<PAGE>
As filed with the Securities and Exchange Commission on October 21, 1997
REGISTRATION STATEMENT NO. 333-30715
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST PG&E-1
(ISSUER OF SECURITIES)
PG&E FUNDING LLC
(Depositor of the Trust described herein)
(Exact Name of Registrant as Specified in Its Certificate of Formation)
DELAWARE 94-3274751
(State or Other Jurisdiction of (I.R.S. Employer
Organization) Identification Number)
PG&E FUNDING LLC
245 MARKET STREET, ROOM 424
SAN FRANCISCO, CA 94105
(415) 972-5467
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
LESLIE EVERETT
CORPORATE SECRETARY
PG&E FUNDING LLC
245 MARKET STREET, ROOM 424
SAN FRANCISCO, CA 94105
(415) 972-5467
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
<TABLE>
<S> <C> <C>
DEAN E. CRIDDLE
MARK R. LEVIE ERIC D. TASHMAN GREGORY M. SHAW
ORRICK, HERRINGTON & SUTCLIFFE LLP CATHY M. KAPLAN CRAVATH, SWAINE & MOORE
Old Federal Reserve Bank Building BROWN & WOOD LLP Worldwide Plaza
400 Sansome Street 555 California Street, 50th Floor 825 Eighth Avenue
San Francisco, California 94111 San Francisco, California 94104 New York, New York 10019
</TABLE>
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Securities to be Registered Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Aggregate Price Per Unit Aggregate Offering Price Registration
Fee/(3)/
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate Reduction Certificates $ 1,000,000 100%/(1)/ $1,000,000/(1)/ $303.03
- -----------------------------------------------------------------------------------------------------------------------------------
Notes $1,000,000/(2)/ /(2)/ /(2)/ None
===================================================================================================================================
</TABLE>
/(1)/ Estimated solely for the purpose of calculating the registration fee.
/(2)/ No additional consideration will be paid by the purchasers of the Rate
Reduction Certificates for the Notes which secure the Rate Reduction
Certificates.
/(3)/ Fee of $303.03 paid in connection with original Registration Statement
filed on July 3, 1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus Supplement shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of the
securities in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
such jurisdiction.
[FORM OF PROSPECTUS SUPPLEMENT]
SUBJECT TO COMPLETION DATED ____, 199_
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED _______, 1997)
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST PG&E-1
RATE REDUCTION CERTIFICATES, SERIES 199_-_
$__________ ORIGINAL PRINCIPAL BALANCE
[$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ ____ % CERTIFICATES
$________ CLASS ___ FLOATING RATE CERTIFICATES]
PG&E FUNDING LLC
Issuer of the Notes
PACIFIC GAS AND ELECTRIC COMPANY
Seller and Servicer
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES, OTHER THAN THE NOTE
ISSUER. NONE OF THE OFFERED CERTIFICATES, THE UNDERLYING NOTES OR THE
TRANSITION PROPERTY WILL BE GUARANTEED OR INSURED BY THE STATE OF CALIFORNIA,
THE INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE SELLER OR ITS AFFILIATES.
The California Infrastructure and Economic Development Bank Special Purpose
Trust PG&E-1 Rate Reduction Certificates, Series 199_-_ (the "OFFERED
CERTIFICATES"), offered hereby will consist of the following ______ Classes:
_______. Each Class of Offered Certificates represents an undivided interest in
the related class of PG&E Funding LLC Notes, Series 199_-_ (the "UNDERLYING
NOTES"), issued by PG&E Funding LLC, a Delaware special purpose limited
liability company (the "NOTE ISSUER") [and, with respect to the Class ___
Certificates, payments pursuant to the Swap Agreement]. Each Underlying Note
will be secured primarily by the Transition Property owned by the Note Issuer,
as described under "Description of the Transition Property" herein and in the
Prospectus; the Underlying Notes will also be secured by the other Note
Collateral described under "Description of the Notes--Security" in the
Prospectus. The Underlying Notes, together with other Series of notes issued
from time to time by the Note Issuer under the Note Indenture (together with the
Underlying Notes, the "NOTES"), are owned by the California Infrastructure and
Economic Development Bank Special Purpose Trust PG&E-1 (the "Trust").
(Continued on following page.)
THERE CURRENTLY IS NO SECONDARY MARKET FOR THE OFFERED CERTIFICATES, AND THERE
IS NO ASSURANCE THAT ONE WILL DEVELOP.
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE __ IN THE
PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT TRUST(1)(2)
- -----------------------------------------------------------------
<S> <C> <C> <C>
Per Class [___] % % %
Certificate
Per Class [___] % % %
Certificate
Total $ $ $
- -----------------------------------------------------------------
</TABLE>
/(1)/ Plus accrued interest, if any, at the applicable Certificate Interest Rate
from ________ __, 199_.
/(2)/ Before deduction of expenses estimated to be $__________.
____________________
The Offered Certificates are offered by the Underwriters when, as and if
issued by the Trust and accepted by the Underwriters and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
the Offered Certificates will be delivered on or about ______________, 199__, in
book-entry form through the facilities of The Depository Trust Company[, Cedel
Bank, societe anonyme, and the Euroclear System].
____________________
[Underwriters]
The date of this Prospectus Supplement is _____, 199_
S-2
<PAGE>
Interest on each Class of Offered Certificates at the applicable Certificate
Interest Rate will be distributable quarterly on or about the 25th day of March,
June, September and December or, if any such day is not a Certificate Business
Day, the next succeeding Certificate Business Day (each, a "DISTRIBUTION DATE")
commencing _________, 199_. INTEREST AND PRINCIPAL ON ANY CLASS OF OFFERED
CERTIFICATES WILL BE DISTRIBUTABLE ONLY TO THE EXTENT OF PAYMENTS RECEIVED BY
THE TRUST ON THE RELATED CLASS OF UNDERLYING NOTES. See "Description of the
Notes" herein.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT
BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF THE
NOTE ISSUER ARE THE SOLE SOURCE OF PAYMENTS ON THE UNDERLYING NOTES. PAYMENTS
ON THE UNDERLYING NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF
DISTRIBUTIONS ON THE OFFERED CERTIFICATES. NONE OF THE STATE OF CALIFORNIA, THE
INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES WILL HAVE ANY OBLIGATIONS
IN RESPECT OF THE OFFERED CERTIFICATES, THE UNDERLYING NOTES OR THE TRANSITION
PROPERTY, EXCEPT AS EXPRESSLY SET FORTH HEREIN AND IN THE PROSPECTUS.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY AGENCY OR INSTRUMENTALITY THEREOF IS PLEDGED TO THE PAYMENT OF
THE PRINCIPAL OF, OR INTEREST ON, THE UNDERLYING NOTES OR THE OFFERED
CERTIFICATES OR TO THE PAYMENTS IN RESPECT OF THE TRANSITION PROPERTY NOR IS THE
STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN ANY MANNER OBLIGATED
TO MAKE ANY APPROPRIATION FOR THE PAYMENT THEREOF.
Prospective investors should refer to the "Index of Principal Definitions" which
begins on page ___ herein and which begins on page ___ in the Prospectus for the
location of the definitions of capitalized terms that appear in the Prospectus
and this Prospectus Supplement.
S-3
<PAGE>
REPORTS TO HOLDERS
Unless and until the Offered Certificates are no longer issued in book-entry
form, the Servicer indirectly will provide to Cede & Co., as nominee of The
Depository Trust Company ("DTC") and registered holder of the Offered
Certificates and, upon request, to Participants of DTC, periodic reports
concerning the Offered Certificates. See "Description of the Certificates--
Reports to Certificateholders" herein. Such reports may be made available to
the holders of interests in the Offered Certificates (the "CERTIFICATEHOLDERS")
upon request to their Participants. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
The financial information provided to Certificateholders will not be examined
and reported upon, nor will an opinion thereon be provided by, any independent
public accountant.
The Note Issuer will file with the Securities and Exchange Commission (the
"COMMISSION") such periodic reports as are required by the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), and the rules, regulations or
orders of the Commission thereunder. Copies of the Registration Statement and
exhibits thereto may be obtained at the locations specified in the Prospectus
under "Available Information" at prescribed rates. Information filed with the
Commission can also be inspected at the Commission's site on the World Wide Web
at http://www.sec.gov. The Note Issuer may discontinue filing periodic reports
under the Exchange Act at the beginning of the fiscal year following the
issuance of the Offered Certificates if there are fewer than 300 holders of such
Offered Certificates.
S-4
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The summary is qualified in its entirety by reference to the detailed
information appearing elsewhere herein and in the Prospectus. Certain
capitalized terms used but not defined in this Prospectus Supplement Summary
have the meanings ascribed to such terms elsewhere in this Prospectus Supplement
or, to the extent not defined herein, have the meanings assigned to such terms
in the Prospectus. The Index of Principal Definitions included in this
Prospectus Supplement which begins on page ___ sets forth the pages on which the
definitions of certain principal terms appear.
Summary of
Offered Certificates The Offered Certificates will be issued on the Series
Issuance Date. The Offered Certificates will be
comprised of the following _____ Classes:
<TABLE>
<CAPTION>
Certificate
Scheduled Final Interest
Class Distribution Date Termination Date Rate
- -------- ------------------------- ----------------------- -------------
<S> <C> <C> <C>
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__% /(1)/
</TABLE>
/(1)/ Calculated as described under "Floating Rate on Class ___ Certificates."
Transaction Overview For a brief summary of the statutes and proceedings
which form the basis for the issuance and sale of the
Offered Certificates by the Trust, investors are
directed to the discussion under the heading
"Prospectus Summary--Transaction Overview" in the
Prospectus.
The Note Issuer will issue the Underlying Notes, which
will be secured primarily by the Transition Property
and the other Note Collateral described under
"Description of the Notes--Security" herein, and sell
the Underlying Notes to the Trust in exchange for the
proceeds of the sale of the Offered Certificates. The
Trust has been established by the Infrastructure Bank.
The Trust, whose sole assets will be the Underlying
Notes and other Notes issued under the Indenture[and
its rights under the Swap Agreement (and any other
comparable interest rate swap agreements) to which it
is a party], will issue the Offered Certificates, which
will be sold to the Underwriters. The Offered
Certificates of each Class represent an undivided
interest in the related Class of Underlying Notes and
the proceeds thereof[, together with the proceeds of
the Swap Agreement]. The Underlying Notes will also be
secured by the Transition Property Purchase and Sale
Agreement between PG&E and the Note Issuer, the
Transition Property Servicing Agreement between PG&E
and the Note Issuer, the Collection Account and all
amounts or investment property on deposit therein or
credited thereto from time to time, all other property
of whatever kind (other than certain cash amounts
described herein) owned from time to time by the Note
Issuer, if any, all present and future claims, demands,
causes and choses in action in respect
S-5
<PAGE>
of any or all of the foregoing and all payments on or
under and all proceeds in respect of any or all of the
foregoing.
The charges included in the Transition Property
described in the Prospectus are calculated to be
sufficient over time to pay principal and interest on
the Offered Certificates, all related fees and expenses
and the Overcollateralization Amount described herein.
These charges will be subject to adjustment pursuant to
the true-up mechanism described in the Prospectus over
the life of the Offered Certificates to enhance the
likelihood of timely recovery of such amounts, although
there can be no assurance that the true-up mechanism
will operate as intended or that any of the Offered
Certificates will mature as scheduled.
Risk Factors Investors should consider the risks associated with an
investment in the Offered Certificates. For a
discussion of certain material risks associated
therewith, investors should review the discussion under
"Risk Factors" which begins on page ___ of the
Prospectus.
[In addition, an investment in the Class ___
Certificates involves the additional risks discussed
herein under "Additional Risk Factors Relating to the
Class ___ Certificates."]
The Offered Certificates The California Infrastructure and Economic Development
Bank Special Purpose Trust PG&E-1 Rate Reduction
Certificates, Series 199_-_ (the "OFFERED
CERTIFICATES"). The Offered Certificates are comprised
of the following _____ classes (each, a "CLASS"):
_____. As of the Series Issuance Date for the Offered
Certificates, the aggregate principal balance thereof
(the "ORIGINAL CERTIFICATE PRINCIPAL BALANCE") will be
$___________. Each Class of Offered Certificates will
have a principal balance (the "CLASS PRINCIPAL
BALANCE") equal to the initial amount of principal
allocable to such Class, reduced by principal
distributed to such Class in accordance with the terms
of the Trust Agreement. See "Description of the
Certificates" herein and in the Prospectus.
None of the Offered Certificates, the Underlying Notes
or the Transition Property will be guaranteed or
insured by the State of California, the Infrastructure
Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or any of its
affiliates. Neither the full faith and credit nor the
taxing power of the State of California or any agency
or instrumentality thereof is pledged to the
distributions of principal of, or interest on, the
Offered Certificates or the Underlying Notes or to the
payments in respect of the Transition Property. The
issuance and sale of the Offered Certificates is
contingent upon the effectiveness of the Issuance
Advice Letter related thereto.
S-6
<PAGE>
Seller and Servicer Pacific Gas and Electric Company, a California
corporation ("PG&E" or, in its capacity as seller of
the Transition Property, the "SELLER" or, in its
capacity as servicer of the Transition Property, the
"SERVICER"). For a more complete discussion of PG&E
and its roles as Seller and Servicer, see "The Seller
and Servicer" herein and in the Prospectus.
Issuer of Certificates "California Infrastructure and Economic Development
Bank Special Purpose Trust PG&E-1" (the "TRUST")
established by the California Infrastructure and
Economic Development Bank (the "INFRASTRUCTURE BANK").
The Trust will not be an agency or instrumentality of
the State of California. The Infrastructure Bank will
not guarantee or insure the Offered Certificates, the
Underlying Notes or the Transition Property. For a
more complete discussion of the Trust, see "The Trust"
in the Prospectus, and for a more complete discussion
of the Infrastructure Bank, see "The Infrastructure
Bank" in the Prospectus.
Certificate Trustee [Bankers Trust Company], a _________ (the "CERTIFICATE
TRUSTEE").
Delaware Trustee [Bankers Trust Company of Delaware], a _________ (the
"DELAWARE TRUSTEE").
Note Issuer PG&E Funding LLC, a Delaware special purpose limited
liability company whose single member is PG&E (the
"NOTE ISSUER").
The principal executive office of the Note Issuer is
located at 245 Market Street, Room 424, San Francisco,
California 94105, and its telephone number is (415)
972-5467.
The Underlying Notes PG&E Funding LLC Notes, Series 199_-_ (the "UNDERLYING
NOTES"), issued by the Note Issuer. The Underlying
Notes are comprised of ______ classes (each, a
"CLASS"). As of the Series Issuance Date for the
Underlying Notes, the aggregate principal balance
thereof (the "ORIGINAL NOTE PRINCIPAL BALANCE") will be
$___________. Each Class of Underlying Notes secures
the payment of the corresponding Class of Offered
Certificates and will have the same Class Principal
Balance as the corresponding Class of Offered
Certificates. See "Description of the Notes" herein
and in the Prospectus.
Note Trustee ____________, a _________ (the "NOTE TRUSTEE").
Transition Property As more fully described under "Description of the
Transition Property" herein and in the Prospectus, the
property right created under the PU Code including,
without limitation, the right, title and interest of an
electrical corporation or its transferee (i) in and to
the FTA Charges, as adjusted from time to time, (ii) to
be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges as provided in the PU
Code.
S-7
<PAGE>
FTA Charges As more fully described under "Description of the
Transition Property" herein and in the Prospectus, the
amounts permitted to be recovered from the Customers
which are necessary to provide for the amortization of
all Certificates in accordance with the applicable
Expected Amortization Schedules, together with all
costs and expenses related thereto and the
Overcollateralization Amount.
Distribution Dates Each March 25, June 25, September 25 and December 26
(or, if any such date is not a Certificate Business
Day, the next succeeding Certificate Business Day),
commencing _________, 1998, the dates on which
distributions will be made to holders of Offered
Certificates (each, a "DISTRIBUTION DATE"). Each
Distribution Date with respect to the Certificates will
also be a date on which payments are made with respect
to the Notes (each, a "PAYMENT DATE").
Record Date With respect to any Distribution Date, the last day of
the preceding calendar month (each, a "RECORD DATE").
Final Distribution Date The Scheduled Final Distribution Date for each Class of
the Offered Certificates, which is the date when all
principal and interest on such Class of Offered
Certificates is expected to be distributed in full,
based on certain assumptions described herein, and the
Termination Date for each Class of Offered Certificates
are specified herein under "Description of the
Certificates."
Failure to pay principal of and interest on any Class
of Offered Certificates in full by the related
Termination Date shall constitute an Event of Default,
and the Certificate Trustee may and, upon the written
direction of the holders of a majority in principal
amount of all Certificates of all Series then
outstanding, shall declare the unpaid principal amount
of all the Notes of all Series then outstanding to be
due and payable. See "Description of the Certificates-
-Certificate Events of Default; Rights Upon Certificate
Event of Default" and "Ratings" in the Prospectus.
Issuance of New Series The Trust may issue new Series of Certificates from
time to time. A new Series may be issued only upon
satisfaction of the conditions described under
"Description of the Certificates--Conditions of
Issuance of Additional Series" herein.
[Swap Agreement The Trust will enter into a swap agreement dated the
Closing Date (the "SWAP AGREEMENT") with ___________,
as swap counterparty (the "SWAP COUNTERPARTY").
Pursuant to the Swap Agreement, on each Distribution
Date, the Trust will be obligated to pay to the Swap
Counterparty, solely from payments received with
respect to the Class _ Notes, an amount equal to the
interest due on the Class ___ Notes on such
Distribution Date, and the Swap Counterparty will be
obligated to
S-8
<PAGE>
pay to the Trust an amount equal to the product of the
(a) Floating Rate and (b) the Class ___ Principal
Balance as of the close of business on the preceding
Distribution Date after giving effect to all payments
of principal made to the Class ____ Certificateholders
on such preceding Distribution Date.
The Swap Agreement will terminate or may be terminated
upon the occurrence of certain events of default or
termination events as described herein under "Summary
of Certain Provisions of the Swap Agreement." If, upon
or prior to the termination of the Swap Agreement, the
Infrastructure Bank, using its best efforts, is unable
to find a successor swap counterparty satisfying the
requirements specified in the Trust Agreement, the
Certificate Interest Rate payable with respect to the
Class ___ Certificates will automatically convert to a
fixed rate equal to the interest rate payable on the
Class ____ Notes. See "Description of the Certificates-
-Floating Rate on Class ___ Certificates" and
"Additional Risk Factors Relating to the Class ____
Certificates."]
Interest On each Distribution Date, the Certificate Trustee
shall distribute pro rata to the Certificateholders of
each Class as of the related Record Date interest in an
amount equal to one-fourth of the product of (a) the
applicable Certificate Interest Rate and (b) the
applicable Class Principal Balance as of the close of
business on the preceding Distribution Date after
giving effect to all payments of principal made to the
Certificateholders on such preceding Distribution Date;
provided, however, that with respect to the initial
Distribution Date, interest on each outstanding Class
Principal Balance will accrue from and including the
Series Issuance Date to, but excluding, the following
Distribution Date. Interest will be calculated on the
basis of a 360-day year of twelve 30-day months[except
that with respect to the Class ___ Certificates
interest will be calculated as described under
"Description of the Certificates--Floating Rate on
Class ___ Certificates"]. Interest on any Class of
Offered Certificates will be payable only to the extent
interest has been paid on the related Class of
Underlying Notes[and, in the case of the Class ___
Certificates, interest will be paid based upon the
variable rate payable pursuant to the Swap Agreement
(the "FLOATING RATE") so long as payments are received
under the terms of the Swap Agreement]. See
Description of the Certificates--Distributions of
Interest" herein and "Description of the Certificates--
Interest and Principal" in the Prospectus.
Principal On each Distribution Date, the Certificate Trustee
shall distribute to the Certificateholders as of the
related Record Date amounts distributable as principal,
in the following order and priority: [TO BE DETERMINED
S-9
<PAGE>
UPON ISSUANCE]. The principal amounts payable with
respect to any Class of Offered Certificates will be
payable only to the extent of payments of principal
made on the related Class of Underlying Notes. See
Description of the Certificates--Distributions of
Principal" herein and "Description of the Certificates-
-Interest and Principal" in the Prospectus.
Optional Redemption The Note Issuer may redeem the Underlying Notes
relating to the Offered Certificates, and accordingly
cause the Trust to redeem the Offered Certificates, on
any Payment Date if the Outstanding Note Principal
Balance (after giving effect to distributions on such
date) has been reduced to less than five percent of the
Original Note Principal Balance. See "Description of
the Certificates--Optional Redemption" herein.
Collection Account
and Subaccounts Upon issuance of the initial Series of Notes, the Note
Issuer will establish the Collection Account, which
will be held by the Note Trustee for the benefit of the
Noteholders. The Collection Account will consist of
four subaccounts: a general subaccount (the "GENERAL
SUBACCOUNT"), a reserve subaccount (the "RESERVE
SUBACCOUNT"), a subaccount for the Over-
collateralization Amount (the "OVERCOLLATERALIZATION
SUBACCOUNT") and a capital subaccount (the "CAPITAL
SUBACCOUNT"). Unless the context indicates otherwise,
references herein to the Collection Account include
each of the subaccounts contained therein. Withdrawals
from and deposits to these subaccounts will be made as
described under "Description of the Notes--Allocations;
Payments" in the Prospectus.
Credit Enhancement The Offered Certificates will benefit from the
following forms of credit enhancement:
Overcollateralization. In order to enhance the
likelihood that distributions on each Class of the
Offered Certificates will be made in accordance with
their Expected Amortization Schedules, the Financing
Order and the Issuance Advice Letter relating to the
Offered Certificates permit the Seller to recover
$_______ through FTA Payments in excess of the amount
expected to be required to pay interest on and
principal of all outstanding Classes of Offered
Certificates and related fees and expenses. Such
excess is the Overcollateralization Amount related to
the Offered Certificates and will be allocated to the
Overcollateralization Subaccount, as described further
under "Description of the Notes--Overcollateralization
Amount" in the Prospectus, to be available to pay any
periodic shortfalls in amounts available for scheduled
payments on the Notes. The Overcollateralization
Amount will be collected ratably over the life of the
Offered Certificates. See also "Description of the
Notes--Overcollateralization Amount" herein.
S-10
<PAGE>
Capital Subaccount. Upon the issuance of the Underlying
Notes, the Seller will make a capital contribution of
$___________ to the Note Issuer. Such amount is equal
to 0.50% of the initial principal amount of the
Underlying Notes. Such amount, less $100,000 in the
aggregate for all Series of Notes, is the Required
Capital Level with respect to the Underlying Notes and
will be deposited into the Capital Subaccount.
Withdrawals from and deposits to the Capital Subaccount
will be made as described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
Reserve Subaccount. FTA Collections available with
respect to any Payment Date in excess of amounts
payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the
Underlying Notes, (c) allocations to the
Overcollateralization Subaccount and (d) allocations to
the Capital Subaccount (all as described under
"Description of the Notes--Allocations; Payments" in
the Prospectus), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee
will draw on amounts in the Reserve Subaccount, to the
extent amounts available in the General Subaccount are
insufficient to make scheduled payments on the
Underlying Notes.
Other. See "Description of the Certificates--Other
Credit Enhancement" herein and in the Prospectus.
Collections;
Allocations;
Distributions On each Distribution Date, amounts on deposit in the
Collection Account will be applied in the manner
described under "Description of the Notes--
Allocations; Payments" in the Prospectus.
Servicing Compensation The Servicer will be entitled to receive a Servicing
Fee for each calendar quarter with respect to the
Offered Certificates in an amount equal to one-fourth
of [ ] percent per annum of the then outstanding
principal balance of the Underlying Notes (the
"SERVICING FEE"). The Servicing Fee will be paid prior
to the distribution of any amounts in respect of
interest on and principal of the Underlying Notes. The
Servicer will be entitled to retain as additional
compensation net investment income on FTA Payments
received by the Servicer prior to remittance thereof to
the Collection Account and the portion of late fees, if
any, paid by Customers relating to the FTA Payments.
See "Servicing--Servicing Compensation" herein and in
the Prospectus.
No Servicer Advances The Servicer will not make any advances of interest or
principal on the Underlying Notes.
Maturity, Weighted
Average Life and Yield
Considerations The actual Distribution Dates on which principal
is distributed on each Class of Certificates will be
affected by, among other things, the amount
S-11
<PAGE>
and timing of receipt of FTA Collections and amounts in
the Overcollateralization Subaccount, Capital
Subaccount and Reserve Subaccount. Since each FTA
Charge will consist of a charge per kilowatt hour of
usage by the applicable class of Customers in the
Territory, the aggregate amount and timing of FTA
Collections (and the resulting amount and timing of
principal amortization on the Offered Certificates)
could depend, in part, on actual usage of electricity
by Customers and the rate of delinquencies and write-
offs. Although the amount of the FTA Charges will
adjust from time to time based in part on the actual
rate of FTA Collections during prior calendar months,
no assurances can be given that the Servicer will be
able to forecast accurately actual Customer energy
usage and the rate of delinquencies and write-offs and
implement adjustments to the FTA Charges that will
cause FTA Payments to be made at any particular
rate.
If FTA Collections are received at a slower rate than
expected, distributions on a Certificate may be made
later than expected. Because principal will only be
distributed in accordance with the Expected
Amortization Schedules, except in the event of an early
redemption, the Certificates are not expected to be
retired earlier than scheduled.
If the Note Issuer exercises its option to redeem all
of the outstanding Underlying Notes on any Payment Date
commencing on the Payment Date on which the Outstanding
Principal Balance (after giving effect to payments on
such date) has been reduced to less than five percent
of the Original Principal Balance, the Certificate
Trustee will be required to redeem the Offered
Certificates. Such redemption will adversely affect
the yield to maturity of Offered Certificates purchased
at par or a premium. See "Certain Distribution,
Weighted Average Life and Yield Considerations" and
"Description of the Transition Property--Adjustments to
the FTA Charges" in the Prospectus.
Denominations Each Class of Offered Certificates will be issued in
minimum initial denominations of [$1,000] and in
integral multiples thereof.
Registration of the
Certificates The [Offered] [Class ______] Certificates will
initially be represented by one or more certificates
registered in the name of Cede & Co. ("CEDE") ("BOOK-
ENTRY CERTIFICATES"), the nominee of The Depository
Trust Company ("DTC"), and available only in the form
of book-entries on the records of DTC, its Participants
and its Indirect Participants. Holders may also hold
such Certificates through CEDEL or the Euroclear system
in Europe. For a more complete discussion of the Book-
Entry Certificates, see "Risk Factors" and "Description
of the Certificates--Book-Entry Registration" in the
Prospectus.
S-12
<PAGE>
Ratings It is a condition of issuance of the Offered
Certificates that the Class ____ Certificates be rated
"____" by _______, "____" by _______ and "____" by
_______ (each of _______, ________ and _________, a
"RATING AGENCY") and that the Class _____ Certificates
be rated "____" by _______, "____" by _______ and
"____" by _______. Each Class of Underlying Notes will
receive the same rating from each Rating Agency as the
corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Offered Certificate and,
accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon
initial issuance thereof will not be revised or
withdrawn by a Rating Agency at any time thereafter.
If a rating of any Class of Offered Certificates is
revised or withdrawn, the liquidity of such Class of
Offered Certificates may be adversely affected. In
general, the ratings address credit risk and do not
represent any assessment of the rate of FTA
Collections. See "Risk Factors--Uncertain Distribution
Amounts and Weighted Average Life Considerations" in
the Prospectus, "Certain Distribution, Weighted Average
Life and Yield Considerations" herein and in the
Prospectus and "Ratings" herein and in the
Prospectus.
Tax Status of the
Certificates The Offered Certificates will be treated as
representing ownership of debt for federal income tax
purposes. Interest and original issue discount, if
any, on the Offered Certificates generally will be
included in gross income for federal income tax
purposes. See "Certain Federal Income Tax
Consequences" in the Prospectus and herein.
Interest and original issue discount, if any, on the
Offered Certificates will be exempt from California
personal income tax, but not exempt from the California
franchise tax applicable to banks and corporations.
See "State Taxation" in the Prospectus and herein.
ERISA Considerations Subject to the considerations described in "ERISA
Considerations" herein and in the Prospectus, the
Offered Certificates are eligible for purchase with
"plan assets" of any Plan (as defined below) ("PLAN
ASSETS"). A fiduciary or other person contemplating
purchasing the Offered Certificates on behalf of or
with Plan Assets of any employee benefit plan or other
plan or arrangement (including but not limited to an
insurance company general account) that is subject to
Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the "CODE")
(collectively, "PLANS"), should carefully review with
its legal
S-13
<PAGE>
advisors whether the purchase or holding of the Offered
Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or
Section 4975 of the Code.
S-14
<PAGE>
[ADDITIONAL RISK FACTORS RELATING TO THE CLASS ____ CERTIFICATES
As described herein under "Summary of Certain Provisions of the Swap Agreement,"
upon the occurrence of certain events of default or termination events, the Swap
Agreement will terminate or may be terminated. Such termination events include
the right of the Infrastructure Bank and the Certificate Trustee to terminate
the Swap Agreement if the long-term unsecured debt rating of the Swap
Counterparty is withdrawn or suspended by either S&P or Moody's or falls below
the rating of "A" of either such Rating Agency. If the Swap Agreement is
terminated, the Infrastructure Bank will use its best efforts to find a
successor swap counterparty satisfying the qualifications described in the Trust
Agreement. If, upon or prior to such termination, the Infrastructure Bank is
unable to find such a successor swap counterparty, the Certificate Interest Rate
payable with respect to the Class __ Certificates will convert to a fixed rate
equal to the interest rate on the Class __ Notes, which is ______%.
Distributions of interest with respect to the Class ___ Certificates will
continue at this fixed interest rate until a successor swap counterparty has
been found, and no assurances are given that a successor swap counterparty will
be found. In such event, both the liquidity and the market value of the Class
___ Certificates may be adversely affected.]
DESCRIPTION OF THE CERTIFICATES
The California Infrastructure and Economic Development Bank Special Purpose
Trust PG&E-1 Rate Reduction Certificates, Series 199_-_ (the "OFFERED
CERTIFICATES") together with the Certificates of other Series issued by the
Trust (collectively, the "CERTIFICATES"), will be issued by the Trust pursuant
to the Trust Agreement and the Series 199_-_ Supplement thereto. Pursuant to
the Trust Agreement, the Infrastructure Bank and the Certificate Trustee may
execute further series supplements in order to issue additional Series of
Certificates. This summary should be read together with the material under the
heading "Description of the Certificates" in the Prospectus.
GENERAL
The Offered Certificates will be issued on the Series Issuance Date. The
Offered Certificates will be comprised of the following _____ Classes:
<TABLE>
<CAPTION>
Certificate
Scheduled Final Interest
Class Distribution Date Termination Date Rate
- -------- ------------------------- ----------------------- -------------
<S> <C> <C> <C>
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__% /(1)/
</TABLE>
/(1)/ Calculated as described under "Floating Rate on Class ___ Certificates."
[FLOATING RATE ON CLASS __ CERTIFICATES
DETERMINATION OF CLASS ___ CERTIFICATE INTEREST RATE. The Certificate
Interest Rate applicable from time to time to Class __ Certificates will be
determined by the _______________(together with any successor Agent Bank under
the Trust Agreement the "AGENT BANK") in accordance with the following
provisions:
(a) On the second London banking day immediately preceding the first
day of each Interest Accrual Period (as defined below) and on the Closing
Date with respect to the first Interest Accrual Period (each such day, an
"INTEREST DETERMINATION DATE"), the Agent Bank will determine "LIBOR" based
on the offered rate for deposits in U.S. dollars for a period of [three
months] commencing on the first day of such Interest Accrual Period that
appears on the display page of the Dow Jones Telerate Service for the
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<PAGE>
purpose of displaying the London Interbank offered rate of major banks for
U.S. Dollars as of 11:00 a.m., London time, on such Interest Determination
Date (such display page being the "TELERATE PAGE"). Notwithstanding the
foregoing, if no offered rate appears, LIBOR for such Interest Accrual
Period will be determined as if the parties had specified the rate
described in clause (b) below. The Certificate Interest Rate applicable to
the Class ___ Certificates for the Interest Accrual Period relating to an
Interest Determination Date shall be the sum of LIBOR as determined by the
Agent Bank on the most recent Interest Determination Date plus _____%.
(b) With respect to an Interest Determination Date on which no offered
rate appears on the Telerate Page, the Agent Bank will request the
principal London office of each of four major banks in the London interbank
market, selected by the Agent Bank (after consultation with the
Infrastructure Bank), to provide the Agent Bank with its offered quotation
for deposits in U.S. Dollars for a period of three months, commencing on
the second London banking day immediately following such Interest
Determination Date, to prime banks in the London interbank market at
approximately 11:00 a.m., London time, on such Interest Determination Date
and in a principal amount that is representative for a single transaction
in U.S. Dollars in such market at such time. If at least two such
quotations are provided, LIBOR for the relevant Interest Accrual Period
will be the arithmetic mean of such quotations. If fewer than two
quotations are provided, LIBOR for such Interest Accrual Period will be the
arithmetic mean of the rates quoted at approximately 11:00 a.m. in The City
of New York, on such Interest Determination Date by three major banks in
The City of New York selected by the Agent Bank (after consultation with
the Infrastructure Bank) for loans in U.S. Dollars to leading European
banks, for the period of three months, commencing on the second London
banking day immediately following such Interest Determination Date and in a
principal amount that is representative for a single transaction in U.S.
Dollars in such market at such time; provided, however, that if any of the
banks so selected by the Agent Bank are not quoting as mentioned in this
sentence, the Certificate Interest Rate in effect for such Interest Accrual
Period will be the rate of interest in effect on such Interest
Determination Date.
(c) Subject to applicable usury laws, there will be no maximum or
minimum Certificate Interest Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, and the Swap Counterparty has not been replaced with a successor
swap counterparty satisfying the requirements of the Trust Agreement, the
interest rate with respect to the Class __ Certificates shall be __ % per annum
(calculated on the basis of a 360-day year consisting of twelve 30-day months),
effective as of the first day of the Interest Accrual Period immediately
preceding the termination of the Swap Agreement.
CALCULATION OF QUARTERLY INTEREST. The Agent Bank will, as soon as
practicable after 11:00 a.m. (London time) on each Interest Determination Date,
determine the Certificate Interest Rate applicable to, and calculate the amount
of interest payable on, each of the Class __ Certificates for the relevant
Interest Accrual Period. Interest payments will be made in an amount equal to
the product of (a)(1) the actual number of days in the related Interest Accrual
Period (as defined herein) divided by 360, multiplied by (2) the applicable
Certificate Interest Rate and (b) the Class __ Principal Balance (as defined
herein) as of the close of business day on the preceding Distribution Date after
giving effect to all payments of principal made to the Class __
Certificateholders on such preceding Distribution Date (or, in the case of the
first Distribution Date, as of the Closing Date) (such amount, the "QUARTERLY
INTEREST" with respect to such Class). The "INTEREST ACCRUAL PERIOD" with
respect to any Distribution Date shall be the period from and including the
preceding Distribution Date (or, in the case of the first Distribution Date,
from and including the Closing Date) to and excluding such Distribution Date.
The determination of the Certificate Interest Rate and the Quarterly Interest by
the
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<PAGE>
Agent Bank shall (in the absence of manifest error) be final and binding upon
all parties.
NOTICE OF CERTIFICATE INTEREST RATE AND INTEREST PAYMENTS. The Agent Bank
will notify the Infrastructure Bank, the Certificate Trustee and any Paying
Agents of the Certificate Interest Rate and the Quarterly Interest due on the
Class __ Certificates for each Interest Accrual Period and the relevant
Distribution Date as soon as possible after their determination but in no event
later than the [first] business day of any Interest Accrual Period.
DETERMINATION OR CALCULATION BY CERTIFICATE TRUSTEE. If the Agent Bank
fails to determine a Certificate Interest Rate or calculate Quarterly Interest
in accordance with paragraph (ii) above at any time or for any reason, the
Certificate Trustee shall determine the Certificate Interest Rate and calculate
the Quarterly Interest in accordance with paragraph (ii) above, and each such
determination or calculation shall be deemed to have been made by the Agent
Bank. The determination by the Agent Bank or the Certificate Trustee (as the
case may be) of any Certificate Interest Rate and calculation thereby of any
Quarterly Interest shall, in the absence of manifest error, be final and binding
on all parties.
AGENT BANK. The Infrastructure Bank will agree that, so long as any of the
Certificates remain outstanding, there will at all times be an Agent Bank. The
Infrastructure Bank may (with the prior written approval of the Certificate
Trustee) terminate the appointment of the Agent Bank for any reason. Notice of
any such termination will be given to Certificateholders within ten days of such
termination. If (a) any person is unable or unwilling to continue to act as the
Agent Bank, (b) the appointment of the Agent Bank is terminated or (c) the Agent
Bank fails duly to determine the Certificate Interest Rate and/or the Quarterly
Interest for any Interest Accrual Period, then the Infrastructure Bank will,
with the approval of the Certificate Trustee, appoint a successor Agent Bank to
act as such in its place, provided that neither the resignation nor removal of
the Agent Bank shall take effect until a successor approved by the Certificate
Trustee has been appointed. Notice of any such appointment of a successor Agent
Bank will be given to the Certificateholders within ten days of such
appointment.]
DISTRIBUTIONS OF INTEREST
Interest on each Class of the Offered Certificates will accrue from the
Series Issuance Date at the rates indicated above (each, a "CERTIFICATE INTEREST
RATE"), in each case distributable quarterly on March 25, June 25, September 25
and December 26 (or, if any such date is not a Certificate Business Day, the
next succeeding Certificate Business Day) each year (each, a "DISTRIBUTION
DATE"), commencing _________.
On each Distribution Date, the Certificate Trustee will distribute pro rata
to the Certificateholders of each Class as of the related Record Date interest
to the extent paid on such date with respect to the Class of Underlying Notes
with the same alphabetical [and numeric] designation, as described below under
"Description of the Notes--Distributions of Interest" [or, with respect to the
Class ___ Certificates, payments received from the Swap Counterparty pursuant to
the Swap Agreement].
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, the Certificate Trustee will distribute to the
Certificateholders of each Class as of the related Record Date principal to the
extent paid on such date with respect to the Class of Underlying Notes with the
same alphabetical [and numeric] designation, as described below under
"Description of the Notes--Principal."
The entire unpaid principal amount of the Offered Certificates will be due
and distributable on the date on which a Certificate Event of Default has
occurred and is continuing, if the Certificate Trustee or holders of a majority
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<PAGE>
in principal amount of the Offered Certificates of all Series then outstanding
have declared the Certificates to be immediately due and payable. See
"Description of the Certificates--Certificate Events of Default; Rights Upon
Certificate Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Trust shall be required to redeem the Offered Certificates if the Note
Issuer elects to redeem the Underlying Notes, which the Note Issuer may elect to
do on any Payment Date commencing with the Payment Date on which the Outstanding
Note Principal Balance (after giving effect to distributions on such date) has
been reduced to less than five percent of the Original Note Principal Balance.
Such Payment Date will correspond to the Distribution Date on which the
Outstanding Certificate Principal Balance has been reduced to five percent of
the Original Certificate Principal Balance. Notice of such redemption will be
given by the Trust to each holder of Certificates to be redeemed by first-class
mail, postage prepaid, mailed not less than five days nor more than 25 days
prior to the date of redemption.
SUMMARY OF CERTAIN PROVISIONS OF THE SERIES __
SUPPLEMENT TO THE TRUST AGREEMENT
[TO BE PREPARED UPON ISSUANCE]
[SUMMARY OF CERTAIN PROVISIONS OF THE SWAP AGREEMENT]
[TO BE PREPARED UPON ISSUANCE]
[THE SWAP COUNTERPARTY]
[TO BE PREPARED UPON ISSUANCE]
DESCRIPTION OF THE NOTES
GENERAL
The PG&E Funding LLC Notes, Series 199_-_ (the "UNDERLYING NOTES"), will be
issued by the Note Issuer to the Trust on ______________ (the "SERIES ISSUANCE
DATE"), pursuant to the Note Indenture and the Series 199_-_ Supplement thereto.
Pursuant to the Note Indenture, the Note Issuer and the Note Trustee may execute
further series supplements in order to issue additional Series of Notes. This
summary should be read together with the material under the heading "Description
of the Notes" in the Prospectus.
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<PAGE>
The Underlying Notes, together with the Notes of other Series issued by the
Note Issuer (collectively, the "NOTES"), will be issued pursuant to the Note
Indenture. The Underlying Notes will be comprised of the following _____
Classes:
<TABLE>
<CAPTION>
Note
Scheduled Interest
Class Maturity Date Final Maturity Date Rate
- -------- ------------------------- ----------------------- ---------
<S> <C> <C> <C>
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
___ ________, 200 (___ years) ______, 200 (___ years) __.__%
</TABLE>
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer has granted to the Note Trustee, for the benefit of the holders of the
Notes (the "NOTEHOLDERS"), a security interest in all of the Note Issuer's
right, title and interest in and to the Note Collateral. The Note Collateral is
described more specifically under "Description of the Notes--Security" in the
Prospectus.
INTEREST
Interest on each Class of the Underlying Notes will accrue from the Series
Issuance Date at the rates indicated above (each, a "Note Interest Rate"), in
each case payable quarterly on March 25, June 25, September 25 and December 26
(or, if any such date is not a Certificate Business Day, the next succeeding
Certificate Business Day) each year (each, a "PAYMENT DATE"), commencing
_________, to the persons in whose names the Underlying Notes are registered at
the close of business on the related Record Date.
On each Payment Date, Noteholders of each Class will be entitled to receive
an amount equal to one-fourth of the product of (a) the applicable Note Interest
Rate and (b) the applicable Class Principal Balance as of the close of business
on the preceding Distribution Date after giving effect to all payments of
principal made to the Noteholders on such preceding Distribution Date; provided,
however, that with respect to the initial Distribution Date, interest on each
outstanding Class Principal Balance will accrue from and including the Series
Issuance Date to but excluding the following Distribution Date. Interest will
be calculated on the basis of a 360-day year of twelve 30-day months. See
"Description of the Notes--Interest and Principal" in the Prospectus.
PRINCIPAL
On each Payment Date, each Class of the Underlying Notes will be entitled
to receive payments of principal as follows: [TO BE PREPARED UPON ISSUANCE].
Principal will be payable at the Corporate Trust Office of the Note Trustee in
the City of _______, or at the office or agency of the Note Issuer maintained
for such purposes in the Borough of Manhattan, the City of New York.
The following Expected Amortization Schedule sets forth the scheduled
outstanding percentage of the initial Class Principal Balance for each Class of
the Underlying Notes at each Payment Date from the Series Issuance Date to the
Scheduled Maturity Date for such Class. In preparing the following table, it
has been assumed that (i) the Offered Certificates are issued on the Series
Issuance Date, (ii) payments on the Offered Certificates are made on each
Distribution Date, commencing _______________, 199_, (iii) the initial Class
____ Principal Balance is $_____ and the initial Class ____ Principal Balance is
$______, (iv) all FTA Collections are deposited in the Collection Account
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<PAGE>
in accordance with the Seller's forecasts, (v) the Note Issuer does not redeem
the Underlying Notes and ( ) [other assumptions].
EXPECTED AMORTIZATION SCHEDULE
Outstanding Principal Balance and
Percentage of Initial Class
Payment Principal Balance Outstanding
-----------------------------
Date Class Class Class Class Class
- ---- ------- ------- ------- ------- -------
Series Issuance Date
_____, 199_
_____, 199_
_____, 199_
[Etc.]
There can be no assurance that the Class Principal Balances of the
Underlying Notes and the related Offered Certificates will be reduced at the
rates indicated in the foregoing table, and the actual reductions in such Class
Principal Balances may be slower than those indicated in the chart. See "Risk
Factors" in the Prospectus for a discussion of various factors which may,
individually or in the aggregate, affect the rate of reductions of the Class
Principal Balances of the Underlying Notes and the Offered Certificates.
The entire unpaid principal amount of the Underlying Notes will be due and
payable on the date on which a Note Event of Default has occurred and is
continuing, if the Note Trustee or holders of a majority in principal amount of
the Notes of all Series then outstanding have declared the Underlying Notes to
be immediately due and payable. See "Description of the Notes--Note Events of
Default; Rights Upon Note Event of Default" in the Prospectus.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, the Underlying Notes, and
accordingly cause the Trust to redeem the Offered Certificates, on any Payment
Date commencing with the Payment Date on which the Outstanding Note Principal
Balance (after giving effect to distributions on such date) has been reduced to
less than five percent of the Original Note Principal Balance. Notice of such
redemption will be given by the Note Issuer to each holder of Underlying Notes
by first-class mail, postage prepaid, mailed not less than five days nor more
than 25 days prior to the date of redemption.
OVERCOLLATERALIZATION AMOUNT
In order to enhance the likelihood that distributions on each Class of the
Offered Certificates will be made in accordance with their Expected Amortization
Schedules, the Financing Order and the Issuance Advice Letter relating to the
Offered Certificates permit the recovery of $_______ through FTA Payments in
excess of the amount expected to be required to pay interest on and principal of
all outstanding Classes of Offered Certificates and related fees and expenses.
Such excess is the Overcollateralization Amount related to the Offered
Certificates and will be allocated to the Overcollateralization Subaccount, as
described further under "Description of the Notes--Overcollateralization Amount"
in the Prospectus, to be available to pay any periodic shortfalls in amounts
available for scheduled payments on the Notes.
OTHER CREDIT ENHANCEMENT
CAPITAL SUBACCOUNT. Upon the issuance of the Underlying Notes, the Seller
will make a capital contribution of $___________ to the Note Issuer. Such
amount is equal to 0.50% of the initial principal amount of the Underlying
Notes. Such amount, less $100,000 in the aggregate for all Series of Notes, is
the Required Capital Level with respect to the Underlying Notes
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<PAGE>
and will be deposited into the Capital Subaccount. Withdrawals from and
deposits to the Capital Subaccount will be made as described under "Description
of the Notes--Allocations; Payments" in the Prospectus.
RESERVE SUBACCOUNT. FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of the Note Issuer and the
Trust, (b) payments of principal of and interest on the Underlying Notes, (c)
allocations to the Overcollateralization Subaccount and (d) allocations to the
Capital Subaccount (all as described under "Description of the Notes--
Allocations; Payments" in the Prospectus), will be allocated to the Reserve
Subaccount. On each Payment Date, the Note Trustee will draw on amounts in the
Reserve Subaccount, to the extent amounts available in the General Subaccount
are insufficient to make scheduled payments on the Underlying Notes.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will at the direction of the
Servicer apply all amounts on deposit in the Collection Account with respect to
the prior calendar month in the manner described under "Description of the
Notes--Allocations; Payments" in the Prospectus.
The Certificate Trustee will then apply all amounts paid by the Note
Trustee on the related Payment Date with respect to the Underlying Notes in the
following priority:
[TO BE PREPARED UPON ISSUANCE]
DESCRIPTION OF THE TRANSITION PROPERTY
FINANCING ORDER AND ADVICE LETTERS
The Financing Order requires the Seller to submit an Issuance Advice Letter
to the CPUC with respect to each Series of Certificates issued. The first
Issuance Advice Letter [, which was filed in connection with the Offered
Certificates,] established the FTA Charges pursuant to which nonbypassable
charges will be billed to the applicable classes of Customers in an amount
sufficient to recover, within the time period specified in the Issuance Advice
Letter, FTA Charges designated in the Issuance Advice Letter based on factors
including, but not limited to, the actual electricity usage of each such
Customer and the rate of delinquencies and write-offs. These charges are
nonbypassable in that applicable consumers cannot avoid paying them if they
purchase electricity from a supplier other than the Seller. [Subsequent
Issuance Advice Letters have modified the FTA Charges to support the issuance of
______ additional Series of Certificates, including the Offered
Certificates.]
The Issuance Advice Letter which was filed in connection with the Offered
Certificates establishes the following FTA Charges:
Class of Customers FTA Charge Per Kilowatt Hour
- ------------------ ----------------------------
Residential
Small Commercial
As of the date hereof, the FTA Charge for an average Residential Customer
will amount to approximately $____ per month, and the FTA Charge for an average
Small Commercial Customer will amount to approximately $____ per month. The
average monthly bill, excluding local taxes, during 1996 was ______ for a
Residential Customer and _____ for a Small Commercial Customer.
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<PAGE>
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that the FTA Collections are neither
more nor less than the amount necessary to amortize the Certificates in
accordance with the Expected Amortization Schedule, fund the
Overcollateralization Subaccount as scheduled and replenish the Capital
Subaccount, the Servicing Agreement and the Financing Order require the Servicer
to seek periodic adjustments to the FTA Charges based on actual FTA Collections
and updated assumptions by the Servicer as to, among other factors, the
electricity usage by Customers and the rate of delinquencies and write-offs.
The date as of which any calculation is performed which forms the basis for a
requested adjustment to the FTA Charges is referred to as a "CALCULATION DATE."
The adjustments to the FTA Charges will continue until all interest and
principal on all Series of Notes and corresponding Series of Certificates have
been paid or distributed in full.
[The following table reflects information regarding the changes to the FTA
Charges which have been requested through Advice Letters since the Financing
Order was issued:
FTA CHARGE FOR RESIDENTIAL CUSTOMERS
<TABLE>
<CAPTION>
Requested Adjustment Resulting
Adjustment to FTA Charge Aggregate
Calcu- to FTA Charge Granted by CPUC FTA Charge Effective
lation per per per Date of
Date Kilowatt Hour Kilowatt Hour Kilowatt Hour Adjustment
- --------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C>
[TO BE PREPARED UPON ISSUANCE]
<CAPTION>
FTA CHARGE FOR SMALL COMMERCIAL CUSTOMERS
Requested Adjustment Resulting
Adjustment to FTA Charge Aggregate
Calcu- to FTA Charge Granted by CPUC FTA Charge Effective
lation per per per Date of
Date Kilowatt Hour Kilowatt Hour Kilowatt Hour Adjustment
- --------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C>
[TO BE PREPARED UPON ISSUANCE]
]
</TABLE>
See "Description of the Transition Property--Adjustments to the FTA
Charges" in the Prospectus.
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal distributions on each Class of Offered Certificates,
the aggregate amount of each interest distribution on each Class of Offered
Certificates and the actual maturity date of each Class of Offered Certificates
will be related to the rate and timing of FTA Collections.
The actual distributions on each Distribution Date for each Class of
Offered Certificates and the weighted average life thereof will be affected
primarily by the rate of FTA Collections and the timing of receipt of such FTA
Collections, as well as amounts on deposit in the Overcollateralization
Subaccount, Capital Subaccount and Reserve Subaccount. Since the FTA Charges
will consist of a charge per kilowatt hour of usage by the applicable classes of
Customers, the aggregate amount of FTA Collections and the rate of principal
amortization on the Offered Certificates will depend, in part, on actual energy
usage by Customers and the rate of delinquencies and write-offs. Although the
amounts of the FTA Charges will be adjusted from time to time based in part on
the actual rate of FTA Collections, no assurances are given that the Servicer
will be able to forecast accurately actual energy usage and
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the rate of delinquencies and write-offs or implement adjustments to the FTA
Charges that will cause FTA Collections to be received at any particular rate.
If FTA Collections are received at a slower rate than expected an Offered
Certificate may be retired later than expected. Because principal will only be
distributed in accordance with the Expected Amortization Schedules, except in
the event of an early redemption, the Offered Certificates are not expected to
mature earlier than scheduled. A distribution on a date that is earlier than
forecasted will result in a shorter weighted average life, and a distribution on
a date that is later than forecasted will result in a longer weighted average
life. In addition, if a larger portion of the delayed distributions on the
Offered Certificates are received in later years, this will result in a longer
weighted average life of the Offered Certificates.
No representation is made as to the particular factors that will affect the
rate of FTA Collections, as to the relative importance of such factors, as to
the percentage of the principal balance of the Offered Certificates that will be
distributed as of any date or as to the overall rate of FTA Collections.
In addition, the Note Issuer has the option to redeem all of the
outstanding Underlying Notes on any Payment Date commencing on the Payment Date
on which the Outstanding Principal Balance (after giving effect to payments on
such date) has been reduced to less than five percent of the Original Principal
Balance. Redemption of the Underlying Notes will require the Certificate
Trustee to redeem the Offered Certificates. Redemption will cause such Offered
Certificates to be retired earlier than would otherwise be expected and will
adversely affect the yield to maturity of Offered Certificates purchased at par
or a premium. There can be no assurance as to whether the Note Issuer will
exercise the option to redeem the Underlying Notes, or as to whether
Certificateholders will be able to receive an equally attractive rate of return
upon reinvestment of the proceeds resulting from any such redemption.
THE SELLER AND SERVICER
The following is information which supplements that provided under the
heading "The Seller and Servicer" in the Prospectus. For a more complete
discussion of the Seller and Servicer, see "The Seller and Servicer" in the
Prospectus.
Pacific Gas and Electric Company reported net income of $_________ on
revenues of $_________ for the [quarter][year] ended ________, 199_, as compared
with net income of $_________ on revenues of $_________ for the [quarter][year]
ended ________, 199_.
SERVICING
GENERAL
The Servicer, as agent for the Note Issuer, will manage, service and
administer, and make collections in respect of, the Transition Property pursuant
to the Servicing Agreement between the Servicer and the Note Issuer. For a
detailed discussion of the Servicer's procedures, the manner in which payments
from Customers are remitted to the Collection Account, and related matters, see
"Servicing" in the Prospectus.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Underlying Notes.
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SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each
calendar quarter, in an amount equal to one-fourth of ___ percent per annum of
the Outstanding Note Principal Balance. The Servicing Fee (together with any
portion of the Servicing Fee that remains unpaid from prior Distribution Dates)
will be paid solely to the extent funds are available therefor as described
under "Description of the Notes--Allocations; Payments" in the Prospectus. The
Servicing Fee will be paid prior to the distribution of any amounts in respect
of interest on and principal of the Underlying Notes. The Servicer will be
entitled to retain as additional compensation net investment income on FTA
Payments received by the Servicer prior to remittance thereof to the Collection
Account and the portion of late fees, if any, paid by Customers relating to the
FTA Payments.
AGGREGATORS AND ALTERNATIVE ENERGY SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPS") to provide a consolidated bill to their retail
customers covering amounts owed to the ESP for electricity, amounts owed to the
Utilities for distribution and other charges, including the applicable FTA
Charges. Any ESP that elects consolidated billing will be responsible for
paying the Servicer amounts billed by the Servicer to the ESP regardless of the
ESP's ability to collect such amounts, including the FTA Charges, from its
customers. The CPUC has not yet made a final determination regarding the
appropriate credit standards to be required of ESPs, or the appropriate form of
the necessary agreement between PG&E and each ESP. There can be no assurance
that each ESP will utilize the same customer credit standards as the Servicer,
or that the Servicer will be able to mitigate credit risks relating to ESPs in
the same manner in which it mitigates such risks relating to its Customers. The
Servicer, on behalf of the Note Issuer, will pursue any ESP that fails to remit
applicable FTA Charges in the same manner that the Servicer will pursue any
failure by a Customer to remit FTA Charges. Neither the Seller nor the Servicer
will pay any shortfalls resulting from the failure of any ESPs to forward FTA
Payments to PG&E, as Servicer. The true-up adjustment mechanism for the FTA
Charges, as well as the collection of the Overcollateralization Amount and the
pledge of amounts deposited in the Capital Subaccount, are intended to mitigate
this risk relating to the timing of collections and payments. However, delays
in distributions to Offered Certificateholders might occur as a result of delays
in implementation of the adjustment mechanism. See "Risk Factors--Potential
Servicing Issues--Reliance on Aggregators and Other Suppliers" in the
Prospectus.
STATEMENTS BY SERVICER
For each Remittance Date and each Distribution Date, the Servicer will
provide the statements and reports described under "Servicing--Statements by
Servicer" in the Prospectus.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Offered Certificates will be included in gross income for
federal income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of an Offered
Certificate, and is based on the opinion of Brown & Wood LLP, counsel to the
Trust ("SPECIAL COUNSEL"). This discussion represents the opinion of Special
Counsel, subject to the qualifications set forth therein or herein. This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "CODE"), currently applicable Treasury regulations and judicial
and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax consequences
to Offered Certificateholders.
The discussion does not address all of the tax consequences relevant to a
particular Offered Certificateholder in light of that Offered
Certificateholder's circumstances, and some Offered Certificateholders may be
subject to special tax rules and limitations not discussed below (e.g., life
insurance companies, tax-exempt organizations, financial institutions or broker-
dealers). CONSEQUENTLY, EACH PROSPECTIVE OFFERED CERTIFICATEHOLDER IS URGED TO
CONSULT ITS OWN TAX ADVISER IN DETERMINING THE FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF AN OFFERED CERTIFICATE.
For purposes of this discussion, "U.S. PERSON" means a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of the
trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S federal income tax purposes regardless of its
source). The term "U.S. OFFERED CERTIFICATEHOLDER" means any U.S. Person and
any other person to the extent that income attributable to its interest in an
Offered Certificate is effectively connected with that person's conduct of a
U.S. trade or business. The term "NON-U.S. OFFERED CERTIFICATEHOLDER" means any
person other than a U.S. Offered Certificateholder.
The discussion assumes that an Offered Certificate is issued in registered
form, has all payments denominated in U.S. dollars and not determined by
reference to the value of any other currency and has a term that exceeds one
year. Moreover, the discussion assumes that any original issue discount ("OID")
on the Offered Certificate (i.e., any excess of the stated redemption price at
maturity of the Offered Certificate over its issue price) is less than a de
minimis amount (i.e., 0.25 percent of its stated redemption price at maturity
multiplied by the Offered Certificate's weighted average maturity), all within
the meaning of the OID regulations. Moreover, the discussion assumes that the
Offered Certificates are of a type, as set forth below, which Special Counsel is
of the opinion will represent ownership of debt for federal income tax purposes.
TREATMENT OF THE OFFERED CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Offered Certificates will represent ownership of debt
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and the Trust will not be treated as an association or publicly traded
partnership taxable as a corporation.
TAXATION OF INTEREST INCOME OF U.S. OFFERED CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
-------
Offered Certificates represent ownership of debt obligations for federal income
tax purposes, stated interest on a beneficial interest in an Offered Certificate
will be taxable as ordinary income when received or accrued by U.S. Offered
Certificateholders in accordance with their method of accounting. Generally,
interest received on the Offered Certificates will constitute "investment
income" for purposes of certain limitations of the Code concerning the
deductibility of investment interest expense.
Market Discount. A U.S. Offered Certificateholder who purchases (including
---------------
a purchase at original issuance for a price less than the issue price) an
interest in an Offered Certificate at a discount that exceeds any unamortized
OID may be subject to the "market discount" rules of sections 1276 through 1278
of the Code. These rules generally provide that, subject to a statutorily-
defined de minimis exception, if a U.S. Offered Certificateholder acquires an
Offered Certificate at a market discount (i.e., at a price below its stated
redemption price at maturity or its revised issue price if it was issued with
OID) and thereafter recognizes gain upon a disposition of the Offered
Certificate (or disposes of it in certain non-recognition transactions,
including by gift), the lesser of such gain (or appreciation, in the case of an
applicable non-recognition transaction) or the portion of the market discount
that accrued while the Offered Certificate was held by such holder will be
treated as ordinary interest income at the time of the disposition. In
addition, a U.S. Offered Certificateholder who acquired an Offered Certificate
at a market discount would be required to treat as ordinary interest income the
portion of any principal payment attributable to accrued market discount on such
Offered Certificate. Generally, market discount accrues ratably over the life
of a debt instrument unless the debt holder elects to accrue market discount on
a constant yield to maturity basis. It is not clear how either the ratable
accrual or constant yield accrual methodologies apply to instruments such as the
Offered Certificates where the timing of principal payments is uncertain.
Investors should consult their own tax advisors concerning the accrual of market
discount. The market discount rules also provide that a U.S. Offered
Certificateholder who acquires an Offered Certificate at a market discount may
be required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or maintained to purchase or carry the
Offered Certificate until the holder disposes of the Offered Certificate in a
taxable transaction.
A U.S. Offered Certificateholder who acquired an Offered Certificate at a
market discount may elect to include market discount in income as the discount
accrues, either on a ratable basis or, if elected, on a constant yield basis.
The current inclusion election, once made, applies to all market discount
obligations acquired on or after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
Internal Revenue Service (the "IRS"). If a holder elects to include market
discount in income in accordance with the preceding sentence, the foregoing
rules with respect to the recognition of ordinary income on sales, principal
payments and certain other dispositions of the Offered Certificates and the
deferral of interest deductions on indebtedness related to the investor
certificates will not apply.
Amortizable Bond Premium. A U.S. Offered Certificateholder who purchases
------------------------
an interest in an Offered Certificate at a premium may elect to offset the
premium against interest income under the constant yield method over the
remaining term of the Offered Certificate in accordance with the provisions of
section 171 of the Code. A holder that elects to amortize bond premium must
reduce the tax basis in the related Offered Certificate by the amount of bond
premium used to offset interest income. If an Offered Certificate purchased at
a premium is redeemed in full prior to its maturity,
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a holder who has elected to amortize bond premium should be entitled to a
deduction in the taxable year of redemption in an amount equal to the excess, if
any, of the adjusted basis of the Offered Certificate over the greater of the
redemption price or the amount payable on maturity.
SALE OR EXCHANGE OF OFFERED CERTIFICATES
Upon a disposition of an interest in an Offered Certificate, a U.S. Offered
Certificateholder generally will recognize gain or loss equal to the difference
between (i) the amount of cash and the fair market value of any other property
received (other than amounts attributable to, and taxable as, accrued stated
interest) and (ii) the U.S. Offered Certificateholder's adjusted basis in its
interest in the Offered Certificate. The adjusted basis in the interest in the
Offered Certificate will equal its cost, increased by any OID or market discount
included in income with respect to the interest in the Offered Certificate prior
to its disposition and reduced by any payments reflecting principal or OID
previously received with respect to the interest in the Offered Certificate and
any amortized premium. Subject to the OID and market discount rules, gain or
loss will generally be capital gain or loss if the interest in the Offered
Certificate was held as a capital asset. Capital losses generally may be used
by a corporate taxpayer only to offset capital gains and by an individual
taxpayer only to the extent of capital gains plus $3,000 of other income.
NON-U.S. OFFERED CERTIFICATEHOLDERS
In general, a non-U.S. Offered Certificateholder will not be subject to
U.S. federal income tax on interest (including OID) on a beneficial interest in
an Offered Certificate unless (i) the non-U.S. Offered Certificateholder
actually or constructively owns 10 percent or more of the total combined voting
power of all classes of stock of the Seller entitled to vote (or of a profits or
capital interest of the Trust characterized as a partnership), (ii) the non-U.S.
Offered Certificateholder is a controlled foreign corporation that is related to
the Seller (or the Trust treated as a partnership) through stock ownership,
(iii) the non-U.S. Offered Certificateholder is a bank which receives interest
as described in Code Section 881(c)(3)(A), (iv) such interest is contingent
interest described in Code Section 871(h)(4), or (v) the non-U.S. Offered
Certificateholder bears certain relationships to any holder of either the Notes
other than the transferor or any other interest in the Trust not properly
characterized as debt. To qualify for the exemption from taxation, the last
U.S. Person in the chain of payment prior to payment to a non-U.S. Offered
Certificateholder (the "WITHHOLDING AGENT") must have received (in the year in
which a payment of interest or principal occurs or in either of the two
preceding years) a statement that (i) is signed by the non-U.S. Offered
Certificateholder under penalties of perjury, (ii) certifies that the non-U.S.
Offered Certificateholder is not a U.S. Person and (iii) provides the name and
address of the non-U.S. Offered Certificateholder. The statement may be made on
a Form W-8 or substantially similar substitute form, and the non-U.S. Offered
Certificateholder must inform the Withholding Agent of any change in the
information on the statement within 30 days of the change. If an Offered
Certificate is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the Withholding Agent. However, in that case, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the non-U.S.
Offered Certificateholder to the organization or institution holding the Offered
Certificate on behalf of the non-U.S. Offered Certificateholder. The U.S.
Treasury Department is considering implementation of further certification
requirements aimed at determining whether the issuer of a debt obligation is
related to holders thereof.
