10. Other Issues

10.1 Pension Contributions

The only revenue requirement issue not addressed by the Settlements is PG&E's request that the Commission approve a TY 2003 forecast contribution to the Retirement Plan trust of $128.6 (total company). PG&E offers a tax-qualified pension plan, which provides benefits to employees upon retirement based on years of service, salary, and age at retirement. PG&E relied on Towers Perrin's analysis of the Retirement Plan's funded status in considering whether a contribution to the Retirement Plan trust was appropriate. PG&E calculated the requested contribution amount using what it refers to as the "normal cost" method to determine the pension fund contributions to be reflected in revenue requirements. PG&E states that under the normal cost method, the forecast pension cost is based on the cost of benefits earned by employees in the current year. PG&E claims that that normal cost method ensures that current customers will pay the cost of benefits earned by employees in the course of providing service to those customers. PG&E maintains that there is no risk to ratepayers if the PG&E normal cost method exceeds the Internal Revenue Service (IRS) maximum tax deductible limit because PG&E will credit back to ratepayers the associated revenue requirement that is not contributed to the trust or otherwise used for related pension costs at the end of the rate case cycle.

ORA urges the Commission to reject PG&E's request. ORA states that PG&E has not provided sufficient evidence to justify a $128.6 million pension plan contribution in 2003 and the subsequent three years to avoid a 25% probability of making a contribution of above $150 million in 2007 absent such a contribution. ORA notes that no contribution is currently required by the IRS/Employee Retirement Income Security Act (IRS/ERISA) minimum contribution and maximum tax-deductible contribution limits and that PG&E's proposed funding is voluntary. ORA argues that there is risk to ratepayers because any refunds would not be approved until the year 2006 at the earliest, or after 2007 if the Settlement is adopted.

10.1.1 Discussion

We review PG&E's Pension Contribution request pursuant to Pub. Util. Code § 451 and 454, which provide that no public utility shall change any rate or charge except upon a showing before the Commission and a finding, by the Commission that a change is just and reasonable.

Although PG&E is correct that the minimum ERISA contribution is not an accurate measure of the cost of benefits earned by PG&E's employees in a given year, the Commission has not advocated strict adherence to the normal cost method in determining whether a contribution is necessary or reasonable when doing so would not be in the ratepayers' interest. Nor has PG&E strictly held that it must make pension contributions annually based on the amount calculated by the normal cost method. In the years subsequent to 1992, the determination of whether to make a contribution to the Retirement Plan trust has been based on an evaluation of the funding status of the pension obligation, as measured by in part by investment performance, combined with an assessment of whether such a contribution would be tax deductible. Thus, the normal cost method has been used as a guide in calculating a contribution amount, rather than a hard and fast rule regarding whether such a contribution is necessary.

As ORA points out, using the normal cost method to determine whether a contribution is necessary essentially ignores the funding status of the pension obligation and the actual investment performance. ORA also points out that in D.00-02-046, the Commission approved PG&E's normal cost method for calculating the contribution amounts in theory, but did not approve or reject a particular funding amount, since PG&E reduced its funding request in that case to eliminate the amount proposed for pension contribution. ORA also notes that in approving the normal cost method in that case, the Commission indicated that it would consider other approaches to calculating pension funding in the future, stating: "future ratemaking proceedings may find a need for further consideration." (D.00-02-046, mimeo., p. 311.)

Towers Perrin's actuarial analysis provided PG&E with both an estimate of the contributions according to a normal cost method of calculating pension costs, and an estimate that a contribution may be needed by 2007 to ensure full funding of the Pension Trust. According to the Towers Perrin analysis, minimum required contributions under ERISA are forecast to be zero for the years 2003 through 2005, and most likely zero in 2006, but the probability of needed contributions to the pension fund are 50% by the year 2007. Notwithstanding the fact that Towers Perrin does not find that a contribution is needed in 2003, Applicant requests funding for annual contributions beginning in the TY 2003.

As ORA notes, the applicant bears the burden of proving that its request is just and reasonable. In PG&E's last GRC, the Commission held that:


"The inescapable fact is that the ultimate burden of proof of reasonableness, whether it be in the context of test-year estimates, prudence reviews outside a particular test year, or the like, never shifts from the utility..." (D.00-02-0246, mimeo., P. 36, citing Re Pacific Bell (1987) 27 CPUC 2d 1, 21, D.87-12-067)

The Commission also held that standard of proof that applicants must meet is one of clear and convincing evidence. (D.00-02-046, Finding of Fact #.) In order to demonstrate that its request is reasonable, PG&E must show, through clear and convincing evidence, that a voluntary contribution of $128.6 million per year is necessary at this time. The normal cost method makes sense in theory, assuming that in each year ratepayers are paying the appropriate amount. However, in reality, the contribution amount is determined based on the investment performance and funding status of the retirement plan.

In this case, PG&E has not provided sufficient evidence demonstrating that the current funding status of the plan requires a contribution in TY 2003. We note that the Towers Perrin analysis titled, Pacific Gas and Electric Company Retirement Plan - PG&E Gas Transmission Northwest Retirement Plan - Impact of Market Decline on Contributions and Funded Status, dated August 20, 2002, indicates that the funded percentage of the plan, including the effect of the 2002 market decline is 110%. (Exhibit 22, p. 19A-6.)

We find that the need for ratepayer contributions to the Retirement Plan trust in any given year must be determined based on the funding status of the plan. To do otherwise would be inconsistent with our obligation, under Pub. Util. Code § 451 to provide for just and reasonable rates. We find that it would be unreasonable to approve a request for pension contribution in TY 2003 based on a showing that there is a 50% probability of a minimum contribution by the year 2007. Accordingly, we deny PG&E's request.

10.2 Diablo Canyon Independent
Safety Committee (DCISC)

PG&E's application included a proposal to terminate the DCISC on the basis that Diablo Canyon is no longer subject to performance based pricing as established in the settlement which created the committee. The DCISC and Mothers for Peace opposed this aspect of PG&E's application. The February 13, 2003, ACR directed that a meet and confer session be held to develop procedural recommendations regarding the DCISC issues in the proceeding. On March 12, 2003, the Mothers for Peace filed a petition seeking to transfer a pending Petition to Modify D.88-12-083 from A.00-11-038 et al.41 to A.02-11-017 et al. (the instant application).

On April 24, 2003, the PG&E, DCISC, ORA, Mothers for Peace, California Energy Commission (CEC) and TURN filed a Motion to Adopt a Stipulation (Stipulation)42 under which: (1) the DCISC would continue to exist and be funded through cost-of-service rates at least through the next rate case cycle; and (2) the Commission will resolve the issues raised by the Petition to Modify D.88-12-083 in the context of PG&E's TY 2003 GRC; and (3) the Commission would hold one of the public participation hearings for the PG&E GRC in San Luis Obispo. The Stipulation is attached as Appendix C.

On April 28, 2003, ALJs Cooke and Wong issued a ruling transferring the Petition to Modify D.88.12-083 filed on November 29, 2001 to this proceeding. The April 28, 2003, ruling directed Mothers for Peace to update its Petition to Modify D.88-12-083 by filing a supplemental brief on May 23, 2003, and reply briefs on June 20, 2003.

10.2.1 DCISC Background

The DCISC was created as the result of a settlement when the reasonableness of the costs associated with the Diablo Canyon Nuclear Power Plant was being examined. The committee was established to "review Diablo Canyon operations for the purpose of assessing the safety of operations and suggesting any recommendations for safe operation." (D.88-12-083, App. C, Att. A, Section I.1.)

Mothers for Peace filed its petition to modify D.88-12-083 on November 29, 2001. Responses to the petition were filed by the California Energy Commission (CEC), DCISC, and PG&E. A reply to the responses of PG&E and the DCISC was filed by Mothers for Peace.

On January 17, 2002, the Physicians for Social Responsibility - Los Angeles (PSR) submitted a pleading to the Docket Office entitled "Petition To Adopt, Amend, Or Repeal A Regulation Pursuant To 1708.5 and AB 301,43 Petition To Establish A Safety Oversight Committee For San Onofre Nuclear Generating Station (SONGS) Units 1, 2 & 3." PSR's pleading stated in part that it was being filed in response to, and in support of, Mothers for Peace's petition to modify D.88-12-083. The Docket Office retitled the pleading as a response and subsequently, in a ruling dated February 22, 2002, the assigned ALJ ruled that PSR's pleading would not be treated as a separate petition under Section 1708.5 because it did not propose a rule "of general applicability and future effect;" the ALJ also ruled that PSR's request for establishment of an independent safety committee for SONGS would not considered in connection with Mothers for Peace's petition.44

Two other petitions to modify D.88-12-083 were previously filed by the Mothers for Peace. The Commission denied those petitions in D.90-04-008 and D.91-10-020. In A.96-03-054, a proceeding determining the sunk costs of Diablo Canyon and the incremental cost incentive price of Diablo Canyon power, Mothers for Peace petitioned to set aside submission of the proceeding in order for the Commission to take additional evidence on the issue of safety impacts. The Commission denied the petition to set aside submission in D.97-05-088. Due to the requirements of AB 1890 (Stats. 1996, ch. 854), which froze customers' rates and accelerated the recovery of transition costs, D.97-05-088 also terminated the Diablo Canyon settlement but specifically directed that the DCISC continue operations until further order of the Commission. (72 CPUC 3d 560, 610.)

