Hello. Welcome to the PG&E Corporation third quarter earnings 2013 conference call. All lines will be muted during the presentation portions of the call, with an opportunity for questions and answers at the end. I would like to introduce your host, Mr. Gabe Togneri with PG&E. Thank you. You may proceed.
Hello, everyone. Thanks for joining us. Before you hear from Tony Earley, Chris Johns, and Kent Harvey, I'll provide you with the usual reminder that our discussion is going to include forward-looking statements about future financial results. These are based on assumptions, expectations, and information that's currently available to management. Some of the important factors that could affect the company's results are described on the second page of today's slide deck. In addition, we encourage you to review the Form 10-Q that will be filed with the SEC later today, also the discussion of risk factors that appears in the 2012 annual report. With that, I'll hand it over to Tony.
Thank you, Gabe. We've got a fair amount to cover today. I'm going to start with the gas business. We continue to make progress in the field to improve the safety and reliability of our system. We've gathered an unprecedented amount of data about our gas transmission system. We're using our comprehensive pipeline features database to prioritize our pipeline safety work. This has resulted in some changes to the work plan and higher unit cost for work on the Pipeline Safety Enhancement Plan as compared to the filing that we made a couple of years ago. Yesterday, we filed a required update with the CPUC that reflects these changes. As a result, we'll be taking a charge for the additional cost that won't be recovered from customers. We're disappointed to have to do this. It reflects the complexity and the challenges of this important gas safety work.
Chris will go through the details in just a couple of minutes. A noteworthy accomplishment this quarter was the resolution of substantially all of the remaining San Bruno-related third-party claims. From the beginning, our focus has been on bringing closure as quickly as possible through settlements that treat people fairly. The judge overseeing the case expressed how pleased he was that we were able to work with the plaintiffs to resolve these six significant cases without going to trial. We are proud of the outcome. Also, the San Mateo County District Attorney's Office has publicly indicated they will not be pursuing criminal charges under state law. However, the federal investigation under the Pipeline Safety Act is ongoing. We continue to cooperate with the U.S. Attorney's Office on that. In a regulatory area, the gas penalty proceedings are taking much longer than we had ever expected.
The record is now complete in the three investigations, and we await the administrative law judges' rulings. When you lay out the timetable for the ALJs issuing a recommended penalty and the subsequent commission decision, I think it's fair to say that the final result should be expected in the first quarter of 2014. As you know, the other parties to the proceedings have suggested unprecedented penalties. More recently, a number of third parties have weighed in, calling for a more balanced approach to the penalty, recognizing that an extreme decision would have negative implications for financing California's ongoing infrastructure needs. We believe it's vital that the commission's final decision recognize the significant improvements we've made to large sums that we've already spent without recovery from customers, and that the victims have been fairly compensated in the civil proceedings.
Before I turn this over to Chris, I'll mention important progress we've made this quarter in addressing some key customer affordability issues. As many of you know, California has a multi-tiered residential rate structure that was intended to promote energy efficiency. Basically, higher electric consumption moves you to a significantly higher rate. Over the years, cost increases have been disproportionately loaded onto the upper tiers, while the CPUC's ability to address this has been constrained by the legislature. As an unintended consequence, the structure disadvantaged a large number of our customers in areas like the Central Valley who need air conditioning in the hot summer months and pay extremely high bills. At the same time, customers living along the coast where there's moderate weather pay much lower bills, even those people that have fairly large houses.
This year, the utilities and the consumer groups worked together on legislation that restores the CPUC's authority to make important changes to fix California's rate structure. The governor signed the bill this month, we look forward to working with the CPUC to move this forward. With that, let me turn this over to Chris.
Thanks, Tony, and hello, everyone. I'll begin my remarks focused on operations, then touch on the regulatory proceedings. Although we've had a lot of success in our overall operations, I'm going to focus my comments on gas ops today. First, on slide four, you can see the significant amount of work we've completed to make our pipelines safer just since the beginning of this year. Over the past few years, we've been testing and replacing more pipeline miles and installing more automated shutoff valves than just about any utility that I'm aware of. Much of the pipeline safety work we've been doing was based on the Pipeline Safety Enhancement Plan that we filed in 2011. The CPUC approved the work in December of 2012 but only gave us partial recovery of our costs.
