HomeMy WebLinkAbout20010821Order No 28808.docBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF PACIFICORP FOR AUTHORITY TO ENTER INTO VARIOUS ARRANGEMENTS WITH FINANCIAL INSTITUTIONS TO MANAGE EXPOSURE TO INTEREST RATE FLUCTUATIONS. )
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CASE NO. PAC-E-01-11
ORDER NO. 28808
On July 9, 2001 PacifiCorp filed an Application that requested authority, pursuant to Chapter 9, Title 61, of the Idaho Code and Rules 141-150 of the Commission’s Rules of Procedure, to enter into interest rate swaps, caps, floors, collars and derivative products (“Interest Rate Swap Products”) with financial institutions to manage exposure to interest rate fluctuations. The notional principal amount in new arrangements entered into pursuant to such authorization would not exceed $400,000,000.
In employing certain Interest Rate Swap Products, the Company may choose not to associate a particular transaction with a particular outstanding security, but choose to view the transaction as applicable to the overall portfolio of liabilities. It is expected that the use of Interest Rate Swap Products will, on average, result in lower or less volatile expense, reduced earnings volatility and improved financing flexibility. As a result, the Company’s cost of capital should be reduced to the benefit of its customers. These products are not intended to be used for speculative purposes.
STAFF RECOMMENDATION
Staff believes that the use of Interest Rate Swap Products can be an effective tool for risk management. Staff also stated that it will review the prudency of any transaction entered into by the Company as part of the cost of debt capital computation prior to inclusion in rates. Staff stated that this review will also look for speculative use of these products. Staff also recommended exclusion from rates for any costs associated with speculative use. To facilitate this review Staff recommended that PacifiCorp be ordered to maintain documentation supporting its decision to utilize these products at the time the decision is made. Staff stated that this documentation should include the market analysis of rates and a review of alternative products. Staff also recommended that PacifiCorp file copies of any agreement entered and a statement showing all terms and conditions of any Interest Rate Derivative Product entered. Finally, Staff recommended approval of PacifiCorp’s Application with the above requirements.
FINDINGS OF FACT
The Company was incorporated under Oregon law in August 1987 for the purpose of facilitating consummation of a merger with Utah Power & Light Company, a Utah corporation, and changing the state of incorporation of PacifiCorp from Maine to Oregon. The Company uses the assumed business names of Pacific Power & Light Company and Utah Power & Light Company within their respective service territories located in the states of California, Idaho, Oregon, Utah, Washington and Wyoming.
The Company proposes that the Commission grant the Company authority to enter into Interest Rate Swap Products to reduce its exposure to fluctuations in interest rates. The notional principal amount involved in the new arrangements entered into pursuant to such authorization would not exceed $400,000,000.
The Company proposes to enter into Interest Swap Products with financial institutions to manage its exposure to interest rate fluctuations.
The types of Interest Rate Swap Products contemplated by the Company in its application include:
a. Interest rate swaps and derivative interest rate swap products.
b. Interest rate caps, floors and collars.
The basic interest rate swap transaction is designed to allow two parties to contractually arrange to make payment to each other with the result that one party's floating rate obligation is effectively converted to a fixed rate payment and the counterparty's fixed rate obligation is effectively converted to a floating payment.
In most cases, interest rate swaps are not callable for the life of the agreement; however, opportunities do exist to arrange callable interest rate swap structures which allow the fixed rate payer to cancel the interest rate swap on or after a predetermined date. Generally, to obtain this flexibility, the fixed rate payer must pay a premium, in the form of a higher interest rate, to the floating rate payer. The call feature permits the fixed rate payer to replace the existing fixed rate obligation with a lower cost obligation should interest rates decline; if interest rates rise, the fixed rate payer would choose to leave the interest rate swap outstanding. In addition, there exists a large secondary market for interest rate swaps which allows parties to sell their positions prior to maturity in the event it becomes necessary or desirable to do so.
In addition to the basic interest rate swaps, derivative interest rate swap products have been developed. These products include forward rate swaps and swaptions. The Company believes that interest rate swaps and derivative interest rate swap products provide opportunities to achieve lower cost funding of existing or prospective debt placements. They also provide the Company enhanced flexibility to manage its exposure to interest rates as market conditions permit.
The structure for interest rate caps, floors and collars involves two parties which, either through an intermediary or directly, enter into an agreement where one party purchases from the other party protection from interest rate volatility. Interest rate caps are purchased to provide an issuer of floating rate obligations protection from increases in interest rates on an underlying obligation exceeding a predetermined level. The purchaser of an interest rate floor seeks to establish a minimum rate its portfolio of securities would earn during a declining interest rate period. In both cases, an up front fee is paid to the party that provides such protection. From time to time, a party may simultaneously purchase an interest rate cap and sell an interest rate floor to create an interest rate collar. The resulting product, an interest rate collar, provides protection from rising interest rates but limits the benefit of declining interest rates to the floor established in the transaction. This has the effect of reducing, but not eliminating, exposure to interest rate volatility. The principal benefit to the Company of selling an interest rate floor to establish an interest rate collar is to receive a premium to offset the cost of purchasing an interest rate cap.