10.2.2 Request for Relief

On May 22, 2003, pursuant to the Stipulation, the Mothers for Peace submitted a revised petition to modify D.88-12-083. The revised petition seeks certain changes to the DCISC selection process, and a new requirement that DCISC establish an office in San Luis Obispo. Specifically, Mothers for Peace proposes the following changes to Attachment A of Appendix C of D.88-12-083.

· Instead of having the committee members selected from a list of candidates jointly nominated by the President of the Commission, the Dean of Engineering of the University of California at Berkeley, and PG&E, Mothers for Peace proposes that the members be nominated solely by the Commission through open requests for nominations. Mothers for Peace also suggests that a provision for seeking public comment on the candidates for the DCISC be created.

· Change the candidate selection criteria from "persons with knowledge, background and experience in the field of nuclear power facilities" to that of "persons with knowledge, background and experience in nuclear safety issues in the field of nuclear power facilities."

· Add a provision to Section I of Attachment A that would require the DCISC to "consist of at least one member from the San Luis Obispo public to represent the affected community."

· Add a provision to Section II of Attachment A that would require the DCISC to have an office and a local staff in San Luis Obispo. The current office in Monterey should be closed.

· Ensure that Section II.E. entitled "Compensation of the Committee" is enforced.

· Modify the DCISC mandate to explicitly include public outreach.

The petition alludes to several reasons for the proposed changes. First, Mother for Peace contends that "the DCISC has never been able to win the trust of the San Luis Obispo Community, nor the nuclear power plant employees, it was created to protect." Arguing that the community has been waiting over a decade for the additional assurance of safety promised in the Diablo Canyon settlement, Mothers for Peace contends that locating the DCISC in the San Luis Obispo area could help provide this assurance. Mothers for Peace maintains that locating the DCISC in San Luis Obispo would allow DCISC to attend meetings regarding Diablo Canyon, members of the public would have an easier time in contacting DCISC members and may result in improved access to DCISC documents, access which is currently limited by the availability of parking and restricted hours of library staff. For those members of the public that cannot attend meetings, Mothers for Peace recommends that the Commission direct PG&E to continue funding the video recording of DCISC meetings for broadcast on public access television.

Second, Mothers for Peace contends that in light of the California energy crisis, a fear exists that California will rely so heavily on nuclear power that safety issues, which Mothers for Peace contend have been downplayed by the utility, may be overlooked. Mothers for Peace asserts that in the last decade "economic pressures have resulted in rushing through refuelings and decreasing a workforce that has become demoralized and fatigued."45 In addition, Mothers for Peace assert that credible safety oversight is needed now in light of PG&E's bankruptcy, and the need to protect nuclear power plants against terrorist attacks.

Third, Mothers for Peace asserts that the open nomination process for selecting the DCISC members will eliminate the conflict of interest in the current nominating process. Under the current screening process, Mothers for Peace asserts in its reply that "PG&E can effectively blackball any applicant that it wishes to keep off the Committee."

And fourth, Mothers for Peace believes that the Commission should examine whether or not the use of ratepayer funds for the DCISC has actually increased safety at Diablo Canyon. Mothers for Peace contends that it has not.

Although more than one year has elapsed since the effective date of D.88-12-083, Mothers for Peace asserts that the time limitation for filing a petition to modify must be waived because "many of the issues detailed in the Petition have arisen over the last decade, specifically in the last 2 years." (Petition, p. 3.) Mothers for Peace also asserts that safety issues continue to plague the nuclear industry, and that the additional assurance of safety that the DCISC was to provide is needed now more than ever.

10.2.3 Positions of the Other Parties

The DCISC contends that there is no need to modify the composition and operations of the committee at this time. The committee argues that Mothers for Peace has failed to show good cause for changing the terms of the DCISC.

The DCISC points out that Mothers for Peace has raised concerns about the usefulness of the committee on three separate occasions over the last ten years. The Commission reviewed Mothers for Peace's request each time and determined that the committee did provide the additional assurance of safety, and that it should continue as initially established.

The DCISC contends that the current and external events cited in the petition have already been considered. For example, the DCISC requested and received detailed reports from PG&E in 2001 concerning the California energy situation and PG&E's subsequent election to file for bankruptcy protection. The DCISC has reviewed and considered these events, and has assessed the potential implications and impacts on the safety of operations at the plant and on the employees who are a vital part of the safety operations. The committee has also reviewed, evaluated and assessed the impacts of the electric deregulation efforts, the transition of the Diablo Canyon engineering staff from San Francisco to Diablo Canyon, PG&E's current Five-Year Business Plan, as well as the Nuclear Regulatory Commission's (NRC) evolving methods for providing nuclear safety oversight.

The DCISC has also followed and reviewed issues about nuclear security and the performance of Diablo Canyon's security organization. Following the events of September 11, 2001, the committee contacted PG&E about these types of issues, and responded to many concerns from citizens about these issues. In October 2001, the DCISC also received an updated report on security issues from PG&E, and a committee member and a consultant observed an on-site security exercise and briefing.

In response to the contention of Mothers for Peace that the committee has not provided an assurance of safety, the DCISC points out that over the last 11 years, it has considered and addressed numerous concerns about the safety of operations at Diablo Canyon, and that it has made 163 specific recommendations to PG&E to help maintain and improve safety at Diablo Canyon. PG&E has responded to each of these recommendations by taking acceptable action. The DCISC believes that these recommendations, and PG&E's actions in response to the recommendations, have significantly increased the assurance of safety and the margin of safety at the plant. Other examples of how the committee has been involved in the safety of the plant, and how this information has been disseminated to the public, are detailed in the committee's response to the Mothers for Peace's petition.

The DCISC does not believe the qualifications criteria should be changed to include background and experience in nuclear safety issues. Since the DCISC was created, all of its members have had direct technical experience in the safe operation of nuclear electric generating plants. The DCISC asserts that "one cannot really have knowledge, background and experience in nuclear safety issues unless one also has the broader knowledge, background and experience in the field of nuclear power facilities." (DCISC Response, pp. 15-16.)

As for the change in the nominating process, the committee states that past experience has shown that its members have been both qualified and independent. In addition, all committee members and consultants are prohibited from having any conflicts of interest. If the proposed nominating process change is adopted, the committee states that this will increase the Commission's burden by requiring review of the qualifications of a larger number of applicants.

Another proposed change is that at least one of the committee members be from the San Luis Obispo area. The DCISC does not oppose such a change as long as the expertise requirement applies to that member. The DCISC states that if one of its members lacks the requisite expertise in nuclear facilities, that this would substantially diminish the value and effectiveness of the committee. The petition also fails to address what would happen if there was no candidate from the San Luis Obispo area that had the required experience to serve on the DCISC. In addition, due to the staggered terms, several years could elapse before a member from the San Luis Obispo area actually serves on the committee. Although the petition asserts that a member from the San Luis Obispo area is needed to represent the interests of the affected community, the DCISC believes that these interests can best be represented through the appointment of the most qualified persons regardless of residency.

As for the request that the committee establish a San Luis Obispo office, the DCISC states that it has taken numerous steps to make the committee, its meetings, operations, and findings accessible to the public. Since the outset of its work, the DCISC has held a minimum of three public meetings each year in the San Luis Obispo area. Each meeting consists of technical presentations by PG&E representatives on plant operation and safety topics as requested by the DCISC and its consultants. The meetings also provide an opportunity for public comment, questions and communication to the committee and to the PG&E representatives. The notices of the meeting and the agenda items are published in local newspapers, as well as on the committee's website, www.dcisc.org. The committee members and consultants also conduct 8 to 10 fact finding visits to the plant and related facilities each year. Several of these visits are scheduled with an advertised evening open house session in San Luis Obispo. In addition, all of the annual reports of the DCISC are available to the public at the Cal Poly State University library in San Luis Obispo.

The DCISC contends that there is no evidence of a community-wide demand or request for a local office. Although the DCISC has considered the idea of a San Luis Obispo office, the committee has determined that such an office is not necessary to fulfill its safety mandates, and believes that available funds should be spent on technical experts and consultants to assist and advise the committee on safety and operations issues, instead of on office rent, overhead and staff. DCISC believes the office location issue should be left to the consideration and discretion of the DCISC.

The CEC contends that the proposed change to the nomination process would avoid any perceived or potential conflict of interest.

The petition also proposes that the committee members have knowledge, background and experience in nuclear safety issues in the field of nuclear power facilities. The CEC contends that since the purpose of the committee is to assess the safety of operations at Diablo Canyon and to make recommendations for safe operation, it "appears eminently reasonable that the DCISC members have a background not just in nuclear plant operations, but in nuclear safety issues at nuclear plants." (June 19, 2003 CEC Comments, p. 3.)

According to the CEC, enlarging the committee to include "at least one member from the San Luis Obispo public to represent the affected community," is comparable to the composition of the CEC, which includes a Commissioner from the public at large.46 The CEC supports this request.

