Exhibit 99.3
BEFORE THE ARIZONA CORPORATION COMMISSION
COMMISSIONERS
MARC SPITZER, Chairman
JIM IRVIN
WILLIAM A. MUNDELL
JEFF HATCH-MILLER
MIKE GLEASON
IN THE MATTER OF THE APPLICATION OF DOCKET NO. E-01345A-02-0707
ARIZONA PUBLIC SERVICE COMPANY FOR AN
ORDER OR ORDERS AUTHORIZING IT TO
ISSUE, INCUR, OR ASSUME EVIDENCES OF
LONG-TERM INDEBTEDNESS; TO ACQUIRE A DECISION NO. 65796
FINANCIAL INTEREST OR INTERESTS IN AN
AFFILIATE OR AFFILIATES; TO LEND MONEY
TO AN AFFILIATE OR AFFILIATES; AND TO
GUARANTEE THE OBLIGATIONS OF AN
AFFILIATE OR AFFILIATES. OPINION AND ORDER
DATES OF HEARINGS: September 24, 2002 (procedural conference);
October 4, 2002 (procedural conference); January
3, 2003 (prehearing); January 8, 9, 10, 13, and
14, 2003
PLACE OF HEARINGS: Phoenix, Arizona
ADMINISTRATIVE LAW JUDGE: Lyn Farmer
IN ATTENDANCE: William A. Mundell, Chairman Marc Spitzer,
Commissioner Jeff Hatch-Miller, Commissioner Mike
Gleason, Commissioner
APPEARANCES: Mr. Michael R. Engleman and Mr. Frederick D.
Ochsenhirt, DICKSTEIN, SHAPIRO, MORIN & OSHINSKY,
L.L.P, on behalf of Panda Gila River, LP;
Mr. Scott S. Wakefield, Chief Counsel, on behalf
of the Residential Utility Consumer Office;
Mr. Thomas L. Mumaw and Ms. Karilee Ramaley,
PINNACLE WEST CAPITAL CORPORATION; and Mr. Jeffrey
B. Guldner, SNELL & WILMER, P.L.C., on behalf of
Arizona Public Service Company;
Mr. James McGuire, ROSHKA, HEYMAN & DeWULF,
P.L.C., on behalf of Tucson Electric Power
Company;
Mr., Lawrence V. Robertson, Sr., MUNGER CHADWICK,
P.L.C.; and Mr. Theodore E. Roberts, SEMPRA
ENERGY, on behalf of Sempra Energy Resources and
Southwestern Power Group, II;
1 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Mr. William P. Sullivan, MARTINEZ & CURTIS, P.C.,
on behalf of Reliant Energy Resources;
Mr. Walter W. Meek, President, on behalf of the
Arizona Utility Investors Association;
Mr. C. Webb Crockett, FENNEMORE CRAIG, P.C., on
behalf of the Arizonans for Electric Choice and
Competition;
Mr. Jay I. Moyes, MOYES STOREY, on behalf of PPL
Southwest Generating Holdings, LLC; PPL
EnergyPlus, LLC; and PPL Sundance Energy, LLC; and
Mr. Christopher C. Kempley, Chief Counsel, and Ms.
Janet F. Wagner, Staff Attorney, Legal Division,
on behalf of the Utilities Division of the Arizona
Corporation Commission.
BY THE COMMISSION:
On September 16, 2002, Arizona Public Service Company ("APS" or "Company")
filed with Corporation Commission ("Commission") the above-captioned application
for financing approval ("Application").
On September 20, 2002, Panda Gila River, L.P. ("Panda") filed a Motion for
Leave to Intervene. On September 23, 2002, the Residential Utility Consumer
Office ("RUCO") filed an Application to Intervene.
By Procedural Order issued September 23, 2002, a Procedural Conference was
held on September 24, 2002, to discuss the procedures for processing this
application. By Procedural Order issued September 25, 2002, a second Procedural
Conference was scheduled. -
On October 4, 2002, the second Procedural Conference was held as scheduled
and established procedural dates for the preparation and conduct of this matter
and to consider the Motions to Intervene by Panda; Reliant Resources, Inc.
("Reliant"); the Harquahala Generating Company, LLC ("Harquahala"); PPL
Southwest Generation Holdings, LLC; PPL Energy Plus, LLC; and PPL Sundance
Energy, LLC (collectively "PPL entities"); the Arizona Utility Investors
Association, Inc. ("AUIA"); Southwestern Power Group II, LLC and Bowie Power
Station (collectively "SWPG/Bowie"); Sempra Energy Resources ("Sempra"); Arizona
Competitive Power Alliance ("ACPA"); and Tucson Electric Power Company ("TEP").
2 DECISION NO. 65796
DOCKET NO. E-01 345A-02-0707
At the Procedural Conference, oral arguments were heard on the motions to
intervene and the parties discussed their proposed procedural schedule for this
matter. The motions to intervene were granted, and it was noted that the scope
of the hearing would not be broadened by their participation.
By Procedural Order issued October 9, 2002, the hearing was set to commence
on January 8, 2003. On October 10, 2002, APS filed an Emergency Motion to Modify
the October 9, 2002 Procedural Order, and on October 15, 2002, the Commission's
Utilities Division Staff ("Staff'), RUCO, and Panda responded to APS' Motion.
On October 16, 2002, APS filed a Motion for Protective Order ("Motion"). On
October 21, 2002, Staff filed its Response; on October 23, 2002, RUCO filed its
Response; on October 23, 2002, APS filed its Reply; and on October 29, 2002,
Panda filed a Response to Staff's Response. On November 25, 2002, APS withdrew
its Motion without prejudice. Intervention was granted to Arizonans for Electric
Choice and Competition ("AECC") on November 18, 2002.
Notice of the hearing was published in the ARIZONA REPUBLIC, THE BISBEE
DAILY REVIEW, THE CASA GRANDE DISPATCH, THE ARIZONA DAILY SUN (FLAGSTAFF), THE
PRESCOTT COURIER, AND THE YUMA DAILY SUN.
The hearing commenced as scheduled in January 8, 2003 and witnesses for
APS, AUIA, Panda, RUCO, and Staff testified and presented evidence during five
days of hearing. Initial posthearing briefs were filed on January 27, 2003 and
reply briefs were filed on February 6, 2003.
BACKGROUND
On May 20, 1994, the Commission opened Docket No. U-0000-94-165 to
investigate the introduction of retail electric competition. On December 26,
1996, the Commission issued Decision No. 59943, which adopted A.A.C. R14-2-1601
through 1616, the Retail Electric Competition Rules. Hearings were held on
generic stranded cost issues, and on June 28, 1998, the Commission issued
Decision No. 60977 on Stranded Costs. On August 10, 1998, in Decision No. 61071,
the Commission adopted amended rules on an emergency basis, and on December 11,
1998, adopted the emergency rules on a permanent basis in Decision No. 61272. On
January 11, 1999, the Commission issued Decision No. 61311, which stayed the
Retail Electric Competition Rules and related decisions, including Decision No.
60977.
3 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
On April 27, 1999, the Commission issued Decision No. 61677, which amended
Decision No. 60977, the Commission's prior Stranded Cost decision. Decision No.
61677 ordered the Hearing Division to issue a Procedural Order to set dates for
consideration of stranded costs and unbundled tariffs for each Affected Utility.
The revised Retail Electric Competition Rules were published on May 14, 1999 and
public comment sessions were held. On May 18, 1999, APS filed for approval of a
Settlement Agreement, a hearing was held, and the Commission issued Decision No.
61973 (October 6, 1999), approving the Settlement Agreement with changes. On
September 29, 1999, the Commission issued Decision No. 61969, which approved the
revised Retail Electric Competition Rules ("Electric Competition Rules"). In
Decision No. 62924 (October 10, 2000) the Commission adopted clarifying
revisions to the Electric Competition Rules.
The Settlement Agreement provided and Decision No. 61973 granted a two-year
extension of time, until December 31, 2002, for APS to separate assets (A.A.C.
1615(A)(1)) and also granted a "similar two-year extension" for compliance with
A.A.C. R14-2-1606(B)(2). APS planned to divest its competitive generation assets
to a yet-to-be formed generation affiliate. The Addendum to APS' Settlement
Agreement also provided that: "[a]fter the extensions granted in Section 4.1
have expired, APS shall procure generation for Standard Offer customers from the
competitive market as provided for in the Electric Competition Rules. An
affiliated generation company formed pursuant to this Section 4.1 may
competitively bid for APS' Standard Offer load, but enjoys no automatic
privilege outside of the market bid on account of its affiliation with APS."
(4.1(3))
On October 18, 2001, APS filed a Variance/Purchased Power Agreement ("PPA")
application. The application stated that "adherence to the competitive bidding
requirements of the Electric Competition Rules will not produce the intended
result of reliable electric service for Standard Offer customers at reasonable
rates," requested that the Commission grant a partial variance to R14-2-1606(B)
that would otherwise obligate APS to acquire all of its customers' Standard
Offer generation requirements from the competitive market, and sought Commission
approval of a long term purchase power agreement with its parent, Pinnacle West
Capital Corporation ("PWCC").
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(1) A.A.C. R14-2-1615(A) provides: "All competitive generation assets and
competitive services shall be separated from an Affected Utility prior to
January 1, 2001. Such separation shall either be to an unaffiliated party
or to a separate corporate affiliate or affiliates. If an Affected Utility
chooses to transfer its competitive generation assets or competitive
services to a competitive electric affiliate, such transfer shall be at a
value determined by the Commission to be fair and reasonable." ("Rule
1615(A)")
(2) A.A.C. R14-2-1606(B) provides: "After January 1, 2001, power purchased by
an investor owned Utility Distribution Company for Standard Offer Service
shall be acquired from the competitive market through prudent, arm's length
transactions, and with at least 50% through a competitive bid process."
("Rule 1606(B)")
4 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
By Procedural Order issued on May 2, 2002, a generic proceeding was
established that set up Track A to resolve issues relating to market power,
divestiture, codes of conduct/affiliate transactions and jurisdictional issues.
It also established Track B to address competitive procurement. On September 10,
2002, the Commission issued Decision No. 65154 in the Track A proceeding. On
September 16, 2002, APS filed this application. On November 8, 2002, APS filed
an "Emergency Application" requesting a partial waiver of A.A.C. R14-2-804(B)(1)
and (2) to allow APS to make short-term advances to PWCC in the form of an
inter-affiliate line of credit, or alternatively, in the form of an APS
guarantee of PWCC's short-term debt. In Decision No. 65434 (December 3, 2002),
the Commission granted the request with conditions. On March 14, 2003, the
Commission issued its Decision No. 65743 in Track B.
DISCUSSION
APS' parent, PWCC, has incurred approximately $1 billion in debt in order
to finance the construction of generating units(3) at Pinnacle West Energy
Corporation ("PWEC"), its merchant subsidiary. PWCC used debt with short-term
maturities(4) because it planned for PWEC to refinance the debt at an investment
grade once the APS rate-based generation assets were transferred to PWEC. In
Decision No. 65154 (September 10, 2002), the Commission ordered APS to cancel
any plans to divest interests in any generating assets.(5) On September 16,
2002, APS filed this financing application. APS, on behalf of its parent and
affiliate, claims that without the APS generation assets, PWEC does not have an
investment grade credit rating and therefore cannot finance the PWEC generation
assets. Further, APS claims on behalf of its parent and affiliate, that due to
market conditions, PWEC cannot obtain project financing. PWCC's bridge debt
begins coming due in August 2003.
In its application APS asks that the Commission:
* Authorize the Company to assume, issue, or incur up to $500,000,000 in
aggregate principal amount of Recapitalization Debt;
* Authorize the Company to determine the terms associated with the
Recapitalization Debt, including whether any portion of the
Recapitalization Debt will be secured by
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(3) West Phoenix combined cycle generating units 4 & 5, Saguaro combustion
turbine Unit No. 3 and Redhawk Units I & 2.
(4) This has been referred to as PWCC's "bridge debt".
(5) The Decision also provided that if "APS wishes to pursue the issue of
acquiring PWEC's generation assets, it shall file the appropriate
application(s) by September 15, 2002."