That decision also required us to update the plan once we had finished validating the maximum allowable operating pressure for all 6,700 miles of our transmission pipelines. We recently completed that effort and used the results to reprioritize every pipeline segment for strength testing, which is funded with expense dollars, and pipeline replacement, which is capital work. Yesterday, we filed the required Pipeline Safety Enhancement Plan update application with the commission. The biggest change is to the pipeline replacement component, which is the capital side of the program. About 90 miles, or roughly half, of the previously planned replacements were removed from the program, and about 50 miles were added to the pipeline replacement portfolio, again, based on the reprioritized risk ranking.
There are fewer miles to replace in total, many of the miles reflected in the update are short pipeline segments, each with costs comparable to the longer segments. In addition, many of the segments included in the reprioritized and updated plan are in difficult terrain, including unstable soil and high water tables that require pumping and disposing of water, adding to the unit cost of the replacement program. We found more third-party infrastructure under the street than originally anticipated, such as water and sewer lines, and this requires additional costs for trenching and pipe fitting. Even though we're replacing fewer miles and the cost per mile will be higher, the total costs for pipeline replacement are not substantially different from the previous plan. However, since we are replacing fewer miles, the revenues eligible for recovery under the terms of the Pipeline Safety Enhancement Plan are lower.
Given this profile, we're required to write off the projected shortfall, which is estimated at $196 million, and we've taken that charge this quarter. We also expect a smaller impact to our strength testing plan, which is the expense component of the program. That's because we expect to do a larger amount of the work on newer pipe, which is not eligible for cost recovery. As a result, we expect additional unrecovered expenses in 2014 of about $30 million. However, those charges will be taken next year as the costs are incurred. While I don't like delivering this news, I know that the result of all this work will be a safer system for our customers. Kent will cover how this impacts our guidance in just a couple minutes. We continue to make progress on the system-wide centerline survey of our pipeline rights of way.
As you can see on the slide, we've completed about 5,800 miles, but we're not done yet. We're currently working throughout the San Francisco Bay Area, our most densely populated region. The survey will still be essentially complete by the end of this year, and we'll review the total cost estimate once we have clear visibility into the entire portfolio of remediation work that results. For now, we're maintaining the estimate of roughly $500 million over five years. Turning to regulatory matters, on Slide 5, the general rate case remains on track. We filed our reply brief and updated our overall request based on the outcome of the hearings. Everything is now in the hands of the administrative law judge, and the schedule calls for a proposed decision on November 19th.
On the electric transmission side last month, the FERC accepted our TO15 filing, and the rates went into effect on October 1st, subject to refund based on the final outcome. We expect the case will now go through the settlement process. As we approach the end of the year, I'll remind you that we're preparing to file our 2015 gas transmission rate case. We're already spending a lot more than is currently in revenues, and in light of this increased spending, we expect the filing to be of significant size and certainly to draw attention from interveners. We plan to file the gas transmission case in the December timeframe to allow the CPUC a full year to make a decision, because we don't have the same assurances about retroactivity of revenues that we've typically had in the general rate case. We'll try to address that through the regulatory process.
With that, I'll turn it over to Kent.
Thank you, Chris. As usual, I'm going to go through our Q3 results as well as guidance, and I'll address the impact of the PSEP capital charge that Chris discussed. Slide 6 summarizes the results for the third quarter, and earnings from operations were $0.88 per share, and GAAP results were $0.36. The difference is our item impacting comparability related to natural gas matters, which totaled $0.52 in the quarter. As usual, that's broken out in pre-tax dollars in the table at the bottom of the slide. Pipeline-related expenses totaled $113 million pre-tax in Q3, and these include the strength testing work in our Pipeline Safety Enhancement Plan, our rights of way and integrity management work, and then our legal costs. Next, you see the $196 million pre-tax charge that Chris described related to the required update to the Pipeline Safety Enhancement Plan.
Again, these are capital costs we expect to incur for pipe replacement work, which we don't expect to recover from customers. In Q3, you see there were no changes in our accrual for potential fines in connection with the gas pipeline investigations. Our accrual remains at $200 million. During the quarter, we did increase our accrual for third-party liability claims by $110 million as a result of settling virtually all remaining third-party claims in Q3. The total accrual for third-party liabilities stands at $565 million, which is within our previously established range of up to $600 million. During Q3, we also recognized $25 million of additional insurance recoveries, and that brings total insurance recoveries to date to $354 million. Slide 7 shows the quarter-over-quarter comparison for earnings from operations.
