Pacific Gas & Electric (PCG)

Cost of Capital Proceedings

        The CPUC generally conducts an annual cost of capital proceeding to determine the Utility's authorized capital structure and the authorized rate of return that the Utility may earn on its electricity and natural gas distribution and electricity generation assets. The cost of capital proceeding establishes the percentage components that common equity, preferred equity and debt will represent in the Utility's total authorized capital structure for a specific year. The CPUC then establishes the authorized return on common equity, preferred equity and debt that the Utility will have the opportunity to collect in its authorized rates. For 2005, this proceeding also set the authorized rate of return for the Utility's gas transportation and storage assets.

Cost of Capital Proceedings

        The CPUC determines the rate of return that the Utility may earn on its electricity and natural gas distribution, natural gas transmission and storage, and electricity generation assets. In December 2004, the CPUC issued a final decision approving a return on common equity, or ROE, for the Utility of 11.22% for 2004 and 2005, which is consistent with the Settlement Agreement. The Settlement Agreement provides that from January 1, 2004 until certain credit ratings are achieved, the Utility's authorized ROE will be no less than 11.22% per year. The Settlement Agreement also provides that the authorized equity ratio of the Utility's capital structure for ratemaking purposes will not be less than 52%, except that for 2004 and 2005 it may not be less than 48.6%. The decision authorizes the following cost of capital for 2004 and 2005:

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        The Utility's annual revenue requirement for 2004 decreased by approximately $105 million compared to the CPUC last authorized revenue requirement, as a result of interest savings associated with the Utility's Chapter 11 exit financing. This decision did not have an impact on the Utility's financial results for 2004 because the Utility has adjusted its operating revenues for the difference between its last authorized rate of return on rate base of 9.24% in 2003 and the lower rate of return on rate base of 8.53% in 2004 that has now been approved.