5 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
all or a portion of the Company's assets;
* Authorize the Company to provide the APS Guarantees in accordance with
the Application;
* Authorize the Company to determine the terms associated with the APS
Guarantees, including whether any portion of the APS Guarantees will
be secured by all or a portion of the Company's assets;
* Provide that the Recapitalization Debt and the APS Guarantees will not
be classified or counted as Continuing Debt;
* Find that the issuance and incurrence of Recapitalization Debt, and
the issuance of the APS Guarantees are reasonable necessary or
appropriate for the purposes set forth in this Application and that
such purposes are within those permitted by A.R.S. Section 40-301, ET
SEQ.;
* Permit such purposes to the extent they may be reasonably chargeable
to operative expenses or to income and allow the payment of related
expenses as contemplated herein;
* Authorize APS to obtain a financial interest in PWEC or Pinnacle West
in the form of an inter-affiliate loan, APS Guarantees, or a
combination of the two up to a maximum aggregate principal amount of
$500,000,000;
* Authorize APS to make such expenditures, sign and deliver such
documents, and negotiate such terms and conditions with underwriters
or selling agents, purchasers and/or lenders, including but not
limited to those pertaining to terms, rates, and collateral
requirements (if any), all as described herein, as may be reasonably
necessary to economically effectuate the other authorizations granted
herein; and
* Grant the Company such additional relief as is appropriate under the
circumstances.
The Company is requesting approval of either an inter-company loan, a
guarantee, or a combination of both. The proceeds of the long-term debt incurred
by APS would then be loaned to either PWEC or PWCC. The funds would be used to
pay off an equivalent amount of PWCC debt previously incurred to finance
construction of the PWEC assets.
Jack Davis, APS President and CEO, and PWCC President, testified that the
following were benefits from granting the application: avoiding a downgrade of
APS debt ratings; avoiding corresponding increases in the APS cost of capital;
strengthening wholesale competition by maintaining PWEC as a viable competitor
in the upcoming Track B solicitation; preserving the Commission's ability to
consider rate base treatment of the PWEC assets in the 2003-2004 rate case;
strengthening investor and rating agency confidence in the Commission;
continuing a responsive and responsible regulatory environment; preserving the
current Track B solicitation process; and resulting in settlement of most of the
issues in the Track A legal appeals. (APS-8 at 4-5) Further, in its Initial
6 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Post-Hearing Brief, APS identified what it believes are additional benefits to
it and its customers from approval of the application, including net interest
income of between 7.5 to 13.2 million dollars per year, and with Staff
conditions, there may be greater regulatory insulation for APS within the
holding company structure.
APS witness, Arthur Tildesley, Managing Director, Salomon Smith Barney,
Inc., testified that under current market conditions, PWEC would be unable to
raise significant debt financing on a standalone or non-recourse basis. "Without
the transfer of the APS generation assets or the establishment of some form of
power purchase agreement ("PPA"), the business profile and credit quality of
PWEC would be viewed as very weak." Mr. Tildesley testified that "APS business
fundamentals and credit statistics are strong, and we believe that APS has
significant capacity to provide an intercompany loan or guarantee to PWEC in the
amount of $500 million without impairing fundamental utility credit quality."
Mr. Tildesley did not attempt to evaluate PWEC's ability to actually service the
loan, and in fact, for purposes of determining the impact of a loan on APS, he
assumed no repayment capacity at PWEC. (APS-3 pp 4 & 5)
AUIA
The AUIA urged the Commission to grant APS the authority it seeks and
believes that this action would be in the public interest in safeguarding the
financial integrity of APS and its parent. AUIA believes that if APS' credit
cannot be used, "it is not inconceivable that a bankruptcy and/or a forced sale
of some or all of the PWEC assets could occur. Of course, any sale in the near
future would be into a market that is already glutted with the bad construction
decisions of merchant generators." (AUIA-1 at 5). AUIA believes that such an
impact on APS would not be positive as it is "increasingly difficult to insulate
an affiliate from the fortunes of its holding company and vice versa and it is
unrealistic to expect that APS would be immune from a financial meltdown at
Pinnacle West." (Id.)
STAFF
Staff believes that APS could face a downgrade if PWCC is downgraded, that
such a downgrade of APS could interfere with APS' ability to provide electric
service to the public if it resulted in increases in the cost of capital,
potential lack of access to the capital markets, potential
7 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
increases in collateral requirements, and an inability to do business with
vendors. Staff believes that APS' requested financing will be compatible with
the public interest if, by preventing a downgrade in APS' credit ratings, it
prevents a substantial disintegration in APS' ability to provide service. For
those reasons, Staff recommended that the Commission authorize APS to borrow
$500 million in order to loan the proceeds to PWEC.
Although Staff concludes that APS' proposed financing will likely serve the
public interest, Staff believes that the transaction poses some risks to the
Company and to its ratepayers, including the fact that issuing debt to loan to
PWEC will diminish APS' ability to obtain its own required debt capital needed
in the coming years, and that the proposed financing runs counter to the goal of
insulating APS from its affiliates' unregulated activities. Staff believes that
these considerations do not outweigh the need to prevent a downgrade to APS'
credit rating, but require conditions to approval of the financing. Staff
Conditions for approval include:
1. APS should be authorized to issue and sell no more than $500,000,000
of debt in addition to its current authorizations;
2. The debt to be lent to PWEC should be no more than $500,000,000 of
secured callable notes from PWEC. The security interest shall be on
the same terms as the security interest APS already has pursuant to
the $125,000,000 loan authorization from Decision No. 65434;
3. The PWEC secured note coupon shall be 264 basis points above the
coupon on APS debt issued and sold on equivalent terms (including but
not limited to maturity and security);
4. The difference in interest income and interest expense should be
capitalized as a deferred credit and used to offset rates in the
future. The deferred credit balance shall bear an interest rate of six
percent;
5. The PWEC debt maturity shall not exceed four years, unless otherwise
ordered by the Commission;
6. Any demonstrable increase in APS' cost of capital as a result of the
transaction, such as from a decline in bond rating, will be extracted
from future rate cases; and
7. APS shall maintain a minimum common equity of 40 percent and shall not
be allowed to pay dividends if such payment would reduce its common
equity ratio below this threshold, unless otherwise waived by the
Commission. The Commission will process the waiver within sixty days,
and for this sixty-day, period this condition shall be suspended.
However, this condition shall not be permanently waived without an
order of the Commission. During the hearing, Staff proposed two
clarifications to Condition 7: that the condition should remain in
effect indefinitely and that APS should file the capital structure
calculation with the Commission within one week of filing a 10-Q or
10-K.
8 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Staff's conditions 2 and 6 are designed to protect APS and its ratepayers
from any harm that may result from this transaction. Condition 2 is necessary to
ensure that APS' interests are protected if there were a default on the loan.
Condition 6 puts the Company and its affiliates on notice that any negative
credit effects to APS will not be borne by its ratepayers. Conditions 3 and 4
are designed to ensure that APS and its ratepayers are appropriately compensated
for the risk associated with the transaction. Conditions 5 and 7 are intended to
provide appropriate regulatory insulation between APS and its affiliates.
Staff believes that ordinarily, it would probably recommend denial of such
a financing. However, Staff believes that the circumstances surrounding this
application are "far from ordinary". "The financial markets are deteriorating,
the energy sector is in disarray, electric utilities in neighboring states have
suffered financial difficulties, and the wholesale market for electricity has
been volatile. Against this backdrop, the Commission's policy should be aimed at
ensuring that Arizona will continue to have financially sound electric
utilities. Because of the potential risk of a downgrade to APS' credit rating,
the Commission should approve APS' application; because of the potential risks
inherent in this transaction, the Commission should condition its approval upon
Staff's seven conditions." (Staff Initial Br. At 6).
Staff asserts that the Commission should not base its approval of this
application upon APS' allegations that the Commission is at fault for PWCC's
predicament. Staff states that throughout its presentation of its case, "APS has
implied that the Commission is responsible for PWCC's dilemma, claiming that the
Commission 'largely created' this problem 'in the first instance.' (Ex. APS-1 at
24). Over and over again, APS insinuates that the Commission's Track A order is
largely to blame, (APS' Br. At 5, 7), and that the Commission is now responsible
for repairing that order's 'loose ends.' (Tr. at 586). Finally, APS has stated
that incurring the bridge debt was 'consistent with Commission guidance and
directives,' (APS' Br. At 8), as if the Commission were the entity that decided
to build the PWEC assets and to finance them through short term bridge debt. The
Commission should not conclude that it is responsible for PWCC's problems, and
it certainly should not base its approval of this application upon such claims."
(Staff Reply Br. at 5).
Staff cites the existing turmoil in the financial markets and the
volatility that has existed in the
9 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
wholesale electric market. Staff's witness testified that if the Commission had
not stopped divestiture, given the current market situation, PWEC could have
been facing an even worse problem than trying to finance now. Staff further
noted that the "PWCC enterprise chose to build the assets at PWEC, chose to
finance them at the holding company level, and chose the maturities of the debt.
None of these decisions were made or sanctioned by the Commission. APS will
argue that its code of conduct prevented it from building the PWEC assets at APS
(Tr. at 520); nonetheless, an examination of that document does not clearly
support that conclusion." (Staff Reply Brief at 5-6)
RUCO
RUCO recommends granting the financing application and also proposes that
APS be required to file an application with the Commission within 45 days to
transfer the PWEC generation assets to APS.
RUCO believes that because APS will use borrowed funds to protect its own
credit rating, the financing is within the proper performance of its duties as a
public service corporation. Based upon Moody's December 30, 2002 Opinion Update
on APS and Standard and Poor's statement that "[e]ven on a stand-alone basis,
APS' financial health remains solidly within the 'BBB' category even with the
addition of $500 million in debt" (Ex S-4), RUCO believes that the financing
will not impair APS' ability to perform its public service obligations.
RUCO believes that with conditions, the financing is compatible with the
public interest. According to RUCO, it will allow PWEC/APS to maintain the
generation assets to the benefit of APS customers. RUCO notes that generally, a
utility issuing debt to finance assets owned by an affiliate is not compatible
with sound financial practices, however, RUCO believes that it and Staff have
proposed conditions that would make the financing consistent with sound
financial practices. RUCO recognizes that "[t]ransferring the PWEC assets to APS
and including some or all in rate base could signal the death knell for
wholesale competition", however, RUCO argues that "it is in the public interest
for the Commission to take action to protect the public, even if that means
returning to an integrated electric utility model at this time." (RUCO Reply Br.
at 3) RUCO concludes that granting the APS application is "merely a stopgap
measure to prevent PWCC from defaulting on its short-term debt obligations and
going into bankruptcy" and that a "cohesive comprehensive plan to rebuild the
10 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
regulatory paradigm is necessary to return the electric industry in Arizona to
functional viability." (RUCO Br. At 7)
PANDA
Panda recommends that the Commission deny the financing application, but if
it does approve some form of credit support to an affiliate, that the Commission
require that it be in the form of a guarantee of affiliate debt, but not a
direct inter-company loan. Panda disagrees with APS' assertions that PWCC cannot
refinance the debt itself; that PWCC will be downgraded if the financing
application is denied; that APS will be downgraded if the financing application
is denied; and that if the financing is approved, APS will not be harmed, even
with the Staff conditions.
According to Panda, APS asserted two primary reasons for Commission
approval of the financing. First, APS argues that the Commission's decision in
the Track A harmed it and its parent and affiliate, and that the Commission
should approve the financing as a remedy. Second, APS argues that PWEC is
fundamentally different from other merchant generators and therefore, Commission
should protect it.
Susan Abbott, a former Moody's analyst with twenty years experience rating
utility companies, including APS, testified on behalf of Panda.
Panda argues that there is no evidence in the record that PWCC will suffer
a downgrade if APS does not refinance the bridge debt. In its Initial Brief,
Panda states "APS introduced NO written evidence that PWCC would be downgraded
if it refinanced or renegotiated the bridge debt at the holding company level,
nor any evidence that such a refinancing or renegotiation is impossible. Rather,
Ms. Gomez relied on undocumented and unsubstantiated conversations she allegedly
had with lenders and rating agency personnel during the course of which, or even
after which, she failed to take a SINGLE note. Tr. at 114, lines 3-6 ... In
short, Ms. Gomez could produce no evidence to back up her assertion that PWCC
would be downgraded if it refinanced the bridge debt at the holding company
level." (emphasis original) (Panda Initial Br. p. 11) Panda's witness testified
that were she analyzing PWCC, she would not recommend a rating downgrade if PWCC
refinanced the debt, because PWCC's credit metrics would remain within the BBB
range. Ms. Abbott further noted that APS testified that PWCC could raise $300
million over the next year for its Nevada generation
11 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
(Silverhawk).