With regard to the proposed change to require the DCISC to have an office and local staff in San Luis Obispo, the CEC states that a local presence might encourage more local residents to participate in the processes of the DCISC. The CEC recognizes that the purpose of the DCISC is to assess the safety of operations at Diablo Canyon and to make recommendations, and that these tasks could be done from anywhere. However, the CEC notes that local residents have an important stake in ensuring that a nearby plant is safely operated and are much more likely to participate in the DCISC process if there is local staff to assist them. The CEC also points out that only one of the current DCISC members is a California resident.

PG&E's response recommends that the petition be rejected as moot, untimely, and without any basis in fact.

PG&E contends that the petition fails to cite any facts in support of the assertion of heightened safety concerns at Diablo Canyon. PG&E points out that "Safety is and has always been PG&E's highest priority at Diablo Canyon," and that the plant is recognized by the NRC as one of the best run and safest nuclear power plants in the country. PG&E also notes that the "NRC has added increased inspection and has inquired into the potential impact of PG&E's bankruptcy on operations and has been satisfied that there have been no adverse impacts on Diablo Canyon operations or safety." (PG&E Response, p. 3.)

With regard to potential threats of terrorism, PG&E states that the NRC has responded by implementing appropriate responses, and that additional measures are being evaluated by the NRC. PG&E asserts that Mothers for Peace has failed to demonstrate or even suggest how the petition, if implemented, would further these efforts.

PG&E contends that there is no reason to modify the process for selecting the DCISC members. Past experience, as shown by the professional background and diversity of the current and former members of the committee, refutes Mothers for Peace's arguments for changing the nominating process. PG&E points out that all of the committee members and consultants must avoid conflicts of interest and file annual statements of economic interest confirming that.

PG&E asserts that the proposed nominating process change would to change the member selection into a partisan political appointment process, and would not further the goals and mandate of the DCISC. In addition, if the proposed requirement to add a member from the San Luis Obispo area is adopted, PG&E contends that this could result in a very limited pool of qualified applicants, and could lead to the forced appointment of candidates who lack the appropriate expertise.

If the petition was intended to increase local participation, PG&E points out that the committee already conducts three public meetings each year in the San Luis Obispo area. Notice of the dates, times, and locations of these meetings is widely disseminated. All of these meetings provide the public with the opportunity to speak and provide information to the committee. PG&E also points out that the committee has a web site, and that the committee is responsive to any inquiries that it receives from the public.

PG&E also contends that the petition is improper under the Commission's rules because the Mothers for Peace has failed to meet its burden to as to why the petition was not filed within one year of the effective date. In addition, PG&E asserts that the Mothers for Peace has failed to adequately allege and support facts in support of its petition.

ORA supports the addition of a qualified public member to the DCISC as a means of both adding expertise and improving local involvement. ORA notes that the addition of a fourth member will increase DCISC expenses.

ORA also supports the Mothers for Peace request to revise the nomination process to eliminate direct involvement by the Dean of Engineering of the University of California at Berkeley (Dean of Engineering) and PG&E, substituting an open request for nominations. ORA states that there was never a good reason for permitting PG&E to nominate members to what is supposed to be an "Independent" committee, therefore removing PG&E from the direct nomination process would enhance the credibility of the DCISC. ORA believes that there is no reason to continue to ask the Dean of Engineering to nominate candidates for the DCISC. According to ORA, an open request for nominations will "cast the widest possible net for potential nominees, and still permit PG&E and the Dean of Engineering to offer their own nominees, if they so choose." (ORA Reply Brief, dated June 20, 2003, p.4.)

ORA also recommends that the Commission order PG&E to resume funding the videotaping of DCISC meetings. ORA believes that broadcasting DCISC meetings on the local cable access channel is a low-cost and efficient means of providing the public information on Diablo Canyon and the DCISC, especially for members of the public who cannot attend meetings.

10.2.4 Discussion

The first issue to be addressed is whether to approve the Stipulation. The Stipulation contains two primary components.47 First, the Stipulation reflects the agreement among the Stipulating Parties that the DCISC should continue to exist and be funded in cost-of-service rates through the next rate case cycle, at funding levels established by the Commission in D.97-05-088 of $673,077, plus 1.5% annual escalation. The 2003 funding, based on the 1.5% escalation rate, is $747,011. To implement this agreement, PG&E agrees to withdraw its proposal to eliminate the DCISC from its TY 2003 GRC application.

Second, the Stipulation reflects the agreement among the Stipulating Parties that the Commission should resolve in the final decision issued in the TY 3000 GRC the issues raised in the Mothers for Peace Petition to modify D.88-12-083 regarding the DCISC nominating and appointment procedures, expertise and residence requirements, and location of the DCISC staff and offices. The Stipulating Parties agreed that, in lieu of evidentiary hearings, Mothers for Peace should file a supplemental brief and parties should file reply briefs addressing the issues raised by the Mothers for Peace Petition to Modify D.88-12-083. Until a decision is issued on the Mothers for Peace Petition, Appendix C of D.88-12-083 (the terms of which Mothers for Peace's petition would change) would remain in place. To the extent that the Commission grants all or part of the Mothers for Peace Petition, the modifications should be prospective. To the extent that the modifications result in an increase in costs associated with the DCISC beyond the funding levels authorized in the TY 2003 GRC, the Stipulating Parties agree to support recovery of those additional cost through an attrition mechanism or submission of a supplemental application.

Prior to approving any stipulated agreement or settlement, the Commission must find that it is in the public interest. We find that the Stipulation, attached as Appendix C to this decision, which addresses certain of the DCISC issues in this proceeding, is in the public interest. The Stipulation provides for a mutually acceptable outcome to an issue (the continued existence of the DCISC) in a pending proceeding, thereby avoiding the time, expense, and uncertainty of litigation on this issue. The Stipulation represents the interests of the applicant as well as all other active parties who filed responses, comments or briefs on this issue. No party opposes it.

10.2.5 The Revised Petition to Modify
D.88-12-083

The first change that the petition seeks to make is to have the Commission nominate all of the members of the committee through an open request for nomination. The petition also seeks to create a process for public comment on the applicants. The proposed change, if adopted, would affect Section I.2. of Attachment A to Appendix C of D.88-12-083.

The existing nomination process involves compiling a list of three candidates who are jointly nominated by the President of the Commission, the Dean of Engineering, and PG&E.48 The committee member whose term is expiring is deemed to be an additional nominee. These names are then forwarded to the appointing authority. The appointing authority rotates with each appointment among the Governor, the Attorney General, and the Chairman of the CEC.

Mothers for Peace seeks this change because it believes the change will eliminate a potential conflict of interest with PG&E and the Dean of Engineering, and that the open nomination process will reestablish the trust of the San Luis Obispo residents and the Diablo Canyon employees. ORA and the CEC agree, arguing that this change would enhance the DCISC's credibility by removing any perceived or potential conflict of interest and offers the advantage of public comment. ORA also believes that this change would make the process more efficient, suggesting that there is no reason to continue to ask the Dean of Engineering to nominate candidates for the DCISC.

We agree. Although no party has demonstrated that the existing nominating process has resulted in the appointment of committee members who are biased in favor of PG&E, we have before us an improvement to the existing process that would both streamline the nomination process and eliminate any potential concerns regarding conflict of interest. PG&E notes in its response that, "the composition of the DCISC and the nominating and appointment structure for selection of its members was carefully negotiated" as part of the settlement that resulted in D.88-12-08 and should not be changed. However, as PG&E acknowledged in its initial request to disband the DCISC, the settlement adopted in D.88-12-083 is no longer in effect. D.88-12-083 found that "Safety Committee will be useful monitor of the safe operation of Diablo Canyon"..."subject to our oversight...to determine the reasonableness of its activities." (30 CPUC 2d, p. 266.) Modifying the nomination in response to a reasonable request is an appropriate exercise of our oversight responsibilities.

The second change that the petition seeks is the requirement that DCISC nominees have "knowledge, background and experience in nuclear safety issues in the field of nuclear power facilities." The existing requirement only specifies that the nominees have "knowledge, background and experience in the field of nuclear power facilities."

The safety issues of nuclear power generation are an inherent component of nuclear power. The DCISC was created "for the purpose of assessing the safety of operations and suggesting any recommendations for safe operation." (D.88-12-083, Appendix C, Attachment A, Section I.1.) With that purpose in mind, the committee members have to focus on the safety of operations in order for them to perform the work that is required of them. The experience requirements should reflect this purpose and focus. However, nominees should continue to be required to have knowledge, background and experience in nuclear power facilities. We will revise this requirement such that Paragraph C of Appendix C shall read as follows:

"The President of the CPUC shall propose as candidates only persons with knowledge, background, and experience in the field of nuclear power facilities and nuclear safety issues."

As a side note, our review of the qualifications of the past and present members of the DCISC, which was attached as Exhibit C to the committee's response, demonstrates that all of the committee members have a background in nuclear safety issues. Accordingly, we do not anticipate that this change will significantly effect the composition of the DCISC.

