Rate Base

In Ordering Paragraph 15 of D.00-02-046, PG&E's request for authority to implement its 2001 ARA is granted, "subject to modification to take into account the results of the 1999 capital audit...."

Ordering Paragraph 12 states the scope of the financial audit:

"The Energy Division shall conduct an audit of calendar year 1999 distribution capital spending by PG&E and report to the Commission on or before November 15, 2000. The scope of the audit will include capital projects closed to Plant in Service during calendar year 1999 and verification of amounts spent." (D.00-02-046, at p. 545.)

The Commission, in the text of D.00-02-046, describes how the results of the audit will be used:

"The audit will establish an accurate year end 1999 electric distribution rate base. It should commence with a year end 1998 rate base, and examine actual capital spending in 1999. If there has been a variance between 1998 forecast and actual spending for 1998, it will not persist beyond the conclusion of the audit."

Based on Ordering Paragraphs 12 and 15 and the Commission discussion of the use of this audit, PG&E used recorded 1999 capital-related data as modified by the results of the Energy Division financial audit as the base for calculating the capital-related portion of the ARA. Since no party disputed the results of the audit, and PG&E has fully implemented the results of the audit in its 2001 revenue requirement, PG&E says we should adopt PG&E's recorded 1999 rate base as a starting point for the attrition calculation.

ORA and PG&E both use a rate base calculation methodology consistent with the methodology used in the last two PG&E GRC proceedings in which attrition was approved. This methodology limits capital-related increases in an attrition year to increases in plant, depreciation reserve, and deferred tax items that are caused by rate base growth. The plant growth projection is based upon a seven-year average. As a starting point, ORA used the same recorded adjusted rate base figure utilized by PG&E in its October 27 update filing. ORA's rate base estimate of $7,292,186,000 is approximately $14 million less than the estimate in PG&E's original showing and $16.8 million less than PG&E's revised showing. ORA's estimate also includes the adjustments recommended by the Energy Division audit. The only difference between PG&E's rate base and ORA's is ORA's exclusion of escalation for 2000. As we have found it proper to exclude escalation for 2000 in regard to expenses, we find it proper to exclude escalation for 2000 in regard to rate base. We adopt an attrition rate base of $7,292,186,000.

However, as discussed above, 2001 was an extraordinary year, and PG&E faced unprecedented financial problems. It is reasonable to conclude that PG&E's financial woes would impact PG&E's capital spending. PG&E has informed the Commission of efforts to reduce costs such as scaling back of distribution undergrounding work.

The record before us is insufficient to determine if PG&E's financial problems resulted in extraordinary reductions in PG&E's capital spending in 2001, but PG&E should recover its reasonably incurred costs. Therefore, while we approve the increase in capital-related costs stated above, we will make this increase subject to revision downward should PG&E's actual 2001 capital costs be less than the assumed amount underlying our increase. This will enable PG&E to recover its costs, but protect ratepayers should we determine PG&E's capital spending was reduced in 2001.