BACKGROUND

PG&E proposed in AL 2570-E to amortize for recovery the balances in various balancing accounts, establish the 2005 Regulatory Asset Rate Adjustment Mechanism (RARAM) revenue requirement, and consolidate rate changes effective January 1, 2005.

PG&E proposed that balances in the RARAM, the Distribution Revenue Adjustment Mechanism (DRAM), the Public Purpose Program Revenue Adjustment Mechanism (PPPRAM), the Nuclear Decommissioning Adjustment Mechanism (NDAM) the Utility Generation Balancing Account (UGBA), the Electric Reimbursable Fees Balancing Account (ERFBA), the Power Charge Collection Balancing Account (PCCBA), the Rate Reduction Bond Memorandum Account (RRBMA), the Hazardous Substance Mechanism (HSM), and the Streamlining Residual Account (SRA) be approved for recovery.

All of these regulatory accounts with the exception of the HSM (established pursuant to D.94-05-020) and SRA (established pursuant to Resolution E-3514) were addressed by Resolution E-3862. PG&E proposed that an annual true-up advice letter be the vehicle to true-up these balances in accordance with D.04-02-062, Advice Letter 2460-E-A, and Resolution E-3862. D.04-02-062 authorized PG&E to implement its post-rate freeze ratemaking mechanisms to ensure that overcollections and undercollections in various accounts are "trued up" in future rates.

D.03-12-035 approved the Modified Settlement Agreement (MSA), which adopted the mechanism to change the annual revenue requirement for the Regulatory Asset included in the MSA. PG&E proposed that advice letter 2570-E be the vehicle for compliance with the provision.

AL-2570 included tables showing account balances requested for recovery as recorded through August 31, 2004, and proposed that a supplement to AL 2570-E be submitted in December to fully amortize end-of-November 2004 recorded balances, in order to effect and consolidate rate changes as of January 1, 2005.

In response to Advice Letter 2570-E, Resolution E-3906 approved the recovery of balances in balancing accounts, established the RARAM revenue requirement and approved consolidated changes to electric rates effective January, 1, 2005, with modifications.

Recovery of balances in all of these accounts was approved by Resolution E-3906. Resolution E-3906 required that these balances be subject to future audit, verification, and adjustment as necessary. PG&E complied by submitting supplemental AL 2570-E-A, with recorded balances through November 30, 2004, to consolidate electric rate tariffs January 1, 2005. In compliance with Resolution E-3906, PG&E set its 2005 RARAM revenue requirement using the rate of return adopted in D.04-12-047. PG&E recalculated its 2004 RA to reflect the change in the 2004 cost of capital, and recalculated its 2005 RA revenue requirement using the reset 2004 revenue requirement as a starting point. PG&E then used the 2005 cost of capital components from D.04-12-047 to develop its 2005 RA revenue requirement.

Advice Letter 2706-E complied with Resolution E-3906, in submitting previously approved balancing accounts for cost recovery by September 1, 2005 for rates effective January 1, 2006.

In addition to requesting in AL 2706-E recovery of balances previously approved in Resolution E-3906, PG&E also requests recovery of balances in the CAREA, the ERBBA, the EVBA, the FERABA, the ATFA, and the SGPMA. Pursuant to D.04-11-015, the ERBBA replaced the RARAM.

Resolution E-3944 authorized PG&E to recover in electric rates balances recorded in the electric SGPMA through October 31, 2004. D.05-06-029 authorized PG&E to recover in gas rates balances in the gas SGPMA after the reasonableness of the amounts recorded in the account have been reviewed by the Commission.

D.01-03-073 required PG&E to allocate costs for the Self Generation Incentive Program (SGIP) between gas and electric customers based on the allocation of energy efficiency programs between those customers. PG&E records electric SGIP costs in its electric SGPMA, and gas SGIP costs in its gas SPGMA. Resolution E-3944, addressing PG&E's AL 2580-E authorized PG&E to recover $35.6 million recorded in the electric account through October 31, 2004.

D.05-06-029 in A.04-07-044, PG&E's biennial gas cost allocation proceeding, authorized PG&E to apply for recovery of gas SGIP expenses recorded in the gas SPGMA in an advice letter. That decision accepted PG&E's gas SGIP costs for the funding period addressed by the decision noting that ORA has reviewed the accounts. D.05-06-029 also states that recovery of gas related expenses in future periods will only be authorized after the reasonableness of those funds have been reviewed by the Commission, either in the SGIP proceeding, R.04-03-017 or as part of the advice letter process.

PG&E estimates in AL 2706-E a consolidated revenue requirement increase for 2006 of $599 million; of this amount, $855 million is related to Commission-authorized cost increases; this is offset by a $256 million decrease related to FERC-authorized costs.

In AL 2706-E PG&E provided illustrative rates based on balancing account balances as of July 31, 2005, and revenue requirement requests filed in the applications and advice letters pending before the Commission. The total annual revenue requirement increase for 2006 reflecting these illustrative rates is approximately $599 million. A breakdown of the components of the annual revenue requirement increase estimated in AL 2706-E is as follows:

PG&E proposes to supplement AL 2706-E prior to January 1, 2006 to incorporate updated balancing account balances and the revenue requirement changes approved by the Commission and FERC.

PG&E proposes to supplement the AL prior to the end of 2005 to incorporate balancing account balances recorded as of November 30, 2005, and the revenue requirement changes authorized by the Commission and FERC by the end of the year. The supplemental AL would include the new rates and revised tariffs to become effective on January 1, 2006.

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