Generally, any gain or income realized by a non-U.S. Offered
Certificateholder upon retirement or disposition of an interest in an Offered
Certificate (other than gain attributable to accrued interest or OID, which is
addressed in the preceding paragraph) will not be subject to U.S. federal
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income tax, provided that in the case of an Offered Certificateholder that is an
individual, such Offered Certificateholder is not present in the United States
for 183 days or more during the taxable year in which such retirement or
disposition occurs. Certain exceptions may be applicable, and an individual
non-U.S. Offered Certificateholder should consult a tax adviser.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of an Offered Certificate to a registered
owner who is not an "exempt recipient" and who fails to provide certain
identifying information (such as the registered owner's taxpayer identification
number) in the manner required. Generally, individuals are not exempt
recipients whereas corporations and certain other entities are exempt
recipients. Payments made in respect of a U.S. Offered Certificateholder must
be reported to the IRS, unless the U.S. Offered Certificateholder is an exempt
recipient or otherwise establishes an exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) investor certificates to non-U.S. Offered
Certificateholders, temporary Treasury regulations provide that backup
withholding and information reporting will not apply to payments with respect to
which either requisite certification has been received or an exemption has
otherwise been established (provided that neither the Certificate Trustee nor a
paying agent has actual knowledge that the holder is a United States Person or
that the conditions of any other exemption are not in fact satisfied). Payments
of the proceeds of the sale of an Offered Certificate to or through a foreign
office of a broker that is a U.S. Person, a controlled foreign corporation for
United States federal income tax purposes or a foreign person 50% or more of
whose gross income is effectively connected with the conduct of a trade or
business within the United States for a specified three-year period are
currently subject to certain information reporting requirements, unless the
payee is an exempt recipient or such broker has evidence in its records that the
payee is not a U.S. Person and no actual knowledge that such evidence is false
and certain other conditions are met. Temporary Treasury regulations indicate
that such payments are not currently subject to backup withholding. Under
current Treasury regulations, payments of the proceeds of a sale to or through
the United States office of a broker will be subject to information reporting
and backup withholding unless the payee certifies under penalties of perjury as
to his or her status as a non-U.S. Person and certain other qualifications (and
no agent of the broker who is responsible for receiving or reviewing such
statement has actual knowledge that it is incorrect) and provides his or her
name and address or the payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to
an Offered Certificateholder would be allowed as a refund or a credit against
such Offered Certificateholder's U.S. federal income tax, provided that the
required information is furnished to the IRS.
STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Offered
Certificates will be exempt from California personal income tax, but not exempt
from the California franchise tax applicable to banks and corporations. Gain or
loss, if any, resulting from an exchange or redemption of Offered Certificates
will be recognized in the year of the exchange or redemption. Present
California law taxes both long-term and short-term capital gains at the rates
applicable to ordinary income. Interest on indebtedness incurred or continued
by an Offered Certificateholder in connection with the purchase of Offered
Certificates will not be deductible for California personal income tax purposes.
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OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Offered Certificates under any state or local tax law other than that of the
State of California. Each investor should consult its own tax adviser regarding
state and local tax consequences.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and/or Section 4975 of the Code impose certain requirements on employee benefit
plans and certain other plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and certain collective investment funds or
insurance company general or separate accounts in which such plans, accounts or
arrangements are invested, that are subject to the fiduciary responsibility and
prohibited transaction provisions of ERISA and/or Section 4975 of the Code
(collectively, "PLANS"), and on persons who are fiduciaries with respect to
Plans, in connection with the investment of assets that are treated as "plan
assets" of any Plan for purposes of applying Title I of ERISA and Section 4975
of the Code ("PLAN ASSETS"). ERISA imposes on Plan fiduciaries certain general
fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
Subject to the considerations described below, the Offered Certificates are
eligible for purchase with Plan Assets of any Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "PARTIES IN INTEREST")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transaction rules generally are set forth in Section 406 of
ERISA and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Offered Certificates of any Class on behalf of or with Plan Assets of any Plan
should determine whether such purchase is consistent with its fiduciary duties
and whether such purchase would constitute or result in a non-exempt prohibited
transaction under ERISA and/or Section 4975 of the Code because any of PG&E, the
Certificate Trustee, the Underwriters or their respective affiliates may be
deemed to be benefiting from the issuance of the Offered Certificates and is a
Party in Interest with respect to the investing Plan. In particular, the
Offered Certificates may not be purchased with Plan Assets of any Plan if any of
PG&E, the Certificate Trustee, the Underwriters or their respective affiliates
(a) has investment or administrative discretion with respect to the Plan Assets
used to effect such purchase; (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such Plan Assets, for a fee
and pursuant to an agreement or understanding that such advice (1) will serve as
a primary basis for investment decisions with respect to such Plan Assets, and
(2) will be based on the particular investment needs of such Plan; or (c) is an
employer maintaining or contributing to such Plan. Each purchaser of the
Offered Certificates will be deemed to have represented and warranted that its
purchase of the Offered
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Certificates or any interest therein does not violate the foregoing limitations.
PLAN ASSET REGULATION
Because the Offered Certificates are likely to be treated as "equity
interests" in the Trust under a regulation (the "PLAN ASSET REGULATION") issued
by the U.S. Department of Labor (the "DOL"), which provides that beneficial
interests in a trust are equity interests, purchasing the Offered Certificates
with Plan Assets may cause the assets of the Trust to be deemed Plan Assets of
the investing Plan which, in turn, would subject the Trust and its assets to the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code. A violation of the prohibited
transaction rules could occur if the Offered Certificates are purchased with
Plan Assets of any Plan and any of PG&E, the Certificate Trustee, the
Underwriters or their respective affiliates is a Party in Interest with respect
to such Plan, unless a statutory or administrative exemption is available or an
exception applies under the Plan Asset Regulation. However, the possibility
that prohibited transactions may occur by reason of the operation of the Trust
is substantially less than in other pass-through trusts because each Class of
Offered Certificates represents an interest in the corresponding Class of
Underlying Notes and only minimal administrative activity is expected to occur
at the Trust level.
Before purchasing any Class of Offered Certificates of this Series, a
fiduciary or other Plan investor should consider whether a prohibited
transaction might arise by reason of any such relationship between the investing
Plan and any of PG&E, the Certificate Trustee, the Underwriters or their
respective affiliates and consult its legal advisors regarding the purchase in
light of the considerations described herein and in the Prospectus. The DOL has
issued six class exemptions that may afford exemptive relief for otherwise
prohibited transactions arising from the purchase or holding of the Offered
Certificates, i.e., DOL Prohibited Transaction Exemptions 96-23 (Class Exemption
for Plan Asset Transactions Determined by In-House Investment Managers), 95-60
(Class Exemption for Certain Transactions Involving Insurance Company General
Accounts), 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds), 90-1 (Class Exemption for Certain Transactions
Involving Insurance Company Pooled Separate Accounts), 84-14 (Class Exemption
for Plan Asset Transactions Determined by Independent Qualified Professional
Asset Managers), and 75-1 (Part III) (Class Exemption for Certain Underwriting
Transactions). A purchaser of the Offered Certificates should be aware,
however, that even if the conditions specified in one or more of the above
exemptions are met, the scope of the relief provided by the exemption might not
cover all acts which might be construed as prohibited transactions.
CONCLUSION
In light of the foregoing, fiduciaries or other Plan investors considering
whether to purchase the Offered Certificates with Plan Assets of any Plan should
consult their own legal advisors regarding whether the Trust assets would be
considered Plan Assets of Plan investors, the consequences that would apply if
the Trust's assets were considered Plan Assets, and the availability of
exemptive relief from the prohibited transaction rules or an exception under the
Plan Asset Regulation. Fiduciaries and other Plan investors should also
consider the fiduciary standards under ERISA or other applicable law in the
context of the Plan's particular circumstances before authorizing an investment
of a Plan Assets in the Offered Certificates. Among other factors, such persons
should consider whether the investment (a) satisfies the diversification
requirement of ERISA or other applicable law, (b) is in accordance with the
Plan's governing instruments, and (c) is prudent in light of the "Risk Factors"
and other factors discussed herein and in the Prospectus.
For further information see "ERISA Considerations" in the Prospectus.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Trust has agreed to sell to each of the Underwriters named below
(the "UNDERWRITERS"), and each of the Underwriters, for whom ______________ are
acting as representatives, has severally agreed to purchase, the respective
principal amounts of the Offered Certificates set forth opposite its name below.
Principal
Amount of
Name Certificates
- ---- ------------
[Underwriter] $
[Underwriter] $
[Underwriter] $
[Others] $
Total $
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and to pay for all of the Offered
Certificates offered hereby, if any are taken.
The Underwriters propose to offer the Offered Certificates in part directly
to retail purchasers at the initial public offering price set forth on the cover
page of this Prospectus Supplement, and in part to certain securities dealers at
such price less a concession not in excess of _____ percent of the principal
amount of the Offered Certificates. The Underwriters may allow and such dealers
may reallow a concession not in excess of _____ percent of the principal amount
of the Offered Certificates to certain brokers and dealers. After the Offered
Certificates are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Offered Certificates are a new issue of securities with no established
trading market. [The Certificates will not be listed on any securities
exchange.] The Trust has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Offered Certificates.
The Note Issuer and the Seller have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
RATINGS
It is a condition of issuance of the Offered Certificates that the Class
____ Certificates be rated "____" by _______, "____" by _______ and "____" by
_______ (each of _______, ________ and _________, a "RATING AGENCY") and that
the Class _____ Certificates be rated "____" by _______, "____" by _______ and
"____" by _______. Each Class of Underlying Notes will receive the same ratings
from each Rating Agency as the corresponding Class of Offered Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Offered
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any Class of Offered Certificates upon initial issuance will not be
revised or withdrawn by a Rating Agency at any time thereafter. If a rating of
any Class of Offered Certificates is revised or withdrawn, the
S-31
<PAGE>
liquidity of such Class of Offered Certificates may be adversely affected. In
general, ratings address credit risk and do not represent any assessment of the
rate of FTA Payments.
LEGAL MATTERS
Certain legal matters relating to the Underlying Notes and certain federal
income tax consequences of the issuance of the Underlying Notes will be passed
upon by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, counsel
to the Seller and the Note Issuer. Certain legal matters relating to the
Offered Certificates and certain federal income tax consequences of the issuance
of the Offered Certificates will be passed upon by Special Counsel. Certain
legal matters relating to the Offered Certificates will be passed upon by
Cravath, Swaine & Moore, New York, New York, counsel to the Underwriters.
S-32
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
------------------------------
Set forth below is a list of the defined terms used in this Prospectus
Supplement and defined herein and the pages on which the definitions of such
terms may be found herein. Certain defined terms used in this Prospectus
Supplement are defined in the Prospectus. See "Index of Principal Definitions"
in the Prospectus.
<TABLE>
<CAPTION>
A-1 Notes S-3
<S> <C>
Agent Bank............................... S-15
Book-Entry Certificates.................. S-12
Calculation Date......................... S-22
Capital Subaccount....................... S-10
Cede..................................... S-12
Certificate Interest Rate................ S-17
Certificate Trustee...................... S-7
Certificateholders....................... S-4
Certificates............................. S-15
Class.................................... S-6, S-7
Class Principal Balance.................. S-6
Code..................................... S-25
Distribution Date........................ S-3, S-8, S-17
DTC...................................... S-4, S-12
ESPs..................................... S-24
Exchange Act............................. S-4
Floating Rate............................ S-9
General Subaccount....................... S-10
Infrastructure Bank...................... S-7
Interest Accrual Period.................. S-16
Interest Determination Date.............. S-15
IRS...................................... S-26
LIBOR.................................... S-15
Non-U.S. Certificateholder............... S-25
Note Issuer.............................. S-1, S-7
Note Trustee............................. S-7
Noteholder............................... S-19
Notes.................................... S-19
Offered Certificates..................... S-1, S-6, S-15
OID...................................... S-25
Original Certificate Principal Balance... S-6
Original Note Principal Balance.......... S-7
Overcollateralization Subaccount......... S-10
Payment Date............................. S-8, S-19
PG&E..................................... S-7
Quarterly Interest....................... S-16
Rating Agency............................ S-13, S-31
Record Date.............................. S-8
Reserve Subaccount....................... S-10
Seller................................... S-7
Series Issuance Date..................... S-18
Servicer................................. S-7
Servicing Fee............................ S-11
Special Counsel.......................... S-25
Swap Agreement........................... S-8
Swap Counterparty........................ S-8
Telerate Page............................ S-16
Trust.................................... S-7
U.S. Certificateholder................... S-25
U.S. Person.............................. S-25
Underlying Notes......................... S-1, S-7, S-18
Underwriters............................. S-31
Withholding Agent........................ S-27
</TABLE>
S-33
<PAGE>
FINANCIAL STATEMENTS
F-1
<PAGE>
PG&E FUNDING LLC
BALANCE SHEET
________________, 1997
[TO BE PREPARED UPON ISSUANCE]
F-2
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of the securities in
any jurisdiction in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of such
jurisdiction.
SUBJECT TO COMPLETION DATED [_], 1997
PROSPECTUS
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE TRUST PG&E-1
RATE REDUCTION CERTIFICATES
ISSUABLE IN SERIES
________________
PG&E Funding LLC
Issuer of the Notes
________________
Pacific Gas and Electric Company
Seller and Servicer
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE STATE OF
CALIFORNIA, THE INFRASTRUCTURE BANK, ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR THE SELLER OR ANY OF ITS AFFILIATES, OTHER THAN THE NOTE
ISSUER. NONE OF THE CERTIFICATES, THE NOTES OR THE UNDERLYING TRANSITION
PROPERTY WILL BE GUARANTEED OR INSURED BY THE STATE OF CALIFORNIA, THE
INFRASTRUCTURE BANK, THE TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE SELLER OR ITS AFFILIATES.
The California Infrastructure and Economic Development Bank Special Purpose
Trust PG&E-1 Rate Reduction Certificates (the "CERTIFICATES") offered hereby in
an aggregate principal amount of up to $__________ may be sold from time to time
in series (each, a "SERIES"), each of which may be comprised of one or more
classes (each, a "CLASS"), as described in the related Prospectus Supplement.
Each Series of Certificates will be issued by the California Infrastructure and
Economic Development Bank Special Purpose Trust PG&E-1 (the "TRUST") established
by the California Infrastructure and Economic Development Bank (the
"INFRASTRUCTURE BANK").
The assets of the Trust will consist solely of the PG&E Funding LLC Notes (the
"NOTES") issued by PG&E Funding LLC, a Delaware special purpose limited
liability company (the "NOTE ISSUER"), and the proceeds thereof. The sole
member of the Note Issuer is Pacific Gas and Electric Company, a California
corporation ("PG&E"). The Notes will be secured primarily by the Transition
Property, as described under "Prospectus Summary--Transition Property" and
"Description of the Transition Property" herein. The Notes will also be secured
by the Transition Property Purchase and Sale Agreement between PG&E and the Note
Issuer, the Transition Property Servicing Agreement between PG&E and the Note
Issuer, the Collection Account and all amounts or investment property on deposit
therein or credited thereto from time to time, all other property of whatever
kind (other than certain cash amounts described herein) owned from time to time
by the Note Issuer, if any, all present and future claims, demands, causes and
choses in action in respect of any or all of the foregoing and all payments on
or under and all proceeds in respect of any or all of the foregoing.
PG&E will sell the Transition Property (in such capacity, the "SELLER") to the
Note Issuer pursuant to the Transition Property Purchase and Sale Agreement
between the Seller and the Note Issuer. See "Description of the Transition
Property--Sale and Assignment of Transition Property" herein. The Seller will
also service the Transition Property (in its capacity as servicer, the
"SERVICER") pursuant to the Transition Property Servicing Agreement between the
Servicer and the Note Issuer. See "Servicing" herein.
1
<PAGE>
The Note Issuer will issue Notes from time to time in series to the Trust, and
the Trust will issue to investors separate Series of Certificates from time to
time upon terms determined at the time of sale and described in the related
Prospectus Supplement. Each Series of Notes (each, a "SERIES") may be issuable
in one or more classes (each, a "CLASS"). A Series may include Classes which
differ as to the interest rate, timing, sequential order and amount of
distributions of principal or interest or both or otherwise. As more
specifically described under "Description of the Notes--Allocations; Payments"
herein, the Note Issuer will use all payments made with respect to Transition
Property to pay certain expenses described herein, interest due on the Notes and
principal payable on the Notes, allocated among the Series and Classes of Notes
based on the priorities described herein and in the related Prospectus
Supplement. All principal not previously paid, if any, on any Note is due and
payable on the Final Maturity Date of such Note. Each Class of Certificates
will correspond to a Class of Notes and will represent undivided interests in
such underlying Class of Notes, the proceeds thereof and payments pursuant to
any related Swap Agreement. As such, each Class of Certificates will entitle
the holders thereof to receive the payments received by the Trust in respect of
the corresponding Class of Notes. The funds received by the Trust from the
payments on each Class of Notes will be the only source of distributions on the
Certificates of the corresponding Class. While the specific terms of any Series
of Certificates (and the Classes, if any, thereof) will be described in the
related Prospectus Supplement, the terms of such Series and any Classes thereof
will not be subject to prior review by, or consent of, the holders of the
Certificates of any previously issued Series.
Offers of the Certificates of a Series may be made through one or more different
methods, including offerings through underwriters, as described under "Plan of
Distribution" herein and "Underwriting" in the related Prospectus Supplement.
There will have been no secondary market for the Certificates of any Series
prior to the offering thereof. There can be no assurance that a secondary
market for any Series of Certificates will develop or, if one does develop, that
it will continue. It is not anticipated that any of the Certificates will be
listed on any securities exchange.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH UNDER THE CAPTION "RISK FACTORS," WHICH BEGINS ON PAGE _______ HEREIN.
THE TRANSITION PROPERTY OWNED BY THE NOTE ISSUER AND CERTAIN OTHER ASSETS OF THE
NOTE ISSUER WILL BE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. PAYMENTS ON THE
NOTES RECEIVED BY THE TRUST ARE THE SOLE SOURCE OF DISTRIBUTIONS ON THE
CERTIFICATES. NONE OF THE STATE OF CALIFORNIA, THE INFRASTRUCTURE BANK, THE
TRUST OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR THE SELLER OR ITS
AFFILIATES WILL HAVE ANY OBLIGATIONS IN RESPECT OF THE CERTIFICATES, THE NOTES
OR THE TRANSITION PROPERTY, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF
CALIFORNIA OR ANY AGENCY OR INSTRUMENTALITY THEREOF IS PLEDGED TO THE
DISTRIBUTIONS OF PRINCIPAL OF, OR INTEREST ON, THE CERTIFICATES OR THE NOTES OR
TO THE PAYMENTS IN RESPECT OF THE TRANSITION PROPERTY NOR IS THE STATE OF
CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF IN ANY MANNER OBLIGATED TO MAKE
ANY APPROPRIATION FOR THE PAYMENT THEREOF.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OFFERED HEREBY
UNLESS ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
Prospective investors should refer to the "Index of Principal Definitions" which
begins on page ___ herein for the location of the definitions of capitalized
terms that appear in this Prospectus.
__________ __, 1997
2
<PAGE>
No dealer, salesperson, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Seller, the Note Issuer, the Trust, the Infrastructure Bank or any
dealer, salesperson, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement do not constitute an offer to
sell or a solicitation of an offer to buy any security in any jurisdiction in
which it is unlawful to make such offer or solicitation.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE RELATED SERIES OF CERTIFICATES, WHETHER OR
NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Note Issuer has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement (as amended, the "REGISTRATION
STATEMENT") under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
with respect to the Certificates and the Notes. This Prospectus, which forms a
part of the Registration Statement, and any Prospectus Supplement describe the
material terms of each document filed as an exhibit to the Registration
Statement; however, this Prospectus and any Prospectus Supplement do not contain
all of the information contained in the Registration Statement and the exhibits
thereto. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance reference
is made to the copy of such document so filed. Each such statement is qualified
in its entirety by such reference. For further information, reference is made
to the Registration Statement and the exhibits thereto, which are available for
inspection without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices located as follows: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of the Registration Statement and exhibits thereto may be obtained at the
above locations at prescribed rates. Information filed with the Commission can
also be inspected at the Commission's site on the World Wide Web at
http://www.sec.gov.
The Note Issuer will file with the Commission such periodic reports with
respect to each Series of Certificates as are required by the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules,
regulations or orders of the Commission thereunder. The Note Issuer may
discontinue filing periodic reports under the Exchange Act at the beginning of
the fiscal year following the issuance of the Certificates of any Series if
there are fewer than 300 holders of such Certificates.
REPORTS TO HOLDERS
Unless and until the Certificates are no longer issued in book-entry form,
the Servicer will provide to Cede & Co., as nominee of The Depository Trust
Company ("DTC") and registered holder of the Certificates and, upon request, to
Participants of DTC, periodic reports concerning the Certificates. See
"Description of the Certificates--Reports to Certificateholders" herein. Such
reports may be made available to the holders of interests in the Certificates
(the "CERTIFICATEHOLDERS") upon request to their Participants. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. The financial information provided to
Certificateholders will not be examined and reported upon, nor will an opinion
thereon be provided, by any independent public accountant.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Note Issuer pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering made hereby shall
be deemed to be incorporated by reference in this Prospectus and to be part
hereof. Any statement contained herein or in a Prospectus Supplement, or in a
document incorporated or deemed to be incorporated by reference herein or
therein shall be deemed to be modified or superseded for purposes of this
Prospectus and any Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus or
any Prospectus Supplement.
The Note Issuer will provide without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any of or all the documents incorporated herein by reference
(other than exhibits to such documents). Requests for such copies should be
directed to the Note Issuer at Mail Code N4E, P.O. Box 770000, San Francisco, CA
94177 or by telephone at (415) 972-5467.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement for a Series of Certificates will describe the
following terms of such Series and, if applicable, the Classes thereof: (a) the
designation of the Series and, if applicable, the Classes thereof, (b) the
principal amount, (c) the annual rate at which interest accrues or, if the Trust
has entered into a Swap Agreement with respect to such Series, the index on
which a variable rate of interest will be based, (d) the dates on which
distributions of interest and principal will occur, (e) the Scheduled Final
Distribution Date, (f) the Termination Date of the Series, (g) the issuance date
of the Series, (h) the place or places for the payment of principal and
interest, (i) the authorized denominations, (j) the provisions for redemption by
the Trust as a result of an optional redemption by the Note Issuer of the
underlying Notes which will, in no event, be permitted unless the outstanding
principal balance thereof is less than five percent of the initial principal
balance thereof, (k) the Expected Amortization Schedule for principal of such
Series and, if applicable, the Classes thereof, (l) the FTA Charges as of the
date of issuance of such Series of Certificates, and the portion of the FTA
Charges attributable to such Series of Certificates, (m) any other terms of such
Series and any Class thereof that are not inconsistent with the provisions of
the Certificates and that will not result in any Rating Agency reducing or
withdrawing its then current rating of any outstanding Series or Class of Notes
or Certificates, (n) the identity of the Certificate Trustee and the Delaware
Trustee and (o) the terms of any interest rate exchange agreement executed
solely to permit the issuance of variable rate Certificates.
4
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION..................................................................... 3
REPORTS TO HOLDERS........................................................................ 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................... 4
PROSPECTUS SUPPLEMENT..................................................................... 4
PROSPECTUS SUMMARY........................................................................ 8
RISK FACTORS.............................................................................. 26
Unusual Nature of the Transition Property............................................ 26
Potential Servicing Issues........................................................... 28
Uncertainties Related to the Electric Industry Generally............................. 30
Bankruptcy and Creditors' Rights Issues.............................................. 31
Nature of the Certificates........................................................... 33
Additional Risks of Floating Rate Certificates....................................... 35
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE................................... 35
DESCRIPTION OF THE TRANSITION PROPERTY.................................................... 36
General.............................................................................. 36
Financing Order and Advice Letters................................................... 37
Transition Property.................................................................. 38
Nonbypassable FTA Charges............................................................ 38
Adjustments to the FTA Charges....................................................... 39
Sale and Assignment of Transition Property........................................... 40
Seller Representations and Warranties................................................ 41
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS...................... 41
THE TRUST................................................................................. 42
THE INFRASTRUCTURE BANK................................................................... 43
THE NOTE ISSUER........................................................................... 43
Officers............................................................................. 44
THE SELLER AND SERVICER................................................................... 44
General.............................................................................. 44
PG&E Customer Base and Electric Energy Consumption................................... 45
Forecasting Consumption.............................................................. 45
Forecast Variance.................................................................... 46
Credit Policy; Billing; Collections; Restoration of Service.......................... 47
Loss and Delinquency Experience...................................................... 49
Delinquencies........................................................................ 50
SERVICING................................................................................. 50
Servicing Procedures................................................................. 50
Servicing Standards and Covenants.................................................... 51
Remittances to Collection Account.................................................... 51
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
No Servicer Advances................................................................. 52
Servicing Compensation............................................................... 52
Aggregators and Other Suppliers...................................................... 52
Servicer Representations and Warranties.............................................. 52
Statements by Servicer............................................................... 53
Evidence as to Compliance............................................................ 53
Certain Matters Regarding the Servicer............................................... 53
Servicer Defaults.................................................................... 54
Rights Upon Servicer Default......................................................... 54
Waiver of Past Defaults.............................................................. 55
Amendment............................................................................ 55
Termination.......................................................................... 55
DESCRIPTION OF THE NOTES.................................................................. 55
General.............................................................................. 55
Security............................................................................. 56
Collection Account................................................................... 56
Interest and Principal............................................................... 57
Optional Redemption.................................................................. 57
Overcollateralization Amount......................................................... 58
Capital Subaccount................................................................... 58
Reserve Subaccount................................................................... 58
Allocations; Payments................................................................ 58
Actions by Noteholders............................................................... 60
Note Events of Default; Rights Upon Note Event of Default............................ 60
Certain Covenants of the Note Issuer................................................. 62
Reports to Noteholders............................................................... 63
Annual Compliance Statement.......................................................... 64
DESCRIPTION OF THE CERTIFICATES........................................................... 64
General.............................................................................. 64
State Pledge......................................................................... 64
Payments and Distributions........................................................... 65
Floating Rate Certificates........................................................... 66
Voting of the Notes.................................................................. 68
Events of Default.................................................................... 68
Optional Redemption.................................................................. 70
Reports to Certificateholders........................................................ 70
Amendments........................................................................... 70
List of Certificateholders........................................................... 71
Registration and Transfer of the Certificates........................................ 71
Book-Entry Registration.............................................................. 71
Definitive Certificates.............................................................. 74
Conditions of Issuance of Additional Series.......................................... 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................... 75
General.............................................................................. 75
Treatment of the Certificates as Debt................................................ 76
Taxation of Interest Income of U.S. Certificateholders............................... 76
Sale or Exchange of Certificates..................................................... 77
Non-U.S. Certificateholders.......................................................... 77
Information Reporting and Backup Withholding......................................... 78
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
STATE TAXATION........................................................................... 79
California Taxation.................................................................. 79
Other States......................................................................... 79
ERISA CONSIDERATIONS...................................................................... 79
USE OF PROCEEDS........................................................................... 80
PLAN OF DISTRIBUTION...................................................................... 80
RATINGS................................................................................... 80
LEGAL MATTERS............................................................................. 81
INDEX OF PRINCIPAL DEFINITIONS............................................................ 82
</TABLE>
7
<PAGE>
PROSPECTUS SUMMARY
The following Prospectus Summary is qualified in its entirety by reference
to the detailed information appearing elsewhere in this Prospectus and by
reference to the information with respect to each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Prospectus Summary have the meanings ascribed to such terms
elsewhere in this Prospectus. The Index of Principal Definitions which begins
on page ___ sets forth the pages on which the definitions of certain principal
terms appear.
Transaction Overview Assembly Bill 1890, Chapter 854, California Statutes of
1996 (as amended, the "STATUTE"), permits the
California investor-owned utilities (collectively, the
"UTILITIES"), including PG&E, to finance the recovery
of a portion of their respective "Transition Costs"
through the issuance of the Certificates, in
conjunction with a reduction in electricity rates for
Residential Customers and Small Commercial Customers.
Transition Costs consist of the costs of generation-
related assets and obligations that may become
uneconomic as a result of a competitive generation
market, together with certain other costs associated
therewith.
The Seller will sell to the Note Issuer the Transition
Property, which represents the right to receive
payments made in respect of certain nonbypassable
charges included in the regular utility bills of
residential and small commercial consumers located in
the historical service territory of the Seller. These
charges are nonbypassable in that applicable consumers
cannot avoid paying them if they purchase electricity
from a supplier other than the Seller. The Seller will
sell the Transition Property to the Note Issuer in
exchange for the proceeds of the Notes.
The Note Issuer will issue the notes (the "NOTES") and
sell the Notes to the Trust in exchange for the
proceeds of the sale of the Certificates. The Trust is
being established by the Infrastructure Bank. The
Trust, whose sole assets will be the Notes and any
interest rate exchange agreement executed solely to
permit the issuance of variable rate Certificates (a
"SWAP AGREEMENT"), will issue the Certificates, which
will be sold to the underwriters named in each
Prospectus Supplement. The Certificates of each Class
represent an undivided interest in the related Class of
Notes, the proceeds thereof and payments pursuant to
any related Swap Agreement. The Notes will be secured
primarily by the Transition Property. The Notes will
also be secured by the Transition Property Purchase and
Sale Agreement between the Seller and the Note Issuer,
the Transition Property Servicing Agreement between the
Servicer and the Note Issuer, the Collection Account
and all amounts or investment property on deposit
therein or credited thereto from time to time, all
other property of whatever kind (other than certain
cash amounts described herein) owned from time to time
by the Note Issuer, if any, all present and future
claims, demands, causes and choses in action in respect
of any or all of the foregoing and all payments on or
under and all proceeds in respect of any or all of the
foregoing. See "Description of the Notes -- Security"
herein.
The charges represented by the Transition Property are
calculated to be sufficient over time to pay principal
of and interest on the Notes and, in turn, the
Certificates, all related fees and expenses and the
8
<PAGE>
Overcollateralization Amount described herein. These
charges will be subject to adjustment pursuant to the
true-up mechanism described under "Description of the
Transition Property--Adjustments to the FTA Charges"
herein over the term of each Series of Certificates to
enhance the likelihood of timely recovery of such
amounts, although there can be no assurance that the
true-up mechanism will operate as intended or that
principal of and interest on any Series or Class of
Certificates will be paid as scheduled.
The following diagram represents a general summary of
the parties to the transactions contemplated hereby,
their roles and their various relationships to the
other parties.
9
<PAGE>
[Diagram] [For EDGARized version: The omitted graphic
reflects the various parties to the transaction, their
roles and their contractual relationships to various
other parties.]
10
<PAGE>
Risk Factors Investors should consider, among other things, the
following risks associated with an investment in the
Certificates. Such risks may adversely affect the
timing of payments to Certificateholders or cause
Certificateholders to suffer losses on their investment
in Certificates.
The ability of the Note Issuer to receive FTA Payments
and make timely payments on the Notes could be affected
by: a legal challenge to the validity or
enforceability of the Statute, the Financing Order or
the Advice Letters; the resignation or removal of the
Servicer; the ability of the Servicer to forecast
accurately the electricity usage of Customers and the
delinquency and write-off experience relating to FTA
Payments; any alteration by the Servicer or any
successor thereto of its billing and collection
practices; the implementation of the new California
electricity market system; changes in the regulatory
framework applicable to the electricity industry;
socio-economic factors affecting electricity
consumption; the bankruptcy or insolvency of the
Seller, the Servicer or the Infrastructure Bank; or any
of the factors described below potentially affecting
the price and liquidity of the Certificates.
The price and liquidity of the Certificates and the
dates of maturity thereof, and, accordingly, the
weighted average lives thereof, may be affected by any
delay in adjustments to the FTA Charges or a delay or
failure by the Servicer or a third-party energy service
provider to remit FTA Payments; any attempted
limitation or alteration of the Statute, the Transition
Property or related matters, or amendment or repeal of
the Statute, whether by the State of California, voter
initiative or legal challenge; or incorrect evaluation
by the Servicer of the creditworthiness of a
significant number of the Customers.
The Statute could be preempted by federal
legislation.
There are no historical performance data for an asset
type such as the Transition Property and the Servicer
does not have any experience administering this
specific type of regulatory asset. In addition, in the
event of a foreclosure, there is likely to be a limited
market, if any, for the Transition Property.
The Certificates will have limited liquidity, will be
available only in book-entry form, will not be
obligations of any entity other than the Trust, will be
issuable in Series, will have ratings which are limited
in nature, will have uncertain distributions of
interest and principal and weighted average lives, and
will be subject to optional redemption.
For a more detailed discussion of certain material
risks associated therewith, investors should review the
discussion under "Risk Factors" which begins on page
__.
Seller and Servicer Pacific Gas and Electric Company, a California
corporation ("PG&E"). PG&E will sell the Transition
Property (in its capacity as seller, the "SELLER") to
PG&E Funding LLC, a Delaware limited liability company
of which the Seller is the sole member (the "NOTE
ISSUER"), pursuant to a Transition Property Purchase
and Sale Agreement between the
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Seller and the Note Issuer (together with any
subsequent sale agreement relating to Subsequent
Transition Property, the "SALE AGREEMENT").
The Seller will also act as the servicer of the
Transition Property (in its capacity as servicer, the
"SERVICER") pursuant to a Transition Property
Servicing Agreement between the Note Issuer and the
Servicer (the "SERVICING AGREEMENT").
PG&E is a public utility primarily engaged in the
business of supplying electric energy and natural gas
to customers in an approximately 70,000 square-mile
area of Northern and Central California.
See "The Seller and Servicer" herein.
Issuer of Certificates A trust entitled "California Infrastructure and
Economic Development Bank Special Purpose Trust PG&E-1"
(the "TRUST") to be established by the California
Infrastructure and Economic Development Bank (the
"INFRASTRUCTURE BANK"). The Trust will not be an
agency or instrumentality of the State of California.
The Trust will be governed by an amended and restated
Declaration and Agreement of Trust among the
Infrastructure Bank, the Delaware Trustee and the
Certificate Trustee (the "TRUST AGREEMENT"). The
Certificateholders will be the beneficiaries of the
Trust upon the issuance of the Certificates. See "The
Trust" herein.
Infrastructure Bank A public body established within the state government
of the State of California. Under the Statute, the
Infrastructure Bank must approve the issuance of
Certificates by the Trust. However, the Infrastructure
Bank will not guarantee, insure or otherwise support
payments or distributions on, as applicable, the
Certificates, the Notes or the Transition Property, nor
will the Infrastructure Bank have any other obligations
with respect thereto. See "The Infrastructure Bank"
herein.
Certificate Trustee The entity named as co-trustee under the Trust
Agreement, as set forth in each Prospectus Supplement
(the "CERTIFICATE TRUSTEE").
Delaware Trustee The Delaware entity named as co-trustee under the Trust
Agreement, as set forth in each Prospectus Supplement
(the "DELAWARE TRUSTEE").
The Certificates The California Infrastructure and Economic Development
Bank Special Purpose Trust PG&E-1 Rate Reduction
Certificates (the "CERTIFICATES"), issuable in Series.
The Certificates will be issuable under the terms of
the Trust Agreement.
The Certificates may be issued in one or more series
(each, a "SERIES"), and the Certificates of each Series
may be issued in one or more classes (each, a "CLASS").
Each Class of Certificates will correspond to a Class
of Notes and will represent undivided interests in such
underlying Class of Notes, the proceeds thereof and
payments pursuant to any related Swap Agreement.
Accordingly, each Class of Certificates will entitle
the holders thereof to receive the payments received by
the Trust in respect of the corresponding Class of
Notes. The funds received by the Trust from the
payments on each Class of Notes will be the only source
of distributions on the Certificates of the
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corresponding Class. Each Note will be secured by all
of the Transition Property owned by the Note Issuer and
the other Note Collateral described under "Description
of the Notes--General" herein. The Certificates are
entitled to all of the benefits accorded to "rate
reduction bonds" by the Statute. The issuance and sale
of any Series or Class of Certificates is contingent
upon the effectiveness of the Financing Order and the
applicable Issuance Advice Letter.
A Series may include two or more Classes of
Certificates which differ as to the interest rate,
timing, sequential order and amount of distributions of
principal or interest or both or otherwise.
Each Series of Certificates may include one or more
Classes of Certificates that accrue interest at an
adjustable rate based on the index described in the
related prospectus supplement (the "FLOATING RATE
CERTIFICATES"). See "Description of the Certificates--
Floating Rate Certificates."
While the specific terms of any Series of Certificates
(and the Classes thereof, if any) in respect of which
this Prospectus is being delivered will be described in
the related Prospectus Supplement, the terms of such
Series and any Classes thereof will not be subject to
prior review by, or consent of, the holders of the
Certificates of any previously issued Series.
The assets of the Trust will be allocated among the
Certificateholders of each Series of Certificates
issued by the Trust in the manner described herein. If
a Series includes two or more Classes of Certificates,
the assets of the Trust allocable to the Certificates
of such Series will be further allocated among each
Class in such Series in the manner described in the
Prospectus Supplement.
All Certificates of the same Series will be identical
in all respects except for the denominations thereof,
unless such Series is comprised of two or more Classes,
in which case all Certificates of the same Class will
be identical in all respects except for the
denominations thereof.
So long as any Certificates are outstanding, the
Certificateholders will direct the Certificate Trustee,
as sole Noteholder, as to matters in which the
Noteholders are permitted or required to take action;
provided, however, that the Certificate Trustee will be
permitted to take certain actions specified in the
Trust Agreement without the direction of the
Certificateholders. See "Description of the Notes--
Actions by Noteholders" herein.
None of the Certificates, the Notes or the underlying
Transition Property will be guaranteed or insured by
any governmental agency or instrumentality or by the
Seller or any of its affiliates. Neither the full
faith and credit nor the taxing power of the State of
California is pledged to the payment of principal of or
interest on the Certificates or the Notes or to the
payments in respect of the Transition Property.
See "Description of the Certificates" and "Description
of the Notes" herein.
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Note Issuer PG&E Funding LLC, a Delaware special purpose limited
liability company whose single member is PG&E. The
assets of the Note Issuer will consist of the
Transition Property and the other Note Collateral,
including capital contributed by PG&E in an amount
specified in each Prospectus Supplement, which will
equal 0.50% of the initial principal amount of all
Notes issued and outstanding pursuant to the Indenture.
The principal executive office of the Note Issuer is
located at 245 Market Street, Room 424, San Francisco,
California 94105, and its telephone number is (415)
972-5467.
The Notes The Notes of each Series and Class issued by the Note
Issuer will be in an initial aggregate principal amount
equal to the initial aggregate principal amount of the
related Series and Class of Certificates, and the Notes
of each Series and Class will bear interest at an
interest rate equal to the interest rate of the related
Series and Class of Certificates, unless a Swap
Agreement is entered into in connection with the
issuance of any Series or Class of Certificates, as
described in the related Prospectus Supplement.
The Note Issuer will use all collections received with
respect to the Transition Property (FTA Collections, as
more specifically defined below) to pay fees payable to
the Note Trustee, the Certificate Trustee, the Delaware
Trustee, the Servicer and the Administrator, other
Operating Expenses, interest due on the Notes and
principal payable on the Notes, allocated among the
Series and Classes of Notes based on the priorities
described herein and in the Prospectus Supplement,
until each outstanding Series and Class of Notes is
retired. However, as described under "Description of
the Notes--Interest and Principal" herein, principal of
any Series or Class of Notes on any Payment Date will
only be paid until the outstanding principal balance of
such Series or Class has been reduced to the principal
balance specified in the applicable Expected
Amortization Schedule for such Distribution Date. Any
FTA Collections remaining with respect to such
Distribution Date will be allocated to the various
subaccounts of the Collection Account, as described
below. All principal not previously paid, if any, on a
Note is due and payable on the Final Maturity Date of
such Note, which will correspond with the Termination
Date of the related Class of Certificates.
Each Series of Notes represents a non-recourse
obligation of the Note Issuer, and will be secured only
by Transition Property owned by the Note Issuer,
together with the other Note Collateral.
See "Description of the Notes" herein.
Note Trustee The entity named as trustee under the Note Indenture,
as set forth in each Prospectus Supplement (the "NOTE
TRUSTEE").
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<PAGE>
Transition Costs In connection with the restructuring of the electric
utility industry in California to facilitate increased
competition among providers of electricity, Sections
367 and 369 of the California Public Utilities Code
(the "PU CODE") provide the Seller, as well as the
other Utilities providing electricity to consumers in
California, with an opportunity to recover certain
costs. These costs, commonly known as stranded costs
and referred to herein and in the Statute as
"TRANSITION COSTS," consist of the costs of generation-
related assets and obligations that may become
uneconomic as a result of a competitive generation
market, together with certain other costs associated
therewith. Examples of generation-related assets
include generation facilities, generation-related
regulatory assets, amounts recoverable in electric
rates pursuant to settlement agreements with the
California Public Utilities Commission (the "CPUC") in
connection with nuclear power plants and power purchase
contracts with third-party generators of electricity
(including voluntary restructuring, renegotiations or
terminations thereof). These assets may become
uneconomic in a competitive generation market, since
they are obligations that were undertaken either
pursuant to legal requirements or with the
understanding that they would be recoverable in rates
approved by the CPUC. Since other participants in a
competitive market, unburdened by these uneconomic
assets, may be able to offer electricity at lower
rates, the costs relating to these uneconomic assets
may not be recoverable in a competitive market.
FTA Charges Under Section 840 of the PU Code, the Seller has
obtained from the CPUC a Financing Order and related
interim opinion (together, the "FINANCING ORDER")
designating the amount of the Seller's Transition Costs
to be financed, along with the costs of providing,
recovering, financing or refinancing the Transition
Costs, including the costs of issuing, servicing and
retiring the Certificates. The total amount specified
in the Financing Order which may be financed, including
associated costs, is $3,500,000,000. In order to
enable the Seller to recover the Transition Costs and
associated costs, the CPUC has authorized, in the
Financing Order, the establishment of nonbypassable,
usage-based, per kilowatt hour charges on designated
consumers of electricity (the "FTA CHARGES"). The FTA
Charges will be payable by existing and future
Residential Customers and Small Commercial Customers
(each, as defined below and collectively, the
"CUSTOMERS") of electricity in the territory of the
Seller specified by the Statute. The territory
specified by the Statute is the territory in which the
Seller provided electricity services as of December 20,
1995 (the "TERRITORY"). The two defined classes of
consumers comprising the Customers are (i) residential
consumers (the "RESIDENTIAL CUSTOMERS") and (ii) small
commercial consumers, which are defined as all
commercial consumers who do not have demand meters,
other commercial consumers whose peak demand,
determined on a one-time basis, was less than 20
kilowatts in at least nine of the twelve billing
periods prior to October 1, 1997, and new commercial
customers since that time whose peak demand, estimated
on a one-time basis, is less than 20 kilowatts ("SMALL
COMMERCIAL CUSTOMERS"). Because of differences in the
tariff rate for each class of Customers, the FTA Charge
payable by Residential Customers is expected to be
different from the FTA Charge payable by Small
Commercial Customers; the initial FTA Charges are
expected to result in FTA Payments by the
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Residential Customers and Small Commercial Customers
representing approximately 76% and 24%, respectively,
of the aggregate FTA Payments expected to be collected
in 1998. The foregoing percentages may change from
time to time based on fluctuations in Customer
composition, electricity usage and write-off
rates.
The FTA Charges will be calculated and adjusted from
time to time to generate projected revenues sufficient
to provide for the amortization of each Series of
Certificates in accordance with the related Expected
Amortization Schedule, together with the
Overcollateralization Amount described herein and fees
and expenses related to the issuance and servicing of
the Certificates. The FTA Charges are, specifically,
separate charges that will be assessed on (i) the class
of electricity consumers comprised of Residential
Customers and (ii) the class of electricity consumers
comprised of Small Commercial Customers. In each case,
the FTA Charge will be assessed for the benefit of the
Note Issuer as owner of the Transition Property based
on the applicable Customer's actual consumption of
electricity. Such amounts will be collected by the
Servicer as part of its normal collection activities
and will be deposited into the Collection Account under
the terms of the Note Indenture and the Servicing
Agreement on each Remittance Date (as defined
below).
The Financing Order requires a notification letter
(each, an "ISSUANCE ADVICE LETTER") to be submitted to
the CPUC prior to the issuance of each Series of
Certificates. The first Issuance Advice Letter will
establish the initial FTA Charges, calculated using the
Base Calculation Model which is described under
"Description of the Transition Property--Financing
Order and Advice Letters" herein. Subsequent Issuance
Advice Letters may modify the FTA Charges to support
the issuance of additional Series of Certificates. The
Issuance Advice Letters and the True-Up Mechanism
Advice Letters (as defined below) are collectively
referred to as "ADVICE LETTERS." The Servicing
Agreement requires the Servicer to calculate
adjustments to the FTA Charges and to file True-Up
Mechanism Advice Letters from time to time as needed,
but not less than annually.
Transition Property The right to collect payments based on
the FTA Charges from the Customers (such payments being
the "FTA PAYMENTS") gives rise to a separate property
right under California law and is referred to herein
generally as the "TRANSITION PROPERTY." FTA Payments
received by the Servicer and remitted to the Collection
Account are referred to generally herein as the "FTA
COLLECTIONS." "Transition Property" is defined more
specifically in Section 840(g) of the PU Code as the
property right created under the PU Code including,
without limitation, the right, title and interest of an
electrical corporation or its transferee (i) in and to
the FTA Charges, as adjusted from time to time, (ii) to
be paid the FTA Payments, and (iii) to obtain
adjustments to the FTA Charges, as provided in the PU
Code.
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<PAGE>
Adjustments to
FTA Charges In order to enhance the likelihood that actual FTA
Collections are neither more nor less than the amount
necessary to amortize the Certificates in accordance
with the Expected Amortization Schedules, fund the
Overcollateralization Subaccount as scheduled and
replenish the Capital Subaccount, the Servicing
Agreement requires the Servicer to seek, and the
Statute and the Financing Order require the CPUC to
approve, periodic adjustments to the FTA Charges based
on actual FTA Collections and updated assumptions by
the Servicer as to future usage of electricity by
Customers, future expenses relating to the Transition
Property, the Notes and the Certificates, and the rate
of delinquencies and write-offs. Each Advice Letter
relating to an adjustment to the FTA Charge is referred
to as a "TRUE-UP MECHANISM ADVICE LETTER." The
adjustments to the FTA Charges will continue until all
interest on and principal of all Series of Notes and
corresponding Series of Certificates have been paid or
distributed in full.
The Servicer will file a routine True-Up Mechanism
Advice Letter annually, requesting modifications to the
FTA Charges. Calculations of appropriate modifications
to the FTA Charges will be made based on the True-Up
Mechanism Calculation Model, which is described under
"Description of the Transition Property--Adjustments to
the FTA Charges" herein. The Servicer will also file a
routine True-Up Mechanism Advice Letter quarterly if
the amount of FTA Collections causes the aggregate
outstanding principal balance of the Certificates,
determined without including amounts withdrawn from the
Overcollateralization Subaccount and the Capital
Subaccount, to vary from the Expected Amortization
Schedule for all outstanding Certificates by more than
an amount to be specified in each Prospectus Supplement
or if amounts on deposit in the Overcollateralization
Subaccount vary from amounts specified in each
Prospectus Supplement. The Servicer may also file a
non-routine True-Up Mechanism Advice Letter as often as
quarterly, to revise the Base Calculation Model or
True-Up Mechanism Calculation Model, if either of such
models no longer accurately calculates FTA Charges.
True-Up Mechanism Advice Letters will take into account
amounts available in the General Subaccount and Reserve
Subaccount, and amounts necessary to replenish the
Overcollateralization Subaccount and Capital Subaccount
to required levels, in addition to amounts payable on
the Notes.
See "Description of the Transition Property--
Adjustments to the FTA Charges" herein.
State Pledge Pursuant to Section 841(c) of the PU Code, the
Infrastructure Bank, on behalf of the State of
California, pledges and agrees with the Trust and the
holders of the Certificates that the State of
California shall neither limit nor alter the FTA
Charges, the Transition Property, or the Financing
Order or Advice Letters relating thereto, or any rights
thereunder, until the Certificates, together with
interest thereon, are fully paid and discharged,
provided nothing contained in this pledge and agreement
shall preclude such limitation or alteration if and
when
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adequate provision shall be made by law for the
protection of the holders (the "STATE PLEDGE").
Customers The Customers consist of Residential Customers and
Small Commercial Customers in the Territory. The sole
source of payments on the Certificates will be payments
on the Notes and payments pursuant to any related Swap
Agreement; the sole sources of payments on the Notes
will be FTA Payments collected from the Customers and
amounts available or realized from the other Note
Collateral (which is not expected to be substantial).
Of amounts collected from the Customers, only the
portion of amounts collected attributable to the FTA
Charges, as adjusted from time to time, will be
available for distributions on the Certificates.
Distribution and
Payment Dates Unless otherwise specified in the related Prospectus
Supplement, each March 25, June 25, September 25 and
December 26 (or, if any such date is not a Certificate
Business Day, the next succeeding Certificate Business
Day) following the Closing Date for a Series of
Certificates, the quarterly dates on which
distributions will be made to specified holders of
Certificates of such Series (each, a "DISTRIBUTION
DATE"). Each Distribution Date with respect to the
Certificates will also be a date on which payments are
made with respect to the Notes (each, a "PAYMENT
DATE").
Record Dates With respect to any Distribution Date, the last day of
the preceding calendar month (each, a "RECORD DATE").
Final Distribution and
Termination Dates For each Class of Certificates, the related Prospectus
Supplement will specify a Scheduled Final Distribution
Date and a Termination Date. The "SCHEDULED FINAL
DISTRIBUTION DATE" will be the date when all principal
of and interest on the related Class of Certificates is
expected to be distributed in full, based on various
assumptions described herein. Failure to pay principal
of and interest on any Class of Certificates in full by
the "TERMINATION DATE," which will be a date specified
in the related Prospectus Supplement after the related
Scheduled Final Distribution Date, shall constitute an
Event of Default and the Certificate Trustee may, and
upon the written direction of the holders of not less
than a majority in principal amount of all Certificates
of all Series then outstanding shall, declare the
unpaid principal amount of all the Notes of all Series
then outstanding to be due and payable. The Scheduled
Final Distribution Date and the Termination Date for
any Class of Certificates will coincide with the
Scheduled Maturity Date and Final Maturity Date,
respectively, for the related Class of Notes. See
"Description of the Certificates--Events of Default"
and "Ratings" herein.
Issuance of New Series The Trust is authorized to issue new Series of
Certificates from time to time. See "Description of
the Transition Property--Financing Order and Advice
Letters." A new Series may be issued only upon
satisfaction of the conditions described under
"Description of the Certificates--Conditions of
Issuance of Additional Series" herein. Each Series of
Certificates will represent an interest in payments to
be made
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on a Series of Notes, which in turn will be secured by
the Transition Property and the other Note Collateral.
A Certificate Event of Default with respect to one
Series of Certificates (or one or more Classes thereof)
may adversely affect other outstanding Classes and
Series of Certificates since such event will be
considered a Certificate Event of Default with respect
to all Series of Certificates and each such Class or
Series will be entitled only to its ratable portion of
the Transition Property. In addition, all Transition
Property owned by the Note Issuer will secure all
Series of Notes and any remedial action taken by
holders of one Series will affect the other
Series.
Interest Unless otherwise specified in the related Prospectus
Supplement, interest on each Class of Certificates will
accrue and be distributable in arrears at the interest
rate for such Class specified in the related Prospectus
Supplement. Interest accrued on each Class of
Certificates at the applicable interest rate will be
distributed, to the extent monies are available
therefor, on each Distribution Date, commencing on the
day specified in the related Prospectus Supplement and
will be distributed in the manner specified in such
Prospectus Supplement, to the extent of payments
received with respect to the related Class of Notes or
any related Swap Agreement on the Payment Date for the
Notes occurring on the same day as such Distribution
Date. Note Events of Default will include failure to
make any payment of interest within five days after the
Payment Date on which such payment is due.
Principal Principal of each Class of Certificates will be
distributed to the Certificateholders of such Class in
the amounts and on the Distribution Dates specified in
the related Prospectus Supplement, but only to the
extent that amounts in the Collection Account are
available therefor, and subject to the other
limitations described below. See "Description of the
Notes--Allocations; Payments" and "Description of the
Certificates--Payments and Distributions" herein. The
related Prospectus Supplement will set forth a schedule
of the expected amortization of principal of the
related Series of Certificates and, if applicable, the
Classes thereof (for any Series or Class, the "EXPECTED
AMORTIZATION SCHEDULE"). On any Payment Date, the Note
Issuer will make principal payments on the Notes only
until the outstanding principal balances thereof have
been reduced to the principal balances specified in the
applicable Expected Amortization Schedules for such
Payment Date; accordingly, on the related Distribution
Date, the Trust similarly will only make principal
distributions on the Certificates in such amounts. Any
FTA Collections in excess of amounts payable as (a)
expenses of the Note Issuer and the Trust, (b) payments
of interest on and principal of the Notes, (c)
allocations to the Overcollateralization Subaccount and
(d) allocations to the Capital Subaccount (all as
described herein under "Description of the Notes--
Allocations; Payments" herein) will be retained by the
Note Trustee in the Reserve Subaccount for payment on
subsequent Payment Dates. However, if insufficient FTA
Collections are received with respect to any Payment
Date, and amounts in the Collection Account are not
sufficient to make up the shortfall, principal of any
Series or Class of Certificates may be distributed
later than reflected in the related Expected
Amortization Schedule, as described herein and in the
related Prospectus Supplement. See "Risk Factors--
Uncertain Distribution
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<PAGE>
Amounts and Weighted Average Life" and "Certain
Distribution, Weighted Average Life and Yield
Considerations" herein.
If an event of default under the Trust Agreement, other
than a breach of the State Pledge by the State of
California, has occurred and is continuing with respect
to any Series or Class of Certificates, the Certificate
Trustee may and, upon the written direction of the
holders of a majority in principal amount of all Series
of Certificates then outstanding shall declare the
unpaid principal amount of all the Notes of all Series
then outstanding to be due and payable. A Certificate
Event of Default is defined as the occurrence and
continuance of an Event of Default under the Notes (a
"NOTE EVENT OF DEFAULT") or a breach by the State of
California of the State Pledge (collectively, a
"CERTIFICATE EVENT OF DEFAULT" and, together with a
Note Event of Default, an "EVENT OF DEFAULT"). See
"Description of the Certificates--Events of Default"
herein.
Optional Redemption The Note Issuer may redeem any Series of Notes relating
to a Series of Certificates, and accordingly cause the
Trust to redeem the related Series of Certificates on
any Distribution Date if, after giving effect to
distributions made on such date, the outstanding
principal balance of such Series of Notes has been
reduced to less than five percent of the initial
principal balance thereof. See "Description of the
Certificates--Optional Redemption" herein.
Collection Account
and Subaccounts Upon issuance of the initial Series of Notes, the Note
Issuer will establish the Collection Account, which
will be held by the Note Trustee for the benefit of the
Noteholders. The Collection Account will consist of
four subaccounts: a general subaccount (the "GENERAL
SUBACCOUNT"), a reserve subaccount (the "RESERVE
SUBACCOUNT"), a subaccount for the
Overcollateralization Amount (the
"OVERCOLLATERALIZATION SUBACCOUNT") and a capital
subaccount (the "CAPITAL SUBACCOUNT"). Unless the
context indicates otherwise, references herein to the
Collection Account include each of the subaccounts
contained therein. Withdrawals from and deposits to
these subaccounts will be made as described under
"Description of the Notes--Allocations; Payments"
herein.
Overcollateralization In order to enhance the likelihood that distributions
on each Series of the Certificates will be made in
accordance with their Expected Amortization Schedules,
the Financing Order permits the Servicer to set the FTA
Charges at levels that are expected to produce FTA
Collections in amounts that exceed the amounts expected
to be required to make all distributions on the related
Series of Certificates in a timely manner and to pay
all related fees and expenses. The amount of such
excess will be specified in the related Prospectus
Supplement. Any such excess amount will be held in the
Overcollateralization Subaccount, as described further
under "Description of the Notes--Overcollateralization
Amount" herein, and will be available to pay any
periodic shortfalls in amounts available for scheduled
payments on the Notes.
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Capital Subaccount Upon the issuance of each Series of Notes, the Seller
will contribute capital to the Note Issuer in an
amount specified in each Prospectus Supplement, which
will equal 0.50% of the initial principal amount of
each such Series of Notes. Such amount, less $100,000
in the aggregate for all Series of Notes (with
respect to each Series, the "REQUIRED CAPITAL
LEVEL"), will be deposited into the Capital
Subaccount. On each Payment Date, the Note Trustee
will draw on amounts in the Capital Subaccount, if
any, to the extent amounts available in the General
Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are insufficient to
make scheduled payments on the Notes and pay expenses
of the Note Issuer and the Trust. If amounts on
deposit in the Capital Subaccount are used to pay
such amounts, on subsequent Payment Dates the Capital
Subaccount will be replenished to the extent FTA
Collections exceed amounts required to pay amounts
having a higher priority of payment, as more fully
described under "Description of the Notes--
Allocations; Payments."
Reserve Subaccount FTA Collections available with respect to any Payment
Date in excess of amounts payable as (a) expenses of
the Note Issuer and the Trust, (b) payments of
principal of and interest on the Notes, (c)
allocations to the Overcollateralization Subaccount
and (d) allocations to the Capital Subaccount (all as
described under "Description of the Notes--
Allocations; Payments" herein), will be allocated to
the Reserve Subaccount. On each Payment Date, the
Note Trustee will draw on amounts in the Reserve
Subaccount, to the extent amounts available in the
General Subaccount are insufficient to make scheduled
payments on the Notes.
Collections; Allocations;
Distributions Except as otherwise specified herein, on the
twentieth calendar day of each calendar month (or, if
such day is not a Certificate Business Day, the
following Certificate Business Day), the Servicer
will remit to the Collection Account FTA Payments
expected to have been received during the preceding
calendar month. Because the Servicer does not track
cash collections on bills rendered within each
calendar month, the amounts remitted will be based on
estimates using the model described herein under
"Servicing--Remittances to Collection Account."
On each Payment Date, amounts in the Collection
Account, including net earnings thereon (subject to
the priority of withdrawals described in the
following paragraph), will be allocated to the
following (in the priority indicated): (1) all
amounts owed by the Note Issuer or the Trust to the
Note Trustee, the Delaware Trustee and the
Certificate Trustee will be paid to such persons; (2)
the Servicing Fee and all unpaid Servicing Fees from
any prior Payment Dates will be paid to the Servicer;
(3) the Quarterly Administration Fee payable under
the Administrative Services Agreement between the
Note Issuer and PG&E, as administrator (the
"ADMINISTRATOR"), and all unpaid Quarterly
Administration Fees from prior Payment Dates will be
paid to the Administrator; (4) so long as no Event of
Default has occurred or would be caused by such
payment, all other fees, costs, expenses and
indemnities of the Note Issuer and the Trust
("OPERATING EXPENSES") will be paid to the persons
entitled thereto; (5) Quarterly
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Interest and any overdue Quarterly Interest with
respect to each Series of Notes will be transferred to
the Certificate Trustee, as Noteholder, for
distribution to the Certificateholders; (6) principal
on any Series of Notes payable as a result of a Note
Event of Default or on the Final Maturity Date for such
Series of Notes will be transferred to the Certificate
Trustee, as Noteholder, for distribution to the
Certificateholders; (7) funds necessary to pay
Quarterly Principal for any Series of Notes based on
priorities described in each Prospectus Supplement will
be transferred to the Certificate Trustee, as
Noteholder, for distribution to the applicable
Certificateholders; (8) unpaid Operating Expenses will
be paid to the persons entitled thereto; (9) the amount
by which the Required Capital Level with respect to all
outstanding Series of Notes exceeds the amount in the
Capital Subaccount as of such Payment Date, if any,
will be allocated to the Capital Subaccount; (10) an
amount up to the sum of the Quarterly
Overcollateralization Collection and any unfunded
Quarterly Overcollateralization Collections from prior
Payment Dates will be allocated to the
Overcollateralization Subaccount; (11) funds up to the
net earnings on amounts in the Collection Account for
the prior quarter without cumulation will be released
to the Note Issuer; (12) if any Series of Notes has
been retired as of such Payment Date, the excess of the
amount in the Overcollateralization Subaccount over the
aggregate Overcollateralization Amount with respect to
all Series of Notes remaining outstanding will be
released to the Note Issuer; (13) if any Series of
Notes has been retired as of such Payment Date, the
excess of the amount in the Capital Subaccount over the
aggregate Required Capital Level with respect to all
Series of Notes remaining outstanding will be released
to the Note Issuer; (14) the balance, if any, will be
allocated to the Reserve Subaccount for distribution on
subsequent Payment Dates; and (15) following the
repayment of all outstanding Series of Notes, the
balance, if any, will be released to the Note
Issuer.
If on any Payment Date funds on deposit in the General
Subaccount are insufficient to make the transfers
contemplated by clauses (1) through (7) above, the Note
Trustee will (i) first, draw from amounts on deposit in
the Reserve Subaccount, (ii) second, draw from amounts
on deposit in the Overcollateralization Subaccount, and
(iii) third, draw on amounts on deposit in the Capital
Subaccount, up to the amount of such shortfall, in
order to make the transfers described above. See
"Description of the Notes--Allocations; Payments"
herein.
The following diagram provides a general summary of the
flow of funds from the Customers through the Servicer
to the Collection Account, and the various allocations
therefrom.
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[Diagram] [For EDGARized version: The omitted graphic
reflects the flow of funds from Customers, in the form
of FTA Payments, to the Servicer, monthly remittances
by the Servicer to the Collection Account, and
quarterly applications of amounts in the manner
described under "Description of the Notes--Allocations;
Payments" in the Prospectus.]
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Servicing The Servicer is responsible for servicing,
managing and receiving FTA Payments in the same manner
that it services and administers bill collections for
its own account. On each Remittance Date, the Servicer
will remit FTA Payments expected to have been received
during the preceding calendar month (or, if Remittance
Dates are more frequent, for the period since the
preceding Remittance Date). Because the Servicer does
not track cash collections on bills rendered within
each calendar month, the amounts remitted will be based
on estimates using the model described under
"Servicing--Remittances to Collection Account" herein.
Subject to certain conditions described herein, pending
deposit into the Collection Account, actual FTA
Payments received by the Servicer may be invested by
the Servicer at its own risk and for its own benefit,
and will not be segregated from other funds of the
Servicer. See "Servicing--Remittances to Collection
Account" herein.
Servicing Compensation The Servicer will be entitled to receive a Servicing
Fee for each calendar quarter in an amount equal to
one-fourth of the percent per annum specified in the
related Prospectus Supplement of the then outstanding
principal amount of the Notes (the "SERVICING FEE").
The Servicing Fee will be paid prior to the
distribution of any amounts in respect of interest on
and principal of the Notes. The Servicer will be
entitled to retain as additional compensation net
investment income on FTA Payments received by the
Servicer prior to remittance thereof to the Collection
Account and the portion of late fees, if any, paid by
Customers relating to the FTA Payments. See
"Servicing--Servicing Compensation" herein.
No Servicer Advances The Servicer will not make any advances of interest or
principal on the Notes.
Denominations Each Class of Certificates will be issued in the
minimum initial denominations set forth in the related
Prospectus Supplement and in integral multiples
thereof.
Registration of the
Certificates Each Class of Certificates may be issued in definitive
form or initially may be represented by one or more
certificates registered in the name of Cede & Co.
("CEDE") ("BOOK-ENTRY CERTIFICATES"), the nominee of
The Depository Trust Company ("DTC"), and available
only in the form of book-entries on the records of DTC,
participating members thereof ("PARTICIPANTS") and
other entities, such as banks, brokers, dealers and
trust companies, that clear through or maintain
custodial relationships with a Participant, either
directly or indirectly ("INDIRECT PARTICIPANTS"). If
so indicated in the applicable Prospectus Supplement,
Certificateholders may also hold Book-Entry
Certificates of a Series through CEDEL or Euroclear (in
Europe), if they are participants in such systems or
indirectly through organizations that are participants
in such systems. Certificates representing Book-Entry
Certificates will be issued in definitive form only
under the limited circumstances described herein and in
the related Prospectus Supplement. With respect to the
Book-Entry Certificates, all references herein to
"HOLDERS" reflect the rights of owners of the Book-
Entry Certificates as they may indirectly exercise such
rights through DTC
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and Participants, except as otherwise specified herein.
See "Risk Factors" and "Description of the
Certificates--Book-Entry Registration" herein.
Ratings It is a condition of issuance of each Class of
Certificates that at the time of issuance such Class
receive the rating indicated in the related Prospectus
Supplement, which will be in one of the four highest
categories, from one or more nationally recognized
statistical rating agencies (each, a "RATING AGENCY")
specified therein. Each Class of Notes will receive
the same rating from the applicable Rating Agencies as
the corresponding Class of Certificates. See "Ratings"
in the related Prospectus Supplement.
A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Certificate and,
accordingly, there can be no assurance that the ratings
assigned to any Class of Certificates upon initial
issuance thereof will not be revised or withdrawn by a
Rating Agency at any time thereafter. If a rating of
any Class of Certificates is revised or withdrawn, the
liquidity of such Class of Certificates may be
adversely affected. In general, the ratings address
credit risk and do not represent any assessment of the
rate of FTA Collections. See "Risk Factors--Uncertain
Distribution Amounts and Weighted Average Life,"
"Certain Distribution, Weighted Average Life and Yield
Considerations" and "Ratings" herein.
Tax Status of the
Certificates The Certificates will be treated as representing
ownership interests in debt for federal income tax
purposes. Interest and original issue discount, if
any, on the Certificates generally will be included in
gross income for federal income tax purposes. See
"Certain Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
Interest and original issue discount, if any, on the
Certificates will be exempt from California personal
income tax, but not exempt from the California
franchise tax applicable to banks and corporations.
See "State Taxation" herein.