Panda also argues that there is no evidence in the record that APS will
suffer a downgrade if PWCC is downgraded. Panda's witness testified that a
downgrade of a holding company can result in a downgrade of the utility
subsidiary when the parent's debt load is so high as to require substantial
dividends from the utility company in order for the parent to service the debt,
but here, the debt load of the parent would not change, since it is a
refinancing. Panda argues that any evidence that APS will not be downgraded if
it assumes an additional $500 million in debt is "either not credible or is
entirely self-serving." (Initial Br. at 14) Panda's witness testified that the
analysis of the rating agencies depends on what information was provided by the
utility, and Panda argues that since APS sent its testimony (which says APS
intends to seek rate base treatment of the PWEC generation assets) to the rating
agencies but APS' witness cannot remember what she told the rating agencies,
there is no way to know whether the analyses presume rate base treatment of the
PWEC assets, and therefore would decline if the assets did not become rate
based. Panda also argues that the relevance of prior rating agency statements
are questionable "given that APS appears to have provided inaccurate information
to the rating agencies and analysts in the past as well. Shortly after the 1999
Settlement and after PWEC proposed constructing generation assets, APS and PWEC
told the rating agencies that PWEC and APS either had, or would, enter into a
four-year Power Purchase Agreement ("PPA") for the supply of APS' power
requirements, even though the final two years of the PPA would be AFTER the date
when APS was required to procure 100% of its Standard Offer Service requirements
from the competitive market rather than from its unregulated merchant affiliate.
Exhs. P-23, 24 and 25. On cross-examination, Ms. Gomez admitted that there
really was no such PPA, and that APS merely told the rating agencies that it
'expected' to sell power under just such a contract. Tr. at 145-146. The
documents offer no such qualification, and it is reasonable to infer, therefore,
that had the agencies been provided more accurate information, they likely would
not have opined as they did." (Panda Initial Br. at 14-15)
Ms. Abbott testified that if additional leverage were to be placed on APS,
it is difficult to believe that would not be reflected in a ratings downgrade by
Moody's and Fitch, and by S&P at the first mortgage bond level. She found that
APS' financial parameters would decline significantly, and
12 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
although they are not the only concern for the rating agencies, they are
important guideposts that have a heavy influence on ratings. Panda argued that
even if APS is not downgraded as result of making a loan to its affiliate, its
credit quality will suffer. Ms. Abbott testified that approval of the financing
application would diminish APS' credit quality and that she would have not
recommended keeping the rating the same based on her analysis and conclusion
that the resulting financial metrics were more commensurate with those of other
vertically integrated fully regulated utilities in the "B 11" range. (Tr. at
752) She expressed some surprise at Moody's December 30, 2002 statement,
indicating that although ratings are not the sole product of financial metrics,
it is not known what information APS provided to Moody's. APS Treasurer, Ms.
Gomez testified that she did not keep records of her conversations.(6)
Another concern expressed by Ms. Abbott is that a loan or guarantee between
APS and PWCC would make that relationship closer, and APS will be less protected
from negative circumstances affecting PWCC. She concludes that there are
negative consequences to APS ratepayers in the long run, including higher
interest cost should APS be downgraded, and a less robust competitive market in
Arizona leading to higher purchased power costs. Panda believes that the
appropriate place to refinance the PWEC assets is at PWCC.
Panda cites the rulemaking docket and order that adopted the Public Utility
Holding Companies and Affiliated Interests Rules A.A.C. R14-2-401 ET SEQ.
("Affiliated Interest Rules") to support its position that the application
should not be granted. Panda quotes the Commission's
Concise Explanatory Statement:
The Rules were first promulgated in 1985 in response to the formation [of
PWCC by APS] and to its acquisition one year later of MeraBank, a federal
savings and loan institution. The Commission at the time expressed concerns
that the transactions would prevent proper regulation and effect the
establishment of rates for APS. In response, APS and its parent offered
assurances to the Commission
- ----------
(6) Q. I think you responded in response to data requests that, in fact, you
have no written statements from any of the financing agencies; is that
correct? As far as your discussions with them?
A. That's right. We don't keep documentation of the discussions with
them.
Q. Why is that?
A. It's our practice to not keep documentation.
Q. Okay. So you keep no documentation of any of your discussions with
Moody's, Fitch, Standard & Poor's?
A. No, I don't. The discussions happen frequently and I do not keep
records of that. Gomez Tr. pp. 113-114. See also TR. At 117 & 298.
13 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
that the concerns were unfounded ... The huge capital losses which have
recently been experienced by MeraBank and have forced Pinnacle West to the
brink of financial collapse served as the catalyst for the Commission to
again engage in rulemaking for the regulation of public utility holding
company formation and affiliated transactions ... Article 8 is designed to
ensure that utility ratepayers are insulated from the dangers proven to be
inherent in holding company structure and diversification. Its singular
purpose is to ensure that ratepayers do not pay rates for utility service
that include costs associated with holding company structure, financially
beleaguered affiliates, or sweetheart deals with affiliates intended to
extract capital from the utility to subsidize non-utility operations.(7)
The Concise Explanatory Statement also stated that the Rules were intended
to implement these principles: "First, utility funds must not be commingled with
non-utility funds. Second, crosssubsidization of non-utility activities by
utility ratepayers must be prohibited. Third, the financial credit of the
utility must not be affected by non-utility activities. Fourth, the utility and
its affiliate must provide the Commission with the information necessary to
carry out regulatory responsibilities." (Id.)
Panda concludes that "APS's (sic) assertion that APS' credit rating will be
adversely affected if it is not permitted to loan half a billion dollars to its
non-regulated affiliate is clearly an action that the Affiliated Interest Rules
were intended to prohibit." (Panda Initial Br. at 5-6)
Panda argues that APS failed to prove the elements required by the
statutory and regulatory standards, but instead posed the "eight 'benefits"' it
believes the financing provides.
Panda argues that the evidence demonstrates that PWEC assets were built to
serve the wholesale market, not APS customers. (Panda Initial Brief pp 15-19)
Panda believes that if the Commission decides that it is in the public
interest for APS to provide some credit support for its affiliate, it should be
in the form of a guarantee, and not a loan.
Panda recommends that the Commission restrict any financing to an APS
guarantee of PWEC's debt because it would: maintain the separation of regulated
and unregulated assets; preserve to the greatest extent possible the goal of
wholesale competition; not prejudge or call into question the issue of rate
basing PWEC assets; allow PWEC to make an entry into the financial markets(8);
and
- ----------
(7) In the Matter of the Notice of Proposed Adoption of Rules for Regulation of
Public Utility Companies with Unregulated Affiliates, Decision No. 56844,
Attachment B at 2 (1990).
(8) APS' witness, Arthur Tildesley of Salomon Smith Barney testified that while
the guarantee structure "may be perceived by investors as somewhat more
complex and may be marginally more expensive than an intercompany loan, it
has the benefit of the notes being issued directly by PWEC." (APS-3 at 9)
14 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
APS credit quality would not suffer as much, because there is no interest
obligation on a guarantee.(9)
Panda believes that the Commission's goal should be to establish PWEC as a
standalone entity as soon as possible, and a direct loan from APS to PWEC would
perpetuate the relationship between regulated and unregulated entities, whereas
a corporate guarantee would provide more of a degree of separation.
Panda argues that APS' new reason to prefer a loan to a guarantee is
because the guarantee would be more difficult to undo if the PWEC assets are
rate based. Panda states that the "Commission is faced with the choice of using
a guarantee, which APS witnesses have testified advances the future potential of
PWEC standing on its own two feet, or allowing an inter-company loan, the only
benefit of which is that it makes APS' desire to rate base the PWEC assets
easier. With these facts and the Commission's objective to preserve a viable
competitive wholesale market, it should be an easy choice for the Commission to
select the corporate guarantee over the interaffiliate loan." (Panda Initial Br.
at 27) "Putting the PWEC assets in APS' rate base is the antithesis of promoting
wholesale competition. As Jack Davis made clear, if the PWEC assets go into rate
base they will all but eliminate APS' capacity and energy needs going forward.
Tr. at 655 ... Based on Mr. Davis' testimony, there is little question that
rate-basing the PWEC assets would decimate wholesale competition in Arizona.
Hence, if approval of the loan option would make this rate-basing any more
likely, it should be rejected in favor of the guarantee option." (Panda Initial
Br. at pp 28-29).
Panda argues that the potential harm to wholesale competition can be
created by the loan itself and by a default under the loan. APS has indicated
its intent to transfer the PWEC assets to APS and seek rate base treatment, and
defaulting on the loan could accomplish that goal. According to Panda, APS'
assertions that the potential for cross-defaults would prevent a PWEC default
would not suffice, because the PWCC debt that contains cross-defaults will
expire, leaving only a $25 million callable Prudential loan at the end of 2004.
Further, even if new debt contains the cross-default provisions, Panda believes
that since the cross-default language is discretionary (the lender MAY declare
the debt
- ----------
(9) APS testified that it proposed the guarantee option "because of its
potentially reduced impact on APS and because it might provide PWEC some
'credit exposure' in the market that would be valuable in the future."
(APS-2 at 7).
15 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
to become immediately due and payable) and that such provisions are routinely
waived by lenders, a waiver would be expected in an inter-company transaction.
Panda also believes that APS' assertion that Deeds of Trust would also prevent
automatic transfer to APS upon PWEC default is without merit, as the Deeds of
Trust allow APS to 'enter upon and take possession of the trust estate.' Deed of
Trust at 9, paragraph 1.10." (Panda Initial Br. at 31). Panda argues that a
direct inter-company loan has the potential to adversely affect wholesale
competition because APS would have a strong incentive to prefer its affiliate in
the Track B competitive solicitation, both to support payment of its loan and to
establish a case for rate base treatment of the PWEC assets.
Panda also points out that the cost of a guarantee would have been
evaluated when APS first proposed that alternative, and states that any costs of
pursuing a guarantee would be borne by PWEC and would be of no consequence to
APS or its customers.
Panda proposes what it believes are three critical terms to any guarantee:
the PWEC assets must be pledged as collateral for the loan; the lender must
execute on the assets prior to seeking payment from APS; and APS should not be
permitted to bid on the assets in the event PWEC were to default and a sale of
assets be held.
In response to APS' argument that under a guarantee, ratepayers will not
have the benefit of the conditions Staff proposes, Panda argues that these are
not "benefits" but ways to mitigate harm from the financing. Panda also argues
that Staff's conditions only address the rate impacts of an increase in APS'
cost of capital, and do not address other ways approval of a loan may harm APS
ratepayers. Panda believes that loan approval will directly harm the competitive
market by making it much more likely APS will ultimately be able to include the
PWEC assets in APS rate base. Staff did not analyze the effect of loan approval
on wholesale power rates, and Panda argues that therefore, Staff cannot be
certain that approval of the application will not harm APS customers.
In response to Staffs assertion that a guarantee is inappropriate, Panda
argues that if Staff still believes that a risk premium is appropriate to
reflect the risk that APS would be called upon to pay the amount of difference
between the underlying; PWEC debt and the value of the PWEC assets, the
transaction could be structured to collect such a risk premium from PWEC. Panda
states that Staffs concern about APS not having a primary security interest is
misplaced unless the point of the security
16 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
interest is that APS ultimately owns the PWEC assets or if Staff believes that
the PWEC assets are not worth at least $500 million. This is because the
security interest requirement is to make sure that ratepayers are protected by
allowing an opportunity to exercise on the collateral to recover the loan. Under
the guarantee, APS would bear no risk of making any payment unless and until
PWEC defaults, and only then if the PWEC assets are sold for less than the
deficiency amount. As far as Staff's assertion that a guarantee is impractical,
Panda notes that it was APS that proposed the guarantee and has consistently
agreed to use the guarantee if the Commission determined that it was
appropriate; that APS has had time to any prepare and address any additional
complexities; and that APS' own lender witness testified that his firm would be
interested in placing the guarantee and underlying PWEC debt.
