SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of Report: July 10, 1998
Exact Name of
Commission Registrant State or other IRS Employer
File as specified Jurisdiction of Identification
Number in its charter Incorporation Number
- ----------- -------------- --------------- --------------
1-12609 PG&E Corporation California 94-3234914
1-2348 Pacific Gas and California 94-0742640
Electric Company
Pacific Gas and Electric Company PG&E Corporation
77 Beale Street, P.O. Box 770000 One Market, Spear Tower, Suite 2400
San Francisco, California 94177 San Francisco, California 94105
(Address of principal executive offices) (Zip Code)
Pacific Gas and Electric Company PG&E Corporation
(415) 973-7000 (415) 267-7000
(Registrant's telephone number, including area code)
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Item 5. Other Events
The discussion below contains forward-looking statements that
involve risks and uncertainties. Words such as "estimates,"
"expects," "anticipates," "plans," "believes," and similar
expressions identify forward-looking statements involving risks
and uncertainties. These risks and uncertainties include, but
are not limited to, the ongoing restructuring of the California
electric industry, the outcome of the regulatory proceedings
related to those restructurings, the continued application of the
regulatory framework established by the California Public
Utilities Commission (CPUC) and state legislation, the
commencement and outcome of litigation involving the California
voter initiative discussed below, the ability of Pacific Gas and
Electric Company to collect revenues sufficient to recover
transition costs in accordance with its transition cost recovery
plan especially in light of the voter initiative discussed below,
and the approval of Pacific Gas and Electric Company's 1999
General Rate Case application resulting in Pacific Gas and
Electric Company's ability to earn its authorized rate of return,
as discussed below.
A. Electric Industry Restructuring
1. California Voter Initiative
On November 24, 1997, various consumer groups filed a voter
initiative (Voter Initiative) with the California Attorney
General which would overturn major provisions of the electric
industry restructuring legislation passed by the California
Legislature in 1996, Assembly Bill (AB) 1890. On June 24, 1998,
the California Secretary of State announced that the Voter
Initiative had qualified for the November 1998 statewide ballot.
In addition to establishing a framework for a competitive
electric generation market, AB 1890: (1) provided a 10 percent
rate reduction on January 1, 1998, for all residential and small
business customers; (2) specified that rates for all other
customer groups are to be held at 1996 levels through a
transition period ending at or before March 31, 2002; and (3)
provided utilities with the opportunity to recover generation-
related costs that prove to be uneconomic in the new competitive
framework (transition costs). Although most transition costs
must be recovered by March 31, 2002, certain transition costs can
be recovered after such date, including certain employee-related
transition costs, above-market payments under existing qualifying
facilities (QFs) and purchased power contracts, and transition
costs financed through the issuance of rate reduction bonds, as
discussed below.
To achieve the 10 percent rate reduction for residential and
small commercial customers, AB 1890 authorized utilities to
finance a portion of their transition costs with rate reduction
bonds. In December 1997, a special purpose entity established by
the California Infrastructure and Development Bank issued $2.9
billion of rate reduction bonds on behalf of a wholly owned
subsidiary of Pacific Gas and Electric Company. Pacific Gas and
Electric Company is authorized by AB 1890 to collect a
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nonbypassable tariff on behalf of the wholly owned subsidiary and
the bondholders to recover principal, interest, and related costs
of the bonds over the term of the bonds from residential and
small commercial customers. The bond proceeds were used by the
wholly owned subsidiary to purchase from Pacific Gas and Electric
Company the right to be paid the revenues from this separate
charge. The bonds are secured by the right to the future revenue
from the separate charge and not by Pacific Gas and Electric
Company's assets. (While the bonds are reflected as long-term
debt on Pacific Gas and Electric Company's balance sheet,
creditors of Pacific Gas and Electric Company do not have any
recourse to the revenues from the separate charge.)
