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 18, 2000
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
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
A. Recent Regulatory Actions Addressing the California Energy Market
On December 13, 2000, the President and a commissioner of the
California Public Utilities Commission (CPUC), issued a press release
stating that certain revisions had been made to the item on the CPUC's
agenda for its December 21, 2000 meeting regarding post-transition period
electric ratemaking mechanisms. As revised, the agenda item proposes
that the CPUC address at its December 21, 2000 meeting, the extraordinary
financial situation facing Pacific Gas and Electric Company (Utility) and
Southern California Edison as a result of current problems in the
wholesale electric market and includes an assessment of accounting
changes and adjustments previously proposed in the proceeding. The
revised agenda item proposes that the CPUC expedite its review of market
valuation proceedings to determine the feasibility of lifting the rate
freeze as expeditiously as possible, and to evaluate the need for
reasonable rate increases. The press release noted that the CPUC need
not act on this item on December 21, 2000, but the fact that it is on the
agenda allows the CPUC to act if necessary. The press release stated
that the financial stability of California's utilities is of paramount
importance to California and to the CPUC and that the CPUC stands ready
to act to protect the financial viability of the California utilities.
The press release urges the Federal Energy Regulatory Commission (FERC)
to act immediately to solve the underlying market failure so that all
energy consumers are assured of reliable delivery of power and protected
from exorbitant energy costs.
On December 14, 2000, the United States Secretary of Energy issued an
order pursuant to Section 202(c) of the Federal Power Act finding that an
emergency exists in California by reason of a shortage of electric energy
and ordered certain electric generators and marketers who had previously
sold power into California to sell their available power to the
California Independent System Operator (ISO) upon the request of the ISO.
The order is in effect until December 21, 2000.
On December 15, 2000, the FERC issued an order adopting remedies for
what the FERC characterized as the seriously flawed electric power
markets in California. Included in the key actions announced by the FERC
are:
- Elimination of the requirement that the California investor-owned
utilities (IOUs) sell all of their generation into and buy all of
their energy needs from the California Power Exchange (PX), which
results in over reliance on spot market (i.e., real-time) purchases.
The order permits the IOUs, effective December 15, 2000, to sell the
power produced by generation owned by or under contract to the IOUs,
which the state had required to be sold at wholesale into the PX, to
be sold directly at retail by the IOUs, subject to California
regulation, if any, of the price the IOUs charge. The order states
that California is free to regulate this power on a cost-of-service
basis, subject to a price cap, or in any other way. The order also
eliminates the requirement that IOUs meet their power needs through
the PX and encourages them to meet their purchase power needs through
bilateral, long-term contracts of two years or more and to adopt a
balanced portfolio of contracts to mitigate cost exposure. However,
the order recognizes that the CPUC must also eliminate its requirement
that the IOUs buy only through the PX. The order notes that is
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critical for the CPUC to give timely and predictable approval of the
prudence of a balanced portfolio of short and long-term contracts. To
encourage the execution of bilateral contracts, the order requires the
PX's rate schedules to terminate effective at the close of business on
April 30, 2001.
- Although the FERC decided not to require that generators enter into
bilateral contracts, it did adopt a price benchmark at $74 per
megawatt hour (MWh) for assessing prices of five-year energy supply
contracts to be used by the FERC in assessing any complaints regarding
justness and reasonableness of pricing long-term contracts. The FERC
also orders all sellers with market based authority to report the
bilateral contracts they are offering to the California market.
- Permits penalties to be imposed on market participants who do not
schedule at least 95 percent of their load in advance of the ISO's
real-time market (through self scheduling, bilateral contracts, or
through the PX markets), to reduce the reliance on the ISO's real-time
market to meet supply. A penalty charge will be assessed when more
than 5 percent of a market participant's load is scheduled into the
ISO's real-time market. Penalties are to be disbursed to other market
participants who schedule their load properly. The FERC order does
not contain provisions for penalties to be imposed on suppliers who do
not schedule in advance.
- Directs the FERC staff to develop a comprehensive and systematic
monitoring and price mitigation program for the ISO and PX spot
markets to ensure there is no abuse of market power. The proposed
plan is to be submitted by March 1, 2001, so that measures can be in
place by May 1, 2001. The monitoring will rely on several threshold
elements including the outage rates of sellers' resources; the failure
to bid unsold megawatts into the ISO's real-time market; and,
variations in bidding patterns for the same or similar resources. The
monitoring will continue until a more comprehensive approach can be
developed.
- Establishes an interim $150 per MWh modification ("soft cap") of the
single price auction so that bids above $150 MWh will not set the
market clearing prices paid to all bidders at or below $150 per MWh.
Bids above the $150 MWh level will trigger certain weekly reporting
requirements and FERC monitoring. These price provisions will be in
effect until April 30, 2001. The FERC had originally proposed that
this price cap be in effect until December 31, 2001.
- The period for potential refund liability continues until December 31,
2002. However, with respect to specific transactions, unless the FERC
issues written notification to the seller that its transaction is
still under review, refund potential on a transaction will close after
60 days. The FERC deferred until later the consideration of
retroactive refund issues linked to protective orders associated with
the volatile prices experienced in California this past summer.
