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Pacific Gas and Electric Company, a subsidiary of PG&E Corporation (PCG - Analyst Report) has announced rate revision for its electric and gas customers to make up for the costs of additional electric transmission infrastructure to modernize California's power grid and deliver more renewable energy to customers. The rates are effective immediately.

Beginning January 2013, residential customers will experience a significant decline in natural gas rates and a modest increase in electric rates. Gas rates will decline 6.0% year over year in January 2013 due to lower wholesale costs for gas. For a residential customer using 72 therms gas, the rates will go down from $82.37 in January 2012 to $77.47 in January 2013.

Recently, PG&E's Pipeline Safety Enhancement Plan received approval from the California Public Utilities Commission (CPUC). The Commission approved the hike in spending and the company is expected to collect $299.2 million from customers for the same. Therefore, this would likely increase gas rates by 2% from February 2013 onward.  

On a system-wide basis, residential electric rates for an average customer will increase about 2.6% from January 2013. Particularly, for a customer using 550 kilowatt hour (kWh) of electricity, rates would increase from $89.31 in January 2012 to $91.60 in January 2013. For a customer using 850 kWh of electricity, rates would increase from $184.23 to $188.05 and for a customer using 1,200 kWh of electricity, rates would increase from $301.54 in January 2012 to $307.13 in January 2013. Customers are expected to face another rate increase of 2% in May 2013.

Though these modernization programs are leading to increase in costs for customers, they have significantly cut down on the number of outages. Currently, the company is working on a number of modernization programs. In 2009, the company had launched a statistics-based program to identify and upgrade problematic circuits that have historically caused the most number of outages. From 2009 to 2012, the outages on upgraded circuits have been reduced by 30% while the average duration of outages has decreased by 50%.

PG&E is also installing the latest Smart Grid technology and automating more than 400 of its distribution circuits. Taking the safety factor into consideration, the company is beefing up wildfire patrols, enhancing inspections to minimize the likelihood of energized wires coming down, and even installing new locking manhole covers in key urban areas.

Therefore, in order to overcome the costs incurred for these programs, the company is requesting state regulators for $1.25 billion over currently authorized spending levels beginning in 2014. The amount will be utilized by the company for additional capital investment for gas and electric distribution and electric generation infrastructure, improvements in customer service, and new technology to improve safety and system reliability.

Recently, utility major FirstEnergy Corporation’s (FE - Analyst Report) business wings – Mon Power and Potomac Edison had announced electric rate cuts for their West Virginia customers. The decision comes after the Public Service Commission issued an order for the rate slash, effective January 1, 2013.

The reduction entails decreasing electric rates by $66 million, which comes on the heels of lower fuel expenses and purchased power costs. With this verdict, West Virginia residential customers consuming 1,000 kilowatt-hours of power will witness a rate cut of around $5, which roughly translates to a 5% drop in their monthly bills. Also, FirstEnergy’s billing rates for the customers will be approximately 20% below the national average. The decline in electric rates is expected to help in customer retention and even attract new customers.

Coming back to PG&E Corporation, the company has a solid portfolio of regulated utility assets. Moreover, it focuses on maintaining a balance between income and expenses. Going forward, PG&E’s earnings growth will be driven by favorable decisions from CPUC and Federal Energy Regulatory Commission (FERC), as well as long-term supply agreements, diversification into alternative power sources and infrastructure improvement programs resulting in rate base growth.

These positives, however, will be partially offset by risks, including the present unfavorable macro backdrop, headwinds in the California economy, tepid demand for electricity and power-price volatility. San Francisco, California-based PG&E Corporation presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

 

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