ERISA Considerations A fiduciary of any employee benefit plan or other plan
or arrangement that is subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "CODE"), should carefully
review with its legal advisors whether the purchase or
holding of the Certificates of any Class or Series
could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code. See
"ERISA Considerations" herein and in the related
Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates:
UNUSUAL NATURE OF THE TRANSITION PROPERTY
RELIANCE ON FTA ADJUSTMENTS
The Servicer will be obligated to submit True-Up Mechanism Advice
Letters to the CPUC at least annually and as often as quarterly, seeking
adjustments to the FTA Charges to reflect amounts available in the General
Subaccount and Reserve Subaccount and amounts required to replenish the
Overcollateralization Subaccount and Capital Subaccount to required levels, as
well as the actual rate of FTA Collections, which will vary from projections
upon which the FTA Charges were based, primarily as a result of variations from
projected electricity usage by Customers and expected delinquencies and write-
offs. PU Code Section 841(c) requires the CPUC to approve adjustments requested
by True-Up Mechanism Advice Letters necessary to assure timely recovery of
Transition Costs, including interest on and principal of the Certificates in
accordance with the related Expected Amortization Schedule and related fees and
expenses. Despite the Statute and the Financing Order, there can be no
assurance that the CPUC will approve such requests in a timely manner. Any
delay in adjustments to the FTA Charges, and any litigation that might ensue as
a consequence, might adversely affect the price and liquidity of the
Certificates and the dates of maturity thereof, and, accordingly, the weighted
average lives thereof.
POSSIBLE STATE AMENDMENT OR REPEAL OF THE STATUTE AND RELATED
LITIGATION
Under the Statute, the State of California pledged and agreed with the
owners of Transition Property and the holders of the Certificates, and the
Infrastructure Bank as agent for the State of California will pledge and
undertake in the Trust Agreement for the benefit of Certificateholders, that the
State will neither limit nor alter the fixed transition amounts, transition
property, financing orders and all rights thereunder until all obligations under
the Certificates are fully met and discharged, provided nothing contained in the
Statute or the Trust Agreement precludes such limitation or alteration by the
State if and when adequate provision shall be made by law for the protection of
the Certificateholders. It is unclear what "adequate provision" would be
afforded to Certificateholders by the State if such limitation or alteration
were attempted. Accordingly, no assurance can be given that any such provision
would not adversely affect the price of the Certificates, or the timing of
receipt of payments with respect to the Certificates.
Under California law, the electorate has the right, through its
initiative powers, to propose statutes as well as amendments to the California
Constitution. Generally, any matter that is a proper subject of legislation can
become the subject of an initiative. Among other procedural requirements, in
order for an initiative measure to qualify for an election, the initiative
measure must be submitted to the State Attorney General and a petition signed by
electors constituting five percent, in the case of a statutory initiative, and
eight percent, in the case of a constitutional initiative, of the votes cast at
the immediately preceding gubernatorial election must be submitted to the
Secretary of State. To become effective, the initiative must then be approved
by a majority vote of the electors voting at the next general election.
Consumer advocacy groups have publicly announced their opposition to
certain elements of the restructuring plan embodied in the Statute, including
the ability of the Utilities to recover fully their stranded costs and the
issuance of the Certificates. These opponents have indicated their intent to
commence litigation to prevent the sale of the Certificates; however, the Note
Issuer has not yet received notice of the commencement of any such litigation.
In addition, opponents have announced their intention to draft a ballot
initiative to eliminate the Utilities' ability to recover fully stranded costs,
including the cost of nuclear plants. To date no such initiative measure has
been submitted to the State Attorney General, the first step in commencing the
initiative qualification process.
In the opinion of Brown & Wood LLP, counsel to the Trust ("SPECIAL
COUNSEL"), under applicable United States and State of California Constitutional
principles relating to the impairment of contracts, the State of
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<PAGE>
California could not repeal or amend the Statute (by way of either legislative
process or California voter initiative) or take, or refuse to take, any action
required by the State of California under its pledge and agreement with the
Certificateholders (described above) if such action or inaction would
substantially impair the rights of the Certificateholders, unless such action or
inaction would constitute a reasonable and necessary exercise of the State's
sovereign powers. There have been numerous cases in which legislative or
popular concerns with the burden of taxation or governmental charges have led to
adoption of legislation reducing or eliminating taxes or charges which supported
bonds or other contractual obligations entered into by public instrumentalities.
However, such concerns have not been considered by the courts to provide
sufficient justification for a substantial impairment of the security for such
bonds or obligations provided by the taxes or governmental charges involved.
Based upon such analogous case law (which, however, does not address these
particular circumstances directly), it would appear unlikely that the State
could reduce, modify or alter the Transition Property, or take, or refuse to
take, any action with respect to the Transition Property in a manner which would
substantially impair the rights of the Note Issuer, as owner of Transition
Property, or of Certificateholders. Nonetheless, no assurance can be given that
a repeal of or amendment to the Statute will not be sought or adopted or that
any action, or refusal to act, by the State may not occur, any of which might
constitute a violation of the State's pledge and undertaking with the
Certificateholders. In any such event, costly and time consuming litigation
might ensue. Any such litigation might adversely affect the price and liquidity
of the Certificates and the dates of maturity thereof, and, accordingly, the
weighted average lives thereof. Moreover, given the lack of judicial precedent
directly on point, and the novelty of the security for the Certificates, the
outcome of any such litigation cannot be predicted with certainty and,
accordingly, Certificateholders may fail to receive distributions of principal
and interest.
Furthermore, Section 3 of Article XIIIC of the California Constitution
("PROPOSITION 218") provides that the initiative process shall not be prohibited
or otherwise limited in matters of reducing or repealing any "local" tax,
assessment, fee or charge. There is no controlling precedent interpreting
Proposition 218, given its recent adoption. However, in the opinion of Special
Counsel, the FTA Charges are not a "local" tax, assessment fee or charge to
which Proposition 218 applies, and the initiative power described in Proposition
218 is therefore inapplicable to the FTA Charges, the Transition Property, the
Notes and the Certificates.
POSSIBLE FEDERAL PREEMPTION OF THE STATUTE
At least one bill was introduced in the 105th Congress, First Session,
prohibiting the recovery of stranded costs such as the Transition Costs, which
could negate the existence of the Transition Property that is the source of
payments on the Notes and the Certificates. The bill is H.R. 1230 (The
Consumers Electric Power Act of 1997) ("H.R. 1230"), which was introduced on
April 8, 1997, and has been referred to the House Commerce Committee, where no
further action has been taken. However, the entire 52-member California
delegation to the House of Representatives is on record opposing any federal
bill that does not grandfather the provisions of the Statute. No prediction can
be made as to whether H.R. 1230, or any future proposed bill which would
prohibit the recovery of stranded costs, will become law or, if it becomes law,
what its final form or effect will be. Federal preemption of the Statute could
prevent Certificateholders from receiving the principal and interest payable on
the Certificates and Certificateholders could suffer a loss on their investment.
See "Energy Deregulation and the New California Market Structure" herein.
POSSIBLE LEGAL CHALLENGES
The existence of the Transition Property and its adequacy as a source
of distributions on the Certificates are dependent on relevant provisions of the
PU Code, the Financing Order and applicable Advice Letters. If the relevant
provisions of the PU Code, the Financing Order or any such Advice Letters were
challenged in a lawsuit and determined to be invalid or unenforceable in whole
or in part, such determination could adversely affect the ability of the Note
Issuer to make timely payments on the Notes, and the Certificateholders could
suffer a loss on their investment.
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<PAGE>
UNCERTAINTIES ASSOCIATED WITH NEW ASSET TYPE
There are no historical performance data for an asset type such as the
Transition Property. Although energy usage records are available, such records
have limited predictive value with respect to the Certificates. Furthermore,
the Servicer does not have any experience administering this specific type of
regulatory asset. See "--Servicing" herein. In addition, in the event of a
foreclosure, there is likely to be a limited market, if any, for the Transition
Property.
LIMITED RIGHTS AND REMEDIES
Under the terms of the Sale Agreement, PG&E, as the Seller, will be
required to repurchase the Transition Property, at a purchase price equal to the
outstanding principal amount of the Notes and all accrued and unpaid interest
thereon as of the repurchase date, if there has been a breach of the Seller's
representation that the Financing Order and each Issuance Advice Letter pursuant
to which any applicable Transition Property has been created are valid, binding
and irrevocable as of the date of any sale of Transition Property. A
nonappealable determination by a court that, based on laws in effect on the date
any Transition Property is sold, the Transition Property, the Financing Order or
any Issuance Advice Letter violated any such laws, or is otherwise invalid or
unenforceable, would be considered to be a breach of the Seller's
representation, thereby obligating the Seller to repurchase the Transition
Property under the Sale Agreement. No assurances are given that PG&E
will be able to repurchase the Transition Property in a timely manner. In the
event of any such repurchase, the Note Issuer would be obligated to redeem the
Notes and accordingly cause the Trust to redeem the Certificates.
In contrast, the Seller will not be required to repurchase the
Transition Property if the FTA Charges become uncollectible as a result of a
change in law occurring after the date the Transition Property is sold. A
repeal of the Statute, an amendment thereto voiding the Transition Property or
the adoption of a federal statute prohibiting the recovery of all stranded costs
are examples of such changes. If any such event were to occur, the Servicer or
the Certificate Trustee, on behalf of the Certificateholders at the expense of
the Trust, would be required to bring legal action seeking to overturn any such
change in law. Any such litigation might adversely affect the price and
liquidity of the Certificates and the dates of maturity thereof, and,
accordingly, the weighted average lives thereof. Moreover, given the lack of
judicial precedent directly on point, and the novelty of the security for the
Certificates, the outcome of any such litigation cannot be predicted with
certainty and, accordingly, Certificateholders may suffer a loss of their
investment in the Certificates.
POTENTIAL SERVICING ISSUES
RELIANCE ON SERVICER
The Trust relies on the Servicer for the determination of any
adjustments to the FTA Charges and for the Customer billing and collection that
is necessary to recover the FTA Payments and, therefore, necessary to make
distributions on the Certificates. If, as a result of its insolvency or
liquidation or otherwise, PG&E were to cease servicing the Transition Property,
determining any adjustments to the FTA Charges or collecting FTA Payments, it
may be difficult to find a substitute Servicer. In such an event, the timing of
recovery of payment on the Transition Property could be delayed. Furthermore,
any successor servicer may experience difficulties in collecting FTA Payments
and determining appropriate adjustments to FTA Charges. See "Servicing"
herein.
INACCURATE USAGE AND CREDIT PROJECTIONS
The ability of the Servicer to forecast accurately the electricity
usage of Customers and the delinquency and write-off experience relating to FTA
Payments will affect significantly whether Certificateholders will receive
timely distributions on the Certificates. Actual energy usage may differ from
projections as a result of weather during the relevant period that is warmer or
cooler than expected. In addition, actual energy usage, delinquencies and
write-offs may differ from projections as a result of general economic
conditions, trends in demographics that are not precisely as predicted,
unexpected catastrophes, and other causes. During the past five years, the
Servicer's forecasts for energy consumption have been quite accurate, with an
average of a 1.18%
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overestimate of usage. See "The Seller and Servicer--Forecast Variance" herein.
The accuracy of the Servicer's historical forecasts are not necessarily
indicative of the accuracy of the Servicer's future forecasts and there can be
no assurances that actual usage, delinquencies and write-offs will not be
significantly different from future forecasts thereof. The adjustment mechanism
for the FTA Charges described under "Description of the Transition Property--
Adjustments to the FTA Charges", as well as the collection of the
Overcollateralization Amount and the pledge of amounts deposited in the Capital
Subaccount, are intended to mitigate these risks relating to the timing of
collections and payments, although the frequency of the adjustments to the FTA
Charges is limited and accordingly delays in distributions to Certificateholders
might result. See "The Seller and Servicer--Credit Policy; Billing;
Collections; Restoration of Service" herein.
DELAYS CAUSED BY CHANGES IN PAYMENT TERMS
The Servicer is permitted to alter the terms of billing and collection
arrangements and modify amounts due from Customers. Although the Servicer does
not have the right to change the amount of a Customer's individual FTA Charge,
it does have the right to take actions that in its judgment will maximize actual
collections from Customers with respect to any utility bill. In addition, the
Servicer has the right to write off outstanding bills that it deems
uncollectible in accordance with its customary practices. Such actions might
include, for example, agreeing to an extended payment schedule or agreeing to
write off a portion of an outstanding bill in order to recover a portion
thereof. While PG&E has no current intention of taking actions that would
change the billing and collection arrangements in a manner which would affect
adversely the collection of FTA Payments, there can be no assurance that changes
in PG&E's customary and usual practices for comparable assets it services for
itself might not result in a determination to do so or that a successor Servicer
may not make such a determination. It is possible that any such changes could
delay collections from Customers or result in lower collections, and accordingly
could adversely affect the distribution of interest on the Certificates on a
timely basis or the distribution of the principal of the Certificates pursuant
to the Expected Amortization Schedules or in full by the applicable Scheduled
Final Distribution Dates. See "Certain Distribution, Weighted Average Life and
Yield Considerations" herein.
LIMITED CREDIT POLICY AND PROCEDURES
The ability of the Servicer to collect amounts billed to Customers
under the FTA Charges, as adjusted from time to time, will depend in part on the
creditworthiness of the Customers. PG&E generally is obligated to provide
service to new Customers under California law and generally no outside credit
investigations are performed on new Customers. PG&E's information regarding the
credit status of new Customers is limited to information regarding prior
service, if any, by PG&E to such Customers. PG&E relies on the information
provided by Customers and its customer information system audits to indicate
whether a new Customer has had previous service from PG&E. If PG&E evaluates
the creditworthiness of a significant number of its Customers incorrectly,
resulting in significant increases in delinquencies and write-offs, delays in
distributions to Certificateholders may occur. See "The Seller and Servicer--
Credit Policy; Billing; Collections; Restoration of Service" herein.
RELIANCE ON AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry
described elsewhere herein, there will be an unbundling of generation,
transmission, distribution and billing services. A decision of the CPUC allows
alternative energy service providers ("ESPS") to provide a consolidated bill to
their retail customers covering amounts owed to the ESP for electricity, amounts
owed to the Utilities for distribution and other charges, including the
applicable FTA Charges. Any ESP that elects consolidated billing will be
responsible for paying the Servicer amounts billed by the Servicer to the ESP
regardless of the ESP's ability to collect such amounts, including the FTA
Charges, from its customers. The CPUC has not yet made a final determination
regarding the appropriate credit standards to be required of ESPs, or the
appropriate form of the necessary agreement between PG&E and each ESP. There
can be no assurance that each ESP will utilize the same customer credit
standards as the Servicer, or that the Servicer will be able to mitigate credit
risks relating to ESPs in the same manner in which it mitigates such risks
relating to its Customers. The Servicer, on behalf of the Note Issuer, will
pursue any ESP that fails to remit applicable FTA Charges in the same manner
that the Servicer will pursue any failure by a Customer to remit FTA Charges.
Neither the Seller nor the Servicer will pay any shortfalls resulting from the
failure of any ESPs to
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forward FTA Payments to PG&E, as Servicer. The true-up adjustment mechanism for
the FTA Charges, as well as the collection of the Overcollateralization Amount
and the pledge of amounts deposited in the Capital Subaccount, are intended to
mitigate this risk relating to the timing of collections and payments. However,
delays in distributions to Certificateholders might occur as a result of delays
in implementation of the adjustment mechanism.
COMMINGLING OF FTA PAYMENTS WITH SERVICER'S OTHER FUNDS; INVESTMENT OF FTA
PAYMENTS FOR SERVICER'S ACCOUNT
Except as described under "Servicing--Remittances to Collection
Account" herein, on each Remittance Date the Servicer will remit to the
Collection Account FTA Payments expected to have been received during the
preceding calendar month. Accordingly, FTA Payments received by the Servicer
will not be segregated from the Servicer's general funds until they are remitted
to the Collection Account. The Servicer will invest FTA Payments received but
not yet remitted for its own account. A failure or inability of the Servicer to
remit the full amount of the estimated FTA Payments on any Remittance Date,
whether voluntary or involuntary, might result in delays in distributions to
Certificateholders. The true-up adjustment mechanism, as well as the collection
of the Overcollateralization Amount and the pledge of amounts deposited in the
Capital Subaccount, are intended to mitigate this risk relating to the timing
of collections and payments. However, delays in distributions to
Certificateholders may occur as a result of delays in implementation of the
adjustment mechanism. Furthermore, six months after each calendar month, the
Actual FTA Payments with respect to such month are determined. If there has
been a Remittance Shortfall (i.e., Actual FTA Payments exceed Estimated FTA
Payments), the Servicer is required to increase the amount that it otherwise
would remit on the Remittance Date following the calculation of the Remittance
Shortfall, with such increased amount coming from its own funds. In the event
of the insolvency of the Servicer, payments of the Remittance Shortfall by the
Servicer may be delayed significantly.
UNCERTAINTIES RELATED TO THE ELECTRIC INDUSTRY GENERALLY
UNTRIED NEW CALIFORNIA MARKET STRUCTURE
The California electric industry will change dramatically in the near
future, as a result of recent decisions by the CPUC and enactment of the
Statute. See "Energy Deregulation and New California Market Structure" herein.
The new California electric market structure, scheduled to begin January 1,
1998, has neither been tested nor implemented. Many elements of the new market
structure present novel regulatory issues yet to be resolved as well as many
practical issues of implementation such as the development of systems, software
and procedures for each of (a) the independent power exchange (the "PX"), which
will provide an auction process to match electricity supply and demand, (b) the
independent system operator (the "ISO"), which will have operational control of
the Utilities' transmission facilities, and (c) all of the market participants
who will transact with the PX and ISO. If the new market structure is not
implemented in a timely and orderly fashion, electricity generation,
transmission and distribution may be adversely affected, FTA Payments may not be
made as expected, the Servicer's business may be impacted or Certificateholders
may fail to receive distributions of principal and interest for other
reasons.
CHANGING REGULATORY ENVIRONMENT
In addition to actions taken by the California Legislature and
regulation by the CPUC, the electric industry is also subject to federal law and
regulation by the Federal Energy Regulatory Commission (the "FERC"). At least
five bills were introduced into the 105th Congress, First Session, mandating the
deregulation of the electric utility industry on the state level. In general,
the bills provide for open competition in the furnishing of electricity to all
retail customers. As described above under "--Transition Property--Federal
Preemption of the Statute," at least one of the bills may prohibit the recovery
of FTA Charges; however, none of the bills have passed in committee. No
prediction can be made as to whether these bills, or any future proposed bills
to mandate the deregulation of the electric industry, will become law or, if
they become law, what their final form or effect would be. Any changes in the
existing legal structure regulating the electric industry might have an impact
on the manner
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in which electricity is distributed and payments therefor are collected, or on
the Servicer and its business, and thus the likelihood that Certificateholders
will receive distributions in the amounts and at the times scheduled.
CHANGES IN GENERAL ECONOMIC CONDITIONS AND ELECTRICITY USAGE
General economic conditions and technological changes that would
significantly alter power consumption or reduce the residential and small
commercial consumer base in the Seller's historical service area may affect
payments on the Notes and, accordingly, distributions on the Certificates.
Changes in business cycles, departures of Customers from the Seller's historical
service area, weather, occurrence of natural disasters such as earthquakes and
floods, implementation of energy conservation efforts and increased efficiency
of equipment all affect energy usage. If a sufficient number of Customers
reduce significantly their electricity consumption or cease consuming
electricity altogether, the FTA Charges, as adjusted from time to time through
True-Up Mechanism Advice Letters, as described herein, required to be paid by
each remaining Customer could become burdensome. See "--Transition Property--
Reliance on FTA Adjustments" herein.
RELIANCE ON BROAD BASE OF CUSTOMERS
The FTA Charges are relatively modest in amount on an individual
Customer basis, when imposed on the Seller's current base of Customers.
However, if one or more of the risks described under the heading "--
Uncertainties Relating to the Electric Industry Generally" or an unforeseen
catastrophe were to occur, the number of Customers on whom the FTA Charges would
be levied might be reduced significantly. Such a reduction would increase the
amount of the applicable FTA Charge for each Customer, which might cause more
Customers to avoid paying the applicable FTA Charge after the Rate Freeze Period
by leaving the Territory. If the number of Customers were to be substantially
reduced, the remaining Customers might be unable or unwilling to pay the FTA
Charges. Alternatively, a reduced number of Customers and corresponding higher
per kilowatt hour FTA Charges might increase the reluctance of the CPUC to allow
adjustments to the FTA Charges or provide greater incentive for the California
legislature to amend the Statute in a manner intended to reduce or eliminate the
FTA Charges in respect of the Transition Property. Although the Note Issuer
believes that the likelihood of this scenario occurring is remote, this result
might cause Certificateholders to fail to receive the full amount of
distributions to which they are entitled.
BANKRUPTCY AND CREDITORS' RIGHTS ISSUES
POTENTIAL BANKRUPTCY OF SELLER
The Seller will represent and warrant in the Sale Agreement that the
transfer of the Transition Property pursuant thereto to the Note Issuer is a
valid sale and assignment of such Transition Property from the Seller to the
Note Issuer. The Seller and the Note Issuer will also represent and warrant
that they will each take the appropriate actions under the PU Code to perfect
this sale. The Statute provides that the transactions described in the Sale
Agreement shall constitute a sale of the Transition Property to the Note Issuer,
and the Seller and the Note Issuer will treat the transactions as a sale under
applicable law, although for financial reporting purposes the transactions will
be treated as debt of the Seller. If the Seller were to become a debtor in a
bankruptcy case, and a creditor or bankruptcy trustee of the Seller or the
Seller itself as debtor in possession were to take the position that the sale of
the Transition Property to the Note Issuer should be recharacterized as a pledge
of such Transition Property to secure a borrowing of the Seller, and a court
were to adopt such position, then delays or reductions in distributions on the
Certificates could result.
The Seller and the Note Issuer have taken steps to ensure that in the
event the Seller or an affiliate of the Seller were to become the debtor in a
bankruptcy case, a court would not order that the assets and liabilities of the
Seller or such affiliate be substantively consolidated with those of the Note
Issuer. The Note Issuer is a separate, limited purpose limited liability
company, the organizational documents of which provide that it shall not
commence a voluntary bankruptcy case without the unanimous affirmative vote of
all of its directors, and pursuant to the Trust Agreement, each holder of a
Certificate agrees that it will not commence an involuntary bankruptcy case
against the Note Issuer. Nonetheless, no assurance can be given that if the
Seller or an affiliate of the Seller
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were to become a debtor in a bankruptcy case, a court would not order that the
assets and liabilities of the Note Issuer be consolidated with those of the
Seller or such affiliate, thus resulting in delays or reductions in
distributions on the Certificates.
Should the transfer of the Transition Property to the Note Issuer be
recharacterized as a borrowing by the Seller, the Statute provides that there is
a perfected first priority statutory lien on the Transition Property that
secures all obligations to the holders of the Certificates. In addition, in the
Sale Agreement, the Seller grants to the Note Issuer a security interest in the
Transition Property, and covenants that the appropriate actions will be taken to
perfect such security interest. The Seller's First and Refunding Mortgage,
dated December 1, 1920, as amended, contains limits on the Seller's ability to
grant consensual security interests, and thus no assurances can be given that
any such security interest is valid or enforceable.
The Statute provides that any Transition Property constitutes a
current property right on the date that the Financing Order and the related
Issuance Advice Letter have become effective and that it thereafter exists
continuously for all purposes. Nonetheless, no assurances can be given that if
the Seller were to become the debtor in a bankruptcy case, a creditor of, or a
bankruptcy trustee for, the Seller or the Seller itself as debtor in possession
would not attempt to take the position that, because the payments based on the
FTA Charges are usage-based charges, Transition Property comes into existence
only as Customers use electricity. If a court were to adopt this position, no
assurances can be given that either the statutory lien created by the Statute or
the security interest purported to be granted in the Sale Agreement would attach
to collections of FTA Payments in respect of electricity consumed after the
commencement of a bankruptcy case for the Seller. If it were determined that
the Transition Property has not been sold to the Note Issuer, and that the
statutory lien created by the Statute and the security interest purported to be
granted in the Sale Agreement do not attach to collections of FTA Payments in
respect of electricity consumed after the commencement of a bankruptcy case for
the Seller, then the Certificate Trustee, as Noteholder and for the benefit of
holders of the Certificates, would be an unsecured creditor of the Seller, and
delays or reductions in distributions on the Certificates could result. Whether
or not the court determined that the Transition Property had been sold to the
Note Issuer, no assurances can be given that the court would not rule that any
FTA Payments relating to electricity consumed after the commencement of the
Seller's bankruptcy cannot be transferred to the Note Issuer or the Certificate
Trustee, thus resulting in delays or reductions of distributions on the
Certificates.
Because the payments based on the FTA Charges are usage-based charges,
if the Seller were to become the debtor in a bankruptcy case, a creditor of, or
a bankruptcy trustee for, the Seller, or the Seller itself as debtor in
possession could take the position that the Note Issuer should pay a portion of
the costs of the Seller associated with the generation, transmission, or
distribution by the Seller of the electricity whose consumption gave rise to the
FTA Collections that are used to make distributions on the Certificates. If a
court were to adopt this position, the result could initially be a reduction in
the amounts paid to the Note Issuer, and thus to the holders of the
Certificates. The FTA Charges may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in receipt
of scheduled distributions.
Regardless of whether the Seller is the debtor in a bankruptcy case,
if a court were to accept the arguments of a creditor of the Seller that
Transition Property comes into existence only as Customers use electricity, a
tax or government lien or other nonconsensual lien on property of the Seller
arising before the Transition Property came into existence may have priority
over the Note Issuer's interest in such Transition Property, thereby possibly
initially resulting in a reduction of amounts distributed to the holders of the
Certificates. The FTA Charges may be adjusted through True-Up Mechanism Advice
Letters, although delays in implementation thereof may cause a delay in receipt
of scheduled distributions.
POTENTIAL BANKRUPTCY OF SERVICER
For so long as the Servicer maintains a short-term debt rating of at
least "A-1" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") and "P-1" by Moody's Investors Service, Inc. ("MOODY'S") or certain
other conditions are satisfied, the Servicer is entitled to commingle FTA
Payments with its own funds until the relevant Remittance Date. In the event of
a bankruptcy of the Servicer, the Note Trustee will
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likely not have a perfected interest in such commingled funds and the inclusion
thereof in the bankruptcy estate of the Servicer may result in delays in
distributions due on the Certificates. See "--Servicing--Reliance on Servicer"
herein.
POTENTIAL BANKRUPTCY OF INFRASTRUCTURE BANK
The Infrastructure Bank is a public body established within the state
government of the State of California. The State of California cannot be a
debtor in a case under the Bankruptcy Code. If a court were to determine that
the Infrastructure Bank is an "instrumentality" of the State, rather than an
integral part of the State, then the Infrastructure Bank could become a debtor
in a case commenced under Chapter 9 of the Bankruptcy Code if the requirements
set forth in the Bankruptcy Code for the commencement of a voluntary case under
Chapter 9 were met. An involuntary case cannot be commenced against the
Infrastructure Bank under Chapter 9, and neither a voluntary nor an involuntary
case can be commenced by or against the Infrastructure Bank under any other
chapter of the Bankruptcy Code.
The Certificates will be issued by the Trust, which is a business
trust formed by the Infrastructure Bank under Title 12, Chapter 38 of the Laws
of the State of Delaware (the "DELAWARE BUSINESS TRUST ACT"). The Trust may be
subject to a voluntary or involuntary case under the Bankruptcy Code. However,
the Trust will be created solely to issue and administer the Certificates, and
the only assets of the Trust will consist of the Notes. The Trust and the
Infrastructure Bank have taken steps to ensure that in the event the
Infrastructure Bank becomes a debtor in a case under Chapter 9 of the Bankruptcy
Code, a bankruptcy court having jurisdiction over such case should not order
that the assets and liabilities of the Trust be substantively consolidated with
those of the Infrastructure Bank. These steps include (a) creating the Trust as
a separate business trust under the Delaware Business Trust Act which includes
provisions preventing creditors of the Infrastructure Bank from having any right
to the assets of the Trust, (b) limiting interaction between the Infrastructure
Bank and the Trust, (c) maintaining accounting, bookkeeping, business forms and
financial statements for the Trust separate from those of the Infrastructure
Bank, and (d) restricting the nature of the Trust's business and its ability to
commence a voluntary case under the Bankruptcy Code.
NATURE OF THE CERTIFICATES
LIMITED LIQUIDITY
There is no assurance that a secondary market for any of the
Certificates will develop or, if one does develop, that it will provide the
Certificateholders with liquidity of investment or that it will continue for the
life of such Certificates. It is not anticipated that any Certificates will be
listed on any securities exchange.
RESTRICTIONS ON BOOK-ENTRY REGISTRATION
The Certificates will be initially represented by one or more
Certificates registered in Cede's name, as nominee for DTC, and will not be
registered in the names of the Certificateholders or their nominees. Therefore,
unless and until Definitive Certificates are issued, Certificateholders will
not be recognized by the Certificate Trustee as Certificateholders. Hence,
until such time, Certificateholders will only be able to receive distributions
from, and exercise the rights of Certificateholders indirectly through, DTC and
participating organizations, and, unless a Certificateholder requests a copy of
any such report from the Certificate Trustee or the Servicer, will receive
reports and other information provided for under the Servicing Agreement only
if, when and to the extent provided to Certificateholders by DTC and its
participating organizations. In addition, the ability of Certificateholders to
pledge Certificates to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Certificates, may be
limited due to the lack of physical certificates for such Certificates. See
"Description of the Certificates--Book-Entry Registration" herein.
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LIMITED OBLIGATIONS
Neither the Notes nor the Certificates will represent an interest in
or obligation of the Seller, the State of California or the Infrastructure Bank.
The Transition Property owned by the Note Issuer and the other Note Collateral,
which is expected to be relatively small, are the sole source of payments on the
Notes. It is anticipated that the Note Collateral, which is described under
"Description of the Notes--Security" herein, will with limited exceptions
specified therein constitute the Note Issuer's only assets. The Note Issuer's
organizational documents will restrict its right to acquire other assets
unrelated to the transaction described herein. The Notes are limited obligations
of the Note Issuer, and are the sole assets of the Trust other than the Trust's
rights under any Swap Agreement. The Certificates represent undivided interests
in the Trust, and the sole source of distributions thereon is the payments on
the Notes and, in the event of variable rate Certificates, the proceeds of any
Swap Agreement. If distributions are not made on the Certificates in a timely
manner as a result of nonpayment of the related Notes, the Certificateholders
may direct the Certificate Trustee to bring an action against the Note Issuer to
foreclose upon the Transition Property and the other Note Collateral securing
the Notes and, if the Certificate Trustee fails to bring such action, the
Certificateholders may bring such an action themselves, as described under
"Description of the Certificates--Events of Default" herein. None of the
Certificates, the Notes or the underlying Transition Property will be guaranteed
or insured by the State of California, the Infrastructure Bank or any other
governmental agency or instrumentality or by the Seller or its affiliates.
Neither the full faith and credit nor the taxing power of the State of
California is pledged to the payment of principal of or interest on the
Certificates or the Notes or the payments in respect of the Transition Property.
ISSUANCE IN SERIES
The Note Issuer expects to issue new Series of Notes from time to
time, and accordingly the Trust is expected to issue new corresponding Series of
Certificates from time to time. While the terms of any Series of Notes and the
corresponding Series of Certificates will be specified in supplements to the
Note Indenture and the Trust Agreement, respectively, and described in the
related Prospectus Supplement, the provisions of supplements to the Note
Indenture and the Trust Agreement and, therefore, the terms of any new Series,
will not be subject to the prior review or consent of holders of the Notes or
Certificates of any previously issued Series. The terms of a new Series of
Certificates may include without limitation the matters described under
"Description of the Certificates--General" herein. The ability of the Trust to
issue any new Series of Certificates is subject to the condition, among others,
that such issuance will not result in any Rating Agency reducing or withdrawing
its then existing rating of the Certificates of any outstanding Class. There
can be no assurance, however, that the issuance of any other Series of
Certificates, including any Series issued from time to time hereafter, might not
have an impact on the timing or amount of distributions received by a
Certificateholder. See "Description of the Certificates--Conditions of Issuance
of Additional Series" herein.
LIMITED NATURE OF RATINGS
It is a condition of issuance of each Class of Certificates that they
receive from the Rating Agencies the respective ratings set forth in the
applicable Prospectus Supplement. The ratings of the Certificates address the
likelihood of the ultimate distribution of principal and the timely distribution
of interest on the Certificates. The ratings do not represent an assessment of
the likelihood that the rate of FTA Collections might differ from that
originally anticipated; as a result of such differences, any Series or Class of
Certificates might mature later than scheduled, resulting in a weighted average
life of such Certificates which is more than expected. A security rating is not
a recommendation to buy, sell or hold securities. There can be no assurance
that a rating will remain in effect for any given period of time or that a
rating will not be revised or withdrawn entirely by a Rating Agency if, in its
judgment, circumstances so warrant.
UNCERTAIN DISTRIBUTION AMOUNTS AND WEIGHTED AVERAGE LIFE
The actual dates on which principal is paid on each Class of
Certificates might be affected by, among other things, the amount and timing of
receipt of FTA Collections. Since each FTA Charge will consist of a charge per
kilowatt hour of usage by the applicable class of Customers in the Territory,
the aggregate amount and
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timing of receipt of FTA Collections (and the resulting amount and timing of
principal amortization on the Certificates) could depend, in part, on actual
usage of electricity by Customers and the rate of delinquencies and write-offs.
See "--Inaccurate Usage and Credit Projections" herein. Although the amount of
the FTA Charges will adjust from time to time based in part on the actual rate
of FTA Collections, no assurances can be given that the Servicer will be able to
forecast accurately actual Customer energy usage and the rate of delinquencies
and write-offs and implement adjustments to the FTA Charges that will cause FTA
Payments to be made at any particular rate. If FTA Collections are received at
a slower rate than expected, distributions on a Certificate may be made later
than expected. Because principal will only be distributed in accordance with
the Expected Amortization Schedules, except in the event of an early redemption,
the Certificates are not expected to be retired earlier than scheduled. A
distribution on a date that is earlier than forecasted will result in a shorter
weighted average life, and a distribution on a date that is later than
forecasted will result in a longer weighted average life. See "Certain
Distribution, Weighted Average Life and Yield Considerations" and "Description
of the Transition Property--Adjustments to the FTA Charges" herein.
EFFECT OF OPTIONAL REDEMPTION ON WEIGHTED AVERAGE LIFE AND YIELD
As described more fully under "Description of the Notes--Optional
Redemption" herein, the Note Issuer has the option to redeem all of the
outstanding Notes of any Series on any Payment Date if, after giving effect to
payments made on such date, the outstanding principal balance of such Series of
Notes has been reduced to less than five percent of the initial outstanding
principal balance thereof. Redemption of a Series of Notes will require the
Certificate Trustee to redeem the related Series of Certificates. Redemption
will cause such Certificates to be retired earlier than would otherwise be
expected, and if the payment schedule otherwise does not differ from that
originally anticipated, will result in a shorter than expected weighted average
life for such Certificates. Such a redemption will also adversely affect the
yield to maturity of Certificates purchased at par or at a premium. There can
be no assurance as to whether the Note Issuer will exercise the option to redeem
any Series of Notes, or as to whether Certificateholders will be able to receive
an equally attractive rate of return upon reinvestment of the proceeds resulting
from any such redemption.
ADDITIONAL RISKS OF FLOATING RATE CERTIFICATES
As described herein under "Description of the Certificates--Floating Rate
Certificates," upon the occurrence of certain events of default or termination
events, the Swap Agreement pursuant to which interest will be paid on any
Floating Rate Certificates will terminate or may be terminated. Such
termination events include the right of the Infrastructure Bank and the
Certificate Trustee to terminate the Swap Agreement if the long-term unsecured
debt rating of the Swap Counterparty is withdrawn or suspended by either S&P or
Moody's or falls below the rating of "A" of either such Rating Agency. If the
Swap Agreement is terminated, the Infrastructure Bank will use its best efforts
to find a successor swap counterparty satisfying the qualifications described in
the Trust Agreement. If, upon or prior to such termination, the Infrastructure
Bank is unable to find such a successor swap counterparty, the interest rate
payable with respect to the Floating Rate Certificates will convert to a fixed
rate equal to the interest rate on the related Class of Notes, which may be
substantially below the rate otherwise payable on the Floating Rate
Certificates. Distributions of interest with respect to the Floating Rate
Certificates will continue at this fixed interest rate until a successor swap
counterparty has been found, and no assurances are given that a successor swap
counterparty will be found. In such event, both the liquidity and the market
value of the Floating Rate Certificates may be adversely affected.
ENERGY DEREGULATION AND NEW CALIFORNIA MARKET STRUCTURE
The electric industry is experiencing intensifying competitive pressures,
particularly in the wholesale generation and industrial customer markets.
Historically, electric utilities operated as regulated monopolies in their
service territories, pursuant to which they were the sole suppliers of
electricity, and in California their rates were set by the CPUC based upon the
utilities' cost of providing services and a reasonable return on their capital
investments. Changes to the traditional market structure are occurring at both
the federal and state levels.
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At the federal level, the National Energy Policy Act of 1992 was designed
to increase competition in the wholesale electric generation market by easing
regulatory restrictions on producers of wholesale power and by authorizing the
FERC to mandate access to electric transmission systems by wholesale power
generators. In addition, at least five bills have been introduced in the 105th
Congress, First Session, which would mandate the deregulation of the electric
industry on the state level; however, none of these bills have passed in
committee. In their current forms, some but not all of the bills contain
provisions recognizing the validity of prior state actions relating to
deregulation. At least one of the bills, H.R. 1230, prohibits the recovery of
stranded costs such as the Transition Costs. The entire California delegation
to Congress has signed a letter to the chairman of the House Subcommittee
responsible for holding hearings regarding the bills, which expresses the shared
concern that the effect of the Statute should not be impacted by federal
legislation. No prediction can be made as to whether any of these bills, or any
future proposed bills to deregulate the electric industry, will become law or,
if they become law, what their final form or effect will be.
At the state level, the California electric industry will change
dramatically in the near future as a result of recent decisions by the CPUC and
enactment of the Statute. Among other things, the PX will create a competitive
market for electric energy in California through the creation of a competitive
auction where all suppliers, including the Utilities, municipal utilities, power
marketing agencies, independent power producers, and out-of-state generators,
will have the opportunity to sell electricity through the pool according to
established competitive bidding procedures with winning bids awarded to those
suppliers that bid to supply electricity at the lowest price. In addition, the
Utilities will be required, and other transmission owners will be permitted, to
place certain of their transmission facilities under the operational control of
the ISO. Ownership and maintenance of the transmission lines will remain with
the transmission line owners. All power suppliers will receive
nondiscriminatory access to the transmission grid under the control of the ISO
and will be subject to the same protocols and pricing procedures. Customers
will have the opportunity to choose the generators from whom they purchase their
electricity. Notwithstanding these changes, the Utilities are expected to
continue to be the sole providers of electricity distribution services within
their service territories. The Utilities have been encouraged, through CPUC-
established incentives, to divest at least 50 percent of their fossil-fueled
electricity generation assets, in order to address market dominance issues.
PG&E has announced its intent to sell eight fossil-fueled power plants
representing 98 percent of PG&E's fossil-fueled generating capacity.
The changes which are occurring at both the federal and the California
levels will have a significant impact on PG&E and the other Utilities, as well
as other entities in the industry. PG&E faces greater competition for resources
and for customers. Competitors include privately owned independent power
producers, exempt wholesale power generators, industrial customers developing
their own generation resources, suppliers of natural gas and other fuels, other
investor-owned electric utilities and municipal generators. There can be no
assurance that such trends will not have a significant adverse impact on PG&E's
business in the future.
DESCRIPTION OF THE TRANSITION PROPERTY
GENERAL
In September 1996, legislation implementing an electric industry
restructuring program for the State of California became law. The legislation,
which as amended is referred to herein as the Statute, was adopted to provide,
among other things, for the issuance of "rate reduction bonds," which are the
Certificates issued hereunder, and a ten percent reduction in rates for services
charged to Residential Customers and Small Commercial Customers, effective as of
January 1, 1998 and continuing until the earlier of March 31, 2002 or the date
on which Transition Costs have been fully recovered (the "RATE FREEZE PERIOD").
As part of this legislation, Sections 367 and 369 of the PU Code provide the
Seller an opportunity to recover the Transition Costs. The Transition Costs
consist of the costs of generation-related assets and obligations that may
become uneconomic as a result of a competitive generation market, together with
costs for capital additions to generating facilities that the CPUC determines to
be reasonable, costs of refinancing or retiring of debt or equity capital, and
associated federal and state tax liabilities. Examples of generation-related
assets include generation facilities, amounts recoverable in electric rates
pursuant to settlement agreements with the CPUC in connection with nuclear power
plants, power
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purchase contracts with third-party generators of electricity (including
voluntary restructuring, renegotiations or terminations thereof) and generation-
related regulatory assets. Generation-related regulatory assets are those
"regulatory assets" whose origin can be attributed to the generation portion of
a utility's business. "Regulatory assets" reflect incurred costs that otherwise
would have been expensed, but have been capitalized because it is probable that
such costs will be recovered in future rates. All of the foregoing generation-
related assets may become uneconomic in a competitive generation market, since
they are obligations that were undertaken either pursuant to legal requirements
or with the understanding that they would be recoverable in rates approved by
the CPUC. Since other participants in a competitive market, unburdened by these
uneconomic assets, may be able to offer electricity at lower rates, the costs
relating to these uneconomic assets may not be recoverable in market prices in a
competitive market.
The Statute provides for the creation of Transition Property, which is the
right to be paid the FTA Payments based on the FTA Charges in order to recover a
portion of the Transition Costs. The Seller has estimated its total Transition
Costs to be between $8 billion and $14 billion, with the Customers' share of
Transition Costs ultimately expected to be at least $4 billion.
FINANCING ORDER AND ADVICE LETTERS
The Statute authorizes the CPUC to issue the Financing Order, a regulatory
order which allows the Seller to reduce electricity rates for the Customers by
ten percent, and approves the amount of the Seller's Transition Costs which the
Seller is permitted to finance through the issuance of rate reduction bonds. On
May 6, 1997, PG&E filed its application for the Financing Order with the CPUC.
The CPUC issued the Financing Order as of September 3, 1997. The Financing
Order also permits the sale of Certificates in an aggregate principal amount not
to exceed $3,500,000,000. As issued, the Financing Order also requires the
Seller to reduce electricity rates for the Customers by ten percent through the
Rate Freeze Period. The principal amount of the Certificates approved in the
Financing Order was calculated so as to result in a reduction in revenue
requirements for the Seller sufficient to enable the Seller to provide the ten
percent rate reduction and to pay interest on and principal of the Certificates,
together with related fees and expenses. The principal amount of the
Certificates was derived based upon a number of variables, including sales
forecasts and the expected interest rate and amortization schedule for the
Certificates. If estimated usage exceeds the assumptions used in the Financing
Order, the Seller intends to request the authority to issue additional
Certificates to support the rate reduction resulting from this increased usage.
The issuance of additional Certificates will result in a corresponding increase
in the FTA Charges, and thus in the amounts payable with respect thereto by
Customers. See "Description of the Certificates--Conditions of Issuance of
Additional Series" herein.
The Financing Order provides for the establishment, among other things, of
the FTA Charges, which constitute separate nonbypassable charges upon
Residential Customers and Small Commercial Customers in an aggregate amount
sufficient to repay in full the Certificates and associated costs and fees. The
FTA Charges are stated to be nonbypassable on the basis that the Statute
authorizes the Seller to continue to collect payments based on the FTA Charges
from all Customers notwithstanding any of the circumstances described under "--
Nonbypassable FTA Charges" below. The Statute provides that the right to
collect payments based on the FTA Charges is a property right which may be
pledged, assigned or sold in connection with the issuance of the Certificates.
Under the Statute and the Financing Order, the owner of Transition Property is
entitled to collect FTA Charges until such owner has received FTA Collections
sufficient to retire all outstanding Series of Certificates and cover related
fees and expenses and the Overcollateralization Amount.
The Financing Order entitles the Note Issuer, as the owner of the
Transition Property, to receive the payments made pursuant to the FTA Charges
from all Residential Customers and Small Commercial Customers. Such payments
are referred to herein as the FTA Payments. The Financing Order requires the
Seller to submit an Issuance Advice Letter to the CPUC with respect to each
Series of Certificates issued. The first Issuance Advice Letter will establish
the initial FTA Charges. The Financing Order provides that Issuance Advice
Letters become effective five business days after filing with the CPUC.
Subsequent Issuance Advice Letters may increase the FTA Charges to support the
issuance of additional Series of Certificates. The Financing Order permits the
Servicer to file True-Up Mechanism Advice Letters to modify the FTA Charges from
time to time, in order to enhance the
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likelihood of retirement of each Series and Class of Certificates on a timely
basis. See "--Adjustments to the FTA Charges" herein.
The initial FTA Charges will be calculated by determining first (i)
projected monthly electricity sales to the Customers and the timing and extent
of receipt of payments therefor and (ii) the required amounts to be covered by
FTA Collections on a projected basis, including interest on the Notes, ongoing
transaction expenses including the Servicing Fee, the related
Overcollateralization Amount and scheduled principal payments on the Notes.
Then, based on the figures determined for the two foregoing amounts, the lowest
aggregate charges which will be adequate to cover all of the amounts to be
covered by FTA Collections will be calculated (the "BASE CALCULATION MODEL").
Because of differences in the tariff rate for each class of Customers, the FTA
Charge payable by Residential Customers is expected to be different from the FTA
Charge payable by Small Commercial Customers; the initial FTA Charges are
expected to result in FTA Payments by the Residential Customers and Small
Commercial Customers representing approximately 76% and 24%, respectively, of
the aggregate FTA Payments expected to be collected in 1998. The foregoing
percentages may change from time to time based on fluctuations in Customer
composition, electricity usage and write-off rates.
The Prospectus Supplement related to a Series of Certificates will specify,
based on the applicable Issuance Advice Letter, the amount of each of the FTA
Charges as of the date thereof.
TRANSITION PROPERTY
The right to be paid the FTA Payments gives rise to a separate property
right under California law and is referred to herein generally as the
"Transition Property." "Transition Property" is defined more specifically in
Section 840(g) of the PU Code as the property right created under the PU Code
including, without limitation, the right, title and interest of an electrical
corporation or its transferee (i) in and to the FTA Charges, as adjusted from
time to time, (ii) to be paid the FTA Payments, and (iii) to obtain adjustments
to the FTA Charges, as provided in the PU Code.
Each Class of Notes will be issued in connection with a specific issuance
of a Class of Certificates. Each Note will be secured by Transition Property,
as well as the other Note Collateral described under "Description of the Notes--
Security" herein. Following the initial Issuance Advice Letter, each subsequent
Issuance Advice Letter will authorize the creation of additional Transition
Property to support payments on the related Series or Class of Notes. Any
additional Transition Property acquired by the Note Issuer pursuant to a Sale
Agreement will be combined into a single asset with all other Transition
Property acquired by the Note Issuer pursuant to previous Sale Agreements.
Accordingly, the aggregate amount of Transition Property will increase as
additional Issuance Advice Letters become effective.
NONBYPASSABLE FTA CHARGES
The Financing Order provides that the FTA Charges are nonbypassable,
meaning that Customers will still be required to make payments with respect to
the applicable FTA Charges, even if a Customer elects to purchase electricity
from another supplier, another entity takes over a portion of PG&E's existing
service territory or a Small Commercial Customer's load increases so that such
Customer is no longer a Small Commercial Customer. The Financing Order provides
that each Customer who leaves PG&E's system during the Rate Freeze Period
through annexation by another electricity supplier will pay an ongoing charge
based on the electricity usage of such Customer prior to annexation or the
Customer's actual or estimated current consumption. The Financing Order
provides that each Customer who ceases to be a Small Commercial Customer as a
result of increased electricity usage will continue to pay the applicable FTA
Charge, based on either (i) the last twelve months of the Customer's recorded
pre-departure use, (ii) an average derived from the last three years of recorded
use or (iii) actual use; provided, however, that any such Customer will have the
opportunity to continue to pay for electricity based on the Small Commercial
Customer rates, including the applicable FTA Charge. The Note Issuer expects
that the applicable FTA Charge will be imposed on Customers who self-generate
their electricity, based on historical usage. However, the ability of the
Servicer to collect such FTA Charges may be limited because the Servicer will
not be able to exercise shut-off rights as an enforcement tool against a self-
generator. The Servicer's current forecasts of
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future electricity demand do not include any shift by Customers to self-
generation, because self-generation of electricity by Customers is not expected
to be economically viable during the period in which the Certificates will be
outstanding.
ADJUSTMENTS TO THE FTA CHARGES
In order to enhance the likelihood that actual FTA Collections are neither
more nor less than the amount necessary to amortize the Certificates in
accordance with the Expected Amortization Schedule, fund the
Overcollateralization Subaccount as scheduled and replenish the Capital
Subaccount, the Servicing Agreement requires the Servicer to seek, and the
Financing Order and the Statute require the CPUC to approve, periodic
adjustments to the FTA Charges based on actual FTA Collections and updated
assumptions by the Servicer as to future usage of electricity by Customers,
future expenses relating to the Transition Property, the Notes and the
Certificates, and the rate of delinquencies and write-offs. The date as of
which any calculation is performed and which forms the basis for a requested
adjustment to the FTA Charges is referred to as a "CALCULATION DATE." The
adjustments to the FTA Charges will continue until all interest and principal on
all Series of Notes and corresponding Series of Certificates have been paid or
distributed in full.
The Financing Order provides that the Servicer will file a routine True-Up
Mechanism Advice Letter annually, requesting modifications to the FTA Charges
which are intended to return the projected principal balance of each outstanding
Series of Certificates to the amount provided for in the Expected Amortization
Schedule within a twelve month period or, if earlier, by the Scheduled Final
Distribution Date. Modifications to the FTA Charges will also factor in any
amount in the Reserve Subaccount available for distribution to
Certificateholders and any amounts necessary to fund the Overcollateralization
Subaccount as scheduled and, to the extent that withdrawals have been made from
the Capital Subaccount, to ensure that the amount on deposit in the Capital
Subaccount will equal the Required Capital Level within a twelve month
period.
Calculations of appropriate modifications to the FTA Charges will be made
based on the Base Calculation Model, except that (i) the amount of debt service
and related expenses including funding of the Overcollateralization Subaccount
for the following year shall be increased or decreased to reflect the amount by
which actual FTA Collections remitted to the Collection Account through the end
of the month preceding the month of calculation was less than or exceeded the
aggregate actual portion of the debt service on the Certificates and related
expenses for such period, (ii) forecasted electricity sales for the remaining
period of the transaction will be revised based on the methodology described in
the Seller's application for the Financing Order, (iii) estimated transaction
expenses will be modified to reflect changed circumstances, (iv) assumed
delinquencies and write-offs will be modified to reflect changed circumstances
and (v) an adjustment will be made to reflect any collections which are expected
to be received at the existing tariff rate from the end of the month preceding
the month of calculation through the end of the month in which the new FTA
Charges become effective (the "TRUE-UP MECHANISM CALCULATION MODEL").
The Servicer will also file a routine True-Up Mechanism Advice Letter
quarterly if the amount of FTA Collections causes the aggregate outstanding
principal balance of the Certificates, determined without including amounts
withdrawn from the Overcollateralization Subaccount and the Capital Subaccount,
to vary from the amount provided for in the Expected Amortization Schedule for
all outstanding Certificates as of any Calculation Date by more than an amount
specified in each Prospectus Supplement or if amounts on deposit in the
Overcollateralization Subaccount vary from amounts specified in each Prospectus
Supplement as of each Calculation Date by more than the amounts specified in
each Prospectus Supplement. Furthermore, the Financing Order provides that the
Servicer may file a non-routine True-Up Mechanism Advice Letter as often as
quarterly, to reflect any changes to the Base Calculation Model or True-Up
Mechanism Calculation Model which are necessary to meet any Expected
Amortization Schedule and fund the Overcollateralization Subaccount as
scheduled. Finally, the Statute requires the Servicer to file a True-Up
Mechanism Advice Letter with the CPUC annually, prior to each anniversary of the
issuance of the Financing Order (a "FINANCING ORDER ANNIVERSARY").
The Servicing Agreement will require the Servicer to deliver a written copy
of each True-Up Mechanism Advice Letter, together with a copy of all supporting
calculations, to the Note Issuer, the Note Trustee, the Infrastructure Bank and
the Certificate Trustee upon filing such True-Up Mechanism Advice Letter with
the CPUC.
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<PAGE>
The Financing Order provides that (i) routine True-Up Mechanism Advice
Letters shall be filed with the CPUC annually at least 15 days before the end of
each calendar year, with resulting adjustments to the FTA Charges to become
effective at the beginning of the next calendar year, (ii) routine True-Up
Mechanism Advice Letters may be filed with the CPUC quarterly at least 15 days
before the end of each calendar quarter, with resulting adjustments to the FTA
Charges to become effective at the beginning of the next calendar quarter, (iii)
non-routine True-Up Mechanism Advice Letters may be filed with the CPUC
quarterly at least 90 days before the end of each calendar quarter, with
resulting adjustments to the FTA Charges to become effective at the beginning of
the next calendar quarter, and (iv) True-Up Mechanism Advice Letters shall be
filed with the CPUC at least 15 days before each Financing Order Anniversary,
with resulting adjustments to the FTA Charges, if necessary, to become effective
within 90 days of such Financing Order Anniversary.
SALE AND ASSIGNMENT OF TRANSITION PROPERTY
On the date on which the initial Series of Certificates is issued and sold
(the "CLOSING DATE"), pursuant to the Sale Agreement the Seller will sell and
assign to the Note Issuer, without recourse, its entire interest in the
Transition Property which is described in the first Issuance Advice Letter
submitted by the Servicer (the "INITIAL TRANSITION PROPERTY"). The net proceeds
received by the Note Issuer from the sale of the Notes will be applied to the
purchase of the Initial Transition Property. Thereafter, in order to finance
the cost of the ten percent rate reduction the Seller may agree with the Note
Issuer to sell additional Transition Property ("SUBSEQUENT TRANSITION PROPERTY")
to the Note Issuer, subject to the satisfaction of certain conditions. Such
Subsequent Transition Property will be sold to the Note Issuer effective on a
date (a "SUBSEQUENT TRANSFER DATE") specified in the written agreement between
the Seller and the Note Issuer. The Note Issuer will issue and sell additional
Notes to the Trust, and the Trust will issue and sell additional Certificates,
in connection therewith.
The Note Issuer will appoint the Servicer as custodian of the documentation
relating to the Transition Property. The Seller's data systems will reflect the
sale and assignment of the Transition Property to the Note Issuer. The Seller's
financial statements will indicate that the Transition Property has been sold to
the Note Issuer and will not be available to creditors, although for financial
reporting purposes the Seller will treat the Transition Property as representing
debt of the Seller.
Subsequent Transition Property may be sold by the Seller to the Note Issuer
from time to time, solely in connection with the issuance and sale of additional
Notes by the Note Issuer and of corresponding additional Certificates by the
Trust. Any conveyance of Subsequent Transition Property is subject to the
following conditions, among others:
(a) the Seller shall have entered into a written sale agreement with
the Note Issuer;
(b) the Seller shall have filed an Issuance Advice Letter with the
CPUC relating to such Subsequent Transition Property, which Issuance Advice
Letter shall have become effective;
(c) as of the applicable Subsequent Transfer Date, the Seller shall
not be insolvent and shall not be made insolvent by such conveyance;
(d) the Rating Agency Condition shall have been satisfied with respect
to such conveyance;
(e) such conveyance will not result in an adverse tax consequence to
the Trust or the Certificateholders;
(f) as of the applicable Subsequent Transfer Date, no breach by the
Seller of its representations, warranties or covenants in the applicable
Sale Agreement shall exist; and
(g) as of the applicable Subsequent Transfer Date, the Note Issuer
shall have sufficient funds available to pay the purchase price for the
Subsequent Transition Property to be transferred on such date
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and all conditions to the issuance of new series of Notes and Certificates
shall have been satisfied or waived.
SELLER REPRESENTATIONS AND WARRANTIES
In the initial Sale Agreement and each subsequent Sale Agreement, the
Seller will make representations and warranties to the Note Issuer to the
effect, among other things, that: (a) the information provided by the Seller to
the Note Issuer with respect to the applicable Transition Property is correct in
all material respects; (b) at the Closing Date, the applicable Transition
Property is owned by the Seller and is free and clear of all security interests,
liens, charges and encumbrances, no offsets, defenses or counterclaims exist or
have been asserted or threatened with respect thereto and the Seller, in its
capacity as Seller or Servicer, will not at any time assert any security
interest, lien, charge or encumbrance against or with respect to any applicable
Transition Property; (c) at the Closing Date, the applicable Transition Property
has been validly transferred and sold to the Note Issuer and all filings
(including filings with the CPUC under the PU Code) necessary in any
jurisdiction to give the Note Issuer a first perfected ownership interest in the
applicable Transition Property shall have been made; (d) the Financing Order and
each Issuance Advice Letter pursuant to which any applicable Transition Property
has been created are valid, binding and irrevocable; (e) the assumptions used in
calculating the FTA Charges related to the applicable Transition Property are
reasonable and made in good faith; (f) the Seller is a corporation duly
organized and in good standing under the laws of the State of California, with
power and authority to own its properties and conduct its business as currently
owned or conducted and to execute, deliver and perform the terms of the Sale
Agreement; (g) the execution, delivery and performance of the Sale Agreement
have been duly authorized by the Seller by all necessary corporate action; (h)
the Sale Agreement constitutes a legal, valid and binding obligation of the
Seller, enforceable against the Seller in accordance with its terms; (i) the
consummation of the transactions contemplated by the Sale Agreement do not
conflict with the Seller's articles of incorporation or bylaws or any material
agreement to which the Seller is a party or bound, result in the creation or
imposition of any lien upon the Seller's properties or violate any law or any
order, rule or regulation applicable to the Seller; (j) no governmental
approvals, authorizations or filings are required for the Seller to execute,
deliver and perform its obligations under the Sale Agreement except those which
have previously been obtained or made; and (k) except as disclosed to the Note
Issuer, no court or administrative proceeding or investigation is pending or, to
the Seller's knowledge, threatened (i) asserting the invalidity of, or seeking
to prevent the consummation of the transactions contemplated by, the Sale
Agreement, the Note Indenture, the Trust Agreement or any of the other Basic
Documents, (ii) seeking a determination that might materially and adversely
affect the performance by the Seller of its obligations thereunder, or (iii)
which might adversely affect the federal or state income tax attributes of the
Notes or the Certificates.
In the event of a breach by the Seller of the representation specified in
clause (d) above, the Seller shall repurchase the Transition Property from the
Note Issuer at a purchase price equal to the outstanding principal amount of the
Notes and all accrued and unpaid interest thereon as of the repurchase date (the
"Repurchase Price").
In the event of a breach by the Seller of any other representation or
warranty specified above, the Seller shall, at its option, either (A) repurchase
the Transition Property for the Repurchase Price or (B) indemnify, defend and
hold harmless the Note Issuer, the Trust, the Noteholders, the Note Trustee, the
Delaware Trustee, the Certificate Trustee, the Certificateholders and the
Infrastructure Bank against any costs, expenses, losses, claims, damages and
liabilities incurred as a result of such breach.
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of principal distributions on each Class of Certificates, the
aggregate amount of each interest distribution on each Class of Certificates and
the actual maturity date of each Class of Certificates will be related to the
rate and timing of receipt of FTA Collections.
The actual distributions on each date for each Class of Certificates and
the weighted average life thereof will be affected primarily by the rate of FTA
Collections and the timing of receipt of such FTA Collections. Since the FTA
Charges will consist of a charge per kilowatt hour of usage by the applicable
classes of Customers, the
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<PAGE>
aggregate amount of FTA Collections and the rate of principal amortization on
the Certificates will depend, in part, on actual energy usage by Customers and
the rate of delinquencies and write-offs. Although the amounts of the FTA
Charges will be adjusted from time to time based in part on the actual rate of
FTA Collections, no assurances are given that the Servicer will be able to
forecast accurately actual energy usage and the rate of delinquencies and write-
offs or implement adjustments to the FTA Charges that will cause FTA Collections
to be received at any particular rate. See "Risk Factors--Unusual Nature of the
Transition Property" and "--Reliance on FTA Adjustments" herein. FTA Collections
are received at a slower rate than expected a Certificate may be retired later
than expected. Because principal will only be distributed in accordance with the
Expected Amortization Schedules, except in the event of an early redemption, the
Certificates are not expected to mature earlier than scheduled. A distribution
on a date that is earlier than forecasted will result in a shorter weighted
average life, and a distribution on a date that is later than forecasted will
result in a longer weighted average life. In addition, if a larger portion of
the delayed distributions on the Certificates are received in later years, this
will result in a longer weighted average life of the Certificates.
No assurances are given that the representations made herein and in the
Prospectus Supplement as to the particular factors that will affect the rate of
FTA Collections, the relative importance of such factors, the percentage of the
principal balance of the Certificates that will be distributed as of any date or
the overall rate of FTA Collections will be realized.
In addition, the Note Issuer has the option to redeem all of the
outstanding Notes of any Series on any Payment Date if, after giving effect to
payments made on such date, the outstanding principal balance of such Series of
Notes has been reduced to less than five percent of the initial outstanding
principal balance thereof. Redemption of a Series of Notes will require the
Certificate Trustee to redeem the related Series of Certificates. Redemption
will cause such Certificates to be retired earlier than would otherwise be
expected and will adversely affect the yield to maturity of Certificates
purchased at par or on premium. There can be no assurance as to whether the Note
Issuer will exercise the option to redeem any Series of Notes, or as to whether
Certificateholders will be able to receive an equally attractive rate of return
upon reinvestment of the proceeds resulting from any such redemption.
THE TRUST
The Trust will be specifically created for the purpose of acquiring the
Notes. The Trust will be formed under the laws of the State of Delaware pursuant
to the Trust Agreement to be entered into among the Infrastructure Bank, the
Delaware Trustee and the Certificate Trustee, each such trustee not in its
individual capacity but acting as trustee on behalf of the holders of the
Certificates. The Trust will not be an agency or instrumentality of the State of
California. The Trust will have no assets other than the Notes and the Trust's
rights under any Swap Agreement. The Trust Agreement will not permit the Trust
to engage in any activities other than holding such assets, issuing the
Certificates, acting as paying agent and engaging in certain other activities
related thereto.
Each Class of Certificates offered hereby will represent a fractional
undivided interest in the corresponding Class of Notes, including all monies due
and to become due under such corresponding Class of Notes, and will represent
the right to receive a portion of the payments of principal of and interest on
the corresponding Class of Notes, together with payments pursuant to any related
Swap Agreement. See "The Certificates--Payments and Distributions" herein.
The Fee and Indemnity Agreement among the Note Issuer, the Note Trustee,
the Infrastructure Bank, the Delaware Trustee and the Certificate Trustee (the
"FEE AGREEMENT") will provide that the Note Issuer will pay the Delaware
Trustee's and the Certificate Trustee's fees and expenses. The Fee Agreement
will further provide that the Delaware Trustee, the Certificate Trustee and the
Infrastructure Bank will be entitled to indemnification by the Note Issuer for,
and will be held harmless against, any loss, liability or expense incurred by
the Delaware Trustee, the Certificate Trustee and the Infrastructure Bank, as
applicable, arising from the issuance of the Certificates and any ongoing
responsibilities associated therewith (other than through such party's own
wilful misconduct, bad faith or negligence or by reason of a breach of any of
its representations or warranties set forth in the Trust Agreement).
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<PAGE>
The fiscal year of the Trust will be the calendar year.
The Trust will be formed shortly prior to the first offering of
Certificates as a special purpose Delaware business trust and, as of the date of
this Prospectus, has not carried on any business activities and has no operating
history. Because the Trust does not have any operating history, this Prospectus
does not include any financial statements or related information for the Trust.
THE INFRASTRUCTURE BANK
The Infrastructure Bank is a public body organized within the government of
the State of California and created pursuant to the Bergeson-Peace
Infrastructure and Economic Development Bank Act, codified at (S)63000 et seq.
of the California Government Code, as amended (the "ACT"). The Infrastructure
Bank is governed, and its corporate powers are exercised, by a Board of
Directors consisting of the State Director of Finance, the State Treasurer and
the State Secretary of Trade and Commerce.
Pursuant to the Act and the Statute, the Infrastructure Bank may authorize
a "special purpose trust" created by the Bank to issue "rate reduction bonds"
and to purchase with the proceeds of such "rate reduction bonds" notes issued by
the Utilities or their affiliates secured by Transition Property. For the
purposes of the Act and the Statute, the Trust will constitute a "special
purpose trust" and each Series of Certificates issued by the Trust will
constitute "rate reduction bonds" entitled to the benefit of the Statute.
Pursuant to the Act, the Infrastructure Bank has no authority to alter or
modify any term or condition related to the Transition Costs or the Transition
Property as set forth in the Financing Order, and has no authority over any
matter that is subject to the approval of the CPUC.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates, other than the Note
Issuer. None of the Certificates, the Notes or the underlying Transition
Property will be guaranteed or insured by the State of California, the
Infrastructure Bank, the Trust or any other governmental agency or
instrumentality or by the Seller or any of its affiliates. None of such
entities will have any obligations in respect of the Certificates, except as
expressly set forth herein or in the related Prospectus Supplement.
