77 Beale Street
To be recognized as the premier energy services company by our customers, our employees, and our shareholders.
PG&E Corporation is one of the largest power and gas distributors in the United States, with several energy-related subsidiaries. The company's most important subsidiary, Pacific Gas and Electric Company, was the second largest investor-owned gas and electric utility in the United States in terms of sales in 1998. It had a service area covering about 94,000 square miles--most of northern and central California--and a population of more than 13 million people. The company was positioning itself to be a nationwide power distributor rather than a power supplier in the approaching deregulated utility environment.
Pacific Gas and Electric Company (PG&E) was formed in 1905 by John Martin and Eugene de Sabla, Jr., to acquire and merge power companies in central California. Martin and de Sabla, who had earlier been involved with gold mines in the Yuba River region north of Sacramento, California, began in the 1890s to use hydroelectric power to operate their mines. De Sabla located customers and raised the capital for their first hydroelectric plant in Nevada City, California, in 1895; Martin handled the engineering with help from William Stanley, developer of the Westinghouse alternating-current electrical system. The plant proved successful and convinced them there was a market for electrical power in Sacramento and San Francisco. They built another plant in 1898 and in 1899 formed Yuba Power Company to build a third, more powerful facility.
In 1900 the three plants were consolidated into Bay Counties Power Company, with de Sabla as president and general manager. In 1901 the company built a 140-mile transmission line, the world's longest at that time, to power an electric railway in Oakland, California. The line, suspended across the San Francisco Bay, carried 60,000 volts--a very high voltage for the time--and attracted great publicity. The company then joined its three plants into a single power grid, although it remained primarily a power-generating company, not a distribution-based utility.
In 1903 de Sabla and Martin formed California Gas & Electric Company (CG&E) to buy power companies and merge them into a large electric grid that could use economies of scale to its advantage. In the next few years CG&E bought many power companies, backed by capital from New York financiers. CG&E's acquisitions included long-established utilities like Oakland Gas Light & Heat Company, serving Oakland and Berkeley, and United Gas & Electric Company, serving communities south of San Francisco. In 1905 de Sabla and Martin bought San Francisco Gas & Electric Company (SFG&E), the dominant utility in San Francisco, giving the company a power grid in the most important city in central California. They merged SFG&E with CG&E to form Pacific Gas and Electric Company, capitalized at about $45 million. The San Francisco company had steam power plants, which complemented PG&E's hydroelectric plants by carrying peak loads when demand was high or when freezes or droughts cut hydroelectric output.
Steady Expansion: 1900-60
PG&E continued buying power companies and merging electric grids. By 1914 it owned the largest integrated regional system on the Pacific Coast and was one of the five largest utilities in the United States. It supplied 1.3 million people in a 37,000-square-mile area and had 36 percent of California's electric and gas business. During most of this period the company's steam-power capacity was growing faster than its hydroelectric capacity, partly because of the falling price of California crude oil. In 1912 PG&E began to increase its hydroelectric capacity. Using water from the South Yuba and Bear Rivers, it built a series of six plants with a projected capacity of 190,750 horsepower. A 110-mile transmission line strung across steel towers carried 100,000 volts to PG&E's switching station at Cordelia, California.
PG&E also continued to grow through mergers. In 1927 it bought the Sierra and San Francisco Power Company, and in 1930 it bought its only major competitor, the Great Western Power Company. In 1935 PG&E consolidated the operations of the companies it had bought.
PG&E and most other electric utilities were not greatly affected by the Great Depression because of their status as monopolies. Most sales that were lost to declining industry were made up by increasing residential sales.
In 1948 Pacific signed an interchange agreement with Southern California Edison Company that stated that either company would sell the other excess electricity when needed until 1962. PG&E continued to expand, buying Vallejo Electric Light & Power Company in 1949 and Pacific Public Service Company in 1954. By 1955 PG&E's network extended into 46 counties in northern and central California. It supplied electricity to 168 cities and towns and gas to 146 cities and towns. Pacific operated 57 hydroelectric plants and 12 steam plants generating about 84 percent of its total electric output, but bought 68 percent of its gas from El Paso Natural Gas Company. The company had 18,000 employees. Total revenue for 1954 was $386 million.
