ALJ/SRT/tcg Mailed 1/11/2002

Decision 02-01-039 January 9, 2002

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Investigation whether Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, and their respective holding companies, PG&E Corporation, Edison International, and Sempra Energy, respondents, have violated relevant statutes and Commission decisions, and whether changes should be made to rules, orders, and conditions pertaining to respondents' holding company systems.

Investigation 01-04-002

(Filed April 3, 2001)

In the Matter of the Application of SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) for authorization to implement a plan of reorganization which will result in a holding company structure.

Application 87-05-007

(Filed May 6, 1987)

In the Matter of the Application of San Diego Gas & Electric Company (U 902-M) for Authorization to Implement a Plan of Reorganization Which Will Result in a Holding Company Structure.

Application 94-11-013

(Filed November 7, 1994)

In the Matter of the Application of Pacific Gas and Electric Company (U 39 M) for Authorization to Implement a Plan of Reorganization Which Will Result in a Holding Company Structure.

Application 95-10-024

(Filed October 20, 1995)

Joint Application of Pacific Enterprises, Enova Corporation, Mineral Energy Company, B Mineral Energy Sub and G Mineral Energy Sub for Approval of a Plan of Merger of Pacific Enterprises and Enova Corporation With and Into B Mineral Energy Sub ("Newco Pacific Sub") and G Mineral Energy Sub ("Newco Enova Sub"), the Wholly Owned Subsidiaries of a Newly Created Holding Company, Mineral Energy Company.

Application 96-10-038

(Filed October 30, 1996)

INTERIM OPINION ON MEANING OF FIRST PRIORITY CONDITION

TABLE OF CONTENTS

Title Page

INTERIM OPINION ON MEANING OF FIRST PRIORITY CONDITION...........1

I. Summary 2

II. Background 3

A. Nature of the Proceeding 3

B. Respondents' and Intervenors' Claims 6

C. The PG&E Bankruptcy Proceeding 8

III. Discussion 9

A. On its Face, the First Priority Condition is Not Limited in
the Manner Respondents Suggest 9

B. The Relationship of the Condition to the Decision as a Whole
Supports the Commission's Reading 11

C. The Records of the Holding Company Proceedings Support
a Broader Reading of the First Priority Condition Than
Respondents Suggest 14

1. SDG&E 15

2. Edison 20

3. PG&E 21

D. Contrary to Respondents' Arguments, Infusions of Working
Capital Can Provide a Return on Investment, and Do Not
Constitute a Taking 24

E. A Broad Interpretation of the First Priority Condition is
Consistent with the Standard of "Ratepayer Indifference" 28

F. Whatever Else it Means, the First Priority Condition Prohibits
a Holding Company from Transferring to Itself the Assets of a
Utility Subsidiary (1) For Less Than Proper Consideration, or
(2) For Any Value, if Such Transfer Would Impair the Utility's
Ability to Fulfill its Obligation to Serve or Operate in a Prudent
and Efficient Manner. 31

IV. Comments on Draft Decision 34

Findings of Fact.....................................................................................36

Conclusions of Law................................................................................39

INTERIM ORDER..................................................................................41

I. Summary

This interim decision provides an initial interpretation of the "first priority" condition incorporated into the decisions approving the holding company systems of Respondents Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE or Edison), and San Diego Gas & Electric Company (SDG&E), as well as their respective parent holding companies, PG&E Corporation (PG&E Corp.), Edison International (EIX), and Sempra Energy (Sempra) (collectively, Respondents).

In previous briefing on this issue in this docket, Respondents have argued that the condition requires, variously, only that they maintain a certain debt-equity ratio, level of capital expenditure, or level of "equity investment" in the utilities' plant and equipment. We find that Respondents' limited interpretations of the condition are not justified by the law, the decisions themselves, or the records of the holding company proceedings. Instead, we find that the first priority condition's reference to the term "capital" must be interpreted expansively. At least under certain circumstances, we find that the condition includes the requirement that the holding companies infuse all types of "capital" into their respective utility subsidiaries when necessary to fulfill the utility's obligation to serve. We do not conclusively find at this time that any Respondent violated the first priority condition. Finding such a violation requires a case-by-case analysis of each Respondent's individual circumstances that will be the subject of later proceedings in this docket.

However, we take official notice¹ of the fact that in the time since briefing on this issue was submitted, one of the holding companies, PG&E Corp., has become a proponent of a proposed Plan and Disclosure Statement on file in the on-going PG&E bankruptcy case.² Because this Plan and Disclosure Statement proposes the transfer of significant assets from PG&E to PG&E Corp., PG&E Corp. could unfairly benefit from such a transfer, to the detriment of ratepayers. On the basis of our expansive interpretation of the first priority condition in this decision, we conclude that the condition prohibits (1) a holding company's acquisition of the assets of its utility subsidiary for inadequate consideration, and (2) a holding company's acquisition of such assets at any price, if such transfer would impair the utility's ability to fulfill its obligation to serve, or to operate in a prudent and efficient manner.³

¹ Rule 72 of the Commission's Rules of Practice and Procedure provides that the Commission may take "official notice" of "such matters as may be judicially noticed by the courts of the State of California." Evidence Code section 452 provides that a trial court may take judicial notice of the official acts of the legislative, executive, and judicial departments of the United States and of any state of the United States, as well as the records of any state or federal court. Evid. Code sections 452(c) & (d). ² In re Pacific Gas & Electric Company, Case No. 01-30923 DM, United States Bankruptcy Court, N.D. Cal. ³ The condition, as initially proposed in the PG&E authorization proceedings, was identical to the condition we previously had imposed on EIX and Sempra. See D.96-11-017, 69 CPUC2d 167, 201 (1996) (ordering paragraph 17). Following an audit, however, we issued a second decision in which the condition was modified, adding requirements concerning the requirement for capital "to operate the utility in a prudent and efficient manner." See D.99-04-068, 194 P.U.R.4th 1, 9 (1999). The full text of the condition, as imposed on each of the holding companies, is recited below.

Order Instituting Investigation whether Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas & Electric Company, and their respective holding companies, PG&E Corporation, Edison International, and Sempra Energy, respondents, have violated relevant statutes and Commission decisions, and whether changes should be made to rules, orders, and conditions pertaining to respondents' holding company systems.	Investigation 01-04-002 (Filed April 3, 2001)
In the Matter of the Application of SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) for authorization to implement a plan of reorganization which will result in a holding company structure.	Application 87-05-007 (Filed May 6, 1987)
In the Matter of the Application of San Diego Gas & Electric Company (U 902-M) for Authorization to Implement a Plan of Reorganization Which Will Result in a Holding Company Structure.	Application 94-11-013 (Filed November 7, 1994)
In the Matter of the Application of Pacific Gas and Electric Company (U 39 M) for Authorization to Implement a Plan of Reorganization Which Will Result in a Holding Company Structure.	Application 95-10-024 (Filed October 20, 1995)
Joint Application of Pacific Enterprises, Enova Corporation, Mineral Energy Company, B Mineral Energy Sub and G Mineral Energy Sub for Approval of a Plan of Merger of Pacific Enterprises and Enova Corporation With and Into B Mineral Energy Sub ("Newco Pacific Sub") and G Mineral Energy Sub ("Newco Enova Sub"), the Wholly Owned Subsidiaries of a Newly Created Holding Company, Mineral Energy Company.	Application 96-10-038 (Filed October 30, 1996)