Neither the full faith and credit nor the taxing power of the State of
California or any agency or instrumentality thereof is pledged to the
distributions of principal of, or interest on, the Certificates or the Notes or
to the payments in respect of the Transition Property.
THE NOTE ISSUER
The Note Issuer is a special purpose, single member limited liability
company organized under the laws of the State of Delaware. The Seller is the
sole member of the Note Issuer. The principal executive office of the Note
Issuer is located at 245 Market Street, Room 424, San Francisco, California
94105. Its mailing address is Mail Code N4E, P.O. Box 770000, San Francisco, CA
94177 and its phone number is (415) 972-5467. The Note Issuer was organized for
the limited purpose of holding and servicing the Transition Property and issuing
Notes secured by the Transition Property and the other Note Collateral and
related activities, and is restricted by its organizational documents from
engaging in other activities. The assets of the Note Issuer will consist
primarily of the Transition Property and the other Note Collateral, including
capital contributed by PG&E as described under "Description of the Notes--
Capital Subaccount." In addition, the Note Issuer's organizational documents
require it to operate in a manner such that it should not be consolidated in the
bankruptcy estate of PG&E in the event PG&E becomes subject to such a
proceeding.
The Note Issuer is a recently formed special purpose limited liability
company and, as of the date of this Prospectus, has not carried on any business
activities and has no operating history. Because the Note Issuer does
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<PAGE>
not have any operating history, this Prospectus does not include any income
statements, selected financial data or historical or pro forma ratio of earnings
to fixed charges for the Note Issuer, although a balance sheet will be included
in any Prospectus Supplement.
OFFICERS
The following is a list of the principal officers of the Note Issuer. All
such persons have served in the capacities set forth below since July 2, 1997.
The officers will devote such time as is necessary to the affairs of the Note
Issuer. The Note Issuer will have sufficient officers and employees to carry on
its business.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Kent M. Harvey 39 President
Gabriel B. Togneri 44 Treasurer
Christopher P. Johns 37 Controller
Leslie H. Everett 46 Corporate Secretary
</TABLE>
Kent M. Harvey is President of the Note Issuer, and has served in such
capacity since July 1, 1997. Mr. Harvey has served as Senior Vice President and
Chief Financial Officer of PG&E since 1997 and Treasurer of PG&E since
1993.
Gabriel B. Togneri is Treasurer of the Note Issuer, and has served in such
capacity since July 1, 1997. Mr. Togneri has served as Assistant Treasurer of
PG&E since 1994, and prior thereto was Manager of Financial Planning and
Analysis of PG&E, a position he had held since 1989.
Christopher P. Johns is Controller of the Note Issuer, and has served in
such capacity since July 1, 1997. Mr. Johns has served as Vice President and
Controller of PG&E since 1996 and as Vice President and Controller of PG&E
Corporation, the parent of PG&E, since 1997. Prior to that time, Mr. Johns
served in various accounting capacities with KPMG Peat Marwick, an accounting
and audit firm, from 1988.
Leslie H. Everett is Corporate Secretary of the Note Issuer, and has served
in such capacity since July 1, 1997. Ms. Everett has served as Vice President
of PG&E since 1996 and Corporate Secretary of PG&E since 1993.
No compensation has been paid by the Note Issuer to any officer of the Note
Issuer since the Note Issuer was formed. The officers of the Note Issuer will
not be compensated by the Note Issuer for their services on behalf of the Note
Issuer. Each officer serves in such capacity at the discretion of the Note
Issuer's sole member, PG&E. PG&E is an affiliate of the Note Issuer. The Note
Issuer's organizational documents limit, to the extent permitted by Delaware
law, the personal liability of each officer of the Note Issuer to the Note
Issuer for monetary damages resulting from breaches of such officer's duty of
care. The Note Issuer's organizational documents provide that officers of the
Note Issuer shall be indemnified against liabilities incurred in connection with
their services on behalf of the Note Issuer, including liabilities under
applicable securities laws.
THE SELLER AND SERVICER
GENERAL
The Seller is engaged in the business of generating, transmitting and
distributing electric power to residential, commercial, industrial and
agricultural customers within its electric service territory. PG&E's electric
service territory currently consists of approximately 70,000 square miles
throughout Northern and Central California with an estimated population of 13
million, and includes all or portions of 48 of California's 58 counties. During
1996, PG&E provided a total of 73,181 million kilowatt-hours of electricity to
4.44 million customers, including 32,440 million kilowatt-hours of electricity
provided to its approximately 4.26 million Residential Customers and Small
Commercial Customers.
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As an investor-owned electric utility, the Seller is regulated by the CPUC
and the FERC.
PG&E CUSTOMER BASE AND ELECTRIC ENERGY CONSUMPTION
PG&E's customer base is divided into several categories, including the
residential and small commercial categories covered by the Statute. Residential
Customers use electricity for lighting, operating household appliances and other
domestic purposes. The primary factor influencing the number of Residential
Customers is the number of housing starts, which is a measure of the strength of
the economy. The primary factors influencing short-term energy consumption are
weather and electricity prices. Long-term factors would include the availability
of more energy efficient appliances, new energy consuming technologies and the
customer's ability to acquire these new products. Small Commercial Customers use
electricity for lighting, operating appliances and operating equipment in office
and retail settings. The primary factor influencing the number of Small
Commercial Customers is commercial employment, which is also a measure of the
strength of the economy. The factors influencing the energy consumption of a
Small Commercial Customer would include those of the Residential Customers, but
would also include the level of business activity associated with the particular
Small Commercial Customer. The table below sets forth the number of customers,
electric energy consumption and billed revenues for the two categories.
CUSTOMERS AND ENERGY CONSUMPTION
<TABLE>
<CAPTION>
AVERAGE NUMBER OF
CUSTOMERS 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential 3,708,374 3,748,831 3,788,044 3,825,413 3,874,223
Small Commercial 390,885 380,451 381,482 383,574 386,800
---------- ---------- ---------- ---------- ----------
Total 4,099,259 4,129,282 4,169,526 4,208,987 4,261,023
ENERGY CONSUMPTION
(GWH)
Residential 23,664 24,111 24,326 24,391 25,458
Small Commercial 6,709 6,387 6,450 6,657 6,982
---------- ---------- ---------- ---------- ----------
Total 30,373 30,498 30,776 31,048 32,440
BILLED
REVENUES
($000S)
Residential $2,790,605 $2,952,893 $2,980,966 $2,979,590 $3,033,612
Small Commercial 934,749 888,759 879,425 896,486 873,410
---------- ---------- ---------- ---------- ----------
Total $3,725,354 $3,841,652 $3,860,391 $3,876,076 $3,907,022
</TABLE>
FORECASTING CONSUMPTION
PG&E has developed sales and load forecasts since the company's inception.
The only things that have changed over the years have been the length of the
forecast horizon and the methods of forecasting. Sales forecasts have always had
a short horizon since they are used for rate making and budgeting purposes.
Load forecast horizons have varied over the years, depending on the lead time
necessary to construct new resources. In the early years, the horizon was as few
as four or five years, but since then it has been twelve to twenty years.
Forecasts developed in the early years used simple trending techniques.
Forecasts produced more recently have been done using more sophisticated
statistical techniques. These models produce quarterly estimates, which are
then spread to the months using recorded monthly sales data as allocation
factors.
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PG&E's electric sales forecast was last updated in January 1997 and is
based on a combination of short-term and long-term forecasting models. The
short-term forecasting models are econometric models used to project sales for
the first two years after the base year. PG&E develops econometric models to
forecast electric sales for the classes of Residential Customers and small light
and power customers (which represent approximately 95% of the Small Commercial
Customers). These forecasts also will be used in calculating the FTA Charges
for any given period, in order to determine the revenue required (in the form of
FTA Payments) to meet the Expected Amortization Schedules.
The long-term models are used to forecast sales for years three through
twenty after the base year. They are end-use models as required by the
California Energy Commission's Common Forecasting Methodology process. Such
models explicitly forecast energy consumption by end-uses such as lighting and
heating.
For the residential sector, energy consumption is the product of the total
number of households in the PG&E service area, average appliance saturations,
and average unit energy consumption by end-use. Adjustments for additional
conservation savings and appliance utilization are also accounted for in the
model.
For the small commercial sector, energy consumption is the product of floor
space (organized by building type and climate area), average end-use equipment
saturation and average unit energy consumption by end-use. Equipment
replacement rates and efficiency rates of new equipment are accounted for in the
calculations. Adjustments for additional conservation savings and equipment
utilization are also accounted for in the model.
The short- and long-term models have been in use for more than twenty
years and have undergone extensive review by the CPUC and the California Energy
Commission, respectively. Each year PG&E updates these models with the most
recent recorded data, and conducts thorough testing to ensure that model
statistics meet the highest standards possible.
PG&E utilizes DRI/McGraw Hill ("DRI") to produce economic and demographic
forecasts. The most recent DRI regional economic forecast (September 1996) was
used to drive PG&E's electric sales forecast of both the short-term and long-
term models of the residential, small light and power, and medium light and
power sectors.
The forecasted weather related drivers assume normal weather conditions.
Normal weather conditions imply a twenty year average for such weather drivers
as heating and cooling degree days.
FORECAST VARIANCE
PG&E conducts sales forecast variance analyses on a regular basis to
monitor how well forecasts track recorded consumption. This is important for
short-term resource procurement functions as well as budgeting and financial
reporting.
Since PG&E updates its forecast on an annual basis, the table below shows
annual variance for forecasts prepared for one year in the future. For example,
the annual 1992 variance is based on a forecast prepared in 1991. With the
exception of 1996, PG&E has over-forecasted the energy consumption of these
customers. The variances for the Aggregate Combined Classes, which consists of
both the Residential and the Small Light and Power classes, range, from a low of
1.09% to a high of 3.37% in absolute terms.
ANNUAL FORECAST VARIANCES
<TABLE>
<CAPTION>
RESIDENTIAL: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Forecast (1) 23,957 24,151 24,171 24,845 24,946
Actual (1) 23,664 24,111 24,326 24,391 25,458
Variance -1.24% -0.17% 0.64% -1.86% 2.01%
SMALL LIGHT AND POWER (2):
Forecast (1) 7,306 6,796 6,697 6,458 6,464
Actual (1) 6,579 6,179 6,208 6,410 6,717
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Variance -11.05% -9.99% -7.88% -0.75% 3.77%
AGGREGATE COMBINED CLASSES:
Forecast (1) 31,263 30,947 30,868 31,303 31,410
Actual (1) 30,243 30,290 30,534 30,801 32,175
Variance -3.37% -2.17% -1.09% -1.63% 2.38%
</TABLE>
________________
(1) In GigaWatt hours.
(2) The Servicer has not historically prepared separate forecasts for the
Small Commercial Customers. However, the small light & power class of customers
represents approximately 95% of the Small Commercial Customers. Accordingly,
the Note Issuer believes that the figures relating to the small light & power
class of customers is indicative of the Servicer's forecasting history with
respect to the Small Commercial Customers.
During the last five years, no discernible trend is apparent with respect
to the historical forecast variance relating to the Residential Customers or the
Aggregate Combined Classes. The variance for the Residential Customer class has
ranged from a 1.86% overestimate of usage to a 2.01% underestimate of usage,
with an average 0.12% overestimate of usage. The variance for the Aggregate
Combined Classes has ranged from a 3.37% overestimate of usage to a 2.38%
underestimate of usage, with an average 1.18% overestimate of usage. With
respect to the historical forecast variances relating to the small light and
power class of customers, which comprise the majority of the Small Commercial
Customers, there has been a trend towards significant improvement in forecasting
in recent years. During the early 1990's, a significant number of customers
were reclassified into classes other than the small light and power class of
customers, resulting in significant overestimates of usage relating to such
class.
CREDIT POLICY; BILLING; COLLECTIONS; RESTORATION OF SERVICE
CREDIT POLICY. PG&E is obligated to provide service to all customers under
California law. PG&E relies on the information provided by the customer and its
customer information system audits to indicate whether the customer has been
previously served by PG&E.
Certain accounts are secured with deposits or guarantees to reduce losses.
The amount of the deposit reflects the expected average use over a two-month
period, which is the average time period required to take action on past-due
billings. Since the vast majority of customers pay their bills within the
allotted time, it is not necessary to require deposits from all customers.
Specific criteria have been developed for establishing credit. These criteria
are based on such factors as prior service, property ownership, or providing an
acceptable guarantor.
As a rule, Residential Customers may establish credit by depositing cash
equal to twice the average monthly bill or furnishing a satisfactory guarantor.
Deposits or guarantees may not be required if the applicant has been a PG&E
customer during the past two years, and (a) the applicant has not had more than
two past-due billings during the last 12 consecutive months, (b) the applicant
has paid all bills for domestic service previously supplied to the applicant and
has proof of payment, or (c) the applicant's credit is otherwise established to
the satisfaction of the Company. Credit that is "established to the
satisfaction of PG&E" is a broad category that includes options such as
acceptable payment records with other utilities, credit scoring, and other
factors that would establish creditworthiness.
Small Commercial Customers may establish credit by depositing cash equal to
twice the maximum monthly bills, owning substantial equity in the location to be
served, furnishing a satisfactory guarantor, or otherwise establishing credit to
the satisfaction PG&E.
Deposits or guarantees may not be required if the applicant has been a PG&E
customer during the past two years with like service, during the past 12
consecutive months of that prior service has not had more than two past due
bills, the billing for the previous service was equal to at least 50 percent of
that estimated for the new service, and the customer has paid all prior PG&E
bills.
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PG&E may change its credit policies and procedures from time to time. It
is expected that any such changes would be designed to enhance PG&E's ability to
make timely recovery of amounts billed to customers.
BILLING PROCESS. PG&E bills its customers once every 27 to 33 days, with
approximately an equal number of bills being distributed each Servicer Business
Day. Any day other than a Saturday, a Sunday or a day on which the Servicer's
offices are not open for business is a "SERVICER BUSINESS DAY." For the year
ending December 31, 1996, the Company mailed out an average of 235,000 bills
daily to customers in its various customer categories.
For accounts with potential billing errors exception reports are generated
for manual review. This review examines accounts that have abnormally high or
low bills, potential meter-reading errors and possible meter malfunctions.
PG&E may change its billing policies and procedures from time to time. It
is expected that any such changes would be designed to enhance PG&E's ability to
make timely recovery of amounts billed to customers.
COLLECTION PROCESS. PG&E receives approximately 68 percent of total bill
payments via the U.S. mail. Approximately 17 percent of bill payments are
received at local offices, and 8 percent are received at local pay stations.
PG&E receives the remainder of payments via automatic payment service,
electronic funds transfer, credit card payments and electronic data interchange.
Two days after the meter is scheduled to be read, bills are processed and
mailed to customers. Bills are due on presentation, and are considered past due
after 15 calendar days for small commercial accounts, and after 19 days for
residential accounts. Timing and collection follow-up is based on customer
type, as follows.
For Residential Customers, a reminder notice is sent to Residential
Customers if payment has not been received at the time of the second month's
billing. Eight days after the reminder notice bill is issued, a fifteen-day
notice is mailed directly to the customer if the account has a prior balance.
Ten workdays after the fifteen-day notice is sent, a 48-hour notice is mailed,
notifying the customer that service is scheduled to be shut off if payment is
not received within 48 hours. A telephone contact, or reasonable attempt at
making telephone contact, is also required to all residential customers prior to
service shut off.
For Small Commercial Customers, thirteen Servicer Business Days after the
first billing, a seven-day notice is mailed directly to Small Commercial
Customers. A 24-hour notice, although not required, is often given to notify
Small Commercial Customers that shut-off is scheduled.
For both Residential and Small Commercial Customers, a closing bill
including all unpaid amounts is generally issued within three to ten days of
service termination. Unpaid closed accounts are written-off six months after
the closing bill is issued.
PG&E may change its collection policies and procedures from time to time.
It is expected that any such changes would be designed to enhance PG&E's ability
to make timely recovery of amounts billed to customers.
RESTORATION OF SERVICE. Before restoring service that has been shut-off
for non-payment, PG&E has the right to require the payment of all of the
following charges: (i) the total amount owing on an account including any past-
due balance, the current billing, and a credit deposit, if requested; (ii) any
miscellaneous charges associated with the reconnection of service (i.e.,
reconnection charges, field collection charges, and/or returned check charges);
(iii) any charges assessed for unusual costs incidental to the termination or
restoration of service which have resulted from the customer's action or
negligence; and (iv) any unpaid closing bills from other accounts in the name of
the customer of record.
PG&E may change its restoration of service policies and procedures from
time to time. It is expected that any such changes would be designed to enhance
PG&E's ability to make timely recovery of amounts billed to customers.
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LOSS AND DELINQUENCY EXPERIENCE
The following table sets forth information relating to the total billed
revenues and write-off experience of PG&E for (i) residential and (ii)
commercial, industrial and agricultural customers for each of the five preceding
years. Such historical information, as well as the delinquency information that
follows, is presented herein because PG&E's actual experience with respect to
write-offs and delinquencies may affect the timing of FTA Payments.
TOTAL GAS & ELECTRIC BILLED REVENUES
<TABLE>
<CAPTION>
Jan.-July
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL $3,883,024,170 $4,105,456,235 $4,251,147,446 $4,186,692,646 $4,144,856,090 $2,507,354,821
COMMERCIAL, INDUSTRIAL
& AGRICULTURAL (1) 5,865,106,178 5,787,993,498 5,484,670,968 5,458,124,905 5,089,201,197 2,990,295,732
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL $9,748,130,348 $9,893,449,733 $9,735,818,414 $9,644,817,551 $9,234,057,287 $5,497,850,553
</TABLE>
NET GAS AND ELECTRIC WRITE-OFFS (2)
<TABLE>
<CAPTION>
Jan.-July
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL $20,235,760 $22,362,116 $25,064,904 $33,358,262 $26,726,988 10,502,641
COMMERCIAL, INDUSTRIAL
& AGRICULTURAL (1) 7,483,259 7,027,293 9,078,783 10,393,267 7,524,792 3,563,344
----------- ----------- ----------- ----------- ----------- -----------
TOTAL $27,719,019 $29,389,409 $34,143,687 $43,751,529 $34,251,780 $14,064,985
</TABLE>
NET WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE (2)
<TABLE>
<CAPTION>
Jan.-July
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL 0.52% 0.54% 0.59% 0.80% 0.64% 0.42%
COMMERCIAL, INDUSTRIAL
& AGRICULTURAL (1) 0.13% 0.12% 0.17% 0.19% 0.15% 0.12%
AGGREGATE COMBINED 0.28% 0.30% 0.35% 0.45% 0.37% 0.26%
CLASSES
</TABLE>
______________
(1) PG&E has not historically maintained separate information regarding
write-offs for the Small Commercial Customers. Revenues for Small Commercial
Customers constituted approximately 20% of revenues for the commercial,
industrial and agricultural class of electricity consumers in 1996.
(2) Net write-offs include any amounts recovered by PG&E from deposits,
bankruptcy proceedings and payments received after an account has been closed.
Slight historical trends towards increased net write-offs are apparent with
respect to both the Residential Customers and the commercial, industrial and
agricultural users. However, such net write-offs continue to be statistically
insignificant.
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DELINQUENCIES
The following table sets forth information relating to the delinquency
experience of PG&E for (i) residential and (ii) commercial, industrial and
agricultural customers for each of the five preceding years:
RESIDENTIAL AND COMMERCIAL, INDUSTRIAL AND AGRICULTURAL DELINQUENCY
DATA/(1)/
<TABLE>
<CAPTION>
Jan.-July
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL:
PERCENT OF BILLED REVENUE
NOT COLLECTED WITHIN:
0-30 DAYS 38.0% 39.0% 42.0% 44.0% 34.0% 38.0%
31-60 DAYS 27.8 27.9 30.9 28.2 24.2 26.2
61-90 DAYS 7.5 7.8 9.6 9.8 7.9 8.5
</TABLE>
<TABLE>
<CAPTION>
Jan.-July
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL, INDUSTRIAL &
AGRICULTURAL(2):
PERCENT OF BILLED REVENUE NOT
COLLECTED WITHIN:
0-30 DAYS 21.0% 23.0% 25.0% 24.0% 20.0% 16.0%
31-60 DAYS 17.3 18.9 18.9 18.0 15.7 12.5
61-90 DAYS 2.4 2.8 3.5 3.0 2.1 1.8
</TABLE>
________________
(1) Data shows delinquency statistics for combined gas and electric
revenues and collections.
(2) PG&E has not historically maintained separate information relating to
delinquencies for the Small Commercial Customers. Revenues for Small Commercial
Customers constituted approximately 20% of the commercial, industrial and
agricultural class of electricity consumers in 1996.
No discernable trends are apparent with respect to PG&E's delinquency
experiences with respect to the Residential Customers and the commercial,
industrial and agricultural customers. The Note Issuer does not believe that
the delinquency experience with respect to the FTA Payments will differ
substantially from the approximate rates indicated above.
SERVICING
SERVICING PROCEDURES
GENERAL. The Servicer, as agent for the Note Issuer, will manage, service
and administer, and make collections in respect of, the Transition Property
pursuant to the Servicing Agreement between the Servicer and the Note Issuer.
The Servicer's duties will include calculation and billing of all amounts based
on the FTA Charges, receipt and posting of all FTA Payments, responding to
inquiries of Customers and the CPUC with respect to the Transition Property and
the FTA Charges, obtaining usage calculations, accounting for collections and
furnishing monthly, quarterly and annual statements to the Note Issuer, the Note
Trustee and the Certificate Trustee and taking action in connection with
periodic revisions to the FTA Charges as described below.
Each FTA Charge will be expressed as an amount per kilowatt hour of
electricity usage by the applicable Customer, regardless of whether the Customer
purchases its electricity from the Servicer or from another electricity
provider. The Servicer expects the applicable FTA Charge to be separately
identified on each Customer's bill, with an aggregate amount to be paid to the
Servicer. Bills are sent to each Customer every 27 to 33 days.
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Any amounts collected by the Servicer that represent partial payments of
the total amount billed will be proportionately allocated between the Note
Issuer and PG&E based on the portion of the amount billed which is based on the
applicable FTA Charge and the total charges due to PG&E. If such amounts are
billed and collected for an alternative energy service provider pursuant to a
consolidated billing arrangement, the total charges due to the alternative
energy service provider will also be included in the proportional allocation of
any partial payment.
SERVICING STANDARDS AND COVENANTS
The Servicing Agreement will require the Servicer, in servicing and
administering the Transition Property, to employ or cause to be employed
procedures and exercise the same care it customarily employs and exercises in
servicing and administering bill collections for its own account.
Consistent with the foregoing, the Servicer may in its own discretion waive
any late payment charge or any other fee or charge relating to delinquent
payments, if any, and may waive, vary or modify any terms of payment of any
amounts payable by a Customer, in each case, if such waiver or action (a) would
be in accordance with the Servicer's customary practices or those of any
successor Servicer with respect to comparable assets that it services for
itself, (b) would not materially adversely affect the Certificateholders and (c)
would comply with applicable law. In addition, the Servicer may write off any
amounts that it deems uncollectible in accordance with its customary
practices.
In the Servicing Agreement, the Servicer will covenant that, in servicing
the Transition Property it will: (a) manage, service, administer and make
collections in respect of the Transition Property with reasonable care and in
accordance with applicable law, including all applicable guidelines of the CPUC,
using the same degree of care and diligence that the Servicer exercises with
respect to bill collections for its own account; (b) follow customary standards,
policies and procedures for the industry in performing its duties as Servicer;
(c) use all reasonable efforts, consistent with its customary servicing
procedures, to enforce, and maintain rights in respect of, the Transition
Property; (d) comply with all laws applicable to and binding on it relating to
the Transition Property; and (e) submit True-Up Mechanism Advice Letters to the
CPUC seeking adjustments to the FTA Charges as described herein.
In the event of a breach by the Servicer of any of these covenants, the
Servicer will indemnify, defend and hold harmless the Note Issuer, the Trust,
the Noteholders, the Note Trustee, the Certificate Trustee, the Delaware
Trustee, the Certificateholders and the Infrastructure Bank against any costs,
expenses, losses, claims, damages and liabilities incurred as a result thereof.
REMITTANCES TO COLLECTION ACCOUNT
Periodically, the Servicer will prepare a forecast of the percentages of
amounts billed in a particular month that are expected to be received during
each of the following six months (the "COLLECTIONS CURVE"). For so long as (a)
no Servicer Default shall have occurred and be continuing and (b) the Rating
Agency Condition shall have been satisfied (and any conditions or limitations
imposed by the Rating Agencies in connection therewith are complied with), the
Servicer is required to remit FTA Payments expected to have been received during
the preceding calendar month, based on the Collections Curve then in effect, to
the Collection Account on or before the twentieth day of each calendar month
(or, if such twentieth day is not a Certificate Business Day, the Certificate
Business Day immediately following such twentieth day). The sum of the amounts
remitted with respect to a particular calendar month during the six months
following such calendar month based on the Collections Curve is referred to as
the "ESTIMATED FTA PAYMENTS" herein. Pending remittance to the Collection
Account, FTA Payments may be invested by the Servicer at its own risk and for
its own benefit, and will not be segregated from funds of the Servicer. If any
of the conditions described above are not satisfied, the Servicer will remit
within two Servicer Business Days of receipt thereof to the Collection Account
all Estimated FTA Payments. The date on which FTA Payments received by the
Servicer with respect to the FTA Charges are required to be deposited in the
Collection Account is referred to herein as the "REMITTANCE DATE."
On or prior to the Remittance Date in the sixth month following each
calendar month, the Servicer will compare actual FTA Payments received with
respect to that calendar month (the "ACTUAL FTA PAYMENTS") to the
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Estimated FTA Payments for that calendar month previously remitted to the
Collection Account. If Estimated FTA Payments remitted with respect to a
calendar month exceed Actual FTA Payments attributable to such calendar month
(such excess, an "EXCESS REMITTANCE"), the Servicer shall be entitled to either
(a) reduce the amount which the Servicer remits to the Collection Account on
such Remittance Date by the amount of such Excess Remittance, the amount of such
reduction becoming the property of the Servicer or (b) immediately be paid from
the Collection Account or any subaccount therein the amount of such Excess
Remittance, such payment becoming the property of the Servicer. If Estimated
FTA Payments remitted with respect to a calendar month are less than Actual FTA
Payments attributable to such calendar month (such deficiency, a "REMITTANCE
SHORTFALL"), the amount which the Servicer remits to the Collection Account on
such Remittance Date will be increased by the amount of such Remittance
Shortfall, such increase coming from the Servicer's own funds. The Estimated
FTA Payments calculated for any Remittance Date shall not be affected by any
Excess Remittance or Remittance Shortfall which modifies the actual amount
remitted by the Servicer on such Remittance Date.
NO SERVICER ADVANCES
The Servicer will not make any advances of interest or principal on the
Notes.
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each
calendar quarter, in an amount equal to one-fourth the percent per annum
specified in the related Prospectus Supplement of the then outstanding principal
amount of the Notes. The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Payment Dates) will be paid solely
to the extent funds are available therefor as described under "Description of
the Notes--Allocations; Payments." The Servicing Fee will be paid prior to the
distribution of any amounts in respect of interest on and principal of the
Notes. The Servicer will be entitled to retain as additional compensation net
investment income on FTA Payments received by the Servicer prior to remittance
thereof to the Collection Account and the portion of late fees, if any, paid by
Customers relating to the FTA Payments.
AGGREGATORS AND OTHER SUPPLIERS
As part of the deregulation of the California electric industry described
elsewhere herein, there will be an unbundling of generation, transmission,
distribution and billing services. A decision of the CPUC allows alternative
energy service providers ("ESPS") to provide a consolidated bill to their retail
customers covering amounts owed to the ESP for electricity, amounts owed to the
Utilities for distribution and other charges, including the applicable FTA
Charges. Any ESP that elects consolidated billing will be responsible for
paying the Servicer amounts billed by the Servicer to the ESP regardless of the
ESP's ability to collect such amounts, including the FTA Charges, from its
customers. The Servicer has the right to revert to separate billing upon
certain payment defaults by an ESP. Neither the Seller nor the Servicer will
pay any shortfalls resulting from the failure of any ESPs to forward FTA
Payments to PG&E, as Servicer, which may result in delays in distributions to
Certificateholders. See "Risk Factors--Potential Servicing Issues--Reliance on
Aggregators and Other Suppliers" herein.
SERVICER REPRESENTATIONS AND WARRANTIES
In the Servicing Agreement, the Servicer will make representations and
warranties to the Note Issuer to the effect, among other things, that: (a) the
Servicer is a corporation duly organized and in good standing under the laws of
the State of California, with power and authority to own its properties and
conduct its business as currently owned or conducted and to execute, deliver and
carry out the terms of the Servicing Agreement; (b) the execution, delivery and
carrying out of the Servicing Agreement have been duly authorized by the
Servicer by all necessary corporate action; (c) the Servicing Agreement
constitutes a legal, valid and binding obligation of the Servicer, enforceable
against the Servicer in accordance with its terms; (d) the consummation of the
transactions contemplated by the Servicing Agreement does not conflict with the
Servicer's articles of incorporation or bylaws or any agreement to which the
Servicer is a party or bound, result in the creation or imposition of any lien
upon the Servicer's properties or violate any law or any order, rule or
regulation applicable to the Servicer; (e) the Servicer has all licenses
necessary for it to perform its obligations under the Servicing Agreement; (f)
no governmental
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<PAGE>
approvals, authorizations or filings are required for the Servicer to execute,
deliver and perform its obligations under the Servicing Agreement except those
which have previously been obtained or made; and (g) except as disclosed to the
Note Issuer, no court or administrative proceeding or investigation is pending
or, to the Servicer's knowledge, threatened (i) asserting the invalidity of, or
seeking to prevent the consummation of the transactions contemplated by, the
Servicing Agreement or (ii) seeking a determination that might materially and
adversely affect the performance by the Servicer of its obligations thereunder.
In the event of a breach by the Servicer of any of its representations and
warranties described in the preceding paragraph, the Servicer will indemnify,
defend and hold harmless the Note Issuer, the Trust, the Noteholders, the Note
Trustee, the Certificate Trustee, the Delaware Trustee, the Certificateholders
and the Infrastructure Bank against any costs, expenses, losses, claims, damages
and liabilities incurred as a result thereof.
STATEMENTS BY SERVICER
On or before each Remittance Date, the Servicer will prepare and furnish to
the Note Trustee, the Certificate Trustee, the Infrastructure Bank and the Note
Issuer a statement for the applicable calendar months (the "MONTHLY SERVICER'S
CERTIFICATE") setting forth the aggregate amount of FTA Payments remitted by the
Servicer to the Collection Account and the Excess Remittance or the Remittance
Shortfall. In addition, the Servicer will prepare, and the Note Trustee will
furnish to the Noteholders on each Payment Date the Quarterly Servicer's
Certificate described under "Description of the Notes--Reports to Noteholders."
The Servicer will also prepare and the Certificate Trustee will furnish to the
Certificateholders on each Payment Date the report described under "Description
of the Certificates--Reports to Certificateholders" herein.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement will provide that a firm of independent public
accountants will furnish to the Note Issuer, the Note Trustee and the
Certificate Trustee on or before January 31 of each year, beginning January 31,
1998, a statement as to compliance by the Servicer during the preceding twelve
months ended December 31 with certain standards relating to the servicing of the
Transition Property. This report (the "ANNUAL ACCOUNTANT'S REPORT") shall state
that such firm has performed certain procedures in connection with the
Servicer's compliance with the servicing procedures of the Servicing Agreement,
identifying the results of such procedures and including any exceptions noted.
The Annual Accountant's Report will also indicate that the accounting firm
providing such report is independent of the Servicer within the meaning of the
Code of Professional Ethics of the American Institute of Certified Public
Accountants.
The Servicing Agreement will also provide for delivery to the Note Issuer,
the Infrastructure Bank, the Note Trustee and the Certificate Trustee, on or
before January 31 of each year, commencing January 31, 1998, of a certificate
signed by an officer of the Servicer stating that the Servicer has fulfilled its
obligations under the Servicing Agreement throughout the preceding twelve months
ended December 31 (or in the case of the first such certificate, the period from
the Closing Date to December 31, 1997) or, if there has been a default in the
fulfillment of any such obligation, describing each such default. The Servicer
has agreed to give the Note Issuer, the Infrastructure Bank, the Note Trustee
and the Certificate Trustee notice of certain Servicer Defaults under the
Servicing Agreement.
Copies of such statements and certificates may be obtained by
Certificateholders by a request in writing addressed to the Certificate Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement will provide that PG&E may not resign from its
obligations and duties as Servicer thereunder, except upon either (a) a
determination that PG&E's performance of such duties is no longer permissible
under applicable law or (b) satisfaction of the Rating Agency Condition, consent
of the CPUC and an arrangement with a successor servicer which provides that
there is no increase in the Servicing Fee. No such resignation will
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<PAGE>
become effective until a successor Servicer has assumed PG&E's servicing
obligations and duties under the Servicing Agreement.
The Servicing Agreement will further provide that neither the Servicer nor
any of its directors, officers, employees, and agents will be under any
liability to the Note Issuer, the Note Trustee, the Infrastructure Bank, the
Trust, the Noteholders, the Delaware Trustee, the Certificate Trustee, the
Certificateholders or any other person, except as provided under the Servicing
Agreement, for taking any action or for refraining from taking any action
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any liability that would otherwise be imposed by reason of willful misconduct,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Servicing Agreement will provide that the Servicer is under no obligation to
appear in, prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under the Servicing Agreement and that, in its
opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer or, with respect to its obligations
as Servicer, which corporation or other entity in each of the foregoing cases
assumes the obligations of the Servicer, will be the successor of the Servicer
under the Servicing Agreement.
SERVICER DEFAULTS
"SERVICER DEFAULTS" under the Servicing Agreement will include (a) any
failure by the Servicer to make any required deposit into the Collection
Account, which failure continues unremedied for three Servicer Business Days
after written notice from the Note Issuer is received by the Servicer or after
discovery by the Servicer; (b) any failure by the Servicer or the Seller, as the
case may be, duly to observe or perform in any material respect any other
covenant or agreement in the Servicing Agreement, the Sale Agreement or any
other Basic Document to which it is a party, which failure materially and
adversely affects the rights of Noteholders and which continues unremedied for
60 days after the giving of notice of such failure (i) to the Servicer by the
Note Issuer or the Note Trustee or (ii) to the Servicer by holders of Notes
evidencing not less than 25 percent in principal amount of the outstanding Notes
of all Series; (c) any representation or warranty made by the Servicer in the
Servicing Agreement shall prove to have been incorrect when made, which has a
material adverse effect on the Note Issuer or the Certificateholders and which
material adverse effect continues unremedied for a period of 60 days after the
giving of notice to the Servicer by the Note Issuer or the Note Trustee; and (d)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities, or similar proceedings with respect to the Servicer or the Seller
and certain actions by the Servicer or the Seller indicating its insolvency,
reorganization pursuant to bankruptcy proceedings, or inability to pay its
obligations.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under the Servicing Agreement remains
unremedied, either the Note Trustee or holders of Notes evidencing not less than
25 percent in principal amount of then outstanding Notes of all Series may
terminate all the rights and obligations of the Servicer (other than the
Servicer's indemnity obligation) under the Servicing Agreement, whereupon a
successor servicer appointed by the Note Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to similar compensation arrangements. In
addition, upon a Servicer Default, each of the following shall be entitled to
apply to the CPUC for sequestration and payment of revenues arising with respect
to the Transition Property: (1) the Certificateholders and the Certificate
Trustee as beneficiary of any statutory lien permitted by the PU Code; (2) the
Note Issuer or its assignees; or (3) pledgees or transferees, including
transferees under PU Code (S) 844, of the Transition Property. If, however, a
bankruptcy trustee or similar official has been appointed for the Servicer, and
no Servicer Default other than such appointment has occurred, such trustee or
official may have the power to prevent the Note Trustee or the Noteholders from
effecting a transfer of servicing. The Note Trustee may appoint, or petition a
court of competent jurisdiction for the appointment of, a successor servicer
which satisfies criteria
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specified by the Rating Agencies. The Note Trustee may make such arrangements
for compensation to be paid, which in no event may be greater than the servicing
compensation to the Servicer under the Servicing Agreement.
WAIVER OF PAST DEFAULTS
Holders of Notes evidencing at least a majority in principal amount of the
then outstanding Notes of all Series, on behalf of all Noteholders, may waive
any default by the Servicer in the performance of its obligations under the
Servicing Agreement and its consequences, except a default in making any
required deposits to the Collection Account in accordance with the Servicing
Agreement. The Servicing Agreement provides that no such waiver will impair the
Noteholders' rights with respect to subsequent defaults.
AMENDMENT
The Servicing Agreement may be amended by the parties thereto, without the
consent of the Noteholders (or, accordingly, the Certificateholders), but with
the consent of the Note Trustee, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of that agreement or
of modifying in any manner the rights of the Noteholders (or, accordingly, the
Certificateholders), provided that such action will not, as certified in a
certificate of an officer of the Servicer delivered to the Note Trustee and the
Note Issuer, materially and adversely affect the interest of any Noteholder (or,
accordingly, any Certificateholder). The Servicing Agreement may also be
amended by the Servicer and the Note Issuer with the consent of the Note Trustee
and the holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes of all Series and Classes for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such agreement or of modifying in any manner the rights of the Noteholders or
the Certificateholders; provided, however, that no such amendment may (i)
-------- -------
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, FTA Collections or (ii) reduce the aforesaid percentage of the Notes
the holders of which are required to consent to any such amendment, without the
consent of the holders of all the outstanding Notes.
TERMINATION
The obligations of the Servicer and the Note Issuer pursuant to the
Servicing Agreement will terminate upon the payment to the Noteholders and
corresponding distribution to the Certificateholders of all amounts required to
be paid or distributed to them pursuant to the Servicing Agreement, the Notes,
the Note Indenture, the Certificates and the Trust Agreement.
DESCRIPTION OF THE NOTES
The Notes of any Class will be issued by the Note Issuer to the Trust (as
such, the "NOTEHOLDER") pursuant to the terms of an Indenture (the "NOTE
INDENTURE") between the Note Issuer and the Note Trustee, in a principal amount
equal to the initial aggregate principal amount of the related Class of
Certificates. The following summary describes the material terms and provisions
of the Note Indenture. The particular terms of the Notes of any Class will be
established in a supplement to the Note Indenture and the material terms thereof
will be described in the Prospectus Supplement for the related Series of
Certificates. This summary does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the terms and provisions of
the Note Indenture and related supplements thereto, forms of which are filed as
exhibits to the Registration Statement.
GENERAL
The Notes may be issued in one or more Series, any one or more of which may
be comprised of one or more Classes. All Notes of the same Series will be
identical in all respects except for the denominations thereof, unless such
Series is comprised of more than one Class, in which case all Notes of the same
Class will be identical in all respects except for the denominations thereof.
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The Prospectus Supplement for a Series of Certificates will describe the
following terms of the related Series of Notes and, if applicable, the Classes
thereof: (a) the designation of the Series and, if applicable, the Classes
thereof, (b) the principal amount, (c) the annual rate at which interest accrues
(the "NOTE INTEREST RATE"), (d) the Payment Dates, (e) the scheduled maturity
date (the "SCHEDULED MATURITY DATE"), (f) the final termination date of the
Series (the "FINAL MATURITY DATE"), (g) the issuance date of the Series (the
"SERIES ISSUANCE DATE"), (h) the place or places for the payment of principal,
(i) the authorized denominations, (j) the provisions for optional redemption by
the Note Issuer, (k) the Expected Amortization Schedule for principal of such
Series and, if applicable, the Classes thereof, (l) the FTA Charges as of the
date of issuance of such Series of Notes, and the portion of the FTA Charges
attributable to such Series of Notes and (m) any other terms of such Class that
are not inconsistent with the provisions of the Notes and that will not result
in any Rating Agency reducing or withdrawing its then current rating of any
outstanding Class of Notes or Certificates (the notification in writing by each
Rating Agency to the Seller, the Servicer, the Note Trustee and the Note Issuer
that any action will not result in such a reduction or withdrawal is referred to
herein as the "RATING AGENCY CONDITION").
SECURITY
To secure the payment of principal of and interest on the Notes, the Note
Issuer will grant to the Note Trustee a security interest in all of the Note
Issuer's right, title and interest in and to (a) all of the Transition Property
and all proceeds thereof, (b) the Sale Agreement, (c) the Servicing Agreement,
(d) the Collection Account and all amounts or investment property on deposit
therein or credited thereto from time to time, (e) all other property of
whatever kind owned from time to time by the Note Issuer, which such other
property is expected to be relatively small, (f) all present and future claims,
demands, causes and choses in action in respect of any or all of the foregoing
and all payments on or under and (g) all proceeds in respect of any or all of
the foregoing; provided, however, that (1) the cash contributed to the Note
Issuer by the Seller which is not held in the Capital Subaccount, including cash
that has been released to the Note Issuer following retirement of a related
Series of Certificates, (2) net investment earnings which have been released to
the Note Issuer by the Note Trustee pursuant to the terms of the Indenture and
(3) the Overcollateralization Amount with respect to a Series of Certificates
that has been released to the Note Issuer following retirement of such Series
will not be covered by the foregoing security interest. The foregoing assets to
which the Note Issuer will grant the Note Trustee a security interest are
referred to collectively as the "NOTE COLLATERAL" herein.
COLLECTION ACCOUNT
The Note Issuer will establish, in the name of the Note Trustee, a
segregated identifiable account (the "COLLECTION ACCOUNT") with an Eligible
Institution. The Collection Account will be held by the Note Trustee for the
benefit of the Noteholders. The Collection Account will consist of four
subaccounts: a general subaccount (the "GENERAL SUBACCOUNT"), a reserve
subaccount (the "RESERVE SUBACCOUNT"), a subaccount for the
Overcollateralization Amount (the "OVERCOLLATERALIZATION SUBACCOUNT") and a
capital subaccount (the "CAPITAL SUBACCOUNT"). All amounts in the Collection
Account not allocated to any other subaccount will be allocated to the General
Subaccount. Unless the context indicates otherwise, references herein to the
Collection Account include each of the subaccounts contained therein.
An "ELIGIBLE INSTITUTION" means (a) the corporate trust department of the
Note Trustee or (b) a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), which (i) has either (A) a
long-term unsecured debt rating of "A" by S&P and Moody's or (B) a certificate
of deposit rating of "A-1" by S&P and "P-1" by Moody's, or any other long-term,
short-term or certificate of deposit rating acceptable to the Rating Agencies
and (ii) whose deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC").
Funds in the Collection Account may be invested in any of the following:
(a) direct obligations of, or obligations fully and unconditionally guaranteed
as to timely payment by, the United States of America, (b) demand deposits, time
deposits, certificates of deposit or bankers' acceptances of Eligible
Institutions, (c) commercial paper having, at the time of investment, a rating
in the highest rating category from each Rating Agency, (d) money market funds
which have the highest rating from each Rating Agency, (e) demand deposits, time
deposits and
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certificates of deposit which are fully insured by the FDIC, (f) repurchase
obligations with respect to any security that is a direct obligation of, or
fully guaranteed by, the United States of America or certain agencies or
instrumentalities thereof, entered into with certain depository institutions or
trust companies, or (g) any other investment permitted by each Rating Agency
(collectively, the "ELIGIBLE INVESTMENTS"), in each case which mature on or
before the Certificate Business Day preceding the next Payment Date. The Note
Trustee and the Certificate Trustee will have access to the Collection Account
for the purpose of making deposits in and withdrawals from the Collection
Account in accordance with the Indenture.
The Servicer will remit to the Collection Account, on each Remittance Date,
FTA Payments expected to have been received during the preceding calendar month,
based on the Collections Curve, modified by the Excess Remittance or Remittance
Shortfall, if any, as described under "Servicing--Remittances to Collection
Account" herein.
INTEREST AND PRINCIPAL
Interest will accrue on the principal balance of Notes of a Class of Notes
at the per annum rate either specified in or determined in the manner specified
in the related Prospectus Supplement and will be payable on the Payment Dates
specified in the related Prospectus Supplement. FTA Collections and, if
necessary, the equity contributed to the Note Issuer by PG&E on deposit in the
Capital Subaccount, will be used to make interest payments to the Noteholders of
each Class on each Payment Date with respect thereto.
Principal of the Notes of each Class will be payable in the amounts and on
the Payment Dates specified in the related Prospectus Supplement, but only to
the extent that amounts in the Collection Account are available therefor, and
subject to the other limitations described below. See "--Allocations; Payments"
herein. Each Prospectus Supplement will set forth the Expected Amortization
Schedule for the related Series of Notes and, if applicable, the Classes of such
Series. On any Payment Date, the Note Issuer will make payments on the Notes
only until the outstanding principal balances thereof have been reduced to the
principal balances specified in the applicable Expected Amortization Schedule
for such Distribution Date. Any FTA Collections in excess of amounts payable as
(a) expenses of the Note Issuer and the Trust, (b) payments of interest on and
principal of the Notes, (c) allocations to the Overcollateralization Subaccount
and (d) allocations to the Capital Subaccount (all as described herein under
"Description of the Notes--Allocations; Payments" herein) will be retained by
the Note Trustee in the Reserve Subaccount for payment on subsequent Payment
Dates. However, if insufficient FTA Collections are received with respect to
any Payment Date, and amounts in the Collection Account are not sufficient to
make up the shortfall, principal of any Class of Notes may be payable later than
expected as described herein. See "Risk Factors--Risks of the Transition
Property" and "--Uncertain Distribution Amounts and Weighted Average Life"
herein. The entire unpaid principal amount of the Notes of a Class will be due
and payable on the date on which a Note Event of Default has occurred and is
continuing with respect to such Class, if the holders of a majority in principal
amount of the Notes of all Series then outstanding have declared the Notes to be
immediately due and payable. See "--Note Events of Default; Rights Upon Note
Event of Default" herein.
Unless the context requires otherwise, all references in this Prospectus to
principal of the Notes of a Series includes any premium that might be payable
thereon if Notes of such Series are redeemed, as described in the related
Prospectus Supplement.
OPTIONAL REDEMPTION
The Note Issuer may redeem, at its option, any Series of Notes and
accordingly cause the Trust to redeem the related Series of Certificates on any
Distribution Date if, after giving effect to distributions made on such date,
the outstanding principal balance of the Series of Notes has been reduced to
less than five percent of the initial principal balance thereof. The Notes may
be so redeemed upon payment by the Note Issuer of the outstanding principal
amount of the Notes and accrued but unpaid interest thereon as of the date of
redemption. Unless otherwise specified in the related Prospectus Supplement,
notice of such redemption will be given by the Note Issuer to each holder of
Notes to be redeemed by first-class mail, postage prepaid, mailed not less than
five days nor more than 25 days prior to the date of redemption.
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OVERCOLLATERALIZATION AMOUNT
The Financing Order and Advice Letters give the Seller (or its assignee)
the right to recover from Customers amounts necessary to pay principal of and
interest on each Series of Notes at the applicable Note Interest Rate and all
related fees and expenses, and an additional amount (for any Series, the
"OVERCOLLATERALIZATION AMOUNT") that will be specified in the related Prospectus
Supplement. The Overcollateralization Amount will be collected ratably over the
life of the Certificates according to the schedule described in the related
Prospectus Supplement. The portion of FTA Collections relating to the
Overcollateralization Amount received with respect to any Payment Date is
referred to as the "QUARTERLY OVERCOLLATERALIZATION COLLECTION" herein.
On each Payment Date, all FTA Collections will be applied as described
under "--Allocations; Payments" herein. On any Payment Date, an amount equal to
the lesser of the Quarterly Overcollateralization Collection and amounts
remaining after payment of scheduled amounts due on the Notes, related fees and
expenses and amounts necessary to replenish the Capital Subaccount to the
Required Capital Level will be deposited in the Overcollateralization
Subaccount. Amounts in the Overcollateralization Subaccount will be invested in
Eligible Investments, and the Note Issuer will be entitled to earnings thereon,
subject to the limitations described under "--Allocations; Payments" herein.
Amounts in the Overcollateralization Subaccount are intended to cover any
shortfall in FTA Collections that might otherwise occur on any Payment Date or
at the last Scheduled Maturity Date for any Series or Class of Notes. Any
amounts remaining in the Overcollateralization Subaccount with respect to a
particular Series of Notes in excess of the amounts required to make
distributions on the related Series of Certificates in full at the Termination
Date will be returned to the Note Issuer, which may distribute such amounts to
its members under the circumstances described under "--Certain Covenants of the
Note Issuer."
CAPITAL SUBACCOUNT
Upon the issuance of each Series of Notes, the Seller will contribute
capital to the Note Issuer in an amount specified in each Prospectus Supplement,
which will equal 0.50% of the initial principal amount of each such Series of
Notes. Such amount, less $100,000 in the aggregate for all Series of Notes
(with respect to each Series, the "REQUIRED CAPITAL LEVEL"), will be deposited
into the Capital Subaccount. On each Payment Date, the Note Trustee will draw
on amounts in the Capital Subaccount, if any, to the extent amounts available in
the General Subaccount, the Reserve Subaccount and the Overcollateralization
Subaccount are insufficient to make scheduled payments on the Notes and pay
expenses of the Note Issuer and the Trust. Deposits to the Capital Subaccount
will be made as described under "Description of the Notes--Allocations;
Payments" herein.
RESERVE SUBACCOUNT
FTA Collections available with respect to any Payment Date in excess of
amounts payable as expenses of the Note Issuer and the Trust, as payments of
interest and principal on the Notes, as allocations to the Overcollateralization
Subaccount and as allocations to the Capital Subaccount (all as described under
"--Allocations; Payments" herein), will be allocated to the Reserve Subaccount.
On each Payment Date, the Note Trustee will draw on amounts in the Reserve
Subaccount, if any, to the extent amounts available in the General Subaccount
are insufficient to make scheduled payments on the Notes, pay expenses of the
Note Issuer and the Trust, fund the Overcollateralization Subaccount as
scheduled and replenish the Capital Subaccount. Amounts in the Reserve
Subaccount will be invested in Eligible Investments, and the Note Issuer will be
entitled to earnings thereon, subject to the limitations described under "--
Allocations; Payments" herein.
ALLOCATIONS; PAYMENTS
On each Payment Date, the Note Trustee will apply, at the direction of the
Servicer, all amounts on deposit in the Collection Account, including net
earnings thereon (subject to the priority of withdrawals described in the
following paragraph), to pay the following amounts in the following priority:
(a) all amounts owed by the Note Issuer or the Trust to the Note
Trustee, the Delaware Trustee and the Certificate Trustee will be paid to such
persons;
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(b) the Servicing Fee and all unpaid Servicing Fees from any prior
Payment Dates will be paid to the Servicer;
(c) the Quarterly Administration Fee and all unpaid Quarterly
Administration Fees from prior Payment Dates will be paid to the Administrator;
(d) so long as no Event of Default has occurred or would be caused by
such payment, all other Operating Expenses will be paid to the persons entitled
thereto;
(e) Quarterly Interest and any overdue Quarterly Interest (together
with, to the extent lawful, interest on such overdue Quarterly Interest at the
applicable Note Interest Rate) with respect to each Series of Notes will be
transferred to Certificate Trustee, as Noteholder, for distribution to the
Certificateholders;
(f) principal on the Notes payable as a result of a Note Event of
Default or on the Final Maturity Date for any Notes will be transferred to the
Certificate Trustee, as Noteholder, for distribution to the Certificateholders;
(g) funds necessary to pay Quarterly Principal for any Series of
Notes based on priorities described in each Prospectus Supplement will be
transferred to the Certificate Trustee, as Noteholder, for distribution to the
applicable Certificateholders;
(h) unpaid Operating Expenses will be paid to the persons entitled
thereto;
(i) the amount by which the Required Capital Level with respect to
all outstanding Series of Notes exceeds the amount in the Capital Subaccount as
of such Payment Date, if any, will be allocated to the Capital Subaccount;
(j) an amount up to the sum of the Quarterly Overcollateralization
Collection and any unfunded Quarterly Overcollateralization Collections from
prior Payment Dates will be allocated to the Overcollateralization
Subaccount;
(k) funds up to the net earnings on amounts in the Collection Account
for the prior quarter without cumulation will be released to the Note Issuer;
(l) if any Series of Notes has been retired as of such Payment Date,
the excess of the amount in the Overcollateralization Subaccount over the
aggregate Overcollateralization Amount with respect to all Series of Notes
remaining outstanding will be released to the Note Issuer;
(m) if any Series of Notes has been retired as of such Payment Date,
the excess of the amount in the Capital Subaccount over the aggregate Required
Capital Level with respect to all Series of Notes remaining outstanding will be
released to the Note Issuer;
(n) the balance, if any, will be allocated to the Reserve Subaccount
for distribution on subsequent Payment Dates; and
(o) following the repayment of all outstanding Series of Notes, the
balance, if any, will be released to the Note Issuer.
If on any Payment Date funds on deposit in the General Subaccount are
insufficient to make the transfers contemplated by clauses (a) through (g)
above, the Note Trustee will (x) first, draw from amounts on deposit in the
Reserve Subaccount, (y) second, draw from amounts on deposit in the
Overcollateralization Subaccount, and (z) third, draw from amounts on deposit in
the Capital Subaccount, up to the amount of such shortfall, in order to make the
transfers described above. In addition, if on any Payment Date funds on deposit
in the General Subaccount are insufficient to make the transfers described in
clauses (i) and (j) above, the Note Trustee will draw from amounts
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on deposit in the Reserve Subaccount to make such transfers. If on any Payment
Date when there is more than one Series of Notes outstanding, funds on deposit
in the Collection Account are insufficient to make the transfers contemplated by
clauses (e) and (f) above, such funds will be allocated among the various
Series, pro rata as specified in the related Prospectus Supplement.
For purposes of the foregoing allocations:
"QUARTERLY ADMINISTRATION FEE" means the quarterly fee payable to PG&E
as the Administrator under the Administrative Services Agreement between
PG&E and the Note Issuer, which will be specified in each Prospectus
Supplement.
"QUARTERLY INTEREST" means, with respect to any Payment Date and any
Series of Notes, the quarterly interest for such date and Series as
specified in the related Prospectus Supplement.
"QUARTERLY PRINCIPAL" means, with respect to any Payment Date and any
Series of Notes, the excess, if any, of the then-outstanding principal
balance of such Series of Notes over the outstanding principal balance
specified for such Payment Date on the applicable Expected Amortization
Schedule.
Payments to the Noteholders of a Series will be made to such holders as
specified in the related Prospectus Supplement.
ACTIONS BY NOTEHOLDERS
The Certificate Trustee, on behalf of the Trust as sole initial holder of
the Notes, has the right to vote and give consents and waivers in respect of
modifications to any Class or Series of Notes thereunder and to the provisions
of certain Basic Documents under the Note Indenture. Subject to certain
exceptions, the holders of a majority of the aggregate outstanding amount of the
Certificates of all Series (or, if less than all Series or Classes are affected,
the affected Series or Class or Classes) shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Certificate Trustee, or exercising any trust or power conferred on the
Certificate Trustee under the Trust Agreement, including any right of the
Certificate Trustee as holder of the Notes of the corresponding Series or Class
or Classes, in each case unless a different percentage is specified in the Trust
Agreement; provided that: (1) such direction shall not be in conflict with any
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rule of law or with the Trust Agreement and would not involve the Certificate
Trustee in personal liability or expense; (2) the Certificate Trustee shall not
have determined that the action so directed would be unjustly prejudicial to the
holders of Certificates of such Series or Class or Classes not taking part in
such direction; (3) the Certificate Trustee may take any other action deemed
proper by the Certificate Trustee which is not inconsistent with such direction;
and (4) if a Note Event of Default with respect to such Series or Class or Notes
shall have occurred and be continuing, such direction shall not obligate the
Certificate Trustee to vote more than a corresponding majority of the related
Notes held by the Trust in favor of declaring the unpaid principal amount of the
Notes of all Series and accrued interest thereon to be due and payable or
directing any action by the Note Trustee with respect to such Note Event of
Default. In circumstances under which the Certificate Trustee is required to
seek instructions from the holders of the Certificates of any Class with respect
to any such action or vote, the Certificate Trustee will take such action or
vote for or against any proposal in proportion to the principal amount of the
corresponding Class, as applicable, of Certificates taking the corresponding
position. See "Description of the Certificates--Voting of Notes" herein.
NOTE EVENTS OF DEFAULT; RIGHTS UPON NOTE EVENT OF DEFAULT
An "EVENT OF DEFAULT" with respect to any Series of Notes (a "NOTE EVENT OF
DEFAULT") is defined in the Note Indenture as being: (a) a default for five
days or more in the payment of any interest on any Note; (b) a default in the
payment of the then unpaid principal of any Note of any Series on the Final
Maturity Date for such Series; (c) a default in the payment of the redemption
price for any Note on the redemption date therefor; (d) a default in the
observance or performance of any covenant or agreement of the Note Issuer made
in the Note Indenture and the continuation of any such default for a period of
30 days after notice thereof is given to the Note Issuer by the Note Trustee or
to the Note Issuer and the Note Trustee by the holders of at least 25 percent in
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principal amount of the Notes of such Series then outstanding; (e) any
representation or warranty made by the Note Issuer in the Note Indenture or in
any certificate delivered pursuant thereto or in connection therewith having
been incorrect in a material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the Note
Issuer by the Note Trustee or to the Note Issuer and the Note Trustee by the
holders of at least 25 percent in principal amount of the Note Indenture of such
Series then outstanding; or (f) certain events of bankruptcy, insolvency,
receivership or liquidation of the Note Issuer.
If a Note Event of Default should occur and be continuing with respect to
any Series of Notes, the Note Trustee or holders of not less than a majority in
principal amount of the Notes of all Series then outstanding may declare the
principal of the Notes of all Series to be immediately due and payable. Such
declaration may, under certain circumstances set forth in the Note Indenture, be
rescinded by the holders of a majority in principal amount of the Notes of all
Series then outstanding.
If the Notes of all Series have been declared to be due and payable
following a Note Event of Default, the Note Trustee may, in its discretion,
either sell the Transition Property or elect to have the Note Issuer maintain
possession of the Transition Property and continue to apply FTA Collections as
if there had been no declaration of acceleration. There is likely to be a
limited market, if any, for the Transition Property following a foreclosure
thereon, in light of the preceding default, the unique nature of the Transition
Property as an asset and other factors discussed herein. In addition, the Note
Trustee is prohibited from selling the Transition Property following a Note
Event of Default with respect to any Series, other than a default in the payment
of any principal or redemption price or a default for five days or more in the
payment of any interest on any Note of any Series unless (a) the holders of all
the outstanding Notes of all Series consent to such sale, (b) the proceeds of
such sale are sufficient to pay in full the principal of and the accrued
interest on the outstanding Notes of all Series or (c) the Note Trustee
determines that the proceeds of the Transition Property would not be sufficient
on an ongoing basis to make all payments on the Notes of all Series as such
payments would have become due if the Notes had not been declared due and
payable, and the Note Trustee obtains the consent of the holders of 66-2/3
percent of the aggregate outstanding amount of the Notes of all Series.
Subject to the provisions of the Note Indenture relating to the duties of
the Note Trustee, in case a Note Event of Default will occur and be continuing,
the Note Trustee will be under no obligation to exercise any of the rights or
powers under the Notes at the request or direction of any of the holders of
Notes of any Series if the Note Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to such provisions
for indemnification and certain limitations contained in the Note Indenture, the
holders of a majority in principal amount of the outstanding Notes of all Series
(or, if less than all Classes are affected, the affected Class or Classes) will
have the right to direct the time, method and place of conducting any proceeding
or any remedy available to the Note Trustee and the holders of a majority in
principal amount of the Notes of all Series then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
the Note Indenture that cannot be modified without the waiver or consent of all
of the holders of the outstanding Notes of all Classes affected thereby.
With respect to the Notes, no holder of any Note of any Series will have
the right to institute any proceeding with respect to the Notes, unless (a) such
holder previously has given to the Note Trustee written notice of a continuing
Event of Default with respect to such Series, (b) the holders of not less than
25 percent in principal amount of the outstanding Notes of all Series have made
written request of the Note Trustee to institute such proceeding in its own name
as Note Trustee, (c) such holder or holders have offered the Note Trustee
reasonable indemnity, (d) the Note Trustee has for 60 days failed to institute
such proceeding and (e) no direction inconsistent with such written request has
been given to the Note Trustee during such 60-day period by the holders of a
majority in principal amount of the outstanding Notes of all Series.
In addition, the Servicer, the Note Trustee, each Noteholder, the
Certificate Trustee and the Certificateholders will covenant that they will not
at any time institute against the Note Issuer or the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
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Neither the Certificate Trustee nor the Note Trustee in its individual
capacity, nor any holder of any ownership interest in the Note Issuer, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, successors or assigns will, in the absence of an express agreement to
the contrary, be personally liable for the payment of the principal of or
interest on the Notes of any Series or for the agreements of the Note Issuer
contained in the Note Indenture.
CERTAIN COVENANTS OF THE NOTE ISSUER
The Note Issuer may not consolidate with or merge into any other entity,
unless (a) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state thereof or the District
of Columbia, (b) such entity expressly assumes by an indenture supplemental to
the Note Indenture the Note Issuer's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement and
covenant of the Note Issuer under the Note Indenture, (c) no Event of Default
will have occurred and be continuing immediately after such merger or
consolidation, (d) the Rating Agency Condition will have been satisfied with
respect to such transaction, (e) the Note Issuer has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Note Issuer, the Trust, any Noteholder or any
Certificateholder and such consolidation or merger complies with the Notes and
all conditions precedent therein provided for relating to such transaction have
been complied with and (f) any action as is necessary to maintain the lien and
security interest created by the Note Indenture will have been taken.
The Note Issuer may not convey or transfer substantially all of its
properties or assets to any person or entity, unless (a) the person or entity
acquiring the properties and assets (i) is a United States citizen or an entity
organized under the laws of the United States, any state thereof or the District
of Columbia, (ii) expressly assumes by an indenture supplemental to the Note
Indenture the Note Issuer's obligation to make due and punctual payments upon
the Notes and the performance or observance of every agreement and covenant of
the Note Issuer under the Notes, (iii) expressly agrees by such supplemental
indenture that all right, title and interest so conveyed or transferred will be
subject and subordinate to the rights of Noteholders, (iv) unless otherwise
specified in the supplemental indenture referred to in clause (ii) above,
expressly agrees to indemnify, defend and hold harmless the Note Issuer against
and from any loss, liability or expense arising under or related to the Note
Indenture and the Notes, and (v) expressly agrees by means of such supplemental
indenture that such person (or if a group of persons, then one specified person)
shall make all filings with the Commission (and any other appropriate person)
required by the Exchange Act in connection with the Notes, (b) no Event of
Default will have occurred and be continuing immediately after such transaction,
(c) the Rating Agency Condition will have been satisfied with respect to such
transaction, (d) the Note Issuer has received an opinion of counsel to the
effect that such transaction will not have any material adverse tax consequence
to the Note Issuer, the Trust, any Noteholder or any Certificateholder and such
conveyance or transfer complies with the Note Indenture and all conditions
precedent therein provided for relating to such transaction have been complied
with and (e) any action as is necessary to maintain the lien and security
interest created by the Note Indenture shall have been taken.
The Note Issuer will not, among other things, (a) except as expressly
permitted by the Note Indenture, sell, transfer, exchange or otherwise dispose
of any of the assets of the Note Issuer, unless directed to do so by the Note
Trustee, (b) claim any credit on, or make any deduction from the principal or
interest payable in respect of, the Notes (other than amounts properly withheld
under the Code) or assert any claim against any present or former Noteholder
because of the payment of taxes levied or assessed upon any part of the
Transition Property and the other Note Collateral, (c) terminate its existence,
dissolve or liquidate in whole or in part; (d) permit the validity or
effectiveness of the Notes to be impaired, (e) permit the lien of the Note
Indenture to be amended, hypothecated, subordinated, terminated or discharged or
permit any person to be released from any covenants or obligations with respect
to the Notes except as may be expressly permitted by the Indenture, (f) permit
any lien, charge, excise, claim, security interest, mortgage or other
encumbrance, other than the lien and security interest created by the Indenture,
to be created on or extend to or otherwise arise upon or burden the Collateral
or any part thereof or any interest therein or the proceeds thereof or (g)
permit the lien of the Note Indenture not to constitute a valid first priority
security interest in the Collateral.
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The Note Issuer may not engage in any business other than financing,
purchasing, owning and managing the Transition Property in the manner
contemplated by the Notes, the Sale Agreement, the Servicing Agreement, the
Trust Agreement, the Note Purchase Agreement between the Note Issuer and the
Trust, or certain related documents (collectively, the "BASIC DOCUMENTS") and
activities incidental thereto.
The Note Issuer will not issue, incur, assume, guarantee or otherwise
become liable for any indebtedness except for the Notes.
The Note Issuer will not, except for any Eligible Investments as
contemplated by the Basic Documents, make any loan or advance or credit to, or
guarantee, endorse or otherwise become contingently liable in connection with
the obligations, stocks or dividends of, or own, purchase, repurchase or acquire
(or agree contingently to do so) any stock, obligations, assets or securities
of, or any other interest in, or make any capital contribution to, any other
person. The Note Issuer will not, except as contemplated by the Basic
Documents, make any expenditure (by long-term or operating lease or otherwise)
for capital assets (either realty or personalty). The Note Issuer will not,
directly or indirectly, make payments to or distributions from the Collection
Account except in accordance with the Basic Documents.