PSR also raised the issue that Diablo Canyon might be sold to another operator sometime in the future, and that such a sale could affect the safe operation or decommissioning of the plant. Any sale of this sort would have to be approved by both the NRC and this Commission. That kind of issue is more appropriately addressed when and if such a sale is proposed.

The third change proposed by Mothers for Peace is that the membership on the DCISC be broadened to "include at least one member from the San Luis Obispo public to represent the affected community." This request would change the number of committee members from three to four, and the fourth member from San Luis Obispo would be required to meet the same experience criteria as the other committee members.

There is currently nothing to prevent a resident of the San Luis Obispo area, with the requisite background and experience in nuclear power facilities, from seeking nomination and appointment to the DCISC. Although a local resident on the committee might be able to promote a better relationship and understanding with the local community, the qualification requirement and the conflict of interest prohibition might significantly limit the pool of eligible nominees from the local area. Accordingly, the proposed change to add as a fourth member of the DCISC a member of the San Luis Obispo public should not be adopted.

The fourth proposal of Mothers for Peace is that the compensation provision in Section II.E. of Attachment A to Appendix C of D.88-12-083 be enforced. The only apparent reason for this proposal is that Mothers for Peace believe that the Commission should investigate whether the use of ratepayer funds for the DCISC is actually increasing safety at Diablo Canyon.

The compensation provision provides in pertinent part:


"Members of the committee shall be compensated in an amount established by the CPUC, to be commensurate with fees PG&E pays for similar services. The fees and expenses of the committee and its contractors shall be paid by PG&E and included in its ordinary rate base operating expenses. The fees and expenses shall not exceed $500,000 in the first year; thereafter, the $500,000 shall escalate at the same rate as the total price set for Diablo Canyon generation."

Although Mothers for Peace may disagree that the DCISC is providing the additional assurance of safety that was expressed in D.88-12-083, there is an ample record that the committee has been actively fulfilling its duties as reflected by the public meetings it holds in the San Luis Obispo area, the annual reports that it prepares, the recommendations that it makes to PG&E, and other activities of the committee members. To date, the DCISC has prepared 11 annual reports, and has made over 160 recommendations to PG&E. These recommendations are then followed up by the committee in subsequent meetings. The DCISC has also solicited the input of the San Luis Obispo community at its public meetings. Mothers for Peace has not presented any evidence that the DCISC's compensation or funding is not being used to promote an additional assurance of safety at Diablo Canyon. The fourth proposal of the Mothers for Peace should not be adopted.

The fifth proposal is for the Commission to require that the DCISC have an office and local staff in San Luis Obispo, and that the office in Monterey be closed. The recommendation to require that the committee establish its office in the San Luis Obispo area seems reasonable since the Diablo Canyon plant is located in that area. A local office, rather than an office located in Monterey, would make the DCISC more accessible to the residents of the area. Although the DCISC can be readily contacted by electronic mail, or by calling a toll free number, we are sensitive to the concern that the DCISC is not accessible. And, contrary to the DCISC's assertion that there has been no public request for an office in San Luis Obispo, the record in this proceeding includes public comments from at least 35 separate individuals at the public participation hearing conducted in San Luis Obispo, most of whom addressed either the DCISC specifically or Diablo Canyon generally and several of whom requested a local office. We agree with the Mothers for Peace that to the extent that the DCISC has an office, the location of the office should be in San Luis Obispo. We note that, to date, DCISC has apparently been operating out of the office of its counsel, in Monterey, and we appreciate that this decision was made in order to conserve funding. Moreover, after reviewing D.88-12-083 and Appendix C of that decision, it is not clear whether the work scope of the DCISC was intended as a full-time operation with a full-time staff. D.88-12-083 left the issue of how best to accomplish its mandate to the DCISC. With this fact in mind, we will deny Mothers for Peace's request that we order the DCISC to establish an office in San Luis Obispo. However, we strongly encourage the DCISC to reconsider its office location, and establish an office in San Luis Obispo instead. The fifth proposed change of the Mothers for Peace is not adopted.

Finally, Mothers for Peace requested that the Commission direct PG&E to resume funding of videotaping services for the DCISC meetings. Mothers for Peace maintains that this is a relatively inexpensive way to allow local residents to understand and participate in the DCISC process. ORA agrees. According to ORA, the cost of the videotaping services is approximately $2,000 per meeting. We agree with Mothers for Peace and ORA and direct PG&E to continue, or resume funding the videotaping of the DCISC meetings.

10.3 Compensation Issues

10.3.1 Executive Compensation

Greenlining filed testimony recommending, among other things, that the Commission encourage PG&E to link executive compensation to the level of philanthropic contributions, workforce diversity, and meeting performance goals related to Supplier Diversity.49 Greenlining suggests that PG&E's executive compensation is excessive and, in relation, its performance with respect to philanthropic contributions, workforce diversity and supplier diversity is inadequate.

Greenlining recommends that the Commission take several steps in order to mitigate these problems. First, Greenlining recommends that the Commission require PG&E to report annually on the total compensation package for each of PG&E's top ten executives, including the value of stock options, retirement plans, and any other compensation not currently reported under GO 77-K. Next, Greenlining recommends that the Commission scrutinize the composition of PG&E's Nominating and Compensation Committee. Third, Greenlining suggests that the Commission encourage PG&E to tie executive compensation to the level of philanthropic contributions and to meeting or exceeding supplier diversity and workforce diversity goals. Greenlining recommends that no bonuses should be paid if the goals of GO 156 are not met.50 Fourth, Greenlining also recommends that the Commission encourage, if not require, PG&E and other utilities that have failed to achieve 15% in minority contracts to allocate additional funds for technical assistance to minority business associations, with the amount of funding based, at least in part, on the level of the total compensation packages of PG&E's top executives.

Finally, Greenlining recommends that the Commission encourage PG&E to ensure that at least two percent of its pre-tax income is awarded to philanthropic causes, with at least 80% of this allocated to groups serving the low-income community. Greenlining believes that these measures would both mitigate the negative effects of excessive executive compensation, such as "wage creep" and provide needed assistance to the low-income community.

TURN also expressed concern about the amount of executive compensation at PG&E and the Holding Company.51 TURN argues that justifying increased payments by ratepayers for executive compensation using surveys of how other companies are paying their executives is circular, and that increases based on surveys and averages will beget further increases. (Exhibit 405, p.8.) TURN does not propose a disallowance in this GRC, but suggests that the Commission "require PG&E to file an executive compensation exhibit in the next GRC that includes compensation data contained on proxy statements for the last five years, identifying those costs for which ratepayer funding is requested, and justifying any increases in compensation above the labor escalator from the period of 2001 (the base year in this GRC) through the test year for the next GRC." (Id.)

As a preliminary matter, we note that employee compensation issues are appropriately within the scope of this GRC. To the extent that PG&E's base revenue requirement request includes revenues associated with employee compensation, it is required to identify its request, and demonstrate through clear and convincing evidence that its request is reasonable. For purposes of its compensation request in this proceeding, PG&E presented a Total Compensation Study prepared by Towers Perrin, and jointly managed by PG&E and ORA. The purpose of the study was to assess PG&E's compensation levels to determine PG&E's competitiveness relative to the market. The study defines total compensation as the combination of cash compensation (base salary plus short-term incentives52) and benefits (medical, dental, vision, life insurance, disability, pension, and savings plans). The study commenced in November 2000 and was completed in June 2001. (Exhibit 7, p.10-4.) The results of the study are presented in the table below.

Towers Perrin Total Compensation Study Results

Based on 141 benchmark jobs representing 51.5% of PG&E's employees,53 the study found that PG&E's total compensation was 105.17% of the survey average; in other words, PG&E pays 5.17% more than the average of firms surveyed.54 The Towers Perrin study results show that the compensation of PG&E's "Executive"55 class was 97.13% of market levels.

After giving the matter careful consideration, we decline to adopt Greenlining's recommendations. First, Greenlining and PG&E jointly filed a petition in another proceeding that addresses the total compensation of top executives. (Joint Petition dated January 30, 2004 in R.03-08-091.) We encourage PG&E to honor its voluntary pledge to provide such information, but we do not prejudge the outcome in the other proceeding, and decline to adopt Greenlining's recommendation in this proceeding to require PG&E to annually report on the total compensation package of its top ten executives.

Second, we are not persuaded to further scrutinize the composition of PG&E's Nominating and Compensation Committee. Greenlining vaguely claims that certain past behavior of one Committee member may demonstrate that he is not `in touch with the common man or ratepayer sentiment,' but Greenlining reaches no hard conclusion. We are not convinced by this equivocal assertion that we may or should meddle in the composition of the Board of Directors. We take no position on the composition of the Board as a whole, and we similarly decline to do so for particular committees.

Third, we decline Greenlining's request to encourage PG&E to tie executive compensation and philanthropic contributions. The California Supreme Court has upheld our policy of excluding charitable contributions from authorized rate recovery. (Pacific Tel. & Tel. Co. v. Public Util. Comm. (1965) 62 Cal. 2d 634, 669.) The corollary of our policy to exclude from rates the expenses incurred by a utility for its philanthropic practices is that this Commission will not, as part of its ratemaking responsibilities, interject itself into utility management decisions regarding corporate philanthropy. Therefore, we find no basis upon which to adopt any of Greenlining's recommendations.

