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: December 22, 1995
PACIFIC GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
California 1-2348 94-0742640
(State or other juris- (Commission (IRS Employer
diction of incorporation) File Number) Identification Number)
77 Beale Street, P.O.Box 770000, San Francisco, California 94177
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(415) 973-700
Item 5. Other Events
A. California Public Utilities Commission Proceedings
1. Electric Industry Restructuring
On December 20, 1995, the CPUC, by a three to two vote, adopted an
order providing for the restructuring of the California electric
industry. The restructuring contemplated in the order involves (1)
the simultaneous implementation of a wholesale power pool (the power
exchange) and direct access for certain customers which would be able
to contract directly with power generation providers, beginning in
1998, with direct access phased in for all customers by 2003; (2)
establishment of an Independent System Operator (ISO) to manage and
control the transmission system, and (3) recovery of utilities'
stranded costs through a surcharge, or competition transition charge
(CTC), to be imposed on all customers taking retail electric service
as of or after December 20, 1995. The order, while effective
immediately, also provides a 100-day period for legislative review and
sets out an ambitious schedule calling for various implementing
filings and comments over the next 30 to 175 days.
Market Structure
The CPUC order requires the three California investor-owned utilities
(IOUs) to develop a detailed proposal for submission to the Federal
Energy Regulatory Commission (FERC) for creation of the ISO. The
order contemplates that the IOUs will, after approvals from the FERC
and the CPUC, turn over control, but not ownership, of their
transmission systems to the ISO. The ISO will control the power
dispatch and transmission system and provide transmission service on a
nondiscriminatory basis. The order provides specific guidance as to
the transmission pricing that should be incorporated into the ISO
proposal to be filed with the FERC.
The order also requires the three IOUs, in conjunction with other
interested parties, to work together to prepare a joint proposal for
the creation of a wholesale power exchange (Exchange) which will be
separate from and independent of the ISO. The Exchange would manage
bids for energy and set the market clearing price, and then submit its
delivery schedule to the ISO for dispatch. The IOUs will be required
to bid all their generation output into the Exchange and purchase all
their energy from the Exchange during the five year transition period
to full direct access. Participation in the Exchange will be
voluntary for all other market participants.
The ISO and Exchange would be separate, independent entities subject
to FERC jurisdiction. The order instructs the IOUs to file an
application to establish the ISO and Exchange with the CPUC and FERC
within 130 days from the effective date of the CPUC order.
Market Power
The CPUC concludes that market power issues associated with the
restructuring of the electric industry mandate that the IOUs divest
themselves of a substantial portion of their fossil generating assets.
Accordingly, the order requires that the three IOUs file plans to
voluntarily divest themselves of at least 50% of their fossil
generation assets. The order proposes a financial incentive to the
IOUs to encourage their voluntary divestiture of 50% of their fossil
fuel generating assets. The order also directs the IOUs to file
comments within 90 days on the feasibility, timing and consequences of
a corporate restructuring to separate their operations and assets
between the generation, transmission and distribution functions,
including the option of a holding company structure.
Customer Choice
Under the restructuring vision, IOUs would continue to provide
distribution functions, as well as power production and procurement
functions for those customers choosing to take bundled service from
the utilities, all of which would be regulated under a performance-
based ratemaking scheme. The CPUC order provides that by January 1,
1998, a representative number of customers from each customer group
(residential, industrial, commercial and agricultural) will be able
singly or in an aggregate to participate in the first phase of direct
access which will last one year, with the balance of customers phased
in to direct access over a five year transition period. Ultimately,
it is contemplated that all customers will have the choice of buying
power from their utility, entering into hedging contracts for power at
a set price with a counterparty who will assume the risk of price
changes at the wholesale level, or buying power directly from power
generators through direct access bilateral contracts.
CTC/Stranded Costs
The order provides for the collection by the IOUs of their transition
costs through the imposition of a non-bypassable CTC, which shall not
increase rates beyond the rate levels in effect as of January 1, 1996.
Valuation of above market generation assets, contracts and commitments
(other than qualifying facility (QF) commitments) for purposes of
determining the CTC will be completed by 2003 with collection of all
CTC to be completed by 2005, with the exception of QF CTC costs, which
will be collected for the duration of their respective contracts. The
CTC will include the above market portion of the undepreciated book
value of a utility's fossil fueled generation plant as reflected in
rate base as of the date of the CPUC order at a reduced return on
equity equal to 10 percent below the utility's embedded cost of debt,
regulatory assets and the above market portion of existing purchase
obligations for generation, including for QFs and nuclear power plant
settlements. Utility non-nuclear generating assets will be valued to
the extent possible for market valuation purposes using market
mechanisms.
A transition cost account will be established for each utility. The
account will be adjusted annually and after a utility generation asset
receives its market valuation through sale, spin-off or appraisal.
Transition costs resulting from the operation of nuclear power plants
and power purchases under existing wholesale and QF contracts will
also be recorded in this account. Transition costs for these
resources will be calculated annually over the terms of the
settlements and contracts or until the authorized transition cost
recovery has been completed. Transition costs associated with
regulatory obligations will be included in the account as authorized
by the CPUC. If the utility retains ownership of a nuclear facility,
decommissioning costs will also be included in the transition cost
account.
