PG&E 2015 Annual Report Download - page 65

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PART II
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Determining probability requires significant judgment
by management and includes, but is not limited to,
consideration of testimony presented in regulatory hearings,
proposed regulatory decisions, final regulatory orders,
and the strength or status of applications for rehearing
or state court appeals. For some of the Utility’s regulatory
assets, including utility retained generation, the Utility
has determined that the costs are recoverable based on
specific approval from the CPUC. The Utility also records a
regulatory asset when a mechanism is in place to recover
current expenditures and historical experience indicates
that recovery of incurred costs is probable, such as the
regulatory assets for pension benefits; deferred income
tax; price risk management; and unamortized loss, net of
gain, on reacquired debt. The CPUC has not denied the
recovery of any material costs previously recognized by
the Utility as regulatory assets for the periods presented.
If the Utility determined that it is no longer probable that
regulatory assets would be recovered or reflected in future
rates, or if the Utility ceased to be subject to rate regulation,
the regulatory assets would be charged against income
in the period in which that determination was made. If
regulatory accounting did not apply, the Utility’s future
financial results could become more volatile as compared
to historical financial results due to the dierences in the
timing of expense or revenue recognition.
In addition, regulatory accounting standards require
recognition of a loss if it becomes probable that capital
expenditures will be disallowed for ratemaking purposes and
if a reasonable estimate of the amount of the disallowance
can be made. Such assessments require significant judgment
by management regarding probability of recovery, as
described above, and the ultimate cost of construction of
capital assets. The Utility records a loss to the extent capital
costs are expected to exceed the amount to be recovered.
The Utility records a provision based on its best estimate; to
the extent there is a high degree of uncertainty in the Utility’s
forecast, it will record a provision based on the lower end of
the range of possible losses. The Utility’s capital forecasts
involve a series of complex judgments regarding detailed
project plans, estimates included in third-party contracts,
historical cost experience for similar projects, permitting
requirements, environmental compliance standards, and
a variety of other factors. The Utility recorded charges of
$407 million in 2015 for estimated capital spending that is
probable of disallowance related to the Penalty Decision.
Management will continue to evaluate and estimate capital
spending that may be probable of disallowance in future
periods. These estimates are subject to adjustment based
on the final 2015 GT&S rate case decision which is expected
in 2016. The Utility also recorded $116 million and $196
million in 2014 and 2013, respectively, for PSEP capital costs
that are expected to exceed the amount to be recovered.
See “Enforcement and Litigation Matters” in Note 13 of
the Notes to the Consolidated Financial Statements in
Item 8. Management will continue to periodically assess
its safety-related capital costs and the related CPUC
regulatory proceedings, and further charges could be
required in future periods.
Loss Contingencies
Environmental Remediation Liabilities
The Utility is subject to loss contingencies pursuant to
federal and California environmental laws and regulations
that in the future may require the Utility to pay for
environmental remediation at sites where it has been, or
may be, a potentially responsible party. Such contingencies
may exist for the remediation of hazardous substances
at various potential sites, including former manufactured
gas plant sites, power plant sites, gas compressor stations,
and sites used by the Utility for the storage, recycling, or
disposal of potentially hazardous materials, even if the
Utility did not deposit those substances on the site.
The Utility generally commences the environmental
remediation assessment process upon notification from
federal or state agencies, or other parties, of a potential
site requiring remedial action. (In some instances, the
Utility may initiate action to determine its remediation
liability for sites that it no longer owns in cooperation with
regulatory agencies. For example, the Utility has begun a
program related to certain former manufactured gas plant
sites.) Based on such notification, the Utility completes an
assessment of the potential site and evaluates whether it
is probable that a remediation liability has been incurred.
The Utility records an environmental remediation liability
when site assessments indicate remediation is probable
and it can reasonably estimate the loss or a range of
possible losses. Given the complexities of the legal and
regulatory environment and the inherent uncertainties
involved in the early stages of a remediation project, the
process for estimating remediation liabilities is subjective
and requires significant judgment. Key factors evaluated
in developing cost estimates include the extent and
types of hazardous substances at a potential site, the
range of technologies that can be used for remediation,
the determination of the Utility’s liability in proportion to
other responsible parties, and the extent to which such
costs are recoverable from third parties.
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 eort and the
costs of compensation for employees who are expected
to devote a significant amount of time directly to the
remediation eort. 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 eorts for a particular
site generally extend over a period of several years. During
this period, the laws governing the remediation process