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: September 10, 1997
Exact Name of
Commission Registrant State or other IRS Employer
File as specified Jurisdiction of Identification
Number in its charter Incorporation Number
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1-12609 PG&E Corporation California 94-3234914
1-2348 Pacific Gas and California 94-0742640
Electric Company
77 Beale Street, P.O. Box 770000, San Francisco, California 94177
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code:(415) 973-7000
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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. Words such as "expects,"
"intends," "plans," and similar expressions identify those
statements which are forward-looking.
Item 5. Other Events
A. Electric Industry Restructuring
1. Rate Reduction Bonds
As part of California's electric industry restructuring
legislation, Pacific Gas and Electric Company (PG&E) and the
other California utilities are authorized to recover their
transition costs from all customers with certain exceptions.
(Transition costs represent the costs of utilities' generation-
related assets and obligations which prove to be uneconomic in
the new competitive framework. These costs include above-market
plant costs, the above-market costs associated with power
purchase agreements such as qualifying facilities contracts, and
generation-related regulatory assets. In general, regulatory
assets are expenses deferred in the current period and allowed to
be included in rates in subsequent periods.)
In addition, the restructuring legislation provides for a 10
percent electric rate reduction for residential and small
commercial customers by January 1, 1998, and freezes electric
customer rates for all customers until the earlier of March 31,
2002, or when the utilities have recovered their transition costs
(the transition period). To achieve the 10 percent rate
reduction for residential and small commercial customers, the
restructuring legislation authorizes the utilities to finance a
portion of their transition costs through the issuance of "rate
reduction bonds" by the California Infrastructure and Development
Bank (Bank) or another financing entity approved by and subject
to the oversight of the Bank.
On September 3, 1997, the California Public Utilities Commission
(CPUC) approved PG&E's application to recover up to approximately
$3.5 billion of its transition costs through the issuance of rate
reduction bonds and to reduce electric rates for residential and
small commercial customers beginning January 1, 1998. PG&E's
application to the Bank for approval of the financing entity and
the terms and conditions of the rate reduction bonds is still
pending, but it is expected that the Bank will approve PG&E's
application early in the fourth quarter of 1997.
The maturity period of the bonds will extend beyond the
transition period. Also, the interest cost of the bonds is
expected to be lower than PG&E's current weighted-average cost of
capital. The combination of the longer maturity period and the
reduced interest costs is expected to lower the amount paid by
residential and small commercial customers each year during the
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transition period, thereby achieving the 10 percent reduction in
rates.
After the bonds are issued, PG&E will collect a separate
nonbypassable tariff on behalf of the bondholders to recover
principal, interest, and related costs over the life of the bonds
from residential and small commercial customers. In exchange for
the bond proceeds, PG&E will sell its right to be paid the
revenues from this separate tariff to an affiliated entity. The
bonds will be secured by the future revenue from the separate
tariff and not by PG&E's assets. The bonds will be reflected as
debt on PG&E's balance sheet. PG&E expects to use the proceeds
from the issuance of the rate reduction bonds to retire utility
debt and equity, while maintaining its CPUC-authorized capital
structure.
Earlier this year, PG&E requested that the Internal Revenue
Service (IRS) issue a ruling that the proceeds of the bond
issuance will not be considered as taxable income to the
utilities when received, but will, instead, be considered as
taxable income ratably as the special nonbypassable tariff is
collected on behalf of bondholders from residential and small
commercial customers. On September 8, 1997, the IRS issued a
ruling which concludes that neither the issuance of the CPUC
decision nor the issuance of rate reduction bonds would result in
taxable income to PG&E.
Subject to the Bank's approval of the financing entity and the
terms and conditions of the rate reduction bonds, PG&E plans that
these bonds will be issued before the end of 1997. However,
various consumer groups have recently indicated that they may
seek to challenge the CPUC decision approving the issuance of the
rate reduction bonds. If legal action is taken to challenge the
CPUC decision, the issuance of the bonds could be delayed. The
CPUC stated that if PG&E concludes that the bonds cannot be
issued by January 1, 1998, PG&E must advise the CPUC how it
intends to proceed and may file a revised application for
approval of an alternative method of recovering the reduced
revenues resulting from the 10 percent rate reduction to
residential and small commercial customers to begin on January 1,
1998.
PG&E currently expects that the initial amount of rate reduction
bonds to be issued will be $3.1 billion, but the actual amount
will depend on a variety of factors, including the interest rate
on the bonds, which will be determined based on market conditions
when the bonds are sold, the credit rating of the bonds, and
whether the bond issuance is delayed beyond January 1, 1998.
Before the CPUC's decision can become effective, PG&E must file
its written consent to all terms and conditions of the decision
by November 3, 1997.
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2. Divestiture
On September 3, 1997, the CPUC approved PG&E's proposed process
for the sale of three of its California fossil-fueled power
plants: Morro Bay Power Plant located in San Luis Obispo County,
Moss Landing Power Plant located in Monterey County, and the
Oakland Power Plant located in Alameda County. These three
plants have a combined capacity of 2,645 megawatts (MW) and an
estimated book value of approximately $380 million. The CPUC
also approved PG&E's proposed accounting and ratemaking treatment
for the sale of these plants, subject to CPUC approval of PG&E's
CTC (competition transition charge) revenue account pending in a
separate CPUC proceeding, so that any loss incurred on the sale
of these three plants will be recovered as a transition cost and
any gain on the sale will offset other transition costs. The
CPUC also concluded that the proposed sale process will determine
the fair market value of the plants for purposes of determining
the uneconomic above-market cost of these generating assets that
may be recovered as transition costs.