SEMPRA/SWPG/BOWIE
Sempra/SWPG/Bowie believes that the Commission should deny the financing
for both policy and failure of proof reasons.
Sempra/SWPG/Bowie believes that serious questions exist as to whether APS
has satisfactorily discharged its probative burden under A.R.S. ss. 40-301(C).
Sempra/SWPG/Bowie argues that the analysis should look at "whether the proposed
borrowing and loaning by APS is for a 'lawful purpose' directly related to each
of the five (5) decision making standards set forth in A.R.S. ss. 40-301(C)."
(emphasis original)(Reply Br. at 9)
Specifically, Sempra/SWPG/Bowie concluded that APS had not met its burden
of showing that its proposed financial assistance to its affiliate is within its
corporate powers and intended corporate purpose.
Sempra/SWPG/Bowie argues that the record contains no credible evidence that
APS' creditworthiness or financial integrity would be impaired if the financing
were denied. Sempra/SWPG/Bowie state that "[o]n the face of it, the use of its
creditworthiness and financial resources by APS to prop up an unregulated
generation affiliate, and to financially back-stop its unregulated corporate
parent, would appear to have nothing to do with the proper performance of its
role and obligations as a public service corporation" (Sempra/SWPG/Bowie Initial
Br. at 11), a finding required under A.R.S. ss. 40-301(C). Sempra/SWPG/Bowie
further stated that APS
17 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
acknowledges that it may be required to secure a loan with mortgage lien on APS
assets and argues that "[t]he very existence of such a mortgage lien would, by
its very nature, restrict APS' ability to use its assets to borrow or bond for
its own needs from what would otherwise be the case." (Br. at 12)
Sempra/SWPG/Bowie believes that given this uncertainty, APS is unable to show
that its ability to properly perform its public service obligations might not be
impaired at some future date.
Sempra/SWPG/Bowie suggests that when looking at whether the financing is in
the public interest, the Commission may consider whether the purposes underlying
APS' proposed borrowing and lending, or guarantee, are consistent with its
purpose and responsibilities as a public service corporation and whether there
is a risk that the results would be inconsistent with other "public interest"
determinations previously made by the Commission. (Sempra/SWPG/Bowie Reply Br.
at 11)
Sempra/SWPG/Bowie argued that it is imperative that this Decision not
undercut or dilute the Commission's efforts to facilitate the development of a
viable competitive wholesale electric market through the Track B proceeding or
preposition the Commission as to how it may resolve any future APS request to
acquire or rate base PWEC's generation assets.
In its Reply Brief, Sempra/SWPG/Bowie argues that APS continues to
attribute a potential "liquidity crisis" that threatens its parent's financial
integrity to Decision No. 65154. Sempra/SWPG/Bowie notes that the Track A
proceeding was instituted in part in response to APS' Variance/PPA application;
that it was APS' parent, PWCC, that decided how to finance the PWEC assets and
chose the maturity dates for such financing; and that there is no suggestion
that APS had any role in that decision or that the Commission was consulted.
"Rather, it appears PWCC made the decision for its own financial gain, and with
a view towards avoiding 'more expensive and restrictive financing' [APS Initial
Brief, page 6, lines 4-7 However, now that PWCC and PWEC apprehend difficulty in
arranging for permanent financing of these generation assets, they look to APS
and its creditworthiness to 'bail' them out, although there is no evidence in
the record that PWCC ever intended to share the benefits of its reduced interim
financing costs with APS or its ratepayers." (Sempra/SWPG/Bowie Reply Br. at
3-4)
Sempra/SWPG/Bowie also notes the "failure of APS (and its unregulated
parent and
18 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
generation affiliate) to avail itself of the Commission's invitation in Decision
No. 65154 to file an application seeking approval to acquire PWEC's generation
assets. Such an application was to be filed on or before September 15, 2002, if
APS decided to pursue that course of action. Had it elected to do so, that
matter might have been resolved by now; and, perhaps an entirely different
scenario might have unfolded without a purported 'liquidity crisis'... It is
very clear from the record in this proceeding that APS has the financial
capacity to issue additional bonds and thus raise funds by which it could have
acquired PWEC's generation assets, without the necessity of an accompanying rate
increase." (Reply Br. at 4-5)
Sempra/SWPG/Bowie is also concerned by APS' acceptance of Staffs
recommended condition that the term of the loan not exceed four years, because a
four-year loan will not solve PWCC's purported need to arrange permanent
financing for PWEC's generation assets, and APS' and PWCC's plan have no "exit
strategy" if the Commission grants the financing but denies an APS application
to rate base the generation assets. Sempra/SWPGBowie believes that APS and PWCC
are actually seeking to put the Commission in a position of having no
alternative but to approve an APS request for rate base treatment of PWEC
assets.
AECC
AECC takes no position on approval of the financing application, but it is
concerned about the effect approval will have, VIS A VIS a December 13, 2002
Memorandum from the Director of the Utilities Division to the Commissioners,
with an attached document titled "Track 'A' Appeals Issues Principles For
Resolution." ("Principles of Resolution") AECC argues that a Commission decision
granting the financing without specifically rejecting certain provisions of the
Principles of Resolution "will have the effect of: 1) breaking the Commission's
reassurance in Decision No. 65154 not to undermine the benefits that the parties
have bargained for under the APS Settlement Agreement; 2) amending Decision No.
61973 without complying with the provisions of A.R.S. ss. 40-252; and 3) may
constitute "legal action" by settling litigation currently before the courts
without proper notice under Arizona's open meeting law." (AECC Opening Br. at
2-3)
RELIANT
In its Opening Post-Hearing Brief, Reliant states that it intervened in
this financing docket to
19 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
"guard against the possibility that the financing application might subvert the
efforts of the Commission and numerous parties to develop a fair and open
competitive wholesale generation market." (Reliant Br. at 3) Reliant requests
that this Decision expressly find that neither the implementation of the Track B
competitive solicitation process nor the Commission's consideration of whether
to authorize APS to acquire PWEC generation assets or their rate base treatment
will be prejudiced or adversely affected by this Decision,.
APS indicates that granting this application will not give PWEC any
advantage in meeting the credit requirements in the Track B process, because
PWEC will remain without an investment grade rating.
ANALYSIS
The Company is requesting approval of either an inter-company loan, a
guarantee, or a combination of both. The proceeds of the long-term debt incurred
by APS would then be loaned to either PWEC or PWCC. The funds would be used to
pay off an equivalent amount of PWCC debt previously incurred to finance
construction of West Phoenix combined cycle generating units 4 & 5, Saguaro
combustion turbine Unit No. 3 and Redhawk Units 1 & 2. As a supplement to a
loan, or as an alternative, APS seeks authority to guarantee debt issued by PWEC
or PWCC.
APPLICABLE STATUTES/REGULATIONS
Pursuant to Arizona Revised Statutes ss.40-285(A), "[a] public service
corporation shall not sell, lease, assign, mortgage, or otherwise dispose of or
encumber the whole or any part of its railroad, line, plant, or system necessary
or useful in the performance of its duties to the public ... . without first
having secured from the commission an order authorizing it to do so."
A.R.S. ss. 40-301(C) sets forth the minimum requirements that the
Commission must find to authorize APS' issuance of additional debt.
A.R.S. ss. 40-301
A. The power of public service corporations to issue stocks and stock
certificates, bonds, notes and other evidences of indebtedness, and to
create liens on their property located within this state is a special
privilege, the right of supervision, restriction and control of which
is vested in the state, and such power shall be exercised as provided
by law and under rules, regulations and orders of the commission.
20 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
B. A public service corporation may issue stocks and stock certificates,
bonds, notes and other evidences of indebtedness payable at periods of
more than twelve months after the date thereof, only when authorized
by an order of the commission.
C. The commission shall not make any order or supplemental order granting
any application as provided by this article unless it finds that such
issue is for lawful purposes which are within the corporate powers of
the applicant, are compatible with the public interest, with sound
financial practices, and with the proper performance by the applicant
of service as a public service corporation and will not impair its
ability to perform that service.
Pursuant to A.R.S. ss. 40-302, the Commission may grant or refuse to grant
permission and may attach whatever conditions it deems reasonable and
appropriate.
A.R.S. ss. 40-302
A. Before a public service corporation issues stocks and stock
certificates, bonds, notes and other evidences of indebtedness, it
shall first secure from the commission an order authorizing such issue
and stating the amount thereof, the purposes to which the issue or
proceeds thereof are to be applied, and that, in the opinion of the
commission, the issue is reasonably necessary or appropriate for the
purposes specified in the order, pursuant to ss. 40-301, and that,
except as otherwise permitted in the order, such purposes are not
wholly or in part, reasonably chargeable to operative expenses or to
income ....
B. The commission may grant or refuse permission for the issue of
evidences of indebtedness or grant the permission to issue them in a
lesser amount, and may attach to its permission conditions it deems
reasonable and necessary. The commission may authorize less than,
equivalent to or greater than the authorized or subscribed capital
stock of the corporation, and the provisions of the general laws of
the state with reference thereto have no applications to public
service corporations.
Pursuant to A.A.C. R14-2-804(B), APS cannot lend to any affiliate not
regulated by the Commission or obtain a financial interest in any affiliate not
regulated by the Commission, or guarantee, or assume the liabilities of the
affiliate, without approval of the Commission. Pursuant to A.A.C. R14-2-804(B),
the Commission will review the transactions "to determine if the transactions
would impair the financial status of the public utility, otherwise prevent it
from attracting capital at fair and reasonable terms, or impair the ability of
the public utility to provide safe, reasonable and adequate service."
OBLIGATIONS OF CERTIFICATED PUBLIC SERVICE CORPORATIONS
As a certificated public service corporation in Arizona, APS has a duty to
provide reliable electric service to its customers at reasonable rates. In
furtherance of that duty, APS should manage its business and operations to
insure that it is financially capable of providing such service. It is in
21 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
the public interest that APS maintain healthy credit ratings so that APS has
access to the capital markets at reasonable terms and rates, as those costs are
reflected in rates paid by APS customers. Further, APS has a duty to comply with
applicable statutes, regulations, and Commission decisions.
NEED FOR APS CREDIT SUPPORT
Much of the testimony focused upon who may be downgraded if the financing
application is approved or denied. APS argued that neither PWCC nor PWEC can
refinance the existing PWCC debt at reasonable terms without support from APS.
APS further argues that PWCC will be downgraded if the application is denied and
APS will be downgraded if PWCC is downgraded. APS argues that a downgrade would
impair its ability to obtain credit to support its utility operations and
possibly interfere with its ability to provide electric service. Staff and RUCO
agreed with APS' conclusions. Panda argued that PWCC could refinance the debt
and that if APS issues debt to loan to PWEC, it is likely to be downgraded, and
at the very least, its credit quality will suffer.
Staff believes that a rating downgrade at APS could interfere with APS'
ability to provide electric service to the public - it could result in increases
in cost of capital, potential lack of access to the capital markets, potential
increases in collateral requirements, and an inability to do business with
vendors. Staff concluded that "there is some risk of ratings downgrade to PWCC,
and as a consequence, to APS." (Staff Initial Br. at 3-4) Although Staff
believes that "the evidence on this issue is clothed in conjecture and
speculation, significant evidence nonetheless supports the conclusion that PWCC
is at risk for credit downgrades. As a consequence, APS faces a similar risk."
(Ibid at 4).
Rating agency reports indicating a potential for a PWCC downgrade include a
December 2002 Fitch report stating "[f]ailure to obtain the inter-company loan
or access alternate sources of funding would result in a downgrade of PNW"
(APS-2, Ex. BMG-2R); Standard and Poor's November 4, 2002 report stating "[t]he
stable outlook reflects the assumption that the ACC will approve the application
by PWCC to issue up to $500 million at APS to repay a portion of the $750
million bridge financing at PWCC" (Staff Ex.4); and a December 30, 2002 Moody's
report stating "PWCC's rating outlook is stable and incorporates the view that
the ACC will adopt the staff recommendation concerning the APS financing
application, which should allow for a successful
22 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
refinancing of PWCC debt." (APS Ex. 5).
