This excerpt taken from the PCG 8-K filed Oct 28, 2005.
Risks Related to the Utility
If either or both of the CPUCs approval of the Settlement Agreement and the confirmation order are overturned or modified on appeal, PG&E Corporations and the Utilitys financial condition and results of operations could be materially adversely affected.
On December 18, 2003, the CPUC approved the Settlement Agreement and, on December 22, 2003, the bankruptcy court confirmed the Utilitys plan of reorganization, which fully incorporates the Settlement Agreement as a material and integral part of the plan. On March 16, 2004, the CPUC denied applications that had been filed by several parties seeking rehearing of the CPUCs decision approving the Settlement Agreement. On April 15, 2004, two of these parties, CCSF and Aglet Consumer Alliance, or Aglet, filed petitions for review of the CPUCs decisions with the California Court of Appeal. Three California state senators have filed a brief in support of the CCSF and Aglet petitions. The California Court of Appeal has not yet acted on the petitions.
In addition, appeals of the confirmation order were filed in the District Court by the two CPUC commissioners who did not vote to approve the Settlement Agreement, or the dissenting commissioners, and a municipality. On July 15, 2004, the District Court dismissed the appeals filed by the dissenting commissioners. The dissenting commissioners have appealed the District Courts order with the Ninth Circuit. The municipalitys appeal remains pending at the District Court.
If the bankruptcy courts confirmation of the Utilitys plan of reorganization or the Settlement Agreement is overturned or modified on appeal, PG&E Corporations and the Utilitys financial condition and results of operations, and the Utilitys ability to pay dividends or otherwise make distributions to PG&E Corporation, could be materially adversely affected.
PG&E Corporations and the Utilitys financial viability depends upon the Utilitys ability to recover its costs in a timely manner from the Utilitys customers through regulated rates and otherwise execute its business strategy.
The Utility is a regulated entity subject to CPUC jurisdiction in almost all aspects of its business, including the rates, terms and conditions of its services, procurement of electricity and natural gas for its customers, issuance of securities, dispositions of utility assets and facilities and aspects of the siting and operation of its electricity and natural gas distribution systems. Executing the Utilitys business strategy depends on periodic CPUC approvals of these and related matters. The Utilitys ongoing financial viability depends on its ability to recover from its customers in a timely manner the Utilitys costs, including the costs of electricity and natural gas purchased by it for its customers, in the Utilitys CPUC-approved rates and its ability to pass through to its customers in rates the Utilitys FERC-authorized revenue requirements.
The Utilitys financial viability also depends on its ability to recover in rates an adequate return on its capital structure, including long-term debt and equity. During the California energy crisis, the high price the Utility had to pay for electricity on the wholesale market, coupled with its inability to fully recover its costs in retail rates, caused the Utilitys costs to significantly exceed its revenues and ultimately caused the Utility to file a petition under Chapter 11. Even though the Settlement Agreement and current regulatory mechanisms contemplate that the CPUC will give the Utility the opportunity to recover its reasonable and prudent future costs in its rates, there can be no assurance that the CPUC will find that all of the Utilitys costs are reasonable and prudent or will not otherwise take or fail to take actions to the Utilitys detriment.
In addition, there can be no assurance that the bankruptcy court or other courts will implement and enforce the terms of the Settlement Agreement and the Utilitys plan of reorganization in a manner that would produce the economic results that PG&E Corporation and the Utility intend or anticipate. Further, there can be no assurance that FERC-authorized tariffs will be adequate to cover the related costs. If the Utility is unable to recover any material amount of its costs through its rates in a timely manner, PG&E Corporations and the Utilitys financial condition and results of operations would be materially adversely affected.
The Utility may be unable to purchase electricity in the wholesale market or to increase its generating capacity in a manner that the CPUC will find reasonable or in amounts sufficient to satisfy the Utilitys obligation to meet the electricity needs of its customers and the CPUCs electricity resource adequacy requirements.
The Utilitys residual net open position (i.e., that portion of the Utilitys electricity customers demand not satisfied by electricity that the Utility generates or has under contract, or by electricity provided under the DWR allocated contracts) is expected to grow over time, as discussed in the Risk Management section of this MD&A above. In addition, unexpected outages at the Utilitys Diablo Canyon power plant or any of its other significant generation facilities, or a failure to perform by any of the counterparties to the Utilitys electricity purchase contracts or the DWR allocated contracts, would immediately increase the Utilitys residual net open position.
As existing electricity purchase contracts expire, sources of electricity otherwise become unavailable or demand increases, the Utility will purchase electricity in the wholesale market. These purchases will be made under contracts priced at the time of execution or, if made in the spot market, at the then-current market price of wholesale electricity. There can be no assurance that sufficient replacement electricity will be available at prices and on terms that the CPUC will find reasonable, or at all. The Utilitys financial condition and results of operations would be materially adversely affected if it is unable to purchase electricity in the wholesale market at prices or on terms the CPUC finds reasonable or in quantities sufficient to satisfy the Utilitys residual net open position.
California investor-owned electric utilities are required to achieve an electricity planning reserve margin of 15% to 17% in excess of peak capacity electricity requirements by June 1, 2006. In order to meet electricity resource adequacy requirements, the Utility may develop or acquire new generation facilities. The development or acquisition of additional generation facilities would require the Utility to incur significant additional capital expenditures or other costs and may require the Utility to issue additional debt, which it may not be able to issue on reasonable terms, or at all. The CPUCs December 16, 2004 decision approving the Utilitys LTPP prohibits the Utility from recovering costs in excess of the Utilitys projection of its initial capital costs included in the Utilitys bid for Utility-owned generation. If the Utility is not able to recover a material part of the cost of developing or acquiring additional generation facilities in the Utilitys rates in a timely manner, PG&E Corporations and the Utilitys financial condition and results of operations would be materially adversely affected.