The Voter Initiative proposes to (1) require Pacific Gas and
Electric Company and the other California investor-owned
utilities to provide a 10 percent rate reduction to their
residential and small commercial customers in addition to the 10
percent rate reduction mandated by AB 1890; (2) eliminate
transition cost recovery for nuclear generation plants and
related assets and obligations (other than reasonable
decommissioning costs); (3) eliminate transition cost recovery
for non-nuclear generation plants and related assets and
obligations (other than costs associated with QFs), unless the
CPUC finds that the utility would be deprived of the opportunity
to earn a fair rate of return; and (4) prohibit the collection of
any customer charges necessary to pay principal and interest on
the rate reduction bonds or, if a court finds that such
prohibition is not legal, require that utility rates be reduced
to fully offset the cost of the customer surcharges.
On May 22, 1998, a group known as "Californians for Affordable
and Reliable Electric Services" (CARES) filed a petition in the
California Third District Court of Appeal to exclude the Voter
Initiative from the November 1998 ballot on the grounds that it
represents an unconstitutional impairment of contract rights and
that it is an unconstitutional attempt to implement actions by
statute that only can be done through a state constitutional
amendment. Supporters of CARES include the California State
Chamber of Commerce, the state's investor-owned utilities
(including Pacific Gas and Electric Company), and a wide range of
business, environmental, and consumer groups. On July 2, 1998,
the Court denied the CARES petition. The Court's ruling did not
represent a ruling on the merits and does not preclude future
legal challenges if the Voter Initiative is approved by the
electorate. CARES has appealed the decision to the California
Supreme Court. No assurances can be given as to whether the
Voter Initiative will be excluded from the November 1998 ballot.
If the Voter Initiative is approved by the electorate, further
legal challenges by the California utilities, including Pacific
Gas and Electric Company, would ensue. Although PG&E Corporation
and Pacific Gas and Electric Company believe the arguments in
litigation challenging the Voter Initiative would be compelling,
no assurances can be given whether or when the Voter Initiative
would be overturned. If the Voter Initiative is approved by
the electorate, and if Pacific Gas and Electric Company were
unable to conclude that it is probable that the Voter Initiative
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ultimately would be found invalid, then under applicable
accounting principles Pacific Gas and Electric Company would be
required to write off generation-related regulatory assets and
certain investments in electric generation plant which would no
longer be probable of recovery because of reductions in future
revenues that could result if the Voter Initiative is fully
implemented as discussed below. It is anticipated that such
a write-off could amount to approximately $2 billion after-tax,
or, based on conservative assumptions, $3 billion after-tax.
The duration and amount of the rate decrease contemplated by the
Voter Initiative is uncertain and, if the Voter Initiative is
approved, will be subject to interpretation by the courts and
regulatory agencies. However, if all provisions of the Voter
Initiative ultimately are upheld against legal challenge and
interpreted in an adverse manner, the amounts of the average
earnings reductions could be approximately $200 million per year
in 1999 through 2001 (based on current frozen rates which would
otherwise be in effect and assuming rates are reduced to offset
the charges for the rate reduction bonds) and approximately $50
million per year, from 2002 (based on rates under current
regulatory decisions assuming such decisions are in effect after
the latest date on which the rate freeze would otherwise end) to
2007 (the longest maturity date of the rate reduction bonds).
The earnings reduction estimates are uncertain and depend on how
the Voter Initiative would be interpreted by courts and
regulators and how future rate changes unrelated to the Voter
Initiative (such as changes resulting from the General Rate Case
proceeding discussed below) might affect the Company's overall
electric revenues.
2. Divestiture
On July 1, 1998, Pacific Gas and Electric Company completed the
previously announced sale of three of its California fossil-
fueled electric generation plants to Duke Energy Power Services,
Inc., a subsidiary of Duke Energy Corporation, for an aggregate
purchase price of $501 million. The three plants, which have a
combined capacity of 2,645 megawatts, are located in Moss
Landing, Morro Bay, and Oakland. Pacific Gas and Electric Company
will continue to operate and maintain the plants under a two-year
operating and maintenance agreement.