Fourth, for the same reason as stated above, we decline to adopt Greenlining's recommendations to encourage PG&E to award at least two percent of its pre-tax income to low-income philanthropic causes, with at least 80% of this allocated to groups serving the low-income community.

Finally, we find TURN's request that we require PG&E to justify any increases in compensation above the labor escalator in the next GRC reasonable, as it will provide additional information on which to consider compensation issues. Although any party, including TURN, could extract this information itself from proxy statements, and submit an exhibit tied to a labor escalator, the burden of proof remains with PG&E. We recognize that the forces of supply and demand largely control compensation levels. Whether or not considering executive compensation studies based on other companies to test compensation levels for PG&E introduces circularity, compensation levels at competitive employers must be considered in order to promote the attraction, motivation and retention of utility employees. Surveys of other companies, while relevant, are not the only measure in determining whether or not the utility's requested compensation is just and reasonable. Therefore, while we will continue to require that the utility and ORA jointly conduct a compensation study, we will also adopt TURN's recommendation.

10.3.2 Retention Bonuses

In January 2004, PG&E Corporation awarded $84.5 million in retention bonuses to 17 executives pursuant to a Senior Executive Retention Program (SrERP). These bonuses vested only days after PG&E Corporation (the holding company), PG&E (the utility) and the Commission entered into a Modified Settlement Agreement (MSA) regarding PG&E's emergence from bankruptcy. (D.03-12-035.) The size and timing of these bonuses raised concerns regarding ratepayer impact and public policy.

We have given the issue special attention. We find that none of the $84.5 million has been, or will be, charged to ratepayers. We adopt additional accounting and reporting measures to further ensure that the $84.5 million is charged to shareholders, not ratepayers. We are appalled at the size of the award, and encourage the senior executives to voluntarily return any amounts not needed to meet the program's purpose, or that are unreasonable or inequitable. The matter is now in the hands of the 17 senior executives, PG&E's shareholders and the California Legislature.56

In December 2000, the PG&E Corporation Nominating and Compensation Committee of the Board of Directors57 adopted the PG&E Corporation SrERP. This program sought to retain 17 key officers of PG&E Corporation, PG&E and National Energy Group (NEG)58 through the difficult period of the energy crisis and the financial insolvency and bankruptcy of PG&E Corp.'s non-utility affiliates and PG&E's voluntary bankruptcy petition by the granting of restricted phantom stock units.

The SrERP was structured to promote retention of key corporate officers by the use of both time-based and performance-based incentives. Under the time-basis, one-half of the grants would vest on December 31, 2004. Under the performance-basis, the other half would vest only if PG&E Corporation's performance, measured by total shareholder return (TSR) on a cumulative basis, was at or above the 55th percentile of a comparator group of 11 companies for the four-year period from January 22, 2001 though December 31, 2004. Vesting could be accelerated by one year, to December 31, 2003, if at the end of 2003 PG&E Corporation's performance measured by TSR on a cumulative basis was at or above the 75th percentile of the comparator group.

The program required that the officer be employed on the vesting date, with some exceptions. The grant would be forfeited, however, in the event of an officer's resignation or termination for cause. To initiate the program, restricted phantom stock units of 3,044,600 shares were granted at a total value of $34,500,000 (i.e., an average of $11.33 per share). The grants were payable in cash during January of the year following vesting, unless an officer elected to defer payment.

PG&E Corporation met the performance results for accelerated vesting. The phantom restricted stock units vested on December 31, 2003 at $27.77 per share, for a total value of $84,548,542. In summary, the awards were:

SENIOR EXECUTIVE RETENTION PROGRAM

ELIGIBILITY LIST

LINE NO

TITLE

RETENTION PAID PER OFFICER

($MM January 2004)

1

Chairman, CEO, and President

$17.1

2

Sr. VP/President and CEO PG&E

10.0

3

Sr. VP and CFO

6.4

4

Three Sr. VPs

3.6

5

Four Sr. VPs

2.7

6

Subtotal (10 Officers)

54.8

NATIONAL ENERGY GROUP

7

EVP/President and CEO

7.4

8

Three Sr. VPs/Presidents and COOs

4.8

9

Three Sr. VPs

2.7

10

Subtotal (7 Officers)

29.8

TOTAL PROGRAM

11

Total (17 Officers)

84.5

PG&E Corporation and PG&E, like other companies, use these compensation programs to meet a number of objectives. Among those objectives are attraction, motivation and retention of employees.

According to PG&E, its compensation program for officers and key employees includes:

a. base compensation (also called base salary or annual salary);

b. short-term incentive plan (STIP - also called Performance Incentive Plan);

c. long-term incentive plan (LTIP);

d. supplemental retirement savings plan (SRSP);

e. supplemental executive retirement plan (SERP);

f. executive stock ownership plan (ESOP);

g. retention mechanisms - including SrERP; and

h. other (e.g., financial planning services, parking, health screenings, reimbursement for non-business related travel).

(PG&E Report Regarding Executive Compensation, February 10, 2004, pp. 2-3, 6-16.)

10.3.3 SrERP Is Funded By Shareholders,
Not Ratepayers

PG&E states that it only requests the costs of two components of employee compensation for inclusion in TY 2003 rates: base salary and STIP. (Id., p. 11.) To put this in perspective, we note that PG&E's total compensation levels are 105.17% of market average (i.e., 5.17% above market). (Towers Perrin Study, Exhibits 7 and 22 cited in PG&E Reply Brief, page 20.) We conclude that PG&E's total compensation for all employees is equivalent to the market level. Similarly, PG&E's executive compensation is 97.13% of market (i.e., 2.87% below market), (Id.,). We again conclude that PG&E's executive compensation is equivalent to the market level. We also note that executive compensation measured by this study does not include SrERP.

We have no information or reason to believe that Settling Parties added compensation components beyond base salary and STIP, and we find the overall Settlement reasonable without dissecting total and executive compensation elements of the Settlements. To the extent applicant only requests base salary and STIP, we only adopt those components in authorized rates. As a result, we find that TY 2003 rates do not include any amounts for retention programs.

Specifically regarding SrERP, shareholders will fund the entire $84.5 million. PG&E states that it has not sought, and states that it does not intend to seek, recovery of SrERP costs through its regulated utility revenue requirement. Moreover, PG&E says that: "PG&E Corporation shareholders have funded the $84.5 million Senior Executive Retention Program." (Id., p. 11.)

Nonetheless, estimated SrERP expenses were allocated and booked as accruals in 2001, 2002, and 2003 to recognize future expenditures, as required by generally accepted accounting principles, according to PG&E. PG&E says that these accruals were recorded in Account 923 for 2001 and 2002, and Account 426 for 2003. PG&E reports that most or all of Account 923 is considered "above-the-line" (i.e., generally eligible for recovery from ratepayers), while Account 426 is "below-the-line" (i.e., generally not eligible for recovery from ratepayers). Although the accruals in Account 923 were "above-the-line," PG&E states that these amounts were not used to develop PG&E's TY 2003 Revenue Requirement request. PG&E states that ORA's audit confirmed that PG&E excluded the cost of stock options and deferred compensation from its TY 2003 forecast.59 (Exhibit 306 9-33.)

Further, PG&E says that it included these expenses in certain memorandum and balancing accounts used to book generation costs for later ratepayer recovery. Specifically, PG&E asserts that it booked about $166,000 of accrued expenses in 2001, and $807,000 in 2002 (i.e., $973,000 for the two years).

PG&E states that these expense entries did not affect its CPUC-jurisdictional rates, or the amount customers paid in those years, however, because electric rates were "frozen." PG&E continues:


"Nevertheless, to assure the Commission that this $973,000 of [SrERP] Program expense is accounted for consistent with "below-the-line" treatment, PG&E is adjusting these entries out of the regulatory memorandum and balancing accounts in 2001 and 2002." (Supplemental Report, February 27, 2003, page 4.)

PG&E's claim that the expense entries did not affect ratepayers due to the rate freeze is not entirely accurate. PG&E is correct that the expense entries did not affect jurisdictional rates, or the amount customers paid in those years due to the rate freeze. However, under the rate freeze the difference between the revenues at the frozen rates levels and the actual costs of providing utility service, often referred to as "headroom," is used to pay for procurement and energy crisis - related undercollections. To the extent the expense entries associated with the SrERP were entered into Account 923 and other memorandum and balancing accounts, less revenues are available for headroom.

We concur that PG&E should adjust these accounts to ensure that there is "below-the-line" treatment. PG&E should include verification of such adjustment in an advice letter, as discussed further below.

PG&E also reports that the January 2004 SrERP payments were made from PG&E Corporation's cash on hand. PG&E says PG&E Corporation has billed PG&E $53.2 million for its share, and the amount is payable to PG&E Corporation upon emergence from bankruptcy. PG&E concludes that: "These amounts do not reduce 2003 `headroom'; nor are they included in the `regulatory asset' approved in the same decision [D.03-12-035]." (February 10, 2004 PG&E Report on Executive Compensation, page 23.)