The Note Issuer will not make any payments, distributions or dividends to
any holder of beneficial interests in the Note Issuer in respect of such
beneficial interest for any calendar month unless no Note Event of Default shall
have occurred and be continuing and any such distributions do not cause the book
value of the remaining equity in the Note Issuer to decline below 0.50% of the
initial principal amount of all Series of Notes issued and outstanding pursuant
to the Indenture.
The Note Issuer will cause the Servicer to deliver to the Note Trustee and
the Certificate Trustee the annual accountant's certificates, compliance
certificates, reports regarding distributions and statements to Noteholders and
the Certificateholders required by the Servicing Agreement.
REPORTS TO NOTEHOLDERS
With respect to each Series of Notes, on or prior to each Payment Date, the
Servicer will prepare and provide to the Note Issuer, the Infrastructure Bank,
the Note Trustee and the Certificate Trustee a statement (the "QUARTERLY
SERVICER'S CERTIFICATE") to be delivered to the Noteholders on such Payment
Date. With respect to each Series of Notes, each such statement to be delivered
to Noteholders will include (to the extent applicable) the following information
(and any other information so specified in the related Prospectus Supplement) as
to the Notes of such Series with respect to such Payment Date or the period
since the previous Payment Date, as applicable:
(a) the amount of the distribution to Noteholders allocable to
principal;
(b) the amount of the distribution to Noteholders allocable to
interest;
(c) the aggregate outstanding principal balance of the Notes, after
giving effect to payments allocated to principal reported under (a) above; and
(d) the difference, if any, between the amount specified in (c) above
and the principal amount scheduled to be outstanding on such date according to
the Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Note Trustee will
mail to each person who at any time during such calendar year has been a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of Federal and
state income tax returns. See "Certain Federal Income Tax Consequences" and
"State Taxation" herein.
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ANNUAL COMPLIANCE STATEMENT
The Note Issuer will be required to file annually with the Note Trustee,
the Certificate Trustee and the Rating Agencies a written statement as to the
fulfillment of its obligations under the Notes.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trust will issue the Certificates pursuant to the Trust Agreement, the
form of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary describes the material terms and
provisions of the Trust Agreement. The particular terms of the Certificates of
any Class will be established in a supplement to the Trust Agreement, and the
material terms thereof will be described in the related Prospectus Supplement.
The following summary description of the Certificates is subject to, and is
qualified in its entirety by reference to, all the provisions of the Trust
Agreement and the Certificates, a form of which is also filed as an exhibit to
the Registration Statement.
The Certificates will be issued in fully registered form only. Each Class
of Certificates offered hereby will represent a fractional undivided interest in
the corresponding Class of Notes, all monies due and to become due under such
corresponding Class of Notes, payments pursuant to any related Swap Agreement
and funds from time to time deposited with the Trustee in certain accounts
relating to the Trust. Each Certificate of each Class will correspond to a pro
rata share of the outstanding principal amount of the corresponding Class of the
Notes held in the Trust and will be issued in minimum denominations specified in
the applicable Prospectus Supplement.
Each Class of Certificates will bear interest at the rate per annum borne
by the corresponding Class of the Notes, unless a Swap Agreement is entered into
in connection with the issuance of any Class of Certificates, as described in
the related Prospectus Supplement, in which case a Series or Class of
Certificates may bear interest at a variable rate. See "Description of the
Notes--Interest and Principal" herein. Payments of interest and principal made
in respect of any Class of Notes are required to be passed through to holders of
the corresponding Class of Certificates at the times and in the manner described
herein. See "--Payments and Distributions" below and "Description of the Notes-
- -Interest and Principal" herein.
The Certificates do not represent an interest in or obligation of the State
of California, the Infrastructure Bank, any other governmental agency or
instrumentality or the Seller or any of its affiliates, other than the Note
Issuer. The Certificates will not be guaranteed or insured by the State of
California, the Infrastructure Bank, the Trust or any other governmental agency
or instrumentality or by the Seller or any of its affiliates. Neither the full
faith and credit nor the taxing power of the State of California or any agency
or instrumentality thereof is pledged to the distributions of principal of, or
interest on, the Certificates. The Certificates represent beneficial interests
in the Trust only.
STATE PLEDGE
Pursuant to Section 841(c) of the PU Code, the Infrastructure Bank, on
behalf of the State of California, pledges and agrees with the Trust and the
holders of the Certificates that the State of California shall neither limit nor
alter the FTA Charges, the Transition Property, or the Financing Order or Advice
Letters relating thereto, or any rights thereunder, until the Certificates,
together with interest thereon, are fully paid and discharged, provided nothing
contained in this pledge and agreement shall preclude such limitation or
alteration if and when adequate provision shall be made by law for the
protection of the holders (the "STATE PLEDGE").
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PAYMENTS AND DISTRIBUTIONS
The Certificate Trustee is scheduled to receive payments of interest on and
principal of the Notes (in each case, the amounts paid to any Series or Class of
the Notes will be determined from time to time in accordance with the provisions
described under "Description of the Notes--Allocations; Payments" herein) on
each Payment Date.
The Certificate Trustee will distribute on each Distribution Date to the
holders of each Class of Certificates all payments of principal and interest
with respect to the corresponding Class of Notes (other than payments received
following a payment default in respect of such Class of Notes), or, in lieu of
such interest, payments under the related Swap Agreement with respect to
interest, the receipt of which is confirmed by the Certificate Trustee by 1:00
p.m. (New York City time) on such Distribution Date or, if such receipt is
confirmed after 1:00 p.m. (New York City time) on such Distribution Date, then
on the following business day. Each such distribution other than the final
distribution with respect to any Certificate will be made by the Certificate
Trustee to the holders of record of the Certificates of the applicable Class on
the Record Date in respect of such Distribution Date. If a payment of principal
or interest on any Class of the Notes (other than a payment received following a
payment default in respect of such Class of Notes) is not received by the
Certificate Trustee on a Distribution Date but is received within five days
thereafter, it will be distributed to such holders of record on the date receipt
thereof is confirmed by the Certificate Trustee, if such receipt is confirmed by
the Certificate Trustee by 1:00 p.m. (New York City time) or, if such receipt is
confirmed after 1:00 p.m. (New York City time), then on the following business
day. If such payment is received by the Certificate Trustee after such five-day
period, it will be treated as a payment received following a payment default in
respect of such Class of Notes and distributed as described below. The final
distribution with respect to any Certificate, however, will be made only upon
presentation and surrender of such Certificate at the office or agency of the
Certificate Trustee specified in the notice given by the Certificate Trustee
with respect to such final distribution.
Any payment received by the Certificate Trustee following a payment default
in respect of any Class of the Notes ("SPECIAL PAYMENTS") will be distributed on
the later of (i) the date such receipt is confirmed by the Certificate Trustee
and (ii) the date on which any Special Payment is scheduled to be distributed by
the Certificate Trustee (a "SPECIAL DISTRIBUTION DATE"). However, in the case
of any such Special Payment receipt of which is confirmed after 1:00 p.m. (New
York City time), such Special Payment will be distributed on the following day.
The Certificate Trustee will mail notice to the holders of record of
Certificates of the applicable Class as of the most recent Record Date not less
than 20 days prior to the Special Distribution Date on which any Special Payment
is scheduled to be distributed in respect of Certificates of such Class stating
such anticipated Special Distribution Date. Each distribution of any such
Special Payment will be made by the Certificate Trustee on the Special
Distribution Date to the holders of record of the Certificates of such Class as
of the most recent Record Date. See "--Events of Default" below.
The Trust Agreement requires that the Certificate Trustee establish and
maintain, for the Trust and for the benefit of the holders of each Class of
Certificates, one or more non-interest bearing accounts (a "CERTIFICATE
ACCOUNT") for the deposit of payments on the Notes corresponding to such Class.
Pursuant to the terms of the Trust Agreement, the Certificate Trustee is
required to deposit any payments received by it with respect to any Class of
Notes in the corresponding Certificate Account. All amounts so deposited will
be distributed by the Certificate Trustee to holders of the applicable Class of
Certificates on a Distribution Date or a Special Distribution Date, as
appropriate, unless a different date for distribution of such amount is
specified herein.
At such time, if any, as the Certificates of any Class are issued in the
form of Definitive Certificates and not to DTC or its nominee, distributions by
the Certificate Trustee from the Certificate Account with respect to such Class
on a Distribution Date or a Special Distribution Date will be made by check
mailed to each holder of a Definitive Certificate of such Class of record on the
applicable Record Date at its address appearing on the register maintained with
respect to the Certificates of such Series, or, upon application by a holder of
any Class of Certificates in the principal amount of $1,000,000 or more to the
Certificate Trustee not later than the applicable Record Date, by wire transfer
to an account maintained by the payee in New York, New York. The final
distribution for each Class of Certificates, however, will be made only upon
presentation and surrender of the Certificates of such Class at the office or
agency of the Certificate Trustee specified in the notice or agency given
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by the Certificate Trustee of such final distribution. The Certificate Trustee
will mail such notice of the final distribution to the Certificateholders of
such Class, specifying the date set for such final distribution and the amount
of such distribution.
If any Special Distribution Date or other date specified herein for
distribution of any distributions to Certificateholders is not a Certificate
Business Day, distributions scheduled to be made on such Special Distribution
Date or other date may be made on the next succeeding Certificate Business Day
and no interest shall accrue upon such distribution during the intervening
period. "CERTIFICATE BUSINESS DAY" means any day other than a Saturday, a
Sunday or a day on which banking institutions or trust companies in New York,
New York or San Francisco, California are authorized or obligated by law,
regulation or executive order to remain closed.
FLOATING RATE CERTIFICATES
If any Floating Rate Certificates are offered, the Trust will enter into a
swap agreement dated the Closing Date (the "SWAP AGREEMENT") a swap counterparty
identified and described in the related Prospectus Supplement (the "SWAP
COUNTERPARTY"). Pursuant to the Swap Agreement, on each Distribution Date, the
Trust will be obligated to pay to the Swap Counterparty, solely from payments
received with respect to the Floating Rate Notes, an amount equal to the
interest due on the related Class of Notes on such Distribution Date, and the
Swap Counterparty will be obligated to pay to the Trust an amount equal to the
product of the (a) Floating Rate and (b) the principal balance of the Floating
Rate Certificates as of the close of business on the preceding Distribution Date
after giving effect to all payments of principal made to the Floating Rate
Certificateholders on such preceding Distribution Date.
The Swap Agreement will terminate or may be terminated upon the occurrence
of certain events of default or termination events as described in the related
Prospectus Supplements. If, upon or prior to the termination of the Swap
Agreement, the Infrastructure Bank, using its best efforts, is unable to find a
successor swap counterparty satisfying the requirements specified in the Trust
Agreement, the interest rate payable with respect to the Floating Rate
Certificates will automatically convert to a fixed rate equal to the interest
rate payable on the related Class of Notes, which may be substantially less than
the rate otherwise payable on the Floating Rate Certificates. See "Additional
Risks of the Floating Rate Certificates."
The amount of interest payable on the Floating Rate Certificates from
time to time will be determined as follows.
(i) Determination of LIBOR. The Agent Bank named in the Trust
--------------------------
Agreement (together with any successor Agent Bank under the Trust Agreement the
"AGENT BANK") will determine the interest rate payable under the Swap Agreement
in accordance with the following provisions:
(a) On the second London banking day immediately preceding the first
day of each Interest Accrual Period (as defined below) and on the Closing
Date with respect to the first Interest Accrual Period (each such day, an
"INTEREST DETERMINATION DATE"), the Agent Bank will determine "LIBOR" based
on the offered rate for deposits in U.S. dollars for the period specified
in the related Prospectus Supplement, commencing on the first day of such
Interest Accrual Period that appears on the display page of the Dow Jones
Telerate Service for the purpose of displaying the London Interbank offered
rate of major banks for U.S. Dollars as of 11:00 a.m., London time, on such
Interest Determination Date (such display page being the "Telerate Page").
Notwithstanding the foregoing, if no offered rate appears, LIBOR for such
Interest Accrual Period will be determined as if the parties had specified
the rate described in clause (b) below. The interest rate applicable to the
Floating Rate Certificates for the Interest Accrual Period relating to an
Interest Determination Date shall be the sum of LIBOR as determined by the
Agent Bank on the most recent Interest Determination Date plus the margin
specified in any related Prospectus Supplement (the "FLOATING RATE").
(b) With respect to an Interest Determination Date on which no offered
rate appears on the Telerate Page, the Agent Bank will request the
principal London office of each of four major banks in the
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London interbank market, selected by the Agent Bank (after consultation
with the Infrastructure Bank), to provide the Agent Bank with its offered
quotation for deposits in U.S. Dollars for a period specified in the
related Prospectus Supplement, commencing on the second London banking day
immediately following such Interest Determination Date, to prime banks in
the London interbank market at approximately 11:00 a.m., London time, on
such Interest Determination Date and in a principal amount that is
representative for a single transaction in U.S. Dollars in such market at
such time. If at least two such quotations are provided, LIBOR for the
relevant Interest Accrual Period will be the arithmetic mean of such
quotations. If fewer than two quotations are provided, LIBOR for such
Interest Accrual Period will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. in The City of New York, on such Interest
Determination Date by three major banks in The City of New York selected by
the Agent Bank (after consultation with the Infrastructure Bank) for loans
in U.S. Dollars to leading European banks, for the period specified in the
related prospectus Supplement, commencing on the second London banking day
immediately following such Interest Determination Date and in a principal
amount that is representative for a single transaction in U.S. Dollars in
such market at such time; provided, however, that if any of the banks so
selected by the Agent Bank are not quoting as mentioned in this sentence,
the Floating Rate in effect for such Interest Accrual Period will be the
rate of interest in effect on such Interest Determination Date.
(c) Subject to applicable usury laws, there will be no maximum or
minimum Floating Rate.
Notwithstanding the foregoing, in the event that the Swap Agreement has been
terminated, and the Swap Counterparty has not been replaced with a successor
swap counterparty satisfying the requirements of the Trust Agreement, the
interest rate with respect to the Floating Rate Certificates shall be the fixed
interest rate payable on the related Class of Notes (calculated on the basis of
a 360-day year consisting of twelve 30-day months), effective as of the first
day of the Interest Accrual Period immediately preceding the termination of the
Swap Agreement.
(ii) Calculation of Quarterly Interest. The Agent Bank will, as soon
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as practicable after 11:00 a.m. (London time) on each Interest Determination
Date, determine the Certificate Interest Rate applicable to, and calculate the
amount of interest payable on, each of the Floating Rate Certificates for the
relevant Interest Accrual Period. Interest payments will be made in an amount
equal to the product of (a)(1) the actual number of days in the related Interest
Accrual Period (as defined herein) divided by 360, multiplied by (2) the
applicable Floating Rate and (b) the Floating Rate Principal Balance (as defined
herein) as of the close of business day on the preceding Distribution Date after
giving effect to all payments of principal made to the Floating Rate
Certificateholders on such preceding Distribution Date (or, in the case of the
first Distribution Date, as of the Closing Date) (such amount, the "QUARTERLY
INTEREST" with respect to such Class). The "INTEREST ACCRUAL PERIOD" with
respect to any Distribution Date shall be the period from and including the
preceding Distribution Date (or, in the case of the first Distribution Date,
from and including the Closing Date) to and excluding such Distribution Date.
The determination of the Floating Rate and the Quarterly Interest by the Agent
Bank shall (in the absence of manifest error) be final and binding upon all
parties.
(iii) Notice of Floating Rate and Interest Payments. The Agent Bank
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will notify the Infrastructure Bank, the Certificate Trustee and any Paying
Agents of the Floating Rate and the Quarterly Interest due on the Floating Rate
Certificates for each Interest Accrual Period and the relevant Distribution Date
as soon as possible after their determination but in no event later than the
first business day of any Interest Accrual Period.
(iv) Determination or Calculation by Certificate Trustee. If the Agent
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Bank fails to determine a Floating Rate or calculate Quarterly Interest in
accordance with paragraph (ii) above at any time or for any reason, the
Certificate Trustee shall determine the Floating Rate and calculate the
Quarterly Interest in accordance with paragraph (ii) above, and each such
determination or calculation shall be deemed to have been made by the Agent
Bank. The determination by the Agent Bank or the Certificate Trustee (as the
case may be) of any Floating Rate and calculation thereby of any Quarterly
Interest shall, in the absence of manifest error, be final and binding on all
parties.
(v) Agent Bank. The Infrastructure Bank will agree that, so long as
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any of the Certificates remain outstanding, there will at all times be an Agent
Bank. The Infrastructure Bank may (with the prior written approval
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of the Certificate Trustee) terminate the appointment of the Agent Bank for any
reason. Notice of any such termination will be given to Certificateholders
within ten days of such termination. If (a) any person is unable or unwilling to
continue to act as the Agent Bank, (b) the appointment of the Agent Bank is
terminated or (c) the Agent Bank fails duly to determine the Floating Rate
and/or the Quarterly Interest for any Interest Accrual Period, then the
Infrastructure Bank will, with the approval of the Certificate Trustee, appoint
a successor Agent Bank to act as such in its place, provided that neither the
resignation nor removal of the Agent Bank shall take effect until a successor
approved by the Certificate Trustee has been appointed. Notice of any such
appointment of a successor Agent Bank will be given to the Certificateholders
within ten days of such appointment.
VOTING OF THE NOTES
The Certificate Trustee, as sole initial holder of the Notes, has the right
to vote and give consents and waivers in respect of modifications to any Class
of Notes. Subject to certain exceptions, the holders of a majority of the
aggregate outstanding amount of the Certificates of all Series (or, if less than
all Series or Classes are affected, the affected Series or Class or Classes)
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Certificate Trustee, or exercising
any trust or power conferred on the Certificate Trustee under the Trust
Agreement, including any right of the Certificate Trustee as holder of the Notes
of the corresponding Series or Class or Classes, in each case unless a different
percentage is specified in the Trust Agreement; provided that: (1) such
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direction shall not be in conflict with any rule of law or with the Trust
Agreement and would not involve the Certificate Trustee in personal liability or
expense; (2) the Certificate Trustee shall not have determined that the action
so directed would be unjustly prejudicial to the holders of Certificates of such
Series or Class or Classes not taking part in such direction; and (3) the
Certificate Trustee may take any other action deemed proper by the Certificate
Trustee which is not inconsistent with such direction. If the Certificate
Trustee is required to seek instructions from the holders of the Certificates of
any Class with respect to any such action or vote, the Certificate Trustee will
take such action or vote for or against any proposal in proportion to the
principal amount of the corresponding Class, as applicable, or Certificates
taking the corresponding position.
EVENTS OF DEFAULT
An event of default with respect to any Class of Certificates under the
Trust Agreement (a "CERTIFICATE EVENT OF DEFAULT") is defined as the occurrence
and continuance of a Note Event of Default or a breach by the State of
California of the State Pledge. For a description of the Note Events of
Default, see "Description of the Notes -- Note Events of Default; Rights Upon
Note Event of Default" herein.
The Trust Agreement provides that, if a Note Event of Default shall have
occurred and be continuing with respect to any Class of Certificates, the
Certificate Trustee may and, upon the written direction of holders representing
not less than a majority of the aggregate outstanding principal amount of the
Certificates of all Series, shall vote all the Notes of all Series in favor of
declaring the unpaid principal amount of all Series of Notes and accrued
interest thereon to be due and payable. In addition, the Trust Agreement
provides that, if a Note Event of Default with respect to any Class of
Certificates shall have occurred and be continuing, the Certificate Trustee may
and, upon the written direction of holders representing not less than a majority
of the aggregate outstanding principal amount of the Certificates of all Series,
shall vote all the Notes of all Series in favor of directing the Note Trustee as
to the time, method and place of conducting any proceeding for any remedy
available to the Note Trustee or of exercising any trust or power conferred on
the Note Trustee under the Note Indenture.
As an additional remedy, if a Note Event of Default shall have occurred and
be continuing with respect to a particular Series or Class of Certificates, the
Trust Agreement provides that the Certificate Trustee may and, upon the written
direction of the holders of Certificates representing not less than a majority
of the aggregate outstanding principal amount of the Certificates of such Series
or Class, will sell any Note or Notes, without recourse to or warranty by the
Certificate Trustee or any Certificateholder, to any person, for cash. The
Certificate Trustee may, but shall not be obligated to refrain, in its sole
discretion, from liquidating any Notes if (i) the Certificate Trustee determines
that amounts receivable from the Note Collateral with respect to the applicable
Class of Notes will be sufficient to pay (a) all principal of and interest on
that Class of Notes in accordance with its terms
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without regard to any declaration of acceleration thereof and (b) all sums due
to the Certificate Trustee and any other administrative expenses specified in
the Trust Agreement, and (ii) holders of Certificates representing not less than
a majority of the aggregate outstanding principal amount of the Certificates of
all Series have not directed the Certificate Trustee to sell any Note or Notes.
In addition, the Certificate Trustee is prohibited from selling any Notes
following certain nonpayment Note Events of Default unless (x) the Certificate
Trustee determines that the amounts receivable from the Note Collateral with
respect to each Class of Notes are not sufficient to pay in full the principal
of and accrued interest on the Notes of each such Class and to pay all sums due
to the Certificate Trustee and other administrative expenses specified in the
Trust Agreement and the Certificate Trustee obtains the written consent of
holders of Certificates of each such Class representing 662/3% of the aggregate
outstanding principal amount of each such Class of Certificates or (y) the
Certificate Trustee obtains the consent of 100% of the aggregate outstanding
principal amount of each such Class of Certificates. Any proceeds received by
the Certificate Trustee upon any such sale will be deposited in the Certificate
Account for such Class and will be distributed to the holders of Certificates of
such Class on a Special Distribution Date.
If a Certificate Event of Default in the form of a breach by the State of
California of the State Pledge has occurred, then, as the sole and exclusive
remedy for such breach, the Certificate Trustee, in its own name and as trustee
of an express trust, as holder of the Notes, shall be, to the extent permitted
by State and Federal law, entitled and empowered to institute any suits, actions
or proceedings at law, in equity or otherwise, to enforce the State Pledge and
to collect any monetary damages as a result of a breach thereof, and may
prosecute any such suit, action or proceeding to judgment or final decree.
Any funds (a) representing payments received with respect to any Series or
Class of Notes in default, (b) representing the proceeds from the sale by the
Certificate Trustee of any Class of Notes or (c) otherwise arising from a
Certificate Event of Default, held by the Certificate Trustee in a Certificate
Account shall, to the extent practicable, be invested and reinvested by the
Certificate Trustee in Eligible Investments permitted under the Trust Agreement
maturing in not more than 60 days or such lesser time as is required for the
distribution of any such funds on a Special Distribution Date, pending the
distribution of such funds to Certificateholders as described herein.
The Trust Agreement provides that, with respect to the Certificates of any
Class, within 30 days after the occurrence of any event that is, or after notice
or lapse of time or both would become, a Certificate Event of Default with
respect to such Class of Certificates (a "DEFAULT"), the Certificate Trustee
will give to the Infrastructure Bank, the Note Trustee and the holders of such
Certificates notice, transmitted by mail, of all such uncured or unwaived
Defaults known to it. However, except in the case of a Default relating to the
payment of principal of or interest on any of the Notes, the Certificate Trustee
will be protected in withholding such notice if in good faith it determines that
the withholding of such notice is in the interests of the holders of the
Certificates of such Class.
The Trust Agreement contains a provision entitling the Certificate Trustee
to be indemnified by the holders of the Certificates before proceeding to
exercise any right or power under the Trust Agreement at the request or
direction of Certificateholders.
In certain cases, the holders of Certificates representing not less than a
majority of the outstanding aggregate principal amount of the Certificates of
all Series may waive any past Default or Certificate Event of Default under the
Trust Agreement and thereby annul any previous direction given by the
Certificate Trustee with respect thereto, except a Default (i) in the deposit or
distribution of any payment on the Notes or Special Payment required to be made
with respect to any Class of Certificates, (ii) in the payment of principal of
or interest on any of the Notes, and (iii) in respect of any covenant or
provision of the Trust Agreement that cannot be modified or amended without the
consent of the holder of each Certificate of all Classes affected hereby. Upon
any such direction, the Certificate Trustee shall vote a corresponding
percentage of the corresponding Class of Notes in favor of such waiver. The
Notes provide that, with certain exceptions, the holders of not less than a
majority in aggregate unpaid principal amount of the Notes of all Series may
waive any Note Event of Default or any event that is, or after notice or passage
of time, or both, would be, a Note Event of Default.
The Trust may hold two or more Classes of Notes, each of which may have a
different interest rate and, in the case of different Classes, a different or
potentially different schedule of the repayment of principal and
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different rights in the security therefor. Accordingly, the holders of
Certificates of each Class may have divergent or conflicting interests from the
holders of Certificates of other Classes.
OPTIONAL REDEMPTION
The Trust shall redeem any Series of Certificates if the related of Series
Notes is redeemed. Unless otherwise specified in the related Prospectus
Supplement, notice of such redemption will be given by the Trust to each holder
of Certificates to be redeemed by first-class mail, postage prepaid, mailed not
less than five days nor more than 25 days prior to the date of redemption.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, Special Distribution Date or any other date
specified in the Trust Agreement for distribution of any payments with respect
to any Class of Certificates, the Certificate Trustee will include with each
distribution to holders of Certificates of such Class a statement with respect
to such distribution to be made on such Distribution Date, Special Distribution
Date or other date, as the case may be, setting forth the following information,
in each case, to the extent received by the Certificate Trustee from the Note
Trustee, no later than two Certificate Business Days prior to such Distribution
Date, Special Distribution Date or other date specified herein for such
distribution:
(a) the amount of the distribution to Certificateholders allocable to
(i) principal and (ii) interest, in each case per $1,000 original principal
amount of each Class of Certificates;
(b) the aggregate outstanding principal balance of the Certificates,
after giving effect to distributions allocated to principal reported under (a)
above; and
(c) the difference, if any, between the amount specified in (b) above
and the principal amount scheduled to be outstanding on such date according to
the Expected Amortization Schedule.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Notes, the Certificate Trustee
will mail to each person who at any time during such calendar year has been a
Certificateholder and received any distribution thereon, a statement containing
certain information for the purposes of such Certificateholder's preparation of
Federal and state income tax returns. See "Certain Federal Income Tax
Consequences" and "State Taxation" herein.
AMENDMENTS
The Infrastructure Bank (with the prior written approval of the Note
Issuer) and the Certificate Trustee may amend the Trust Agreement from time to
time, without the consent of the Certificateholders of any Series, (1) to add to
the covenants of the Infrastructure Bank for the benefit of the
Certificateholders, or to surrender any right or power conferred upon the
Infrastructure Bank; (2) to correct or supplement any provision in the Trust
Agreement or in any supplemental agreement which may be defective or
inconsistent with any other provision in the Trust Agreement or in any
supplemental agreement or to make any other provisions with respect to matters
or questions arising under the Trust Agreement; provided that any such action
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shall not adversely affect the interests of the Certificateholders; (3) to cure
any ambiguity or correct any mistake; (4) to qualify, if necessary, the Trust
Agreement (including any supplement thereto) under the Trust Indenture Act of
1939, as amended or (5) to provide for the issuance of the Certificates of any
Series or Class, or to provide for the execution and delivery of any Swap
Agreement.
In addition, the Infrastructure Bank (with the prior written approval of
the Note Issuer) and the Certificate Trustee may amend the Trust Agreement with
the consent of Certificateholders holding not less than a majority of the
aggregate outstanding principal amount of the Certificates of all affected
Classes. No amendment, however, may, without the consent of each
Certificateholder affected thereby, (a) reduce in any manner the amount of, or
delay the timing of, deposits or distributions on any Certificate, (b) permit
the disposition of any Note held by the
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Trust except as permitted by the Trust Agreement, or otherwise deprive any
Certificateholder of the benefit of the ownership of the related Notes held by
the Trust, (c) reduce the aforesaid percentage of the aggregate outstanding
principal amount of the Certificates the holders of which are required to
consent to any such amendment, (d) modify the provisions in the Trust Agreement
relating to amendments with the consent of Certificateholders, except to
increase the percentage vote necessary to approve amendments or to add further
provisions which cannot be modified or waived without the consent of all
Certificateholders, or (e) adversely affect the status of the Trust as a grantor
trust taxable as a corporation for federal income tax purposes. Promptly
following the execution of any amendment to the Trust Agreement (other than an
amendment described in the preceding paragraph), the Certificate Trustee will
furnish written notice of the substance of such amendment to each
Certificateholder.
Any supplement to the Trust Agreement executed in connection with the
issuance of one or more new Series of Certificates will not be considered an
amendment to the Trust Agreement.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder or group of
Certificateholders of any Series or of all outstanding Series of record holding
Certificates evidencing not less than 10 percent of the aggregate outstanding
principal amount of the Certificates of such Series or all Series, as
applicable, the Certificate Trustee will afford such Certificateholder or
Certificateholders access during business hours to the current list of
Certificateholders of such Series or of all outstanding Series, as the case may
be, for purposes of communicating with other Certificateholders with respect to
their rights under the Trust Agreement.
The Trust Agreement does not provide for any annual or other meetings of
Certificateholders.
REGISTRATION AND TRANSFER OF THE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates will be issued in definitive form and will be transferable and
exchangeable at the office of the registrar identified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, no
service charge will be made for any such registration or transfer of such
Certificates, but the owner may be required to pay a sum sufficient to cover any
tax or other governmental charge.
Each Class of Certificates will be issued in the minimum initial
denominations set forth in the related Prospectus Supplement and, except as
otherwise provided in the related Prospectus Supplement, in integral multiples
thereof.
Distributions of interest and principal will be made on each Distribution
Date to the Certificateholders in whose names the Certificates were registered
on the related Record Date.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates initially may be Book-Entry Certificates, which are initially
represented by one or more certificates registered in the name of Cede, as
nominee of DTC, or another securities depository, and are available only in the
form of book-entries. Any Book-Entry Certificates will initially be registered
in the name of Cede, the nominee of DTC. Holders may also hold Certificates of
a Class through Centrale de Livraison de Valeurs Mobilieres S.A. ("CEDEL") or
the Euroclear System ("EUROCLEAR") (in Europe), if they are participants in such
systems or indirectly through organizations that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Certificate or Certificates.
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective Depositaries (as defined herein) which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC. Citibank, N.A. will
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act as depositary for CEDEL and Morgan Guaranty Trust Company of New York will
act as depositary for Euroclear (in such capacities, the "DEPOSITARIES").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations, which are the Participants, and facilitate
the settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities. Participants include
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to Indirect Participants, which are
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants (as defined herein) and Euroclear
Participants (as defined herein) will occur in accordance with their respective
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary. Cross-market transactions will require delivery of instructions
to the relevant European international clearing system by the counterparty in
such system in accordance with its rules and procedures and within its
established deadlines (European time). The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final settlement
on its behalf by delivering or receiving bonds in DTC, and making or receiving
distributions in accordance with normal procedures for same-day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent settlement processing and dated the Certificate Business Day
following the DTC settlement date. Such credits or any transactions in such
Certificates settled during such processing will be reported to the relevant
Euroclear or CEDEL Participant on such Certificate Business Day. Cash received
in CEDEL or Euroclear as a result of sales of Certificates by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the Certificate Business Day
following settlement in DTC.
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Certificates may do so only through Participants and Indirect Participants.
In addition, Certificateholders will receive all distributions of principal of
and interest on the Certificates from the Certificate Trustee through DTC and
its Participants. Under a book-entry format, Certificateholders will receive
distributions after the related Distribution Date, as the case may be, because,
while distributions are required to be forwarded to Cede, as nominee for DTC, on
each such date, DTC will forward such distributions to its Participants, which
thereafter will be required to forward them to Indirect Participants or holders
of beneficial interests in the Certificates. The Certificate Trustee, the
Seller, the Servicer and any paying agent, transfer agent or registrar may treat
the registered holder in whose name any Certificate is registered (expected to
be Cede) as the absolute owner thereof (whether or not such Certificate is
overdue and notwithstanding any notice of ownership or writing thereon or any
notice to the contrary) for the purpose of making distributions and for all
other purposes.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede, as nominee of DTC. Certificateholders will only be permitted to
exercise their rights as Certificateholders indirectly through Participants and
DTC. All references
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herein to actions by Certificateholders thus refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders refer to distributions,
notices, reports and statement to Cede, as the registered holder of the
Certificates, for distribution to the beneficial owners of the Certificate in
accordance with DTC procedures.
While any Book-Entry Certificates of a Series are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants with whom Certificateholders have accounts with respect to Book-
Entry Certificates are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificateholders. Accordingly, although Certificateholders will not possess
physical certificates, the Rules provide a mechanism by which Certificateholders
will receive distributions and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of holders of
beneficial interests in the Certificates to pledge Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such Certificates, may be limited due to the lack of a Definitive
Certificate for such Certificates.
DTC has advised the Certificate Trustee that it will take any action
permitted to be taken by a Certificateholder under the Trust Agreement and the
related Prospectus Supplement only at the direction of one or more Participants
to whose account with DTC the Certificates are credited. Additionally, DTC has
advised the Certificate Trustee that it may take actions with respect to the
Certificateholders' Interest that might conflict with other of its actions with
respect thereto.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to a Series of Certificates offered hereby. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("EUROCLEAR PARTICIPANTS") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
securities and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 29 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by Morgan
Guaranty Trust Company of New York, Brussels, Belgium office (the "EUROCLEAR
OPERATOR"), under contract with Euroclear Clearance System S.C., a Belgian
cooperative corporation (the "COOPERATIVE"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. CEDEL or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Trust Agreement or the relevant
Prospectus Supplement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE CERTIFICATES
Certificates of a Class will be issued in registered form to
Certificateholders, or their nominees, rather than to DTC (such Certificates
being referred to herein as "DEFINITIVE CERTIFICATES") only under the
circumstances provided in the Trust Agreement, which will include (a) DTC
advising the Certificate Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Certificates of such Class and the Certificate Trustee
or the Infrastructure Bank being unable to locate a qualified successor, (b) the
Infrastructure Bank (with the prior written approval of the Note Issuer)
electing to terminate the book-entry system through DTC or (c) after the
occurrence of an Event of Default under the terms of the Trust Agreement,
holders of Certificates representing not less than 50 percent of the aggregate
outstanding principal amount of the Certificates of all Series advising DTC in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) to the exclusion of any physical certificates being issued to
Certificateholders is no longer in the best interests of Certificateholders.
Upon issuance of Definitive Certificates of a Class, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and registered
holders will deal directly with the Certificate Trustee with respect to
transfers, notices and distributions.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive securities representing the Certificates and instructions for
registration, the Certificate Trustee will issue the Certificates in the form of
Definitive Certificates, and thereafter the Certificate Trustee will recognize
the holders of such Definitive Certificates as Certificateholders under the
Trust Agreement and the related Prospectus Supplement.
Distribution of principal of and interest on the Certificates will be made
by the Certificate Trustee directly to Certificateholders in accordance with the
procedures set forth herein and in the Trust Agreement and the related
Prospectus Supplement. Interest distributions and principal distributions will
be made to Certificateholders in whose names the Definitive Certificates were
registered at the close of business on the related Record Date. Distributions
will be made by check mailed to the address of such Certificateholder as it
appears on the register maintained by
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the Certificate Trustee. The final distribution on any Certificate (whether
Definitive Certificates or Certificates registered in the name of Cede),
however, will be made only upon presentation and surrender of such Certificate
on the final distribution date at such office or agency as is specified in the
notice of final distribution to Certificateholders. The Certificate Trustee
will provide such notice to registered Certificateholders not later than the
fifth day of the month of the final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the transfer agent and registrar, which initially will be the
Certificate Trustee. No service charge will be imposed for any registration of
transfer or exchange, but the transfer agent and registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
CONDITIONS OF ISSUANCE OF ADDITIONAL SERIES
The issuance of any additional Series of Certificates is subject to the
following conditions, among others:
(a) appropriate documentation required by the Note Indenture and Trust
Agreement, including supplements thereto, shall have been authorized,
executed and delivered by all parties required to do so by the terms of the
relevant documents;
(b) an Issuance Advice Letter shall have been submitted to the CPUC
and shall have become effective;
(c) the Rating Agency Condition shall have been satisfied with respect
to such issuance;
(d) such issuance will not result in an adverse tax consequence to the
Trust or the Certificateholders;
(e) no Event of Default shall have occurred and be continuing under
the Note Indenture or the Trust Agreement;
(f) as of the date of issuance, the Trust shall have sufficient funds
available to pay the purchase price for the related Series of Notes, and
all conditions to the issuance of a new series of Notes and Certificates
shall have been satisfied or waived; and
(g) delivery by the Note Issuer to the Note Trustee of certain
certificates and opinions specified in the Note Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Interest on the Certificates will be included in gross income for federal
income tax purposes.
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of a
Certificate, and is based on the opinion of Special Counsel. This discussion
represents the opinion of Special Counsel, subject to the qualifications set
forth therein or herein. Additional federal income tax considerations relevant
to a particular Series may be set forth in the related Prospectus Supplement.
This discussion is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), currently applicable Treasury regulations and
judicial and administrative rulings and decisions. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect tax consequences
to Certificateholders.
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The discussion does not address all of the tax consequences relevant to a
particular Certificateholder in light of that Certificateholder's circumstances,
and some Certificateholders may be subject to special tax rules and limitations
not discussed below (e.g., life insurance companies, tax-exempt organizations,
financial institutions or broker-dealers). CONSEQUENTLY, EACH PROSPECTIVE
CERTIFICATEHOLDER IS URGED TO CONSULT ITS OWN TAX ADVISER IN DETERMINING THE
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND ANY OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF A CERTIFICATE.
For purposes of this discussion, "U.S. PERSON" means a citizen or resident
of the United States, a corporation or partnership created or organized in the
United States, or under the law of the United States or of any state thereof
(including the District of Columbia), an estate the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of the
trust (or, under certain circumstances, a trust the income of which is
includible in gross income for U.S federal income tax purposes regardless of its
source). The term "U.S. CERTIFICATEHOLDER" means any U.S. Person and any other
person to the extent that income attributable to its interest in a Certificate
is effectively connected with that person's conduct of a U.S. trade or business.
The term "NON-U.S. CERTIFICATEHOLDER" means any person other than a U.S.
Certificateholder.
The discussion assumes that a Certificate is issued in registered form, has
all payments denominated in U.S. dollars and not determined by reference to the
value of any other currency and has a term that exceeds one year. Moreover, the
discussion assumes that any original issue discount ("OID") on the Certificate
(i.e., any excess of the stated redemption price at maturity of the Certificate
over its issue price) is less than a de minimis amount (i.e., 0.25 percent of
its stated redemption price at maturity multiplied by the Certificate's weighted
average maturity), all within the meaning of the OID regulations. Moreover, the
discussion assumes that the Certificates are of a type, as set forth below,
which Special Counsel is of the opinion will represent ownership of debt for
federal income tax purposes. The applicable Prospectus Supplement will set
forth a discussion of any additional material tax consequences with respect to
Certificates not conforming to the foregoing assumptions.
TREATMENT OF THE CERTIFICATES AS DEBT
Special Counsel has rendered an opinion to the effect that, for federal
income tax purposes, the Certificates will represent ownership of debt and the
Trust will not be treated as an association or publicly traded partnership
taxable as a corporation.
TAXATION OF INTEREST INCOME OF U.S. CERTIFICATEHOLDERS
General. Assuming, in accordance with Special Counsel's opinion, that the
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Certificates represent ownership of debt obligations for federal income tax
purposes, stated interest on a beneficial interest in a Certificate will be
taxable as ordinary income when received or accrued by U.S. Certificateholders
in accordance with their method of accounting. Generally, interest received on
the Certificates will constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense.
Market Discount. A U.S. Certificateholder who purchases (including a
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purchase at original issuance for a price less than the issue price) an interest
in a Certificate at a discount that exceeds any unamortized OID may be subject
to the "market discount" rules of sections 1276 through 1278 of the Code. These
rules generally provide that, subject to a statutorily-defined de minimis
exception, if a U.S. Certificateholder acquires a Certificate at a market
discount (i.e., at a price below its stated redemption price at maturity or its
revised issue price if it was issued with OID) and thereafter recognizes gain
upon a disposition of the Certificate (or disposes of it in certain non-
recognition transactions, including by gift), the lesser of such gain (or
appreciation, in the case of an applicable non-recognition transaction) or the
portion of the market discount that accrued while the Certificate was held by
such holder will be treated as ordinary interest income at the time of the
disposition. In addition, a U.S. Certificateholder who acquired a Certificate
at a market discount would be required to treat as ordinary interest income the
portion of any principal payment attributable to accrued market discount on such
Certificate. Generally, market discount
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accrues ratably over the life of a debt instrument unless the debt holder elects
to accrue market discount on a constant yield to maturity basis. It is not
clear how either the ratable accrual or constant yield accrual methodologies
apply to instruments such as the Certificates where the timing of principal
payments is uncertain. Investors should consult their own tax advisors
concerning the accrual of market discount. The market discount rules also
provide that a U.S. Certificateholder who acquires a Certificate at a market
discount may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry the Certificate until the holder disposes of the Certificate
in a taxable transaction.
A U.S. Certificateholder who acquired a Certificate at a market discount
may elect to include market discount in income as the discount accrues, either
on a ratable basis or, if elected, on a constant yield basis. The current
inclusion election, once made, applies to all market discount obligations
acquired on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the Internal
Revenue Service (the "IRS"). If a holder elects to include market discount in
income in accordance with the preceding sentence, the foregoing rules with
respect to the recognition of ordinary income on sales, principal payments and
certain other dispositions of the Certificates and the deferral of interest
deductions on indebtedness related to the investor certificates will not apply.
Amortizable Bond Premium. A U.S. Certificateholder who purchases an
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interest in a Certificate at a premium may elect to offset the premium against
interest income under the constant yield method over the remaining term of the
Certificate in accordance with the provisions of section 171 of the Code. A
holder that elects to amortize bond premium must reduce the tax basis in the
related Certificate by the amount of bond premium used to offset interest
income. If a Certificate purchased at a premium is redeemed in full prior to
its maturity, a holder who has elected to amortize bond premium should be
entitled to a deduction in the taxable year of redemption in an amount equal to
the excess, if any, of the adjusted basis of the Certificate over the greater of
the redemption price or the amount payable on maturity.
SALE OR EXCHANGE OF CERTIFICATES
Upon a disposition of an interest in a Certificate, a U.S.
Certificateholder generally will recognize gain or loss equal to the difference
between (i) the amount of cash and the fair market value of any other property
received (other than amounts attributable to, and taxable as, accrued stated
interest) and (ii) the U.S. Certificateholder's adjusted basis in its interest
in the Certificate. The adjusted basis in the interest in the Certificate will
equal its cost, increased by any OID or market discount included in income with
respect to the interest in the Certificate prior to its disposition and reduced
by any payments reflecting principal or OID previously received with respect to
the interest in the Certificate and any amortized premium. Subject to the OID
and market discount rules, gain or loss will generally be capital gain or loss
if the interest in the Certificate was held as a capital asset. Capital losses
generally may be used by a corporate taxpayer only to offset capital gains and
by an individual taxpayer only to the extent of capital gains plus $3,000 of
other income.
NON-U.S. CERTIFICATEHOLDERS
In general, a non-U.S. Certificateholder will not be subject to U.S.
federal income tax on interest (including OID) on a beneficial interest in a
Certificate unless (i) the non-U.S. Certificateholder actually or constructively
owns 10 percent or more of the total combined voting power of all classes of
stock of the Seller entitled to vote (or of a profits or capital interest of the
Trust characterized as a partnership), (ii) the non-U.S. Certificateholder is a
controlled foreign corporation that is related to the Seller (or the Trust
treated as a partnership) through stock ownership, (iii) the non-U.S.
Certificateholder is a bank which receives interest as described in Code Section
881(c)(3)(A), or (iv) such interest is contingent interest described in Code
Section 871(h)(4). To qualify for the exemption from taxation, the last U.S.
Person in the chain of payment prior to payment to a non-U.S. Certificateholder
(the "WITHHOLDING AGENT") must have received (in the year in which a payment of
interest or principal occurs or in either of the two preceding years) a
statement that (i) is signed by the non-U.S. Certificateholder under penalties
of perjury, (ii) certifies that the non-U.S. Certificateholder is not a U.S.
Person and (iii) provides the name and address of the non-U.S.
Certificateholder. The statement may be made on a Form W-8 or substantially
similar substitute form, and the non-U.S. Certificateholder must inform the
Withholding Agent
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of any change in the information on the statement within 30 days of the change.
If a Certificate is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide a
signed statement to the Withholding Agent. However, in that case, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
non-U.S. Certificateholder to the organization or institution holding the
Certificate on behalf of the non-U.S. Certificateholder. The U.S. Treasury
Department is considering implementation of further certification requirements
aimed at determining whether the issuer of a debt obligation is related to
holders thereof.
Generally, any gain or income realized by a non-U.S. Certificateholder upon
retirement or disposition of an interest in a Certificate (other than gain
attributable to accrued interest or OID, which is addressed in the preceding
paragraph) will not be subject to U.S. federal income tax, provided that in the
case of a Certificateholder that is an individual, such Certificateholder is not
present in the United States for 183 days or more during the taxable year in
which such retirement or disposition occurs. Certain exceptions may be
applicable, and an individual non-U.S. Certificateholder should consult a tax
adviser.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of U.S. federal income tax at a rate of 31 percent may
apply to payments made in respect of a Certificate to a registered owner who is
not an "exempt recipient" and who fails to provide certain identifying
information (such as the registered owner's taxpayer identification number) in
the manner required. Generally, individuals are not exempt recipients whereas
corporations and certain other entities are exempt recipients. Payments made in
respect of a U.S. Certificateholder must be reported to the IRS, unless the U.S.
Certificateholder is an exempt recipient or otherwise establishes an exemption.
In the case of payments of principal of and interest on (and the amount of
OID, if any, accrued on) investor certificates to non-U.S. Certificateholders,
temporary Treasury regulations provide that backup withholding and information
reporting will not apply to payments with respect to which either requisite
certification has been received or an exemption has otherwise been established
(provided that neither the Certificate Trustee nor a paying agent has actual
knowledge that the holder is a U.S. Person or that the conditions of any other
exemption are not in fact satisfied). Payments of the proceeds of the sale of a
Certificate to or through a foreign office of a broker that is a U.S. Person, a
controlled foreign corporation for United States federal income tax purposes or
a foreign person 50% or more of whose gross income is effectively connected with
the conduct of a trade or business within the United States for a specified
three-year period are currently subject to certain information reporting
requirements, unless the payee is an exempt recipient or such broker has
evidence in its records that the payee is not a U.S. Person and no actual
knowledge that such evidence is false and certain other conditions are met.
Temporary Treasury regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury regulations, payments of
the proceeds of a sale to or through the United States office of a broker will
be subject to information reporting and backup withholding unless the payee
certifies under penalties of perjury as to his or her status as a non-U.S.
Person and certain other qualifications (and no agent of the broker who is
responsible for receiving or reviewing such statement has actual knowledged that
it is incorrect) and provides his or her name and address or the payee otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Certificateholder would be allowed as a refund or a credit against such
Certificateholder's U.S. federal income tax, provided that the required
information is furnished to the IRS.
Recently, the Treasury Department has promulgated final regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not significantly alter the substantive
withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the
final regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations would generally be effective
for payments made after December 31, 1998, subject to certain transition
rules.
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STATE TAXATION
CALIFORNIA TAXATION
In the opinion of Special Counsel, interest and OID on the Certificates
will be exempt from California personal income tax, but not exempt from the
California franchise tax applicable to banks and corporations. Gain or loss, if
any, resulting from an exchange or redemption of Certificates will be recognized
in the year of the exchange or redemption. Present California law taxes both
long-term and short-term capital gains at the rates applicable to ordinary
income. Interest on indebtedness incurred or continued by a Certificateholder
in connection with the purchase of Certificates will not be deductible for
California personal income tax purposes.
OTHER STATES
The discussion above does not address the taxation of the Trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
Certificates under any state or local tax law other than that of the State of
California. Each investor should consult its own tax adviser regarding state
and local tax consequences.
ERISA CONSIDERATIONS
ERISA and/or Section 4975 of the Code impose certain requirements on
employee benefit plans and certain other plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and certain collective
investment funds or insurance company general or separate accounts in which such
plans, accounts or arrangements are invested, that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and/or Section
4975 of the Code (collectively, "PLANS"), and on persons who are fiduciaries
with respect to Plans, in connection with the investment of assets that are
treated as "plan assets" of any Plan for purposes of applying Title I of ERISA
and Section 4975 of the Code ("PLAN ASSETS"). ERISA imposes on Plan fiduciaries
certain general fiduciary requirements, including those of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. Generally, any person who has
discretionary authority or control respecting the management or disposition of
Plan Assets, and any person who provides investment advice with respect to Plan
Assets for a fee or other consideration, is a fiduciary with respect to such
Plan Assets.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons who have certain specified relationships to a
Plan or its Plan Assets ("parties in interest" under ERISA and "disqualified
persons" under the Code (collectively, "PARTIES IN INTEREST")), unless a
statutory or administrative exemption is available. Parties in Interest and
Plan fiduciaries that participate in a prohibited transaction may be subject to
penalties imposed under ERISA and/or excise taxes imposed pursuant to Section
4975 of the Code, unless a statutory or administrative exemption is available.
These prohibited transactions generally are set forth in Section 406 of ERISA
and Section 4975 of the Code.
Any fiduciary or other Plan investor considering whether to purchase the
Certificates of any Class or Series on behalf or with Plan Assets of any Plan
should consult with its legal advisors and refer to the related Prospectus
Supplement for guidance regarding the ERISA Considerations applicable to the
Certificates offered thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, except as provided in the applicable Prospectus Supplement,
assets of such plans may be invested in the Certificates of any Class or Series
without regard to the ERISA considerations described herein, subject to the
provisions of other applicable federal and state law. However, any such plan
that is qualified and exempt from taxation under Sections 401(a) and 501(a) of
the Code is subject to the prohibited transaction rules set forth in Section 503
of the Code.
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USE OF PROCEEDS
The Trust will use the net proceeds received from each sale of a Series of
Certificates to purchase the related Note or Notes from the Note Issuer. The
Note Issuer will use such proceeds to purchase the Transition Property from the
Seller and to pay issuance costs related to the Notes. The Seller will use such
proceeds to repay outstanding debt and reduce the amount of outstanding equity
generally in proportion to its existing capital structure.
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through underwriters
named in the related Prospectus Supplement (the "UNDERWRITERS") by a negotiated
firm commitment underwriting and public reoffering by the Underwriters or such
other underwriting arrangement as may be specified in the related Prospectus
Supplement or may be offered or placed either directly or through agents. The
Note Issuer and the Trust intend that Certificates will be offered through such
various methods from time to time and that offerings may be made concurrently
through more than one of such methods or that an offering of a particular Series
of Certificates may be made through a combination of such methods.
The distribution of Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents may
receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession to
certain other dealers. Underwriters, dealers and agents that participate in the
distribution of the Certificates of a Series may be deemed to be underwriters
and any discounts or commissions received by them from the Trust and any profit
on the resale of the Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act. Any such Underwriters or
agents will be identified, and any such compensation received from the Trust
will be described, in the related Prospectus Supplement.
Under agreements which may be entered into by the Seller, the Note Issuer
and the Trust, Underwriters and agents who participate in the distribution of
the Certificates may be entitled to indemnification by the Seller and the Note
Issuer against certain liabilities, including liabilities under the Securities
Act.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and there
is no assurance that any such market, if established, will continue.
RATINGS
It is a condition of issuance of each Class of Certificates that at the
time of issuance such Class receive the rating indicated in the related
Prospectus Supplement, which will be in one of the four highest categories, from
at least one Rating Agency. Each Class of Notes will receive the same rating
from the applicable Rating Agencies as the corresponding Class of Certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to any Class of
Certificates upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. If a rating of any Class of Certificates is
revised or withdrawn, the liquidity of such Class of Certificates may be
adversely affected. In general, ratings address credit risk and do not
represent any assessment of the rate of FTA Collections.
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LEGAL MATTERS
Certain legal matters relating to the Notes and certain federal income tax
consequences of the issuance of the Notes will be passed upon by Orrick,
Herrington & Sutcliffe LLP, San Francisco, California, counsel to the Seller and
the Note Issuer. Certain legal matters relating to the Certificates and certain
federal income tax consequences of the issuance of the Certificates will be
passed upon by Brown & Wood LLP, San Francisco, California, counsel to the
Trust. Certain legal matters relating to the Certificates will be passed upon
by Cravath, Swaine & Moore, New York, New York, counsel to the Underwriters.
81
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
------------------------------
<TABLE>
<S> <C>
Act............................................................................. 43
Actual FTA Payments............................................................. 51
Administrator................................................................... 21
Advice Letters.................................................................. 16
Agent Bank...................................................................... 66
Annual Accountant's Report...................................................... 53
Base Calculation Model.......................................................... 38
Basic Documents................................................................. 63
Book-Entry Certificates......................................................... 24
Calculation Date................................................................ 39
Capital Subaccount.............................................................. 20, 58
Cede............................................................................ 24
CEDEL........................................................................... 71
CEDEL Participants.............................................................. 73
Certificate Account............................................................. 65
Certificate Business Day........................................................ 66
Certificate Event of Default.................................................... 20, 68
Certificate Trustee............................................................. 12
Certificateholders.............................................................. 3
Certificates.................................................................... 1, 12
Class........................................................................... 2, 12
Closing Date.................................................................... 40
Code............................................................................ 25
Collection Account.............................................................. 56
Collections Curve............................................................... 51
Commission...................................................................... 3
Cooperative..................................................................... 73
CPUC............................................................................ 15
Customers....................................................................... 15
Default......................................................................... 69
Definitive Certificates......................................................... 74
Delaware Business Trust Act..................................................... 33
Delaware Trustee................................................................ 12
Depositaries.................................................................... 72
Distribution Date............................................................... 18
DRI............................................................................. 46
DTC............................................................................. 3, 24
Eligible Institution............................................................ 56
Eligible Investments............................................................ 57
ERISA........................................................................... 25
ESPs............................................................................ 29
Estimated FTA Payments.......................................................... 51
Euroclear....................................................................... 71
Euroclear Operator.............................................................. 73
Euroclear Participants.......................................................... 73
Event of Default................................................................ 20
Excess Remittance............................................................... 52
Exchange Act.................................................................... 3
Expected Amortization Schedule.................................................. 19
FDIC............................................................................ 56
Fee Agreement................................................................... 42
</TABLE>
82
<PAGE>
<TABLE>
<S> <C>
FERC...................................................................................... 30
Final Maturity Date....................................................................... 56
Financing Order........................................................................... 15
Financing Order Anniversary............................................................... 39
Floating Rate............................................................................. 66
Floating Rate Certificates................................................................ 13
FTA Charge................................................................................ 15
FTA Collections........................................................................... 16
FTA Payments.............................................................................. 16
General Subaccount........................................................................ 20
H.R. 1230................................................................................. 27
Indirect Participants..................................................................... 24
Infrastructure Bank....................................................................... 1, 12
Initial Transition Property............................................................... 40
Interest Accrual Period................................................................... 67
Interest Determination Date............................................................... 66
IRS....................................................................................... 76, 77
ISO....................................................................................... 30
Issuance Advice Letter.................................................................... 16
Monthly Servicer's Certificate............................................................ 53
Moody's................................................................................... 32
Non-U.S. Certificateholder................................................................ 76
Note Collateral........................................................................... 56
Note Event of Default..................................................................... 20, 60
Note Indenture............................................................................ 55
Note Interest Rate........................................................................ 56
Note Issuer............................................................................... 1, 11
Note Trustee.............................................................................. 14
Noteholder................................................................................ 55
Notes..................................................................................... 1, 8
OID....................................................................................... 76
Operating Expenses........................................................................ 21
Overcollateralization Amount.............................................................. 58
Overcollateralization Subaccount.......................................................... 20, 58
Participants.............................................................................. 24
Parties in Interest....................................................................... 79
Payment Date.............................................................................. 18
PG&E...................................................................................... 1, 11
Plan Assets............................................................................... 79
Plans..................................................................................... 79
Proposition 218........................................................................... 27
PU Code................................................................................... 15
PX........................................................................................ 30
Quarterly Administration Fee.............................................................. 60
Quarterly Interest........................................................................ 60, 67
Quarterly Overcollateralization Collection................................................ 58
Quarterly Principal....................................................................... 60
Quarterly Servicer's Certificate.......................................................... 63
Rate Freeze Period........................................................................ 36
Rating Agency............................................................................. 25
Rating Agency Condition................................................................... 56
Record Date............................................................................... 18
Registration Statement.................................................................... 3
Remittance Date........................................................................... 51
</TABLE>
83
<PAGE>
<TABLE>
<S> <C>
Remittance Shortfall........................................................... 52
Required Capital Level......................................................... 21
Reserve Subaccount............................................................. 20
Residential Customers.......................................................... 15
Rules.......................................................................... 73
S&P............................................................................ 32
Sale Agreement................................................................. 12
Scheduled Final Distribution Date.............................................. 18
Scheduled Maturity Date........................................................ 56
Securities Act................................................................. 3
Seller......................................................................... 1, 11
Series......................................................................... 1, 2, 12
Series Issuance Date........................................................... 56
Servicer....................................................................... 1, 12
Servicer Business Day.......................................................... 48
Servicer Defaults.............................................................. 54
Servicing Agreement............................................................ 12
Servicing Fee.................................................................. 24
Small Commercial Customers..................................................... 15
Special Counsel................................................................ 26
Special Distribution Date...................................................... 65
Special Payments............................................................... 65
State Pledge................................................................... 18, 64
Statute........................................................................ 8
Subsequent Transfer Date....................................................... 40
Subsequent Transition Property................................................. 40
Swap Agreement................................................................. 8, 66
Swap Counterparty.............................................................. 66
Termination Date............................................................... 18
Terms and Conditions........................................................... 74
Territory...................................................................... 15
Transition Costs............................................................... 15
Transition Property............................................................ 16
True-Up Mechanism Advice Letter................................................ 17
True-Up Mechanism Calculation Model............................................ 39
Trust.......................................................................... 1, 12
Trust Agreement................................................................ 12
U.S. Certificateholder......................................................... 76
U.S. Person.................................................................... 76
Underwriters................................................................... 80
Utilities...................................................................... 8
Withholding Agent.............................................................. 77
</TABLE>
84
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================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
SELLER, THE NOTE ISSUER, THE TRUST, THE INFRASTRUCTURE BANK, THE UNDERWRITERS OR
ANY DEALER, SALESPERSON OR OTHER PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PROSPECTUS SUPPLEMENT
<S> <C>
REPORTS TO HOLDERS..................................... S-4
PROSPECTUS SUPPLEMENT SUMMARY.......................... S-5
[ADDITIONAL RISK FACTORS RELATING TO THE CLASS
____ CERTIFICATES.................................. S-15
SUMMARY OF CERTAIN PROVISIONS OF THE SERIES __
SUPPLEMENT TO THE TRUST AGREEMENT.................. S-18
[SUMMARY OF CERTAIN PROVISIONS OF THE SWAP
AGREEMENT]
[THE SWAP COUNTERPARTY]................................ S-18
DESCRIPTION OF THE NOTES............................... S-18
DESCRIPTION OF THE TRANSITION PROPERTY................. S-21
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE AND
YIELD CONSIDERATIONS
THE SELLER AND SERVICER................................ S-23
SERVICING.............................................. S-23
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................ S-25
STATE TAXATION......................................... S-28
ERISA CONSIDERATIONS................................... S-29
UNDERWRITING........................................... S-31
RATINGS................................................ S-31
LEGAL MATTERS.......................................... S-32
INDEX OF PRINCIPAL DEFINITIONS......................... S-33
FINANCIAL STATEMENTS................................... F-1
PROSPECTUS
AVAILABLE INFORMATION..................................
REPORTS TO HOLDERS.....................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........
PROSPECTUS SUPPLEMENT..................................
PROSPECTUS SUMMARY.....................................
RISK FACTORS...........................................
ENERGY DEREGULATION AND NEW CALIFORNIA
MARKET STRUCTURE.....................................
DESCRIPTION OF THE TRANSITION PROPERTY.................
CERTAIN DISTRIBUTION, WEIGHTED AVERAGE LIFE
AND YIELD CONSIDERATIONS.............................
THE TRUST..............................................
THE INFRASTRUCTURE BANK................................
THE NOTE ISSUER........................................
THE SELLER AND SERVICER................................
SERVICING..............................................
DESCRIPTION OF THE NOTES...............................
DESCRIPTION OF THE CERTIFICATES........................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................
STATE TAXATION.........................................
ERISA CONSIDERATIONS...................................
USE OF PROCEEDS........................................
PLAN OF DISTRIBUTION...................................
RATINGS................................................
LEGAL MATTERS..........................................
INDEX OF PRINCIPAL DEFINITIONS.........................
</TABLE>
CALIFORNIA
INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
SPECIAL PURPOSE
TRUST PG&E-1
$_______________
RATE REDUCTION CERTIFICATES
SERIES 199_-__
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
[NAME OF UNDERWRITER(S)]
_______, 199__
================================================================================
<PAGE>
PART II
ITEM 14. Other Expenses of Issuance and Distribution.
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
Registration Statement Fee............................. $303.03
Printing and Engraving Expenses........................ *
Trustees' Fees and Expenses............................ *
Legal Fees and Expenses................................ *
Blue Sky Fees and Expenses............................. *
Accountants' Fees and Expenses......................... *
Rating Agency Fees..................................... *
Miscellaneous Fees and Expenses........................ *.
---------
Total.............................................. $ *.
=========
___________________
* To be filed by amendment.
ITEM 15. Indemnification of Directors and Officers.
Section 18-108 of the Delaware Limited Liability Company Act provides that
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement, a limited liability company may and has the
power to indemnify and hold harmless any member or other person from and against
any and all claims and demands whatsoever. Section 20 of the Amended and
Restated Limited Liability Company Agreement of the Registrant will provide
that, to the full extent permitted by applicable law, the Registrant shall
indemnify any member, officer, director, employee or agent of the Registrant and
any employee, representative, agent or affiliate of the member (collectively,
"Covered Persons") for any loss, damage or claim incurred by reason of any act
or omission performed or omitted by such Covered Person in good faith on behalf
of the Registrant and in a manner reasonably believed to be within the scope of
the authority conferred on such Covered Person by the Amended and Restated
Limited Liability Company Agreement, except that the Registrant shall not
indemnify any such Covered Person for any loss, damage or claim incurred by such
Covered Person by reason of such Covered Person's gross negligence or willful
misconduct with respect to such acts or omissions.
Section 317 of the California Corporation Law (the "California Law")
provides that a corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any proceeding or action by
reason of the fact that he or she is or was a director, officer, employee or
other agent of such corporation. Section 317 also grants authority to a
corporation to include in its articles of incorporation indemnification
provisions in excess of that permitted in Section 317, subject to certain
limitations.
Article SIXTH of the Articles of Incorporation of Pacific Gas and Electric
Company (the "Member") authorizes the Member to provide indemnification of
directors and officers through bylaws, resolutions, agreements with agents, vote
of shareholders or disinterested directors, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California Law,
subject only to
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the applicable limits set forth in Section 204 of the California Law. The
Registrant believes that the officers of the Registrant are serving at the
request of the Member and are therefore entitled to such indemnity from the
Member.
The Board of Directors of the Member has adopted a resolution implementing
the authority granted in Article SIXTH of the Articles of Incorporation. The
resolution provides for the indemnification of any director and officer of the
Member for any threatened, pending or completed action, suit or proceeding to
the fullest extent permissible under California Law and the Articles of
Incorporation, subject to the terms of any agreement between the Member and such
a person; provided that, no such person shall be indemnified: (i) except to the
extent that the aggregate of losses to be indemnified exceeds the amount of such
losses for which the director or officer is paid pursuant to any director's or
officer's liability insurance policy maintained by the Member; (ii) for any suit
or judgment resulting from an accounting of profits made through the purchase or
sale of securities of the Member pursuant to Section 16(b) of the Securities
Exchange Act of 1934; (iii) if a court of competent jurisdiction determines that
the indemnification is unlawful; (iv) for any acts or omissions involving
intentional misconduct or knowing and culpable violation of law; (v) for acts or
omissions that the director or officer believes to be contrary to the best
interests of the Member or its shareholders, or that involve the absence of good
faith; (vi) for any transaction from which the director or officer derived an
improper personal benefit; (vii) for acts or omissions that show a reckless
disregard for the director's or officer's duty to the Member or its shareholders
in circumstances in which the director or officer was aware, or should have been
aware, in the ordinary course of performing his or her duties, of a risk of
serious injury to the Member or its shareholders; (viii) for acts or omissions
that constitute an unexcused pattern of inattention that amount to an abdication
of the director's or officer's duties to the Member or its shareholders; (ix)
for costs, charges, expenses, liabilities and losses arising under Section 310
or 316 of the California Law; or (x) as to circumstances in which indemnity is
expressly prohibited by Section 317. The exclusions set forth in clauses (iv)
through (x) above shall apply only to indemnification for acts, omissions or
transactions involving breach of duty to the Member or its shareholders. The
resolution also provides that the Member shall indemnify any director or officer
in connection with (a) a proceeding (or part thereof) initiated by him or her
only if such proceeding (or part thereof) was authorized by the Board of
Directors or (b) a proceeding (or part thereof), other than a proceeding by or
in the name of the Member to procure a judgment in its favor, only if any
settlement of such a proceeding is approved in writing by the Member.
