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 19, 1996
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) 973-7000
Item 5. Other Events
A. Performance Incentive Plan - Year-to-Date Financial Results
The following information includes forward-looking statements
that involve a number of risks, uncertainties, and assumptions.
A number of factors which could cause actual results to differ
materially from those indicated in the forward-looking statements
are described in more detail below.
The Performance Incentive Plan (Plan) is an annual incentive
compensation plan applicable to all regular, nonbargaining unit
employees of Pacific Gas and Electric Company (PG&E) and
designated subsidiaries. The Plan provides for awards based on
(1) PG&E's success in meeting overall corporate financial
performance objectives, based on combined earnings per common
share for PG&E's utility operations (including Pacific Gas
Transmission Company (PGT), a wholly owned subsidiary of PG&E),
Diablo Canyon Nuclear Power Plant (Diablo Canyon) operations and
PG&E's diversified operations, conducted principally through PG&E
Enterprises (Enterprises), a wholly owned subsidiary of PG&E; and
(2) the performance of the employee's organizational unit in
meeting its specific unit, team or individual objectives. The
organizational objectives may include such measures as cost
control, quality and reliability of service to customers, public
and employee safety, financial performance and operational
efficiency.
Under the Plan, the Nominating and Compensation Committee of the
Board (Committee) makes the final determination of awards for
officers based upon achievement of the Plan objectives. The
Committee has the discretion to modify or eliminate awards for
officers. The final determination of non-officer awards is made
by the chief executive officer, who also has the discretion to
modify or eliminate non-officer awards.
The performance measurement target for the 1996 Plan year was
disclosed in a Report on Form 8-K/A dated January 18, 1996, and
was based upon the corporate capital and operating budgets
prepared for 1996.
The 1996 budgeted earnings per common share for the utility was
derived from, among other things, (i) budgeted revenues as
authorized by the California Public Utilities Commission (CPUC)
for 1996 which include the results of the 1996 General Rate Case
(GRC), (ii) PG&E's capital budget for 1996 of approximately $1.3
billion for utility operations and (iii) budgeted utility
operating expenses that are approximately $250 million greater
than the amount adopted by the CPUC for recovery in the 1996 GRC.
The higher expense level is primarily attributable to several
projects related to transmission and distribution system
reliability, and improved customer service and public information
systems. The utility budgeted earnings per common share assumes
contribution to earnings of $.11 per common share from PGT.
The budgeted earnings per common share for Diablo Canyon was
derived from, among other things, (i) a reduction in the price of
power produced by Diablo Canyon from 11.0 cents per kilowatt-hour
(kWh) in 1995 to 10.5 cents per kWh in 1996, consistent with the
agreement to modify the Diablo Canyon rate case settlement
(Diablo Settlement) which was approved by the CPUC in 1995, (ii)
an operating capacity factor (excluding refueling outages) of
94.0%, (iii) an overall annual capacity factor of 88.8% and (iv)
one 40-day refueling outage at Unit 2 during 1996. Budgeted
operating expenses for 1996 relating to Diablo Canyon are
approximately equal to those budgeted for 1995. Budgeted capital
expenditures for Diablo Canyon are approximately $35 million for
1996, which is approximately 10% more than actual capital
expenditures in 1995.
The budgeted earnings per common share for diversified operations
assumes net income of $15 million from U.S. Generating Company,
which is offset by budgeted net losses of $28 million
attributable primarily to business activities involving
international power generation and distribution, and energy
products and services in U.S. utility markets. Actual results
may vary significantly depending on the availability of
attractive investment or acquisition opportunities.
All of the 1996 budgeted earnings per common share amounts assume
that the average number of shares of common stock outstanding
during 1996 is 406 million. The budgeted earnings per common
share amounts assume no significant gain or loss on the sale of
assets.