This is fully consistent with our expectation and order regarding any retention bonuses related to PG&E Corporation, PG&E and NEG, including SrERP:


"For purposes of calculating the headroom for 2003 (including the amount beyond the $875 million cap), in no event may the litigation costs, bankruptcy-related costs or any costs of PG&E Corporation or of any other PG&E affiliate be included in the determination of the headroom amount nor may any retention bonuses of PG&E's directors, officers, managers or any other employees be included in such a determination." (D.03-12-035, Ordering Paragraph 4.)

This direction is similarly applicable to any SrERP payments made in 2004. Both the $84.5 million of SrERP expenses in general, and the $53.2 million charged to PG&E in particular, are ineligible for recovery from ratepayers via existing rates, the TY 2003 revenue requirement, TY 2003 rates, headroom, the regulatory asset, or any other ratemaking tools or rates that involve ratepayer funds.

PG&E states that it "will be making an advice letter filing at the Commission in the near future to demonstrate compliance with Ordering Paragraph 4." (Supplemental Report, February 27, 2004, page 5.) The advice letter filing should also show the adjustments from Account 923 described above. Further, it should track the SrERP payments made in January 2004 (whether or not the cash distributions were deferred) to demonstrate that they were not charged to ratepayers. Finally, it should include anything else reasonably necessary to ensure that ratepayers have not paid, and will not pay, any portion of the $84.4 million in SrERP expenses.

We expect staff to audit the accounting of the $84.5 million SrERP, including an audit as necessary of any or all of the items reported in the Advice Letter. We expect PG&E and PG&E Corporation to fully cooperate with staff.60 To the extent the audit results in a finding that any SrERP costs were included in PG&E's TY 2003 revenue requirement request, these amounts are subject to refund.

This audit should also assess any amounts allocated to NEG (now NEGT) that might find their way into gas or electricity rates. That is, PG&E reports that the cost of service for Gas Transmission Northwest (previously Pacific Gas Transmission) is determined by FERC. PG&E further reports that, to the extent NEGT's senior compensation costs are included in Gas Transmission Northwest's rates, PG&E's bundled core gas customers pay a portion of these costs through interstate gas pipeline charges to the interstate gas pipeline providing their service. This in some cases is Gas Transmission Northwest, either directly or through a broker, according to PG&E. However, PG&E states that:


"Gas Transmission Northwest's current rates were approved by the FERC in 1996 and would not include amounts related to the PG&E Corporation Senior Executive Retention Program or the Management Retention Programs." (February 10, 2004 Report, page 25.)

Based on PG&E's statement, we conclude that no SrERP costs are included in existing gas rates.61 The auditors should bring any contrary finding, should there be one, to our attention.

Going forward, we also direct PG&E to specifically identify for this Commission any SrERP costs included in any applications pending at FERC. PG&E should bring such information to our attention within 10 days of the mailing date of this decision for any applications now pending at FERC, and within 10 days of the filing of any future applications at FERC. This will permit us the opportunity to oppose any SrERP costs included by an applicant in any rate requests before FERC for FERC-jurisdictional rates related to PG&E's electric or gas transmission services.

Thus, with the reversal of the identified entries in Account 923 plus the audit ordered above, we are confident that SrERP costs will not be charged to ratepayers. SrERP costs were not in existing rates, are excluded from PG&E's 2003 GRC request, are not included in the adopted revenue requirement, are not in adopted rates, and will not be funded through headroom, the regulatory asset, or any other rates or ratemaking devices paid or funded by ratepayers.

Further, we will oppose any SrERP costs that are included by PG&E in any rate requests sought in proceedings before the FERC for FERC-jurisdictional rates related to PG&E's electric or gas transmission services.

10.4 GO 77-K Report and Dividend-
Related Advice Letter

Applicant states that, in order to ensure that stockholders-not ratepayers-pay retention grants, PG&E will list all such awards in its 2003 General Order (GO) 77-K Report and indicate the FERC account to which the payment will be billed. (February 10, 2004 Report, pages 22-23.) This will permit further verification that the amounts are "below-the-line" and funded by shareholders, not ratepayers.

We adopt PG&E's GO 77-K proposal, including the identification of the FERC account. The 2003 GO 77-K Report was due by March 31, 2004. In making its proposal here, applicant does not ask for an extension, and none is granted.

If, however, applicant's 2003 GO 77-K Report (as filed by March 31, 2004) did not include a list of the $84.5 million retention bonus awards and show the FERC account to which they were (or will be) charged, applicant shall provide that information by filing an amendment to its 2003 GO 77-K Report within 10 days of the mailing date of this decision. If the 2003 GO 77-K report did include data on the retention bonuses but not clearly identify the persons, retention bonus amounts and FERC account (e.g., if they were included in an alphabetical listing of over 3,000 employees and not easily identifiable), applicant shall provide the information in a separate table. The table should only list SrERP recipients, and be filed as an amendment to its 2003 GO 77-K Report.

In another proceeding, PG&E proposes that each public utility with annual operating revenues over $1 billion include an additional table in its annual GO 77-K report. (Joint Petition of PG&E and Greenlining To Ensure Full Corporate Transparency of Executive Compensation, dated January 30, 2004, filed in R.03-08-091.) The table would list the total compensation of the top executive officers of the utility's holding company and the utility. It would include both compensation received and compensation granted but not yet received, and would be verified by an independent auditor. In its joint petition, PG&E states:


"In the spirit of corporate transparency and leadership, PG&E commits, by June 30, 2004, to voluntarily provide such changes and reporting for the year ending December 31, 2003, and in the future without regard to any formal order from the CPUC." (Joint Petition, page 3.)

Without prejudging what we will do in R.03-08-091, we encourage PG&E to voluntarily include this additional table in its 2003 GO 77-K report, and to do so within 10 days of the mailing date of this decision.

Finally, PG&E is authorized to reinstate the payment of dividends on or after July 1, 2004, but may defer dividend payments until after July 1, 2005. (D.03-12-035, Appendix C, page 2, Recital Item E.)62 To further ensure that shareholders (not ratepayers) pay SrERP grants, we require PG&E to make an advice letter compliance filing within 10 days of the date that PG&E Corporation announces that it will reinstate the payment of dividends and knows its underlying total earnings and dividend rate. The advice letter should show the retained earnings63 (total and per share) before and after the award of the $84.5 million SrERP, and the effect, if any, on dividends (total and per share).64 If the earnings, dividends and charges for the $84.5 million in SrERP bonuses are not in the same period, the advice letter should identify the period when the $84.5 million was charged but apply the $84.5 million for illustrative purposes in the same period covered by the earnings and dividends. This will illustrate that shareholders have funded these bonuses, and the effect of shareholding funding. PG&E shall serve a copy of either the advice letter, or a notice of its availability, on the service list for this Phase 1 GRC proceeding.

10.4.1 Voluntary Return of Bonuses

With this explanation of ratemaking treatment plus the compliance filings, we are confident that ratepayers have not been, and will not be, obligated to fund any portion of the $84.5 million in SrERP expenses. Nonetheless, we question the cost and reasonableness of the program, and call on the 17 senior executives to voluntarily return some or all of the SrERP bonuses.

The record provides several examples of corporate executives taking what some believe to be excessive compensation, and the resulting societal conflict and frustration.65 Specifically regarding PG&E, individual Commissioners have spoken of their outrage at bankrupt companies paying enormous bonuses to retain officers, even when several of those officers are no longer with the company; PG&E's senior executives taking millions in bonuses at the same time that PG&E ratepayers are forced to pay billions of dollars to ensure that PG&E emerges from bankruptcy while PG&E shareholders forgo at least 13 quarters of dividends; and PG&E employees having to look on with likely extreme distaste at the very most senior PG&E management feathering their nests during this very difficult time.

Utilities and their parent companies have a unique role in the economy and society. They have special monopoly or quasi-monopoly status. They provide a critical and essential service to California residents and businesses. Their facilities are essential in maintaining and protecting public health and safety. In short, they are affected with the public interest, have a special public interest obligation and duty, and must be held to a high level of public trust.

In this light, utilities may seek recovery from ratepayers of each and every legitimate expense that provides benefit to ratepayers, and ratepayers must fund approved expenses. The SrERP provides no such benefit, however, as evidenced by applicant not even seeking recovery of SrERP costs from ratepayers.

Each utility may only charge ratepayers the just and reasonable costs necessary for the utility to provide safe, reliable and sufficient service. Similarly, we think that utilities and their holding companies should seek no more than just and reasonable amounts from shareholders.

The goal of the SrERP bonuses was to retain top officers during a difficult period, linking retention to time and performance. We question whether bonuses of over $80 million are needed to meet this goal. We question the necessity and reasonableness of paying $17.1 million alone to retain the top corporate officer. Even if some or all of these officers were retained, the difficult times continue with two companies not yet out of bankruptcy. Even when out of bankruptcy, the difficult times for PG&E ratepayers will continue.66

The record shows that socially responsible companies can do as well as or better than other corporations. For example, stocks of companies run more selflessly perform better than those run by companies where executives put themselves first. (Exhibit 656, page 15.) Similarly, a Governance Metrics International study demonstrates a positive correlation between good corporate governance and corporate profit. (Id.)