In the past, the Company has maintained a portion of its capital structure as floating rate, which generally results in lower cost sources of capital during times of a positive sloping yield curve and enables the Company to provide service to its customers at lower cost. Caps, collars and floors give the Company and its customers the opportunity to benefit from the use of floating rate securities, while protecting the Company from rising interest rates or increased volatility of interest rates, which may adversely affect customer rates.
There are no proceeds from entering into an interest rate swap or forward rate swap, only a change in the all in effective cost of the underlying securities. Swaptions, caps, floors and collars may result in the receipt, or payment, of cash upon entering into one of these transactions, but any payments will be reflected in the all in effective cost of the underlying securities. No significant change in the capitalization of the Company is anticipated as a result of the Interest Rate Swap Products.
The proposed Interest Rate Swap Products are part of an overall plan to minimize the cost of the financings which support the Company's ongoing construction and its in service plant and to reduce its cost of capital.
The Company has paid the fees required by Idaho Code § 61 905.
CONCLUSIONS OF LAW
PacifiCorp is an electrical corporation within the definition of Idaho Code § 61 119 and is a public utility within the definition of Idaho Code § 61 129.
The Idaho Public Utilities Commission has jurisdiction over this matter pursuant to the provisions of Idaho Code § 61 901 et seq., as the functional equivalent of security issuance for "the guaranteeing, taking over, refunding, discharging, replacing or retiring" of a security, Idaho Code § 61 905, and the Application reasonably conforms to Section 14 of the Commission's Rules of Practice and Procedure.
The method of issuance is proper.
The general purposes to which the proceeds, if any, will be put are lawful purposes under the Public Utility Law of the State of Idaho and are compatible with the public interest. However, this general approval of the general purposes to which the proceeds will be put is neither a finding of fact nor a conclusion of law that any particular construction program of PacifiCorp which may be benefited by the approval of this Application has been considered or approved by this Order, and this Order shall not be construed to that effect.
The issuance of an Order authorizing the proposed financing does not constitute agency determination/approval of the type of financing or the related costs for ratemaking purposes, which determination the Commission expressly reserves until the appropriate proceeding.
The Application shall be approved.
ORDER
IT IS THEREFORE ORDERED that the application of PacifiCorp for authority to enter into interest rate swaps, caps, floors and collars and derivative products (Interest Rate Swap Products) with financial institutions to manage exposure to interest rate fluctuations not to exceed a notional principal amount involved in such new arrangements of $400,000,000 is granted.
IT IS FURTHER ORDERED that this authorization is without prejudice to the regulatory authority of this Commission with respect to rates, service, accounts, valuation, estimates, or determination of costs, or any other matter that may come before this Commission pursuant to this jurisdiction and authority as provided by law.
IT IS FURTHER ORDERED that nothing in this Order and no provision of Chapter 9, Title 61, Idaho Code, or any act or deed done or performed in connection with this Order shall be construed to obligate the State of Idaho to pay or guarantee in any manner whatsoever any security authorized, issued, assumed, or guaranteed under the provisions of Chapter 9, Title 61, Idaho Code.
IT IS FURTHER ORDERED that PacifiCorp shall file the following as they become available:
a. Verified copies of any agreement entered into in connection with Interest Rate Swap Products pursuant to this order.
b. A verified statement setting forth in reasonable details the terms and conditions of each Interest Rate Swap Product entered into pursuant to this order.
c. If an agreement is terminated, verified copies of the termination document.
IT IS FURTHER ORDERED that issuance of this Order does not constitute acceptance of PacifiCorp's exhibits or other material accompanying the Application for any purpose other than the issuance of this Order.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally decided by this Order) or in interlocutory Orders previously issued in this Case No. PAC E 01-11 may petition for reconsideration within twenty one (21) days of the service date of this Order with regard to any matter decided in this Order or in interlocutory Orders previously issued in this Case No. PAC E 01-11. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross petition for reconsideration. See Idaho Code § 61 626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho, this
day of August 2001.
PAUL KJELLANDER, PRESIDENT
MARSHA H. SMITH, COMMISSIONER
DENNIS S. HANSEN, COMMISSIONER
ATTEST:
Jean D. Jewell
Commission Secretary
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ORDER NO. 28808 1
Office of the Secretary
Service Date
August 21, 2001