at 201, Ordering paragraph 17.

Edison: "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 Edison's parent holding company and Edison." Edison Authorization, 27 CPUC2d at 376, Ordering paragraph 12.

SDG&E: "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." SDG&E Authorization 2, Ordering paragraph 6, 62 CPUC2d at 651; see also Sempra Merger Authorization, Ordering paragraph 2(b) & Attachment B(IV)(5), 184 P.U.R.4^th at 498, 502.

⁵ See PG&E Authorization I, Ordering paragraph 15; 69 CPUC2d at 201; Edison Authorization, Ordering paragraph 10, 27 CPUC2d at 376; SDG&E Authorization II, Ordering paragraph 5, 62 CPUC2d at 651; see also Sempra Merger Authorization, Ordering paragraph 2(b) & Attachment B(IV)(4), 184 P.U.R.4^th at 498, 502.