Our lower authorized cost of capital resulted in a reduction of $0.09 compared to Q3 of last year, and our increased shares outstanding resulted in a $0.04 reduction. These negative factors were partially offset by higher rate-based earnings worth $0.05 compared to Q3 of last year, along with a number of smaller items. Our guidance for 2013 is on slide eight, and at the top you'll see the guidance for earnings from operations is unchanged at $2.55 to $2.75 per share. Some of the key assumptions underlying our guidance are provided in the appendix of the slide deck. At the bottom of the slide, you'll see our guidance for the key components of the natural gas matters in pre-tax dollars, and we've made three primary changes here.
First, the range for pipeline related expenses has been adjusted downward by $50 million to reflect somewhat lower cost experiences this year. The new range is $350 million-$400 million, compared to the old range of $400 million-$500 million. Second, below that, you see that we've added the charge for the unrecovered PSEP capital of $196 million. Third, we've replaced the previous range for third-party liabilities with the actual amount of the accrual taken during Q3, $110 million, since virtually all claims have been settled. In addition, as we've done in the past, insurance recoveries have been updated to reflect the proceeds received during Q3. Regarding our equity needs, we continue to expect to target roughly $1 billion-$1.2 billion for the year, although some portion of that may be pushed into 2014.
Our cumulative issuance through the end of Q3 was about $740 million, and about $170 million of that was done in Q3. I'm going to stop there, and I'll turn it back to Tony for some closing remarks.
Thanks, Kent. Let me just summarize what we're doing to both resolve outstanding issues and to move the company forward. First, we're focused on wrapping up the uncertainty related to the gas penalty proceedings, and we expect a final result in the first quarter of 2014. Second, on third-party liability claims, we're in good shape, and we expect to recover a significant portion of the cost through insurance, and we're going to continue to work through that process. Third, the hearings and all subsequent regulatory briefs for the general rate case are all completed, and we're now awaiting the proposed decision in the GRC. Fourth, we're working on the gas transmission rate case that will be filed by year-end. The GRC and the gas transmission cases are critical to our path forward.
We made solid progress executing on our plans, we know we're laying the foundation for future success. With that, we'll open up the lines and answer your questions.
Certainly. Ladies and gentlemen, if you would like to ask a question, press star one. To remove your question, press star two. If you're using a speakerphone, please pick up your handset before using your keypad. Again, to ask a question, press star one. We will pause now to allow questions to generate. Once again, ladies and gentlemen, to ask a question, press star one. Our first question comes from the line of Leslie Rich with JPMorgan. You may proceed.
Hi, Tony. How are you?
Morning, Leslie.
In terms of thinking of the timing of the ALJ rulings, I know they're on really separate and distinct paths, but is it possible that you get an ALJ ruling on the GRC before you get an ALJ ruling on the fines and penalties? Then in terms of the Commission decision on the final decisions for both of those, are they interrelated at all or really sort of separate and distinct?
I'll let Thomas Bottorff comment in a minute, since the record is closed and now the ALJs are working on their decisions, it really is up to the ALJs to decide how to orchestrate when they issue those decisions. I'm not privy to what their thinking is, but they really have lots of flexibility right now. Tom, I don't know if you have any more insights.
I think that's right. In the General Rate Case, Chris mentioned that the schedule calls for the GRC PD to come out in November. That may or may not happen, but that's the current schedule. With respect to the proposed decisions on the three investigations, we expect those to come out in mid-December. That remains to be seen as well, but the procedural schedule would call for that kind of outcome. I don't think that the two decisions are being coordinated. I think they're on separate tracks. The judges do communicate with one another occasionally, but I think they're working on their own decisions and trying to get them out as quickly as possible.
The final decisions are sort of typically within 60 to 90 days, but not necessarily?
Yes. They could be as early as 30. That rarely happens. Yes, 60 to 90 is realistic.
Great. Thank you.
Thank you. Our next question comes from the line of Steven Fleishman with Wolfe Research. You may proceed.
Yes, hi. I have a couple questions. First, on this issue of what I guess there's kind of like a revenue per mile cap in the PSEP final order. Could you just explain a little better why it matters how much cost per mile?
Hey, this is Chris. I'll start off and then Tom can come in on some of the requirements from a regulatory process. In general, when the order was put together and the supporting work papers behind that, it identified a certain amount of work and then allowed revenues based on that certain amount and type of work that was being done. When we've taken work out and putting work back in, it basically reduced the amount of work being done, and therefore the revenues go down with that. Unfortunately, when you look at the mix of work that's remaining to be done, it is at a higher unit cost. The way it was set up was not something that allowed us a bucket of dollars to do a bucket of work.
