PG&E 2014 Annual Report Download - page 68

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records those expected future costs as regulatory liabilities. In addition, the Utility records regulatory liabilities when the CPUC or
the FERC requires a refund to be made to customers or has required that a gain or other reduction of net allowable costs be given
to customers over future periods. At December 31, 2014, PG&E Corporation and the Utility reported regulatory assets (including
current regulatory balancing accounts receivable) of $9.0 billion and regulatory liabilities (including current balancing accounts
payable) of $7.6 billion. (See Notes 2 and 3 of the Notes to the Consolidated Financial Statements in Item 8.)
Determining probability requires significant judgment by management and includes, but is not limited to, consideration
of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory orders, and the strength or status of
applications for rehearing or state court appeals. For some of the Utility’s regulatory assets, including utility retained generation,
the Utility has determined that the costs are recoverable based on specific approval from the CPUC. The Utility also records a
regulatory asset when a mechanism is in place to recover current expenditures and historical experience indicates that recovery
of incurred costs is probable, such as the regulatory assets for pension benefits; deferred income tax; price risk management;
and unamortized loss, net of gain, on reacquired debt. The CPUC has not denied the recovery of any material costs previously
recognized by the Utility as regulatory assets for the periods 2012 through 2014. If the Utility determined that it is no longer
probable that regulatory assets would be recovered or reflected in future rates, or if the Utility ceased to be subject to rate
regulation, the regulatory assets would be charged against income in the period in which that determination was made.
In addition, regulatory accounting standards require recognition of a loss if it becomes probable that capital expenditures
will be disallowed for ratemaking purposes and if a reasonable estimate of the amount of the disallowance can be made. Such
assessments require significant judgment by management regarding probability of recovery, as described above, and the ultimate
cost of construction of capital assets. The Utility records a loss to the extent capital costs are expected to exceed the amount to
be recovered. The Utility records a provision based on its best estimate; to the extent there is a high degree of uncertainty in the
Utility’s forecast, it will record a provision based on the lower end of the range of possible losses. The Utility’s capital forecasts
involve a series of complex judgments regarding detailed project plans, estimates included in third-party contracts, historical cost
experience for similar projects, permitting requirements, environmental compliance standards, and a variety of other factors. The
Utility recorded charges of $116 million, $196 million, and $353 million in 2014, 2013, and 2012, respectively, for PSEP capital
costs that are expected to exceed the amount to be recovered. See “Pipeline Safety Enhancement Plan” in Note 14 of the Notes
to the Consolidated Financial Statements in Item 8. The additional charge in 2014 primarily reflects costs for Line 109 (that runs
through the San Francisco peninsula) mostly related to emergent permitting conditions and requirements, as well as updated
estimates for the few remaining PSEP projects. Management will continue to periodically assess its PSEP capital costs and the
related CPUC regulatory proceedings, and further charges could be required in future periods.
Loss Contingencies
Environmental Remediation Liabilities
The Utility is subject to loss contingencies pursuant to federal and California environmental laws and regulations that
in the future may require the Utility to pay for environmental remediation at sites where it has been, or may be, a potentially
responsible party. Such contingencies may exist for the remediation of hazardous substances at various potential sites, including
former manufactured gas plant sites, power plant sites, gas compressor stations, and sites used by the Utility for the storage,
recycling, or disposal of potentially hazardous materials, even if the Utility did not deposit those substances on the site.
The Utility generally commences the environmental remediation assessment process upon notification from federal or
state agencies, or other parties, of a potential site requiring remedial action. (In some instances, the Utility may initiate action to
determine its remediation liability for sites that it no longer owns in cooperation with regulatory agencies. For example, the Utility
has begun a program related to certain former manufactured gas plant sites.) Based on such notification, the Utility completes
an assessment of the potential site and evaluates whether it is probable that a remediation liability has been incurred. The Utility
records an environmental remediation liability when site assessments indicate remediation is probable and it can reasonably
estimate the loss or a range of possible losses. Given the complexities of the legal and regulatory environment and the inherent
uncertainties involved in the early stages of a remediation project, the process for estimating remediation liabilities is subjective
and requires significant judgment. Key factors evaluated in developing cost estimates include the extent and types of hazardous
substances at a potential site, the range of technologies that can be used for remediation, the determination of the Utility’s liability
in proportion to other responsible parties, and the extent to which such costs are recoverable from third parties.
When possible, the Utility estimates costs using site-specific information, but also considers historical experience for
costs incurred at similar sites depending on the level of information available. Estimated costs are composed of the direct costs
of the remediation effort and the costs of compensation for employees who are expected to devote a significant amount of time
directly to the remediation effort. These estimated costs include remedial site investigations, remediation actions, operations and
maintenance activities, post remediation monitoring, and the costs of technologies that are expected to be approved to remediate