In 1957 PG&E and the General Electric Company constructed the small Vallecitos atomic power plant. Plans for a large nuclear power plant at Bodega Bay, north of San Francisco, were scrapped in the early 1960s because of public opposition. The company constructed a 63,000-kilowatt nuclear power plant at Humboldt Bay near Eureka, California, in 1963. From 1968 to 1970, Pacific participated in a design study of a 350,000-kilowatt sodium-cooled nuclear power plant. The company contributed $10 million over the following ten years to a joint U.S. government-industry project to build the first large sodium-cooled reactor. It also began construction of two pressurized-water nuclear power plants at Diablo Canyon, expected to total one million kilowatts. The plants were scheduled to be finished in 1975 and 1976.
Controversy in the 1970s
By 1973 PG&E was the second largest utility in the United States, with 65 hydroelectric plants and 12 steam electric plants and total revenue of $494 million. The Diablo Canyon nuclear power plants, however, were running years behind schedule. PG&E entered the 1970s expecting demand to increase by six to seven percent annually, as it had for years; but California was growing rapidly, and demand grew faster than PG&E had projected. In addition, natural gas, which fueled the steam electric plants, was in short supply in California. The energy crisis of the early 1970s sent the price of gas skyrocketing, and the company's natural gas business shriveled. Between 1975 and 1984 PG&E lost 60 percent of its industrial gas sales.
PG&E announced the urgent need to convert its plants to oil, which was also in short supply. At a cost of $100 million, the conversion involved building moorings for oil supertankers at seven of PG&E's 12 steam electric plants. To pay for the conversion, the company asked for a $233 million rate increase by 1975, the largest in California history.
The California Public Utilities Commission (CPUC), the state body that regulates PG&E, traditionally had been one of the toughest in the United States. From 1966 to 1974, however, when Ronald Reagan was governor of California, the CPUC became more sympathetic to utilities. One decision by the Reagan-appointed commission allowed utilities to increase rates without public hearings as the price of oil increased. By early 1974, with the price of oil soaring, rate increases were enacted almost monthly. As a result, PG&E's $233 million rate increase received wide news coverage and was opposed vigorously by consumer groups, which used public outrage to push for utility reform. Jerry Brown, Reagan's successor, appointed reform-oriented commissioners to the CPUC. In 1975 the CPUC ordered PG&E to offer a minimal amount of electricity at subsidized rates to all residential customers. The move was opposed by PG&E and its largest customers, whose electric rates would pay for the subsidy.
PG&E also faced opposition from environmentalists. The Environmental Defense Fund (EDF) confronted the utility, claiming PG&E would not need to build more power plants if it used its existing capacity more wisely. Both sides ran television commercials to push their viewpoints. The EDF eventually helped pressure PG&E into using alternative energy suppliers, such as windmill farms, and use-strategies such as redirecting customer demand to stretch generating capacity further. By the late 1970s PG&E was offering incentives to customers who fulfilled their energy requirements at nonpeak hours.
In 1979 the CPUC granted PG&E a $269 million annual rate increase, but it also pushed the company to buy more power from alternative energy sources. In 1980 the CPUC granted a $530 million gas- and electric-rate increase, but over the next few years it ordered the company to give several refunds. Net income for 1980 was $525 million. In 1981 the CPUC authorized the company to begin a six-year, interest-free home loan program for customers who installed insulation or energy-saving devices.
Rising Rates in the 1980s
One of the two Diablo Canyon nuclear plants was finished in 1981, but PG&E did not receive permission to begin testing because of concerns that the plant, located just two miles from an earthquake fault, was not safe. Questions were also raised about quality control during the plant's construction. Protesters blockaded the plant for two days while the U.S. Nuclear Regulatory Commission considered approving its start-up. Permission was granted in late 1981, and in 1982 the company hired Bechtel Power Corporation to manage the project while it was completed and licensed. In late 1983 uranium fuel was finally loaded into the Diablo Canyon reactor, and testing began in 1984. The company then requested rate increases to pay for the plant, which cost $5.8 billion, 18 times initial projections.
At the same time the company continued buying electricity from alternative sources. Under the 1978 Public Utility Regulatory Policies Act, U.S. electric utilities were required to buy power offered by independent producers at prices set by state utility commissions. In 1982 PG&E signed a contract to buy most of the wind-generated power from a wind farm in Solano County, California. In 1983 it agreed to buy all the electricity from a solar-energy power plant being built by a subsidiary of Atlantic Richfield Company. By mid-1986 PG&E had signed 695 contracts to buy 20 percent of alternative capacity planned for the United States, more than half of PG&E's own capacity. The company had so many alternative generating contracts that it had excess capacity.