The likelihood of an APS downgrade in the event of a PWCC downgrade is more
speculative. Staff's witness testified that he could not state for a fact that
APS would be downgraded, but cited the December 30, 2002 Moody's Opinion update
(APS Exh. 5) which states: "APS' rating outlook is stable and incorporates the
view that the ACC will adopt the staff recommendation concerning the APS
financing application and other Track A issues. Moody's notes that while APS'
coverages may decline if the financing application is approved,. the resulting
credit metrics should remain consistent with the current rating, particularly
when one considers the benefits to bondholders of having APS remain vertically
integrated." Staff acknowledges that the report is subject to interpretation,
but believes that it implies that APS' ratings outlook is stable as long as the
financing application is approved.
Panda's witness testified that APS acquiring additional debt to loan to
PWEC should result in a downgrade of APS, whereas, PWCC refinancing its existing
bridge debt should not result in a downgrade of PWCC or APS. Logically, this
analysis makes sense. However, we do not know what APS told the rating agencies
- - since Ms. Gomez sent them her testimony that indicates that APS seeks to rate
base these assets, we do not know whether or how this information was factored
into the agency opinions. Therefore, it is possible that APS may be downgraded
if APS led the rating agencies to believe that the assets are going to be rate
based, and that the assets had an assured cash flow.
This testimony and evidence on the need for APS credit support consists of
speculation on actions that third parties may take as a result of our decision.
Our foremost concern and guiding principle is what is in the best interest of
the ratepayers of APS. Although it is not clear to us that APS would be
downgraded if this financing application is denied, we are not willing to risk
that since we believe that with appropriate conditions, we can minimize the
effects of the financing on the ratepayers. Accordingly, APS should be
authorized to provide credit support.
FORM OF APS CREDIT SUPPORT - LOAN AND/OR GUARANTEE
APS seeks either a loan and/or a guarantee. Staff supports only a loan, and
Panda supports only a guarantee.
23 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
LOAN
Panda and other intervenors urge the Commission not to approve a loan
because it does not maintain separation between APS and its affiliate; it would
undermine wholesale competition; and because APS' credit quality would not
suffer as much as with a guarantee.
We stated in Decision No. 65434 (December 3, 2002), that we would examine
ways to improve the regulatory insulation between APS and its affiliates in this
docket. We are also concerned about regulatory insulation, but find that Panda's
concerns about a loan can be addressed in the conditions we place upon a loan,
by monitoring subsequent events including the Track B solicitation, and through
our Affiliated Interest Rules.(10) Further, we are not adopting RUCO's
recommended requirement that APS file an application to acquire or rate base the
PWEC assets, and none of the proceeds will be used for or to support PWEC's
non-Arizona generation assets.
Although APS' witness Tildesley testified that for purposes of determining
the impact on APS, he assumed no repayment capacity at PWEC, we are approving
this financing based upon the testimony of President and Chief Executive Officer
for APS and the President of PWCC, Jack Davis, that if PWEC did not win any bids
in the Track B competitive procurement, that PWEC would sell its power out into
the wholesale market, and that that would generate sufficient funds to pay the
loan to APS. (Davis Tr. p. 641). Additionally, APS will soon be filing a rate
case and we can take further action to protect ratepayers at that time, if
necessary. Therefore, if there are any negative effects of the financing (in
addition to Staff's identified capital cost concerns), we will insure that APS'
ratepayers are held harmless. Further, we will require that APS notify the
Commission in the event of a default on the loan, so that the Commission can
take appropriate action. Staffs Condition 2 requires APS to obtain a security
interest in the PWEC assets and only APS has such a lien, so APS would have the
first priority in the event of a default. (Tr. 269-272)
APS generally agreed with Staff's conditions for a loan approval, but
requested modification of Condition 3 to reduce the point spread from 264 to
150. APS believes that Staff's premium is excessive and "substantially
overstates the risk undertaken by APS". APS' point spread corresponds
- ----------
(10) See discussion and conditions hereinafter in the Affiliated Interest Rules
section.
24 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
to the difference between APS' credit rating and the rating APS believes PWEC
would have obtained absent Decision No. 65154. Staff believes that the loan
should be priced at an appropriate market rate - PWEC's current status reflects
a BB minus rating which is not investment grade. Staff's basis point risk
premium is designed to insure that APS will be compensated for the actual risk
associated with lending money to PWEC. We agree with Staff that APS should be
compensated for the actual risk and given PWEC's acknowledgement that it could
not obtain project financing even prior to Decision No. 65154,(11) believe that
Staffs premium is appropriate.
APS proposes that the Commission adopt its clarification to Condition 7, by
defining the calculation of the amount of common equity to mean calculated on a
quarterly basis, using APS' 10-Q or 10-K filings with the Securities and
Exchange Commission. Using the reported APS balance sheet accounts, APS' common
equity would be divided by the sum of such common equity and APS long-term debt
(including current maturities of such debt). Staff did not disagree with this
method. However, it is not clear from APS' clarification if this new debt is to
be included in the calculation,(12) so we will approve APS' clarification with
the condition that the debt financing approved herein will be included in the
calculation.
Accordingly, we will adopt Staffs recommended conditions to APS' financing,
with the clarifications above.
GUARANTEE
In its Initial Brief, APS indicates that although it initially requested
either a loan or a guarantee, if forced to choose between the two, it prefers
the loan option, primarily because of timing - it believes that the financial
markets are more familiar with APS debt so an APS loan would be easier and
quicker than if potential lenders must do "market discovery" on PWEC. This is
especially so if "it is determined that PWEC should register its debt with the
SEC as an initial public offering rather than place debt privately." APS also
believes that Staff's conditions would be difficult to implement with a
guarantee. Further, APS believes that an APS loan would "reduce future issues
involved in the determination by the Commission of the ultimate retaking
treatment" of the PWEC
- ----------
(11) Tr. At 211
(12) Staff recommends a maximum term of four years, which would likely not be
included in long-term debt.
25 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
assets because "it minimizes any subsequent costs of assuming or refunding the
PWEC debt being guaranteed by APS." (APS Initial Br. at 25) Further, a guarantee
would be more costly to PWEC.
APS believes that Panda's three critical conditions on a guarantee should
be rejected as impractical, unnecessary, and contrary to APS' customers' best
interests. APS criticizes Panda's requirement that PWEC assets should be pledged
to a third-party lender as directly conflicting with Staff's Condition No. 2;
that a requirement that a third-party lender execute on PWEC assets before
seeking payment from APS would make the financing unmarketable; and that
precluding APS from bidding on PWEC assets in an auction would violate a
fundamental principle in commercial secured transactions that "a creditor is
entitled to protect its own equity in an investment by bidding at least its
secured amount into any auction" (APS Closing Br. at 15); and would prevent the
Commission from ever considering the used and usefulness of the plants.
Staff opposed APS' request to guarantee the debt issued by PWCC or PWEC
because Staff believes that it is "undefined, impractical, ill suited by the
circumstances of the case, and unsupported by the record." (Staff Initial Br. at
6) Even if a guarantee were well defined, Staff believes that a loan would
better protect ratepayers because an explicit loan with a stated interest rate
would set forth the APS risk exposure. Further, Staff is concerned with the
timing and complexity of a guarantee and believes that a guarantee would
interfere with Staff's condition that APS hold a security interest in the PWEC
assets. In response to Panda's argument that a guarantee would maintain
separation between APS and its affiliates, Staff states that although regulatory
insulation is important, it would be unreasonable to structure this transaction
around that single goal.
We believe that APS should have the flexibility to use the guarantee option
if it would be in the best interests of ratepayers. Although none of the parties
are as familiar with such a guarantee, we believe that it is possible to
structure such a guarantee to address the concerns raised by Staff in its
proposed conditions to the loan approval. Not all of the debt to be refinanced
is due this summer, and it may be possible to use a combination of debt now and
guarantee later. If APS chooses to use the guarantee option, it shall consult
with Staff to make sure that the transaction's structure meets Staff's concerns.
We find that Panda's proposed restriction limiting APS' ability to bid at
auction to preserve its equity is not in the public interest.
26 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
COMPLIANCE WITH A.R.S. ss. 40-301
In response to Sempra/SWPG/Bowie argument that the financing is not within
its corporate powers, APS argues that its current Articles of Incorporation were
adopted in 1988 under Title 10 of the Arizona Revised Statutes. A.R.S. ss.
10-054(A)(4) required all corporations to include in their articles of
incorporation a brief statement of character of business the corporation intends
to actually conduct, but the statement did not limit the character of business
that the corporation ultimately conducted. Further, pursuant to A.R.S. ss. ss.
10-301 & 302, corporations have the power to pledge property, borrow and lend
monies, and engage in any lawful activity." APS argues that the language
included in its Articles of Incorporation to comply with the then-applicable
1976 Arizona Business Corporation Act did not act as an implied limitation to
the broad "purposes" paragraph of the Articles: We agree and find that the
financing is for lawful purposes within APS' corporate powers.
Generally, a public service corporation borrowing funds to lend to an
affiliate to refinance assets would not be considered to be in the public
interest, to be consistent with sound financial practices, nor to be within the
proper performance of its duties as a public service corporation. In fact, we
adopted Affiliated Interest Rules in order to ensure that utility ratepayers are
insulated from the dangers inherent in holding company structures and
diversification. Their purpose is to make sure that ratepayers do not pay rates
for utility service that include costs associated with the holding company
structure, including financially beleaguered affiliates and "sweetheart deals
with affiliates intended to extract capital from the utility to subsidize
non-utility operations." However, we believe that with the conditions imposed in
this decision, those goals can be met. Taking into account the events that have
happened in the move to deregulate the electric industry, on both a national and
local basis, including the current state of the financial markets, the public
interest may require approval of some unusual requests that seemingly are not
related to a utility's proper performance of its duties as a public service
corporation. It is under this unique backdrop that we must analyze whether we
can make the findings required by statute to approve this financing.
Approval of the financing will allow APS to use the borrowed funds to
protect its own credit rating, and in that context, the financing is within the
proper performance of its duties as a public service corporation. According to
the rating agencies, APS' health will remain stable, even with the
27 DECISION NO. 65796
DOCKET NO. E-01 345A-02-0707
additional debt. Although Staff found that APS has significant needs for capital
for the regulated utility operations over the coming years and issuing debt to
loan to PWEC would diminish APS' ability to obtain its own debt capital, the
condition that the loan not exceed four years and APS' ability to fund capital
expenditures from internally-generated funds together with the restriction on
payment of dividends, will prevent the financing from impairing APS' ability to
perform its service as a public service corporation. Generally, a utility
issuing debt to finance assets owned by an affiliate is not consistent with
sound financial practices, but with conditions of Staff, including the security
interest in the PWEC assets and the interest premium paid by PWEC, there will be
no "sweetheart deal" extracting capital from APS. Staff's witness testified that
the financing is not obviously compatible with the public interest, but with
conditions, it will protect APS' credit rating which will insure that APS can
continue to provide electric service to its customers at a reasonable cost. We
conclude that APS' financing with the conditions adopted herein, will be
compatible with the public interest if, by preventing a downgrade in APS' credit
rating, it prevents a substantial disintegration in APS' ability to provide
service.
In December 2002, PWCC raised approximately $200 million in net proceeds
from the sale of common stock and the proceeds were used for debt reduction at
PWCC. We believe that it is appropriate for PWCC to improve its overall
financial health, but not at the expense of APS ratepayers. Accordingly,
consistent with APS' argument that a downgrade to PWCC would result in a
downgrade of APS, and in recognition of our approval of the financing, we expect
that PWCC not take any actions (including issuing debt or equity) that would
result in a downgrade to itself or to APS.
Through this financing application, PWCC is attempting to share the
financial risks associated with the PWEC assets with APS. There is no evidence
that APS analyzed the developing wholesale market and requested PWCC to build
such assets(13), and in fact, APS was obligated to purchase its power for
Standard Offer customers from the competitive market, not through a PPA with its
affiliate. PWCC's supposed claim "damages as a result of Decision No. 65154"
rings hollow when
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(13) Tr. p 281
28 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
one looks at the circumstances under which PWEC obtained its investment grade
credit, especially against the background of our admonitions contained in
Decision No. 61973,(14) and given APS' witness' testimony that by the time she
started talking to bankers about refinancing options in the fall/winter of
2001(15), the options were basically the same as today. Nevertheless, we find
ourselves in the situation where it appears that some action must be taken to
prevent APS ratepayers from potential harm resulting from APS' parent's decision
to build generation and to finance that generation with "bridge debt", in
combination with the circumstances that currently exist in the financial
markets. We believe that with the conditions contained herein, approval of the
application is in the public interest.