Indemnification shall cover all costs, charges, expenses, liabilities and
losses, including, without limitation, attorneys' fees, judgments, fines, ERISA
excise taxes, or penalties and amounts paid or to be paid in settlement,
reasonably incurred or suffered by the director or officer.
The Member has directors' and officers' liability insurance policies in
force insuring directors and officers of the Member and its subsidiaries.
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<PAGE>
ITEM 16. Exhibits.
*1.1 Form of Underwriting Agreement.
+3.1 Certificate of Formation.
+3.2 Limited Liability Company Agreement.
3.3 Form of Amended and Restated Limited Liability Company Agreement.
*4.1 Form of Note Indenture.
*4.2 Form of Trust Agreement.
*4.3 Form of Note.
*4.4 Form of Rate Reduction Certificate.
5.1 Opinion of Orrick, Herrington & Suteliffe LLP with respect to legality
of the Notes.
*5.2 Opinion of Brown & Wood LLP with respect to legality of the Rate
Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to tax matters.
*10.1 Form of Transition Property Purchase and Sale Agreement.
*10.2 Form of Transition Property Servicing Agreement.
*10.3 Form of Note Purchase Agreement.
*10.4 Form of Fee and Indemnity Agreement.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in its opinion
filed as Exhibit 5.1).
*23.2 Consents of Brown & Wood LLP (included in its opinions filed as
Exhibits 5.2 and 8.1).
26.1 Statement of Eligibility and Qualification of Note Trustee on Form T-1.
+99.1 Application for Financing Order.
99.2 Financing Order.
99.3 Form of Issuance Advice Letter.
*99.4 Application to Infrastructure Bank (Exhibit A to Part I thereof is
incorporated by reference to Exhibit 99.1 of this Registration
Statement).
*99.5 Order of Infrastructure Bank.
99.6 Interim Opinion of CPUC.
*99.7 Opinion of Brown & Wood LLP with respect to impairment of contracts.
__________
*To be filed by amendment.
+Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant on behalf of the California Infrastructure
and Economic Development Bank Special Purpose Trust PG&E-1 (the "Trust") hereby
undertakes as follows:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement; (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement (Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
Registration Statement.); (iii) to
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include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement; provided, however, that
(a)(1)(i) and (a)(1)(ii) will not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering hereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934), with respect to the Trust that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of each
issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Francisco, State of California, on October
21, 1997.
PG&E FUNDING LLC
as Registrant
By: /s/ Kent M. Harvey
---------------------
Name: Kent M. Harvey
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed on October 21, 1997 by the
following persons in the capacities indicated.
Signature Title
--------- -----
Pacific Gas and Electric Company, Member
as Member
By: /s/ Kent M. Harvey
------------------
Kent M. Harvey
Senior Vice President, Treasurer
and Chief Financial Officer
/s/ Kent M. Harvey
------------------ President
Kent M. Harvey (Principal Executive Officer)
/s/ Gabriel B. Togneri
---------------------- Treasurer
Gabriel B. Togneri (Principal Financial Officer)
/s/ Christopher P. Johns
------------------------ Controller
Christopher P. Johns (Principal Accounting Officer)
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C>
*1.1 Form of Underwriting Agreement.
+3.1 Certificate of Formation.
+3.2 Limited Liability Company Agreement.
3.3 Form of Amended and Restated Limited
Liability Company Agreement.
*4.1 Form of Note Indenture.
*4.2 Form of Trust Agreement.
*4.3 Form of Note.
*4.4 Form of Rate Reduction Certificate.
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to legality of
the Notes.
*5.2 Opinion of Brown & Wood LLP with respect to legality of the Rate
Reduction Certificates.
*8.1 Opinion of Brown & Wood LLP with respect to tax matters.
*10.1 Form of Transition Property Purchase and Sale Agreement.
*10.2 Form of Transition Property Servicing Agreement.
*10.3 Form of Note Purchase Agreement.
*10.4 Form of Fee and Indemnity Agreement.
23.1 Consent of Orrick, Herrington & Sutcliffe LLP (included in its opinion
filed as Exhibit 5.1).
*23.2 Consents of Brown & Wood LLP (included in its opinions filed as
Exhibits 5.2 and 8.1).
26.1 Statement of Eligibility and Qualification of Note Trustee on Form T-1.
+99.1 Application for Financing Order.
99.2 Financing Order.
99.3 Form of Issuance Advice Letter.
*99.4 Application to Infrastructure Bank (Exhibit A to Part I thereof is
incorporated by reference to Exhibit 99.1 of this Registration Statement).
*99.5 Order of Infrastructure Bank.
99.6 Interim Opinion of CPUC.
*99.7 Opinion of Brown & Wood LLP with respect to impairment of contracts.
</TABLE>
__________
*To be filed by amendment.
+Previously filed.
II-6
<PAGE>
EXHIBIT 3.3
FORM OF AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
PG&E FUNDING LLC
This Amended and Restated Limited Liability Company Agreement (together
with the schedules attached hereto, this "Agreement") of PG&E Funding LLC (the
"Company"), is entered into by Pacific Gas and Electric Company, a California
corporation, as the sole member (the "Initial Member"). Capitalized terms used
herein and not otherwise defined have the meanings set forth on Schedule A
----------
hereto.
The Initial Member, by execution of this Agreement, (i) hereby
continues the Company as a limited liability company pursuant to and in
accordance with the Delaware Limited Liability Company Act (6 Del.C. (S)18-101,
------
et seq.), as amended from time to time (the "Act"), and this Agreement, (ii)
- -- ---
hereby amends and restates in its entirety the initial Limited Liability Company
Agreement of the Company, dated as of July 1, 1997 (the "Initial LLC
Agreement"), and (iii) hereby agrees as follows:
1. Name.
----
The name of the limited liability company formed hereby is PG&E
Funding LLC.
2. Principal Business Office.
-------------------------
The principal business office of the Company shall be located at 245
Market Street, Room 424, San Francisco, California 94105, or such other location
as may hereafter be determined by the Member.
3. Registered Office.
-----------------
The address of the registered office of the Company in the State of
Delaware is c/o RL&F Service Corp., One Rodney Square, 10th Floor, Tenth and
King Streets, Wilmington, New Castle County, Delaware 19801.
4. Registered Agent.
----------------
The name and address of the registered agent of the Company for
service of process on the Company in the State of Delaware is RL&F Service
Corp., One Rodney Square, 10th Floor, Tenth and King Streets, Wilmington, New
Castle County, Delaware 19801.
-1-
<PAGE>
5. Members.
-------
a. The name and the mailing address of the Initial Member are set
forth on Schedule B attached hereto.
----------
b. Subject to Section 9j, the Member may act by written consent.
6. Certificates.
------------
James G. Leyden, Jr., as an "authorized person" within the meaning of
the Act, has executed, delivered and filed the Certificate of Formation with the
Secretary of State of the State of Delaware. Upon the filing of the Certificate
of Formation with the Secretary of State of the State of Delaware, his powers as
an "authorized person" ceased, and the Member thereupon became the designated
"authorized person" and shall continue as the designated "authorized person"
within the meaning of the Act. The Member or an Officer shall execute, deliver
and file any other certificates (and any amendments and/or restatements thereof)
necessary for the Company to qualify to do business in California and in any
other jurisdiction in which the Company may wish to conduct business.
7. Purposes.
--------
Subject to Section 9j, the purposes of the Company are to engage in the
following activities:
a. (i) to acquire, own, hold, administer, service, or enter into
agreements for the servicing of, finance, manage, sell, assign, pledge, collect
amounts due on and otherwise deal with the Transition Property and other assets
to be acquired pursuant to the Basic Documents and any proceeds or rights
associated therewith;
(ii) to issue, sell, authorize and deliver the Notes and other
evidences of the Indebtedness and to enter into any agreement or document
providing for the authorization, issuance, sale and delivery of the Notes;
(iii) to sell, exchange, pledge, encumber or otherwise dispose of
all or any part of the Transition Property and its other assets and property
and, in connection therewith, to accept, collect, hold, sell, exchange or
otherwise dispose of evidences of indebtedness or other property received
pursuant thereto, including the encumbrance of all of the Transition Property
and its other assets and property as collateral security for the Indebtedness;
(iv) to execute, deliver and perform the Basic Documents;
(v) to invest proceeds from the Transition Property and its
other assets and any capital and income of the Company in accordance with the
Basic
-2-
<PAGE>
Documents or as otherwise determined by the Board and not inconsistent with this
Section 7 or the Basic Documents; and
(vi) to do such other things and carry on any other activities
which the Board determines to be necessary, convenient or incidental to any of
the foregoing purposes, and have and exercise all of the power and rights
conferred upon limited liability companies formed pursuant to the Act.
b. The Company, by or through any Officer on behalf of the Company,
may enter into and perform the Basic Documents, including the Note Issuance
Documents, the Notes, the Sale Documents, the Servicing Agreement and all
documents, agreements, certificates, or financing statements contemplated
thereby or related thereto, all without any further act, vote or approval of the
Member or any Director or Officer notwithstanding any other provision of this
Agreement, the Act or applicable law, rule or regulation. The foregoing
authorization shall not be deemed a restriction on the powers of any Officer to
enter into other agreements on behalf of the Company.
8. Powers.
------
Subject to Section 9j, the Company (i) shall have and exercise all
powers necessary, convenient or incidental to accomplish its purposes as set
forth in Section 7 and (ii) shall have and exercise all of the powers and rights
conferred upon limited liability companies formed pursuant to the Act.
9. Management.
----------
a. Board of Directors. Subject to Section 9j, the business and
------------------
affairs of the Company shall be managed by or under the direction of a Board of
one or more Directors. Subject to Section 10, the Member may determine at any
time in its sole and absolute discretion the number of Directors to constitute
the Board. The authorized number of Directors may be increased or decreased by
the Member at any time in its sole and absolute discretion, subject in all cases
to Section 10. The initial number of Directors shall be three, one of which
shall be an Independent Director pursuant to Section 10. Each Director elected,
designated or appointed shall hold office until a successor is elected and
qualified or until such Director's earlier death, resignation or removal. Each
Director shall execute and deliver the Management Agreement. Directors need not
be Members.
b. Powers. Subject to Section 9j, the Board of Directors shall have
------
the power to do any and all acts necessary, convenient or incidental to or for
the furtherance of the purposes described herein, including all powers,
statutory or otherwise. Subject to Section 9j, the Board of Directors has the
authority to bind the Company.
c. Meeting of the Board of Directors. The Board of Directors of the
---------------------------------
Company may hold meetings, both regular and special, within or outside the State
of Delaware. Regular meetings of the Board may be held without notice at such
time and at such place as shall from time to time be determined by the Board.
Special meetings of the
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<PAGE>
Board may be called by the President on not less than one day's notice to each
Director by telephone, facsimile, mail, telegram or any other means of
communication, and special meetings shall be called by the President or
Secretary in like manner and with like notice upon the written request of any
one or more of the Directors.
d. Quorum; Acts of the Board. At all meetings of the Board, a
-------------------------
majority of the Directors shall constitute a quorum for the transaction of
business and, except as otherwise provided in any other provision of this
Agreement, the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board. If a quorum shall not be
present at any meeting of the Board, the Directors present at such meeting may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
e. Electronic Communications. Members of the Board, or any committee
-------------------------
designated by the Board, may participate in meetings of the Board, or any
committee, by means of telephone conference or similar communications equipment
that allows all persons participating in the meeting to hear each other, and
such participation in a meeting shall constitute presence in person at the
meeting. If all the participants are participating by telephone conference or
similar communications equipment, the meeting shall be deemed to be held at the
principal place of business of the Company.
f. Committees of Directors.
-----------------------
(i) The Board may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the Directors of the Company. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
(ii) In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such members constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
(iii) Any such committee, to the extent provided in the resolution
of the Board, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Company. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board. Each committee shall keep
regular minutes of its meetings and report the same to the Board when required.
-4-
<PAGE>
g. Compensation of Directors; Expenses. The Board shall have the authority
-----------------------------------
to fix the compensation of Directors. The Directors may be paid their expenses,
if any, of attendance at meetings of the Board, which may be a fixed sum for
attendance at each meeting of the Board or a stated salary as Director. No such
payment shall preclude any Director from serving the Company in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
h. Removal of Directors. Unless otherwise restricted by law, any Director
--------------------
or the entire Board of Directors may be removed, with or without cause, by the
Member, and, subject to Section 10, any vacancy caused by any such removal may
be filled by action of the Member.
i. Directors as Agents. To the extent of their powers set forth in this
-------------------
Agreement and subject to Section 9j, the Directors are agents of the Company for
the purpose of the Company's business, and the actions of the Directors taken in
accordance with such powers set forth in this Agreement shall bind the Company.
j. Limitations on the Company's Activities.
---------------------------------------
(i) This Section 9j is being adopted in order to comply with certain
provisions required in order to qualify the Company as a "special purpose
entity" for the purpose of the Indebtedness.
(ii) The Member shall not, so long as any Indebtedness is outstanding,
amend, alter, change or repeal the definition of "Independent Director" or
Sections 7, 8, 9, 10, 20, 21, 22, 23, 24, 26 or 31 or Schedule A of this
----------
Agreement without the unanimous written consent of the Board (including the
Independent Director). Subject to this Section 9j, the Member reserves the right
to amend, alter, change or repeal any provisions contained in this Agreement in
accordance with Section 31.
(iii) Notwithstanding any other provision of this Agreement and any
provision of law that otherwise so empowers the Company, the Member or the
Board, so long as any Indebtedness is outstanding none of the Company, the
Member or the Board shall be authorized or empowered, nor shall they permit the
Company, without the prior unanimous written consent of the Member and the Board
(including the Independent Director), to institute proceedings to have the
Company be adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against the Company or file a petition
seeking, or consent to, reorganization or relief with respect to the Company
under any applicable federal or state law relating to bankruptcy, or consent to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or a substantial part of its property, or
make any assignment for the benefit of creditors of the Company, or admit in
writing the Company's inability to pay its debts generally as they become due,
or, to the fullest extent permitted by law, take action in furtherance of any
such action, or dissolve or liquidate the Company, or consolidate or merge the
Company with or into any Person, or sell all or substantially all of
-5-
<PAGE>
the assets of the Company; provided, however, that the foregoing is subject in
-------- -------
all cases to Section 843(e) of the Statute.
(iv) Unless otherwise provided in the Note Issuance Documents, so long
as any Indebtedness is outstanding, the Board and the Member shall cause the
Company to do or cause to be done all things necessary to preserve and keep in
full force and effect its existence, rights (charter and statutory) and
franchises; provided, however, that the Company shall not be required to
-------- -------
preserve any such right or franchise if: (A) the Board shall determine that the
preservation thereof is no longer desirable for the conduct of its business and
that the loss thereof is not disadvantageous in any material respect to the
holders of the Indebtedness and the Company shall deliver to the Note Trustee an
Officer's Certificate to that effect and (B) the Rating Agency Condition is
satisfied. The Board also shall cause the Company to:
(1) maintain its own separate books and records and bank accounts;
(2) at all times hold itself out to the public as a legal entity
separate from the Member and any other Person;
(3) have a Board composed differently from that of the Member and
any other Person;
(4) file its own tax returns, if any, as may be required under
applicable law, to the extent not part of a consolidated group
filing a consolidated return or returns, and pay any taxes
required to be paid under applicable law;
(5) not commingle its assets with assets of any other Person
(except as contemplated by the Basic Documents);
(6) conduct its business in its own name;
(7) maintain separate financial statements;
(8) pay its own liabilities only out of its own funds;
(9) maintain an arm's length relationship with its Affiliates and
its Member;
(10) pay the salaries of its own employees, if any;
-6-
<PAGE>
(11) not hold out its credit as being available to satisfy the
obligations of others;
(12) allocate fairly and reasonably any overhead for shared office
space;
(13) use separate stationery, invoices and checks;
(14) not pledge its assets for the benefit of any other Person;
(15) correct any known misunderstanding regarding its separate
identity;
(16) maintain adequate capital in light of its contemplated business
purposes;
(17) cause its Board of Directors to meet at least annually or act
pursuant to written consent and keep minutes of such meetings
and actions and observe all other Delaware limited liability
company formalities; and
(18) not acquire any obligations or securities of a Member.
(v) So long as any Indebtedness is outstanding, the Board shall not
cause or permit the Company to:
(1) guarantee any obligation of any Person, including any
Affiliate;
(2) engage, directly or indirectly, in any business other than that
arising out of the issuance of the Indebtedness or the actions
required or permitted to be performed under Section 7, the Note
Issuance Documents or this Section 9j;
(3) incur, create or assume any indebtedness other than the
Indebtedness or as otherwise expressly permitted under the Note
Issuance Documents;
(4) make or permit to remain outstanding any loan or advance to, or
own or acquire any stock or securities of, any Person other
than the instruments constituting part of the Collateral,
except that the Company may invest in those investments
permitted under the Note
-7-
<PAGE>
Issuance Documents and may make any advance required or
expressly permitted to be made pursuant to any provisions of
the Note Issuance Documents and permit the same to remain
outstanding in accordance with such provisions;
(5) to the fullest extent permitted by law, engage in any
dissolution, liquidation, consolidation, merger, asset sale or
transfer of ownership interests other than such activities as
are expressly permitted pursuant to any provision of the Note
Issuance Documents; or
(6) form, acquire or hold any subsidiary (whether corporate,
partnership, limited liability company or other).
10. Independent Director.
--------------------
As long as any Indebtedness is outstanding, the Member shall cause the
Company at all times to have at least one Independent Director who will be
appointed by the Member. To the fullest extent permitted by Section 18-1101(c)
of the Act, the Independent Director shall consider only the interests of the
Company, including its respective creditors, in acting or otherwise voting on
the matters referred to in Section 9j(iii). No resignation or removal of an
Independent Director, and no appointment of a successor Independent Director,
shall be effective until the successor Independent Director shall have accepted
his or her appointment by a written instrument, which may be a counterpart
signature page to the Management Agreement. All right, power and authority of
the Independent Directors shall be limited to the extent necessary to exercise
those rights and perform those duties specifically set forth in this Agreement.
Except as provided in the second sentence of this Section 10, in exercising
their rights and performing their duties under this Agreement, the Independent
Directors shall have a fiduciary duty of loyalty and care similar to that of a
director of a business corporation organized under the General Corporation Law
of the State of Delaware.
11. Officers.
--------
a. Officers. The Officers of the Company shall be chosen by the Board
--------
and shall consist of at least a President, a Secretary and a Treasurer. The
Board of Directors may also choose one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers. Any number of offices may be held by the
same person. The Board shall choose a President, a Secretary and a Treasurer.
The Board may appoint such other Officers and agents as it shall deem necessary
or advisable who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board. The salaries of all Officers and agents of the Company shall be fixed by
or in the manner prescribed by the Board. The Officers of the Company shall hold
office until their successors are chosen and qualified. Any Officer elected or
-8-
<PAGE>
appointed by the Board may be removed at any time, with or without cause, by the
affirmative vote of a majority of the Board. Any vacancy occurring in any office
of the Company shall be filled by the Board.
b. President. The President shall be the chief executive officer of
---------
the Company, shall preside at all meetings of the Members, if any, and the
Board, shall be responsible for the general and active management of the
business of the Company and shall see that all orders and resolutions of the
Board are carried into effect. The President shall execute all bonds, mortgages
and other contracts, except: (i) where required or permitted by law or this
Agreement to be otherwise signed and executed, including Section 7b; (ii) where
signing and execution thereof shall be expressly delegated by the Board to some
other Officer or agent of the Company; and (iii) as otherwise permitted in
Section 11c.
c. Vice President. In the absence of the President or in the event
--------------
of the President's inability to act, the Vice President, if any (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated by the Directors, or in the absence of any designation, then in the
order of their election), shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. The Vice Presidents, if any, shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
d. Secretary and Assistant Secretary. The Secretary shall be
---------------------------------
responsible for filing legal documents and maintaining records for the Company.
The Secretary shall attend all meetings of the Board and all meetings of the
Members, if any, and record all the proceedings of the meetings of the Company
and of the Board in a book to be kept for that purpose and shall perform like
duties for the standing committees when required. The Secretary shall give, or
cause to be given, notice of all meetings of the Members, if any, and special
meetings of the Board, and shall perform such other duties as may be prescribed
by the Board or the President, under whose supervision the Secretary shall
serve. The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there be no such
determination, then in order of their election), shall, in the absence of the
Secretary or in the event of the Secretary's inability to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
e. Treasurer and Assistant Treasurer. The Treasurer shall have the
---------------------------------
custody of the Company funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Company and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Company in such depositories as may be designated by the Board.
The Treasurer shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
President and to the Board, at its regular meetings or when the Board so
requires, an account of all of the Treasurer's transactions and of the financial
condition of the Company. The Assistant Treasurer, or if there shall be more
than
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<PAGE>
one, the Assistant Treasurers in the order determined by the Board (or if there
be no such determination, then in the order of their election), shall, in the
absence of the Treasurer or in the event of the Treasurer's inability to act,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
f. Officers as Agents. The Officers, to the extent of their powers
------------------
set forth in this Agreement or otherwise vested in them by action of the Board
not inconsistent with this Agreement, are agents of the Company for the purpose
of the Company's business, and, subject to Section 9j, the actions of the
Officers taken in accordance with such powers shall bind the Company.
g. Duties of Board and Officers. Except to the extent otherwise
----------------------------
provided herein, each Director and Officer shall have a fiduciary duty of
loyalty and care similar to that of directors and officers of business
corporations organized under the General Corporation Law of the State of
Delaware.
12. Limited Liability.
-----------------
Except as otherwise expressly provided by the Act, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or
otherwise, shall be the debts, obligations and liabilities solely of the
Company, and neither any Member nor any Director shall be obligated personally
for any such debt, obligation or liability of the Company solely by reason of
being a Member or Director of the Company.
13. Capital Contributions.
---------------------
The Initial Member was deemed admitted as the Member of the Company
upon the execution and delivery of the Initial LLC Agreement. The Initial
Member has contributed the amount of cash to the Company listed on Schedule B
----------
attached hereto.
14. Additional Contributions.
------------------------
The Initial Member is not required to make any additional capital
contribution to the Company. However, a Member may make additional capital
contributions to the Company at any time upon the written consent of such
Member. To the extent that the Member makes an additional capital contribution
to the Company, the Member shall revise Schedule B of this Agreement. The
----------
provisions of this Agreement, including this Section 14, are intended solely to
benefit the Member and, to the fullest extent permitted by law, shall not be
construed as conferring any benefit upon any creditor of the Company (and no
such creditor of the Company shall be a third-party beneficiary of this
Agreement) and no Member shall have any duty or obligation to any creditor of
the Company to make any contribution to the Company or to issue any call for
capital pursuant to this Agreement.
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<PAGE>
15. Allocation of Profits and Losses.
--------------------------------
The Company's profits and losses shall be allocated to the Member.
16. Distributions.
-------------
Distributions shall be made to the Member at the times and in the
aggregate amounts determined by the Board. Notwithstanding any provision to the
contrary contained in this Agreement, the Company shall not be required to make
a distribution to any Member on account of its interest in the Company if such
distribution would violate Section 18-607 of the Act or any other applicable law
or the Basic Documents.
17. Books and Records.
-----------------
The Board shall keep or cause to be kept complete and accurate books of
account and records with respect to the Company's business. The books of the
Company shall at all times be maintained by the Board. Each Member and its duly
authorized representatives shall have the right to examine the Company books,
records and documents during normal business hours. The Company, and the Board
on behalf of the Company, shall not have the right to keep confidential from the
Member any information that the Board would otherwise be permitted to keep
confidential from the Member pursuant to Section 18-305(c) of the Act. The
Company's books of account shall be kept using the method of accounting
determined by the Member. The Company's independent auditor shall be an
independent public accounting firm selected by the Member.
18. Reports.
-------
a. Within 60 days after the end of each fiscal quarter, the Board
shall cause to be prepared an unaudited report setting forth as of the end of
such fiscal quarter:
(i) unless such quarter is the last fiscal quarter, a balance
sheet of the Company; and
(ii) unless such quarter is the last fiscal quarter, an income
statement of the Company for such fiscal quarter.
b. The Board shall use diligent efforts to cause to be prepared and
mailed to the Members, within 90 days after the end of each fiscal year, an
audited or unaudited report setting forth as of the end of such fiscal year:
(i) a balance sheet of the Company;
(ii) an income statement of the Company for such fiscal year; and
(iii) a statement of such Member's capital account.
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<PAGE>
c. The Board shall, after the end of each fiscal year, use reasonable
efforts to cause the Company's independent accountants to prepare and transmit
to each Member as promptly as such tax information as may be reasonably
necessary to enable such Member to prepare its federal, state and local income
tax returns relating to such fiscal year.
19. Other Business.
--------------
The Member and any Affiliate of the Member may engage in or possess an
interest in other business ventures (unconnected with the Company) of every kind
and description, independently or with others. The Company shall not have any
rights in or to such independent ventures or the income or profits therefrom by
virtue of this Agreement.
20. Exculpation and Indemnification.
-------------------------------
a. No Member, Officer, Director, employee or agent of the Company and
no employee, representative, agent or Affiliate of the Member (collectively, the
"Covered Persons") shall be liable to the Company or any other Person who has an
interest in or claim against the Company for any loss, damage or claim incurred
by reason of any act or omission performed or omitted by such Covered Person in
good faith on behalf of the Company and in a manner reasonably believed to be
within the scope of the authority conferred on such Covered Person by this
Agreement, except that a Covered Person shall be liable for any such loss,
damage or claim incurred by reason of such Covered Person's gross negligence or
willful misconduct.
b. To the fullest extent permitted by applicable law, a Covered
Person shall be entitled to indemnification from the Company for any loss,
damage or claim incurred by such Covered Person by reason of any act or omission
performed or omitted by such Covered Person in good faith on behalf of the
Company and in a manner reasonably believed to be within the scope of the
authority conferred on such Covered Person by this Agreement, except that no
Covered Person shall be entitled to be indemnified in respect of any loss,
damage or claim incurred by such Covered Person by reason of such Covered
Person's gross negligence or willful misconduct with respect to such acts or
omissions; provided, however, that any indemnity under this Section 20
-------- -------
shall be provided out of and to the extent of Company assets only, and no Member
shall have personal liability on account thereof.
c. To the fullest extent permitted by applicable law, expenses
(including legal fees) incurred by a Covered Person defending any claim, demand,
action, suit or proceeding shall, from time to time, be advanced by the Company
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Company of an undertaking by or on behalf of the Covered
Person to repay such amount if it shall be determined that the Covered Person is
not entitled to be indemnified as authorized in this Section 20.
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<PAGE>
d. A Covered Person shall be fully protected in relying in good faith
upon the records of the Company and upon such information, opinions, reports or
statements presented to the Company by any Person as to matters the Covered
Person reasonably believes are within such other Person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Company, including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, or any other facts pertinent to the
existence and amount of assets from which distributions to the Member might
properly be paid.
e. To the extent that, at law or in equity, a Covered Person has
duties (including fiduciary duties) and liabilities relating thereto to the
Company or to any other Covered Person, a Covered Person acting under this
Agreement shall not be liable to the Company or to any other Covered Person for
its good faith reliance on the provisions of this Agreement or any approval or
authorization granted by the Company or any other Covered Person. The provisions
of this Agreement, to the extent that they restrict the duties and liabilities
of a Covered Person otherwise existing at law or in equity, are agreed by the
Member to replace such other duties and liabilities of such Covered Person.
f. The foregoing provisions of this Section 20 shall survive any
termination of this Agreement.
21. Assignments.
-----------
Subject to Section 23, the Member may assign in whole or in part its
limited liability company interest in the Company. If the Member transfers all
of its limited liability company interest in the Company pursuant to this
Section 21, the transferee shall be admitted to the Company as a member of the
Company upon its execution of an instrument signifying its agreement to be bound
by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the transfer, and, immediately following such
admission, the transferor Member shall cease to be a member of the Company.
Notwithstanding anything in this Agreement to the contrary, any successor to a
Member by merger or consolidation in compliance with the Basic Documents shall,
without further act, be a Member hereunder, and such merger or consolidation
shall not constitute an assignment for purposes of this Agreement.
22. Resignation.
-----------
So long as any Indebtedness is outstanding, the Initial Member may not
resign unless the Rating Agency Condition is satisfied. A Member (other than the
Initial Member) may resign from the Company with the written consent of the
Initial Member. If a Member is permitted to resign pursuant to this Section 22,
an additional member of the Company shall be admitted to the Company, subject to
Section 23, upon its execution of an instrument signifying its agreement to be
bound by the terms and conditions of this Agreement, which instrument may be a
counterpart signature page to this Agreement. Such admission shall be deemed
effective immediately prior to the resignation, and,
-13-
<PAGE>
immediately following such admission, the resigning Member shall cease to be a
member of the Company.
23. Admission of Additional Members.
-------------------------------
One or more additional members of the Company may be admitted to the
Company with the written consent of the Member; provided that, notwithstanding
--------
the foregoing, so long as any Indebtedness remains outstanding, no additional
Members may be admitted to the Company unless the Initial Member retains a
majority interest in the Company and the Rating Agency Condition is satisfied.
24. Dissolution.
-----------
a. Subject to Section 9j, the Company shall be dissolved, and its
affairs shall be wound up upon the first to occur of the following: (i) the
retirement, resignation or dissolution of the Member or the occurrence of any
other event which terminates the continued membership of the Member in the
Company unless the business of the Company is continued in a manner permitted by
the Act or (ii) the entry of a decree of judicial dissolution under Section 18-
802 of the Act.
b. The bankruptcy (as defined in Section 18-101(1) of the Act) of the
Member shall not cause the Member to cease to be a member of the Company and
upon the occurrence of such an event, the business of the Company shall continue
without dissolution.
c. In the event of dissolution, the Company shall conduct only such
activities as are necessary to wind up its affairs (including the sale of the
assets of the Company in an orderly manner), and the assets of the Company shall
be applied in the manner, and in the order of priority, set forth in Section 18-
804 of the Act.
25. Waiver of Partition; Nature of Interest.
---------------------------------------
Except as otherwise expressly provided in this Agreement, to the
fullest extent permitted by law, each Member hereby irrevocably waives any right
or power that such Member might have to cause the Company or any of its assets
to be partitioned, to cause the appointment of a receiver for all or any portion
of the assets of the Company, to compel any sale of all or any portion of the
assets of the Company pursuant to any applicable law or to file a complaint or
to institute any proceeding at law or in equity to cause the dissolution,
liquidation, winding up or termination of the Company. No Member shall have any
interest in any specific assets of the Company, and no Member shall have the
status of a creditor with respect to any distribution pursuant to Section 16
hereof. The interest of the Members in the Company is personal property.
-14-
<PAGE>
26. Benefits of Agreement; No Third-Party Rights.
--------------------------------------------
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditor of the Company or by any creditor of any Member.
Nothing in this Agreement shall be deemed to create any right in any Person
(other than Covered Persons) not a party hereto, and this Agreement shall not be
construed in any respect to be a contract in whole or in part for the benefit of
any third Person.
27. Severability of Provisions.
--------------------------
Each provision of this Agreement shall be considered severable and if
for any reason any provision or provisions herein are determined to be invalid,
unenforceable or illegal under any existing or future law, such invalidity,
unenforceability or illegality shall not impair the operation of or affect those
portions of this Agreement which are valid, enforceable and legal.
28. Entire Agreement.
----------------
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof.
29. Binding Agreement
-----------------
Notwithstanding any other provision of this Agreement, the Member
agrees that this Agreement, including, without limitation, Sections
7,8,9,10,20,21,22,23,24,26 and 31, constitutes a legal, valid and binding
agreement of the Member, and is enforceable against the Member by the
Independent Director, in accordance with its terms.
30. Governing Law.
-------------
This Agreement shall be governed by and construed under the laws of the
State of Delaware (without regard to conflict of laws principles), all rights
and remedies being governed by said laws.
31. Amendments.
----------
Subject to Section 9j, this Agreement may not be modified, altered,
supplemented or amended except pursuant to a written agreement executed and
delivered by the Member. Notwithstanding anything to the contrary in this
Agreement, so long as any Indebtedness is outstanding, this Agreement may not be
modified, altered, supplemented or amended unless the Rating Agency Condition is
satisfied, except: (i) to cure any ambiguity or (ii) to correct or supplement
any provision in a manner consistent with the intent of this Agreement.
32. Counterparts.
------------
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original of this Agreement and all of which together
shall constitute one and the same instrument.
-15-
<PAGE>
33. Notices.
-------
Any notices required to be delivered hereunder shall be in writing and
personally delivered, mailed or sent by telecopy or other similar form of rapid
transmission, and shall be deemed to have been duly given upon receipt (a) in
the case of the Company, to the Company at its address in Section 2, (b) in the
case of a Member, to such Member at its address as listed on Schedule B attached
----------
hereto and (c) in the case of either of the foregoing, at such other address as
may be designated by written notice to the other party.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, has duly executed this Agreement as of the ____ day of _________, 1997.
MEMBER:
PACIFIC GAS AND ELECTRIC
COMPANY
By:________________________________
Name:
Title:
-16-
<PAGE>
SCHEDULE A
Definitions
-----------
A. Definitions
-----------
When used in this Agreement, the following terms not otherwise defined
herein have the following meanings:
"Act" has the meaning set forth in the preamble to this Agreement.
---
"Affiliate" means, with respect to any Person, any other Person
---------
directly or indirectly Controlling or Controlled by or under direct or indirect
common Control with such Person.
"Agreement" means this Amended and Restated Limited Liability Company
---------
Agreement, together with the schedules attached hereto, as amended, restated or
supplemented from time to time.
"Basic Documents" has the meaning assigned to that term in the
---------------
Indenture.
"Board" or "Board of Directors" means the Board of Directors of the
----- ------------------
Company.
"Certificate of Formation" means the Certificate of Formation of the
------------------------
Company filed with the Secretary of State of the State of Delaware on July 1,
1997, as amended or amended and restated from time to time.
"Class" has the meaning assigned to that term in the Indenture.
-----
"Collateral" has the meaning assigned to that term in the Indenture.
----------
"Company" means PG&E Funding LLC, a Delaware limited liability company.
-------
"Control" means the possession, directly or indirectly, or the power to
-------
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities or general partnership or managing
member interests, by contract or otherwise. "Controlling" and "Controlled" shall
have correlative meanings. Without limiting the generality of the foregoing, a
Person shall be deemed to Control any other Person in which it owns, directly or
indirectly, a majority of the ownership interests.
"Covered Persons" has the meaning set forth in Section 20a.
---------------
"Directors" means the directors elected to the Board of Directors from
---------
time to time by the Member, including the Independent Director. A Director is
hereby
A-1
<PAGE>
designated as a "manager" of the Company within the meaning of Section 18-
101(10) of the Act.
"Indebtedness" means the obligations of the Company arising under all
------------
Series of Notes.
"Indenture" means the Indenture dated as of __________ between the
---------
Company, as issuer, and the Note Trustee, as trustee, as the same may be
amended, supplemented or otherwise modified from time to time.
"Independent Director" means a natural person who, for the five-year
--------------------
period prior to his or her appointment as Independent Director has not been, and
during the continuation of his or her service as Independent Director is not:
(i) an employee, director, stockholder, partner or officer of the Company or any
of its Affiliates (other than his or her service as an Independent Director of
the Company); (ii) a customer or supplier that derives more than ten percent of
its revenues from the Company or any of its Affiliates; or (iii) any member of
the immediate family of a person described in (i) or (ii).
"Initial LLC Agreement" has the meaning set forth in the preamble to
---------------------
this Agreement.
"Initial Member" means Pacific Gas and Electric Company, a California
--------------
corporation, as the sole member of the Company.
"Management Agreement" means the agreement of the Directors in the form
--------------------
attached hereto as Schedule C.
----------
"Member" means the Initial Member and includes any Person admitted as
------
an additional member of the Company or a substitute member of the Company
pursuant to the provisions of this Agreement.
"Note Issuance Documents" means the collective reference to the
-----------------------
Indenture and the other governing documents relating to the Indebtedness, as the
same may be amended, supplemented or otherwise modified from time to time.
"Notes" means the PG&E Funding LLC Notes at any time issued pursuant to
-----
the Indenture or any indenture supplemental thereto.
"Note Trustee" means ________, as trustee under the Indenture.
------------
"Officer" means an officer of the Company described in Section 11.
-------
"Officer's Certificate" has the meaning assigned to that term in the
---------------------
Indenture.
A-2
<PAGE>
"Person" means any individual, corporation, partnership, joint venture,
------
limited liability company, limited liability partnership, association, joint-
stock company, trust, unincorporated organization, or other organization,
whether or not a legal entity, and any governmental authority.
"Rating Agency" has the meaning assigned to that term in the Indenture.
-------------
"Rating Agency Condition" means, with respect to any action, that each
-----------------------
Rating Agency shall have been given ten days prior notice thereof and that each
of the Rating Agencies shall have notified the Company in writing that such
action will not result in a reduction or withdrawal of the then current rating
by such Rating Agency of any Series or Class of the Notes.
"Sale Agreement" means the Transition Property Purchase and Sale
--------------
Agreement dated as of __________ between the Company and the Initial Member, as
seller.
"Sale Documents" means the collective reference to the Sale Agreement,
--------------
any Subsequent Sale Agreements and the agreements, instruments and documents
contemplated thereby, as the same may be amended, supplemented or otherwise
modified from time to time.
"Series" has the meaning assigned to that term in the Indenture.
------
"Servicing Agreement" means the Transition Property Servicing Agreement
-------------------
dated as of __________ between the Company and the Initial Member, as servicer,
as the same may be amended, supplemented or otherwise modified from time to
time.
"Statute" has the meaning assigned to that term in the Servicing
-------
Agreement.
"Subsequent Sale Agreement" has the meaning assigned to that term in
-------------------------
the Servicing Agreement.
"Transition Property" has the meaning assigned to that term in the
-------------------
Sale Agreement and also includes any "Transition Property" as defined in any
Subsequent Sale Agreement.
B. Rules of Construction
---------------------
Definitions in this Agreement apply equally to both the singular and plural
forms of the defined terms. The words "include" and "including" shall be deemed
to be followed by the phrase "without limitation." The terms "herein," "hereof"
and "hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular Section, paragraph or subdivision. The Section
titles appear as a matter of convenience only and shall not affect the
interpretation of this Agreement. All Section, paragraph,
A-3
<PAGE>
clause, Exhibit or Schedule references not attributed to a particular document
shall be references to such parts of this Agreement.
A-4
<PAGE>
SCHEDULE B
Members
-------
<TABLE>
<CAPTION>
Agreed Value of Percentage
Name Mailing Address Capital Contribution Interest
- ---- --------------- -------------------- --------
<S> <C> <C> <C>
Pacific Gas and Electric 77 Beale Street $5,000.00 100%
Company San Francisco, CA 94105
</TABLE>
B-1
<PAGE>
SCHEDULE C
Management Agreement
--------------------
________________________, 1997
PG&E Funding LLC
245 Market Street, Room 424
San Francisco, CA 94105
Re: Management Agreement
PG&E Funding LLC
--------------------
Ladies and Gentlemen:
For good and valuable consideration, each of the undersigned persons,
who have been designated as managers of PG&E Funding LLC, a Delaware limited
liability company (the "Company"), in accordance with the Amended and Restated
Limited Liability Company Agreement of the Company, dated as of
________________, 1997, as it may be amended or restated from time to time (the
"LLC Agreement"), hereby agree as follows:
1. Each of the undersigned accepts such person's rights and authority as
a Director (as defined in the LLC Agreement) under the LLC Agreement and agrees
to perform and discharge such person's duties and obligations as a Director
under the LLC Agreement, and further agrees that such rights, authorities,
duties and obligations under the LLC Agreement shall continue until such
person's successor as a Director is designated or until such person's
resignation or removal as a Director in accordance with the LLC Agreement. Each
of the undersigned agrees and acknowledges that it has been designated as a
"manager" of the Company within the meaning of the Delaware Limited Liability
Company Act.
2. THIS MANAGEMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AND ALL RIGHTS AND REMEDIES
SHALL BE GOVERNED BY SUCH LAWS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Management
Agreement as of the day and year first above written.
__________________________________
Name:
__________________________________
Name:
__________________________________
Name:
3
<PAGE>
EXHIBIT 5.1
OPINION OF ORRICK, HERRINGTON & SUTCLIFFE LLP
REGARDING LEGALITY OF NOTES
<PAGE>
EXHIBIT 5.1
October 20, 1997
PG&E Funding LLC
245 Market Street, Room 424
San Francisco, California 94105
Ladies and Gentlemen:
This opinion is delivered in connection with Amendment No. 2 to the
Registration Statement on Form S-3 (the "Registration Statement") filed under
the Securities Act of 1933, as amended (the "Act"), by PG&E Funding LLC, a
Delaware special purpose limited liability company (the "Note Issuer" and the
"Registrant"), with the Securities and Exchange Commission (the "Commission") in
connection with the registration by the Registrant under the Act, of Rate
Reduction Certificates (the "Certificates") to be issued by the California
Infrastructure and Economic Development Bank Special Purpose Trust PG&E-1 (the
"Trust") and Notes (the "Notes") to be issued by the Note Issuer which underlie
the Certificates. The Notes will be issuable in series (each, a "Series") under
an Indenture (the "Indenture") to be entered into by and between the Note Issuer
and the trustee named therein (the "Note Trustee"). The Certificates and the
Notes of each Series are to be sold as described in the Registration Statement
and the prospectus and prospectus supplement relating to such Certificates and
Notes.
We have examined (i) the Registration Statement, (ii) the form of
Indenture, as filed as an exhibit to the Registration Statement, pursuant to
which the Notes are to be issued, and (iii) the form of Note Purchase Agreement
to be executed by the Note Issuer and a certificate trustee (the "Certificate
Trustee") on behalf of the Trust (the "Note Purchase Agreement"), as filed as an
exhibit to the Registration Statement, pursuant to which the Certificate Trustee
will acquire the Notes from the Note Issuer on behalf of the Trust. In
addition, we have examined such instruments, documents and records as we deemed
relevant and necessary as a basis for our opinion hereinafter expressed. In
such examination, we have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures; (b) the conformity to
the originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
<PAGE>
PG&E Funding LLC
October 20, 1997
Page 2
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that when the Indenture has
been duly authorized by appropriate corporate action and validly executed and
delivered by the Note Issuer and the Note Trustee and the Notes of any Series or
Class have been duly authorized by appropriate corporate action and duly
executed, authenticated, issued and delivered in accordance with the provisions
of the Note Indenture and paid for and sold as contemplated by the Note Purchase
Agreement, the Notes of such Series or Class will be legally issued, fully paid,
binding obligations of the Note Issuer, and the holders of such Notes will be
entitled to the benefits of the Indenture.
Our opinions set forth in the preceding paragraph are qualified as to
(i) limitations imposed by applicable bankruptcy, insolvency, reorganization,
arrangement, fraudulent conveyance, moratorium, or other laws relating to or
affecting the rights of creditors generally and (ii) general principles of
equity, including concepts of materiality, reasonableness, good faith and fair
dealing, and the possible unavailability of specific performance or injunctive
relief, regardless of whether such enforceability is considered in a proceeding
in equity or at law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever it appears in the
Registration Statement and the prospectus contained therein.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 26.1
STATEMENT OF ELIGIBILITY AND QUALIFICATION OF TRUSTEE ON FORM T-1
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) ___________
______________________________
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
_________________________________
PG&E FUNDING LLC
(Depositor of the Trust)
(Exact name of obligor as specified in its charter)
DELAWARE 94-3274751
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification Number)
245 MARKET STREET, ROOM 424
SAN FRANCISCO, CALIFORNIA 94105
(Address, including zip code
of principal executive offices)
NOTES
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3. -15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990, Certificate of Amendment of
the Organization Certificate of Bankers Trust Company
dated June 21, 1995 -Incorporated herein by reference to
Exhibit 1 filed with Form T-1 Statement, Registration No.
33-65171, Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated March 20,
1996, incorporated by referenced to Exhibit 1 filed with
Form T-1 Statement, Registration No. 333-25843 and
Certificate of Amendment of the Organization Certificate
of Bankers Trust Company dated June 19, 1997,
incorporated by reference to Exhibit 1 filed with Form T-
1 Statement, Registration No. 333-32935.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2 filed with
Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise corporate trust
powers - Incorporated herein by reference to Exhibit 2
filed with Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as amended on
February 18, 1997, Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration No.
333-24509-01.
- 2-
<PAGE>
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by Section
321(b) of the Act. - Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust Company
dated as of June 30, 1997, incorporated by reference to
Exhibit 2 filed with Form T-1 Statement, Registration
No. 333-32935.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
- 3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 17th day
of October, 1997.
BANKERS TRUST COMPANY
By: Jenna Kaufman
-------------
Jenna Kaufman
Vice President
- 4 -
<PAGE>
EXHIBIT 99.2
FINANCING ORDER
<PAGE>
EXHIBIT 99.2
Decision 97-09-055 September 3, 1997
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In the Matter of the Application of the
Pacific Gas and Electric Company
(U 39-E) For: (1) Authority to Reduce
Rates Effective January 1, 1998, (2)
Authority to Sell or Assign Transition Application 97-05-006
Property to One or More Financing (Filed May 6, 1997)
Entities; (3) Authority to Service
Rate Reduction Bonds on Behalf of
Financing Entities; (4) Authority to
Establish Charges Sufficient to Recover
Fixed Transition Amounts; and (5) Such
Further Authority Necessary for PG&E
to Carry out the Transactions Described
in this Application.
- ----------------------------------------
FINANCING ORDER
-i-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
FINANCING ORDER
Summary of Financing Order.......................................... 1
Statutory Overview.................................................. 1
Rate Reduction Bond Transaction..................................... 3
Proposed Structure of the Transaction............................. 3
Timing of Transaction and Amount of Financed Transition Costs..... 4
Amount of Financed Transition Costs............................... 5
Issuance Costs.................................................... 6
Ongoing Transaction Costs......................................... 7
FTA Charges....................................................... 8
FTA Charge True-Up Mechanism...................................... 10
Routine FTA Charge True-Up Mechanism............................ 10
Nonroutine FTA Charge True-Up Mechanism......................... 11
Determination of Need for FTA Charge Adjustment on Anniversary
of Financing Order............................................. 12
Transition Property............................................... 12
Sale of Transition Property to the SPE............................ 13
Issuance and Transfer of SPE Debt Securities, and Issuance of RRBs 14
Rate Reduction Authorization........................................ 14
Eligibility....................................................... 15
Prevention of FTA Charge Bypass................................... 15
Ratepayer Benefits.................................................. 16
Related Issues...................................................... 17
Tax Considerations................................................ 17
Financial Accounting.............................................. 18
Credit Rating Agency Considerations............................... 18
True-Sale Opinion............................................... 18
Allocation of Collection Shortfalls............................... 19
Credit Enhancement................................................ 19
Sequestration..................................................... 20
Servicing......................................................... 21
Ratemaking........................................................ 21
Transition Cost Balancing Account............................... 21
RRB Memorandum Account.......................................... 22
Findings of Fact................................................ 25
Conclusions of Law................................................ 26
ORDER................................................................ 31
</TABLE>
Appendix A Pro forma Issuance Advice Letter,
FTA Charge True-Up Mechanism Advice Letters
-i-
<PAGE>
SUMMARY OF FINANCING ORDER
Under Assembly Bill 1890 (AB 1890), electric corporations can request to
finance a portion of their transition costs through the issuance of securities
known as rate reduction bonds (RRBs). The revenue requirement reduction produced
by the RRBs will provide residential and small commercial electric customers
with a 10% rate reduction through the rate-freeze period established by Public
Utilities (PU) Code Section 368(a).
The Commission finds that the issuance of RRBs, coupled with a 10% rate
reduction for residential and small commercial customers (a small commercial
customer is defined by PU Code Section 331(h) as one whose maximum peak demand
is less than 20 kilowatts) beginning on January 1, 1998, and continuing through
the rate-freeze period, will lower rates residential and small commercial
customers would have paid if this financing order were not adopted. Therefore,
subject to confirmation in an issuance advice letter that the structure and
pricing terms for the RRBs result in net present value benefits, the Commission
authorizes Pacific Gas and Electric Company's (PG&E's) participation in the
transaction described in its application. Upon issuance of RRBs, the Commission
requires PG&E to provide a 10% rate reduction (from June 10, 1996 rates) to
residential and small commercial customers on January 1, 1998, to remain in
effect for the remainder of the rate-freeze period. In the event that PG&E
concludes that RRBs cannot be issued in time to commence the rate reduction on
January 1, 1998, we expect PG&E to so advise the Commission, and submit a
revised application for approval of a cost recovery plan that accomplishes the
rate reduction by January 1, 1998. This financing order will become effective
only after PG&E files with the Commission its written consent to all terms and
conditions of this financing order.
STATUTORY OVERVIEW
On September 23, 1996, Governor Wilson signed into law a comprehensive
electric industry restructuring bill, AB 1890. Among other things, AB 1890 added
Article 5.5 to the PU Code (PU Code (S)(S) 840-847) to authorize electrical
corporations to recover certain transition costs through the issuance of a new
type of asset-backed
1
<PAGE>
security (ABS), known as RRBs./1/ PG&E was required to apply to the Commission
for a financing order no later than June 1, 1997. (PU Code (S) 841(a).)
If the Commission approves an application for a financing order, AB 1890
requires residential and small commercial customers to repay the principal,
interest and related costs of the RRBs through separate, nonbypassable charges
called fixed transition amounts (FTA) charges. (PU Code (S) 841(a).) FTA charges
are generally defined in AB 1890 as the nonbypassable rates authorized by the
Commission in a financing order to recover the costs of providing, recovering,
financing or refinancing transition costs, including the costs of issuing,
servicing and retiring RRBs. (PU Code (S) 840(d).) Residential and small
commercial customers will pay the FTA charges as a usage-based, cents-per-
kilowatt-hour component of their monthly bills. AB 1890 designates the right to
be paid the nonbypassable FTA charge revenues that will be collected from
residential and small commercial customers as an irrevocable property right. (PU
Code (S) 841.) This property right is defined in AB 1890 as transition property.
(PU Code (S) 840(g).) Upon the issuance of RRBs, the right to recover FTA
charges is irrevocable, and cannot be rescinded by either the Commission or the
State of California. (PU Code (S) 841(c).)
AB 1890 also requires the establishment of a true-up mechanism to
periodically adjust the FTA charges to ensure that they remain sufficient to
recover, in a timely manner, the scheduled RRB principal, including an
overcollateralization amount, interest and ongoing costs (hereinafter, FTA
charge True-Up Mechanism). (See PU Code (S) 841(e).)
AB 1890 provides for the RRBs to be issued by the California Infrastructure
and Economic Development Bank (Infrastructure Bank), one or more special-purpose
trusts
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/1/ AB 1890 generally defines transition costs as the costs and categories of
costs for generation-related assets and obligations, consisting of generation
facilities, generation-related regulatory assets, nuclear settlements, and power
purchase agreements that may become uneconomic as a result of a competitive
generation market. Transition costs also include the cost of refinancing or
retiring of debt or equity capital of an electrical corporation, and associated
federal and state tax liabilities. (PU Code (S) 840(f).)
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(SPT) that are authorized by and subject to the oversight of the Infrastructure
Bank, or another financing entity (Issuer) approved by the Infrastructure Bank.
(See PU Code (S) 840(a), (b).) PG&E has submitted applications to the
Infrastructure Bank for approval of the Issuer, and for approval of the terms
and conditions of the RRB transaction.
RATE REDUCTION BOND TRANSACTION
PROPOSED STRUCTURE OF THE TRANSACTION
PG&E has provided a general description of the transaction structure in its
application and prepared testimony. This proposed structure is subject to
modification, depending upon marketing of the RRBs and negotiations with the
nationally recognized credit rating agencies, which will be asked to rate the
RRBs. The final structure will be determined by the Infrastructure Bank and the
Issuer at the time the RRBs are marketed and after input from the rating
agencies and the underwriters./2/
As described in PG&E's application, the principal asset to be used to
support the RRBs is transition property. PG&E will form a Special Purpose Entity
(SPE), a bankruptcy-remote business entity, wholly-owned by PG&E, and will
contribute equity (approximately 1/2% of the total RRB principal amount) to it.
PG&E will transfer the transition property to the SPE.
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/2/ The Commission has traditionally allowed utilities flexibility as to the
structure of debt issued. While this decision does not authorize the issuance
of debt of PG&E, the Commission's decision in this application is consistent
with that precedent.
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The SPE will issue debt securities (SPE Debt Securities). The debt
securities will either be RRBs, or will be pledged for and will substantially
mirror the terms and conditions of the RRBs issued by another financing
entity./3/ The transition property, the equity of the SPE, and the rights of the
SPE will be pledged as collateral to secure the SPE Debt Securities.
The Issuer will issue RRBs to investors in the form of notes or
certificates representing beneficial ownership interests in the SPE Debt
Securities. The RRBs may be secured by a statutory lien on the transition
property to the extent provided by the PU Code. It is anticipated that the RRBs
will be issued in a few large transactions, and that each issuance may have
several classes. The longest term bonds will have expected repayment terms of
approximately ten years, with legal maturities up to three years beyond the
expected repayment term. If the RRBs are issued by a financing entity other than
the SPE, the proceeds from the issuance will be transferred from the Issuer to
the SPE, which will then transfer such proceeds to PG&E in consideration for the
transfer of the transition property. If the RRBs are issued directly by the SPE,
the SPE will then transfer such proceeds to PG&E in consideration for the
transfer of the transition property.
TIMING OF TRANSACTION AND AMOUNT OF FINANCED TRANSITION COSTS
In order to commence the rate reduction on January 1, 1998, PG&E must also
receive necessary approvals from the Infrastructure Bank. Assuming the other
contingencies described in PG&E's application have been resolved, and market
conditions are such that the transaction provides a sufficient revenue
requirement reduction to support a 10% rate reduction during the rate-freeze
period and to result in net present value benefits, the SPE Debt Securities and
RRBs will be issued in the fourth quarter of 1997. If PG&E concludes that RRBs
cannot be issued in time to commence the rate reduction on January 1, 1998, we
expect PG&E to so advise the Commission by
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/3/ The SPE Debt Securities may bear a fixed rate of interest and the RRBs may
bear a floating rate of interest, with the difference covered by a swap
contract.
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letter to the Executive Director, indicating how PG&E proposes to proceed
(including, if appropriate, a revised application for approval of a cost
recovery plan).
AMOUNT OF FINANCED TRANSITION COSTS
To authorize recovery of transition costs through the proposed financing,
we note that the transition costs referred to in PU Code (S) 841(a) are defined
in PU Code (S) 840(f). The uneconomic costs described in PU Code (S) 367 include
transition costs. PG&E's application does not include the costs of refinancing
or retiring of debt or equity referred to in the last sentence of PU Code (S)
840(f). Requests, if any, for recovery of such costs pursuant to PU Code Section
367 will be made in another proceeding. The estimate of total uneconomic costs
pursuant to PU Code Section 367 is sufficiently large to warrant issuance of the
RRBs in the requested amounts. PG&E estimates transition costs to be between $8
and $14 billion, with the residential and small commercial customers' share
ultimately expected to be at least $4 billion. Most of those uneconomic costs
(including qualifying facility capacity prices and nuclear sunk costs) are
neither in dispute in proceedings pursuant to PU Code Section 367, nor sensitive
to market prices. Thus, the Commission concludes that transition costs in
sufficient amounts currently exist. Any concern regarding the sufficiency of
available transition costs is mitigated by the fact that if such estimates are
in error, the rate-freeze period will end early and residential and small
commercial customers will receive credit for any excess savings produced by the
financing through the ratemaking mechanisms set forth in PG&E's application and
discussed in this financing order.
PG&E is authorized to recover a portion of its transition costs from the
proceeds of SPE Debt Securities and RRBs in an aggregate principal amount of up
to $3.5 billion, as necessary to provide the 10% rate reduction to residential
and small commercial customers. In determining the appropriate size of initial
issuances, PG&E shall use the bond sizing model presented in its prepared
testimony in this proceeding as applied to the structure and terms of RRBs
actually issued and described in one or more issuance advice letters. Issuance
advice letters shall become effective five business
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days after filing. The form of issuance advice letter in Appendix A to this
financing order shall be used.
In addition, as is described below, higher than currently forecasted sales
to residential and small commercial customers during the rate-freeze period
could lead to the need to issue RRBs in addition to those reflected in the
initial issuance. Such additional issuances are authorized, up to the aggregate
total amount of $3.5 billion (to the extent not included in the initial issuance
of RRBs) and shall be initiated during the rate-freeze period based on PG&E's
assessment of whether the revenue requirement reduction resulting from the RRB
transaction (as measured by the Rate Reduction Bond Memorandum Account) is
adequate to support the 10% rate reduction over the rate-freeze period. These
issuances, if needed, shall be implemented and reflected in FTA charges by
future issuance advice letter filings. Conversely, if the revenue requirement
reduction produced by the RRB transaction exceeds the amount needed for the 10%
rate reduction, residential and small commercial customers will receive the
excess amounts reflected in the Rate Reduction Bond Memorandum Account, plus
interest as discussed below, after the rate-freeze period ends, through an
adjustment to rates.
ISSUANCE COSTS
In accordance with PU Code (S) 840(d), "the costs of providing, recovering,
financing, or refinancing the transition costs through a plan approved by the
commission in the financing order, including the costs of issuing, servicing,
and retiring rate reduction bonds" are recoverable through the FTA charges.
Thus, PG&E proposes to finance such costs by the issuance of RRBs. PG&E
estimates the issuance costs associated with the transaction to be approximately
$25 million based on an issuance of $3.1 billion aggregate principal amount of
RRBs, or less than one percent of the RRB issuance amount. These costs include
underwriters fees and expenses, legal fees, rating agency fees, Securities and
Exchange Commission (SEC) registration fees, accounting fees, trustees fees,
Infrastructure Bank fees, printing fees and miscellaneous
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costs./4/ These costs will be recovered by PG&E in the RRB transaction and will
be paid out of the proceeds of the issuance of the RRBs, or to the extent prior
payment is required, will be paid by PG&E, as seller and servicer under the
transaction documents for the RRBs, and reimbursed through the proceeds of the
RRBs. We shall limit the aggregate costs of issuance to $25 million for the
first $3.1 billion aggregate principal amount of RRBs and 1% for the next $400
million aggregate principal amount of RRBs. Any costs that are approved by the
Infrastructure Bank or STO shall be paid prior to costs that are not subject to
approval by the Infrastructure Bank or STO.
ONGOING TRANSACTION COSTS
The primary ongoing transaction cost will be the servicing fee paid to PG&E
or a substitute servicer for servicing the RRBs. In order to support the SPE's
legal status separate and apart from PG&E, the servicing fee paid to PG&E must
be market-based. The servicing fee will be a part of the servicing agreement and
will be included in the determination of the FTA charges.
The full amount of the market-based servicing fee will be included in the
FTA charges. However, as long as PG&E is servicer, PG&E proposes a ratemaking
mechanism which will provide a credit, after the rate-freeze period, to
residential and small commercial ratepayers in PG&E's Rate Reduction Bond
Memorandum Account equal in value to any amounts it receives as compensation,
excepting only amounts needed to cover incremental, out-of-pocket costs and
expenses incurred by PG&E to service the RRBs. These types of expenses would
include required audits related to PG&E's role as servicer, and legal and
accounting fees related to the servicing obligation. Thus, the only net
ratemaking impact will be such incremental expenses. To the extent these
expenses occur, and are included in the adjusted FTA charges, they
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/4/ The Infrastructure Bank or State Treasurers' Office (STO) will approve bond
counsel fees, underwriter fees, underwriter counsel fees, bond trustee fees,
Infrastructure Bank fees, rating agency fees, SEC registration fees, printing
fees, and other expenses related to the sale of the RRBs to which the
Infrastructure Bank or the STO is a party.
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<PAGE>
may be reviewed in a subsequent PG&E Revenue Allocation Proceeding or successor
ratemaking proceeding.
It is anticipated that there will be a small amount of additional, ongoing
costs associated with the RRB transaction, such as trustees fees and other
administrative costs. These costs will also be recovered through the FTA
charges.
FTA CHARGES
To facilitate the transaction, the Commission will ensure that residential
and small commercial customer rates necessary to repay the RRBs, i.e., FTA
charges, are implemented when the RRBs are issued and that expeditious
procedures are adopted to establish and to adjust FTA charges. Therefore, five
business days in advance of issuance of the RRBs, PG&E is authorized to file an
issuance advice letter with the Commission. There may be more than one RRB
issuance, and a separate issuance advice letter will be necessary for each. The
issuance advice letter will describe the actual structure of the RRB transaction
it covers, as approved by the Infrastructure Bank, the total principal amount
and the pricing of RRBs being issued under its terms. It will also describe the
FTA charges associated with the RRB issuance to be reflected in PG&E's tariffs,
which will be calculated using the methodology and formulas proposed in PG&E's
application as adopted in this financing order based on market conditions at the
time the RRBs are priced. To confirm that the actual terms of the RRBs are
forecast to result in lower rates for residential and small commercial customers
than without the RRBs at the time the RRBs are issued, the Commission will
require PG&E to provide a net present value calculation of such benefits, using
the methodology contained in PG&E's prepared testimony, applied to the actual
structure and terms of the RRBs in the issuance advice letters. So long as the
terms and structure result in positive net present value benefits, PG&E is
authorized to undertake the RRB transaction. The FTA charges for residential and
small commercial customers, calculated using the methodology contained in PG&E's
prepared testimony, shall become effective five business days after the issuance
advice letter is filed. This procedure is reasonable because the bond sizing
model and the FTA charge
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calculations have been examined and found reasonable in this proceeding and
because PG&E will use the pro forma issuance advice letter contained in Appendix
A to this financing order. The transition property relating to the FTA charges
will then constitute a current property right, as required for the issuance of
the RRBs, and will continuously exist thereafter for all purposes.
PG&E (or a substitute servicer) will remit FTA charges collected during the
prior month to a trustee (the Trustee) appointed under an indenture or pooling
and servicing agreement in connection with the related transition property. The
Trustee will deposit these remittances to a collection account. Once each
quarter, the Trustee will release money from the collection account to pay
servicing compensation and the other SPE and Trustee expenses, as well as
accrued interest and principal in respect of the SPE Debt Securities and the
RRBs.
FTA charges will be set at a level intended to recover scheduled interest
and principal on the RRBs, in accordance with the amortization schedule for the
RRBs determined at the time of issuance, plus an overcollateralization amount as
well as related financing costs and fees, including servicing fees, based on
assumptions including sales forecasts, charge-offs, and lags between FTA charge
billing and collection. If SPE Debt Securities and RRBs are redeemed prior to
the scheduled maturity dates in connection with a sale of transition property by
the Trustee upon an event of default, or in connection with the exercise of an
optional "clean-up" call, FTA charges will be set as if the SPE Debt Securities
and RRBs remained outstanding to their scheduled maturity. The FTA charges shall
remain in effect until the owner of the transition property, or its assignee,
has received FTA charges sufficient to cover the overcollateralization amount,
and to pay the principal amount, plus interest and other ongoing costs.
During the rate-freeze period, FTA charges will not increase residential
and small commercial customers' rates. This will be accomplished by reducing
residual competition transition charges (CTCs) by an amount equal to the FTA
charges so that total rates, which reflect the 10% rate reduction, are not
impacted by this additional
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charge during the rate-freeze period. Other customers' rates are subject to the
June 10, 1996 total rate level freeze during the rate-freeze period. After the
rate-freeze period, the FTA charges will be added to residential and small
commercial customers' rates until the RRBs are retired, as is contemplated by AB
1890.
FTA CHARGE TRUE-UP MECHANISM
Although this financing order and the designated FTA charges are
irrevocable, the Commission must approve adjustments to the FTA charges as
necessary to ensure timely recovery of all transition costs that are the subject
of this financing order, as well as the costs of capital associated with the
provision, recovery, financing, or refinancing of transition costs, including
costs of issuing, servicing, credit enhancing (including through
overcollateralization as a cost of financing), and retiring the RRBs. (PU Code
(S) 841(c).) As is provided for in AB 1890, the Commission must establish a
procedure for the expeditious approval of periodic adjustments to the FTA
charges. (PU Code (S) 841(e).)
PG&E proposes to adjust FTA charges by an FTA charge True-Up Mechanism at
least annually to keep actual principal amortization in line with the expected
schedule which is established at the time of offering. The calculation will
reflect the debt service revenue requirement. To the extent there are any
previous under- or over-payments to the Trustee, the revised FTA charges will be
established to return the outstanding balance of the RRBs to the originally
projected balance within 12 months of the adjustment.
PG&E's proposed FTA charge adjustment mechanisms are consistent with AB
1890 and are reasonable. The forms of advice letters for both the annual and the
quarterly routine FTA charge True-Up Mechanisms are included in Appendix A to
this financing order.