It had a cap on it based on very specific type of work that was done. Unfortunately, the way the order works out for us is that the revenues are decreased because the amount of work is decreased. It was indifferent as to what the cost per unit was. The types of work that we're seeing that's left to do is, as I said, in instances, just in different terrains and in situations where the cost per unit is higher.
Okay.
I have something here. Remember, Steve, we had also proposed contingencies that were disallowed in that case, which we didn't think was fair because of the uncertainties like this. That has hurt us.
Right. Okay. Tony, you've talked before about with the right kind of GRC orders being able to earn your allowed return, I guess electric in 2014 and gas 2015. Can you say that's still feasible?
Well, that's still our objective. I think as we've said in the past, I was pleased with the way the GRC went in. Remember, the commission had asked us to really focus on risk and safety and what we were doing. We did that. They hired independent consultants to look at both the gas distribution business that's in that case and the electric business. The consultants had favorable reports, the interveners in the case really did not take issue with the safety analysis and the risk analysis. It was really just, "Well, we don't want rates to go up too high." In the case, we've shown that even if we were granted the full relief, which obviously never happens, but even if we're granted the full relief, the average customer bill is still below the national average.
I'm guardedly optimistic that we will get a good result, and we believe with a good result in the GRC, that we certainly have ability to earn or meet our objective of earning allowed return. On the second piece, gas transmission and storage, that case, as Chris said, we'll file by the end of the year. Once we file it, we'll see what the reaction to it is from various interveners and get a better feel for whether it's going to be hotly contested or whether people say, "Yeah, you really do need to spend on gas transmission and storage." Because remember, a lot of new requirements that we have to cover in that case.
Okay. Just one other question to clarify on the rights of way issue. In the past, when you've talked about the $500 million, you would say that we're still on track for that? Is that fair to say this time that that's still-
Yes
best estimate, or you're just, yeah.
Well, Steve, this is Chris. As I said earlier, we're getting near completion. We still have to do San Francisco, which is a more congested area to go through. Based on what we've seen, we're reiterating the $500 million at this time.
Okay. One last thing. Can you just explain what happened with this San Carlos situation and how these might be handled going forward?
Sure, Steve. This is Chris again. One of the things that everybody needs to recognize is obviously this is a very politically charged environment that we're working in right now. When you look at San Carlos, this is what we refer to as our Line number 147. We pressure tested that line in 2011 and have done the work on it that we're convinced makes it a safe line. We've reiterated that to the commission and to our customers. The issue that arose is that when we were in 2012 doing some follow-up excavation on a routine leak survey and repair, we found in there that some of our records associated with that line weren't accurate.
We updated those, we did alert the CPUC and their staff to that process, eventually filed, making sure that through an errata filing, that folks were aware that we found that discrepancy. Quite frankly, that's part of what we want to do is just as we're doing work, we want to constantly challenge and make sure that our records and the pipes are safe. We're going to continue to look for those kind of things. As we went through that, then that caused the others in San Carlos to get concerned, and that's where it's become a little bit more involved in the press and through the political process. The CPUC did, because they took issue with, and had concerns about the timing of when we notified them and the method of which we notified them.
They opened these orders to show cause. Both of those are proceeding now. It's hard to estimate what the outcome will be on those, but we do anticipate that they'll be wrapped up in the next month or two. Especially on the one that we need to get them to authorize us to re-energize that line.
Great. Thank you.
Thank you. Our next question comes from the line of Jonathan Arnold with Deutsche Bank. You may proceed.
Yeah, good morning, guys.
Morning, Jonathan.
Just FYI, I think a PD on the very question you were addressing just came out. My question is on the equity delay, Kent saying some of it might be pushed into 2014. You obviously already also had this additional charge you've taken. Is that really just because the proceedings are taking longer and then are pushed into next year? The timing for any sort of significant incremental charge is pushed out, or are you doing better elsewhere? Can you just talk around your thought process there?
Yes, Jonathan. First of all, I'll state the obvious, which is that equity requirements is sort of the end game. There's all sorts of different things that factor into our cash needs as well as our capital structure. Essentially everything in our results factors into that. It's kind of at the end of the line. The reality is, as in any year, there's been puts and takes that drive our equity needs. The fact that we did take this charge fairly recently, in reality, isn't a huge driver for the total annual needs because the annual needs are weighted average over the whole year. When you have a charge towards the end of the year, it doesn't have the same kind of impact as when it's reflected throughout the entire year. Puts and takes, no major changes in our expectations.