With respect to recovery of costs associated with the Company's Diablo
Canyon Nuclear Power Plant (Diablo Canyon) and the Diablo Canyon rate
case settlement, the order confirms that the CPUC will continue to
honor regulatory commitments regarding the recovery of nuclear power
costs. The order provides that (1) transition costs associated with
Diablo Canyon will be calculated as the difference between the revised
Diablo settlement price and the market prices as determined by the
Exchange price; (2) Diablo Canyon transition costs will be calculated
over the term of the settlement or until transition cost recovery is
completed; and (3) the ISO will schedule power from Diablo Canyon on a
must-take basis, consistent with the Diablo settlement. The CPUC
orders the Company to file an application within 100 days with a
proposal for pricing Diablo Canyon generation at market prices by 2003
and for completing recovery of Diablo Canyon CTC by 2005 while
assuring no overall rate increase over January 1, 1996 levels. The
CPUC requires that at least one of the alternatives presented in the
Company's proposal shall be structured in a manner similar to the
settlement recently proposed by Southern California Edison (SCE)
concerning rate recovery for its SONGS nuclear plant. SCE's SONGS
proposal provides for accelerated recovery of the existing
undepreciated portion of the SONGS plant, at a reduced return tied to
the embedded cost of debt, and a performance based ratemaking
structure for recovery of operating costs and prospective capital
additions. The CPUC's requirement reflects its perception that
disparate ratemaking treatment of Diablo Canyon and SONGS may create
inequities for ratepayers in different parts of the state.
Public Purpose Programs
The CPUC order suggests that the California State Legislature adopt a
non-bypassable "public goods charge" on retail sales to fund research,
development and demonstration and energy efficiency programs. The
CPUC also will support legislation authorizing a separate surcharge to
fund low-income rate assistance and energy efficiency programs.
Implementation Schedule
The CPUC orders the IOUs to file a series of applications, comments
and proposals addressing a number of issues. These include proposals
to establish performance based ratemaking for generation and
distribution functions (to be filed within 60 days of the CPUC order),
proposals concerning ratemaking treatment and CTC recovery for Diablo
Canyon (to be filed simultaneously with the FERC and the CPUC within
100 days) and proposals to establish the ISO and Exchange (to be filed
within 130 days from the effective date of the order).
2. 1996 Rate Case Proceedings
On December 20, 1995, the California Public Utilities Commission
(CPUC) issued decisions which authorize for the Company a consolidated
annual electric revenue decrease of $443 million and an annual gas
revenue decrease of $210 million. This represents an electric and gas
revenue decrease of 5.6% and 9.4%, respectively. The rate decreases
will become effective January 1, 1996. However, copies of the final
decisions are not yet available and the following information is
subject to confirmation of the text of the final decisions.
The CPUC's decision in the Company's 1996 general rate case (GRC)
authorizes annual electric and gas revenue decreases of approximately
$300 million and $270 million, respectively, from rates currently in
effect. The total $570 million revenue decrease in the GRC decision
incorporates the rate impact of the previously reported 11.60% return
on equity authorized by the CPUC in the Company's cost of capital
proceeding and the resulting 9.49% overall authorized utility rate of
return for 1996. The GRC proceeding is held open to consider, among
other things, the cost effectiveness of the Helms Pumped Storage Plant
and the Company's response to outages caused by recent storms (see
Item 5.A.3 below).
The CPUC also issued a decision in the Company's Energy Cost
Adjustment Clause (ECAC) proceeding. The decision reduces electric
revenues by approximately $112 million for the twelve-month forecast
period beginning January 1, 1996. The decrease is composed of a
decrease of approximately $263 million in the ECAC revenue
requirement, an increase in the Electric Revenue Adjustment Mechanism
of approximately $157 million, a decrease of approximately $12 million
under the Annual Energy Rate and an increase of approximately $6
million under the California Alternative Rates for Energy.
In addition, the CPUC issued a decision in the Company's Biennial Cost
Allocation Proceeding (BCAP) authorizing an approximately $65 million
annual increase in gas revenues, for a two-year period beginning
January 1, 1996. The BCAP decision also orders a one-time refund, to
be made in February 1996, of $161 million, which represents an
overcollection in certain gas procurement balancing accounts.
Finally, the CPUC issued a decision in the Annual Earnings Assessment
Proceeding, which determines the shareholder incentives earned for the
Company's energy efficiency payments programs. The decision adopts
the Company's requested incentive payment of $19.3 million for its
1994 programs, to be collected in installments over a 10-year period.
However, because the incentives from the Company's 1991 programs are
expiring, the net revenue change in 1996 from energy efficiency
shareholder incentives is an electric decrease of $12.8 million and a
gas decrease of $3.1 million, which are reflected in the ECAC and BCAP
decisions discussed above.