As previously announced, the auction of these plants began on
September 8, 1997. During the initial stage of the auction, non-
binding indications of interest from potential bidders are due
October 6, 1997. A selected group of bidders will then be
invited to submit binding offers by November 14, 1997. It is
anticipated that PG&E will enter into a sales agreement with the
final bidder by the end of 1997. The auction is subject to the
CPUC's final review and approval of the definitive agreements
following the auction. PG&E may not accept final bids until the
CPUC has approved a final mitigated negative declaration
regarding any mitigation measures that may be required to avoid
or reduce to nonsignificant levels potential adverse
environmental impacts which may arise from the transfer of the
plants. On August 25, 1997, the CPUC issued a proposed mitigated
negative declaration. It is expected that a final mitigated
negative declaration will be issued by the CPUC in late October
1997.
In addition, before PG&E may accept final bids, the Federal
Energy Regulatory Commission (FERC) must approve the form of
agreement with the Independent System Operator (ISO) which will
ensure that those plants which are needed to maintain the
reliability of the electric supply remain available and
operational, i.e., "must-run" plants. (Under the restructuring
legislation, electric transmission facilities, which will
continue to be owned and maintained by the California utilities,
will be operated by the ISO to ensure system reliability and
provide electric generators with open and comparable access to
transmission and distribution services.) PG&E expects the FERC
to approve the form of ISO agreements for the must-run plants in
late October 1997.
PG&E will enter into agreements with the new purchasers of the
plants to operate the plants for at least two years to ensure
system reliability during the transition period. To the extent
that payments to PG&E under these agreements exceed PG&E's cost
of operating the plants, PG&E would credit the difference to the
CTC revenue account to offset PG&E's other transition costs.
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Conversely, PG&E would be at risk to the extent operating costs
exceed the revenues from these agreements.
As previously reported, on June 24, 1997, PG&E announced its
plans, subject to CPUC approval, to sell three more of its
California fossil-fueled power plants: the Potrero Power Plant
located in San Francisco County and the Contra Costa and
Pittsburg Power Plants located in Contra Costa County, and its
geothermal facilities: The Geysers Power Plant located in Lake
and Sonoma Counties. PG&E had originally announced that its
Hunters Point fossil-fueled power plant located in San Francisco
would be included in the first group of power plants to be sold,
but PG&E now intends to include the proposed sale of the Hunters
Point plant in its application to the CPUC to sell the Potrero,
Contra Costa, and Pittsburg fossil-fueled plants, and the
geothermal facilities. These five plants have a combined
generating capacity of 4,718 MW and an estimated book value of
approximately $760 million.
PG&E intends to file its plan for the sale of these five power
plants with the CPUC later this year and will seek to sign sales
agreements with buyers by the end of 1998. In its application,
PG&E intends to propose that any loss incurred on the sale of
these five plants would be recovered as a transition cost and
that any gain on the sale would offset other transition costs.
Together, the eight power plants represent 98 percent of PG&E's
fossil-fueled generating capacity, as well as its only geothermal
facility.
3. Capital Additions
Also, on September 3, 1997, the CPUC adopted a decision
addressing transition cost recovery for capital additions to
PG&E's non-nuclear generating facilities. The decision allows
PG&E to recover costs of capital additions made in 1996 and 1997
(and in 1998 for fossil-fueled plants completely divested by
March 31, 1998) based upon an after-the-fact reasonableness
review. All capital additions found reasonable by the CPUC
through this process will be recoverable as transition costs.
Capital additions made in 1998 and thereafter to non-nuclear
generation-related assets and capital additions made to fossil-
fueled generating assets which are not completely divested by
March 31, 1998, must be recovered either through the ISO
agreements for "must-run" plants or from revenues collected from
sales of electricity to the Power Exchange ("PX"), the
competitive auction process that will be used to establish
electricity prices as of January 1, 1998. However, the cost of
capital additions made to hydroelectric and geothermal facilities
in 1998 and thereafter may be recoverable in rates under a
performance-based ratemaking mechanism now being considered by
the CPUC in a separate proceeding.
Also, although the decision finds the "must-run" contract options
currently proposed by the ISO will afford PG&E the opportunity to
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recover the costs of capital additions necessary to maintain
electric system reliability, since the FERC has not yet approved
the ISO contract options, the CPUC decision allows PG&E to seek
an after-the-fact reasonableness review of capital addition
expenditures for collection as transition costs in certain
circumstances. Specifically, the CPUC will undertake after-the-
fact reasonableness review if: 1) the capital additions were
made to ISO designated must-run units and were necessary to
continue operating the must-run unit through December 31, 2001;
2) the capital additions were cost-effective compared to other
options for maintaining plant operations through December 31,
2001, and compared to other resources available to the ISO for
system reliability; 3) the final ISO agreement approved by the
FERC did not include provisions that would allow utilities to
negotiate recovery of these costs; and 4) the costs of capital
additions could not be recovered in market prices.
Generating facilities which are not designated "must run" by the
ISO, i.e., "non-must-run" facilities, must, under the CPUC
decision, recover capital additions costs incurred in 1998 and
thereafter solely from PX revenues.
Finally, the CPUC deferred to future proceedings how the cost of
capital additions completed in 1998 and thereafter will be
accounted for in determining the market value of generation-
related assets for purposes of calculating the uneconomic portion
of the net book value of the generation-related assets
recoverable as transition costs.
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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: September 10, 1997
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