PCG

Business Context and Reporting Period

This Form 8-K, dated April 18, 2003, reports on the Test Year 2003 General Rate Case (GRC) proceeding for Pacific Gas and Electric Company (PG&E) before the California Public Utilities Commission (CPUC). The filing details the Office of Ratepayer Advocates (ORA) report issued on April 11, 2003, regarding PG&E's request for rate adjustments.

Key Financial Metrics and Rate Case Details

The filing focuses on proposed revenue adjustments rather than historical financial performance. Key figures from the ORA report versus PG&E's requests include:

• Electric Base Revenues: ORA recommends a $170 million increase; PG&E requested $447 million.
• Gas Base Revenues: ORA recommends a $3.7 million increase; PG&E requested $105 million.
• Utility Retained Generation: ORA recommends a $2 million decrease; PG&E requested a $149 million increase.
• Administrative and General (A&G) Expenses: ORA forecasts $188 million less than PG&E's estimate, citing rejected pension contributions and holding company costs.
• Depreciation Expenses: A $123 million difference exists, primarily due to the ORA rejecting PG&E's request for higher electric depreciation rates for aging infrastructure.

Material Changes and Discrepancies

The primary material change is the significant reduction in the ORA's recommended revenue increase compared to PG&E's application. The ORA attributes the $277 million gap in electric revenue requests largely to A&G expenses (35% of the total difference) and depreciation expenses (23% of the total difference). Additionally, the ORA recommends delaying the next test year GRC to 2007 instead of 2006 to stagger proceedings with Southern California Edison.

Outlook, Risks, and Management Commentary

Attrition Revenue Adjustment: Both parties agree on the methodology for attrition adjustments for 2004 and 2005, though the ORA's calculated amounts are lower due to its lower expense and capital expenditure forecasts.

• Electric Distribution: PG&E projects $64 million (2004) and $85 million (2005); ORA projects $58 million and $83 million.
• Gas Distribution: PG&E projects $26 million (2004) and $32 million (2005); ORA projects $23 million and $29 million.

Risks: The CPUC may accept all, part, or none of the ORA's recommendations. PG&E states that an adverse decision, if it prevents the utility from lowering expenses to match approved base revenues while maintaining safety and reliability, would adversely affect its ability to earn its authorized rate of return for 2003 through 2006. Timeline: Evidentiary hearings are scheduled for summer 2003, with a proposed decision in December 2003 and a final CPUC decision expected in February 2004. Any approved changes would be effective retroactively to January 1, 2003.

Investor Verification Checklist

• Verify the final CPUC decision on the 2003 GRC, expected in February 2004, to determine the actual approved revenue increase.
• Monitor PG&E's ability to reduce A&G and depreciation expenses to align with the ORA's lower forecasts if the CPUC adopts them.
• Confirm the impact of the delayed 2007 GRC schedule on future rate case planning and capital expenditure recovery.
• Assess the risk to the authorized rate of return for the 2003-2006 period if expense reductions cannot be achieved without compromising system reliability.