On a quarterly basis, PG&E discloses year-to-date financial
performance relating to the three types of operations: utility,
Diablo Canyon and diversified operations. For the six months
ended June 30, 1996, selected financial information is shown
below:
(in thousands of dollars, except per share amounts)
Six Months Ended June 30, 1996
=================================================================
Actual (1) Budget
(unaudited)
Operating Revenues:
Utility $ 3,517,324 $ 3,676,763
Diablo Canyon 812,467 (2) 815,407
Diversified Operations 57,643 44,186
----------- -----------
Total Consolidated $ 4,387,434 $ 4,536,356
=========== ===========
Net Income (Loss):
Utility $ 179,878 (3) $ 308,771
Diablo Canyon 186,930 (2) 182,695
Diversified Operations 5,676 (3,298)
----------- -----------
Total Consolidated $ 372,484 488,168
=========== ===========
Earnings (Loss) Per
Common Share:
Utility $ 0.41 (3) $ 0.73
Diablo Canyon 0.44 (2) 0.43
Diversified Operations 0.01 (0.01)
----------- -----------
Total Consolidated $ 0.86 $ 1.15
=========== ===========
(1) In the opinion of management, the unaudited "actual"
financial information presented above reflects all adjustments to
date which are necessary to present a fair statement of operating
revenues, net income and earnings per common share for the
period. All material adjustments are of a normal recurring
nature, except as noted below. This information should be read
in conjunction with the 1995 Consolidated Financial Statements
and Notes to Consolidated Financial Statements incorporated by
reference in PG&E's Annual Report on Form 10-K, and the
Consolidated Financial Statements and Notes to Consolidated
Financial Statements in PG&E's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.
(2) Diablo Canyon operated at an overall capacity factor of
83.5% compared to a budgeted overall capacity factor of 83.6% for
the six months ended June 30, 1996.
(3) Utility maintenance and other operating expenses were higher
than budgeted due to higher expenses for certain distribution
reliability and customer service activities. In addition,
utility earnings were adversely impacted by a one-time charge of
$133 million ($.19 per share) for the settlement of litigation
relating to groundwater contamination near the Hinkley Compressor
Station. See Item C. below.
Although budgeted corporate earnings per common share is a
performance target and is not a forecast of actual performance
that will be realized by PG&E, it does constitute a forward-
looking statement which is subject to various risks and
uncertainties. Actual performance during the year may differ
materially from the budgeted amount. The budgeted amount does
not reflect the resolution of various regulatory uncertainties or
other contingencies, including those disclosed in the Notes to
PG&E's Consolidated Financial Statements or in PG&E's Annual
Report on Form 10-K, which could materially affect PG&E's
performance during the year. The factors and uncertainties which
could cause actual results to differ materially from budgeted
amounts include the following:
- - The outcome of the California electric industry
restructuring and the transition to a competitive
environment, including the extent to which PG&E will be
able to recover its stranded costs (costs which are
above market and could not be recovered under market-
based pricing) through a competition transition charge
(CTC) or otherwise. The restructuring may adversely
impact PG&E's returns on its investments in utility
generating assets and its ability to recover certain
other costs, including qualifying facilities (QF) power
purchase obligations and generation-related regulatory
assets.
- - Changes in accounting due to changes in the regulatory
or competitive environment in the electric or gas
industries, including a change in the method or lives
used to depreciate plant and the possible discontinued
application of Statement of Financial Accounting
Standards No. 71.
- - The continued operation of Diablo Canyon at assumed
operating levels and under the rates and terms
specified in the existing Diablo Settlement. Under the
prices for 1996, each Diablo Canyon operating unit
contributes approximately $2.7 million in revenues per
day.
- - The outcome of the Gas Accord negotiations and
resolution of existing regulatory issues. PG&E has
proposed to settle several outstanding gas regulatory
issues that are currently pending at the CPUC in
separate proceedings, including issues relating to
PG&E's capacity commitments with Transwestern Pipeline
Company, the Interstate Transition Cost Surcharge
proceeding and the reasonableness proceeding for the
PG&E portion of the PGT/PG&E Pipeline Expansion.
- - Utility maintenance and operating expense levels
through the balance of the year. These expenses have
been higher than budgeted due to certain distribution
reliability and customer service activities.
