IV. Comments on Draft Decision

Pursuant to Pub. Util. Code § 311(g)(3), and Rule 77.7(f)(9), we reduced the 30-day period for comments on the draft decision due to public necessity. Here, the public necessity provision is implicated by the time pressures imposed by the proceedings in the PG&E bankruptcy case. We believe that it is essential to the public interest that we issue this decision holding that the first priority condition prohibits a holding company's acquisition of the assets of its utility subsidiary for inadequate consideration, or at any price, if such transfer of assets would impair the utility's ability to fulfill its obligation to serve, or to operate in a prudent and efficient manner.

Comments were due by hand delivery and e-mail to the ALJ and the service list by 4 p.m. Pacific Standard Time on January 4, 2002. PG&E, PG&E Corp., Edison, EIX, SDG&E, ORA and TURN each filed comments. We did not allow reply comments.

The Respondents' comments reflect a lack of understanding of the reach -- and limits -- of this decision. This decision interprets a provision of a previously issued Commission decision. It does not rule on any factual issue relating to the past behavior of any of the Respondents. However, in their various comments, the Respondents have cited a whole range of purely speculative outcomes that assume one or more sets of factual determinations that this decision does not make. It is not necessary for this Commission to address or rebut such factual speculations in a decision that is based entirely on legal analysis and considerations of public policy.

As we explained in an earlier decision in this proceeding, "we will recategorize [this] proceeding as adjudicatory if our investigation results in a decision that there is probable cause to believe Respondents . . . , as well as their respective parent holding companies. . . , violated past decisions of this Commission or other law, and we opt to determine finally whether violations occurred and consider remedies."⁸⁴ If, after further proceedings -- either here or in another forum -- the evidence bears out the preliminary findings we have made in this proceeding, there is always a possibility that we may take the steps Respondents cite. However, we are not at that stage now. In this decision, we are not making a final determination that any Respondent utility or holding company violated the first priority condition, or that a particular remedy should follow. Thus, Respondents' concerns that our decision makes ratepayers better off than they would have been absent a holding company structure by giving them access to shareholder funds; that we are injecting new ideas into the case and deciding them sua sponte; that we are determining that the holding companies must give first priority to the utility over all competing needs, rather than only those of other, non-utility affiliates; that the utility's cost of borrowing will increase in the future due to the liability our decision imposes; and other, similar concerns, are all premature. We reject the remaining comments on the draft decision.

Findings of Fact

1. In adopting the first priority condition, the Commission was not merely concerned with ensuring technical compliance with the capital structure requirements of the various utilities' general rate cases.

2. The Commission was concerned in adopting the first priority condition with preventing the utilities from becoming unable to obtain sufficient funds to meet their obligation to serve.

3. The term "first priority" means the highest preferential rating assigning rights to scarce products or materials.

4. The term "requirements" refers to need.

5. The term "capital," where not otherwise limited or qualified, encompasses all of the following: the money and property with which a company carries on its corporate business; a company's assets, regardless of source, utilized for the conduct of the corporate business and for the purpose of deriving gains and profits; and a company's working capital.

6. The term "capital" is not limited in the first priority condition to mean only "equity capital," infrastructure investment, or any other term that does not include, simply, money or working cash.

7. The term "obligation to serve" includes all actions a utility must take to provide utility service to California ratepayers, and is not limited to maintaining infrastructure.

8. In the holding company authorization decisions, the Commission did not define the term "capital requirements" as used in the first priority condition. However, the Commission discussed the first priority condition in broad terms of utility needs and financial strength, and holding company responsibility and financial support to the utilities.

9. Nowhere in the record of the holding company proceedings does any party define the term "capital requirements." Nowhere in the record of the respective holding company proceedings does any party explicitly limit the term "capital requirements" to mean only the funds necessary to maintain or improve utility plant and equipment.

10. In the holding company authorization decisions, the Commission imposed a separate condition that states, as set forth in the SDG&E decision: "SDG&E shall maintain a balanced capital structure consistent with that determined to be reasonable by the Commission in its most recent decision on SDG&E's capital structure. "

11. In the 1985 SDG&E holding company proceeding, ORA expressed its concern that the holding company structure would adversely affect the utility's capital structure and the utility's ability to provide adequate services.

12. In addressing ORA's concerns, SDG&E proposed the first priority condition. SDG&E witnesses testified regarding the priority of the utility's financial health and obligation to serve and that the utility's capital demands would be given first priority.

13. The decision in the Edison holding company proceeding states that the first priority condition adopted therein originated in the SDG&E decision and was identical to it.

14. Edison testified in its holding company proceeding that the utility's need for capital takes first priority and that the holding company would infuse capital into the utility.

15. In the PG&E holding company proceedings, PG&E witnesses testified that the utility's financial integrity and ability to satisfy its obligation to serve would be preserved and the holding company would provide a financially distressed utility with a source of cash.

16. The first priority condition, requiring the holding companies to infuse all types of capital into their utility subsidiaries under certain conditions, was necessary to protect the public interest and maintain ratepayer indifference. This necessity was due, in part, to the transfer of utility assets to the holding companies when they were formed.

17. 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. Cal.

18. PG&E and its parent, PG&E Corp, were both proponents of the Plan and Disclosure Statement submitted to the Bankruptcy Court on September 20, 2001.

19. On November 27, 2001, the Commission timely filed and served its Objection to PG&E's Disclosure Statement. We take official notice of PG&E's Plan and Disclosure Statement and of the Commission's Objection to PG&E's Disclosure Statement.

