PG&E 2013 Annual Report Download - page 33

When possible, the Utility estimates costs using site-specific information, but also considers historical experience
for costs incurred at similar sites depending on the level of information available. Estimated costs are composed of
the direct costs of the remediation effort and the costs of compensation for employees who are expected to devote a
significant amount of time directly to the remediation effort. These estimated costs include remedial site
investigations, remediation actions, operations and maintenance activities, post remediation monitoring, and the costs
of technologies that are expected to be approved to remediate the site. Remediation efforts for a particular site
generally extend over a period of several years. During this period, the laws governing the remediation process may
change, as well as site conditions, thereby possibly affecting the cost of the remediation effort.
At December 31, 2013 and 2012, the Utility’s accruals for undiscounted gross environmental liabilities were
$900 million and $910 million, respectively. The Utility’s undiscounted future costs could increase to as much as
$1.7 billion if the extent of contamination or necessary remediation is greater than anticipated or if the other
potentially responsible parties are not financially able to contribute to these costs, and could increase further if the
Utility chooses to remediate beyond regulatory requirements. Although the Utility has provided for known
environmental obligations that are probable and reasonably estimable, estimated costs may vary significantly from
actual costs, and the amount of additional future costs may be material to results of operations in the period in
which they are recognized.
Legal and Regulatory Matters
PG&E Corporation and the Utility are subject to various laws and regulations and, in the normal course of
business, PG&E Corporation and the Utility are subject to claims or named as parties in lawsuits. In addition, the
Utility can incur penalties for failure to comply with federal, state, or local laws and regulations. PG&E Corporation
and the Utility record a provision for a loss when it is both probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. PG&E Corporation and the Utility evaluate the range of reasonably estimated
losses and record a provision based on the minimum amount, unless an amount within the range is a better estimate
than any other amount. These accruals, and the estimates of any additional reasonably possible losses (or reasonably
possible losses in excess of the amounts accrued), are reviewed quarterly and are adjusted to reflect the impacts of
negotiations, discovery, settlements and payments, rulings, advice of legal counsel, and other information and events
pertaining to a particular matter. In assessing the amount of such losses, PG&E Corporation’s and the Utility’s policy
is to exclude anticipated legal costs. (See ‘‘Natural Gas Matters’’ and ‘‘Legal and Regulatory Contingencies’’ in
Note 14 of the Notes to the Consolidated Financial Statements.)
Asset Retirement Obligations
PG&E Corporation and the Utility account for an ARO at fair value in the period during which the legal
obligation is incurred if a reasonable estimate of fair value and its settlement date can be made. A legal obligation
can arise from an existing or enacted law, statute, or ordinance; a written or oral contract; or under the legal
doctrine of promissory estoppel.
At the time of recording an ARO, the associated asset retirement costs are capitalized as part of the carrying
amount of the related long-lived asset. The Utility recognizes a regulatory asset or liability for the timing differences
between the recognition of expenses and costs recovered through the ratemaking process.
Most of PG&E Corporation’s and the Utility’s AROs relate to the Utility’s obligation to decommission its
nuclear generation facilities, certain fossil fuel-fired generation facilities, and gas transmission assets. The Utility
estimates its obligation for the future decommissioning of its nuclear generation facilities and certain fossil fuel-fired
generation facilities. In December 2012, the Utility submitted an updated estimate of the cost to decommission its
nuclear facilities to the CPUC. The estimated undiscounted cost to decommission the Utility’s nuclear power plants
increased by $1.4 billion in 2012 due to higher spent nuclear fuel disposal costs and an increase in the scope of work.
To estimate the liability, the Utility uses a discounted cash flow model based upon significant estimates and
assumptions about future decommissioning costs, inflation rates, and the estimated date of decommissioning. The
estimated future cash flows are discounted using a credit-adjusted risk-free rate that reflects the risk associated with
the decommissioning obligation. (See Note 2 of the Notes to the Consolidated Financial Statements.)
Changes in these estimates and assumptions could materially affect the amount of the recorded ARO for these
assets. For example, a premature shutdown of the nuclear facilities at Diablo Canyon would increase the likelihood
of an earlier start to decommissioning and cause an increase in the ARO. Additionally, if the inflation adjustment
increased 25 basis points, the amount of the ARO would increase by approximately 4.21%. Similarly, an increase in
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