PG&E 2008 Annual Report Download - page 41

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The CPUC also authorizes the Utility’s revenue require-
ments and associated rates for the Utility’s natural gas
transmission and storage services. In September 2007,
the CPUC approved a multi-party settlement agreement,
known as the Gas Accord IV, to establish the Utility’s natu-
ral gas transmission and storage rates and associated revenue
requirements for 2008 through 2010. The Gas Accord IV
establishes a 2008 natural gas transmission and storage
revenue requirement of $446 million, with slight increases
in 2009 and 2010. Although most of the Utility’s natural
gas revenues are collected through balancing accounts, most
of the Utility’s transportation service-only revenue is based
on actual volumes of natural gas sold and therefore is
subject to volumetric risk.
The Utility is also authorized to collect revenue require-
ments from customers to fund public purpose, demand
response, and energy effi ciency programs, including the
California Solar Initiative program and the Self-Generation
Incentive program. In addition, the Utility is authorized to
collect revenue requirements to recover its capital costs for
projects such as new Utility-owned generation resource facili-
ties and the installation of advanced meters for its electric
and gas customers. Finally, incentive ratemaking mechanisms
allow rates to be adjusted to refl ect incentive awards earned
by the Utility, or obligations incurred by the Utility, to the
extent certain benchmarks or goals are or are not met.
The FERC sets the Utility’s rates for electric transmission
services. The primary FERC ratemaking proceeding to deter-
mine the amount of revenue requirements that the Utility
can recover for its electric transmission costs is the TO rate
case. The Utility is typically able to set the schedule for its
TO rate cases and, if accepted by the FERC, to charge new
rates, subject to refund, before the outcome of the FERC
ratemaking review process. The Utility’s recovery of its
FERC-authorized electric transmission revenue requirements
can vary with the volume of electricity sales. As a result,
lower customer demand caused by the economic downturn
could affect the Utility’s results of operations or fi nancial
condition. (See “Regulatory Matters — Electric Transmission
Owner Rate Cases” below.)
The Utility’s rates refl ect the revenue requirement
components authorized by the CPUC and the FERC.
In annual true-up proceedings, the Utility requests the
CPUC to authorize an adjustment to electric and gas rates
to (1) refl ect over- and under-collections in the Utility’s
major electric and gas balancing accounts, and (2) imple-
ment various other electricity and gas revenue requirement
changes authorized by the CPUC and the FERC. Generally,
these rate changes become effective on the fi rst day of the
following year. Balances in all CPUC-authorized accounts
are subject to review, verifi cation audit, and adjustment,
if necessary, by the CPUC.
UTILITY
In the Utility’s last GRC, the CPUC authorized the Utility’s
revenue requirements for 2007 through 2010 for its basic
business and operational costs related to its electricity and
natural gas distribution and electricity generation opera-
tions. Effective January 1, 2007, the CPUC authorized the
Utility to collect annual revenue requirements of approxi-
mately $2.9 billion for electricity distribution, approximately
$1.0 billion for natural gas distribution, and approximately
$1.0 billion for electricity generation operations. The CPUC
also authorized annual increases (known as “attrition adjust-
ments”) to authorized revenues of $125 million in 2008, 2009,
and 2010 to help avoid a reduction in earnings in years
between GRCs, due to infl ation, increases in invested capital,
and other similar items. In addition, the CPUC authorized
a one-time additional adjustment of $35 million in 2009 for
the cost of a second refueling outage at the Utility’s Diablo
Canyon nuclear power plant. The Utility’s next GRC will
be held in 2010 to establish revenue requirements beginning
in 2011. The Utility expects to submit a draft of its GRC
application and revenue requirement request to the CPUC
staff in July or August of 2009.
Revenue requirements by the CPUC are independent,
or “decoupled,” from the volume of sales, which eliminates
volatility in the amount of revenues earned by the Utility
due to fl uctuations in customer demand. As a result, lower
customer demand caused by the economic downturn has
not and is not expected to have a material adverse impact
on the Utility’s results of operations or fi nancial condition.
The Utility uses revenue or sales regulatory balancing accounts
to accumulate differences between revenues and the Utility’s
revenue requirements authorized by the CPUC. Under-
collections that are probable of recovery through regulated
rates are recorded as regulatory balancing account assets. Over-
collections that are probable of being credited to customers
are recorded as regulatory balancing account liabilities.
The CPUC also conducts a proceeding to determine the
Utility’s authorized capital structure (i.e., the relative weight-
ings of common equity, preferred equity, and debt) and the
authorized rate of return (including an ROE) that the Utility
may earn on the components of capital structure used to
fi nance its electricity and natural gas distribution and elec-
tricity generation assets. For 2008 through 2010, the CPUC
has authorized a capital structure that includes a 52% equity
component. For 2009, the CPUC has authorized an 11.35%
ROE for the Utility. The Utility’s rates of return will remain
at current levels through 2010, unless the CPUC’s annual
adjustment mechanism is triggered. The CPUC will review
the Utility’s capital structure and cost of capital again for
possible reset beginning in 2011.