3. Storm Response Proceedings
As part of the Company's 1996 GRC, the CPUC held hearings in April
1995 addressing issues relating to customer service and the Company's
response to service interruptions caused by severe storms in January
and March of 1995. A CPUC order issued in September 1995 required the
Company to implement improvements in its telephone system and public
information activities and to report on those improvements by
December 31, 1995.
In early December 1995, the Company's service territory experienced
storms and hurricane-force winds which caused electrical service
outages for approximately 1.6 million customers. On December 19,
1995, the assigned commissioner in the Company's 1996 GRC issued a
ruling which orders hearings on various issues arising out of the
Company's response to those wind storms. First, the ruling orders the
Company to include in a report due to be filed on December 31, 1995 an
explanation of the Company's compliance with the telephone system and
public information improvements that were to be implemented pursuant
to a CPUC decision issued in the storm response hearings held in April
as part of the 1996 GRC, and how these improvements, or lack thereof,
may have affected the Company's response to the December storms. The
order schedules a hearing to address the telephone system and public
information issues in February 1996, and indicates that the Company
may be subject to penalties if the CPUC finds that the Company has
failed to comply with the earlier decision without adequate
justification.
Second, the ruling orders further proceedings to consider whether the
Company acted reasonably in maintaining its system to assure integrity
during storms and other natural disasters and in responding to its
customers during the December storms. The order advises parties that
the hearings will address potential remedies, including reparations to
customers for reduced reliability, penalties, disallowances and
damages to customers for property loss. A prehearing conference has
been set for January 5, 1996, to establish the scope of this
proceeding.
4. Gas Reasonableness - Transwestern Capacity Costs
In 1992, the Company entered into 15-year gas transportation contracts
with Transwestern Pipeline Company (Transwestern) for 200 million
cubic feet per day (MMcf/d) of firm capacity. Currently, the annual
demand charges for the Transwestern capacity are approximately $28
million.
On December 18, 1995, the CPUC issued a decision in the Company's gas
reasonableness decision for the 1992 record period which concludes
that it was unreasonable for the Company to subscribe for Transwestern
capacity. The decision finds the Company acted unreasonably in
deciding to undertake its Transwestern subscription at a time when its
procurement and intrastate transportation roles were being
significantly reduced and contemporaneously with its decision to go
forward with its own pipeline expansion to Canada, knowing it would
thereby strand significant amounts of Southwest capacity. The Company
currently holds approximately 1100 MMcf of capacity on El Paso Natural
Gas Company's pipeline through the end of 1997. The decision also
finds that the Company failed to offer evidence showing that the
benefits of the subscription outweighed the costs during 1992, and
orders that all costs incurred by the Company for Transwestern
capacity in that year (approximately $18 million) be disallowed. The
decision further orders that costs for the capacity in subsequent
years of the 15-year contracts be disallowed unless the Company can
establish by clear and convincing evidence that the benefits of the
Transwestern capacity exceeded the costs of such capacity in that
year.
The Company plans to file in January 1996 a request for rehearing of
this decision. In the meantime, the Company continues to pursue the
resolution of issues concerning past and future Transwestern costs as
part of its Gas Accord negotiations.
The Company believes that the ultimate resolution of Transwestern
costs will not have a significant adverse impact on its financial
position or results of operations.
B. Legal Proceedings - Antitrust Litigation
As previously disclosed in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, in December 1993, the
County of Stanislaus and a residential customer of the Company filed a
complaint in the U.S. District Court, Eastern District of California,
against the Company and its wholly owned subsidiary, Pacific Gas
Transmission Company (PGT), as a purported class action on behalf of
all natural gas customers of the Company during the period of February
1988 through October 1993. The complaint alleged that the purchase of
natural gas in Canada was accomplished in violation of various
antitrust laws and sought damages of as much as $950 million, before
trebling. In August 1994, the District Court dismissed plaintiffs'
antitrust claims, and in September 1994, the plaintiffs filed an
amended complaint which added Alberta and Southern Gas Co. Ltd. (A&S),
the Company's wholly owned gas purchasing subsidiary, as a defendant.
The amended complaint reiterated price fixing claims and also alleged
that the defendants, through anticompetitive practices, foreclosed
access to over the PGT pipeline to alternative sources of gas in
Canada.
On December 18, 1995, the District Court dismissed the plaintiffs'
amended complaint with prejudice. In dismissing the lawsuit, the
District Court determined that plaintiffs were barred from making
price fixing allegations because gas rates had been reviewed by
various federal authorities and the CPUC. The District Court also
found that plaintiffs were barred from making foreclosure of access
claims because the volume of imports of gas had been reviewed by
federal authorities, and the CPUC had actively overseen the allocation
of pipeline capacity. Plaintiffs have the right to appeal the
dismissal to the Court of Appeals.
The Company believes that the ultimate outcome of this matter will not
have a significant adverse impact on its financial position or results
of operations.
PACIFIC GAS AND ELECTRIC COMPANY
BRUCE R. WORTHINGTON
By ________________________________
BRUCE R. WORTHINGTON
Senior Vice President and
General Counsel
Dated: December 22, 1995
