II. Background

A. Nature of the Proceeding

This proceeding is an investigation into transactions between the three major California investor-owned utilities and their respective holding companies. The Commission seeks to determine both whether these entities engaged in conduct in the past that violated relevant statutes and Commission decisions that allowed them to establish holding companies, ⁴ and whether additional rules, conditions, or other changes are needed to protect ratepayers and the public from dangers of abuse of the holding company structure.

In each decision establishing the holding company systems, we incorporated a provision requiring that the utilities be given first priority within those systems.⁵ In PG&E's case, the provision read as follows:

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.⁶

The Edison/EIX condition provides that:

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.⁷

In SDG&E/Sempra's case, the first priority condition states that:

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.⁸

In our Order Instituting Investigation (OII), we cited conduct of each Respondent that implicated the first priority condition:

Available information suggests that at no time since wholesale energy prices started rising in the summer of 2000, while the utilities were increasingly strident in their claims of worsening financial condition, imminent bankruptcy, and the consequent threat to their ability to fully meet their obligation to serve, did any of their respective holding companies provide an infusion of capital to address the utilities' capital needs as detailed above. We will investigate whether this apparent failure to infuse capital violates the condition in our holding company decisions that the holding company give "first priority" to the capital needs of its utility subsidiary to meet its obligation to serve.⁹

We asked Respondent holding companies, inter alia, to furnish information regarding whether they provided sufficient capital to their utility subsidiaries to alleviate or mitigate the subsidiaries' need for capital during that time period, and each Respondent utility to inform us whether it had made demands on its respective holding company to infuse needed capital.¹⁰

In response to this order and in other documents, the holding companies have suggested, inter alia, that their utilities' recent financial needs constitute needs for operating cash, or working capital, and that these needs do not implicate the first priority condition because, they contend, that condition is limited to needs for so-called "equity capital." To resolve this issue, we ordered briefing on the meaning of the first priority condition.

B. Respondents' and Intervenors' Claims

Respondents make several arguments about the meaning of the first priority condition, but each contends that the condition cannot be interpreted to require infusions of operating funds into the utilities to enable them to make energy purchases. We address these arguments below, and find that if the condition, and specifically its use of the term "capital" is interpreted expansively, it follows that PG&E Corp.'s bankruptcy Plan raises the inference of a first priority condition violation.

PG&E proposes an interpretation of the first priority condition that would limit the condition to utility capital requirements for investment needed for capital additions.¹¹ Similarly, PG&E Corp. alleges that the first priority condition

[p]rovides that the holding company's board of directors, when faced with investment allocation decisions, would invest equity capital in the [u]tility in preference to other investments, when the board determines that the [u]tility's investment requirements are necessary and prudent to meet the [u]tility's obligation to serve and that such investment would provide an opportunity to earn a reasonable rate of return.¹²

Edison asserts that the first priority condition "does not require . . . EIX . . . to infuse cash into SCE to fund the power purchases . . . SCE has experienced since about May 2000."¹³ Rather, Edison contends, the first priority condition only requires that the holding companies make available to the utilities "funds for investment in plant and equipment."¹⁴

SDG&E claims that the first priority condition "requires a utility holding company to permit the utility to retain sufficient earnings to make the capital investment in its systems and facilities necessary both to maintain the Commission's approved capital structure and to meet the utility's obligation to provide safe and reliable service to its customers."¹⁵

The Utility Reform Network (TURN), the Office of Ratepayer Advocates, the City and County of San Francisco, and the City of Long Beach also briefed the first priority issue. They assert that the plain language of the first priority condition "requires a holding company to infuse money into its utility subsidiary when the utility's internal access to capital is impaired such that discharge of its obligation to serve or its ability to operate normally is threatened."¹⁶ Otherwise, they claim, the utilities fail to fulfill their obligation to serve. In addition, TURN argues that the term "capital" in the condition must be given an expansive meaning, and be defined so as to distinguish it from the "balanced capital structure" condition that also appears in the Commission's holding company decisions.¹⁷

C. The PG&E Bankruptcy Proceeding

On September 20, 2001, PG&E filed its proposed Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Pacific Gas and Electric Company (the "Plan") together with its Disclosure Statement in In re Pacific Gas & Electric Company, Case No. 01-30923 DM, United States Bankruptcy Court, N.D. of California (the "Bankruptcy Case").

Under PG&E's proposed Plan and Disclosure Statement, PG&E's electric transmission operations will be spun off into a separate business, temporarily named ETrans, under PG&E Corp; PG&E's natural gas transmission operations will be spun off into a separate business, temporarily named GTrans, under PG&E Corp.; and PG&E's hydroelectric and nuclear generating operations will be spun off into a separate business, temporarily named Gen, under PG&E Corp.

On November 27, 2001, the Commission timely filed and served its Objection to PG&E's Disclosure Statement. ¹⁸ In this Objection, the Commission argued that the proposed Plan is unconfirmable and the Disclosure Statement is inadequate and deceptive. Of particular relevance to the question of the meaning of the first priority condition, the Commission raised certain issues regarding (a) the value of the assets PG&E seeks to transfer, (b) the consideration to be received in exchange therefor, and (c) the identities of the transferees.