- Requires the replacement of the ISO Board of Governors with a non-
stakeholder board who are independent of market participants. The
order requires the ISO Board of Governors to relinquish their
decision-making power and operating control to the ISO management on
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January 29, 2001, although they may continue as a stakeholder advisory
committee to provide input to ISO management until there is a new
board, or until April 27, 2001, whichever occurs first. The FERC
intends to issue a further order on the manner of selection for the
new board after receiving input from various California
representatives.
In addition, the FERC announced plans to hold a technical conference
on December 19, 2000, with market participants to facilitate forward
contracting by California IOUs.
PG&E Corporation and the Utility believe the actions outlined in the
order will not provide a solution that ensures reliability of the
state's electric supply and relief from future price increases,
particularly since the FERC order fails to require sellers to enter into
forward contracts at reasonable prices, and fails to provide an effective
price cap. In addition, the FERC order does not address issues associated
with retroactive refund and retroactive remedial authority issues.
B. Pacific Gas and Electric Company's Wholesale Power Purchase Costs
Higher than forecasted power prices in November and October 2000 have
caused the Utility's under-collected balance of wholesale power purchase
costs recorded in its regulatory balancing account (the Transition
Revenue Account or TRA) to increase to $4.5 billion at November 30, 2000
from $3.4 billion at October 31, 2000. Wholesale power prices for
December have been even higher than the November 2000 prices, in part due
to a sharp increase in natural gas prices paid by generators in producing
electricity and reflected in the price of power charged by the
generators. Further, a large number of generating plants that serve the
California market were not operating for maintenance and other related
reasons. There also has been a dramatic increase in the wholesale price
of power since December 8, 2000, when the FERC, at the request of the
ISO, issued an order lifting the interim $250 per megawatt hour price cap
for energy purchased by the ISO. The FERC order issued on December 15, 2000,
states that effective January 1, 2001, the interim $250 price cap will be
superceded by the new $150 price cap on bids that can set the market
clearing price.
C. Liquidity and Financial Impacts
As previously reported, the Utility has been required to finance the
majority of its net wholesale power purchase costs because the Utility's
wholesale power purchase costs have greatly exceeded revenues collected
from customers through frozen rates and the revenues from the Utility's
generation sales to the PX and the ISO. The current forward price curve
indicates that wholesale power prices are expected to remain high unless
there are immediate and significant changes made to the wholesale electric
market. Therefore, it is necessary that the Utility continue financing
its wholesale power purchase costs.
On December 11, 2000, Moody's Investor Services, Inc., a principal
credit rating agency, has placed the securities of PG&E Corporation and
the Utility under review for possible downgrade. On December 13, 2000,
another credit rating agency, Standard & Poor's, has placed the securities
of PG&E Corporation, the Utility, and related entities on "CreditWatch"
with negative implications. The credit agencies cited concerns about the
escalating financial burdens placed on the Utility and the absence of
short-term or long-term regulatory or legislative mechanisms for recovery
of the under-collections. In addition, some third party power suppliers
have requested credit assurances or immediate payment from the Utility
before supplying power to the ISO and PX.
The Utility has fully utilized its existing CPUC short-term debt
authorization by issuing $1.7 billion in commercial paper and drawings
under its existing revolving credit facilities to support the Utility's
higher purchased power costs and the associated increases in the TRA as
well as other liquidity requirements. On November 1, 2000, the Utility
issued $1 billion of short-term floating rate notes and $680 million of
five-year notes. On November 22, 2000, the Utility issued an additional
$240 million of short-term floating rate notes. The Utility's
application requesting authority to issue an additional $2 billion in
long-term debt instruments is pending at the CPUC and a decision is on the
agenda for the CPUC's meeting on December 21, 2000. Although the Utility
currently has approximately $1.2 billion of short-term investments,
without obtaining additional financing, the Utility will be unable to
continue paying its net power purchase costs. There is no assurance that
the Utility will be able to obtain such additional financing.
The Utility will continue to work with interested parties to create
an effective solution to the state's broken wholesale electric market
that ensures fair prices for customers and maintains the reliability of
the state's electric system. If, based upon the timing and extent of
such discussions, the Utility were unable to conclude that its current
TRA under-collection is probable of future recovery, the Utility would be
required to write-off such amount resulting in a material charge to
earnings. If the Utility were unable to continue deferring its future
wholesale power purchase costs there would be a significant adverse
affect on the Utility's and PG&E Corporation's future earnings, assuming
the high prices continue as the current forward price curve suggests.
Finally, absent adequate assurance as to future recovery, the resulting
financial condition of the Utility may be such that it may be unable to pay
dividends to PG&E Corporation, which in turn could adversely impact
PG&E Corporation's ability to pay dividends in the future.
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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
By CHRISTOPHER P. JOHNS
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CHRISTOPHER P. JOHNS
Vice President and Controller
PACIFIC GAS AND ELECTRIC COMPANY
By DINYAR B. MISTRY
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DINYAR B. MISTRY
Vice President and Controller
Dated: December 18, 2000