In our plans, we've built in flexibility so that obviously some amounts can always spill over into the following year, just because that's how the markets work and that's how timing is, and you want to have that kind of flexibility. We're going to see how the last part of the year goes. We're generally on track, but some of it may end up being in 2014. I don't think it's a concern.
Great. Thank you.
Thank you. Our next question comes from the line of Ben Eggers with Credit Suisse. You may proceed.
Hey, good morning, guys. Just following up on this extra $200 million of cost as you reallocated priority of work. Is there potential for more of these to be done as you guys reprioritize kind of the phase of work that's got to get done in 2014 or 2015 under the PSEP? Is there a chance this could be reversed as you continue to do more work on what needs to get done?
Hey, Ben, this is Chris. We were required to file this as a one-time update on the Pipeline Safety Enhancement Plan. We don't anticipate going through and reprioritizing or doing another update on this through the end of the program, which is through the end of 2014.
Okay. I guess just kind of could be getting the cart before the horse a little bit, but as far as getting a resolution on San Bruno and potentially where the fines could end up or the penalties could end up. Can you guys just walk through kind of the legal arguments if some of these high fines or penalties are put out there, how you guys could look to protest or try and reduce those impacts to shareholders from a legal perspective?
Yeah, I'll start off. Hyun Park, our General Counsel, is here and can add to this. We believe that there are some very strong arguments that when the penalty gets too large, that we do have options to appeal that penalty. That there are provisions under California law that prevent excessive fines and penalties. We think that we've got some good arguments there if they just get out of line with precedents across the country and what's reasonable given all the money we've already spent. Hyun, I don't know if you want to add any more into that.
This is Hyun Park, General Counsel. I actually think it's too early to tell. Obviously, we're speculating. As Tony said, we believe that if the fine is so excessive, we would have both state and federal constitutional law-based arguments.
Those would be appealed through California State Court, U.S. Federal Court, or combination of any which route you decide to go?
I think those are all being assessed at this point. We would have option to go to both state as well as federal court, we believe.
Okay. Got it. Thank you, guys.
Thank you. Our next question comes from the line of Kit Konolige with BGC. You may proceed.
Good morning, guys. To revisit the gas transmission case a little bit again. Is it going to be a part of the potential reaction here that it may not be completely clear what you've been disallowed from recovering that you've already spent or plan to spend versus what the new rules require you to spend in the future. In other words, are we going to get into some very complex detailed arguments that will make it hard to figure out what the rate base is and what the return is likely to be?
This is Chris. Just for clarification, are you referring to the gas transmission case that we're going to file? Is that what you're talking about?
Yes.
Okay. As I said, we're spending significantly more right now, as you guys are well aware, than we're getting in revenues. We expect this filing to be a pretty large ask. I think it's important to remember there's a couple of differences from what we asked for the first time that got disallowed versus what we're going to ask for this time. In the last case, when they did the big disallowance, there were two real big areas that they disallowed. One was on our records systems that we were updating and modernizing, and that project will be done by the end of next year. That won't be part of the ask for the next time.
The second one was referred to earlier, is we asked for a large contingency because at the time, this was several years ago, we hadn't gotten through the design phase and all the engineering, and the estimates were pretty rough at that time. We put in some large contingencies, and they disallowed all those contingencies. In this case, now we've got two years under our belts, two and a half years under our belts, knowing what these costs look like. Contingency requests would be a lot smaller.
I think that it'll be a little bit more of a standard type in terms of filings and such, other than part of the big increase is from the fact that they've changed the rules and they've raised the standards around safety, which are good standards, and that requires a lot more work from us and the other utilities. Those will be items that will be in there. We do expect that because of the size of the asset, interveners will get involved and they'll probably challenge us as they did on the last cases to, did we already get paid for these kind of costs in the past? We think we'll have a very solid case to be able to file, and I think you'll be able to see with transparency what the rate base ask will look like.
I don't think that the issues that will be raised will be any different than things that we've seen in the past.
Okay. Thank you.
Thank you. Our next question comes from the line of Julien Dumoulin-Smith with UBS. You may proceed.
Hi. Good morning or good afternoon. Can you hear me?
Yes, we can.
Excellent. Just wrapping up on the gas side quickly. You talked about filing this later this year just to provide a little extra buffer. How much buffer do you think that provides you ultimately in terms of getting through it in a timely fashion?
