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PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION RESOLUTION E-3681

R E S O L U T I O N

SUMMARY

This Resolution approves the Investment Management Agreement [Agreement] between the San Diego Gas & Electric Company's [SDG&E] Nuclear Facilities Decommissioning Master Trust Committee [Committee] and Payden & Rygel and TCW Asset Management Company and authorizes the Commission's Executive Director or his designee to sign the Agreement on behalf of the Commission.

BACKGROUND

In Order Instituting Investigation No. 86, the Commission conducted an extensive investigation on its own motion into the recovery of costs of decommissioning nuclear power plants owned by the California utilities. In Decision [D.] 87-05-062, the Commission adopted externally managed trust funds as vehicles for accruing decommissioning funds. In that decision, the Commission also established guidelines for the trust agreements.

In response to D.87-05-062, SDG&E established two trusts, one to hold contributions which qualify for an income tax deduction under Section 468A of the Internal Revenue Code [Qualified Trust] and another to hold the remaining funds [Non-qualified Trust]. By Resolution E-3060, dated November 25, 1987, the Commission approved SDG&E's trust agreements.

Section 3.01 of both trust agreements provides for the establishment of a Nuclear Facilities Decommissioning Master Trust Committee. Subject to Commission approval, the Committee is authorized to appoint one or more investment managers to direct investments of all or part of the trust assets. To date, the Commission has approved the Committee's appointments of Delaware Investment Advisers, Brown Brothers Harriman & Company, and NISA Investment Advisors as fixed-income managers, Fidelity Management Trust Company and State Street Global Advisors as equity managers, to direct the investment of the trusts.

The Commission has set forth its limitations on the nuclear utilities' trust fund investments in a series of Decisions. Most recently, D.95-07-055 authorized that up to 50% of the fair market value of Qualified Trust funds may be invested in publicly traded equity securities. Therefore, the fixed-income allocation must be at least 50% for the Qualified Trust. For the Non-qualified Trust, the upper limit of the equity investment is 60% and the lower limit of the bond [fixed income] investments is 40%.

D.95-07-055 also provides for Investment Management Agreements to be approved through the Commission's Advice Letter process.

SDG&E, in conformance with D.95-07-055, requests Commission approval to hire Payden & Rygel to replace Brown Brothers Harriman & Company as fixed-income manager for the Non -qualified Trust; and to hire TCW Asset Management Company to replace Brown Brothers Harriman & Company as fixed income manager for the Qualified Trust. SDG&E states that under the proposed Agreement with Payden & Rygel and TCW, the Qualified and Non-qualified Trusts will be invested within the levels authorized by the Commission and will provide appropriate diversification among its fixed-income managers to maximize after-tax returns on a risk-adjusted basis. In this Advice Letter, SDG&E is also requesting the Commission's Executive Director or his designee to sign the Agreement on behalf of the Commission.

NOTICE

Public notice of this advice letter was made by publication in the Commission's calendar. SDG&E served copies of this filing to utilities, parties in OII 86, and other interested parties.

PROTESTS

There were no protests filed with the Commission for AL 1227-E.

DISCUSSION

The Committee wants to replace Brown Brothers Harriman & Company because of the latter's declining performance and change in personnel. Specifically, the company's rolling 3-year performance has under-performed the benchmark for almost 2 ½ years and a key investment advisor is not now involved in the management of the SDG&E portfolios to the extent that the Committee feels he should.

The Committee, at its December 14, 1999 meeting, directed the staff to search for a replacement investment manager for Brown Brothers Harriman & Company who has managed fixed-income assets for the Non-qualified and Qualified Trusts since 1992. The Committee evaluated eighteen firms to replace Brown Brothers Harriman & Company. The firms were evaluated based on risk-adjusted three-year and five-year returns, turnover, and the Sharpe measure [for measuring return per unit of risk]. The Committee's decision to retain both Payden & Rygel and TCW to manage fixed-income securities was based on evidence presented to it by the SDG&E staff and the independent judgment of the Committee members.