ROUTINE FTA CHARGE TRUE-UP MECHANISM
As servicer, PG&E shall file routine True-Up Mechanism advice letters
annually, at least 15 days before the end of the calendar year, with the option
of filing quarterly routine True-Up Mechanism advice letters, if needed. PG&E
may file a
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routine FTA charge True-Up Mechanism advice letter at least 15 days before the
end of any calendar quarter (including calendar year end), with the resulting
changes to the FTA charges to be effective on the first day of the next calendar
quarter. For these adjustments, the trued-up FTA charges will be calculated
using the methodology described in PG&E's prepared testimony, based on updated
forecasts of kWh sales, uncollectibles, and the timing of collections if
necessary.
PG&E proposes to adjust the FTA charges at least annually, and as often as
quarterly with a trigger mechanism based on a specified variance between the
actual principal balance (based on the amounts actually received by the Trustee)
and the projected principal balance. The actual criteria for the quarterly true-
up trigger are to be established in the servicing agreement, based on input from
rating agencies. At a minimum, there will be a required annual adjustment to
track the expected decline in FTA charges over time as interest charges decrease
with declining amounts of principal outstanding.
NONROUTINE FTA CHARGE TRUE-UP MECHANISM
As PG&E points out, it is not possible at this time to anticipate all
eventualities that might require an adjustment to the formulas used to calculate
FTA charges. Therefore, PG&E may also request nonroutine changes to the FTA
charges, as is necessary to ensure the timely recovery of RRB principal,
including an overcollateralization amount, and interest. These nonroutine FTA
charge True-Up advice letters must be filed at least 90 days before the end of a
calendar quarter, with the resulting changes to be effective on the first day of
the next calendar quarter. In contrast to the issuance advice letters and the
routine true-up adjustment mechanism, these filings may require a Commission
resolution because such filings may involve changes to the basic FTA charge
calculation methodology contained in PG&E's prepared testimony. The Energy
Division will advise PG&E by the 45th day after PG&E files a nonroutine FTA
charge True-Up Mechanism advice letter if there are any modifications to the
calculation methodology the Energy Division believes are necessary. If the
Energy Division and PG&E cannot resolve any differences, then the
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Commission will issue a resolution to decide any issues. However, the Commission
will issue such a resolution before the 90-day period has elapsed. In the
absence of notice by the Commission that the Energy Division believes
modifications to the calculation methodology are necessary, PG&E will be
authorized to implement the FTA charge adjustments it has proposed in its
nonroutine True-Up Mechanism advice letter on the 90th day after the filing.
DETERMINATION OF NEED FOR FTA CHARGE ADJUSTMENT ON
ANNIVERSARY OF FINANCING ORDER
AB 1890 requires the Commission to determine, on each anniversary date of
the issuance of the financing order, whether the FTA charges need to be
adjusted. (PU Code (S) 841(e).) Therefore, at least 15 days before each
anniversary date of the issuance of this financing order, PG&E will file an FTA
charge True-Up advice letter stating whether an adjustment to the FTA charges is
necessary. The Commission will make the appropriate finding on the anniversary
date, with any necessary changes to be approved within 90 days of the financing
order anniversary date. Due to administrative convenience, and the other
adjustment options authorized herein, it is expected that PG&E will avail itself
of annual and quarterly routine and nonroutine FTA charge True-Up Mechanisms, if
possible, to place into effect all necessary adjustments to the FTA charges.
TRANSITION PROPERTY
Transition property is contemplated to be transferred to an SPE,
bankruptcy-remote from PG&E, which then will issue SPE Debt Securities to the
Issuer. These structural elements are expected to enable the RRBs to receive a
credit rating superior to PG&E's. The transition property used to secure the
RRBs will be a property right created by AB 1890. (PU Code (S) 841(f).) Thus,
the Commission finds that upon the effective date of each issuance advice letter
associated with this financing order, all of the transition property identified
in such advice letter constitutes a current property right and shall thereafter
continuously exist as property for all purposes. The transition property shall,
without limitation, include (1) the right, title and interest in and to the
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FTA charges set forth in the issuance advice letter, as adjusted from time to
time, (2) the right to be paid the total amount set forth in the issuance advice
letter, (3) the right, title and interest in and to all revenues, collections,
claims, payments, money, or proceeds of or arising from the FTA charges, and (4)
the right, title and interest in and to all rights to obtain adjustments to the
FTA charges under the FTA charges True-Up Mechanism.
In addition, in accordance with AB 1890, the Commission finds that the
holders of the transition property are entitled to recover FTA charges in
amounts equal to the scheduled principal amounts for the SPE Debt Securities
(which will equal the scheduled principal payment amounts for the RRBs), all
interest thereon, the overcollateralization amount and all related fees, costs
and expenses.
SALE OF TRANSITION PROPERTY TO THE SPE
The Commission approves the sale by PG&E of the transition property
identified in issuance advice letters to one or more SPEs, and finds that upon
approval by the Infrastructure Bank, such SPEs constitute financing entities for
all purposes of AB 1890. Upon the sale of the transition property identified in
an issuance advice letter to the SPE, the SPE will have all of the rights
originally held by PG&E with respect to the transition property, including,
without limitation, the right to exercise any and all rights and remedies to
collect any amounts payable by any customer in respect of the transition
property, notwithstanding any objection or direction to the contrary by PG&E.
Any payment by any such customer to the SPE shall discharge the customer's
obligations in respect of the transition property to the extent of the payment,
notwithstanding any objection or direction to the contrary by PG&E.
By means of this financing order, the Commission approves the sale of
transition property created by an issuance advice letter from PG&E to the SPE
identified in the related issuance advice letters. The Commission also finds
that any such SPE is, to the extent so approved by the Infrastructure Bank, a
financing entity as defined by AB 1890.
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ISSUANCE AND TRANSFER OF SPE DEBT SECURITIES, AND ISSUANCE OF RRBS
The Commission approves the issuance by any such SPE of SPE Debt
Securities, on terms approved by the Infrastructure Bank, with the terms to
mirror substantially the terms of the RRBs, to the Issuers identified in the
issuance advice letter. The Commission also approves any such SPE's pledging of
its right, title and interest in and to the transition property as security for
its SPE Debt Securities.
The Commission approves the issuance by any such Issuer of RRBs, on terms
authorized by the Infrastructure Bank. The Commission also approves any such
Issuer's pledging of its right, title and interest in and to its SPE Debt
Securities, and all security therefor, as security for the Issuer's RRBs if the
RRBs are issued as debt securities.
RATE REDUCTION AUTHORIZATION
Contingent upon timely and sufficient issuance of RRBs, the Commission
requires PG&E to provide a 10% rate reduction from June 10, 1996 rate levels to
its residential and small commercial electric customers, consistent with our
decision (D.) 96-12-077 and PG&E's cost recovery plan approved thereby. Subject
to these conditions, the rate reduction is to go into effect on January 1, 1998,
and to remain in effect for the remainder of the rate-freeze period, i.e., until
Commission-authorized uneconomic costs pursuant to PU Code Section 367 have been
fully recovered, but no later than March 31, 2002. (D. 96-12-077, mimeo. at pp.
9, 35.)
PG&E's proposed method to provide the 10% reduction to eligible customers,
via a bill credit, results in the same bills for these customers as would a
reduction implemented via a reduction in each component of the customers' rates.
Therefore, it is consistent with AB 1890, which generally refers to rate
reductions. PG&E proposes to use the bill credit for administrative convenience.
Additionally, it is easier to provide the reduction to direct access
customers via a bill credit. The bill credit can be calculated under the
assumption that the customer is a full service customer, so that the same bill
reduction is received regardless of whether a customer is a direct access or
full service customer.
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For these reasons we will authorize PG&E to implement the 10% reduction via
a bill credit.
ELIGIBILITY
The rate reduction applies to residential and small commercial customers as
defined by AB 1890. For this purpose, PG&E's eligible customers include all of
its residential customers. They also include all of PG&E's commercial customers
on Schedules A-1 and A-6, as these customers are not demand metered. With
respect to PG&E's remaining small commercial rate schedules, all Schedule A-10
and E-19 customers with peak demand of less than 20 kW, as required by AB 1890
(PU Code (S) 331(h)), will receive the rate reduction.
Eligibility for existing A-10 and E-19 customers will be determined on a
one-time basis. PG&E's proposal, to provide the rate reduction to all of these
customers whose peak demand in at least 9 of the 12 most recent billing periods
was less than 20 kW, will be adopted. The determination will be made on October
1, 1997, shortly before the FTA charges are expected to become effective.
Commercial customers whose loads grow so that they are no longer in
the eligible category will have the choice of continuing service on the RRB-
eligible schedule, or of taking service off their new applicable schedules and
paying an ongoing amount in respect of the fixed transition amounts based on
historical usage data.
PREVENTION OF FTA CHARGE BYPASS
Customers subject to the FTA charges who subsequently discontinue or reduce
purchases of electricity supply and delivery services from PG&E or any successor
distribution utility, purchase or consume electricity supplied and delivered by
sources other than PG&E or any successor distribution utility, and remain
physically located at the same location or are located within the historical
service territory of PG&E or any successor distribution utility (departing
customers) will continue to be responsible for paying the FTA charges. In
assessing the FTA charges for departing
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customers, PG&E proposes to apply similar nonbypassability provisions as
applicable to CTC for departing load customers./5/ PG&E's proposal for
collecting CTC from departing customers is described in PG&E's CTC Application
(A.) 96-08-070. PG&E is authorized to include comparable tariff provisions to
ensure the FTA charges are nonbypassable.
RATEPAYER BENEFITS
PG&E evaluated whether residential and small commercial customers can be
expected to benefit from the RRB transaction (assuming a 10-year amortization
with level principal payment obligations, and financing $3.1 billion of
transition costs) and associated 10% rate reduction. PG&E did so by comparing
the net present value of (1) the amount these ratepayers could be expected to
pay in rates with the RRBs and rate reduction in place to (2) the amount they
could be expected to pay without the RRBs and rate reduction. In our companion
decision today, D.97-09-054, we determined that the rates for purpose of the
second clause of the previous sentence are the rates in effect as of June 10,
1996.
On a net present value basis, using a discount rate of 10%, PG&E expects
the RRB transaction and 10% rate reduction to result in net present value
benefits of approximately $470 million over the life of the RRBs. Based on this
evidence, the Commission finds that the issuance of RRBs of ten-year expected
final maturity and the implementation of the associated 10% rate reduction
during the rate-freeze period will lower rates for residential and small
commercial customers as is contemplated by AB 1890. To confirm this finding
prior to the issuance of RRBs, issuance advice letters shall include a
calculation in accordance with the bond sizing model described in PG&E's
prepared testimony indicating that, based on the actual structure and pricing
terms (i.e., actual amortization pattern, interest rate, amount of transition
costs financed, and expected maturities for the RRBs), the issuance of RRBs is
expected to result in a net
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/5/ The CTC exemptions specified in AB 1890 for certain irrigation districts and
for load served by onsite generation after June 30, 2000 will not apply to the
FTA charges.
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present value benefit to residential and small commercial customers. If such a
confirmation cannot be made, then PG&E should so advise the Commission and
should not proceed with the transaction.
RELATED ISSUES
As PG&E describes in its testimony, there are several related issues that
have a potentially significant impact on the RRB transaction. The following
sections of this financing order discuss those issues.
TAX CONSIDERATIONS
The possibility that the Internal Revenue Service (IRS) would assess income
taxes when PG&E receives the initial proceeds from the RRBs, rather than when
FTA charge revenues are collected, is a risk associated with financing the
transition costs. In addition to having tax consequences, the economics of
issuing the RRBs would be adversely affected if PG&E's income tax payments
associated with the FTA charges were to be accelerated and become due when the
RRBs are issued rather than when FTA charges are billed.
As a result, in February 1997, PG&E submitted a ruling request to the IRS
seeking confirmation that (1) the SPE Debt Securities will be treated as debt of
the utility for federal income tax purposes, and (2) the FTA charges will be
included in PG&E's gross income in the year in which the related electrical
service is provided to residential and small commercial customers and not at the
time of debt issuance.
If the receipt of RRB proceeds yields current income taxation of those
proceeds, the benefits of the financing transaction would be substantially
reduced. Should the IRS choose not to provide a ruling, or rule adversely, PG&E
would have to reassess the transaction and, if possible, modify it to reduce the
risk of current taxation. If the structure of the transaction changes beyond the
bounds contemplated in its Application or this financing order, PG&E will take
appropriate steps to modify its request with the Commission to the extent
permitted by PU Code Section 841(c). If the transaction as modified does not
produce net present value benefits through overall revenue requirement
reductions as indicated in issuance advice letters, then the
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Commission cannot confirm that the transaction will lower rates for residential
and small commercial customers. The requirement that issuance advice letters
include a net present value benefit calculation addresses this concern.
In its brief, PG&E has indicated that it may go forward with the RRB
transaction under this financing order in the absence of an IRS ruling. PG&E is
put on notice that if it chooses to do so, its shareholders will bear the
consequences of any tax treatment, to the extent that it is more adverse than
the tax treatment assumed in the NPV benefits calculation it has presented in
its application.
FINANCIAL ACCOUNTING
The amount financed will be recorded as debt of the SPE for financial
reporting purposes. PG&E, the SPE, the Infrastructure Bank and the holders of
the RRBs will expressly agree pursuant to the terms of the applicable documents
to treat the SPE Debt Securities as debt of the SPE secured by, among other
things, the transition property and the equity of the SPE for all purposes.
Because the SPE is consolidated with PG&E for financial reporting purposes, the
amounts financed will appear as debt in PG&E's consolidated financial
statements. This is not expected to impact PG&E's utility credit ratings, as it
is expected that the rating agencies will determine that the RRBs, which are not
supported by PG&E's general revenue stream, do not affect PG&E's
creditworthiness.
CREDIT RATING AGENCY CONSIDERATIONS
TRUE-SALE OPINION
Credit rating agencies will require an acceptable opinion of
bankruptcy counsel at the time the RRBs are issued for assurance that the
transition property will be bankruptcy-remote from PG&E. To obtain such an
opinion, the transfer of the transition property from PG&E to the SPE must
constitute a "true sale" (i.e., if PG&E were to become the subject of a
bankruptcy proceeding, the transition property would not be part of PG&E's
bankruptcy estate and therefore would not be subject to the claims of PG&E's
creditors).
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AB 1890 expressly provides that certain transfers of transition
property approved in a financing order and intended by the parties to constitute
an absolute transfer or true sale shall be so treated for all purposes, subject
to certain limited exceptions. (See PU Code (S) 844.) As contemplated by AB
1890, the RRBs will be non-recourse to any of PG&E's assets, other than the
SPE's equity and the transition property sold to the SPE. (PU Code (S) 842(a).)
In furtherance of this true-sale analysis, PG&E envisions that it
will give sufficient notice to third parties that the transition property is
owned by the applicable SPE and is not available to creditors of PG&E by serving
the issuance advice letters on the parties to this proceeding as well as PG&E's
standard advice letter service list. This decision authorizes PG&E to include
FTA charges as a separate line item on customers' bills.
ALLOCATION OF COLLECTION SHORTFALLS
In order to preserve the bankruptcy-remote status of the transition
property once it is transferred to the SPE, PG&E cannot have any claim on the
FTA charges. In particular, if PG&E collects less than the full amount that is
billed to residential and small commercial customers, it cannot favor itself
over the owner of the transition property. It must allocate that shortfall
appropriately between FTA charges and other charges. Such shortfalls shall be
allocated between FTA charges and other PG&E charges in the same proportion as
the amount of FTA charges billed bears to the aggregate amount of PG&E charges
billed.
CREDIT ENHANCEMENT
Credit enhancements are mechanisms that provide investors with added
assurance that they will recover their investment. Examples of credit
enhancement provided by the original owner include reserve accounts,
overcollateralization amounts, and True-Up Mechanisms. Examples of credit
enhancement provided by third parties include bond insurance and letters of
credit. It is expected that the RRB transaction will use a True-Up Mechanism
authorized by AB 1890 (as described above) and overcollateralization amounts or
other means of credit enhancement.
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The purpose of the overcollateralization amount is to provide security to
investors and to enhance the credit rating of the RRBs by providing an
additional financed amount to cover shortfalls in FTA charge collection payments
to the Trustee between the final expected FTA charge true-up and the expected
maturity of the RRBs. In other words, the FTA charges will be set to collect an
amount slightly in excess of the payments required to amortize the RRBs as
scheduled.
The overcollateralization amount needed to satisfy the credit rating
agencies will be established by the Issuer with input from the credit rating
agencies prior to the time of RRB pricing. The actual amount will be approved by
the Infrastructure Bank and STO. The amount will be a function of several
variables but is expected primarily to be a function of the FTA charge True-Up
Mechanism.
Customers bearing the FTA charges in their rates should receive credit
equal to the amount of any transition property overcollateralization not used to
repay the principal and interest on RRBs. As a result, overcollateralization
will not reduce customer benefits from the RRB transaction.
The FTA charges will be set to collect any overcollateralization amount. As
with other components of the FTA charges, it will be trued-up to the extent
necessary using the True-Up Mechanism we adopt in this financing order. As is
set forth below, any overcollateralization amount collected in excess of the
amount needed to repay the principal, plus appropriate interest, of the RRBs
will benefit residential and small commercial customers.
SEQUESTRATION
Consistent with PU Code (S) 843(e), we will agree that, in the event of a
default by PG&E in payment of the FTA charges to the SPE, we will, upon
application by the Trustee, order the sequestration and payment to the SPE, or
such other party as designated by the Trustee, of revenues arising with respect
to the transition property. This will provide additional certainty that the FTA
charges will benefit the owner of the transition property, and should serve to
enhance the credit quality of the RRBs.
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SERVICING
To the extent that any interest in transition property is transferred by
PG&E to an SPE, the Commission is required to authorize the utility to contract
with the financing entity to perform servicing functions on behalf of the
financing entity. (PU Code (S) 842(c).) Pursuant to a servicing agreement with
the SPE and/or Issuer, PG&E will act as servicer of the transition property.
That is, PG&E will be responsible for customer kilowatt-hour billing and usage
information, and for billing and collecting the FTA charges. On a monthly or
more frequent basis, PG&E will remit estimated FTA charge collections, on behalf
of the SPE and/or Issuer, to the Trustee. The Trustee, in turn, will make
quarterly debt service payments to the RRB investors, as well as pay other
ongoing costs associated with the RRB transaction. Pursuant to this decision,
the Commission authorizes PG&E to contract with the SPEs and/or Issuers to
collect amounts in respect of the FTA charges for the benefit and account of
such SPEs and/or Issuers, and to account for and remit these amounts to or for
the account of such SPEs and/or Issuers. The servicing agreement will provide
that PG&E, as initial servicer, may not voluntarily resign its duties as
servicer without obtaining the prior approval of the Commission.
RATEMAKING
It is necessary to incorporate the RRB transaction into PG&E's ratemaking
mechanisms to ensure that PG&E's CTC ratemaking mechanism accomplishes its
intended purpose of determining when the rate freeze should end, preventing any
CTC cost shifting to large customers as a result of the 10% rate reduction and
the RRBs, and providing residential and small commercial customers all of the
benefits from the RRB transaction.
TRANSITION COST BALANCING ACCOUNT
PG&E proposes a mechanism to adjust the CTC ratemaking mechanism to ensure
it is treated as if the RRBs were not issued. The reason for this is to ensure
the RRB transaction does not cause any cost shifting. It will do so by ending
the rate-freeze period at the same time it would have ended in the absence of
the rate
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reduction and RRB issuance. By ending the rate freeze at the same time it would
have ended if the RRB transaction did not take place, large customers are
assured that they will not pay additional transition costs. The Rate Reduction
Bond Memorandum Account, discussed below, then ensures that small customers are
also treated fairly under the RRB transaction.
PG&E proposes to reflect the RRB transaction in its CTC ratemaking
mechanism established in D.97-06-060 by imputing a revenue credit to the
ratemaking mechanism equal to the net CTC revenue reduction due to the FTA
charges and the 10% rate reduction for residential and small commercial
customers. With this adjustment, the balance in the CTC ratemaking mechanism may
reach zero at some time during the rate-freeze period and indicate that
transition costs that must be recovered before March 31, 2002, would have been
recovered absent the impact of the 10% rate reduction and absent the RRBs. By
doing this, customers are assured that the rate freeze ends at the same time it
otherwise would have, regardless of the 10% rate reduction and the issuance of
RRBs. The rate-freeze period ends when this approach, including these imputed
revenues, shows that transition costs have been fully recovered (or on March 31,
2002, if that comes first). Thus, large customers' responsibility for paying CTC
is unaffected by the 10% rate reduction and the RRBs. All customers will still
be required to pay for those transition costs eligible for recovery after
December 31, 2001 pursuant to certain provisions of AB 1890.
RATE REDUCTION BOND MEMORANDUM ACCOUNT
The Rate Reduction Bond Memorandum Account will be used by PG&E to make a
determination if additional RRBs need to be issued (within the aggregate total
amount of $3.5 billion authorized by this financing order). As the sizing model
demonstrates, financing a given amount of transition costs with RRBs means that
residential and small commercial customers should receive a specific amount of
total savings because of the 10% rate decrease. If sales to residential and
small commercial customers during the rate-freeze period are higher than was
estimated in the sizing model used to determine the amount of RRBs to be issued,
then these customers' total
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savings from the rate reduction (which is equal to the rate reduction times the
total amount of sales to the customers) will be higher than was estimated when
the RRBs were sized.
A specific subaccount of the Rate Reduction Bond Memorandum Account
proposed by PG&E will track this, and allow PG&E to make a determination of
whether the issuance of more RRBs is appropriate. Therefore, PG&E is authorized
to put this ratemaking mechanism, as described in its prepared testimony, into
place.
Moreover, there are several ratemaking adjustments which may need to be
made to residential and small commercial customers' rates after the end of the
rate-freeze period due to the RRB transaction.
Some of these adjustments relate to amounts held by the SPE. The
distinction between amounts owned by the SPE and amounts owned by PG&E must be
respected. The SPE is distinct from PG&E, and in light of bankruptcy
considerations it would be inappropriate for the Commission to order that such
amounts be paid by the SPE to PG&E.
The ratemaking can be accomplished, while respecting this distinction.
PG&E's rates charged to residential and small commercial customers will be
periodically reduced while transition property remains outstanding to reflect
(1) distributions by the SPE to PG&E, and (2) any increase in the value of
PG&E's ownership interest in the SPE. It is expected that, after payment of SPE
expenses, any undistributed earnings or overcollateralization actually collected
as a part of the FTA charges and returned to the SPE will result in a
corresponding increase in PG&E's ownership in the SPE.
Adjustments will be necessary due to:
1. the after-tax interest earnings on the FTA charges before
PG&E forwards them to the Trustee;
2. the amount received by PG&E, from SPE dividends or due
to an increase in the value of PG&E's ownership interest in
the SPE, due to investment income earned by the SPE and
any overcollateralization amounts or other FTA charges that
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are released by the Trustee to the SPE and not used to make
payments on the RRBs;
3. the servicing fees (less incremental expenses incurred by
PG&E as servicer) received by PG&E after the rate-freeze
period;
4. total savings to which residential and small commercial
customers are entitled given the amount of transition costs
financed through RRBs, but which are in excess of what was
provided through the 10% rate reduction during the rate-freeze
period;
5. any carrying cost savings associated with the financed taxes.
PG&E is to pass each of these back to residential and small commercial
customers via the Rate Reduction Bond Memorandum Account ratemaking mechanism
described in its prepared testimony, with one exception. The Utility Reform
Network (TURN) and the Office of Ratepayer Advocates point out that the
appropriate carrying cost for the savings not yet provided to residential and
small commercial customers (item (4) above), is PG&E's authorized rate of return
until the savings are actually passed on to those customers through lower rates.
During the rate-freeze period, PG&E is to return all of the servicing fees
it receives from the SPE by means of the revenues it imputes to the CTC
ratemaking mechanism, which includes the full amount of the FTA charges,
including the full amount of the servicing fees.
After the rate-freeze period ends, PG&E shall consolidate any annual credit
or debit amounts described above and record them in the Rate Reduction Bond
Memorandum Account. Those amounts will then be consolidated annually with other
pending rate changes considered in the annual Revenue Adjustment Proceeding, or
successor ratemaking proceeding authorized by the Commission.
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FINDINGS OF FACT
1. The rates that residential and small commercial customers of PG&E
would have paid if this financing order were not adopted are the rates in effect
as of June 10, 1996.
2. The designation of the fixed transition amounts and the issuance of up
to $3.5 billion of SPE Debt Securities and RRBs in connection with such fixed
transition amounts will reduce rates that residential and small commercial
customers of PG&E would have paid if this financing order were not adopted.
3. Residential and small commercial customers will benefit from the
issuance of rate reduction bonds and the reduction of rates provided that the
net present value of fixed transition amounts and rate reductions is positive
when calculated in accordance with the methodology set forth by PG&E in its
application and related testimony.
4. PG&E's request for recovery of a portion of its transition costs and
the costs of providing, recovering, financing and refinancing transition costs
in an aggregate principal amount of up to $3.5 billion from proceeds of SPE Debt
Securities and RRBs, including all costs of issuance, is reasonable in relation
to estimates of the total amount of such transition costs.
5. PG&E estimates total costs of issuance to be less than $25 million.
6. The owner of the transition property will have the right to recover
principal, interest, and related costs (including taxes) associated with the SPE
Debt Securities and the RRBs through fixed transition amounts, which are
authorized by this financing order.
7. The methodology used to calculate the FTA charges associated with rate
reduction bond issuance as described in PG&E's prepared testimony is reasonable.
8. The methodology to calculate routine FTA charge adjustments as
described in PG&E's prepared testimony is reasonable.
9. If residential or small commercial customers fail to pay their utility
bills in full, any shortfall in revenues received must be allocated between FTA
charges and
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PG&E's charges based on the ratio of the amount of the bills relating to the FTA
charges and the amount relating to PG&E's charges, to avoid PG&E favoring its
own interests.
10. The rate collection methods described in PG&E's application to ensure
that the FTA charges are nonbypassable are reasonable.
11. The ratemaking mechanisms described in the application, including the
Rate Reduction Bond Memorandum Account, FTA charges tariff language, and
modifications to PG&E's Preliminary Statement and competitive transition charge
ratemaking mechanism are reasonable; provided, however, that balances that are
to be credited to ratepayers in respect of issuances of rate reduction bonds
that subsequently were determined not to be necessary in order to financing a
rate reduction, should bear interest at PG&E's authorized rate of return.
CONCLUSIONS OF LAW
1. Because the designation of the Fixed Transition Amounts and the
issuance of up to $3.5 billion of SPE Debt Securities and RRBs in connection
with such Fixed Transition Amounts will reduce rates that residential and small
commercial customers of PG&E would have paid if this financing order were not
adopted, a financing order should be adopted, as required by PU Code Section
841(a).
2. The amount of SPE Debt Securities and RRBs to be issued should be
determined using the sizing methodology described in PG&E's prepared testimony
based on market conditions at the time the RRBs are priced.
3. The principal on the SPE Debt Securities and the RRBs should be repaid
in substantially equal annual amounts so that FTA charges will decline over
time.
4. Consistent with PG&E's showing of ratepayer benefit, the expected
final maturity of the SPE Debt Securities and the RRBs should be no later than
ten years from the date of issuance with a legal final maturity to be determined
by the Infrastructure Bank.
5. The Infrastructure Bank and/or STO should determine the
overcollateralization amount required.
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6. The Infrastructure Bank and/or STO should determine bond counsel fees,
underwriter fees, underwriter counsel fees, bond trustee fees, Infrastructure
Bank fees, rating agency fees, SEC registration fees, printing fees, and other
expenses related to the sale of the RRBs pursuant to an agreement to which the
Infrastructure Bank or the STO is a party.
7. Costs of issuance for the first $3.1 billion aggregate principal
amount of RRBs should be limited to $25 million and for the next $900 million
aggregate principal amount, to 1%.
8. The methodology used to calculate the FTA charges associated with rate
reduction bond issuance should be as described in PG&E's prepared testimony.
9. FTA charges should be filed with the Commission in advice letters (the
Issuance Advice Letters).
10. FTA charges should be included as a separate line item on customers'
bills, if practicable.
11. The rate collection methods described in PG&E's application to ensure
that the FTA charges are nonbypassable should be approved.
12. Each Issuance Advice Letter associated with this financing order
should be effective five business days after filing, upon which it should be
deemed to constitute the plan approved by this financing order for purposes of
PU Code Section 841(c), and the FTA charges established thereby will constitute
fixed transition amounts.
13. Procedures are required for the expeditious approval by the Commission
of periodic True-Up Mechanisms to the FTA charges (as may be necessary to ensure
timely recovery of (a) the principal amount of all transition costs that are the
subject of this financing order, and (b) the costs of capital associated with
the provision, recovery, financing, or refinancing thereof, including the costs
of issuing, servicing and retiring (including, without limitation, interest) the
SPE Debt Securities and RRBs contemplated by this financing order).
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14. The methodology to calculate routine FTA charge adjustments should be
as described in PG&E's prepared testimony.
15. Routine FTA charge adjustments should be filed with the Commission in
routine True-Up Mechanism advice letters.
16. Changes to FTA charges proposed by routine True-Up Mechanism advice
letters should be filed with the Commission annually at least 15 days before the
end of each calendar year, and the resulting adjustments to the FTA charges
should be implemented at the beginning of the calendar year next following the
date of such filing.
17. Routine True-Up Mechanism advice letters should be permitted to be
filed at least 15 days before the end of any calendar quarter and the resulting
adjustments to the FTA charges should be implemented at the beginning of the
calendar quarter next following the date of such filing. These quarterly
adjustments should be required when a variance from the scheduled principal
amortization schedule as set forth in the related Issuance Advice Letter
triggers a requirement for such a filing.
18. Because routine True-Up Mechanism advice letters to be filed in
accordance with the adjustment calculation methodology found reasonable in this
financing order are to use the pro forma FTA charge annual and quarterly True-Up
Mechanism advice letters attached to this financing order as Appendix A, no
protests to such advice letter filings should be allowed, and the resulting FTA
charge adjustments should be effective as requested in such filings.
19. The provisions described in PG&E's application to ensure that the FTA
charges are nonbypassable should be approved.
20. Upon the effective date of each Issuance Advice Letter associated with
this financing order, all of the transition property identified in such advice
letter will constitute a current property right and will thereafter continuously
exist as property for all purposes.
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21. The transition property identified in an Issuance Advice Letter
associated with this financing order should, without limitation, include (1) the
right, title and interest in and to the FTA charges set forth in such advice
letter, as adjusted from time to time, (2) the right to be paid the total
amounts set forth in such advice letter, (3) the right, title and interest in
and to all revenues, collections, claims, payments, money, or proceeds of or
arising from such FTA charges, and (4) all rights to obtain adjustments to such
FTA charges under the True-Up Mechanisms.
22. The holders of the transition property will be entitled to recover
fixed transition amounts in the aggregate amount equal to the principal amount
of the SPE Debt Securities or the RRBs (as applicable), all interest thereon,
the overcollateralization amount and all related fees, costs and expenses in
respect of the scheduled payment of the SPE Debt Securities and RRBs.
23. The Commission should approve the sale by PG&E of the transition
property identified in an Issuance Advice Letter to one or more SPEs, as
identified in such advice letter.
24. Upon the sale by PG&E of the transition property to one or more SPEs,
(1) each such SPE should have all of the rights originally held by PG&E with
respect to such transition property, including, without limitation, the right to
exercise any and all rights and remedies to collect any amounts payable by any
customer in respect of such transition property, notwithstanding any objection
or direction to the contrary by PG&E and (2) any payment by any customer to such
SPE will discharge such customer's obligations in respect of such transition
property to the extent of such payment, notwithstanding any objection or
direction to the contrary by PG&E.
25. Upon the sale by PG&E of the transition property to one or more SPEs,
PG&E should not be entitled to recover the FTA charges associated with such
transition property other than for the benefit of the holders of the SPE Debt
Securities and the RRBs, in accordance with PG&E's duties as servicer.
26. Each SPE identified in an Issuance Advice Letter, upon approval by the
Infrastructure Bank, will constitute financing entities for all purposes of AB
1890.
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27. The pledge by each SPE identified in an Issuance Advice Letter of such
SPE's right, title and interest in and to the transition property and such SPE's
other assets as security for the SPE Debt Securities should be approved.
28. Each Issuer, identified in an Issuance Advice Letter and approved by
the Infrastructure Bank, are approved to issue RRBs directly or indirectly
through the SPE on terms to be approved by the Infrastructure Bank. The
aggregate principal amount of RRBs related to all such PG&E Issuance Advice
Letters associated with this financing order should not exceed $3.5 billion.
29. To the extent stated in an Issuance Advice Letter, the Commission
should approve the pledging by the Issuer(s), as security for the RRBs, of such
Issuer's right, title and interest in and to the SPE Debt Securities and all
security therefor.
30. Any default under the documents relating to the SPE Debt Securities or
the RRBs will entitle the holders of the SPE Debt Securities or RRBs or the
trustees or representatives for such holders to exercise any and all rights or
remedies such holders or such trustees or representatives therefor may have
pursuant to any statutory lien on the transition property.
31. In the event of default by PG&E in payment to or for the benefit of
the SPE of the FTA charges, the Commission, upon the application by (1) the
holders of the SPE Debt Securities or the RRBs and the trustees or
representatives therefor as beneficiaries of any statutory lien permitted by the
PU Code, (2) the SPE or its assignees, (3) the Issuer, or (4) pledgees or
transferees, including transferees under PU Code Section 844, of the transition
property, should order the sequestration and payment to or for the benefit of
the SPE or such other party of revenues arising with respect to the transition
property.
32. For purposes of eligibility to receive the rate reduction and
responsibility to pay for FTA charges, PG&E's residential and small commercial
customers should be determined as described in PG&E's prepared testimony.
33. The ratemaking mechanisms described in the application, including the
Rate Reduction Bond Memorandum Account, FTA charges tariff language, and
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modifications to PG&E's Preliminary Statement and competitive transition charge
ratemaking mechanism should be approved; provided, however, that balances that
are to be credited to ratepayers in respect of issuances of rate reduction bonds
that subsequently were determined not to be necessary in order to finance a 10%
rate reduction from the rates in effect as of June 10, 1996, should bear
interest at PG&E's authorized rate of return.
34. PG&E should not voluntarily resign as initial servicer without the
prior approval of the Commission.
O R D E R
IT IS ORDERED that:
1. The application of Pacific Gas and Electric Company (PG&E) for a
financing order pursuant to Public Utilities (PU) Code Section 841(a) is
approved subject to the terms and conditions stated in the following ordering
paragraphs.
2. PG&E may recover an aggregate total principal amount of three billion,
five hundred million dollars ($3.5 billion) in transition costs, as defined by
PU Code Section 840(f), which may be recovered through fixed transition amounts
(FTA) as defined by PU Code Section 840(d), to the extent of the sum of the
principal amount of (i) related rate reduction bonds, as defined by PU Code
Section 840(e), issued by a financing entity, as defined by PU Code Section
840(b) and (ii) the transition property, as defined in PU Code Section 840(g),
pledged as overcollateralization for the issuance of such rate reduction bonds.
3. PG&E may sell and assign all or portions of its interest in transition
property arising from or constituting the FTA that are the subject of this
financing order to one or more affiliates of PG&E, of the character described in
the application as a Special Purpose Entity (SPE). Upon the sale by PG&E of the
transition property to one or more SPEs, (1) each such SPE shall have all of the
rights originally held by PG&E with respect to such transition property,
including, without limitation, the right to exercise any and all rights and
remedies to collect any amounts payable by any customer in respect of such
transition property, notwithstanding any objection or
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direction to the contrary by PG&E and (2) any payment by any customer to such
SPE shall discharge such customer's obligations in respect of such transition
property to the extent of such payment, notwithstanding any objection or
direction to the contrary by PG&E. Upon the sale by PG&E of the transition
property to one or more SPEs, PG&E shall not be entitled to recover the FTA
charges associated with such transition property other than for the benefit of
the holders of the SPE debt securities and the related rate reduction bonds in
accordance with PG&E's duties as servicer with respect to such rate reduction
bonds.
4. The initial FTA charges for such transition property shall be filed
with the Commission in advice letters substantially in the form attached to this
financing order as Appendix A as a pro forma Issuance Advice Letter, which shall
not be subject to protest, which shall be completed in accordance with the
methodology described by PG&E in its application and supporting testimony, which
shall state that the net present value of benefits to ratepayers is a positive
number, and which shall be effective five business days after filing with the
Commission, whereupon each such Issuance Advice Letter shall be deemed to
constitute the plan approved by this Commission within the meaning of PU Code
Section 840(d).
5. PG&E or an SPE may sell or assign all or portions of its interest in
such transition property to one or more financing entities.
6. PG&E or an SPE may pledge all or portions of its interest in such
transition property to one or more financing entities, and an SPE may pledge any
other asset, to secure debt securities of the related SPE that are not
themselves rate reduction bonds but substantially mirror the financial terms and
conditions of the rate reduction bonds issued in connection with such pledge;
provided, that, subject to the approval of the California Infrastructure and
Economic Development Bank (Infrastructure Bank), in the case of rate reduction
bonds bearing a variable rate of interest, such debt securities may pay a fixed
rate of interest.
7. One or more financing entities may pledge such transition property as
collateral for rate reduction bonds.
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8. One or more financing entities may issue rate reduction bonds in
connection with such transition property upon the terms and conditions approved
by the Infrastructure Bank; provided, however, that the principal on rate
reduction bonds shall be repaid in substantially equal annual amounts and shall
have expected maturities of ten years or less from the date of issuance.
9. To the extent that any interest in such transition property is so sold
or assigned, or is so pledged as collateral, PG&E is authorized to continue to
operate its system to provide service to its customers, and, as servicer under
the transaction documents associated with the related rate reduction bonds,
collect amounts in respect of the FTA for the benefit and account of the
financing entity, and account for and remit these amounts to or for the account
of the financing entity.
10. PG&E and each successor servicer shall separately state FTA charges
for the purpose of each customer's bill if practicable; otherwise, FTA charges
will be stated as required for other charges described in PU Code Section
367(a)(1)-(6).
11. PG&E and each successor servicer shall allocate amounts collected from
a customer pro rata between FTA and other charges.
12. In the event of failure of any customer to pay FTA charges, PG&E is
authorized to shut-off power of such customer in accordance with Commission-
approved shut-off policies, at the direction of the related servicer.
13. PG&E is authorized to implement the rate collection methods described
in the application to ensure that the FTA charges are nonbypassable.
14. PG&E, or a successor servicer, on behalf of the related financing
entity is authorized to file routine, non-routine, and statutorily required FTA
charge adjustments (True-Up Mechanisms), which shall continue until the all
payments of principal and interest to which the holders of the related rate
reduction bonds are entitled have been paid in full. True-Up Mechanism advice
letter filings shall be in substantially the form attached to this Financing
Order as Appendix A and shall be completed in accordance with the methodology
described in PG&E's application and supporting testimony.
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15. A non-routine True-Up Mechanism advice letter may be filed at least 90
days before the end of any calendar quarter and the resulting adjustments to the
FTA charges shall be implemented at the beginning of the next calendar quarter.
Non-routine True-Up Mechanism advice letters are subject to confirmation by the
Commission's Energy Division. However, if the Energy Division believes
modifications to such Advice Letters are needed, unless such differences are
resolved between the Energy Division and PG&E, or a successor servicer, or if
the Commission issues a resolution to resolve any dispute, PG&E, or a successor
servicer, will be authorized to implement the FTA charge adjustments it has
proposed on the 90th day after the filing.
16. A True-Up Mechanism advice letter shall be filed at least 15 days
before each anniversary of the issuance of this financing order. The Commission
shall determine on this financing order issuance anniversary, as required by PU
Code Section 841(c), whether adjustments to the FTA charges are required, with
the resulting adjustments to the FTA charges, if necessary, to be implemented
within 90 days of this financing order issuance anniversary.
17. To the extent that rate reduction bonds have been issued, beginning
January 1, 1998, PG&E shall reduce the rates to eligible residential and (as
defined in PU Code Section 331(h)) small commercial customers, from the rates
that were in effect on June 10, 1996 by providing a 10% bill credit. For such
purpose, eligible customers shall include all residential customers, commercial
customers on Schedules A-1 and A-6, and all Schedule A-10 and E-19 customers
with peak demand, determined on a one-time basis, in at least 9 of the 12 most
recent billing periods ending prior to October 1, 1997, of less than 20 kW.
18. In the event that PG&E concludes that rate reduction bonds cannot be
issued in time to commence the rate reduction on January 1, 1998, PG&E shall
submit a revised application pursuant to PU Code (S) 368 for approval of a cost
recovery plan that provides for a 10% rate reduction for residential and small
commercial customers as of January 1, 1998.
34
<PAGE>
19. PG&E is authorized to establish by advice letter filing, the Rate
Reduction Bond Memorandum Account, FTA charges tariff language, and
modifications to PG&E's Preliminary Statement and competitive transition charge
ratemaking mechanism as described in the application; provided, that balances
that are to be credited to ratepayers in respect of issuances of rate reduction
bonds that subsequently were determined not to be necessary in order to finance
a 10% rate reduction from the rates in effect as of June 10, 1996, should bear
interest at PG&E's authorized rate of return.
20. PG&E shall not voluntarily resign as initial servicer without the
prior approval of the Commission.
21. This financing order shall become effective in accordance with its
terms and conditions only when PG&E files with the Commission its written
consent to all terms and conditions of this financing order.
22. This financing order shall be void and of no force or effect if PG&E
does not file its written consent to all terms and conditions of this financing
order on or prior to November 3, 1997.
23. On or after the effective date of this financing order, upon request
of the Infrastructure Bank or the State Treasurer's Office (STO), or both of
them, the President of the Commission, a Commissioner assigned to this
application, the Executive Director of the Commission, his nominee in a notice
filed in this docket, or any of them, are hereby authorized and directed, for
and on behalf of and in the name of the Commission to execute and deliver a
certificate to the Infrastructure Bank or the STO, or both of them, that
attaches a true, correct, and complete copy of this financing order and
certifies such copy to be the act and deed of this Commission, and the recipient
of such certificate may rely upon such certificate for all purposes in
connection with the issuance of any series of rate reduction bond authorized by
this financing order. Thereafter, upon request of the Infrastructure Bank or the
STO, or both of them, the President of the Commission, a Commissioner assigned
to this application, the Executive Director of the Commission, his nominee in a
notice filed in this docket, or
35
<PAGE>
any of them, are hereby authorized and directed, for and on behalf of and in the
name of the Commission to execute and deliver a certificate to the
Infrastructure Bank or the STO, or both of them, to certify that this financing
order has not been altered, rescinded, amended, modified, revoked, or
supplemented as of the date of the closing of any issuance of rate reduction
bonds authorized by this financing order.
24. Application 97-05-006 is closed effective at the close of business on
November 3, 1997 or upon filing of PG&E of its consent to the terms and
conditions of this financing order, whichever first occurs.
Dated September 3, 1997, at San Francisco, California.
P. GREGORY CONLON
President
JESSIE J. KNIGHT, JR.
HENRY M. DUQUE
JOSIAH L. NEEPER
RICHARD A. BILAS
Commissioners
36
<PAGE>
APPENDIX A
PRO FORMA
ISSUANCE
ADVICE LETTER
[date]
ADVICE ________-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
ENERGY DIVISION
SUBJECT: Issuance Advice Filing for Rate Reduction Bonds
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-055
(Decision), Ordering Paragraph No. 4, Pacific Gas and Electric Company (PG&E)
hereby transmits for filing, on the pricing date of this series of Rate
Reduction Bonds, the initial FTA charges for the series. This Issuance Advice
Filing is for the Rate Reduction Bonds series _________, class(es) __________.
PURPOSE
- -------
This filing establishes initial FTA charges for rate schedules for residential
and eligible small commercial customers. This filing also establishes the
Transition Property to be sold to the Transition Property Owner (SPE).
BACKGROUND
- ----------
In Decision No. 97-09-055, the Commission authorized PG&E to file Issuance
Advice Letters when pricing terms for Rate Reduction Bonds have been
established. Issuance Advice Letter filings are those in which PG&E uses the
bond sizing methodology and FTA charge formulas found reasonable by the
Commission in Decision No. 97-09-055 to establish initial FTA charges for a
series of Rate Reduction Bonds. Using the methodology approved by the Commission
in Decision No. 97-09-055, this filing establishes FTA charges.
Because this series of Rate Reduction Bonds is being issued prior to January 1,
1998, to preserve the rate freeze mandated by AB 1890, concurrent with the
implementation of the FTA charges, the Energy Cost Adjustment Clause rate
component will be reduced by an amount equal to the FTA charges so that total
rates remain frozen.
-1-
<PAGE>
ISSUANCE INFORMATION:
- ---------------------
Rate Reduction Bond Name:_____________
Rate Reduction Bond Issuer: _____________
Transition Property Owner (SPE): _________
Trustee(s): ____________
Closing Date: __________
Bond Rating: __________
Amount Issued: _____________
Issuance Costs: _________
Issuance Costs Approved by Infrastructure Bank or STO: __________
Issuance Costs as a Percent of Amount Issued: ___________
Cumulative Aggregate Cumulative Issuance Costs for all Series: ____________
Transition Costs Financed: ______
Coupon Rate(s): _____________
Call Features: _________
California Tax Exempt (yes/no): ______
Expected Principal Amortization Schedule: See Attachment 1
Expected Final Maturity: ________
Legal Final Maturity: _______
Distributions to Investors (monthly or quarterly): __________
Annual Servicing Fee as a percent of the issuance amount: _________
Overcollateralization amount for the series: ________
Pledges by Issuer of SPE Debt Securities and all security therefor:________
Quarterly Variance Trigger Mechanism
- ------------------------------------
Each quarter the servicer will compare the actual FTA outstanding balance with
the expected FTA outstanding balance as set forth in Attachment 2. If the
variance is greater than _____%, a change to the FTA charges will be requested
via a True-Up Mechanism Advice Letter in accordance with Decision No. 97-09-055.
Confirmation of Ratepayer Benefits
- ----------------------------------
Decision No. 97-09-055 requires PG&E to demonstrate, using the bond sizing model
found reasonable in that Decision, that the actual pricing terms of the Rate
Reduction Bonds result in net present value benefits. Attached to this Advice
Filing is a spreadsheet calculation which shows expected net present value
benefits of $___ million for this series of Rate Reduction Bonds.
-2-
<PAGE>
FTA Charges
- -----------
Table I below shows the current assumptions for each of the variables used in
the FTA
charges calculation.
<TABLE>
<CAPTION>
TABLE I
INPUT VALUES FOR FTA CHARGES
- -------------------------------------------------------------------------------
<S> <C>
Monthly residential kWh sales
Monthly eligible small commercial kWh sales
Percent of revenue requirement allocated to residential customers
Percent of revenue requirement allocated to eligible small commercial
customers
Percent of residential customers' revenue written off
Percent of eligible small commercial customers' revenue written off
Percent of residential customers' billed amounts expected to be uncollected
Percent of small commercial customers' billed amounts expected to be
uncollected
Percent of billed amounts collected in current month
Percent of billed amounts collected in second month after billing
Percent of billed amounts collected in third month after billing
Percent of billed amounts collected in fourth month after billing
Percent of billed amounts collected in fifth month after billing
Percent of billed amounts collected in sixth month after billing
Monthly ongoing transaction expenses
Expected FTA outstanding balance as of ___/___/___
- -------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
Table II shows the initial FTA charges calculated for residential and eligible
small commercial customers. The FTA calculations are shown in Attachment 3.
<TABLE>
<CAPTION>
---------------------------------------------
TABLE II
---------------------------------------------
<S> <C>
Residential Customer FTA Charge c/kWh
---------------------------------------------
Eligible Small Commercial Customer
FTA Charge c/kWh
---------------------------------------------
</TABLE>
Attached are proposed changes to Part I of PG&E Preliminary Statement to show
FTA charges to be effective ___________, [year].
Transition Property
- -------------------
transition property is the property described in Public Utilities Code (S)840(g)
relating to the FTA charges set forth herein, including, without limitation, all
of the following:
(1) The right, title and interest in and to the FTA charges set forth herein,
as adjusted from time to time.
(2) The right to be paid the total amounts shown on Attachment 2.
(3) The right, title and interest in and to all revenues, collections, claims,
payments, money, or proceeds of or arising from the FTA charges, set forth
herein.
(4) All rights to obtain adjustments to the FTA charges under the True-Up
Mechanism.
These FTA charges, as adjusted from time to time, shall remain in place until
the total amounts in Attachment 2 are paid in full to the owner of the
transition property, or its assignee(s).
EFFECTIVE DATE
- --------------
In accordance with Decision No. 97-09-055, these FTA charges shall be effective
five business days after filed and will continue to be effective, unless they
are changed by subsequent FTA Charge Issuance Advice Letter, or an FTA Charge
True-Up Mechanism Advice Letter.
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-006. In accordance with Public Utilities Code
(S)491, notice
-4-
<PAGE>
to the public is hereby given by filing and keeping this filing open for public
inspection at the Company's corporate headquarters.
Enclosures
cc: CPUC, SF - Attn: Paul Clanon, Energy Division
CPUC, SF - Attn: Elena Schmid, ORA
CPUC, SF - Attn: Juanita Porter, Energy Division
-5-
<PAGE>
ATTACHMENT 1
EXPECTED PRINCIPAL AMOUNT AMORTIZATION
SERIES _____, CLASS _____
-1-
<PAGE>
ATTACHMENT 2
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $_____ principal amount, plus
interest on such the principal amount, plus a $___ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D. 97-09-055.
The FTA charges shall be adjusted from time to time, at least annually, via
the FTA Charge True-Up Mechanism in accordance with D. 97-09-055.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
Payment Date Receipt Amount Payment Amount Outstanding Principal
------------ -------------- -------------- ---------------------
<S> <C> <C> <C>
[date 1] [$receipt 1] [$payment 1] [$outstanding principal 1]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal n]
[$0]
</TABLE>
-1-
<PAGE>
APPENDIX A
PRO FORMA
ROUTINE ANNUAL FTA CHARGE TRUE-UP MECHANISM
ADVICE LETTER
[DRAFT PRO FORMA ANNUAL FTA CHARGE ADJUSTMENT ADVICE FILING]
[date]
ADVICE ________-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
ENERGY DIVISION
SUBJECT: Annual FTA Charge True-Up Mechanism Advice Filing
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-055
(Decision), Ordering Paragraph No. 14, Pacific Gas and Electric Company (PG&E)
as servicer of the Rate Reduction Bonds and on behalf of [the Note Trustee as
assignee of] [Special Purpose Entity] is required to apply for adjustment to FTA
charges at least 15 days before the end of each calendar year.
PURPOSE
- -------
This filing establishes revised FTA charges for rate schedules for residential
and eligible small commercial customers. During the rate-freeze period, changes
in the FTA charges will be offset by equal and offsetting changes in the
residual Competition Transition Charge (CTC) component of customers' rates.
-1-
<PAGE>
BACKGROUND
- ----------
In Decision No. 97-09-055, the Commission authorized PG&E to file routine True-
Up Mechanism Advice Letters on an annual basis, at least 15 days before the end
of the calendar year. Routine Advice Letter filings are those where PG&E uses
the methodology found reasonable by the Commission in Decision No. 97-09-055 to
revise existing FTA charges.
Using the methodology approved by the Commission in Decision No. 97-09-055, this
filing modifies the variables used in the FTA charge calculation and provides
the resulting modified FTA charges. Table I shows the revised assumptions for
each of the variables used in calculating the FTA charges for residential and
small commercial customers. The assumptions underlying the current FTA charges
were filed in Advice ____ -E, an Issuance Advice Letter, as authorized by
Decision No. 97-09-055.
the Attachment 1 shows the revised payment schedule.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TABLE I
INPUT VALUES FOR REVISED FTA CHARGES
- --------------------------------------------------------------------------------
<S> <C>
Monthly residential kWh sales
Monthly eligible small commercial kWh sales
Percent of revenue requirement allocated to residential customers
Percent of revenue requirement allocated to eligible small commercial customers
Percent of residential customers' revenue written off
Percent of eligible small commercial customers' revenue written off
Percent of residential customers' billed amounts expected to be uncollected
Percent eligible small commercial customers' billed amounts expected to
be uncollected
Percent of billed amounts collected in current month
Percent of billed amounts collected in second month after billing
Percent of billed amounts collected in third month after billing
Percent of billed amounts collected in fourth month after billing
Percent of billed amounts collected in fifth month after billing
Percent of billed amounts collected in sixth month after billing
Percent of billed amounts remaining less uncollectibles
Monthly ongoing transaction expenses
Expected FTA outstanding balance as of ___/___/___
Over- or undercollection of principal to be reflected in the new FTA charges
- --------------------------------------------------------------------------------
</TABLE>
Table II shows the revised FTA charges calculated for residential and eligible
small commercial customers. The FTA calculations are shown in Attachment 2.
-2-
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------
TABLE II
---------------------------------------------
<S> <C>
Residential Customer FTA Charge c/kWh
Eligible Small Commercial Customer
FTA Charge c/kWh
---------------------------------------------
</TABLE>
Attached are proposed changes to Part I of PG&E's Preliminary Statement to show
FTA charges to be effective January 1, [year]
EFFECTIVE DATE
- --------------
In accordance with Decision 97-09-055, routine True-Up Mechanism Advice Letters
for required annual FTA charge adjustments shall be filed at least 15 days
before the end of each calendar year and these adjustments to FTA charges shall
be effective at the beginning of the next calendar year. No Commission
resolution is required. Therefore, these FTA charges shall be effective January
1, [year] through December 31, [year],unless they are changed by a quarterly
adjustment prior to December 31, [year].
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-006. In accordance with Public Utilities Code
(S)491, notice to the public is hereby given by filing and keeping this filing
open for public inspection at the PG&E's corporate headquarters.
Enclosures
cc: CPUC, SF - Attn: Paul Clanon, Energy Division
CPUC, SF - Attn: Elena Schmid, ORA
CPUC, SF - Attn: Juanita Porter, Energy Division
-3-
<PAGE>
ATTACHMENT 1
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $_____ principal amount, plus
interest on such principal amount, plus a $___ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D. 97-09-055.
The FTA charges shall be adjusted from time to time, at least annually, via
the FTA Charge True-Up Mechanism in accordance with D. 97-09-055.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
Payment Date Receipt Amount Payment Amount Outstanding Principal
------------ -------------- -------------- ---------------------
<S> <C> <C> <C>
[date 1] [$receipt 1] [$payment 1] [$outstanding principal 1]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal n]
[$0]
</TABLE>
-1-
<PAGE>
APPENDIX A
PRO FORMA
ROUTINE QUARTERLY FTA CHARGE TRUE-UP MECHANISM
ADVICE LETTER
[DRAFT PRO FORMA QUARTERLY FTA CHARGE ADJUSTMENT ADVICE LETTER]
________, [year]
ADVICE ________-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
ENERGY DIVISION
SUBJECT: Quarterly FTA Charge True-Up Mechanism Advice Filing
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-055
(Decision), Ordering Paragraph No. 14, Pacific Gas and Electric Company (PG&E)
as servicer of the Rate Reduction Bonds and on behalf of [the Note Trustee as
assignee of] [Special Purpose Entity] is required to apply for FTA charges at
least 15 days before the end of each quarter, if in the previous quarter the
variance between the expected outstanding FTA principal balance and the actual
outstanding principal balance exceeds certain limits.
Attachment 1, PG&E's Quarterly Servicer Certificate for the ________ quarter of
19__, shows that the variance between the expected FTA outstanding balance and
the actual FTA outstanding balance exceeds the limit of ___%. Therefore, in
accordance with Ordering Paragraph No. 14, PG&E, as servicer of the Rate
Reduction Bonds, hereby transmits for filing this Advice Letter to revise the
FTA charges.
PURPOSE
- -------
This filing establishes revised FTA charges for rate schedules for residential
and eligible small commercial customers. During the rate-freeze period, changes
in the FTA charges will be offset by equal and offsetting changes in the
residual Competition Transition Charge (CTC) component of customers' rates.
-1-
<PAGE>
BACKGROUND
- ----------
In Decision No. 97-09-055, the Commission authorized PG&E to file routine True-
Up Mechanism Advice Letters on a quarterly basis, at least 15 days before the
end of the calendar quarter. Routine Advice Letter filings are those where PG&E
uses the methodology found reasonable by the Commission in Decision No. 97-09-
055 to revise existing FTA charges.
Using the methodology approved by the Commission in Decision No. 97-09-055, this
filing modifies the variables used in the FTA charge calculation and provides
the resulting modified FTA charges. Table I shows the revised assumptions for
each of the variables used in calculating the FTA charges for residential and
small commercial customers. The assumptions underlying the current FTA charges
were filed in Advice ________ -E, an Issuance Advice Letter, as authorized by
Decision No. 97-09-055.
Attachment 2 shows the revised payment schedule.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE 1
INPUT VALUES FOR REVISED FTA CHARGES
- --------------------------------------------------------------------------------
<S> <C>
Monthly residential kWh sales
Monthly eligible small commercial kWh sales
Percent of revenue requirement allocated to residential customers
Percent of revenue requirement allocated to eligible small commercial
customers
Percent of residential customers' revenue written off
Percent of eligible small commercial customers' revenue written off
Percent of residential customers' billed amounts expected to be uncollected
Percent of eligible small commercial customers' billed amounts expected to
be uncollected
Percent of billed amounts collected in current month
Percent of billed amounts collected in second month after billing
Percent of billed amounts collected in third month after billing
Percent of billed amounts collected in fourth month after billing
Percent of billed amounts collected in fifth month after billing
Percent of billed amounts collected in sixth month after billing
Percent of billed amounts remaining less uncollectibles
Monthly ongoing transaction expenses
Expected FTA outstanding balance as of ___/___/___
Over- or undercollection of principal to be reflected in the new FTA charges
- --------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
Table II shows the FTA charges calculated for residential and eligible small
commercial customers. The FTA calculations are shown in Attachment 3.
<TABLE>
<CAPTION>
TABLE II
-----------------------------------------------
<S> <C>
Residential Customer FTA Charge c/kWh
Eligible Small Commercial FTA Charge c/kWh
-----------------------------------------------
</TABLE>
Attached are proposed changes to Part I of PG&E's Preliminary Statement to show
FTA charges to be effective ___ 1, [year]___.
EFFECTIVE DATE
- --------------
In accordance with Decision No. 97-09-055, routine True-Up Mechanism Advice
Letters for quarterly FTA charge adjustments shall be filed at least 15 days
before the end of a calendar quarter and these adjustments to FTA charges shall
be effective at the beginning of the next calendar quarter. No Commission
resolution is required. Therefore, these FTA charges shall be effective ___ 1,
[year]_ through December 31, [year]__, unless they are changed by a quarterly
adjustment prior to December 31, [year]__.
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-006. In accordance with Public Utilities Code
(S)491, notice to the public is hereby given by filing and keeping this Advice
Filing open for public inspection at the Company's corporate headquarters.
Enclosures
cc: CPUC, SF - Attn: Paul Clanon, Energy Division
CPUC, SF - Attn: Elena Schmid, ORA
CPUC, SF - Attn: Juanita Porter, Energy Division
-3-
<PAGE>
ATTACHMENT 1
PG&E'S QUARTERLY SERVICER CERTIFICATE
-1-
<PAGE>
ATTACHMENT 2
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $_____ principal amount, plus
interest on such principal amount, plus a $___ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D. 97-09-055.
The FTA charges shall be adjusted from time to time, at least annually, via
the FTA Charge True-Up Mechanism in accordance with D. 97-09-055.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
Payment Date Receipt Amount Payment Amount Outstanding Principal
------------ -------------- -------------- ---------------------
<S> <C> <C> <C>
[date 1] [$receipt 1] [$payment 1] [$outstanding principal 1]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal n]
[$0]
</TABLE>
-1-
<PAGE>
EXHIBIT 99.3
FORM OF ISSUANCE ADVICE LETTER
<PAGE>
EXHIBIT 99.3
PRO FORMA
ISSUANCE
ADVICE LETTER
[date]
ADVICE ________-E
(U39E)
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
ENERGY DIVISION
SUBJECT: Issuance Advice Filing for Rate Reduction Bonds
Pursuant to California Public Utilities Commission (CPUC) Decision No. 97-09-055
(Decision), Ordering Paragraph No. 4, Pacific Gas and Electric Company (PG&E)
hereby transmits for filing, on the pricing date of this series of Rate
Reduction Bonds, the initial FTA charges for the series. This Issuance Advice
Filing is for the Rate Reduction Bonds series _________, class(es) __________.
PURPOSE
- -------
This filing establishes initial FTA charges for rate schedules for residential
and eligible small commercial customers. This filing also establishes the
Transition Property to be sold to the Transition Property Owner (SPE).
BACKGROUND
- ----------
In Decision No. 97-09-055, the Commission authorized PG&E to file Issuance
Advice Letters when pricing terms for Rate Reduction Bonds have been
established. Issuance Advice Letter filings are those in which PG&E uses the
bond sizing methodology and FTA charge formulas found reasonable by the
Commission in Decision No. 97-09-055 to establish initial FTA charges for a
series of Rate Reduction Bonds. Using the methodology approved by the Commission
in Decision No. 97-09-055, this filing establishes FTA charges.
Because this series of Rate Reduction Bonds is being issued prior to January 1,
1998, to preserve the rate freeze mandated by AB 1890, concurrent with the
implementation of the FTA charges, the Energy Cost Adjustment Clause rate
component will be reduced by an amount equal to the FTA charges so that total
rates remain frozen.
-1-
<PAGE>
ISSUANCE INFORMATION:
- ---------------------
Rate Reduction Bond Name:_____________
Rate Reduction Bond Issuer: _____________
Transition Property Owner (SPE): _________
Trustee(s): ____________
Closing Date: __________
Bond Rating: __________
Amount Issued: _____________
Issuance Costs: _________
Issuance Costs Approved by Infrastructure Bank or STO: __________
Issuance Costs as a Percent of Amount Issued: ___________
Cumulative Aggregate Cumulative Issuance Costs for all Series: ____________
Transition Costs Financed: ______
Coupon Rate(s): _____________
Call Features: _________
California Tax Exempt (yes/no): ______
Expected Principal Amortization Schedule: See Attachment 1
Expected Final Maturity: ________
Legal Final Maturity: _______
Distributions to Investors (monthly or quarterly): __________
Annual Servicing Fee as a percent of the issuance amount: _________
Overcollateralization amount for the series: ________
Pledges by Issuer of SPE Debt Securities and all security therefor:__________
Quarterly Variance Trigger Mechanism
- ------------------------------------
Each quarter the servicer will compare the actual FTA outstanding balance with
the expected FTA outstanding balance as set forth in Attachment 2. If the
variance is greater than _____%, a change to the FTA charges will be requested
via a True-Up Mechanism Advice Letter in accordance with Decision No. 97-09-055.
Confirmation of Ratepayer Benefits
- ----------------------------------
Decision No. 97-09-055 requires PG&E to demonstrate, using the bond sizing model
found reasonable in that Decision, that the actual pricing terms of the Rate
Reduction Bonds result in net present value benefits. Attached to this Advice
Filing is a spreadsheet calculation which shows expected net present value
benefits of $___ million for this series of Rate Reduction Bonds.
-2-
<PAGE>
FTA Charges
- -----------
Table I below shows the current assumptions for each of the variables used in
the FTA charges calculation.
- --------------------------------------------------------------------------------
TABLE I
INPUT VALUES FOR FTA CHARGES
- --------------------------------------------------------------------------------
Monthly residential kWh sales
- --------------------------------------------------------------------------------
Monthly eligible small commercial kWh sales
- --------------------------------------------------------------------------------
Percent of revenue requirement allocated to residential customers
- --------------------------------------------------------------------------------
Percent of revenue requirement allocated to eligible small commercial
customers
- --------------------------------------------------------------------------------
Percent of residential customers' revenue written off
- --------------------------------------------------------------------------------
Percent of eligible small commercial customers' revenue written off
- --------------------------------------------------------------------------------
Percent of residential customers' billed amounts expected to be uncollected
- --------------------------------------------------------------------------------
Percent of small commercial customers' billed amounts expected to be
uncollected
- --------------------------------------------------------------------------------
Percent of billed amounts collected in current month
- --------------------------------------------------------------------------------
Percent of billed amounts collected in second month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in third month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in fourth month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in fifth month after billing
- --------------------------------------------------------------------------------
Percent of billed amounts collected in sixth month after billing
- --------------------------------------------------------------------------------
Monthly ongoing transaction expenses
- --------------------------------------------------------------------------------
Expected FTA outstanding balance as of ___/___/___
- --------------------------------------------------------------------------------
-3-
<PAGE>
Table II shows the initial FTA charges calculated for residential and eligible
small commercial customers. The FTA calculations are shown in Attachment 3.
TABLE II
---------------------------------------------
Residential Customer FTA Charge c/kWh
Eligible Small Commercial Customer
FTA Charge c/kWh
---------------------------------------------
Attached are proposed changes to Part I of PG&E Preliminary Statement to show
FTA charges to be effective ___________, [year] .
Transition Property
- -------------------
transition property is the property described in Public Utilities Code (S)840(g)
relating to the FTA charges set forth herein, including, without limitation, all
of the following:
(1) The right, title and interest in and to the FTA charges set forth herein,
as adjusted from time to time.