CONTINUING LONG-TERM INDEBTEDNESS
As of June 30, 2002, APS had total outstanding long-term indebtedness in an
aggregate principal amount of approximately $2,206,780,000. Decision No. 55017
(May 6, 1987)(16) allows APS to have outstanding up to an aggregate principal
amount of long-term indebtedness of $2,698,917,000. Accordingly, APS has
approximately $492,137,000 in additional long-term debt authorization
outstanding. APS views having such a debt margin as a "critical component of the
financing flexibility afforded by the 1986 Order." (Application p. 10) APS
requests that the Commission maintain the current margin under the Continuing
Debt limit by not treating the new debt as Continuing Debt under the 1986 and
1984 Orders. Staff did not object to such treatment. Although we are not
counting the new debt as continuing debt, we are including the $500,000,000 in
APS' capital structure for purposes of calculating the minimum 40 percent common
equity ratio requirement for APS to issue, dividends. Staff testified that "APS
has significant needs for capital for regulated utility operations over the
coming years" (Exhibit S-1, Thornton p. 1). APS' needs for capital for its
regulated public utility service take precedence over PWCC's desire for
dividends from APS. Accordingly, in the proper performance of its duties as a
public service corporation, APS' financial decisions shall be governed by those
duties, and not by the needs of its parent or affiliates.
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(14) See Tr. p 275; pp 649-50
(15) Well before Decision No. 65154, issued in September 2002.
(16) The 1986 Order superseded the long-term indebtedness limitation granted APS
in Decision No. 54230 (November 8, 1984) (1984 Order).
29 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
APS shall not forgo funding for needed utility operations so that it can pay
dividends to its parent.
ASP DEBT - SECURED OR UNSECURED
On February 20, 2003, the Federal Energy Regulatory Commission ("FERC")
issued a news release "Commission Sets New Conditions For Utility Debt
Acquisition" and on February 21, 2003, issued its "Order Conditionally Granting
Authorization to Issue Long-Term Unsecured Debt and Announcing New Policy on
Conditioning Securities Authorizations" in Docket No. ES02-52-000, concerning
Westar Energy, Inc.
Section 204 of the Federal Power Act ("FPA") provides that requests for
authority to issue securities or assume liabilities shall be granted if FERC
finds that the issuance:
(a) is for some lawful object, within the corporate purposes of the
applicant, and compatible with the public interest, which is necessary
or appropriate for or consistent with the proper performance by the
applicant of service as a public utility and which will not impair its
ability to perform that service, and (b) is reasonably necessary or
appropriate for such purposes.
Section 204 of the FPA does not apply to a public utility organized and
operating in a state where its securities issuances are regulated by a state
commission. Accordingly, jurisdiction over APS' financing application is with
this Commission. We note the similarities of Arizona's financing statutes with
Section 204 of the FPA and therefore, in addition to our consideration of state
law, will consider and evaluate APS' application in light of FERC's newly
announced conditions. Those conditions are:
* public utilities seeking authorization to issue debt backed by a
utility asset must use the proceeds of the debt for utility purposes
only;
* if any utility assets that secure debt issuances are 'spun off,' the
debt must follow the asset and also be 'spun off'
* if any of the proceeds from unsecured debt are used for non-utility
purposes, the debt must follow the non-utility assets. If the
non-utility assets are 'spun off,' then proportionate share of the
debt must follow the 'spun off' non-utility asset; and
* if utility assets financed by unsecured debt are 'spun off' to another
entity, then a proportionate share of the debt must also be 'spun
off'. The stated purpose of the conditions is "to prevent public
utilities from borrowing substantial amounts of money and diverting
the proceeds to finance non-utility businesses.
30 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Under these FERC conditions, APS could not issue debt secured by its assets
because the proceeds of the debt are not being used for a utility purpose, but
are being used to lend funds to an affiliate to refinance affiliate debt.
Further, if the funded non-utility assets are 'spun off', then the debt must
follow the assets. Under this analysis, the non-utility assets are already
divested or 'spun off' since they are owned by PWEC, and APS would essentially
be acting as a secured lender. We believe that our condition to require APS to
obtain a security interest in the PWEC assets assures that the debt follows the
assets, and the interest premium paid by PWEC will compensate APS for its risk.
We agree that it is not in the public interest for APS to use its assets to
secure its debt and will limit the debt APS issues to unsecured debt only. As
indicated hereinafter, we will further condition approval on APS and its
affiliate's agreement to be bound by all the Affiliated Interest Rules,
including those that APS obtained a waiver from in Decision No. 61973, during
the terms of the loan and/or guarantee.
PRINCIPLES OF RESOLUTION
AECC believes that the Commission should reject certain provisions of the
Principles of Resolution. Notwithstanding Staff and APS' agreement, any party
may object to the inclusion of those issues in the rate case, and the presiding
officer can determine the appropriate scope of the proceeding.(17) However, as
we said in Decision No. 65154, "[a]ccordingly, we will direct Staff to open a
rulemaking docket to address any required changes to rules, and will keep this
docket open for parties to file comments upon what other decisions/issues may
need to be revisited." (p. 27) APS' ability to raise these issues may be limited
by the Settlement Agreement, but until such time as that issue is before us, APS
should comply with the terms of the Settlement Agreement if it seeks to modify
issues resolved therein. Our approval of this financing application with the
knowledge that Staff has filed its Principles of Resolution does not mean that
we consider the Commission a party to the 1999 Settlement Agreement and have
agreed to reopen the 1999 Settlement Agreement, nor is it intended to indicate
our agreement that the issues set forth in the Principles of Resolution will be
decided by us in the rate case. The Staff's Principles of Resolution is
essentially an agreement by Staff not to object to APS' inclusion of these
issues in the rate case, and does not eliminate APS'
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(17) It is possible that other parties may propose to address additional issues
as well, such as APS' recovery of stranded costs from its ratepayers.
31 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
obligations to parties under the Settlement Agreement, or under A.R.S. ss.
40-252. As is clear in our discussion herein, our decision to approve the
financing application with the conditions contained herein is not based upon
APS' assertion that Decision No. 65154 "caused damages to APS" and is not
related to settling the appeal filed by APS.
APS notes that it can withdraw portions of its Track A appeal on its own,
with or without Commission action.
TRACK B - COMPETITIVE PROCUREMENT
As stated in the Company's application, "APS also wishes to make it clear
that this Application does not affect nor is it intended to affect the
Commission's consideration of, or the Company's position on, any of the 'Track
B' issues identified in Commission Docket No. E-00000A02-0051. This too was an
express part of the Commission's order in Decision No. 65154 (ID. at pp.33-34,
Tenth Ordering Paragraph.)" (Application p. 4) APS indicates that granting this
application will not give PWEC any advantage in meeting the credit requirements
in the Track B process, because PWEC will remain without an investment grade
rating.
Accordingly, the public interest requires that any improvement in PWEC's
credit worthiness as a result of approval of this financing not be considered or
used in the evaluation of bids/offers during APS' Track B competitive
procurement. This will help neutralize possible "preference to an affiliate"
incentives that may be created by approval of this financing. Further, we
believe that we have structured the Track B proceeding to prevent favoritism.
Reliant requests that this Decision expressly find that neither the
implementation of Track B competitive solicitation process nor the Commission's
consideration of whether to authorize APS to acquire PWEC generation assets or
the rate base treatment will be prejudiced or adversely affected by this
Decision.
AFFILIATED INTERESTS RULES
Pursuant to Decision No. 61973 (October 6, 1999), APS was granted various
waivers of the Commission's Public Utility Holding Companies and Affiliated
Interests rules. Specifically, APS was granted waivers of:
* "R14-2-801(5) and R14-2-803, such that the term 'reorganization' does
not include,
32 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
and no Commission approval is required for, corporate restructuring
that does not directly involve the utility distribution company
('UCD') in the holding company. For example, the holding company may
reorganize, form, buy or sell non-UDC affiliates, acquire or divest
interests in non-UDC affiliates, etc., without Commission approval";
R14-2-805(A) "shall apply only to the UDC."
* R14-2-805(A)(2)
R14-2-805(A)(6)
* R14-2-805(A)(9), (10),and (11).
R14-2-805(A) provides:
On or before April 15th of each calendar year, all public utilities meeting
the requirements of R14-2-802 and public utility holding companies will
provide the Commission with a description of diversification plans for the
current calendar year that have been approved by the Boards of Directors.
As part of these filings, each public utility meeting the requirements of
R14-2-802 will provide the Commission the following information:
1. The name, home office location and description of the public utility's
affiliates with whom transactions occur, their relationship to each
other and the public utility, and the general nature of their
business;
2 A BRIEF DESCRIPTION OF THE BUSINESS ACTIVITIES CONDUCTED BY THE
UTILITY'S AFFILIATES WITH WHOM TRANSACTIONS OCCURRED DURING THE PRIOR
YEAR, INCLUDING ANY NEW ACTIVITIES NOT PREVIOUSLY REPORTED;
3. A description of plans for the utility's subsidiaries to modify or
change business activities, enter into new business ventures or to
acquire, merge or otherwise establish a new business entity;
4. Copies of the most recent financial statements for each of the
utility's subsidiaries;
5. An assessment of the effect of current and planned affiliated
activities on the public utility's capital structure and the public
utility's ability to attract capital at fair and reasonable rates;
6. THE BASES UPON WHICH THE PUBLIC UTILITY HOLDING COMPANY ALLOCATES
PLANT, REVENUE AND EXPENSES TO AFFILIATES AND THE AMOUNTS INVOLVED; AN
EXPLANATION OF THE DERIVATION OF THE FACTORS; THE REASONS SUPPORTING
THAT METHODOLOGY AND THE REASONS SUPPORTING THE ALLOCATION;
7. An explanation of the manner in which the utility's capital structure,
cost of capital and ability to raise capital at reasonable rates have
been affected by the organization or reorganization of the public
utility holding company;
8. The dollar amount transferred between the utility and each affiliate
during the annual period, and the purpose of each transfer;
9. CONTRACTS OR AGREEMENTS TO RECEIVE, OR PROVIDE MANAGEMENT,
ENGINEERING, ACCOUNTING, LEGAL, FINANCIAL OR OTHER SIMILAR SERVICES
BETWEEN A PUBLIC UTILITY AND AN AFFILIATE;
10. CONTRACTS OR AGREEMENTS TO PURCHASE OR SELL GOODS OR REAL PROPERTY
BETWEEN A PUBLIC UTILITY AND AN AFFILIATE; AND
11. CONTRACTS OR AGREEMENT TO LEASE GOODS OR REAL PROPERTY BETWEEN A
PUBLIC UTILITY AND AN AFFILIATE.
We believe that as a condition to our approval of the financing herein, and
in order to protect APS' security interests in PWEC's generation assets and to
promote the public interest, neither
33 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
PWCC nor PWEC shall reorganize or restructure, acquire or divest assets, or
form, buy or sell affiliates, or pledge or otherwise encumber the PWEC
generation assets during the duration of the loan/guarantee without prior
Commission approval. This requirement will apply to reorganizations and
restructurings, including the formation, buying or selling of affiliates,
acquisitions or divestitures of assets in the amount of $100 million or greater,
measured on a cumulative basis over the calendar year in which the transactions
will be made. Further, those transactions identified in the Company's "recovery
plan", including the accelerated sale of SunCor assets in the amount of $80 -
100 million per year for 3 years; the sale of 25 percent of the Silverhawk
generation project to the Southern Nevada Water Authority; and the payment of
ongoing construction costs for the West Phoenix CC #5 and the Silverhawk
generation plant in Nevada would not need prior Commission approval. Further, we
believe that the public interest requires that during the term of the loan or
guarantee, APS and its affiliates must comply with all the Affiliated Interest
Rules. Compliance with the Rules is, subject to the provisions and limitations
described in this paragraph, on a going forward basis, and the approval granted
in Decision No. 65434 allowing APS' $125 million credit line to PWCC is not
affected. Accordingly, we will make this a condition to our approval of this
financing application.