I'll start, Tom. This is Chris again. What we're trying to do is if we do it in December, that gives them hopefully a full 12 months worth of time to get through the regulatory process, which is what we would hope that they would be able to do at the commission. Normally, the schedules will call for something around the 12-month timeframe. That's really what we're trying to have accomplished. I don't know, Tom, if you want to add anything.
The schedule had called for us to file no later than February 3rd. We're adding this extra couple of months just to try to make sure we get a decision by the end of the year. We'll have that established once the application is filed. There'll be a pre-hearing conference to set the schedule. Again, we hope it calls for a decision by January 1 of 2015.
Great. Going back a little bit to Dan's question and kind of juxtaposing, if you will, a potential appeals process in the context of equity needs. Can you provide just a little bit of clarity in terms of when you might need to issue equity to the extent to which a decision were to come out from the CPUC? Is there some need to fund that immediately pending an appeal process? Or how do you think about that ultimately? I mean, obviously, there's some balance sheet ramifications as well.
Julien, this is Kent. Of course, any answer to that is somewhat hypothetical because it kind of depends on what the decision is. We have a huge variety of recommendations out there and a range of possible outcomes still in these proceedings. The specifics are going to depend on what the final decision is. If we do appeal it, unless it's an unusual situation, my guess is that from an accounting perspective, we'll still be required to accrue what the decision is, because to not do that would essentially we'd have to think it probable that the appeal would occur. My guess is the accounting will cause us to have to deal with some of the capital structure and financing implications, and the appeal could last a long time before that's actually resolved.
Really the reality is you could only need a partial amount of equity to the extent to which you get resolution and full payment ultimately would be on resolution of the appeal most likely, if it were to come to that.
Julien, let's remember the scenarios, and if I use one scenario, which is the SED recommendation, there's only a portion of that that actually drives upfront equity financing. A lot of it is over time. Again, it really depends on the specifics of the final PUC decision.
Right. Absolutely. Thank you very much.
Thank you. Our next question comes from the line of Anthony Crowdell with Jefferies. You may proceed.
Good morning. I want to follow up on Julien and Dan's question, talking about the appeals process. I think that one of the responses you gave Dan was based on precedents across the country, I guess another pipeline matters. Could you, I guess, highlight or give us some examples or yard markers of where previous appeals or pipeline penalties have been?
Well, as far as we can determine, the largest penalty in a gas pipeline explosion incident related to El Paso Natural Gas about a little over a decade ago, and was just over $100 million in penalties. There have been some more recently. There was one in Pennsylvania, that was in the low double digits. I don't know, Nick, do you remember that number? About $25 million. Some of that was constrained by some of the state law in Pennsylvania. If you look at all of it, and we've done this work, the numbers that are being talked about, which would total of $4 billion in penalties, are orders of magnitude beyond anything that's ever been assessed. When you think about it, assessing a penalty that size doesn't accomplish anything. We've made major changes in the leadership in the organization here.
We immediately started to do work, knowing that we weren't going to recover, but we didn't wait until we had an order telling us what we'd recover and what we didn't. We went and did the right thing. We don't think it accomplishes any logical purpose to have penalties the size that some of the folks are talking about.
Just to follow up, if I think about it, a decision comes out, we hope in the first quarter of 2014. Let's just say the decision comes out that's on top of the SED recommendation, and the company does appeal it, and I guess there's really no timeline for an appeal. If an appeal brings a decision back to something closer to like an El Paso decision, does the utility now go refile with the commission to recoup the difference or to start recovering what was disallowed previously?
Yeah. It's too early to speculate.
Okay
what you do in that case. Clearly, if we get a decision that's near where some of the proponents are advocating, we'll start the appeal process and work that through.
Great. Thanks for your time.
Thank you. Our next question comes from the line of Michael Lapides with Goldman Sachs. You may proceed.
Hey, guys. Question on the general rate case. Tony, you commented that you've kind of got a little bit of a positive outlook or have gotten somewhat of positive feedback on the rate case filing. If I go back and actually look at the testimony, there's a pretty big spread between your request and what some of the main interveners had requested in terms of a revenue requirement. I'm just curious, is there a bogey or a level where if you get a certain amount in the rate increase, it wouldn't impact what you would wind up spending on the system, whether in OPEX or in capital spending levels? Meaning, are you in a position where if you get an outcome that isn't what you're looking for, that you're willing to dial back spending on the system?
