Pacific Gas & Electric (PCG)

Electricity Procurement Costs and Long-Term Electricity Procurement Plan

As a regulated utility, the Utility is obligated to procure electricity to meet the needs of its customers. The amount of electricity needed to meet the demands of customers, plus applicable reserve margins, that is not satisfied from the Utility’s own generation facilities, the Utility’s electricity purchase contracts, or from the DWR’s electricity purchase contracts allocated to the Utility’s customers, is referred to as the Utility’s residual net open position. Electricity procurement costs significantly impacted the Utility’s results of operations and financial condition during the California energy crisis. California legislation has been enacted which allows the Utility to recover its reasonably incurred wholesale electricity procurement costs and includes a mandatory rate adjustment provision that requires the CPUC to adjust rates on a timely basis to ensure that the Utility recovers its costs. Accordingly, during 2004, electricity procurement costs did not have the same impact on the Utility’s results of operations that they had during the California energy crisis. The level of electricity procurement costs and revenues continue to have an impact on cash flows.

In December 2004, the CPUC issued a final decision which approved, with certain modifications, each California investor-owned electric utility’s long-term electricity procurement plan, or LTPP, in order to authorize each utility to plan for and procure the resources necessary to provide reliable service to their customers for the ten-year period 2005-2014. The utilities are required to solicit bids from providers of all potential sources of new generation (e.g., conventional or renewable resources to be provided under utility owned turnkey developments, or under third party power purchase agreements) through a single, open, transparent and competitive request for offers, or RFO, process, although a utility can tailor a RFO to meet specific resource needs.

Electricity Procurement Costs and Long-Term Electricity Procurement Plan

        As a regulated utility, the Utility is obligated to procure electricity to meet the needs of its customers. The amount of electricity needed to meet the demands of customers, plus applicable reserve margins, that is not satisfied from the Utility's own generation facilities, the Utility's electricity purchase contracts, or from the DWR's electricity purchase contracts allocated to the Utility's customers, is referred to as the Utility's residual net open position. Electricity procurement costs significantly impacted the Utility's results of operations and financial condition during the California energy crisis. California legislation has been enacted which allows the Utility to recover its reasonably incurred wholesale electricity procurement costs and includes a mandatory rate adjustment provision that requires the CPUC to adjust rates on a timely basis to ensure that the Utility recovers its costs. Accordingly, during 2004, electricity procurement costs did not have the same impact on the Utility's results of operations that they had during the California energy crisis. The level of electricity procurement costs and revenues continue to have an impact on cash flows.

        In December 2004, the CPUC issued a final decision which approved, with certain modifications, each California investor-owned electric utility's long-term electricity procurement plan, or LTPP, in order to authorize each utility to plan for and procure the resources necessary to provide reliable service to their customers for the ten-year period, 2005-2014. The utilities are required to solicit bids from providers of all potential sources of new generation (e.g., conventional or renewable resources to be provided under utility owned turnkey developments, or under third party power purchase agreements) through a single, open, transparent and competitive request for offers, or RFO, process, although a utility can tailor a RFO to meet specific resource needs.

        The decision notes that there is a great degree of uncertainty as to the amount of load the existing utilities will be responsible for serving in the future. Among other provisions, the decision:

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Permits the utilities to recover their net stranded costs of all new fossil-fuel and renewable generation resources from all customers, including departing customers, for a period of 10 years or the life of the power purchase agreement, whichever is less;



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Extends the mandatory rate adjustment mechanism for wholesale electric procurement costs under California law, which otherwise would end on January 1, 2006, to the length of a resource commitment or 10 years, whichever is longer;

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Prohibits the utilities from recovering initial capital costs in excess of their final bid price for utility-owned generation resources; and



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Recognizes that the full cost (or debt equivalence) of power purchase agreements should be considered when evaluating energy contracts.

For more information, see "Regulatory Matters" below.