Further, we believe that a preliminary inquiry into APS, PWCC, and PWEC's
actions related to the transition to electric competition, particularly
compliance with our electric competition rules and with Decision No. 61973 and
APS' activities with its affiliates should be undertaken by Staff. Of concern to
us is testimony and evidence elicited during this hearing of the PWCC
enterprise's possible use of APS (both its generation assets and captive
ratepayers) to gain advantage in the developing competitive environment. One
example is how APS' Treasurer described the way that PWEC was able to obtain an
investment grade rating(18); another is APS' application for an air quality
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(18) Information provided to the rating agencies by PWCC et al. By the Spring of
2001, PWEC obtained a contingent investment grade rating.(See Tr. At
281-282) Testimony and evidence indicate that PWEC made presentations to
rating agencies indicating that PWEC was under contract to sell its output
to APS under a four year purchase power agreement. (See Panda Exh. 4, 5,
Gomez Tr. At 150, 276) In September, 2002, APS asked the credit rating
agencies to withdraw PWEC's credit rating. APS would have been required to
begin purchasing 100% of its standard offer power from the competitive
market by January 1, 2001, if it had not obtained a 2 year waiver in its
Settlement Agreement. During that 2 year period, APS' parent formed
competitive affiliates, including PWEC, and PWCC/PWEC built 4 new
generating units and obtained a contingent investment grade rating for
PWEC. If the Commission had not stayed divestiture of its assets, on
January 1, 2003, APS would have been acquiring 100% of its standard offer
power from the competitive market, with no ability to change its rates
until at least July, 2004. APS' position in this application that these
assets were "dedicated.:
34 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
permit on behalf of PWEC. Although some may argue that our granting approval of
the financing request is another example, we have carefully tried to neutralize
any competitive advantage that may accrue to PWEC as a result of our approval.
Nothing in this Decision condones actions taken by APS, PWEC, or PWCC, it is
merely an attempt to prevent harm to APS ratepayers. Additionally, we are not
intending our approval to constitute state action for the purposes of antitrust
laws.
When asked whether Decision No. 61973 was presented as part of the
presentation to the rating agencies, APS' Treasurer responded that: "[w]ell, we
would have modeled what the Order required in our presentation, yes." (Gomez,
Tr. p. 275) When asked whether she was familiar with the following quote from
Decision No. 61973 at p. 10 which states: "[w]e share the concerns that the
noncompetitive portion of APS not subsidize the spun-off competitive assets
through an unfair financial arrangement", APS Treasurer Gomez stated that she
was not familiar with that sentence. (Gomez, Tr. p. 275). Ms. Gomez testifies
that there was no contract, but was a modeling assumption. She further testified
that the investment grade rating was not based upon just the unification of
assets, but it is also based upon the cash flow from those assets. (Gomez, Tr.
pp. 277-278; 281-282) During cross-examination of Jack Davis, he testified about
documents prepared by PWEC for a Rating Agency Presentation in February
2001.(19) Mr. Davis testified that the document discussed a "PPA between
Pinnacle West Power Marketing & Trading, and Pinnacle West Energy" and also a
PPA between APS and it "goes on to represent how Pinnacle West Marketing &
Trading will make those deliveries to Arizona Public Service." Mr. Davis
testified that a page entitled "PWEC Credit Strengths shows the first arrow
indicates "Four year fixed price contract" and "The majority of generation is
dedicated to APS load through 2004". (Tr. pp. 729-730)
The date of 2004 is significant, because the APS rates set in Decision No.
61973 were to remain in effect until at least June 30, 2004. However, from
January 1, 2003 until June 30, 2004, APS was to be purchasing power from the
competitive market (without an adjustor in place) and would have been exposed to
the price difference between the "market price" and the APS Standard
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to APS customers raises the issue of possible intended noncompliance with
the Commission's electric competition rules and/or possible
anti-competitive activity.
(19) Panda Exhibit 22 was admitted under seal, but the cross examination of Mr.
Davis was not confidential. This discussion will refer only to the
non-confidential testimony on that document.
35 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Offer rates.
Decision No. 61973 provided that: "Such Code of Conduct should also include
provisions to govern the supply of generation during the two-year period of
delay for the transfer of generation assets so that APS doesn't give itself an
undue advantage over the ESPs". (p. 12)
"Some parties were concerned that Sections 4.1 and 4.2 provide in effect
that the Commission will have approved in advance any proposed financing
arrangements associated with future transfers of `competitive services' assets
to an affiliate. As a result, there was a recommendation that the Commission
retain the right to review and approve or reject any proposed financing
arrangements. In addition, some parties expressed concern that APS has not
definitively described the assets it will retain and which it will transfer to
an affiliate. We share the concerns that the non-competitive portion of APS not
subsidize the spun-off competitive assets through an unfair financial
arrangement. We want to make it clear that the Commission will closely
scrutinize the capital structure of APS at its 2004 rate case and make any
necessary adjustments." (Decision No. 61973 at p. 10)
Although APS asserts that under its Code of Conduct, the Electric
Competition Rules, and Decision No. 61973, it could not construct generation,
Staff, in its Responsive Brief, states that "APS will argue that its code of
conduct prevented it from building the assets at APS, (Tr. at 520); nonetheless,
an examination of that document does not clearly support that conclusion."
(Staff Responsive Br. at 5).
MISCELLANEOUS
The issue transferring PWEC assets to APS is not before us in this
application. RUCO recommended that we approve this financing and order APS to
file an application to transfer the assets. APS indicated it would not be
appropriate for the Commission to require a proceeding seeking transfer of the
PWEC assets to APS at this time, and believes that Staff's Condition No. 2
provides essentially the same protection. We will not adopt RUCO's
recommendation.
* * * * * * * * * *
Having considered the entire record herein and being fully advised in the
premises, the Commission finds, concludes, and orders that:
36 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
FINDINGS OF FACT
l. APS is a public service corporation principally engaged in furnishing
electricity in the State of Arizona. APS provides either retail or wholesale
electric service to substantially all of Arizona, with the major exceptions of
the Tucson metropolitan area and about one-half of the Phoenix metropolitan
area. APS also generates, sells and delivers electricity to wholesale customers
in the western United States.
2. On September 16, 2002, APS filed an application requesting approval of
financing in the form of either an inter-company loan and/or a guarantee of debt
to allow PWCC or PWEC to refinance bridge debt incurred by PWCC in the
construction of certain PWEC generation assets.
3. Notice of the application was provided in accordance with the law.
4. Intervention was granted to RUCO, Panda, Reliant, Harquahala, the PPL
entities, AUIA, SWPG/Bowie, Sempra, AECC, ACPA and TEP.
5. The hearing commenced on January 8, 2003 and testimony and evidence was
taken over five days of hearing. Initial Briefs were filed on January 27, 2003,
and Reply Briefs were filed on February 6, 2003.
6. APS' parent, PWCC, has incurred approximately $1 billion in debt
financing the construction of generating units at PWEC, its merchant subsidiary.
7. PWCC used debt with short-term maturities because it planned for PWEC to
refinance the debt at an investment grade once the APS rate-based generation
assets were transferred to PWEC.
8. In the spring of 2001, PWCC made presentations to rating agencies on
behalf of PWEC and obtained a contingent investment grade rating for PWEC.
9. By the fall of 2001, project financing for the PWEC generation assets
was no longer available.
10. On October 18, 2001, APS filed an application for approval of a
Variance/Purchased Power Agreement. The application stated that "adherence to
the competitive bidding requirements of the Electric Competition Rules will not
produce the intended result of reliable electric service for Standard Offer
customers at reasonable rates," requested that the Commission grant a partial
variance to R14-2-1606(B) that would otherwise obligate APS to acquire all of
its customers' Standard Offer
37 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
generation requirements from the competitive market, and sought Commission
approval of a long term purchase power agreement with its parent, PWCC.
11. By Procedural Order issued May 2, 2002, a generic proceeding was
established that set up Track A to resolve issues relating to market power,
divestiture, codes of conduct/affiliate transactions and jurisdictional issues,
and Track B to address competitive procurement.
12. On September 10, 2002, the Commission issued Decision No. 65154 in the
Track A proceeding wherein the Commission ordered APS to cancel any plans to
divest interests in any generating assets:
13. On March 14, 2003, the Commission issued Decision No. 65743, the
Decision in the Track B proceeding.
14. Currently, there is turmoil in the financial markets and the wholesale
electric market is volatile.
15. APS seeks authorization to issue up to $500 million of debt, and APS
would loan the proceeds of that debt to PWCC or PWEC to be used to retire PWCC's
existing debt.
16. In addition, or in the alternative, APS seeks approval to guarantee
debt that may be issued by PWCC or PWEC to retire PWCC's existing debt.
17. The total amount of financing authority requested does not exceed $500
million.
18. RUCO recommended approval of the loan with conditions, including that
the Commission require APS to file an application to transfer the PWEC assets to
APS.
19. Panda and various intervenors recommended that the Commission not grant
the requested financing, but if some financing is approved, it should be in the
form of a guarantee with certain conditions.
20. Staff recommended that the Commission authorize APS to borrow $500
million in order to loan the proceeds to PWEC, with seven conditions.
21. As a certificated public service corporation, APS has a duty to provide
reliable electric service to its customers at reasonable rates.
22. It is in the public interest that APS maintain healthy credit ratings
so that it has access to the capital markets at reasonable terms and rates.
38 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
23. APS could face a downgrade if PWCC is downgraded, and such a downgrade
of APS could interfere with APS' ability to provide electric service to the
public at reasonable rates if it resulted in increases in the cost of capital,
potential lack of access to the capital markets, potential increases in
collateral requirements, and an inability to do business with vendors.
24. APS' requested financing will be compatible with the public interest
if, by preventing a downgrade in APS' credit ratings, it prevents a substantial
disintegration in APS' ability to provide reliable service at reasonable rates.
25. Because the transaction poses some risks to the Company and to its
ratepayers, we will require conditions to approval of the financing, including
Staff's seven conditions and conditions that the debt authorized herein will be
included in the capital structure calculation to determine whether APS can issue
dividends; that any guarantee shall meet the same concerns identified in Staff's
seven conditions; APS shall inform the Commission in the event of a loan default
so that the Commission can take appropriate action; APS', debt issuance be for
unsecured debt only; that neither PWCC nor PWEC shall reorganize or restructure,
acquire or divest assets, or form, buy or sell affiliates, or pledge or
otherwise encumber the PWEC generation assets during the duration of the
loan/guarantee without prior Commission approval and this requirement will apply
to reorganizations and restructurings, including the formation, buying or
selling of affiliates, acquisitions or divestitures of assets in the amount of
$100 million or greater, measured on a cumulative basis over the calendar year
in which the transactions will be made. Further, those transactions identified
in the Company's "recovery plan", including the accelerated sale of SunCor
assets in the amount of $80 - 100 million per year for 3 years, the sale of 25
percent of the Silverhawk generation project to the Southern Nevada Water
Authority, and the payment of ongoing construction costs for the West Phoenix CC
#5 and the Silverhawk generation plant in Nevada would not need prior Commission
approval; and that during the term of the loan or guarantee, APS and its
affiliates must comply with all the Affiliated Interest Rules. Compliance with
the Rules is, subject to the provisions and limitations described in this
paragraph, on a going forward basis, and the approval granted in Decision No.
65434 allowing APS' $125 million credit line to PWCC is not affected.
26. Staffs Condition 2 requires APS to obtain a security interest in the
PWEC assets and
39 DECISION NO. 65796
DOCKET NO. E-01 345A-02-0707
only APS has such a lien, so APS would have the first priority in the event of a
default.
27. APS shall immediately notify the Commission within five business days
in the event of a default on the loan, so that the Commission can take
appropriate action.
28. The public interest requires that any improvement in PWEC's
creditworthiness as a result of approval of this financing not be considered or
used in the evaluation of bids/offers during APS' Track B competitive
procurement.
29. It is in the public interest to grant authority for both a loan and a
guarantee with the conditions attached hereto, so that Arizona Public Service
can structure the transaction in a manner that will provide the most protection
for its ratepayers.
30. The issue of the purpose for which the PWEC assets were built is not
before us in this proceeding, and we are making no determination as to whether
or not those assets should be part of APS' rate base.