Corporate officers should lead by example. If officers expect employees not to seek or take more compensation than reasonable and equitable, officers should similarly not seek or take more than reasonable and equitable. We call on the 17 senior officers to return to the shareholders any portion-or all-of the retention bonuses that were, or are, unnecessary to accomplish the goal of the retention program, or are either unreasonable or inequitable. PG&E should file a report with the Commission within 90 days of its next annual shareholders meeting that states whether or not any or all officers returned some or all of their retention bonus awards, and identifies the individual(s) and amounts returned, if any.

Voluntary return of compensation is not unusual in California. For example, the Governors in each of the last three administrations (Governors Wilson, Davis, and Schwarzenegger) have voluntarily returned some or all of their compensation in pursuit of larger goals. Each Governor also asked for a voluntary return, where possible, of some percent of the compensation paid to each of his most senior appointees in order to pursue these larger goals.

The senior executives of PG&E can follow the leadership of California's senior executive and his top appointees, along with his two most recent predecessors and their top appointees. Each PG&E officer should examine the issue, and do whatever he or she determines to be the right thing. The matter is now in the hands of each PG&E senior officer, PG&E's shareholders and the Legislature.

10.4.2 Workforce Diversity

Pursuant to the ACR issued on February 17, 2003, and a subsequent request from the ALJ, Applicant submitted testimony on its workforce diversity over the last 10 years, and its present and future plans regarding workforce diversity on March 17, 2003 (Exhibit 14) and April 18, 2003 (Exhibit 16).

PG&E has a company policy of providing equal opportunity in employment and advancement for all qualified persons without regard to race, color, religion, age, sex, national origin, marital status, pregnancy, sexual orientation, gender identity, or any non-job related factor.  PG&E supports its diversity goals through an Affirmative Action Program.  Other company-wide efforts to promote diversity include the Officer Succession Plan, of which 35 % of the 2002 Officer candidates identified were women and 21 % of the 2002 officer candidates were minorities, and the Leadership Development Initiative (LDI), a 15-month, comprehensive mentoring and development program designed to accelerate employee leadership development skills, increase diversity, and prepare participants for advanced career opportunities at PG&E.  PG&E's current LDI class is 62 % women and contains 62 % minority representation.  PG&E also works with various community groups, educational institutions and diversity organizations in an effort to ensure that it continues to attract employees from a diverse labor pool.

PG&E reports that in the past 10 years, its efforts have significantly increased women and minority representation at the officer, director, and manager levels and in almost every employee category.  In 2002 minorities made up 40% of the PG&E's "Officer" category, 19.8% of the "Director" category, 20.1% of the "Manager" category, and 33.77% of the "Bargaining Unit" category, an increase in every category from the 1992 levels of 10.3%, 19.9%, and 9.2%, and 29.9%, respectively.67 Within the "Bargaining Unit" category, minorities made up 29.1% of the "Bargaining Unit - IBEW Physical"68 subcategory, and 35.1% of the "Bargaining Unit - ESC/IUSO"69 subcategory, increases from the 1992 levels of 25.2% and 34.4%, respectively.

The percentage of women employees in PG&E's workforce increased as well. The only category where the percentage of women decreased is the "Administrative and Technical"70 category, where representation by women decreased from 83.9 % in 1992 to 73.8 % in 2002. PG&E's diversity success has been recognized nationally by the U.S. Department of Labor.  PG&E Corporation has also been included in Fortune Magazine's list of "America's 50 Best Companies for Minorities" five times, most recently in 2002.

Greenlining acknowledges that PG&E is a leader in the area of workforce diversity, but maintains that certain minority groups remain underrepresented on PG&E's board and in top executives. Greenlining recommends that the Commission: (1) encourage PG&E to set workforce diversity goals such as achieving at least 50 % minorities on the board of directors and at least one-third minorities among the top 25 and top 100 employees by salary, (2) encourage PG&E to put more resources toward the development of qualified, experienced lower-level employees for promotion, (3) encourage PG&E to create a link between the company's success in the areas of workforce diversity and executive bonuses, and (4) require all utilities to file annual reports on workforce diversity, which would be presented and compared at a hearing conducted by the Commission.

We decline to adopt Greenlining's recommendations. We find that PG&E has in place formal, effective programs and policies designed to enhance its workforce diversity in a manner consistent with state and federal laws. Moreover, the record shows that these programs have been successful in continually increasing the diversity of PG&E's workforce over the past 10 years. Greenlining has not demonstrated that PG&E is out of compliance with its affirmative action and/or equal employment opportunity obligations or any rule or order of this Commission. To the contrary, Greenlining agrees that "PG&E has a record in the area of diversity that is generally quite good particularly relative to other companies." (Exhibit 656, p.4.) PG&E has demonstrated that it complies with all relevant federal, state and local laws, regulations and ordinances related to workforce diversity, including Executive Order 11246, which requires all federal government contractors to include in every government contract an agreement not to discriminate against applicants and employees on the bases of race, color, religion, sex or national origin. PG&E recognizes that "success in workplace diversity does not happen by accident but rather is the result of concerted efforts" (Exhibit 14, p.2-1.)

Based on the record in this proceeding, and our intention to require PG&E to update its workforce diversity statistics in PG&E's next GRC, we find Greenlining's request for annual reports on workforce diversity unnecessary and duplicative. We find no compelling reason to suggest changes to PG&E's workforce diversity program. Naturally, we will continue our ongoing review in this area, and in its next GRC application, PG&E should update the workforce diversity statistics presented in this GRC.

10.5 Service Drop Maintenance

Adams filed testimony objecting to PG&E's current practices of: (1) requiring customers to trim vegetation growing in the vicinity of a "residential electrical service lateral or drop wire," and (2) charging customers for trimming around service drops. Adams maintains that requiring customers to trim vegetation in the vicinity of service drops is inherently risky, and endangers both the safety of the individual and the reliability of the service drop. Adams argues that the alternative approach, charging customers for tree trimming services, is also unsafe because it gives customers a financial incentive to undertake the trimming themselves. Adams requests that the Commission require PG&E to cease its current practice of charging customers for trimming around service drops.

PG&E responds that the responsibility for maintaining services71 or service wire is clearly set forth in Electric Rule 16 of PG&E's tariffs, which requires customers to maintain clearance around services. PG&E maintains that Adams' request would require changes to the Commission's General Order 95 as well as Electric Rule 16, subjects that are currently part of R.01-10-001, the Commission's ongoing Rulemaking considering revisions to GO 95 and GO 128.

10.5.1 Discussion

The Commission's General Order 95 applies to owners of electrical systems and sets forth rules regarding overhead electric line construction, maintenance, and safety. Included among the rules in GO 95 is Rule 35, which addresses tree clearance requirements and responsibilities. As PG&E correctly notes, Adams' request would require a change to Rule 35 of GO 95.

While we understand and appreciate Adams' concern for the safety of PG&E's customers, Adams request would require changes to GO 95 and Electric Rule 16, issues that Adams admits are the subject of another ongoing proceeding. We do not adopt Adams' recommendations.

10.6 Adopted Rate Changes

In its application, PG&E stated that it was not seeking a change in total electric rates for the increased revenue requirement it was requesting due to the fact that bundled electric rates remained "frozen." PG&E stated that although electric rates were not expected to increase immediately if the Commission approved its forecast, future electric rates may be affected. As noted above, D.04-02-062 adopted a Rate Design Settlement implementing, on an interim basis, rate reductions contemplated in D.03-12-035, the Commission's Decision approving a Modified Settlement Agreement in PG&E's bankruptcy proceeding. D.04-02-062 provides that the final resolution of rate design issues related to the Modified Settlement Agreement will be litigated in Phase 2 of PG&E's GRC (the instant proceeding).72 The rate reductions provided in the Rate Design Settlement were based, on applicant's "best estimates of its revenue requirements" (D.04-02-063, p. 12), including, in part, on an assumption that the Settlements filed in this proceeding would be approved and that applicant's requested contribution to the Retirement Plan trust would be granted. Therefore, the increase in PG&E's revenue requirements for electric distribution we authorize today has already been reflected, and to a large degree, offset, as part of the revenue requirement reductions approved in D.04-02-062, resulting in minimum changes to current electric rates.

D.04-02-062 provides that with a final decision in Phase 1 of the GRC, PG&E shall revise component revenue requirements for Nuclear Decommissioning, Public Purpose Programs, Distribution, and non-fuel Retained Generation. (D.04-02-062, p. 12.) D.04-02-062 also directs PG&E to implement an approximate $18 million annual revenue requirement increase for Direct Access customers and prepare associated billing changes which were deferred in D.04-02-062 until the final Phase 1 decision. (D.04-02-062, Conclusion of Law 4.)

