CPUC Approves $3 Billion in PG&E Bonds

By Published On: November 30, 2004

On a 3-2 vote at its November 19 meeting, the California Public Utilities Commission authorized Pacific Gas & Electric to issue up to $3 billion in energy recovery bonds to restore its postbankruptcy creditworthiness. PG&E estimated that the cost to ratepayers would exceed $4.6 billion, while saving them $694 million. The commission projected that the bonds would save ratepayers more than $600 million by reducing associated federal and state income taxes. It acknowledged, however, that actual ratepayer savings will depend on various uncertainties, including the interest rate on the bonds, the cost of servicing them, the cost of credit enhancements, and how the Internal Revenue Service resolves PG&E?s outstanding corporate tax issues. Months earlier, the commission estimated that refinancing the $2.2 billion in a phantom regulatory asset through energy recovery bonds would save ratepayers $1 billion (<i>Circuit</i>, June 11, 2004). (Under the utility?s bankruptcy settlement, PG&E was allowed to create a fictitious regulatory asset, with ratepayers footing the bill. The asset will be treated as if the utility had built a new power plant or made other real capital investment. Of that, a portion will be refinanced with ratepayer-backed bonds, with state approval. That portion of the phantom asset is able to obtain lower cost of capital, and that cost reduction is passed on to ratepayers.) The $3 billion in bonds will be financed through two new nonbypassable surcharges imposed on PG&E retail customers. The refinancing was authorized by SB 772, which approved the conversion of PG&E?s regulatory asset to ratepayer-backed bonds because of the lower cost to ratepayers. The measure expressly shielded the state of California from any liability associated with PG&E?s bonds. The CPUC directed the utility to issue both series of its recovery bonds by May 2005 to take advantage of favorable interest rates and reduce costs to ratepayers?or explain why they have been unable to do so. The bonds will conclude in 2012. Commissioner Loretta Lynch voted against authorizing the bond issuance because she contended that it gives PG&E discretion over when to issue the bonds in violation of SB 772. ?It doesn?t require PG&E to act as expeditiously as possible. PG&E has a financial incentive to delay issuance of the bonds because of the 11 percent regulatory advantage? on its authorized rate of return, Lynch charged. She also said the ruling allows PG&E to spend $200,000 in ratepayer funds to administer the recovery bonds and includes subsidies for direct-access customers. In September, the Office of Ratepayer Advocates objected to PG&E?s request to issue two bond series a year apart, contending that it would violate SB 772, which was passed as an emergency statute. ORA urged the CPUC to require PG&E to issue all of the bonds at once or at least to issue the second series no later than May 2005. The CPUC?s decision requires the utility to open all of its financial books and records to the commission. In other actions, the CPUC authorized Sierra Pacific Power to sell its four hydroelectric generating stations on the Truckee River and its right to divert water from the river to the Truckee Meadows Water Authority. The commission determined that the sale is in the public interest because it would have no impact on statewide electric system reliability and would not cause adverse environmental impacts. Commissioners Lynch and Carl Wood opposed the sale. Lynch noted that Sierra Pacific failed to make an affirmative showing that the sale is in the public interest as required. ?If this power is cheaper to generate than other electric generators, it isn?t in the public interest and in Sierra?s customers? interests,? she said. The CPUC also directed PG&E to negotiate an agreement to take over operation of the California Power Authority?s Demand Reserves Partnership program, which expires November 30. The CPUC selected PG&E because most of the load is in its service territory. ?We need the megawatts for this program to be available for next summer,? commission president Mike Peevey said.

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