B. Electric Industry Restructuring
As directed by the CPUC's December 1995 electric industry
restructuring decision, PG&E recently has made several filings on
various aspects of the electric industry restructuring.
1) Performance Based Ratemaking Proposal
The restructuring decision requires PG&E to file proposals to
establish performance-based ratemaking (PBR) for its electric
generation and distribution functions. On July 15, 1996, PG&E
submitted an application proposing to establish a PBR mechanism
for a portion of its electric generation services. The
application does not include a detailed proposal for a
distribution PBR, as the CPUC has deferred filing of a
distribution PBR mechanism until the Federal Energy Regulatory
Commission (FERC) provides further guidance on the separation of
transmission and distribution functions and costs.
Key elements of PG&E's proposed generation PBR include the
following:
- - PG&E proposes a combined PBR recovery of its hydroelectric
and geothermal generating unit costs. The proposed
mechanism consists of a base revenue amount that is indexed
to account for inflation less a productivity offset.
Adjustments are made to account for shared earnings, fuel
costs, performance standards and extraordinary costs or
savings. Implementation of the hydroelectric/geothermal PBR
would begin on January 1, 1998, the proposed start date for
the restructured industry, and, if PG&E's proposal to modify
the Diablo Settlement and effect a customer electric rate
freeze is adopted, terminate by the end of 2001, at which
time all generation will be priced at market levels.
- - For all fossil generation units, PG&E proposes that after
January 1, 1998, sunk costs be recovered directly through
the CTC component of rates, consistent with the CPUC's
restructuring decision. Sunk costs include such items as
net plant, working capital and regulatory assets. Fossil
generation plant sunk costs will be identified in the Sunk
Cost Application to be filed by PG&E on August 1, 1996.
- - PG&E proposes that all other costs to operate its fossil
generation units incurred after January 1, 1998 (i.e., fixed
and variable operating costs including capital additions)
would be recovered either through revenues from sales
through the wholesale power pool (Exchange) or through
contracts with the Independent System Operator (ISO) which
will manage and control the electric transmission system.
- For fossil units required by the ISO to maintain
transmission system reliability (referred to as
"constrained on" units), PG&E's primary proposal is to
recover each plant's non-sunk costs through a FERC-
approved short-term contract with the ISO for those
services necessary to ensure transmission system
reliability. PG&E proposes that these contracts
recover all of the plants' fixed operating costs and
that portion of the variable operating costs incurred
to provide ISO services. The ISO could use a
competitive procurement process to determine which
plants would receive such contracts. As a secondary
proposal, PG&E recommends an interim PBR mechanism for
fossil plants that are needed by the ISO. This
secondary proposal would be in effect only in the event
the FERC has not approved ISO contracts by the start of
the Exchange operation. These fossil generation plants
may also sell into the Exchange and incur additional
variable operating costs related to Exchange sales.
PG&E proposes to offset the CTC account with any
Exchange revenues above the additional variable
operating costs.
- For fossil units that are not called upon to
provide ISO services (referred to as "energy commodity"
units), PG&E would be fully at risk for the recovery of
variable and fixed operating costs of these units
through the revenues it receives from the Exchange. No
ISO contracts or PBR mechanism are proposed for these
units. If revenues from the Exchange exceed the fixed
and variable costs for the energy commodity units, PG&E
would retain up to 150 basis points above the
authorized return and any remaining revenues would be
used to offset the amount remaining in the CTC account.
PG&E indicated that its PBR application will be supplemented with
actual revenue requirement information in early 1997 once the ISO
contract structure is developed and filed with the FERC.
2) Unbundling Proposal
Also on July 15, 1996, PG&E submitted a preliminary unbundling
proposal relating to the separation of electric rates and the
costs that underlie them into five basic components: generation,
CTC, transmission, distribution and public purpose programs. The
preliminary filing includes a conceptual discussion of the
process of unbundling electric base revenues (i.e., costs not
associated with fuel or purchased power) into these five
categories. PG&E's formal unbundling application with
implementation details will be filed by November 15, 1996, and
will incorporate any resolution at FERC regarding the separation
between distribution and transmission.