B. Pacific Gas and Electric Company's General Rate Case
Proceeding
Pacific Gas and Electric Company's Test Year 1999 General Rate
Case (GRC) application pending before the CPUC requests increases
in base revenues, to be effective on January 1, 1999, of $572
million for electric base revenues and $460 million for gas base
revenues over the 1998 authorized amounts. On June 26, 1998, the
CPUC's Office of Ratepayer Advocates (ORA) provided to Pacific
Gas and Electric Company and other parties ORA's revenue
requirement calculation which supplements ORA's June 8, 1998,
report on Pacific Gas and Electric Company's 1999 GRC proceeding.
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ORA's calculation indicates that ORA is recommending a decrease
of $86 million in electric base revenues and an increase in gas
base revenues of $91 million, over the 1998 authorized amounts.
In the aggregate, ORA is recommending a net increase in electric
and gas revenue requirements of $5 million compared to Pacific
Gas and Electric Company's request for an increase in electric
and gas revenue requirements of $1.03 billion. The difference is
comprised of the amounts shown in the table below:
Electric Department Gas Department
(Millions of Dollars)
Distribution M&O* $102 $19
Administrative and General 130 64
Customer Accounts and Services 72 46
Other 87 42
Depreciation and Decommissioning 93 132
Taxes 73 57
Return on rate base 101 9
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Total: $658 $369
(*Maintenance and Operations)
The table above reflects ORA's lower calculation of electric rate
base which results in lower recommended revenue requirements for
return on rate base, associated taxes, and depreciation, in an
aggregate amount which is approximately $230 million less than the
amounts requested by Pacific Gas and Electric Company based on a
higher rate base. ORA also recommends that the CPUC reject
Pacific Gas and Electric Company's request for higher depreciation
rates for certain natural gas facilities (reflected in the table
above). Finally, ORA recommends that the CPUC reject the request
for a contribution to the pension fund in the amount of $47
million (included in the requested aggregate of electric and gas
administrative and general expenses).
The GRC schedule calls for evidentiary hearings to take place
before an administrative law judge from August 24, 1998, through
October 16, 1998. The administrative law judge will consider
testimony and other evidence, including ORA's report, from many
parties. A proposed decision by the administrative law judge is
scheduled to be issued in February 1999, and a final decision is
scheduled to be issued by the full CPUC in March 1999. The CPUC
may accept all, part, or none of ORA's recommendations. Pacific
Gas and Electric Company cannot predict the amount of base
revenue increase or decrease the CPUC will ultimately approve.
In the event of an adverse decision by the CPUC, and if Pacific
Gas and Electric Company is unable to lower expenses to conform
to the base revenue amounts adopted by the CPUC while maintaining
safety and system reliability standards, the ability of Pacific
Gas and Electric Company to earn its authorized rate of return
for the years 1999 through 2001 would be adversely affected.
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C. Sale of Australian Assets
On June 23, 1998, PG&E Corporation announced it had agreed to
sell its Australian energy holdings to Duke Energy International,
LLP (DEI), a subsidiary of Duke Energy Corporation. DEI
submitted the winning bid for the assets, which are located in
the southeast corner of the Australian State of Queensland. The
assets include a 627-kilometer gas pipeline, pipeline operations,
and trading and marketing operations. Subject to government
approval, DEI will take immediate ownership of the assets. PG&E
Corporation had previously announced that it was evaluating its
Australian holdings in light of its intention to focus on the
domestic marketplace.
While the sale to Duke represents a premium on PG&E Corporation's
1996 investment in the assets, due to the weakening of the
Australian dollar during the past two years, the transaction is
expected to result in a non-recurring charge of about six cents
per share in the second quarter of 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrants have duly caused this report to be signed
on their behalf by the undersigned thereunto duly authorized.
PG&E CORPORATION
and
PACIFIC GAS AND ELECTRIC COMPANY
CHRISTOPHER P. JOHNS
By __________________________
CHRISTOPHER P. JOHNS
Vice President and Controller
(PG&E Corporation)
Vice President and Controller
(Pacific Gas and Electric Company)
Dated: July 10, 1998
