3. PG&E's Request

The energy industry has undergone significant changes since PG&E's last GRC. At that time, California was in the process of restructuring the electric industry consistent with the requirements of Assembly Bill (AB) 1890 (Stats.1996, Ch. 854) and PG&E was the only large electric utility in the state that had not shifted from cost of service ratemaking to Performance-Based Ratemaking. When we issued D.00-02-046, we expressed concern regarding the large difference between the revenue requirement requested by PG&E and the revenue requirement recommended by ORA and other parties as well as the "history of divergence between authorized revenues and actual expenditures in mission critical areas." We observed that, "after two years of proceedings...we are still faced with making significant decisions about PG&E's revenue requirements, accounting and costing practices and service levels based on judgments that are informed by less than clear or precise information." (D.00-02-046 mimeo., 28.) We adopted certain measures designed to improve the accuracy of PG&E's next GRC filing,¹⁰ in the hope that, these measures, combined with the concerted effort of all the parties, would result in a much more accurate and much less controversial TY 2003 GRC filing. As a result of the energy crisis in 2001 and the subsequent filing by PG&E for Chapter 11 bankruptcy protection on April 6, 2001, not only do we continue to face many of the same issues we had hoped to eliminate, but additional complications have emerged.

On September 20, 2001, PG&E and PG&E Corporation, as co-proponents, filed a Plan of Reorganization (POR) in PG&E's bankruptcy case. The POR provided for the disaggregation of PG&E's business into four companies, removing PG&E's hydroelectric generation facilities, natural gas transmission assets, and nuclear facilities from Commission regulation.

In its initial application, PG&E proposed overall forecast test year 2003 electric and gas distribution revenue requirements of $2,716 million and $1,000 million, respectively, which would result in increases of $447 million, or 19.7%, in electric distribution revenues and $105 million, or 11.7%, in gas distribution revenues over then current authorized revenue requirements. (Exhibit 1, p. 1-1.)

PG&E also sought attrition year revenue requirement increases in 2004 and 2005. PG&E proposed that attrition year increases would be updated just prior to each attrition year, based upon current escalation and other information. PG&E estimated its attrition year increases at $64 million in 2004 and $85 million in 2005 for its electric distribution operations and $26 million for 2004 and $32 million for 2005 for its gas distribution operations. (Exhibit 8, p. 2-8 and 2-9.)

In its February 20, 2003 update pursuant to the ACR, PG&E requested a TY 2003 generation revenue requirement of $1,022 million, representing a $149 million increase over the authorized 2002 revenue requirement (Exhibit 10, pp. A-1 to A-2) and forecast generation attrition changes for 2004 and 2005 of a $33.7 million increase and a $39.3 million decrease, respectively. (Exhibit 10, p. 16-1.)

Applicant claims that its request is reasonable in light of rising costs over the four-year period since PG&E's last GRC including: cost increases caused by: continuing wage and price inflation; the costs of new programs; the cumulative increase in capital investment as customers and activity continue to grow; and the need to replace aging infrastructure with new facilities. In addition to these general cost increases, applicant states that there are at least four special cost drivers reflected in its request: (1) the updating of electric and gas distribution rates to ensure that depreciation costs are allocated fairly to ratepayers over time; (2) resuming contributions to PG&E's Retirement Plan trust; (3) the inclusion of certain A&G elements that were not included in the costs adopted in the 1999 GRC (e.g., a portion of Performance Incentive Plan payments and certain support costs billed by PG&E Corporation); and (4) a substantial "ramp-up" in generation expenditures required by the recent shift in regulatory policy direction away from the short-term maintenance and back toward long-term investment.

When PG&E filed its application, it indicated that it was not seeking a change in total electric rates related to the increased electric revenues it was requesting, due to the electric rate freeze that was in effect at that time. PG&E acknowledged that future rates may be affected if the Commission approves its request. PG&E's requested increase in gas distribution revenues was expected to increase a typical residential customer's total gas bill by 4.1 %, or $1.56 per month.

PG&E also stated that the Chapter 11 protection for which PG&E filed in April 2001 allows PG&E to operate its distribution business in the "ordinary course," i.e., continuing to provide safe and reliable electric and gas distribution service to its customers. PG&E states that its GRC request covers only the costs of continuing to provide distribution services to its customers and does not reflect its POR.