At its meeting of March 15, 2000, the Committee, in a 4-0 vote

According to SDG&E, Payden & Rygel was established in 1983 and is also located in Los Angeles. It manages some $26 billion of fixed-income assets. Its experienced municipal bond team has over 10 years of experience in the management of such fixed-income assets. Payden & Rygel would be the manager of about $40 million municipal fixed-income securities in SDG&E's Non-qualified Trust.

According to SDG&E, TCW Asset Management Company was established in 1971 and is located in Los Angeles. It has over $27 billion of fixed-income assets under its management. TCW has an experienced core bond team with expertise in government, corporate, and asset-backed securities. Most of its specialists have over 15 years of experience. TCW would be the manager of some $75 million core bond securities in SDG&E's Qualified Trust.

The proposed Investment Management Agreements between the SDG&E's Nuclear Decommissioning Trust Committee and both Payden & Rygel and TCW Asset Management Company are substantially the same as Investment Management Agreements previously approved by the Commission, with the exception of the fee schedules. The fee schedules are consistent with those ordered in D.87-07-062 and subsequently in D.95-07-055 and are therefore deemed reasonable by the Energy Division.

Pursuant to PU Code 583, the proposed Agreements require that the reports and information submitted to the Commission be treated as confidential and not disclosed to third parties. The public, however, may request this information and records in the possession of the Commission by using General Order 66-C as a vehicle for that purpose.

The Energy Division has reviewed SDG&E's AL 1227. The Energy Division believes that the proposed agreements are in compliance with applicable Commission requirements and the changes will be beneficial to the ratepayers as well as the shareholders of SDG&E. Accordingly, the Energy Division recommends approval of the request by authorizing the Executive Director, or his assignee, to sign the two agreements on behalf of the Commission.

COMMENTS

This is an uncontested matter, which the resolution grants the relief requested. Accordingly, pursuant to PU Code Section 311(g)(2), the otherwise applicable 30-day period for public review and comment is waived.

FINDINGS

1. SDG&E filed AL 1227-E on May 8, 2000 requesting approval of its Investment Management Agreements with Payden & Rygel and TCW Asset Management Company.

2. In D. 87-05-062, the Commission required externally managed trust funds to finance the decommissioning of nuclear power plants.

3. D. 95-07-055 requires that all Investment Management Agreements must be approved by the Commission through the Advice Letter process.

4. In its meeting on March 15, 2000, SDG&E's Nuclear Facilities Decommissioning Master Trust Committee [the Committee], in a 4-0 vote: (1) approved retaining Payden & Rygel as a fixed-income Investment Manager under the Non-qualified Trust to replace Brown Brothers Harriman & Company as manager of the approximately $40 million portfolio, (2) authorized the execution of an Investment Management Agreement between Payden & Rygel and the Committee, (3) approved retaining TCW Asset Management Company as a fixed-income Investment Manager under the Qualified Trust to replace Brown Brothers Harriman & Company as manager of the approximately $75 million portfolio, and (4) authorized the execution of an Investment Management Agreement between TCW Asset Management Company and the Committee.

5. The proposed Investment Management Agreements between the Committee and both Payden & Rygel and TCW Asset Management Company are substantially the same as Investment Management Agreements previously approved by the Commission, with the exception of the fee schedule.

6. The proposed Investment Management Agreements are consistent with applicable Commission requirements and should be approved.

THEREFORE, IT IS ORDERED that:

The Investment Management Agreements executed by the San Diego Gas and Electric Company's Nuclear Facilities Decommissioning Master Trust Committee and both Payden & Rygel and TCW Asset Management Company is approved.

The Commission's Executive Director, or his designee, is authorized to sign the Agreements

on behalf of the Commission.

This Resolution is effective today.

I certify that the foregoing resolution was duly introduced, passed, and adopted at a conference of the Public Utilities Commission of the State of California held on July 20, 2000; the following Commissioners voted favorably thereon:

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