IV. Exemption from the Competitive Bidding Rule

A. Proposal Seeking Exemption

GSWC requests an exemption from the Commission's Competitive Bidding Rule with respect to issues of any and all of the New Securities. Rules adopted in D.38614, as amended in D.49941, D.75556, and D.81908, and Commission Resolution (Res.) F-616 generally require California public utilities to obtain competitive bids for the purchase of their debt securities in order to advance the method that produces the lowest cost to the public utility.

Exhibit A of Res. F-616 dated October 1, 1986, however, exempted certain types of debt instruments from competitive bidding, which stated:

"Securities privately placed with specific lenders and bank term loans obviously must be negotiated. Competitive bidding is not presently available in European or Japanese markets. Certain tax-exempt pollution control bonds have terms that are specifically negotiated. Variable interest rate debt is normally completed on a negotiated basis. It is reasonable that these types of debt instruments should be exempt from the Competitive Bidding Rule."

In Res. F-616, the Commission also exempted from the resolution all bond issues of $20 million or less in light of findings that it was not financially prudent to subject issues below this threshold to the Competitive Bidding Rule because of the difficulty of generating sufficient interest among investment bankers to form bidding syndicates for such small amounts.

In addition, in D.03-06-011, the Commission stated that it had previously exempted from the Competitive Bidding Rule issues for "overseas indebtedness, foreign currency denominated securities, medium-term notes, commercial paper, preferred securities, tax exempt securities and for obtaining loans."

Based on these Commission precedents, GSWC requests to be exempted from the Competitive Bidding Rule with respect to debt issues for which competitive bidding is not viable or available, which include, without limitation, variable interest rate debt, medium-term notes, tax exempt securities, and privately placed debt. GSWC requests further exemptions from the Competitive Bidding Rule for its remaining New Debt Securities, including, without limitation, bonds, debentures and direct loans.

GSWC states that as a relatively small and infrequent participant in the capital and debt markets, its debt offerings require substantial marketing efforts to potential investors. If a competitive bidding process were utilized, GSWC explains, bidding underwriters would be unable to obtain adequate market intelligence on GSWC. As a result, underwriters would be forced to bid up their price for the debt securities above levels that would be available through a negotiated offering. Thus, GSWC seeks exemption from the competitive bidding rules so that it can obtain more cost-effective financing through negotiated offerings.

B. Discussion

GSWC's request for exemption is within the purview of the modified and prevailing conditions for enforcement and exemptions defined in Res. F-616. In previous decisions, (e.g., D.03-06-011, D.98-02-104, D.00-10-063 and D.88-07-069), we granted exemptions from the Competitive Bidding Rule to a major electric utility for issues of variable rate debt securities, overseas indebtedness, foreign currency denominated securities, medium term notes, commercial paper, preferred securities, and tax exempt securities. These exemptions were granted in recognition that these types of debt issues did not lend themselves to competitive bidding. Consistent with those exemptions, we likewise find it reasonable to grant exemptions here for debt issues of like kind by GSWC.

In addition to those limited exemptions, GSWC seeks exemption from the Competitive Bidding Rule for all of its remaining issuances of New Debt. In considering the request for a broader exemption, a guiding consideration is that GSWC minimize overall costs to ratepayers. In this regard, it is useful to contrast competitive bidding versus negotiated offerings as a means of issuing debt.

In a competitive bidding process, an issuer, usually after consulting with one or more investment banks, determines the amount, structure and timing of the debt offering. The issuer invites two or more lead managers to bid on the transaction. The lead managers form underwriting syndicates consisting of other investment and commercial banks, and possibly other financial institutions. With competitive bidding, there is no premarketing of the securities. At a specified time and date (determined by the issuer), the lead managers submit bids to the issuer. The issuer awards the deal to the lowest bidder, but retains the ability to reject all bids.

The competitive bidding process is fundamentally designed for highly rated, well-known issuers who do not require pre-sale meetings or discussions with potential investors. These issuers are frequently in the market, and the investment community knows and is comfortable with their credit profiles, performance and outlook. Investor confidence in the issuer, and consequently the debt issue itself, is essential to obtaining successful and cost-effective financing. Furthermore, the debt issue must be small enough to be fully sold to investors in a short period of time.

In contrast, under a negotiated offering, an issuer, such as GSWC, would select one or more underwriters for a debt offering. The underwriting group advises the issuer as to the appropriate structure, timing, and amount of the proposed transaction, given the issuer's credit history and current market conditions.

If necessary, the lead underwriter arranges and schedules investor presentations in strategic locations. After the investor presentations by company executives and investment bankers, an order period is initiated whereby the investment banks solicit purchase orders from investors. This period is critical in identifying investor demand at different pricing levels and in setting the final price on the securities. This type of market intelligence cannot be obtained through a competitive bid process.

In a negotiated offering, final pricing is determined based upon investor demand for the bonds based on the lowest possible rate to achieve the necessary transaction size. Underwriting fees for negotiated capital market transactions are generally determined according to an industry-wide standard, based upon the debt's maturity.

Negotiated transactions are the most common means used for issuing securities, and are necessary when there are potential investor concerns about the issuer and/or the financing. In these types of situations, the investor presentations described above are commonly conducted to perform additional marketing and solicit investor interest in the debt offering. Accordingly, a negotiated offering would allow potential investors to obtain market intelligence on GSWC.

As noted in D.03-06-011, the "competitive bidding process is fundamentally designed for highly rated and well-known issuers who do not require any pre-sale meetings or discussions with potential investors." Investor confidence in the issuer and, as a result, in the debt issue itself, is essential in obtaining cost-effective financing. If a competitive bidding process were used by GSWC, however, the bidding underwriters would be unable to obtain adequate market intelligence about GSWC. These underwriters would be forced, as a result, to bid above what the issuer would be able to obtain in a negotiated deal in order to minimize unexpected market or interest rate risk. We therefore conclude that a negotiated offering would lead to a lower cost as compared with competitive bidding given the characteristics of GSWC. We agree therefore that a negotiated offering it is the appropriate process through which GSWC can market its New Debt securities.

We also recognize that as a relatively small and infrequent participant in the capital and debt markets, competitive bidding is not viable or realistically suitable for GSWC. Accordingly, we hereby grant its request for exemption from the Commission's Competitive Bidding Rules with respect to issuances of New Securities authorized pursuant to this decision. However, we will review the reasonableness of the interest rate and associated fees in GSWC's next GRC or cost of capital proceeding.