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UNITED STATES
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 (Date of earliest event reported) July 16, 1997
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Pacific Enterprises
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(Exact name of registrant as specified in its charter)
California
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(State or other jurisdiction of incorporation
1-40 94-0743670
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Commission File Number (I.R.S. Employer Identification No.)
555 West Fifth Street, Los Angeles, California 90013-1011
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(Address of principal executive offices)
(Zip Code)
(213) 895-5000
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(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
CPUC PBR Decision
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On July 16, 1997, the California Public Utilities Commission (CPUC) issued
its final decision on Southern California Gas Company's (SoCalGas or the
Company) application for performance based regulation (PBR).
SoCalGas filed its PBR application with the CPUC in 1995. PBR replaces the
general rate case and certain other regulatory proceedings. Under PBR,
regulators allow future income potential to be tied to achieving or
exceeding specific performance and productivity measures, rather than
relying solely on expanding utility rate base in a market where SoCalGas
already has a highly developed infrastructure. Key elements of the PBR
include a reduction in base rates, an indexing mechanism that limits future
rate increases to the inflation rate less a productivity factor, and rate
refunds to customers if service quality deteriorates. The change in
regulatory oversight will change the way earnings are affected by various
factors. For example, earnings will become more reliant on operational
efficiencies and less on investment in plant.
Under ratemaking procedures in effect prior to the PBR decision, SoCalGas
typically filed a general rate case with the CPUC every three years. In a
general rate case, the CPUC established a base margin, which is the amount
of revenue to be collected from customers to recover authorized operating
expenses (other than the cost of gas), depreciation, taxes and return on
rate base. Separate proceedings were held annually to review SoCalGas' cost
of capital including return on common equity, interest costs and changes in
capital structure. Under PBR, the annual cost of capital proceedings will be
replaced by an automatic adjustment mechanism if changes in certain indices
exceed established tolerances. The mechanism is triggered if actual
interest rates change by more than 150 basis points and are forecasted to
continue to vary by at least 150 basis points for the next year. If this
occurs, there would be an automatic adjustment of rates for the change in
the cost of capital according to a pre-established formula.
Furthermore, under the prior ratemaking procedures the CPUC allowed annual
adjustments to rates for years between general rate cases to reflect the
changes in rate base and the effects of inflation. This attrition allowance
mechanism is eliminated by PBR. Biennial cost allocation proceedings
(BCAP), which will continue under PBR, adjusts rates to reflect variances in
the cost of gas and core customer demand from estimates previously adopted.
The Commission's PBR decision indicates that it will address issues such as
throughput forecast, cost allocation, rate design and other matters which
may arise from SoCalGas' PBR experience in the 1998 BCAP. The Gas Cost
Incentive Mechanism (GCIM) is a process for comparing SoCalGas' gas
purchases to a benchmark level, which is the average price of 30-day firm
spot supplies delivered to the SoCalGas market area. The GCIM proceeding
will not change under PBR.
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The Commission's PBR decision establishes the following rules for SoCalGas:
- A net rate reduction of $160 million for an initial base margin of $1.3
billion (a rate reduction now of $191 million, offset by an estimated $31
million rate increase to reflect inflation and customer growth on January
1, 1998). The CPUC refers to a rate reduction of $229 million in its
decision. However, this amount does not include approximately $38
million of other social program costs authorized in this proceeding, that
were previously part of base margin.
- If earnings exceed the authorized rate of return on ratebase, a portion
will be returned to customers. Earnings between 25 and 300 basis points
above our authorized rate of return on ratebase will be shared with
customers in eight blocks of 25 to 50 basis points each with the first
block returning 75% to customers and declining to 0% as earned returns
approach 300 basis points above authorized amounts. However, the
decision rejects sharing of any amount by which actual earnings may fall
below the authorized rate of return. In 1997, SoCalGas was authorized to
earn a 9.49% return on ratebase which the decision adopts as the
authorized rate for PBR.
- Index revenue or margin per customer by inflation less an estimated
productivity factor of 2.1% in the first year, increasing 0.1% per year
up to 2.5% in the fifth year. This factor includes 1% to approximate the
projected impact of declining ratebase. This methodology, combined with
the retention of the Core Fixed Cost Balancing account, removes the
risk/reward potential for shareholders arising from higher or lower gas
throughput per customer to core (residential and small
commercial/industrial) customers.
- Maintain the current residential customer charge of $5 per month. The
CPUC decision defers action on residential rate design to a future
Commission proceeding, but does allow for some pricing flexibility for
residential and small commercial customers with any shortfalls being
borne by shareholders; and
- Continue to offer some types of products and services it currently
offers (e.g. contract meter reading), but defers issue of other new
product and service offerings to a future Commission proceeding.
SoCalGas has the option of implementing the base margin reduction in late
July, and all other elements on January 1, 1998, or to implement all PBR
elements including the reduction to base margin retroactive to January 1,
1997. SoCalGas' plan is to implement the base margin reduction effective
late July, and implement all other PBR elements on January 1, 1998. The
CPUC intends for its PBR decision to be in effect for five years. The CPUC
decision also provides the possibility that changes to the PBR mechanism
could be adopted in a decision to be issued in SoCalGas' 1998 BCAP
application, which decision is anticipated to become effective on August 1,
1999.
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It is the intent of management to control operating expenses and investment
within the amounts authorized to be collected in rates in this PBR decision.
SoCalGas intends to make the efficiency improvements, changes in operations
and cost reductions necessary to achieve this objective and earn its
authorized rate of return. However, in view of the earnings sharing
mechanism and other elements of PBR authorized by the CPUC, it will be more
difficult for SoCalGas to achieve the level of returns it has recently
experienced.
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC ENTERPRISES
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(Registrant)
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Ralph Todaro
Vice President and Controller
(Chief Accounting Officer and
duly authorized signatory)
Date: July 16, 1997