PG&E Files for Rate Increase

Pacific Gas and Electric Company, a subsidiary of PG&E Corporation (PCG - Analyst Report), has filed a 2014 General Rate Case (“GRC”) with the California Public Utilities Commission (“CPUC”). The electric utility requested for an increase in electric bills from 2014 to 2016 for financing its additional infrastructure investments.

For a typical residential customer, the company has made a request for an increase of $5 per month to about $95 per month. For natural gas customers, the typical residential bill would increase by $7 per month to about $53. Despite the increase, a typical residential electric or natural gas bill will remain well below the national averages of approximately $108 and just over $65 per month, respectively.

Over the current authorized level, the company has made a total funding request of $1.25 billion for 2014. However, it has requested an additional increase of $500 million for both 2015 and 2016 to take into account infrastructure improvements, and increased costs of labor, materials, supplies and other expenses.

The main aim behind the filing was to recover for additional infrastructure investment necessary for the smooth and reliable generation of power, and efficient electric and gas distribution.

The objectives include the upgrade of electric distribution infrastructure to improve safety, lessen outages, and restore service to customers more quickly.

New technologies like SmartMeter devices, increasing the length of distribution gas pipe six times, setting up advanced technology to detect and repair gas leaks more quickly, and building and operating a new, modern gas distribution control facility to monitor and manage the entire gas distribution system would go a long way to meet these objectives.

The request, if approved, will also be used to implement new safety regulations for both hydroelectric and nuclear power generating facilities and provide improvements in customer services.

Earlier in 2012, the company had made a funding request for its Pipeline Safety Enhancement Plan to fund important safety improvements to meet or exceed new regulatory standards in the company’s gas transmission business. If approved, the typical residential gas customer's bill would increase by less than $2 per month.

Once approved, these investments will also help in generating new jobs and stimulating economic growth throughout the state. Specifically, the GRC request would help in generating $9 billion annually from the sale of goods and services worldwide and would create 39,000 jobs. As a result of added business sales, the company expects the uprate to generate $685 million per year in California as local tax revenue.

CPUC's Division of Ratepayer Advocates will review the filing and inform the company of any changes to be made. After receiving approval from the Division of Ratepayer Advocates, PG&E will formally file its GRC application. The company expects a decision from CPUC at the end of 2013.

San Francisco, California-based PG&E Corp. is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. The company’s supportive regulatory environment in California, particularly its decoupling mechanism and forward looking rate cases, ensures a steady stream of earnings and returns.

Going forward, favorable decisions from regulators, long-term supply contracts, diversification into alternative power sources and infrastructure improvement programs such as Smart Meter bode well for the company.

Overall, the current request would help the company to modernize the system and accelerate the progress towards the long-term goal of being the safest utility in the country. It will also make California stronger and help revitalize the state's economy.

However, these positives will be partially tempered by risks, including the present unfavorable macro backdrop, headwinds in the California economy, tepid demand for electricity and power-price volatility. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

The company mainly competes with Edison International (EIX - Analyst Report) and Sempra Energy (SRE - Analyst Report).