PG&E 2008 Annual Report Download - page 37

35
KEY FACTORS AFFECTING RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
PG&E Corporation’s and the Utility’s results of operations
and fi nancial condition depend primarily on whether the
Utility is able to operate its business within authorized
revenue requirements, timely recover its authorized costs,
and earn its authorized rate of return. A number of factors
have had, or are expected to have, a signifi cant impact on
PG&E Corporation’s and the Utility’s results of operations
and fi nancial condition, including:
• The Outcome of Regulatory Proceedings and the Impact of
Ratemaking Mechanisms — Most of the Utility’s revenue
requirements are set based on its costs of service in pro-
ceedings such as the General Rate Case (“GRC”) fi led with
the CPUC and transmission owner (“TO”) rate cases fi led
with the FERC. Unlike the current GRC, which set revenue
requirements for a four-year period (2007 through 2010),
it is expected that the next GRC will set revenue require-
ments for the Utility’s electric and natural gas distribution
operations and electric generation operations for a three-
year period (2011 through 2013). From time to time, the
Utility also fi les separate applications requesting the CPUC
or the FERC to authorize additional revenue requirements
for specifi c capital expenditure projects, such as new power
plants, gas or electric transmission facilities, installation
of an advanced metering infrastructure, and reliability or
system infrastructure improvements. The Utility’s revenues
will also be affected by incentive ratemaking, including the
CPUC’s customer energy effi ciency shareholder incentive
mechanism. (See “Regulatory Matters” below.) In addition,
the CPUC has authorized the Utility to recover 100%
of its reasonable electric fuel and energy procurement costs
and has established a timely rate adjustment mechanism
to recover such costs. As a result, the Utility’s revenues
and costs can be affected by volatility in the prices
of natural gas and electricity. (See “Risk Management
Activities” below.)
• Capital Structure and Return on Common Equity —
The Utility’s current CPUC-authorized capital structure
includes a 52% common equity component. The CPUC
has authorized the Utility to earn an ROE of 11.35%
on the equity component of its electric and natural gas
distribution and electric generation rate base. The Utility’s
capital structure is set until 2011, and its cost of capital
components, including an 11.35% ROE, will only be
changed before 2011 if the annual automatic adjustment
mechanism established by the CPUC is triggered. If the
12-month October through September average yield for
the Moody’s Investors Service (“Moody’s”) utility bond
index increases or decreases by more than 1% as com-
pared to the applicable benchmark, the Utility can adjust
its authorized cost of capital effective on January 1 of
the following year. The 12-month October 2007 through
September 2008 average yield of the Moody’s utility bond
index did not trigger a change in the Utility’s authorized
cost of capital for 2009. The Utility can also apply for an
adjustment to either its capital structure or cost of capital
at any time in the event of extraordinary circumstances.
• The Ability of the Utility to Control Costs While Improving
Operational Effi ciency and Reliability — The Utility’s
revenue requirements are generally set at a level to allow
the Utility the opportunity to recover its basic forecasted
operating expenses, as well as to earn an ROE and recover
depreciation, tax, and interest expense associated with
authorized capital expenditures. Differences in the amount
or timing of forecasted and actual operating expenses and
capital expenditures can affect the Utility’s ability to earn
its authorized rate of return and the amount of PG&E
Corporation’s net income available for shareholders. When
capital expenditures are higher than authorized levels, the
Utility incurs associated depreciation, property tax, and
interest expense, but does not recover revenues to offset
these expenses or earn an ROE until the capital expen-
ditures are added to rate base in future rate cases. Items
that could cause higher expenses than provided for in
the last GRC primarily relate to the Utility’s efforts to
maintain the aging infrastructure of its electric and natural
gas systems and to improve the reliability and safety of its
electric and natural gas systems, as well as to higher debt
interest rates and to expenditures for technology infra-
structure and support. In addition, the Utility intends to
accelerate the work associated with system-wide gas leak
surveys and targets completing this work in a little more