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California Regulators Extend Utility Finance Limits

Watching the Wall Street credit meltdown and its aftermath, California regulators last Thursday expanded financing limits on the state's two largest private-sector utilities -- Pacific Gas and Electric Co. (PG&E) and Southern California Edison Co. (SCE).

The California Public Utilities Commission (CPUC) voted 4-1 for the measure. The commissioners emphasized the need to provide PG&E and SCE with more flexibility in handling their debt and equity transactions. The assigned commissioner for all three actions (two pertaining to Edison) was Commissioner John Bohn, a former international banker who was CEO of Moody's Investors Service (1989-1996) and holds a law degree from Harvard.

"These are important today, given what is going on in the capital markets," Bohn said. "It is important that we grant these utilities this kind of flexibility because this is a very tough and uncertain capital market. We need to empower the utilities to use their own best judgment in raising this funding over this period of time. It's unclear how these things will sort themselves out."

Calling the items "straightforward requests for the utilities to engage in normal financing activity," Bohn said the measures:

Bohn recommended that the CPUC continue to do what it has for the past 20 years and grant the utilities' waivers from the regulatory panel's competitive bidding requirements, but at least one of his colleagues, Timothy Alan Simon, objected to this and voted against all three measures as a result.

"Competitive bidding requirements in any kind of a capital-raising marketplace are designed to push discipline into the process," said Bohn. "It was originally conceived of as a requirement to make sure utility ratepayers were getting the best possible competitive costs, since ultimately they are responsible for paying the debt [as a portion of their monthly utility bill payments]."

Longer term, Bohn suggested that the CPUC re-examine its approach to the bidding waiver on financial instruments sales. Even though the requirements can be "burdensome," Bohn said he thinks "nonetheless a great deal can be said for having competition enter into the discussions."

A former financial legal adviser to private equity firms and a securities regulation law professor, Simon said he was concerned about the two utilities' requests in these specific cases and generally, while acknowledging that the state's major utilities "clearly need access to capital." Simon added that the CPUC should not postpone action on the matters because of the "distressed and uncertain state" of the nation's financial markets. One of the problems he had with the actions was what he thought was the imprudence of PG&E's locking in its financings for three-year terms.

"Locking in noncompetitive financial terms for such a large request for a lengthy period of time may not be in the best interest of ratepayers when a better deal could be obtained, if this large offering request were submitted in pieces, to take advantage of fluctuating, and potentially better, market conditions prior to 2011," he said.

He also did not think that the utilities' met the CPUC test for getting a waiver -- namely, proving the waivers would be "in the best interest of ratepayers."

Simon said he finds the financial markets now "highly distressed, with entrenched banks and other institutions failing or teetering on the edge of collapse. The status quo clearly is not working."

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