Safety Concerns Drive Nearly $900M Increase for PG&E

Subject to several minor modifications, the California Public Utilities Commission has approved a proposed settlement governing a new three-year rate plan for Pacific Gas & Electric Company (PG&E). The commission related that the parties had stipulated to a cumulative increase in the utility's revenue requirement of $893 million from 2017 to 2019. While obviously not an inconsequential amount, the commission said that the increase set forth in the agreement was a significant reduction from the company's final request for $1.156 billion in rate relief, not to mention its original application, which sought to implement a rate hike of $1.336 billion. The commission concurred with the signatory parties that the utility needed a higher revenue requirement in order to cover ongoing investments in safety, reliability, and emergency preparedness enhancements. 

The settlement, which reflects a consensus agreement between PG&E and 14 other parties, provides for a net increase of 1.1% in 2017 revenues over the company's 2016 revenue requirement. As prescribed in the stipulation, the utility willincrease its electric generation rates by $153 million in 2017, but that increase will be offset by decreases in its electric and natural gas distribution rates of $62 million and $3 million, respectively, for a total increase of $88 million in 2017. 

There are no similar offsets in 2018 and 2019, however, with rates rising in both years by substantially more than in 2017. The parties agreed that PG&E should be permitted to raise its rates by $444 million, or 5.5%, in 2018, followed by $361 million in additional revenues in 2019, an increase of 4.3%. 

In presenting its updated three-year rate plan, PG&E emphasized its continuing efforts to address past safety lapses, especially with regard to the fallout from a gas pipeline explosion in San Bruno, California, in September of 2010, which resulted in several deaths and an entire neighborhood being decimated. In the aftermath of that incident, it was revealed that the utility had falsified certain inspection records, failed to keep system maps updated, and engaged in lax maintenance practices, among other infractions of pipeline safety regulations. 

The commission accepted some blame as well, conceding that it had not been as diligent in its oversight of the utility as it should have been. The commission asserted that in the intervening years, both it and the state legislature have rededicated themselves to assuring that public utility plant and facilities are operated in a safe manner and are managed by officials who appreciate that their corporate governance structures must prioritize safety above all else. 

The commission noted that two pieces of legislation have been passed since the San Bruno explosion. The first, Senate Bill 705, was enacted in 2011, while the second, Senate Bill 900, became law in 2014. According to the commission, both were targeted at strengthening safety practices, instituting enhanced data tracking and analysis requirements, fortifying system monitoring and inspection standards, and implementing improved emergency planning and preparedness protocols. 

It was just such safety matters that PG&E claimed its rate filing was designed to address. More particularly, the company averred that, with respect to its natural gas operations, additional funding was needed to enable it to replace and/or upgrade aging gas pipeline plant, introduce new surveying technology, institute advanced corrosion control applications, and craft more effective emergency response programs. The utility drew special attention to its plans to accelerate its pipeline inspection and leak survey schedule from a five-year cycle to a four-year timeline. 

On the electric side of the equation, the company reported that it wanted to pursue such additional safety measures as undergrounded utility lines, circuit upgrades, enhanced vegetation management, system hardening, and integration of new digital information technology. The utility posited that in conjunction with its general grid modernization initiative, those endeavors would greatly increase the efficiency of its emergency centers. 

In reviewing the proposed stipulation, the commission commended the utility for bringing together so many parties and for negotiating appropriate compromises. The commission said it was especially pleased to see that PG&E and the other interested stakeholders had included more risk assessment analyses in their various filings. The commission affirmed the value of such risk assessments in furthering the state's safety and reliability goals. 

In particular, the commission observed that, as instructed in its last general rate case, PG&E had demonstrated how incorporating risk management factors in the integrated planning process can form a stronger foundation for system safety and compliance projects. The commission added that such risk assessments clearly are vital to proper prioritization of new project proposals. 

Besides affirming the link between risk analyses and safety improvements, the commission also underscored the link between safety and executive compensation. The commission statedthat the utility is now giving much greater weight to safety strides when calculating any bonuses or incentive pay due an executive or other employee. 

More specifically, the commission noted with favor that over the last four years, PG&E's total safety metric has risen from a 10% weighting to a 50% weighting. The utility attested that safety matters have become the "single biggest focus" of its short-term incentive plan (STIP), under which certain employees are awarded extra compensation for achieving various operational and financial goals. 

Although some parties initially expressed concern that no individual safety benchmark outweighed any of the individual financial performance metrics, the commission ruled that the company had shown significant progress in emphasizing safety as a component of STIP rewards. It therefore declared itself satisfied with the proportionate weight accorded safety measures. 

The commission also pointed out that under the new rate agreement, PG&E stockholders alone will be responsible for all STIP compensation paid to personnel on the executive level. And, it said, shareholders also must cover all stock-based incentive payments made under the utility's long-term incentive plan, regardless of the employee's rank. Re Pacific Gas & Electric Co., Decision 17-05-013, Application 15-09-001, May 11, 2017 (Cal.P.U.C.).