Well, we think everything that we've asked for is justifiable. We did a lot of work around the risk associated with not doing the work. I think the issue, as I said before, you never get 100%. At some point, whatever the number is, you have to take a look at, are there discretionary things that you'd take out of your spending, or are there some important things that instead of having a five-year plan to do a particular program, do it in seven years or eight years or something like that. I think there will be flexibility. We'll have to work hard, I think we made a really good showing that a lot of this, and particularly on the gas side of the business, is things that we ought to get on with.
Okay. How much, when you think about the rate increase request, how much is capital-driven versus how much is growth in O&M?
Let me ask. Tom, do you have those numbers handy?
No, I'm sorry. We don't have those numbers available, but we can certainly share them with you later.
Okay. Apologies, just kind of focusing on the rate case because I know there's been so much attention on the San Bruno-related dockets, but the revenue request of over $1 billion is a big number in the grand scheme of things, and some of the interveners came out with dramatic differences versus your forecast.
They did. To get back to my point earlier, when you look at it's a big company. With total revenues in the high teens, the average bill, if we get 100% of what we've asked for, is still below the national average. I think that's what customers really care about. There's always a discussion about, well, your rate is high. In many parts of our service territory, the total bill is low because of usage. That's why the legislation we got that allows restructuring the rates is so important because this skewing where the high end of our structure was way high. We'll be able to make a significant dent in that high end. Our current high rate is about $0.35.
That will come down significantly if we just use the normal cost of service regulation that many other states, probably almost all states use.
Got it. Okay. Thanks, Tony. Much appreciated.
Thank you. Our next question comes from the line of Angie Storozynski with Macquarie. You may proceed.
Thank you very much. Okay, I'm actually looking at the calendar here. We are waiting for a decision on the penalty or a proposed decision on the penalty. You will file a gas transmission rate case where you're going to ask for a pretty significant increase, as you were suggesting. We have a pending electric rate case. How is it possible though, you could actually challenge the decision by the Commission while you have two big rate cases pending? I'm asking about legal challenges to a proposed penalty decision or the final penalty decision.
There certainly is no legal barrier to doing that. These are all-
I'm talking about the collateral damage to those other proceedings from such a filing.
Right. Remember, our gas transmission and storage case, while we'll file it'll go through a year-long process. You're going to have a significant amount of time pass between when we file the case and when it actually gets decided, and lots of hearings and a recommended decision there. I'm comfortable that in the interest of protecting our shareholders' interests, we'll have to make the right decision on the penalty phase. If the penalty phase is too big, we're comfortable with going ahead and appealing that. We've seen that the Commission seems to have been able to separate the San Bruno proceeding from our normal regulatory process.
I know early on, there was a lot of concern about was there going to be some slop over, would San Bruno affect other regulatory proceedings, we continue to believe that there isn't any evidence of that.
Okay. Separately, you were planning to issue between $1 billion and $1.2 billion of equity this year, we are almost in November, you've issued $740 million. Is it that you need less for this year and thus you're not rushing to issue the additional equity, or are you basically waiting for the final, at least for the proposed penalty decision?
Angie, this is Kent. We have had $1-$1.2 as our target for the year. I indicated on an earlier question that we do have some flexibility. If it's appropriate, we're going to sort of assess things over the remaining months, if it's appropriate, some might push into next year. We haven't had any major change in our overall needs for equity.
Great. Thank you.
Thank you. Our next question comes from the line of Ashar Khan with Visium Asset Management. You may proceed.
Hi. Good morning. Kent, I just was trying to look at this slide eight, where you have the natural gas matters and the expenses tied to them. The pipeline -related expenses, the low end of the guidance is $450 million and the high guidance range, I guess is $350 million. If I'm right, you've spent till the nine months, something like $250 million. Can you give us a sense where you're going to end up over here? It's still, I guess the range is still wide enough with only one quarter left, and I guess now only two months left as the year is coming to a close.
Ashar, we're keeping the range. We've adjusted the range to $350 million- $450 million. That range used to be at $400 million- $500 million, that's the adjustment we've made on the call.
We could still. Why is it back-end loaded, can I ask? That's what I'm trying to understand.
Well, let me just sort of recap what's included in that. There are three major components. There is our Pipeline Safety Enhancement Plan expense work, which is for the strength testing, and that is seasonal work. We didn't have a lot of that very early in the year, so it tends to be certainly in the third quarter and some of it in the fourth quarter as well. The second component of that is our rights of way work as well as our integrity management work, and Chris gave an update on the rights of way work. We're not done with that yet, and that'll continue into the fourth quarter. The last category is sort of our legal and other costs, and that also is obviously driven by the things you think would drive that. Those are really the factors, and our guidance is $350 million- $450 million .