D.04-02-062 authorizes PG&E to adjust its electric and distribution rates as follows:


"In the event that additional rate changes are needed prior to the adoption of rates in Phase 2 of PG&E's 2003 GRC due to changes in PG&E's total revenue requirement, such as would occur if FERC refunds or El Paso settlement refunds are received, such additional interim changes will be implemented based on the following principles: Changes in the revenue requirement for any given component will be recovered as an equal percent change to the component that is changing. For example, if the distribution revenue requirement decreases relative to the revenue at then-current distribution rates, PG&E would lower all distribution rate components by the percent required to achieve the necessary reduction. Total rates would then be reduced commensurately. Similarly, if the generation revenue requirement increases, generation rates for all bundled service customers would be increased on a system average percentage basis and total rates would increase commensurately. The DA CRS cap shall not be modified solely as a result of such interim revenue requirement changes, but accruals of CRS cap undercollections may be affected, consistent with existing Commission policies and this Agreement." (D.04-02-063, Attachment A, Section 10, p. 5.)

Consistent with the Commission's decision in the Gas Accord, prior gas cost allocation proceedings, and the Rate Case Plan, gas rate design for the gas distribution revenue requirement is determined in PG&E's BCAP. Therefore, the gas revenue requirement adopted herein will be allocated to customer classes according to PG&E's most recent BCAP.

10.7 Rulings of the Administrative Law Judge

The rulings of the ALJ regarding admissibility of evidence, access to computer models, status as an intervenor, and status regarding intervenor compensation are affirmed.

41 By ruling dated December 6, 2001, the Chief ALJ determined that the Petition to Modify D.88-12-083 should be addressed in A.00-11-038. 42 The Motion to Adopt the Stipulation was filed pursuant to Rule 51. As required by Rule 51, on April 4, 2003, PG&E held a noticed settlement conference to discuss the terms of the stipulation. 43 Pursuant to Pub. Util. Code § 1708.5, interested persons may petition the Commission to adopt, amend, or repeal a regulation. The legislative intent underlying this statute construes a regulation to be a rule of general applicability and future effect. 44 For the reasons stated in the ALJ's ruling of February 22, 2002, we confirm the ruling that PSR's January 17, 2002 pleading shall be treated as a response to the petition of the Mothers for Peace, and that PSR's pleading shall not be considered as a petition filed pursuant to Pub. Util. Code § 1708.5, nor will PSR's request for relief be entertained in connection with the petition filed by the Mothers for Peace. 45 Similar safety issues were raised by Mothers for Peace in A.96-03-054, and rejected by the Commission in D.97-05-088. (See 72 CPUC2d at pp. 597-599.) 46 The CEC notes that, pursuant to Public Resources Code section 25201, of the five CEC Commissioners, one member is appointed from the public at large, but is not required to have any specific energy expertise. 47 A third agreement, that, "the Commission should plan to hold one of the public participation hearings for the PG&E 2003 GRC in San Luis Obispo" is not discussed because it has already been effectively approved and is therefore moot. The Commission held a public participation meeting in A.02-11-017 in San Luis Obispo on August 27, 2003. 48 If the joint nominating bodies cannot agree upon the three nominees, each nominating body is to submit to the other two a list of two nominees. Each nominating body can then strike any one of the four names proposed on the other two nomination lists. The names remaining after the exercise of this right to strike are then submitted to the appointing authority. 49 In response to a request from PG&E, at the prehearing conference on May 21, 2003, the ALJ struck portions of Greenlining's initial testimony related to GO 156 exclusions, and directed that those issues be addressed in R.03-02-035, the Commission's Rulemaking into revisions to GO 156. Greenlining filed a motion for expedited motion for full commission decision on inclusion of philanthropy and supplier diversity testimony in this GRC. In this decision we affirm the ALJ's ruling striking Greenlining's testimony regarding exclusions and deny Greenlining motion. 50 GO 156 implements Pub. Util. Code §§ 8281-8286, and establishes goals for increasing the participation of women, minority, and disabled veteran business enterprises in utility procurement. 51 TURN indicates that it is less concerned about the Holding Company if the Commission adopts ORA's recommendations regarding the allocation of Holding Company costs. 52 For PG&E, short-term incentives are represented by the Performance Incentive Plan and are calculated based on a target incentive award of 50 percent of the maximum potential payout. 53 Excluding nuclear and temporary employees. 54 ORA noted that the Commission has adjusted total compensation to reflect no more than 5% above market in previous PG&E GRCs, specifically, D.95-12-055 (63,CPUC 2d, p.633) and D.92-12-057 (47 CPUC 2d, p. 304), in which the Commission reduced PG&E's request for total compensation from 7.93% to 5% and from 8.5% to 5%, respectively, however, based on the surveys results finding that PG&E's total compensation is 5.17% above market levels, ORA did not recommend that the Commission adjust PG&E's request. 55 The total population of the Executive class used in the study was 20 positions, of which 12 were included as the benchmark sample. Exhibit 7, p. 10-7 (page 5 of the Towers Perrin Total Compensation Study Report) lists the Total Compensation associated with the 20 positions in PG&E's Executive category as $7,562,580. 56 The Assembly is considering a bill that would (a) require any expense resulting from a bonus paid to an officer or employee of an insolvent public utility to be borne by shareholders and not ratepayers, and (b) provide that no income tax deduction be allowed for the costs paid or incurred during the taxable year by a public utility for any bonus paid to an officer or employee during the period the utility is insolvent. (Assembly Bill 2303, introduced on February 19, 2004, by Assembly Member Leno.) 57 According to PG&E, it is now known as the PG&E Corporation Nominating, Compensation, and Governance Committee of the Board of Directors. 58 This affiliate performs electric power generation and natural gas transmission. As it seeks to emerge from bankruptcy, the bankruptcy court judge has authorized a name change to National Energy & Gas Transmission, Inc. 59 ORA notes that the cost of stock options and deferred compensation totaled $3.9 million in 2002. 60 This is required of all public utilities and their holding companies pursuant to the Public Utilities Code and Commission decisions, but we emphasize here the importance of this routine obligation. (See, e.g., Pub. Util. Code §§ 314, 581, 582, 584, 701.) 61 This statement, along with all statements in PG&E's February 10 and February 27 reports, was verified by an officer of PG&E as being truthful, and declared as such under penalty of perjury. 62 "PG&E has told the financial community that it does not expect to pay a common stock dividend before the second half of 2005." (D.03-12-035, mimeo., page 13.) 63 After an audit by PG&E's independent certified public accountants. 64 We would expect the difference in retained earnings to be about $0.21 per share based on $84.5 million and 400 million shares. (PG&E Corporation's Consolidated Quarterly Report for the period ending December 31, 2003, shows 401 million weighted average common shares outstanding; see: http://investor.pgecorp.com/quarterly.cfm.) At this cost per share, a shareholder with 1,000 shares will forego $210 in retained earnings as a result of the SrERP awards. 65 For example, Richard Grasso of the New York Stock Exchange forced to resign after disclosure of $140 million compensation; David Coulter at Bank of America taking a $100 million severance package; Jack Welch of General Electric taking a pension with a guaranteed rate of return of more than 12% per year; John Snow of CSX Corporation and Donald Carty of American Airlines taking large pensions; Ken Lay of Enron taking $31 million total compensation in 2002 (such that removing his compensation alone reduced the average from $8.5 million to $6.3 million in a sample of Chairmen and CEOs from the Hewitt Study used by PG&E Corporation's Nominating and Compensation Committee); Jeffrey Skilling of Enron taking $30.6 million total compensation in 2002 (such that removing his compensation alone reduced the average from $6.2 million to $3.8 million in a sample of the next level executive down from Chairmen and CEO in the Hewitt Study used by PG&E Corporation's Nominating and Compensation Committee). (Exhibit 657, p. 5 and 11; Greenlining Opening Brief, p. 4-8.) 66 For example, ratepayers will be obligated to pay relatively high rates by giving up any possibility of refunds of up to about $4 billion in headroom. Further, ratepayers must fund the $2.21 billion regulatory asset for up to 9 years. The Commission staff estimates that the net present value of the estimated ratepayer contribution to the settlement from headroom and the regulatory asset is about $7.1 billion. (D.03-12-035, mimeo., page 45.) Ratepayers must also fund a return on equity of no less than 11.22% for several years. 67 The data is presented in Table 1-1 of Exhibit 16. 68 Includes employees represented by the International Brotherhood of Electric Workers (IBEW) Local 1245. Job classifications within this category include line workers, equipment operators, and system operators. 69 Includes employees represented by the Engineers and Scientists of California (ESC) and the International Union of Security Officers (IUSO). Job classifications include Electric Distribution Engineer, Gas Distribution Engineer, Engineering Estimator, Mappers and Security Officers. 70 The "Administrative and Technical" category includes non-bargaining unit, non-exempt employees that are primarily clerical. This category includes small numbers of employees in technical positions such as senior inspector and aircraft mechanic. This category does not include any engineer positions or other exempt positions. 71 As defined by PG&E, "services" are the overhead wires that run from the low voltage connection on the distribution transformer to the customer's weatherhead and/or meter. 72 D.04-02-062 provided for a final resolution of certain issues that would otherwise have been litigated in Phase 2. (See D.04-02-062.)

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