PG&E 2009 Annual Report Download - page 14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PG&E Corporation, incorporated in California in 1995, is a
holding company whose primary purpose is to hold
interests in energy-based businesses. PG&E Corporation
conducts its business principally through Pacific Gas and
Electric Company (“Utility”), a public utility operating in
northern and central California. The Utility generates
revenues mainly through the sale and delivery of electricity
and natural gas to customers. PG&E Corporation became
the holding company of the Utility and its subsidiaries on
January 1, 1997. Both PG&E Corporation and the Utility
are headquartered in San Francisco, California.
The Utility served approximately 5.1 million electric
distribution customers and approximately 4.3 million
natural gas distribution customers at December 31, 2009.
The Utility had $42.7 billion in assets at December 31,
2009 and generated revenues of $13.4 billion in the 12
months ended December 31, 2009.
The Utility is regulated primarily by the California
Public Utilities Commission (“CPUC”) and the Federal
Energy Regulatory Commission (“FERC”). In addition, the
Nuclear Regulatory Commission (“NRC”) oversees the
licensing, construction, operation, and decommissioning of
the Utility’s nuclear generation facilities. The CPUC has
jurisdiction over the rates and terms and conditions of
service for the Utility’s electric and natural gas distribution
operations, electric generation, and natural gas
transportation and storage. The FERC has jurisdiction over
the rates and terms and conditions of service governing the
Utility’s electric transmission operations and over the rates
and terms and conditions of service governing the Utility
on its interstate natural gas transportation contracts. Before
setting rates, the CPUC and the FERC determine the
annual amount of revenue (“revenue requirements”) that
the Utility is authorized to collect from its customers to
recover its reasonable operating and capital costs of
providing utility services. The authorized revenue
requirements also provide the Utility an opportunity to
earn a return on “rate base,” the Utility’s net investment in
facilities, equipment, and other property used or useful in
providing utility service to its customers. The CPUC
requires the Utility to maintain a certain capital structure
(i.e., the relative weightings of common equity, preferred
equity, and debt) when financing its rate base and
authorizes the Utility to earn a specific rate of return on
each capital component.
The Utility’s ability to recover the revenue
requirements, authorized by the CPUC in the general rate
case (“GRC”), does not depend on the volume of the
Utility’s sales of electricity and natural gas services. This
“decoupling” of revenues and sales eliminates volatility in
the revenues earned by the Utility due to fluctuations in
customer demand. However, fluctuations in operating and
maintenance costs may impact the Utility’s ability to earn
its authorized rate of return. Generally, the Utility’s
recovery of its FERC-authorized revenue requirements can
vary with the volume of electricity sales. A portion of the
Utility’s CPUC-authorized revenue requirements for its
natural gas transportation and storage services also depends
on the volume of natural gas transported and the extent to
which the Utility provides firm transmission services.
The Utility also collects additional revenue requirements
to recover certain costs that the Utility has been authorized
to pass on to customers, including costs to purchase
electricity and natural gas; to fund public purpose, demand
response, and customer energy efficiency programs; and to
recover certain capital expenditures. The Utility’s ability to
recover these costs is not dependent on the volume of the
Utility’s sales. Therefore, although the timing and amount
of these costs can impact the Utility’s revenue, these costs
generally do not impact earnings.
The Utility’s revenues and earnings also are affected by
incentive ratemaking mechanisms that adjust rates
depending on the extent the Utility meets certain
performance criteria.
The Utility uses regulatory balancing accounts primarily
to accumulate differences between actual billed and
unbilled revenues and the Utility’s authorized revenue
requirements for the period. The Utility also uses
regulatory balancing accounts to accumulate differences
between incurred costs and actual billed and unbilled
revenues, as well as differences between incurred costs and
authorized revenue meant to recover those costs. The
CPUC periodically authorizes adjustments to electric and
natural gas rates to (1) reflect over- and under-collections in
the Utility’s major electric and natural gas balancing
accounts, and (2) implement various other electric and
natural gas revenue requirement changes authorized by the
CPUC and the FERC. Generally, these rate changes
become effective on the first day of the following year.
Balances in all CPUC-authorized accounts are subject to
review, verification audit, and adjustment, if necessary, by
the CPUC.
This is a combined annual report of PG&E Corporation
and the Utility, and includes separate Consolidated
10