31. Testimony and evidence presented during the hearing merit a preliminary
inquiry by Staff into APS' compliance with Decision No. 61973, the Electric
Competition Rules, its Code of Conduct, and applicable law.
CONCLUSIONS OF LAW
1. Arizona Public Service Company is a public service corporation within
the meaning of Article XV of the Arizona Constitution and A.R.S. ss.ss. 40-285,
- -301, and 40-302 and A.A.C. R-14-2804.
2. The Commission has jurisdiction over Arizona Public Service Company and
the subject matter of the application.
3. Notice of the application was provided in accordance with the law.
4. APS' application should be approved consistent with the Discussion,
Analysis, and Findings of Fact herein.
5. The financing with the conditions approved herein is for lawful purposes
within Arizona Public Service Company's corporate powers, is compatible with the
public interest, with sound financial practices, and with the proper performance
by Arizona Public Service Company of
40 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
service as a public service corporation, and with the conditions approved
herein, will not impair Arizona Public Service Company's ability to perform that
service.
6. The financing with the conditions approved herein is for the purposes
stated in the application and is reasonably necessary for those purposes, and
such purposes may, wholly or in part, be reasonably chargeable to operating
expenses or to income.
7. The financing with the conditions approved herein will not impair the
financial status of the public utility, otherwise prevent it from attracting
capital at fair and reasonable terms, or impair the ability of the public
utility to provide safe, reasonable and adequate service.
ORDER
IT IS THEREFORE ORDERED that the application for financing, with the
conditions contained herein, is hereby approved and Arizona Public Service
Company is hereby authorized to either issue non-secured debt in an amount not
greater than $500,000,000 and loan the proceeds to Pinnacle West Energy
Corporation and/or guarantee the debt of Pinnacle West Energy Corporation in the
amount of $500,000,000, for the purposes set forth in the application and as
modified herein, and in compliance with the conditions and restrictions
contained in the discussion and findings herein.
IT IS FURTHER ORDERED that such debt will not be classified or treated as
continuing debt in the context of the debt limits established by Decision Nos.
55017 and 54230.
IT IS FURTHER ORDERED that Arizona Public Service Company is hereby
authorized to obtain a financial interest and/or a guarantee in its affiliate
Pinnacle West Energy Corporation consistent with the terms, conditions, and
restrictions of this Decision.
IT IS FURTHER ORDERED that Arizona Public Service Company is hereby
authorized to engage in any transactions and to execute any document necessary
to effectuate the authorization granted herein.
IT IS FURTHER ORDERED that such authority is expressly conditioned upon
Arizona Public Service Company's compliance with the conditions set forth below
in this ordering paragraph and upon the use of the proceeds for the purposes set
forth in the application as modified herein. The conditions are:
41 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
1) APS should be authorized to issue and sell no more than $500,000,000
of debt in addition to its current authorizations;
2) The debt to be lent to PWEC should be no more than $500,000,000 of
secured callable notes from PWEC. The security interest shall be on
the same terms as the security interest APS already has pursuant to
the $125,000,000 loan authorization from Decision No. 65434;
3) The PWEC secured note coupon shall be 264 basis points above the
coupon on APS debt issued and sold on equivalent terms (including but
not limited to maturity and security);
4) The difference in interest income and interest expense should be
capitalized as a deferred credit and used to offset rates in the
future. The deferred credit balance shall bear an interest rate of six
percent;
5) The PWEC debt maturity shall not exceed four years, unless otherwise
ordered by the Commission;
6) Any demonstrable increase in APS' cost of capital as a result of the
transaction, such as from a decline in bond rating, will be extracted
from future rate cases;
7) APS shall maintain a minimum common equity of 40 percent and shall not
be allowed to pay dividends if such payment would reduce its common
equity ratio below this threshold, unless otherwise waived by the
Commission. This condition shall remain in effect indefinitely, and
APS shall file with the Commission a calculation of capital structure
within one week of filing a 10-Q or 10-K;
8) The debt authorized herein will be included in the capital structure
calculation to determine whether APS can issue dividends;
9) Any guarantee shall meet the same concerns identified in Staff's seven
conditions;
10) APS' debt issuance be for unsecured debt only;
11) Neither PWEC or PWCC shall reorganize or restructure, acquire or
divest assets, or form buy or sell affiliates, or pledge or otherwise
encumber the PWEC generation assets during the duration of the
loan/guarantee without prior Commission approval and this requirement
will apply to reorganizations and restructurings, including the
formation, buying or selling of affiliates, acquisitions or
divestitures of assets in the amount of $100 million or greater,
measured on a cumulative basis over the calendar year in which the
transactions will be made. Further, those transactions identified in
the Company's "recovery plan", including the accelerated sale of
SunCor assets in the amount of $80 - 100 million per year for 3 years;
the sale of 25 percent of the Silverhawk generation project to the
Southern Nevada Water Authority; and the payment of ongoing
construction costs for the West Phoenix CC #5 and the Silverhawk
generation plant in Nevada would not need prior Commission approval;
and
42 DECISION NO. 65796
DOCKET NO. E-01 345A-02-0707
12) During the term of the loan or guarantee, APS and its affiliates must
comply with all the Affiliated Interest Rules. Compliance with the
Rules is, subject to the provisions and limitations described in this
paragraph, on a going forward basis, and the approval granted in
Decision No. 65434 allowing APS' $125 million credit line to PWCC is
not affected.
IT IS FURTHER ORDERED that with respect to any waiver sought by Arizona
Public Service Company under Condition No. 7, the Commission shall process such
waiver request within 60 days and, for this 60-day period, the condition shall
be suspended. However, Condition No. 7 shall not be permanently waived without
an order of the Commission.
IT IS FURTHER ORDERED that approval of the financing set forth herein does
not constitute or imply approval or disapproval by the Commission of any
particular expenditure of the proceeds derived thereby or any particular prior
expenditure being refinanced for the purpose of establishing just and reasonable
rates.
IT IS FURTHER ORDERED that Arizona Public Service Company shall file with
the Commission copies of all executed financing documents setting forth the
terms of the financing, within 30 days of obtaining such financing.
IT IS FURTHER ORDERED that Arizona Public Service Company shall not use any
authority granted in this Decision to prejudice or adversely affect the
implementation of the Track B competitive solicitation process.
IT IS FURTHER ORDERED that the issue of Arizona Public Service Company's
acquisition of Pinnacle West Energy Corporation generation assets and rate base
treatment is not presently before us, and we make no determination on those
issues in this Decision.
IT IS FURTHER ORDERED that any improvement in Pinnacle West Energy
Corporation's creditworthiness as a result of approval of this financing shall
not be considered or used in the evaluation of bids/offers during Arizona Public
Service Company's Track B competitive procurement.
IT IS FURTHER ORDERED that Arizona Public Service Company shall immediately
notify the Commission within five business days in the event of a default on the
loan, so that the Commission can take appropriate action.
43 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
IT IS FURTHER ORDERED that Staff shall commence a preliminary inquiry into
Arizona Public Service Company and its affiliate's compliance with the Electric
Competition Rules, Decision No. 61973, its Code of Conduct, and applicable law.
IT IS FURTHER ORDERED that this Decision shall be come effective
immediately. BY ORDER OF THE ARIZONA CORPORATION COMMISSION.
MARC SPITZER JIM IRVIN WILLIAM A. MUNDELL
- --------------------------------------------------------------------------------
CHAIRMAN COMMISSIONER COMMISSIONER
JEFF HATCH-MILLER
- --------------------------------------------------------------------------------
COMMISSIONER COMMISSIONER
IN WITNESS WHEREOF, I, BRIAN C. McNEIL,
Executive Secretary of the Arizona
Corporation Commission, have hereunto set my
hand and caused the official seal of the
Commission to be - fixed at the Capitol, in
the City of Phoenix, this 4th day of April,
2003.
BRIAN C. McNEIL
---------------------------------------------
DISSENT Mike Gleason
------------------------------------
LAF:dap
44 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
SERVICE LIST FOR: ARIZONA PUBLIC SERVICE COMPANY
DOCKET NOS.: E-01345A-02-0707
Jeffrey B. Guldner
SNELL & WILMER
One Arizona Center
400 E. Van Buren
Phoenix, Arizona 85004
Thomas L. Mumaw
Karilee Ramaley
PINNACLE WEST CAPITAL CORP
LAW DEPARTMENT
P.O. Box 53999, MS 8695
Phoenix, Arizona 85004-3999
C. Webb Crockett
Jay L. Shapiro
FENNEMORE CRAIG
3003 N. Central Avenue, Suite 2600
Phoenix, Arizona 85012
Attorney for Panda Gila River, L.P.
Larry F. Eisenstat
Michael R. Engleman
Frederick D. Ochsenhirt
DICKSTEIN SHAPIRO MORIN & OSHINSKY LLP
2101 L Street, NW
Washington, DC 20037
Attorneys for Panda Gila River, L.P.
Scott Wakefield
RUCO
1110 W. Washington, Suite 200
Phoenix, Arizona 85007
William P. Sullivan
Michael A. Curtis
2712 N. 7th Street
Phoenix, Arizona 85006-1090
Attorneys for Reliant Resources, Inc.
45 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Roger K. Ferland
QUARLES & BRADY STRETCH LANG, LLP
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
Attorneys for Harquahala Generating Company, LLC
Jay I. Moyes
MOYES STOREY
3003 N. Central Ave., Suite 1250
Phoenix, Arizona 85012
Attorneys for PPL Southwest Generation Holdings, LLC:
PPL Energy Plus, LLC; and PPL Sundance Energy, LLC
Jesse A. Dillon
PPL
2 North Ninth Street
Allentown, Pennsylvania 18101
Walter W. Meek AUIA
2100 N. Central Ave., Suite 210
Phoenix, Arizona 85004
Lawrence V. Robertson, Jr.
MUNGER CHADWICK
National Bank Plaza
333 N. Wilmot, Suite 300
Tucson, Arizona 85711
Attorneys for Southwestern Power Group II, LLC; Bowie Power Station; and
Sempra Energy Resources
Greg Patterson
ACPA
5432 E. Avalon
Phoenix, Arizona 85018
Raymond S. Heyman
Michael W. Pattern
ROSHKA, HEYMAN & DeWULF
One Arizona Center
400 E. Van Buren, Suite 800
Phoenix, Arizona 85004
Attorneys for Tucson Electric Power Co.
46 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
Christopher Kempley, Chief Counsel
ARIZONA CORPORATION COMMISSION
Legal Division
1200 West Washington
Phoenix, AZ 85007
Ernest Johnson, Director
Utilities Division
ARIZONA CORPORATION COMMISSION
1200 West Washington Street
Phoenix, Arizona 85007
47 DECISION NO. 65796
DOCKET NO. E-01345A-02-0707
DISSENT OF COMMISSIONER GLEASON
I respectfully dissent from my fellow Commissioners regarding the Commission's
approval of APS's request to loan PWEC up to $500 million. While I believe the
record supports APS's claim that PWEC needs APS's credit support to refinance
its debt, a guarantee is the only type of refinancing that is in the public
interest.
By this order, the Commission approved a speculative loan from a regulated
utility to an unregulated company with less than investment credit rating, which
will put the utility over its mandated debt ceiling.
The following support this statement:
1. There is no list of collateral for this loan.
2. There is no appraisal of assets to be used as collateral for this
loan.
3. The banks will not make the loan; thus it must be considered a
speculative loan.
4. The exclusion of this loan from APS's continuing credit will, by
testimony, put APS's debt over the mandated ceiling. This tacitly
increases the debt limit when utilities are under pressure to conserve
their financial debts.
Thus, the Commission authorized a speculative use of a regulated utilities fund
which could put the ratepayers at risk of higher rates.
Furthermore, the fundamental principles of the Commission's Affiliated Interest
Rules prohibit exactly this type of situation. To preserve competition and to
maintain the integrity of our Affiliated Interest Rules, a lending institution
needs to stand in between PWEC assets and APS.
The Order requires APS to refinance PWEC debt in a manner that is in the best
interest of the ratepayers. To that end, it is my belief APS should choose a
guarantee. Since the Order allows APS to select a loan, I must dissent.
48 DECISION NO. 65796