Can you give us some approximation percentage-wise, the three factors that you mentioned, how much they make up of this total?
There is a slide in the appendix that gives the ranges for each of the components, so I'll refer you to that.
Okay. Thank you so much.
Thank you. Our next question comes from the line of Travis Miller with Morningstar. You may proceed.
Hi, thanks. I want to turn to the trend, the electric transmission stuff, the TO. Wonder if you could characterize the key issues in those settlement discussions right now, both in the TO14, TO15.
Yeah. This is Tom Bottorff. Well, maybe where TO14 has been settled, we reached a tentative agreement with all the parties, and we filed that settlement agreement with FERC yesterday. That's pending. We expect the judge to certify it, make a recommendation to the full commission to approve it, and probably expect a final decision in the first quarter of next year. All the issues in that case were settled. The key issues tend to be around the rate of return. That's been one, not just in our proceedings, but nationally. The amount of investment is also an issue. The depreciation rate sometimes is an issue. Operating and maintenance costs compared to historical trends tend to be an issue. They tend to be fairly consistent from proceeding to proceeding, and I'm sure we'll address those again in TO15, which is pending.
Okay. Then on TO15, with that possible increase in the ROE, what kind of earnings impact could that have, given that the rates went into effect October 1st, so you have essentially three months versus what I believe you said in guidance was about a 9.1% full year?
This is Kent. It is in effect for three months. I'll just say we book the revenues that we request, but we also reserve against those revenues for a litigation assessment until the case is resolved. It's really the net of those that affect our overall results. I would say compared to the nine one, we're hopeful that we're going to end up doing better, so it's probably a slight favorable this year, but it's, in reality, not in place for very long during 2013.
Thank you. Once again, ladies and gentlemen, if you would like to ask a question, press star one.
Monique, I take it that there are no further questions?
One moment, sir. We have one question from Kamil Patel with Wells Fargo. You may proceed.
Hi, this is Kamil Patel from Wells Fargo. I had two questions. One, dealing with
Monique, did we lose him?
Yes, sir. One moment. Mr. Patel, your line is open.
Yes. Can you hear me?
Yes, we can.
Oh, sorry. What risk do you see in your pending or your upcoming gas transmission rate case with the potential shuffling of leadership at the CPUC late next year, early 2015?
Yeah, this is Tom Bottorff. I don't think the shuffling of the commissioners puts the case at risk at this point. I think it depends on the arguments that are presented by both sides and what the judge ultimately considers to be a reasonable outcome after hearing the case. If the decision, if the PD is out prior to the end of the year and commissioners who are seated today get a chance to vote on it, there's no change. You're correct. If the decision is beyond January 15, we could have two new commissioners, and it's unclear what perspectives they will bring to the commission at this point.
Okay. Second question being, one of the, I guess, key focus areas for the management team has been to partner effectively and rebuild relationships. Wondering where you think you stand in light of, Tony, I think you've been there about two years, in light of comments that were made back in August regarding concerns surrounding a bankruptcy and the recent San Carlos issues. Do you think those have had a detrimental impact on rebuilding these relationships?
Obviously, this is politically charged, and the articles in the press can affect that, but we continue to see improvement in our customer satisfaction numbers. Last quarter, we saw yet another increase. The other indicator, I think, over the past probably two months, we've had one to two dozen editorials and op-ed pieces from community leaders, mayors, business associations supporting the notion that while PG&E ought to be penalized for San Bruno, the numbers that are now being talked about are counterproductive, that the company is an effective and important member of communities across large portions of the state. If you read those things, it's very encouraging that our message has gotten out and our efforts to, as we call it, go local and really partner with local communities have been very effective.
Okay. Thank you. It seems like the newswires tend to pick up the negative articles a bit more than the positive ones.
We'd be happy to send you copies of the good ones.
Thanks.
Thank you. There are currently no additional questions waiting from the phone lines.
In that case, I'd like to thank everybody for your time today. I know it's a very busy day with a number of earnings calls, and we'll probably see many of you at the EEI Financial Conference in a little bit more than a week. Thank you.
Thank you, ladies and gentlemen, for attending today's PG&E Corporation third quarter earnings 2013 conference call. This will now conclude the conference. Please enjoy the rest of your day.