(2) The right to be paid the total amounts shown on Attachment 2.
(3) The right, title and interest in and to all revenues, collections, claims,
payments, money, or proceeds of or arising from the FTA charges, set forth
herein.
(4) All rights to obtain adjustments to the FTA charges under the True-Up
Mechanism.
These FTA charges, as adjusted from time to time, shall remain in place until
the total amounts in Attachment 2 are paid in full to the owner of the
transition property, or its assignee(s).
EFFECTIVE DATE
- --------------
In accordance with Decision No. 97-09-055, these FTA charges shall be effective
five business days after filed and will continue to be effective, unless they
are changed by subsequent FTA Charge Issuance Advice Letter, or an FTA Charge
True-Up Mechanism Advice Letter.
NOTICE
- ------
Copies of this filing are being furnished to the parties on the attached service
list and to parties to A. 97-05-006. In accordance with Public Utilities Code
(S)491, notice
-4-
<PAGE>
to the public is hereby given by filing and keeping this filing open for public
inspection at the Company's corporate headquarters.
Enclosures
cc: CPUC, SF - Attn: Paul Clanon, Energy Division
CPUC, SF - Attn: Elena Schmid, ORA
CPUC, SF - Attn: Juanita Porter, Energy Division
-5-
<PAGE>
ATTACHMENT 1
EXPECTED PRINCIPAL AMOUNT AMORTIZATION
SERIES _____, CLASS _____
-1-
<PAGE>
ATTACHMENT 2
AMOUNTS RECEIVABLE AND EXPECTED PRINCIPAL AMOUNT AMORTIZATION
The total amount payable to the owner of the transition property, or its
assignee(s), pursuant to this advice letter is a $_____ principal amount, plus
interest on such the principal amount, plus a $___ overcollateralization amount,
plus other ongoing costs, to be obtained from FTA charges calculated in
accordance with D. 97-09-055.
The FTA charges shall be adjusted from time to time, at least annually, via
the FTA Charge True-Up Mechanism in accordance with D. 97-09-055.
The following amounts are scheduled to be paid by the Bond Trustee from FTA
charges it has received. These payment amounts include principal plus interest,
overcollateralization, and other ongoing costs.
<TABLE>
<CAPTION>
Payment Date Receipt Amount Payment Amount Outstanding Principal
------------ -------------- -------------- ---------------------
<S> <C> <C> <C>
[date 1] [$receipt 1] [$payment 1] [$outstanding principal 1]
. . . .
. . . .
. . . .
[date n] [$receipt n] [$payment n] [$outstanding principal n]
[$0]
</TABLE>
<PAGE>
EXHIBIT 99.6
INTERIM OPINION OF CPUC
<PAGE>
EXHIBIT 99.6
[LETTERHEAD OF STATE OF CALIFORNIA APPEARS HERE]
September 11, 1997
TO: PARTIES OF RECORD IN APPLICATION 97-05-006 ET AL.
Decision 97-09-054 was signed on September 3, 1997 with a concurrence from
Commissioners Neeper, Knight, Duque, and Bilas. However, the concurrence is not
available at the time of mailing the enclosed decision. It will be mailed at a
later date.
/s/ Lynn T. Carew
- -----------------
Lynn T. Carew, Chief
Administrative Law Judge
LTC:jac
Enclosure
<PAGE>
Decision 97-09-054 September 3, 1997
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
In the Matter of the Application of Pacific Gas and Electric Company for: (1)
Authority to Reduce Rates Effective January 1, 1998; (2) Authority to Sell or
Assign Transition Property to One or More Financing Entities; (3) Authority to
Service Rate Reduction Bonds on Behalf of Financing Entities; (4) Authority to
Establish Charges Sufficient to Recover Fixed Transition Amounts; and (5) Such
Further Authority Necessary for PG&E to Carry Out the Transactions Described in
this Application.
(U 39 E)
Application 97-05-006
(Filed May 6, 1997)
In the Matter of the Application of the Southern California Edison Company (U
338-E) for: (1) Authority to Reduce Rates Effective January 1, 1998; (2)
Authority to Sell or Assign Transition Property to One or More Financing
Entities; (3) Authority to Service Rate Reduction Bonds on Behalf of Financing
Entities; (4) Authority to Establish Charges Sufficient to Recover Fixed
Transition Amounts; and (5) Such Further Authority Necessary for Edison to Carry
Out the Transactions Described in this Application.
Application 97-05-018
(Filed May 6, 1997)
In the Matter of the Application of San Diego Gas and Electric Company for:
Authority to Reduce Rates Effective January 1, 1998; (2) Authority to Sell or
Assign Transition Property to One or More Financing Entities; (3) Authority to
Service Rate Reduction Bonds on Behalf of Financing Entities; (4) Authority to
Establish Charges Sufficient to Recover Fixed Transition Amounts; and (5) Such
Further Authority Necessary for PG&E to Carry Out the Transactions Described in
this Application.
Application 97-05-022
(Filed May 6, 1997)
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INTERIM OPINION............................................................. 3
SUMMARY..................................................................... 3
PROCEDURAL HISTORY.......................................................... 3
BACKGROUND.................................................................. 4
DESCRIPTION OF THE APPLICATIONS............................................. 6
Structure Of The Transactions............................................. 6
Size Of The Transactions.................................................. 7
Other Issuance-related Authority Requested................................ 8
Transition Property....................................................... 8
Mechanisms To Set Fixed Transition Amounts................................ 9
Setting Fixed Transition Amounts Initially..............................10
Adjusting Fixed Transition Amounts Periodically.........................10
RATE REDUCTION AUTHORIZATION..............................................11
RATEMAKING TREATMENT......................................................13
SERVICING.................................................................14
DISCUSSION..................................................................14
Rates That Apply In Absence Of Financing Orders...........................14
Whether Designation Of Fixed Transaction Amounts And Issuance Of Rate
Reduction Bonds Would Reduce Rates........................................18
Determination Of Fixed Transition Amounts.................................21
Other Issues..............................................................23
Whether PU Code section 367(E)(1) Precludes Financing Orders............24
Whether PU Code section 367(E)(2) Precludes Financing Orders............26
Whether PU Code Section 371 Precludes Financing Orders..................26
Whether PU Code Section 779.2 Precludes Financing Orders................27
Whether D,97-05-039 CREDIT STANDARDS SHOULD BE TIGHTENED................28
Application Of PROCEEDS.................................................29
Modification Of Structure Of Transaction To Achieve Desired
Tax Treatment...........................................................31
Additional Issuance of Rate Reduction Bonds.............................32
Need for Some
Issues Raised in the Applications to be Determined in Other Proceedings.....33
FINDINGS OF FACT............................................................34
CONCLUSIONS OF LAW..........................................................34
INTERIM OFFER...............................................................36
</TABLE>
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<PAGE>
INTERIM OPINION
SUMMARY
Pacific Gas & Electric Company (PG&E), Southern California Edison Company
(Edison), and San Diego Gas & Electric Company (SDG&E) (collectively, the
Applicants, each an electrical corporation within the meaning of Public
Utilities (PU) Section 218) separately apply for financing orders, as required
by PU Code Section 841(a). The Office of Ratepayer Advocates (ORA) gives its
qualified support to the applications. The Utility Reform Network (TURN) and the
California City-County Street Light Association (CAL-SLA) oppose the
applications. The California Farm Bureau Federation (Farm Bureau) briefed a
statutory interpretation issue and a specific proposal in Edison's application
regarding limitations on changing schedules, which Farm Bureau opposes. The
California Industrial Users (CIU) briefed a statutory interpretation issue.
Consistent with Decision (D) 96-12-077, the Commission will find, in
separate financing orders for each of the Applicants, that the designation of
fixed transition amounts as requested by each of the Applicants, and issuance of
rate reduction bonds in connection with some or all of the fixed transition
amounts would reduce rates that residential and small commercial customers would
have paid if the related financing order were not adopted.
In the event that any Applicant concludes that rates reduction bonds cannot
be issued in time to commence the rate reduction on January 1, 1998, we expect
to be so advised and that the Applicant will submit a revised application
pursuant to PU Code Section 368 that accomplishes the 10% rate reduction.
PROCEDURAL HISTORY
Applicants filed separate applications on May 6, 1997. On May 16, 1997,
the assigned administrative law judge (ALJ) issued a ruling consolidating the
applications, which present identical questions of law. TURN filed its protest
on May 20, 1997, and ORA filed its response to the applications on the same
date. A prehearing conference was held on May 27, 1997 and June 3, 1997, at
which it was determined that no disputed
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<PAGE>
issues of material fact existed requiring an evidentiary hearing. The
applications were ordered submitted on the concurrent opening briefs and reply
briefs filed June 16, 1997 and June 25, 1997, respectively. A draft of this
interim opinion, and drafts of separate financing orders, were served on the
parties on August 5, 1997, by an Assigned Commissioners' Ruling (ACR) that
invited comment. An ALJ ruling, filed August 12, 1997, asked parties to comment
upon the status of pending legislation that would amend several relevent
sections of the PU Code. Comments were received from Applicants, TURN, and ORA
on August 20, 1997, and reply comments were received from the Applicants and
TURN on August 27, 1997.
BACKGROUND
PU Code Section 841(a)/1/ provides as follows:
An electrical corporation shall, by June 1, 1997, and may from time to
time thereafter apply to the commission for a determination that
certain transition costs may be recovered through fixed transition
amounts, which would therefore constitute transition property under
this article. An electrical corporation may request this determination
by the commission in separate proceedings or in an order instituting
investigation or order instituting rulemaking, or both. The electrical
corporation shall in its application specify that the residential and
small commercial customers as defined in subdivision (h) of Section
331 would benefit from reduced rates through the issuance of rate
reduction bonds. The commission shall designate fixed transition
amounts as recoverable in one or more financing orders if the
commission determines, as part of its findings in connection with the
financing order, that the designation of the fixed transition amounts,
and issuance of rate reduction bonds in connection with some or all of
the fixed transition amounts would reduce rates that residential and
small commercial customers would have paid if the financing order were
not adopted. These customers shall continue to pay fixed transition
amounts after December 31, 2001, until the bonds are paid in full by
the financing entity. No electrical corporation shall be found to have
acted imprudently or unreasonably for failing to amend a
____________________
/1/ PU Code Section 841(a) was amended after the draft of this interim opinion
was served for comment. (See 1997 stats. Ch. 275) (SB 477).) SB 477 also amended
PU Code Sections 367, 840, other parts of Section 841, 842 and 843.
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<PAGE>
power purchase contract where the amendment would modify or waive an
existing requirement that the seller be a qualifying facility pursuant to
federal law.
PU Code Section 841(a) directed Applicants to apply to the Commission, by June
1, 1997, for a determination that certain transition costs (as defined in PU
Code Section 840(f)) may be recovered through fixed transition amounts (as
defined in PU Code Section 840(d)), which would therefore constitute transition
property (as defined in PU Code Section 840(g)). We must designate fixed
transition amounts as recoverable in one or more financing orders (as defined in
PU Code Section 840(c)) if we determine, as part of our findings in connection
with the financing order, that the designation of the fixed transition amounts,
and issuance of rate reduction bonds (as defined in PU Code Section 840(e)) by a
financing entity (as defined in PU Code Section 840(b)) in connection with some
or all of the fixed transition amounts, would reduce rates that residential and
small commercial customers/2/ would have paid if the financing order were not
adopted (PU Code (S) 841(a)). As required by PU Code Section 841(e), we have
adopted procedures, in Resolution ALJ-173, which require us to approve or deny
the applications not later than 120 days after the date of filing.
We may set aside various defined terms in PU Code Section 841(a)
temporarily. For present purposes, it may simply be noted that the proposed
transactions are intended to substitute lower-interest, longer-term, secured
obligations for higher-interest, shorter-term, unsecured obligations./3/ Rate
reduction bonds are secured by (or represent the right to, depending on the
specific structure of the transaction) transition property, which is a new
species of property that is created by a financing order issued by the
Commission.
_________________
/2/ PU Code Section 331(h) defines a small commercial customer as "a customer
that has a maximum peak demand of less than 20 kilowatts."
/3/ For purposes of discussion, it can be assumed that rate reduction bonds bear
interest at approximately 7.5% and that the carrying costs that would otherwise
be applicable to the underlying obligations bear interest at approximately 9.5%.
This difference of approximately 2% is what gives rise to the potential savings
in an NPV basis.
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<PAGE>
DESCRIPTION OF THE APPLICATIONS
STRUCTURE OF THE TRANSACTIONS
Applicants will each create a wholly-owned subsidiary, which is
intended to be a separate legal entity whose only business is to own transition
property. Applicants refer to this entity as a special purpose entity (SPE). In
the shorthand of commercial law, the SPE is said to be "bankruptcy-remote" in
relation to its related utility, meaning that its assets would not be available
to satisfy the claims of the utility's creditors. This technique is common in
securitization of cash flows. It permits the credit of the SPE (backed by its
ownership of transition property, which is the right to receive certain rates
and charges) to be considered independently of the credit of the utility.
Each of the applicants would capitalize the related SPE with equity in
an amount equal to approximately 1/2% of the principal amount of rate reduction
bonds to be issued and would transfer the transition property to it in exchange
for the proceeds from sale of rate reduction bonds.
The SPE would issue its own securities, either in the form of rate
reduction bonds, should the SPE qualify as a financing entity pursuant to PU
Code Section 840(b), as determined by the California Infrastructure and Economic
Development Bank (Infrastructure Bank), or other debt securities to which the
SPE's equity and the transition property would be pledged. It is expected that
the SPE debt securities would closely resemble the financial terms and
conditions of the rate reduction bonds./4/ Applicants request that we determine
that the SPEs qualify as financing entities to the extent approved by the
Infrastructure Bank.
Rate reduction bonds, whether issued by the SPE or a different
financing entity, would be issued to investors in the form of notes or
certificates representing beneficial ownership interests in transition property
or debt securities of the SPE. The
_______________________
/4/ However, the debt securities might be fixed-rate obligations while the rate
reduction bonds could be variable-rate obligations, in which case the difference
would be covered by an interest rate swap agreement.
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<PAGE>
rate reduction bonds may be secured by a statutory lien on transition property.
Rate reduction bonds would be issued in a few large transactions, and each issue
might have several classes. The rate reduction bonds are expected to be
outstanding approximately 10 years until repaid, but legal maturity dates may be
set up to three years later.
The rate reduction bonds would be issued during the fourth quarter of
1997 or thereafter. Proceeds of the rate reduction bonds are deemed to reduce
the revenue requirements of the Applicants, with the results that rates for
residential and small commercial customers may be reduced by 10%.
The Applicants each anticipate that changes in the details of the
structure of the transaction will be made at the direction of the Infrastructure
Bank and the financing entity in response to the requirements of the
underwriters in marketing the rate reduction bonds and the rating agencies to
obtain a favorable rating for the rate reduction bonds.
One of the credit enhancements that applicants contemplate would be
used to improve the credit rating (and thus minimize the interest charges) of
the rate reduction bonds is overcollateralization. For each dollar of rate
reduction bonds issued, more than a dollar in transition property would be
created. The proceeds of this excess transition property would be available for
the benefit of bond holders to support cash flow requirements in the event that
the amounts realized from fixed transition amounts during any period varied from
the forecast amounts. The amount of overcollateralization is determined by
negotiation with the rating agencies.
In addition, currently pending legislation and pending requests of the
Applicants to the Internal Revenue Service (IRS) for favorable tax treatment may
make more substantial changes in the structure of the transaction necessary.
However, the Applicants did not indicate what the nature of those changes might
be.
SIZE OF THE TRANSACTIONS
PG&E requests authority for the issuance by its related financing
entity of up to $3.5 billion aggregate principal amount of rate reduction bonds.
Edison requests authority for the issuance by its related financing entity of up
to $3.0 billion aggregate
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<PAGE>
principal amount of rate reduction bonds. SDG&E requests authority for the
issuance by its related financing entity of up to $800 million aggregate
principal amount of rate reduction bonds. In each case, a bond sizing model
would be applied, as described in the related application, to determine the
precise amount of rate reduction bonds needed to finance a 10% rate reduction
for residential and small commercial customers, compared to the rates in effect
immediately prior to January 1, 1998, as described below.
OTHER ISSUANCE-RELATED AUTHORITY REQUESTED
Applicants request approval of the issuance by their related SPEs of
such debt securities to the issues of such rate reduction bonds, which will
substantially mirror the terms of the related rate reduction bonds. These debt
securities would include such terms as may be approved by the Infrastructure
Bank, as specified in an advice letter to be filed not later than five business
days prior to the closing of the sale or rate reduction bonds. Applicants also
request that we approve the pledge by any financing entity of its right, title,
and interest in any SPE debt securities as may be issued as security for rate
reduction bonds.
TRANSITION PROPERTY
PU Code Section 840(g)(1) defines "transition property" as follows:
... the property right created pursuant to this article [PU Code (S)(S)
840-847] including, without limitation, the right, title, and interest of
an electrical corporation or its transferee: (A) In and to the tariff
established pursuant to a financing order, as adjusted from time to time in
accordance with subdivision (c) of Section 841 and the financing order. (B)
To be paid the amount that is determined in a financing order that the
electrical corporation or its transferee is lawfully entitled to recover
pursuant to the provisions of this article and the proceeds thereof, in and
to all revenues, collections, claims, payments, money, or proceeds of or
arising from the tariff or constituting fixed transition amounts that are
the subject of a financing order including those nonbypassable rates and
other charges referred to in subdivision (d). (c) In and to all rights to
obtain adjustments to the tariff pursuant to the terms of subdivision (c)
of Section 841 and the financing order.
PU Code Section 841(a) describes the applications as involving "a determination
that certain transition costs may be recovered through fixed transition amounts,
which would
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<PAGE>
therefore constitute transition property under this article" [emphasis added].
In addition, PU Code Section 841(g)(2) states that transition property shall
constitute a current property right notwithstanding the fact that the value of
the property will depend on consumers using electricity or, in those instances
where consumers are customers of a particular electrical corporation, the
electrical corporation performing certain services. Applicants seek the
additional comfort of having the Commission formally confirm in financing orders
of what the transition property consists and set forth with specificity when
transition property comes into legal existence. In addition, Applicants request
that we approve the sale to the related SPE of such transition property and to
confirm the scope of the rights of ownership of transition property of each such
SPE vis-a-vis its related electrical corporation
MECHANISMS TO SET FIXED TRANSITION AMOUNTS
Fixed transition amounts (defined by PU Code (S)840(d) are the
source of repayment of the costs involved with the rate reduction bonds,
including principal, interest, costs of issuance, and the costs of administering
the collection (from residential and small commercial customers) and payments
(of principal and interest, to the holders of rate reduction bonds). Fixed
transition amounts would be collected through a charge on the bills of
residential and small commercial customers, generally based on current
consumption./5/ That charge is to be stated separately, if practicable, but will
otherwise be stated in like manner to the other charges set forth in PU Code
Section 367(a)(1)-(6). Because consumption is variable, however, and because of
the potential for uncollectable amounts, receipts of fixed transition amounts
will not usually match obligations and expenses for rate reduction bonds
precisely. Therefore, mechanisms are needed to set fixed transition amounts for
each issuance of rate reduction bonds initially and to make adjustments, from
time to time.
__________________________
/5/ In some circumstances, to make fixed transition amounts nonbypassable,
departing customers could pay based upon historical consumption, rather than
current consumption.
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<PAGE>
SETTING FIXED TRANSITION AMOUNTS INITIALLY
Because the actual amount of rate reduction bonds will not be
known until they are sold, the corresponding fixed transition amounts cannot be
set until that time. Applicants have proposed to file advice letters five
business days prior to issuance of the rate reduction bonds to describe the
final approved structure for the issuance of rate reduction bonds, the total
principal amount and pricing of the rate reduction bonds, their scheduled
amortization and costs of issuance, and the estimated post-issuance expenses
involved in collecting and administering the fixed transition amounts and
disbursing and administering proceeds to the holders of the rate reduction
bonds. Such advice letter filings would also include an NPV calculation, in
accordance with the model described in each application, that shows benefit.
In order that the transition property represented by the fixed
transition amounts be a current property right, as is required as a condition of
issuance of rate reduction bonds for various tax and legal reasons, Applicants
request that the issuance advice letters should become effective, without
further action of the Commission, five business days after filing.
ADJUSTING FIXED TRANSITION AMOUNTS PERIODICALLY
As mentioned earlier, variations in electrically consumption
compared to forecasts are practically assured to result in proceeds from fixed
transition amounts being either greater than or less than required for rate
reduction bonds. Moreover, because rate reduction bonds will be issued with
level principal amortization, the interest component of rate reduction bonds
declines over time. All other things being equal, this will result in an
expected decline in fixed transition amounts over time. This necessarily results
in the need to adjust fixed transition amounts. These facts require adjustments
quarterly, should fixed transition amounts depart too sharply compared to the
tolerance planned/4/ or annually, otherwise, in
________________
* As determined in accordance with criteria established at the time of issuance
of the rate reduction bonds.
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<PAGE>
accordance with the methodologies described in the applications. Applicants
request that such "routine true-ups" be implemented by advice letter filed at
least 15 days before the end of each calendar quarter, optionally, or year, in
any event, to become effective without further Commission action on the first
day of the following quarter.
Applicants also anticipate that circumstances now unforeseen
could arise that require adjustment of fixed transition amounts in a way that
the methodologies described in the applications do not accommodate. In that
event, Applicants request permission to file advice letters at least 90 days
before the end of a calendar quarter, to become effective on the first day of
the following quarter. Applicants request that the Commission's Energy Division
determine whether modifications to the calculation methodology are required and,
in such event, to inform the requesting Applicant within 45 days of filing. The
Commission would resolve any outstanding issues by adopting a resolution prior
to the first day of the next calendar quarter.
Finally, to comply with the requirement for an anniversary review
imposed by PU Code Section 841(e), Applicants propose to file an advice letter
15 days prior to the anniversary of the financing order stating whether any
change to the then-current fixed transition amounts is required. It is
anticipated that in light of the other adjustments being made on a quarterly and
annual basis that no such adjustments would be required.
RATE REDUCTION AUTHORIZATION
Applicants request permission to implement rate reductions/7/ of 10%
for residential and small commercial customers as of January 1, 1998 to remain
in effect until March 31, 2002, or until the recovery of authorized uneconomic
costs pursuant to D.96-12077 and Section 367.
____________________
/7/PG&E and Edison propose, for administrative convenience, to implement the
reduction through a bill credit. SDG&E proposes that each applicant rate be
reduced.
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<PAGE>
Small commercial customers whose load grows beyond a peak demand of 20
kilowatts(kW) would be permitted to continue service on the existing schedule or
would be permitted to change to the otherwise applicable schedule, subject to
payment of fixed transition amounts based on historical usage data. Departing
customers (those who discontinue or reduce purchases of electricity and
distribution services from Applicants or their respective successor distribution
utilities and who purchase or consume electricity from other sources while
remaining at the same physical location or within the historical service
territory) would continue to be responsible for paying the fixed transaction
amounts, in order to make them nonbypassable. PG&E requests authority to include
tariff provisions similar to those in proposes in Application (A) 96-08-070 for
collecting other charges that are intended to be nonbypassable. Edison requests
authority to include tariff provisions similar to those it proposes in
A.96-08-071 for collecting other charges intended to be nonbypassable. SDG&E
requests authority to include tariff provisions similar to those its proposes in
A.96-08-072.
PG&E requests that its small commercial customers who take service
under its Schedule A-10 or E-19 have eligibility determined on a one-time basis.
Customers with peak demand of less than 20 kW in at least 9 of the 12
most-recent billing periods prior to October 1, 1997 would be eligible for the
10% rate reduction.
Edison requests that its small commercial customers who no longer meet
the service criteria (because, for example, usage grows beyond 20kW) be
permitted to migrate to an Edison schedule that includes neither a bill credit
(to implement the 10% rate reduction) nor the related fixed transition amounts
charge. However, to prevent a customer from taking unfair advantage of the 10%
rate reduction during the rate-freeze period' by voluntarily switching to
another schedule to avoid the fixed transition amounts charges after the
rate-freeze, Edison proposes that the fixed transition amounts charge should
apply to the agricultural and pumping, GS-2, and TOU-GS-2 schedules
____________________
* The earlier of March 31, 2002 or the date on which the costs identified in PU
Code Section 367 have been recovered.
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<PAGE>
for customers who were served on a rate schedule in Edison's GS-1 rate group as
of January 1, 1998.*
SDG&E proposes that its small commercial customers whose loads grow
such that they would not otherwise be eligible for service on its Rate Schedule
A be given the option of continuing to take service under Rate Schedule A or the
schedule that matches their new load. In either case, however, the customer
would continue to pay fixed transition amounts charges.
RATEMAKING TREATMENT
During the rate-freeze period, the revenues of Applicants will be
applied to the costs of energy purchased from the Power Exchange, to the
authorized costs of Applicants with respect to non-energy production activities,
generally, to certain other programs, and to fixed transition amounts. Any
residual amount will be applied to the Applicants' uneconomic costs of
generation-related assets described in PU Code Section 367 and to other
recoverable costs described in PU Code Sections 368, 375, and 376. Applicants
propose ratemaking treatment to achieve results that neutralize the effect of
issuance of rate reduction bonds on the duration of the rate-freeze period,
prevent cost shifting or excess recovery of uneconomic costs, deal with possible
issuance of rate reduction bonds less than or more than the amount actually
required to finance a 10% rate reduction over the rate-freeze period, flow the
servicing fees for collecting fixed transition amounts to ratepayers, to the
extent that such fees are in excess of Applicants' costs, and account for
amounts held by the SPEs.
______________
* In its application, Edison proposed that customers who were served on a rate
schedule in the GS-1 rate group as of January 1, 1998 should not be permitted
voluntarily to switch to service on another rate schedule (where charges for
fixed transition amounts did not apply) until the repayment obligations of the
rate reduction bonds had been discharged. In response to a concern raised by the
Farm Bureau, Edison revised its position as described.
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<PAGE>
SERVICING
PU Code Section 842(c) requires Commission authority for Applicants to
perform servicing/10/ of fixed transition amounts on behalf of the related
financing entity, and Applicants have requested that authority. PU Code Section
843(e) permits the pledgees of transition property who have perfected a security
interest in the transition property to foreclose or otherwise enforce their
security interest by application to this Commission for an order for the
sequestration and payment to the pledgees or their authorized transferees of
revenues arising with respect to the transition property. Applicants ask us to
confirm that upon proper application, we will do so.
DISCUSSION
RATES THAT APPLY IN ABSENCE OF FINANCING ORDERS
The central contested issue presented by these applications is what
rates residential and small commercial customers would have paid if the
financing orders are not issued. The Applicants, CIU, and Farm Bureau argue that
the rates that will apply
_______________________
/10/ In asset-backed securitization, "servicing" is a term that refers to the
billing of an obligation, such as a home loan, to the customer, its collection,
forwarding of the amount received to the holder of the right to receive payment,
the related accounting and reporting, and invoking the remedies provided by law
on behalf of the holder to enforce its rights against the consumer in the event
of nonpayment or other breach of the obligation. Thus, the bank that originates
a home loan may sell it, together will a pool of similar loans, to investors.
Under the typical structure, the pool of loans would be owned by an
institutional trustee who, in that capacity, would contract with the bank to
continue its former activities of sending monthly statements, receiving payment,
and carrying out the other tasks that are required to assure that proceeds of
the home loans match the amounts provided for in the underlying notes. The bank
no longer has an economic interests in the home loans, aside from the
contractual interest of earning a fee for administering the loans. Sometimes, a
bank will sell a pool of loans without retaining the right to service them. In
that case, the new owner will arrange for a firm (which is often an affiliate,
but may be a third-party) to take over the servicing function. Whoever is
performing the servicer role, however, is subject to replacement for failure to
perform its duties. Since the servicer has no economic interest in the
underlying obligations, other than its right to earn a fee for administering
them; the fee must be set at a level that covers the costs of performing the
servicing functions and provides a reasonable profit. Otherwise, it would prove
difficult to attract a successor firm interested in assuming the servicer
function.
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<PAGE>
otherwise will be the "frozen" rates provided in PU Code Section 368(a). ORA,
TURN, and CAL-SLA argue that PU Code Section 368(a) unconditionally requires
that the frozen rates be reduced by 10% for residential and small commercial
customers as of January 1, 1998 and, therefore, the rates that would otherwise
apply, if the applications are denied, are the frozen rates less 10%
PG&E cites Assembly Bill 1890 (1995 stats. Ch. 854) (AB 1890) Section
1(b) (Legislature contemplated an immediate 10% reduction and its financing
through rate reduction bonds), AB 1890 Section 1(e) (intent to require
applications for financing orders) and PU Code Section 330(w) (intent to require
and enable monetization of competition transition charge as means to achieve
rate reductions for such customers of no less than 10%).
Edison points to the parallel references to 10% rate reductions in AB
1890 Section 1(b) and PU Code 368(a) in conjunction with the intent language of
PU Code Section 330(w), the Senate Conference Committee on Electric Industry
Restructuring Conference Report Committee Analysis of AB 1890, and PU Code
Section 365, which requires consistency of Commission action with PU Code
Section 330.
SDG&E interprets PU Code Section 368 as a requirement that the
Commission must freeze rates (subject to the residential and small commercial
consumer reduction of 10%) and concedes that PU Code Section 368(a) does not
"explicitly recognize the means by which rate reduction would be financed."
SDG&E traces the legislative history of AB 1890 to demonstrate the "linkage"
between the 10% rate reduction and its financing through securitization.
CIU cites AB 1890 Section 1(e) (intent of Legislature to require
electrical corporations to apply for financing orders in an amount sufficient to
achieve the rate reduction).
The Farm Bureau observes that AB 1890 Section 1(b) and PU Code Section
330(w) so clearly set out legislative intent, that it would be unreasonable to
expect the linkage between the 10% rate reduction and its financing through the
issuance of rate reduction bonds to be repeated in Section 368(a), which deals
specifically with rates.
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ORA recommends that to the extent the Commission wishes to reconsider
D.96-12-077 here, we should seek guidance from the Legislature.
TURN points to the omission in PU Code Section 368(a) of any mention
of financing of the 10% rate reduction as proof that the Legislature intended
that the rate reduction be absolutely independent of rate reduction bonds.
CAL-SLA observes that nothing in AB 1890 or PU Code Sections 840-847
precludes the 10% rate reduction in the event that rate reduction bonds are not
issued.
The parties re-argue a point that we addressed in D 96-12-077 (see
mimeo. at 9, where we observed that AB 1890 allows the utilities the option of
accomplishing the required rate reduction by issuing rate reduction bonds) and
on which we are now considering a petition for modification: Does PU Code
Section 368(a) permit, but not require, Applicants to implement a 10% rate
reduction for residential and small commercial customers through the issuance of
rate reduction bonds? However, that is a different question (which we will not
revisit here) than the one before us. In D.96-12-077, we were considering the
Applicants' cost recovery plans under PU Code Section 368(a).
Section 368(a) provides in part
The cost recovery plan shall set rates for each customer class, rate
schedule, contract, or tariff option, at levels equal to the level as
shown on electric rate schedules as of June 10, 1996 [the so-called
"freeze"], provided that rates for residential and small commercial
customers shall be reduced so that these customers shall receive rate
reductions of no less than 10 percent for 1998 continuing through
2002.
Thus, the Applicants were required to prepare a cost recovery plan,
which had to freeze rates, except in the case of residential and small
commercial customers, for whom the cost recovery plan was to provide a 10% rate
reduction beginning January 1, 1998. In approving the cost recovery plans
pursuant to PU Code Section 368, we authorized Applicants to recover the
uneconomic costs of their generation-related assets and obligations identified
in PU Code Section 367 pursuant to their respective cost recovery plans. The
cost recovery plan for each of the Applicants provides for
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frozen rates and, in the case of residential and small commercial customers, a
reduction of 10%, upon issuance of rate reduction bonds in an amount sufficient
to finance the cost of the 10% reduction.
The parties all overlook the central role of the cost recovery plan.
One key observation will help put the contentions of the parties in
proper perspective: PU Code Section 368(a) does not establish rates/11/;
rather, it establishes criteria for cost recovery plans that permit Applicants
to recover certain costs through rates. Nor do the cost recovery plans
themselves establish rates. Rates are established through tariffs. As a
consequence, we look to the cost recovery plans (the framework of which we have
already approved) to determine whether a particular rate that may be proposed in
a tariff from time to time is one which is consistent with that plan. Applicants
are now requesting to change rates, as of January 1, 1998, from the frozen
levels to a rate that is 10% less for residential and small commercial
customers. As this change is consistent with what the cost recovery plans
contemplate and the requirements of PU Code Section 368, no question arises
directly as to whether the Applicants should be permitted to recover the costs
specified in PU Code Section 368(a) through rates./12/
___________________
/11/ The proviso ("provided that rates for residential and small commercial
customers shall be reduced so that these customers shall receive rate reductions
of no less than 10 percent for 1998 continuing through 2002") is a subordinate
clause that qualifies the main clause of PU Code Section 368(a). The rates that
the proviso refers to are the rates that the cost recovery plan is required to
set. If the Legislature had intended to set rates more directly, under its
plenary authority pursuant to Article XII, Section 5 of the California
Constitution, it could have done so. Rather, consistent with its constitutional
power to confer additional authority upon the Commission, it chose to require
cost recovery plans, to set criteria related to rates as an incentive to
Applicants to reduce rates, and to make such a reduction a prerequisite to the
approval of plans for the recovery of the uneconomic costs described in PU Code
Section 367. (See also SB 477 (S)(setting of utility rates, as well as
modifications to existing rates, must be approved by Commission); D.96-12-077,
Conclusion of Law 7.)
/12/ Another way of looking at this issue is that under the transition period
fixed-rate regime (whether at 100% or 90% of frozen rates), rates are not so
much a question of how much is collected, as of how much is to be applied,
ultimately, to which accounts.
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In the event of a failure to implement a 10% rate reduction for
residential and small commercial customers, we should have to consider whether
the Applicants would be barred from recovering the costs specified in PU Code
Section 368(a) through rates. In the event that any Applicant concludes that
rate reduction bonds cannot be issued in time to commence the rate reduction on
January 1, 1998, we expect to be so advised and that the Applicant will submit a
revised application pursuant to PU Code Section 368 that accomplishes the 10%
rate reduction.
The cost recovery plans we approved in D.96-12-077 provided for the
10% rate reduction called for in PU Code Section 368(a), with that reduction to
be financed by issuance of rate reduction bonds by the Applicants. Given that it
is only appropriate-for the purpose of calculating the ratepayer benefits from
the issuance of the bonds-to include in that calculation the benefit of reducing
rates 10% from the frozen levels also mandated by PU Code Section 368(a). In
other words, for the ratepayer benefit calculation in, and the standard required
by, PU Code Section 841(a), the rates that would otherwise apply ("the rates
that residential and small commercial customers would have paid if the financing
order were not adopted" referred to in PU Code (S) 841(a)) are the frozen rates
before the 10% rate reduction.
At the same time, we note that if for any reason, Applicants could not
issue the rate reduction bonds that are part of our approved cost recovery
plans, we would expect the Applications to propose alternative cost recovery
plans that would accomplish the 10% rate reduction and which, if approved, would
provide the applicants with a reasonable opportunity to recover their uneconomic
costs described in PU Code Section 367(a).
WHETHER DESIGNATION OF FIXED TRANSITION AMOUNTS AND ISSUANCE OF RATE
REDUCTION BONDS WOULD REDUCE RATES
The Applicants' cost recovery plans each provided for a 10% reduction
(upon issuance of rate reduction bonds) in the frozen rates (as adjusted in
SDG&E's case, on February 1, 1997) paid by residential and small commercial
customers. Therefore, it follows that the designation of fixed transition
amounts (a precondition of the rate reduction bonds) and the issuance of rate
reduction bonds would reduce rates
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during the rate-freeze period ending when each applicant has recovered its
uneconomic costs on March 31, 2002, whichever occurs earlier. After the
rate-freeze period, all other things being equal, rates will be higher/19/ than
they would have been in the absence of rate reduction bonds and the fixed
transition amounts that will be required to retire them. What is needed is a
single method of evaluating the rate reduction (during the freeze period) in
conjunction with the rate increase (after the freeze period, compared to rates
that would otherwise apply). This is provided by the requirement that Applicants
must state in their applications that residential and small commercial customers
"would benefit from reduced rates." (PU Code (S) 841(a).)
None of the parties dispute that each of the Applicants has shown
substantial net present value benefits to residential and small commercial
customers over the approximate 10-year period beginning January 1, 1998,
compared to frozen rates./14/ If the net present value of benefits had been
negative or nominal, we would have been concerned with whether the proposals
actually represented a rate reduction. But that is not the case. Instead, the
parties dispute whether the Applicants should be required to maximize the net
present value of benefits by restructuring their proposals.
TURN argues that greater benefits, including a larger rate reduction,
are available by (1) issuing a greater principal amount of rate reduction bonds,
(2) retiring the rate reduction bonds over a longer maturity, or (3) amortizing
the rate reduction bonds mortgage-style, rather than with fixed principal
payments. The Applicants respond that (1) trying to achieve a rate reduction of
greater than 10% cuts too close to the estimated amount of transition costs
allocable to residential and small commercial
________________
/19/Fixed transition amounts do not affect residential and small commercial
customer rates during the rate-freeze period. Following the rate-freeze period,
fixed transition amounts will add 1-2c/kWh to rates, declining over time.
/14/The calculation of net present value depends upon many assumptions that were
made regarding the final structure of the rate reduction bonds, and will be
subject to a final confirmation prior to the issuance of the rate reduction
bonds through an advice letter filing. For PG&E, the net present value of the
savings due to the 10% rate reduction combined with the added costs due to fixed
transition amounts over the approximate 10-year life of the rate
Footnote continued on next page
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customers, (2) a maturity of 20-30 years would not be as well received by rating
agencies and investors and could result in higher debt services costs than a 10-
year maturity, and (3) fixed principal payments will help to assure that fixed
transition amounts decline, which minimizes the difference between what rates
would have been in the post-freeze period and the rates that will occur as a
result of financing orders.
The proposed structure results in net present value benefits that are
substantial enough to withstand the risk of misanalysis, yet still result in a
rate reduction, for purposes of PU Code Section 841(a). We agree with
Applicants that there might not be sufficient transition costs available to
support more than a 10% rate reduction for residential and small commercial
customers and that much longer maturities for the rate reduction bonds present
an investment risk factor that is best avoided for the initial issuance of this
novel type of utility-related security. We also agree with Applicants that
mortgage-style amortization increases the risk that the fixed transition amount
would increase due to forecasting errors and that level principal payment
amortization provides a margin that lessens the likelihood of an increase in the
fixed transition amounts.
The only remaining issue concerning the rate reduction is whether the
means by which PG&E and Edison/13/ have chosen to implement the rate reduction,
a 10% bill credit, conflicts with the notion of a "rate" reduction. As a bill
credit is mathematically equivalent to reducing individual rates and because it
would be implemented through tariff, we conclude that it constitutes a rate
reduction for these purposes./14/ (See D.97-08-056, mimeo., at 50-51.)
________________________________________________________________________________
reduction bonds would be approximately $470 million; for Edison, approximately
$400 million; and for SD&E, approximately $100 million.
/15/ SD&E, proposes to reduce each tariffed rate individually for affected
customers by 10%.
/14/ ORA notes that in the event that we order a future one-time rebate that the
rebate should be applied after the bill credit to assure that customers receive
100% of the adopted rebate. We will rely upon ORA to bring this issue to our
attention in connection with any rebate that may be considered, as we would
prefer to implement this principle directly.
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DETERMINATION OF FIXED TRANSITION AMOUNTS
PU Code Section 840(d) defines "fixed transition amounts" as "those
nonbypassable rates and other charges... that are authorized by the [C]ommission
in a financing order to recover (1) transition costs, and (2) the costs of
providing, recovering, financing or refinancing the transition costs through a
plan approved by the [C]ommission in a financing order, including the costs of
issuing, servicing, and retiring rate reduction bonds." The components of fixed
transition amounts can thus be thought of as a principal amount (the transition
costs), an interest amount (part of the cost of retiring rate reduction bonds),
and an amount in respect of initial and ongoing transaction costs. Only the
principal component can be fixed in advance; the interest component and the
transaction component (collectively, financing costs) are fixed pursuant to a
plan, as their determinants become known.
DETERMINATION OF TRANSITION COSTS
It will be recalled that the definition of transition costs contained
in PU Code Section 840(f) has two parts. The first part is similar to the
description contained in PU Code Section 367 (with a minor variation in a
illustrative example, but without the detailed allocation, calculation, and
limitation rules), and the second part refers to the costs of retiring debt and
equity. None of the Applicants rely on the second part of the definition; each
presents an estimate of its total transition costs based on the first part and
requests that a portion of that total be designated as fixed transition amounts
on the grounds that in the proceedings in which PU Code Section 367 uneconomic
costs are being determined (A.96-08-011 et al.) such estimates are neither in
dispute nor sensitive to market prices.
Nothing is inherently wrong about using estimates when measurements
are not available. What gives us pause is that our usual way of correcting for
errors in estimating, directly adjusting utility rates or requiring surcharges
or surcredits, is foreclosed by PU Code Section 841(c), which makes the
"principal" portion of fixed transition amounts and their underlying transition
costs immutable. This immutability is necessary, of course, in order to
vindicate the right in "transition property" as defined
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in PU Code Section 840(g) and to induce investors in rate reduction bonds to pay
to acquire the right to the proceeds of fixed transition amounts. Investors in
rate reduction bonds who are asked to pay money today for the right to receive
an amount tomorrow that depends on the accuracy of an estimate of the principal
amount to be returned could demand a considerable risk premium, negating the
premise behind rate reduction bonds./17/
Fortunately, the simple and effective ratemaking approach/18/ that
Applicants propose addresses this question, and makes ratepayers indifferent to
the possibility that transition costs may have been overestimated. The
ratemaking treatment also deals with the contingency that the rate-freeze period
might otherwise end before March 31, 2002. The two issues are related, because
the rate-freeze period may end before that date and the uneconomic costs
identified by PU Code Section 367 to be recovered by the end of the rate-freeze
period have been recovered. One reason that might happen is if a sufficiently
large amount of transition costs is deducted from uneconomic costs. Also, the
amount of transition property reserved for overcollateralization might not all
be required. The parties do not disagree about the ratemaking treatment
proposed, except with respect to the interest that should be imputed to certain
memorandum accounts that would be established./19/
_______________________
/17/ The premise is that rate reduction bonds, because they are secured by fixed
transition amounts are low-risk instruments that command a low rate of interest
and, therefore, reduce costs compared to shorter-term, higher-rate alternatives.
/18/ This approach is described in the related financing orders. It is designed
to remove any effect of the rate reduction bonds on the timing of when the
rate-freeze period ends, prevent shifting of costs between residential and small
commercial customers, on one hand, and large commercial customers, and on the
other, and to ensure that residential and small commercial customers receive the
benefits of the rate reduction bond financing even if the rate-freeze period
ends earlier than expected.
/19/ We agree with ORA that these mechanisms are intended to implement two
undisputed principles: that rate reduction bonds should not result in cost
shifting among consumer classes and should not increase the amount of uneconomic
costs that would otherwise be recovered by Applicants, and we will observe these
principles in future decisions regarding mechanisms for cost allocation and
tracking.
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TURN and ORA recommend that the appropriate interest rate for excess
proceeds be the authorized rate return for each utility's rate base, because
otherwise Applicants would otherwise be unduly enriched by the proceeds of rate
reduction bonds, which reduce their need for other financing./20/ Applicants,
who modified their original proposal that the appropriate interest rate should
be the short-term commercial rate, recommend that the appropriate rate interest
rate should be the rate of interest borne by the rate reduction bonds.
Requiring Applicants to bear full rate of return interest rates on
unneeded rate reduction bonds issuance proceeds, rather than the rate of
interest for the rate reduction bonds, is necessary to prevent a windfall to
Applicants./21/ The risk that Applicants might have to repay a short-term loan
at long-term rates has the beneficial effect of making Applicants careful in
sizing the transaction. Such proceeds will be required to bear interest at each
Applicant's respective authorized rate of return.
OTHER ISSUES
The conclusion that the designation of fixed transition amounts and
issuance of rate reduction bonds would reduce rates completely determines our
decision under PU Code Section 841(a), which provides:
The [C]ommission shall designate fixed transition amounts as recoverable in
one or more financing orders if the [C]ommission determines, as part of its
findings in connection with the financing order, that the designation of
the fixed transition amounts, and issuance of rate reduction bonds in
connection with some or all of the fixed transition amounts would reduce
rates that residential and small commercial customers would have paid if
the financing order were not adopted.
_____________________
/20/ The analysis that TURN and ORA propose is more appropriate to traditional
ratesetting than to electrical industry restructuring as required by AB 1890 and
SB 477.
/21/ Using the rate of interest borne by the rate reduction bonds makes it
unnecessary to consider whether any special rate of return applicable to
uneconomic costs pursuant to PU Code Section 367 should be applied to the
unneeded proceeds of the rate reduction bonds.
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We will issue financing orders for each of the Applicants in companion
orders; but parties have raised other issues, and the Applicants have made other
requests, each of which we will take up in this interim opinion.
WHETHER PU CODE SECTION 367(E)(1) PRECLUDES FINANCING ORDERS.
PU Code Section 367(e)(1) requires that uneconomic costs,/22/
which include, since the passage of SB 477, transition costs as defined in PU
Code Section 840(f), be recovered from all customers or, in the case of fixed
transition amounts, from residential and small commercial customers, on a
nonbypassable basis and be
allocated among the various classes of customers, rate, schedules, and
tariff options to ensure that costs are recovered from these classes, rate
schedules, contract rates, and tariff options, including self-generation
deferral, interruptible, and standby rate options in substantially the same
proportion as similar costs are recovered as of June 10, 1996, through the
regulated retail rates of the relevant electric utility, provided that
there shall be a firewall segregating the recovery of the costs of
competition transition charge exemptions such that the costs of competition
transition charge exemptions granted to members of the combined class of
residential and small commercial customers shall be recovered only from
these customer and the costs of competition transition charge exemptions
granted to members of the combined class of customers, other than
residential and small commercial customers, shall be recovered only from
these customers.
_________________
/22/ Referring to "generation-related assets and obligations, consisting of
generation facilities, generation-related regulatory assets, nuclear
settlements, and power purchase contracts ... that may become uneconomic as a
result of a competitive generation market." (PU Code (S) 367.) SB 477 amended
the forepart of PU Code Section 367 to include "transition costs" as defined in
PU Code Section 840(f).
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TURN argues that the issuance of rate reduction bonds violates
this stricture because, in the case of Edison, to the extent that post rate-
freeze period sales to small commercial customers decline, the fixed transition
amounts will be allocated to residential customers, and vice versa, However, PU
Code Section 367(e)(1) does not require that fixed transition amounts be
allocated in the identical proportion as similar costs were recovered as of June
10, 1996. Instead, fixed transition amounts must be allocated in "substantially
the same proportion" as similar costs were being recovered on such date. TURN
presented no evidence to show why we should expect a sufficient decline in sales
to one or the other class of customers to cause the allocation of fixed
transition amounts to be no longer in substantially the same proportion as
similar costs were recovered as of June 10, 1996.
TURN also argues that to the extent the Applicants use proceeds
to retire debt, cost shifting could result because more or less of the
uneconomic costs would be collected from classes other than residential and
small commercial customers than would otherwise be the case. To prevent such
shifting, TURN recommends that the proceeds be traced and reductions in the
embedded cost of debt be allocated to the residential and small commercial
customers, as a class, rather than being flowed through to all customers. This
argument is inconsistent, however, with TURN's position in its brief that the
Applicants' proposals respect the firewall required by PU Code Section 367(e)(1)
between residential and small commercial customers, on the one hand, and the
class of all other customers, on the other. As TURN correctly observed in its
brief, Applicants propose to impute the revenue that would be been received but
for the 10% rate reduction to the Transition Cost Balancing Accounts. "As a
result," TURN concludes," customers in other classes are assured that the rate
freeze will end at the same time, whether or not there is a reduction of not
less than 10%, and whether or not [r]ate [r]eduction [b]onds are issued."
Because the class of customers other than residential and small commercial
customers pay frozen rates during the rate freeze period, if TURN is correct,
which we believe to be the case, if there is no effect on the date on which the
rate freeze ends, there can be no possibility of shifting.
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WHETHER PU CODE SECTION 367(E)(2) PRECLUDES FINANCING ORDERS
PU Code Section 367(e)(2) requires that "individual customers
shall not experience rate increases as result of the allocation of transition
costs" as described in PU Code Section 367(a). TURN argues that the issuance of
rate reduction bonds, which permits deferred recovery of what would otherwise be
transition costs within the meaning of PU Code Section 367(e)(2), violates this
stricture because the rates that individual customers pay after the rate-freeze
period would be higher than the rates that they would pay at that time without
the fixed transition amounts that are required to retire the rate reduction
bonds.
We think that this interpretation misconstrues the language of
the statute. By its terms, PU Code Section 367(e)(2) prohibits "rate increases"
without specifying the base to which the increase is to be compared. The most
straightforward interpretation, therefore, is to compare the rates on two
different dates to see if they differ, and, if so, whether the difference
represents an increase. The Legislature knows how to specify a rate comparison
that depends on rates that would have otherwise been in effect on a given date.
(See PU Code (S) 841(a), which uses "rates that residential and small commercial
customers would have paid".) Therefore, the fixed transition amounts do not
represent a rate increase within the meaning of PU Code Section 367(e)(2).
WHETHER PU CODE SECTION 371 PRECLUDES FINANCING ORDERS
PU Code Section 371(a) makes the uneconomic costs (which, with
the passage of SB 477, includes transition costs, as well) provided in PU Codes
Sections 367, 368, 375, and 376 applicable to each customer based on the amount
of electricity purchased, subject to changes in usage occurring in the normal
course of business. TURN argues that once the rate-freeze period ends, changes
in the fixed transition amounts will be harder for customers to avoid by
reducing usage, and, therefore, the financing orders should not be issued.
As fixed transition amounts are allocated based upon usage,
however, any customer who changes consumption patterns will experience a
corresponding increase or decrease in the associated fixed transition amount
currently,
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which is all that PU Code Section 371(a) requires. If a reduction in usage in
year 5 contributes to the necessity of increasing the per-kWh charge in year 6,
the customer remains able to reduce consumption further to avoid any increase in
the amount paid in respect of fixed transition amounts.
WHETHER PU CODE 779.2 PRECLUDES FINANCING ORDERS
PU Code Section 779.2 prohibits an "electrical ... corporation from
terminating residential service for nonpayment of any delinquent account or
other indebtedness owed by the customer ... to any other person or corporation
or when the obligation represented by the delinquent account or other
indebtedness was incurred with a person or corporation other than the electrical
... corporation demanding payment therefor. "TURN argues that this statute would
prohibit applicants from terminating service in the event of nonpayment of fixed
transition amounts, since an entity other than the electric utility would own
the right to receive payment.
The statute predates AB 1890 by several years, and it is designed to
address problems not relevant here. Rather than speculating on why the
Legislature may not have thought it necessary to amend PU Code Section 779.2, we
observe that fixed transition amounts are "nonbypassable rates and other
charges" that we authorize in a financing order to be collected. (PU Code (S)
849(d).) We have the authority to "specify how amounts collected from a
customer shall be allocated between fixed transition amounts and other charges."
(PU Code(S) 841(b).) We will specify that amounts collected be allocated
between fixed transition amounts and other charges on a pro rata basis.
Accordingly, to the extent that a customer withholds fixed transition amounts
from payment, a portion of the shortfall will be allocable to charges for which
it is undisputed that Applicants may disconnect service for nonpayment.
Therefore, no conflict with PU Code Section 779.2 arises, since disconnection
for failure to make payment would not be attributable solely to fixed transition
amounts.
It is theoretically possible that certain small commercial customers
might be obligated to pay fixed transition amounts at times when they had no
other utility charges. In that contingency, however, there would be nothing to
disconnect.
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WHETHER D.97-05-039 CREDIT STANDARDS SHOULD BE TIGHTENED
In D.97-05-039, we took several steps to promote retail
competition for the provision of electric services to all customers, including
permitting competing energy service providers to present consolidated bills. We
made those energy service providers responsible for all payments, regardless of
whether they receive payment from their end-use customer, and we permitted the
utility serving as the related distribution company to impose reasonable
creditworthiness requirements on energy service providers utilizing bill
consolidation. By that, we meant the same creditworthiness requirements that
would be imposed on similarly sized and situated customers of the utility.
Utilities were to file their credit requirements by advice letter.
Applicants note that competing energy service providers should
not be authorized to bill and collect charges for fixed transition amounts
unless such providers meet rating agency standards governing billing,
collecting, and reporting for servicers in similar asset-backed securities
transactions. In the case of providers that are not rated as investment grade,
this might include the requirement for forwarding charges for fixed transition
amounts within two days of receipt or that the obligations of the providers be
secured by credit enhancement, which might include a letter of credit. The
Applicants propose that we articulate a policy to address rating agency concerns
with respect to issuance of the rate reduction bonds:
* The obligation to pay charges for fixed transition amounts is an
obligation of the customer, and that obligation is unaffected by the
use of a third-party energy services provider who bills and collects
such charges.
* Applicants should have access to information on kilowatt-hour billing
and usage in order properly to discharge their obligations as
servicers.
* Current policies should be maintained to permit shut-off of customers
by the utility in the event of non-payment of charges for fixed
transition amounts.
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* In the event of default of the third-party energy services provider,
billing responsibilities must be transferred promptly to another party
to minimize losses.
TURN argues that we should reaffirm our decision in D.97-05-039
and refuse to adopt any more stringent requirement.
This is not the proceeding in which to deal with the
creditworthiness question in detail. We recognize that success of asset
securitization of fixed transition amounts depends upon the degree to which
rating agencies and investors can look to the large number of individual
obligations (residential and small commercial customers) and derive comfort from
historical statistical payment patterns to predict the likelihood of the timely
receipt of revenue in the amount due. We also recognize that even though
third-party energy service providers may have better credit than customers
individually, that they nonetheless present potential points of failure in the
chain of obligations, and that makes their creditworthiness important. We
recognize, further, that the importance of timeliness of payment to investors in
rate reduction bonds may make different creditworthiness standards applicable
for purposes of fixed transition amounts than for purposes of payment of the
utilities' charges. But we cannot set standards in a vacuum. Rating agencies
undoubtedly have criteria, such as market presence and diversity, supply assets,
physical liquidity, competitiveness, risk management operations, control
systems, pretax interest coverage, free operating cash flow, and other financial
parameters that they will apply to gauge the default risk percentage represented
by participation of energy service providers in the payment chain. We need to
better understand what those criteria are and how they apply to electric service
providers in California before we are in a position to take more definite steps.
We observe that the proposed policies appear reasonable, but we are not prepared
to adopt them on this record.
APPLICATION OF PROCEEDS
Applicants propose to use the proceeds of rate reduction bonds to
retire existing debt and equity in proportions that would maintain current
debt/equity ratios. As a result, the Applicants' respective costs of capital
would not change. ORA
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and TURN argue, however, that there is unlikely to be enough existing debt with
high interest rates to make it economically feasible to replace existing debt
with new rate reduction bond debt, and it makes little sense for ratepayers to
incur an approximate 7.5% interest rate on new rate reduction bonds in order to
obtain funds to retire existing debt that may have a lower rate.
ORA recommends that Applicants should be required to apply a
greater proportion of the proceeds of rate reduction bonds to equity retirement
than to debt for any debt that bears an interest rate lower the rate reduction
bonds. ORA suggests limiting such application, however, such that the overall
debt/equity ratio not change by more than 5%, initially.
TURN would go further, by limiting the amount of rate reduction
bonds that can be issued to the amount of existing debt that bears a higher
interest rate than the rate reduction bonds. If that means that the issuance of
rate reduction bonds would not finance a 10% rate reduction of residential and
small commercial customers, TURN suggests that the shortfall should be made up
by reduced recovery by Applicants of uneconomic costs pursuant to PU Code
Section 367.
PG&E opposes decreasing its existing 48% common equity ratio
because doing so may affect existing bond ratings on other outstanding debt, and
the appropriate balance between debt and equity ought be addressed in PG&E's
cost of capital proceeding. ORA dismisses PG&E's concerns about ratings.
Edison argues that the comparison of the interest rate on the
rate reduction bonds, which is based on a 10-year maturity, with the cost of
retired debt is inappropriate because rate reduction bonds simply accelerate
the reduction in capitalization to a one-year time frame from a four-year time
frame. ORA finds Edison's position to be absurd.
SDG&E disagrees with ORA'S position because there may be
instances in which SDG&E may need to retire lower-cost tax-exempt debt and
because SDG&E has a high proportion of variable-rate debt in relation to its
total outstanding debt. To address its situation, SDG&E proposes to invest
proceeds of unutilized rate reduction bonds proceeds in short-and intermediate-
term investments to offset the
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variable-rate interest paid to holders of tax-exempt debt. This will keep
low-cost tax-exempt debt outstanding and avoid the issuance of taxable debt, the
cost of which would be higher than the interest rate borne by the rate reduction
bonds, and SDG&E would remove the cost of variable-rate, tax-exempt debt in an
amount equal to its short-and intermediate-term investment balances. In
addition, SDG&E commits to making monthly adjustments to its balancing account
for uneconomic costs recovered pursuant to PU Code Section 367 that fully
reflect the impacts on embedded cost of debt from retiring existing debt with
rate reduction bond proceeds. ORA acknowledges that SDG&E's approach mitigates
the retirement of low-cost debt, but argues that it does not do as much good as
retiring a greater proportion of equity.
We agree with PG&E that this is not the proper forum for
redesigning capital structures of Applicants. Moreover, we are unconvinced that
it is necessary to attempt to trace the use of proceeds, in light of the fact
that ratepayer benefits are calculated assuming that utility debt, preferred
stock, and common equity are reduced in proportions that will maintain the
authorized capital structure. Following issuance of rate reduction bonds, the
issues associated with use of proceeds can be considered in our transition cost
proceeding, A.96-08-001 et al. (See D.96-12-077, mimeo. at 9.)
MODIFICATION OF STRUCTURE OF TRANSACTION TO ACHIEVE DESIRED TAX
TREATMENT
Applicants have each assumed that proceeds of rate reduction
bonds will not be taxed as current income when received but will, instead, be
taxed ratably as fixed transition amounts are earned through the provision of
electric service over time. Applicants have pending requests for private letter
rulings with the IRS in which they ask confirmation of their proposed tax
treatment. It is not known when, or if, the IRS will give a definitive response.
None of the Applicants request a tax change memorandum account or other
ratemaking mechanism that would permit recording the difference in tax liability
associated with the alternative outcomes of the IRS requests. In their briefs,
Applicants assume the risk of adverse tax treatment on behalf of their
respective shareholders if they proceed with the transaction and the IRS should
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later assert that proceeds of rate reduction bonds are recognizable as taxable
income when received./23/
ORA suggests that in the event any modification to the proposed
structure of the transaction is made in order to qualify for the desired tax
treatment, Applicants should be required to return to the Commission for
approval if such modification resulted in a decrease by 10% or more of ratepayer
benefits on an NPV basis. TURN would not permit any latitude in changes to the
proposed structure without prior Commission review and approval.
We cannot speculate on what the changes to accommodate the
requested tax treatment might involve. To the extent that a changes involves a
"minor" adjustment, such as increasing the equity contribution by Applicants to
their related SPEs from 1/2% to 1%, we suppose that it would be substantially
the transaction described by the Applicants in their applications, and should
not require our further review. On the other hand, if the change were somehow to
require that rate reduction bonds be issued in the form of equity of the SPE,
for example, we would want to know how that change comported with the
requirements of PU Code Section 840(e). It is impossible to set down a fixed
rule as to what changes might constitute a change to the structure as described
by the Applicants that is sufficiently significant to call the validity of the
financing order into doubt. If Applicants accept the terms and conditions of
their financing orders before they are satisfied that they have received the tax
treatment requested, they proceed at their own risk, and they have accepted this
risk.
ADDITIONAL ISSUANCE OF RATE REDUCTION BONDS
Applicants state that in the event of higher sales to residential
and small commercial customers than forecast, it will be necessary to issue more
rate reduction bonds to cover the actual revenue reduction associated with the
10% rate reduction. In this case, the Applicants request authorization to issue
such additional rate reduction bonds. TURN opposes the request, calling it a
"blank check." The
__________________
/23/ Whether or not Applicants rely upon an opinion of tax counsel, reasonably,
or otherwise.
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Applicants respond that objective standards are provided by the requirement for
a showing of positive NPV using the methodology proposed for initial issuance,
the same transaction structure, and the cap on total issuance provided in their
respective applications.
There is no distinction, in principle, between issuance of rate
reduction bonds in a series all at the end of 1997 and in a series that spans
1997 through 2001./24/ However, the important limiting factor is the amount of
transition property that we authorize to be created and how that property is
applied. If Applicants size the initial issuance of rate reduction bonds based
upon some estimate of what is required to support a 10% rate reduction, some
portion of the authorized total amount of transition property must be set aside
to satisfy the direct claims of the holders of rate reduction bonds and their
indirect claims through that portion, if any, which is to be devoted to
overcollateralization. To the extent that authorized amounts of transition
property remain available, future series of rate reduction bonds could be issued
in the same structure, subject to the same method of determining positive NPV,
to the extent supported by the remaining authorized amount of transition
property. To the extent that authorized amounts of transition property are
insufficient to support future issuance of rate reduction bonds, Applicants are
required to make further application for financing orders to create new
transition property, as required by PU Code Section 841(a)
NEED FOR SOME ISSUES RAISED IN THE APPLICATIONS TO BE DETERMINED IN
OTHER PROCEEDINGS
ORA recommends that charges in Applicants' embedded debt cost
resulting from application of proceeds of rate reduction bonds and other cost of
capital issues be addressed and resolved through embedded cost studies. Although
PG&E has a current cost of capital proceeding, Edison and SDG&E do not have
annual cost of capital proceedings. Accordingly, it will be appropriate to
consider Applicants' revenue
________________________
/24/ Timing of issuance may affect NPV calculations, however.
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requirements in the light of any changes to their respective costs of capital
and changes, if any, in their average cost of debt. This may be done for PG&E in
its current cost of capital application and, for Edison and SDG&E, in the
applications for 1999 required by D.97-08-056.
FINDINGS OF FACT
1. Applicants propose to enter into separate transactions for the
issuance of rate reduction bonds.
2. No disputed issues of material fact were identified.
3. The applications of Applicants were consolidated by the assigned ALJ
for the purposes of hearing and briefing.
4. PU Code Section 841(a) provides that the Commission shall designate
fixed transition amounts as recoverable in one or more financing orders if the
Commission determines, as part of its findings in connection with the financing
order, that the designation of the fixed transition amounts, and issuance of
rate reduction bonds in connection with some or all of the fixed transition
amounts would reduce rates that residential and small commercial customers would
have paid if the financing order were not adopted.
CONCLUSIONS OF LAW
1. Based on the applications, the protests, responses, and briefs of the
parties, it is a legal question whether the designation of the fixed transition
amounts, and issuance of rate reduction bonds in connection with some or all of
the fixed transition amounts would reduce rates that residential and small
commercial customers would have paid if the respective financing order were not
adopted.
2. The rates that residential and small commercial customers would have
paid if the respective financing order is not adopted are the frozen rates
described in D.96-12-077 (as adjusted in SDG&E's case, on February 1, 1997).
3. Because Applicants would use financing orders as the bases for
separate rate reduction bond transactions, a separate financing order should be
prepared for each application.
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4. PU Code Section 367(e)(1) does not preclude the issuance of financing
orders.
5. PU Code Section 367(e)(2) does not preclude the issuance of financing
orders.
6. PU Code Section 371(a) does not preclude the issuance of financing
orders.
7. PU Code Section 779.2 does not prevent disconnection of service for
nonpayment of fixed transition amounts.
8. No changes should be made in this proceeding to the credit standards
for third-party services that were adopted in D.97-05-039.
9. No changes should be made in this proceeding to the capital structure
of applicants.
10. Applicants have assumed the risk of adverse tax treatment on behalf of
their respective shareholders if they proceed with the transactions and the IRS
should later assert that proceeds of rate reduction bonds are recognizable as
taxable income when received.
11. Rate reduction bonds should be permitted to be issued in one or more
series, up to the aggregate maximum amount of transition property created by
each financing order.
INTERIM ORDER
IT IS ORDERED that Application (A.) 97-05-006, (A.) 97-05-018, and A.97-05-
022 shall be unconsolidated so that separate financing orders may be issued. The
service list
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for each application shall be the service list that was in effect for the
consolidated applications.
This order is effective today.
Date September 3, 1997, at San Francisco, California.
P.GREGORY CONLON
President
JESSIE J. KNIGHT, JR.
HENRY M.DUQUE
JOSIAH L. NEEPER
RICHARD A. BILAS
Commissioners
Commissioner Josiah L. Neeper will file a concurring opinion, joined in
part by Commissioners Jessie J. Knight, Jr., Henry M. Duque, and Richard
A. Bilas.
/s/ JOSIAH L. NEEPER
Commissioner
/s/ JESSIE J. KNIGHT, JR.
Commissioner
/s/ HENRY M. DUQUE
Commissioner
/s/ RICHARD A. BILAS
Commissioner
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