In 1982 PG&E appointed Richard Clarke as head of utility operations. Clarke won CPUC approval to overhaul the structure of natural gas rates for PG&E's industrial customers. That move helped reverse a long decline in gas sales and doubled the utility's net income to $1 billion during the next four years. Also in 1982 the CPUC ordered PG&E to suspend its large fuel-oil contract with Chevron USA Inc. PG&E had signed a long-term contract with Chevron during the early 1970s, when natural gas prices and power-demand projections were high. In 1981, however, capacity increased due to alternative electric sources, and natural gas prices dropped. In part because PG&E had contracted to buy more expensive fuel oil, residential electric rates rose six percent in 1981. The CPUC used contingency provisions in PG&E's oil contract that allowed for suspension of deliveries if a government agency ordered it.
In 1984 the CPUC granted the company $697 million in rate increases, a 1.7 percent hike. Net income for 1984 was $975 million. In 1985 the CPUC ordered PG&E to lower its natural gas rates by $316.9 million per year. The following year the company acquired the 48.9 percent of Pacific Gas Transmission Company that it did not already own in a stock swap valued at $164 million, and in 1986 Pacific Gas Transmission became a wholly owned subsidiary of PG&E.
In 1986 Richard Clarke became chairman and chief executive officer of PG&E, and George Maneatis became president. While PG&E's managers had traditionally begun as engineers, Clarke was an attorney-turned-manager, and his experience as an attorney served his company's interest in the ensuing years.
California had become the most competitive power market in the United States, partly because of high rates the CPUC had mandated for independent power generators. Because PG&E had to buy relatively high-priced power from independents, the company's electricity rates were forced up. To protect residential customers from the rising costs, the CPUC raised industrial power rates and used them to subsidize residential rates. In the mid-1980s a long-term plan for industry deregulation began by allowing large industrial customers to buy power from independent suppliers. As a result, many large industrial customers devised plans to build their own power stations, or to import power from other states where electricity was 15 percent to 30 percent cheaper. With the loss of many of its large industrial customers, PG&E was forced to lay off approximately 2,500 employees in 1987. To be more competitive, Clarke pressed the CPUC to make changes that would allow his company to offer better rates to large customers and to set up a major accounts program that would give individual attention to PG&E's biggest customers.
In 1988 PG&E reorganized into five new business divisions. Four of the divisions focused on primary markets: electric supply, gas supply, distribution, and nonutility business. The electric supply division generated, transported, bought, and sold electricity for the distribution division and for other wholesale customers throughout the western United States. The gas supply division acquired natural gas for the distribution and electric supply divisions and for large customers outside PG&E's service area; it operated about 5,000 miles of pipeline from southern California to Alberta, Canada, as well as underground storage tanks. The distribution division provided gas, electric, and steam service to customers and was responsible for maintaining the customer base. The nonutility operations included natural gas exploration and production, enhanced oil recovery, real estate development, and power plant operations. The company formed a subsidiary, PG&E Enterprises, to manage the nonutility businesses. The fifth division, engineering and construction, provided services to the other divisions and was responsible for designing and building most of the company's dams, power plants, and other transmission and distribution systems. The new structure was designed to help managers identify costs, know their customers, understand their competition, and respond quickly to technological and regulatory changes.
In 1988 the company took a $576 million charge to pay for cost overruns during the construction of the Diablo Canyon nuclear plant. The charge reduced net income for 1988 to $62.1 million.
Also in 1988 PG&E-Bechtel Generating Company, a joint venture of PG&E and Bechtel Power, began construction of its first power plant, in Montana. The joint venture was formed to build and operate plants outside of PG&E's territory. By 1990 the venture had completed the Montana plant, had one under way in Pennsylvania, and was planning another in New Jersey.
PG&E was well prepared for the major earthquake that hit the San Francisco area in 1989. Although power was cut off from 1.4 million customers, it was restored to one million of them within 12 hours. The company sustained $100 million in damage, mostly to transmission and generating equipment, with distribution and communications barely disrupted.