20. The Disclosure Statement fails to provide enough information to allow the Commission to analyze the consideration to be paid for such assets.

21. Implementation of the proposed Plan and Disclosure Statement in the on-going PG&E bankruptcy proceeding could unfairly benefit PG&E Corp., to the detriment of its utility subsidiary, PG&E.

22. Implementation of the proposed Plan and Disclosure Statement in the on-going PG&E bankruptcy proceeding could result in an unacceptable diminishment of the ability of PG&E to serve its customers and to operate in a prudent and efficient manner.

Conclusions of Law

1. The Commission is the arbiter of the meaning of its own decisions.

2. In the context of Respondents' holding company decisions, when a utility's financial health is impaired and its ability to discharge its obligation to serve is consequently threatened, the first priority condition requires its holding company to give the utility preference over all competing potential recipients of capital resources.

3. The holding company authorization decisions' discussion of the first priority condition in broad terms of utility financial health supports a reading of the condition as requiring the holding company to infuse the utility with all types of capital necessary for the utility to fulfill its obligation to serve.

4. The "balanced capital structure" condition in each holding company decision requires the utility to maintain its own balanced capital structure pursuant to the ratio set by the Commission in the respective general rate cases.

5. According to SDG&E's interpretation-i.e., that the first priority condition only requires the utility to retain earnings to maintain a balanced capital structure and meet its obligation to serve, and does not require an affirmative holding company obligation to infuse funds into the utility-the first priority condition would impose the same requirement as the balanced capital structure condition and make the first priority condition superfluous. Because the decision cannot be read as making one of the conditions superfluous, the first priority condition must impose a different requirement, namely that the holding company must infuse capital into the utility when needed to meet its obligation to serve.

6. The Commission need not refer to the record of the holding company proceedings to determine the meaning of the first priority condition. Even so, the parties' testimony and briefs in those proceedings do not conflict with a broad reading of the condition.

7. In light of the overall concern expressed in the record that the holding company structure not adversely affect the utility's financial health and ability to meet its obligation to serve, references in the record to "capital investment" and "equity" must be read broadly.

8. The implementation of any scheme, whether under a bankruptcy reorganization plan or otherwise, pursuant to which a holding company would unduly benefit, to the detriment of its utility subsidiary and that utility's ratepayers, would be contrary to any reading of the first priority condition.

9. The first priority condition prohibits a holding company from acquiring the assets of a utility subsidiary for inadequate consideration.

10. The first priority condition prohibits a holding company from acquiring the assets from a utility subsidiary at any price, if such transfer of assets would impair the utility's ability to fulfill its obligation to serve or to operate in a prudent and efficient manner.

INTERIM ORDER

IT IS ORDERED that:

1. The first priority condition does not preclude the requirement that the holding companies infuse all types of "capital" into their respective utility subsidiaries where necessary to fulfill the utility's obligation to serve.

2. The first priority condition prohibits a holding company from (1) acquiring assets of its utility subsidiary for inadequate consideration, and (2) acquiring assets of its utility subsidiary at any price, if such acquisition would impair the utility's ability to fulfill its obligation to serve or to operate in a prudent and efficient manner.

3. PG&E Corporation is dismissed without prejudice as a respondent to these proceedings.

This order is effective today.

Dated January 9, 2002, at San Francisco, California.

LORETTA M. LYNCH

President

CARL W. WOOD

GEOFFREY F. BROWN

Commissioners

I dissent.

/s/ HENRY M. DUQUE

Commissioner

I dissent.

/s/ RICHARD A. BILAS

Commissioner

I will file a concurrence.

/s/ GEOFFREY F. BROWN

Commissioner

Commissioner Geoffrey F. Brown, Concurring:

I concur in the Commission's First Priority Decision. However, I believe some of the language contained in it should be qualified. While I believe that a First Priority condition requires the holding company to do more than look to the capital assets or investment in infrastructure, I do not believe it connotes an unlimited responsibility to keep cash flowing from the holding company to the utility where the Commission has failed to allow compensatory utility rates.

All of the First Priority provisions basically say this: The capital requirements of the utility as determined to be necessary to meet its obligation to save, shall be given first priority by the board of directors of the holding company and the utility. The operative term here is "to be necessary to meet its obligation to serve." I interpret this to mean that both holding company and the company must maintain the utility's financial condition so that it can serve its customers. How that responsibility is met depends on the circumstances of the time. It may mean making sufficient capital investment to deliver electricity. It may also mean deferring a dividend during a cash crunch or the infusion of cash to deal with unforeseen emergencies that threaten a breakdown of service. If the First Priority Condition were relevant only to capital assets, a board of directors of a financially strapped utility could authorize a dividend even if it meant laying-off employees critical to keeping the lights on. Certainly, the First Priority Condition means that a holding company is prohibited from transferring to itself the assets of the utility for less than proper consideration or for any value if the transfer would impair the utility's ability to serve.

There are limitations to the First Priority Condition that must be recognized. For example, the Commission has a corresponding duty to maintain reasonable rates to meet operating costs, among other things. In general, First Priority provisions can not be used to force utilities into bankruptcy nor to deprive them of the opportunity to earn reasonable rates of return.

/s/ GEOFFREY F. BROWN

GEOFFREY F. BROWN

Commissioner

San Francisco, California

January 9, 2002