This section addresses the expense and capital revenue requirements that are needed to support PG&E's gas transmission and storage services during the 2004 test year. This cost of service, expressed in terms of a revenue requirement, is used to calculate the 2004 rates. PG&E seeks to recover a revenue requirement of $454 million in 2004 for its gas transmission and storage services.57 This would recover the $310.5 million in total operating expenses, and provide a rate of return of 9.24% on a rate base of $1.551 billion. The $454 million represents an increase of about 7% over the revenue requirement for 2003 of $424 million.
The current cost structure of PG&E's gas transmission and storage services are based on the Gas Accord Settlement Agreement, and were calculated based on revenue requirement estimates from three sources. The three sources are: (1) PG&E's 1996 GRC decision amounts for the gas department; (2) a specific model to estimate the revenue requirements for Line 401 over its service life; and (3) specific calculations of the revenue requirements associated with required NOx-related capital additions.
PG&E's O&M expenses for 2004 include labor, materials, supplies, contracts, and other related expenses for operating and maintaining the gas transmission and storage facilities and to provide customer service. PG&E's estimate of operating expenses for 2004, which includes O&M and A&G expenses, are $149.966 million, as shown in Table 12.2 of Exhibit 3.
PG&E's A&G expenses, and the amount of A&G expenses to be allocated to gas transmission and storage, are being addressed in PG&E's 2003 test year GRC. Since a decision in the 2003 GRC is not expected until late 2003, PG&E is proposing in this proceeding that the A&G expenses for the 2004 gas structure revenue requirement be a placeholder only, and subject to update with the results of the GRC. The placeholder amount for A&G expenses is $53.130 million, and is shown in Table 12-2 under operating expenses. Once the 2003 GRC decision determines the portion of A&G expenses that should be assigned to gas transmission and storage, the 2004 gas structure rates would be updated with the GRC-adopted amount.
In the event that PG&E's 2003 GRC decision is not available in time to reflect the GRC A&G amount in the 2004 rates by January 1, 2004, PG&E proposes that the Commission approve the creation of a memorandum account in which the A&G difference between the adopted revenue requirements from the 2003 GRC, plus escalation to 2004, and the placeholder used in the 2004 gas structure revenue requirement be tracked with interest. The balance in the memorandum account would be incorporated directly in the gas transmission and storage rates by an advice letter filing.
PG&E's estimate of taxes include state and federal income taxes, property taxes, payroll taxes, business taxes, and other taxes. PG&E estimates 2004 taxes of $81.413 million as shown in Table 12-2 of Exhibit 3. PG&E's calculation of the federal income tax and the California Corporation Franchise Tax are reflected in detail in Table 12-5 of Exhibit 3.
PG&E's estimate of depreciation expense for the 2004 gas structure revenue requirement is $79.143 million, as shown in Table 12-2 of Exhibit 3.
PG&E's estimates of plant and rate base for the 2004 gas structure revenue requirement are reflected in Tables 12-2 and 12-4 of Exhibit 3. PG&E's estimate of rate base for the 2004 revenue requirement for its gas transmission and storage system is $1.551 billion. This rate base estimate includes the addition of $80.5 million of non-cycle working gas in storage into rate base. At the present time, the PG&E receives the short-term interest rate for this gas through the procurement component in the BCAP.
Many of the arguments pertaining to PG&E's cost of service were addressed earlier in Section III.B. Some of the parties advocated that 2003 rates be extended into 2004, or that PG&E's cost of service for its transmission and storage systems be addressed in other proceedings.
We allowed PG&E to submit a cost of service study in this proceeding, and directed parties to provide testimony on what the gas market structure should be for 2004, and what rates should apply. This is the appropriate proceeding in which to address PG&E's cost of providing transmission and storage services to its customers, and to develop a revenue requirement and rates to recover those costs. Although time and resource constraints prevented ORA and others from conducting a thorough review of PG&E's application, we are obligated to adopt a revenue requirement and rates in 2004.
Based on the proposals adopted in this decision, the adjustments58 made to PG&E's forecast of O&M expenses and to its forecast of capital expenditures, we adopt a total revenue requirement of $436,397,000 for PG&E's gas transmission and storage systems for 2004. This revenue requirement may be affected by the A&G costs that are being addressed in PG&E's 2003 GRC, escalated to 2004.59 We expect to act on that decision in the near future. Today's adopted revenue requirement may also be affected in the future by the 2004 cost of capital proceeding.
Our adopted revenue requirement is set forth in Table 1 and Table 2 of Appendix A, and illustrates the differences between 2003 rates, PG&E's revenue requirement request, and our adopted revenue requirement amount.
PG&E shall establish its 2004 transmission and storage services rates and charges based upon our adopted revenue requirement, and the adopted proposals that affect the allocation of costs, and the design of rates.