3) Market Power Filing
As required by the CPUC's electric industry restructuring
decision, in April 1996 PG&E and the other California investor-
owned utilities submitted an application to FERC to make sales of
electric energy at market-based rates through the Exchange. In
support of that filing, on July 19, 1996, PG&E filed a report
with the FERC analyzing market power issues in connection with
sales of electric energy in the Exchange and discussing options
for mitigating any such market power. In its restructuring
decision, the CPUC defined market power as "the ability of a
particular seller or group of sellers to maintain prices
profitably above competitive levels for a significant period of
time."
PG&E's analysis identifies two market imperfections. The first
relates to market concentration. PG&E's analysis shows that
after divestiture of at least 50% of fossil generation by both
PG&E and Southern California Edison Company, the potential for
market power is low, except during periods when transmission is
constrained from Southern California to Northern California.
However, the potential for market power is high prior to such
time as divestiture can be accomplished. PG&E concludes that
divestiture is the preferred remedy to address the horizontal
market power reflected in the analysis. To mitigate potential
market power prior to divestiture, PG&E proposes to enter into
contracts with independent parties to temporarily transfer the
ability to bid specific PG&E generating resources into the
Exchange. These transfers of the right to bid will be for a
limited duration until more permanent measures, such as
divestiture of generation ownership, can be implemented to ensure
adequate levels of competition.
The second market imperfection identified in PG&E's filing
relates to "must run" generation, i.e., certain generation that
must run to ensure reliability of the integrated electric power
grid. When must-run generation is required, owners of these
units could exercise market power by increasing its bid price to
noncompetitive levels. To mitigate this risk, PG&E proposes a
"call" contract with the ISO, under which the ISO will pay the
generator a reservation fee for the right to call upon the unit
when needed for reliability. In addition, the generator will be
paid its variable operating costs when called upon by the ISO.
PG&E believes the ISO should be allowed to award call contracts
in a competitive bid process. Under its proposal, PG&E would
commit to make its own units available for must-run operations
for a reservation fee that will not exceed its annual fixed
operating costs, plus incremental capital additions necessary for
reliability. When not required by the ISO for must-run
generation, PG&E's generating facilities would be unconstrained
bidders into the Exchange.
C. Hinkley Compressor Station Litigation
In May 1993, a complaint was filed in San Bernardino County
Superior Court on behalf of a number of individuals seeking
recovery of an unspecified amount of damages for personal
injuries and property damage allegedly suffered as a result of
exposure to chromium near PG&E's Hinkley Compressor Station,
located along PG&E's gas transmission system in San Bernardino
County, as well as punitive damages. The plaintiffs contend that
between 1951 and 1966 PG&E discharged chromium-contaminated
wastewater into unlined ponds, which led to chromium percolating
into the groundwater of surrounding property.
PG&E and the plaintiffs had reached a settlement pursuant to
which plaintiffs agreed to arbitration of their actions for
resolution of issues concerning the cause and extent of any
damages suffered by plaintiffs and PG&E agreed to pay an
aggregate amount of no more than $400 million in settlement of
plaintiffs' claims. In June 1996, PG&E and plaintiffs' counsel
reached agreement on an amendment to that settlement. Under the
amended agreement, PG&E agreed to settle the plaintiffs' claims
for the aggregate sum of $333 million, $50 million of which PG&E
has previously paid.
Of the $283 million that PG&E was required to pay under the
amended settlement, $20 million was paid into an escrow account
which is intended to secure the obligation of plaintiffs and
their attorneys to indemnify PG&E against additional losses from
related future claims in connection with the contamination. That
amount will be released only when all of the plaintiffs sign a
supplemental release in which they agree to the amended
settlement.
Taking into account amounts previously paid or accrued in respect
of this litigation, the Company incurred a charge of $133 million
in June 1996 as a result of the amended settlement.
PACIFIC GAS AND ELECTRIC COMPANY
LESLIE H. EVERETT
By ________________________________
LESLIE H. EVERETT
Corporate Secretary
Dated: July 19, 1996