The 1990s: Preparing for Full Deregulation
In 1990 the company added a sixth division, nuclear power generation, which was responsible for the Diablo Canyon nuclear power plants and the support services they required. Earnings were strong in 1990, with an increase of 10.5 percent from 1989. PG&E had held the operating costs of its utility business at 1986 levels, while utility revenues had increased 20 percent during the years 1986 to 1990. In anticipation of an increasingly competitive market, the company began a program in 1990 to reduce its management staff by 300 over the next three years. The utility business accounted for about 70 percent of PG&E's earnings in 1990, but the company, through PG&E Enterprises, continued to pursue nonutility ventures that offered a potentially higher return than the strictly regulated utility operations.
The flight of large industrial customers to independent suppliers continued to hurt PG&E in the early 1990s. Since the mid-1980s, the company's annual revenues from such customers had dropped by $400 million. As a result, PG&E's need for gas dropped, leaving the company short on its longstanding contracts with gas producers. In 1992 three Canadian gas producers sued PG&E for not fulfilling its contracts for gas purchases. The following year, PG&E paid $210 million to settle the suit.
In 1994 Stanley T. Skinner, who had been a PG&E employee for years, became chief executive officer. Skinner pushed ahead company plans to adapt to increasing deregulation. Although PG&E was the nation's largest investor-owned utility, it faced out-of-state competition with prices 25 percent lower than its own. Cost-cutting was a major goal for the company; it had laid off 1,500 employees in 1993 and planned to lay off another 1,500 in 1994. The company cut its spending on energy conservation programs by $100 million in 1994. Skinner also planned not to renew contracts with alternative energy suppliers, which the company had been forced to make in the regulated environment. In 1994 PG&E paid $1.6 billion for power from solar, wind, and other alternative sources. According to Skinner, once freed from regulation the company could buy that power from traditional sources for half the price.
To offset potential losses of its California customers, PG&E moved to beef up its nonregulated business in the mid-1990s. PG&E Enterprises formed U.S. Generating Co., a joint venture with Bechtel Group, to build power plants in the United States and eventually in China, India, and South America. Other strategies included selling plant management and advising overseas customers on energy conservation. In 1995 PG&E moved into energy commodity purchasing and portfolio management with the creation of a new subsidiary, PG&E Energy Services.
In 1996 subsidiary Pacific Gas Transmission acquired a 389-mile natural gas pipeline in Australia for $136 million. The following year PG&E increased its natural gas supply business by purchasing Valero Energy for $1.5 billion.
In 1996 California law reduced the rate of return it allowed PG&E to earn from its Diablo Canyon nuclear plant from 17 percent to 6.77 percent. In addition, the company agreed to accelerate the depreciation on the Diablo plant from 20 years to five in 1998. Because Diablo contributed almost 40 percent of the company's earnings, these two changes would result in a significant loss of earnings for PG&E in 1998.
In 1997 PG&E terminated the implementation of a new customer information system, which it had bought from IBM for $100 million. The company said the plan had failed because the system could not adapt quickly enough to changes wrought by deregulation. In another blow in 1997, PG&E was found guilty by a California court of 739 counts of negligence and fined $2 million. According to court documents, PG&E had been cutting its budget for tree trimming; inadequate trimming near power lines was found to have caused at least one wildfire.
PG&E Energy Services expanded rapidly in the late 1990s, opening 17 offices across the United States in 1997 alone. Targeting its services to commercial, agricultural, and industrial customers, the subsidiary hired McCann-Erickson Worldwide that year to create a national advertising campaign. By 1998 PG&E Energy Services had signed contracts for a total of more than $1 billion with such customers as McDonald's, Atlantic Richfield Co., Safeway, and Blockbuster Video. Another of the company's unregulated businesses, U.S. Generating Company, became a wholly owned subsidiary in 1997 when PG&E bought out Bechtel's interest in the joint venture.
PG&E's efforts to make its utility business competitive were showing signs of progress in 1998. That year it signed a contract with Ultramar Diamond Shamrock worth $2 billion to provide power to the customer's refineries, pipelines, and gas stations. Also in 1998 PG&E bought 18 non-nuclear power plants from New England Electric for $1.6 billion.
Principal Subsidiaries: Pacific Gas & Electric Co.; Calaska Energy Co.; Eureka Energy Co.; Natural Gas Corporation of California; PG&E Generating Co.; PG&E Resources Co.; Pacific Gas Transmission Company; Alberta and Southern Gas Company Limited (Canada); Pacific Gas Properties Company; PG&E Enterprises; Mission Trail Insurance (Cayman) Ltd.; Pacific Energy Fuels Co.