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PG&E Eyes Renewables, Carbon Law

Pacific Gas and Electric Corp. (PG&E) CEO Peter Darbee said San Francisco-based utility Pacific Gas and Electric Co. plans to invest heavily in renewable energy projects, in part because of the increasing financing barriers independent renewable developers face.

Darbee also emphasized that there is going to be debate over a national cap-and-trade program for carbon emissions and a national renewable portfolio standard (RPS). What remains to be seen is when and how they will be rolled out.

PG&E reported strong fourth quarter and full year 2008 earnings Tuesday, and Darbee touted a mix of technology advances and public policy shifts that all play into Pacific Gas and Electric Co.'s relatively small carbon footprint. He sounded confident that national carbon-limiting laws will be coming out of Washington, DC, in the first two years of the Obama administration.

"We've been at the forefront, working across the Edison Electric Institute's clean energy group, with Congress and also the administration," said Darbee.

PG&E executives are aware that some of the companies in the renewable energy space are hurting because of the recession and credit crisis, Darbee told financial analysts last Thursday at a PG&E-hosted investors conference in New York City. The large combination utility is worried that some of its renewable contracts, which add up to nearly 24% of its project power portfolio in 2012, could be in jeopardy. That's why the utility is looking at direct investment in projects.

PG&E said last Tuesday it plans to develop up to 500 MW of solar photovoltaic power in its northern and central California service area over the next five years. In a plan submitted to the California Public Utilities Commission (CPUC) that same day, PG&E proposed up to 250 MW of utility-owned PV generation -- PG&E's first direct investment in renewable generation in more than a decade -- and an additional 250 MW to be built and owned by independent developers under a streamlined regulatory process.

"We would deploy the panels -- proven PV technology -- on land at or near our substations and connect them right into our existing distribution system," Darbee said. "The beauty of the strategy is that it doesn't involve transmission, which can take years to build, and the need for permits [for small 1-20 MW systems] is nonexistent or minimized.

"We believe this is the easiest and fastest way to get into the renewables business, and this is where we plan to start," said Darbee, before elaborating on much broader, longer-term plans for PG&E as a renewable developer and operator. "We've already said in different announcements that we'd like to do more."

Darbee said PG&E's strategy is to pursue direct investments in other types of renewables, such as central station, utility-scale developments of solar thermal and wind.

"It also occurs to us that many of the counterparties that we have dealt with [independent renewable developer/operators] have found themselves not being sure they can raise capital in the current market," Darbee said. "Some developers have said that to us quite specifically. "The conclusion we have come to is that this could put pressure on the [renewable] contracts we have already signed. We've signed renewable contracts for more than 20% by 2010 and more than 24% by 2012, and so we have been working hard to be more than diligent in moving the 2010 requirement and gone beyond the minimum.

"But we are concerned that counterparties may not be able to deliver," he said. "By entering the business ourselves, we are doing all we can to meet and beat the requirements of the state" (20% in 2010 and 33% in 2020).

Keeping in mind that there are potential penalties after 2012 for major California utilities found wanting in the renewable area, Darbee stressed PG&E's strategy of even taking on what he called "distressed assets" in the renewable sector to show unequivocally that the giant utility is doing all it can.

"In that respect, it [direct investment] will be a 'defensive' strategy, as well as an offensive strategy," said Darbee, stressing that the renewables provide a "whole new" arena in which the utility can invest. Thus, he is touting the utility as a "growth" company.

Any of the scenarios for addressing carbon emissions examined by the company would be "relatively modest" in impact on the PG&E utility, he said. Utilities that would be hardest hit would be those that rely heavily on coal-fired generation, he said.

He said there is still "a bit of a debate" on whether there should be an auction, and if so, when in the sequence of events. Some people advocate allocating allowances initially and starting a cap-and-trade system later. "One could see as a compromise [developing] an initial allocation and then an auction," said Darbee. "One way to pay those [stimulus package-related budget deficits] down, would be from the dollars resulting from an auction."

In response to a question about the "sustainability" of the ongoing energy tax and investment credits, Darbee said he thinks Congress and the administration see the advantages of having a longer duration for the credits, such as what happened to solar last year, but the historical indicators are that Congressional members prefer short-term credits for political reasons.

PG&E managed to avoid being added to the recession's casualty list as proceeds from a multi-year tax settlement pushed 4Q2008 consolidated net income to $517 million, or $1.37/share, which is more than double the $203 million, or 56 cents/share, in the same quarter of 2007.

On a non-generally accepted accounting principles (GAAP) earnings from operations basis, which excludes the tax settlement, PG&E's 4Q2008 net income was 70 cents/share, compared with 56 cents/share in 4Q2007.

The company reported that net income for the year and quarter were increased substantially by the benefits of a multi-year tax settlement, the proceeds of which will help fund utility capital investments by the utility subsidiary.

PG&E's consolidated net income for full-year 2008 was $1.34 billion, or $3.63/share, compared with $1 billion, or $2.78/share, in 2007. Per-share earnings on a GAAP basis in 2008 include income from a settlement of 2001-2004 tax audits, totaling $257 million, or 68 cents/share. On a non-GAAP earnings from operations basis, which excludes the benefits of the tax settlement, PG&E's results in 2008 were $2.95/share, compared with $2.78/share in 2007.

The company attributed its year-over-year increase in earnings to earnings from higher authorized capital investments in utility infrastructure and energy efficiency incentive revenues, partially offset by higher expenses due to storm-related outages, natural gas system maintenance activities and an extended outage to replace the steam generators at one unit of the Diablo Canyon nuclear plant.

For 2009 the company reaffirmed its guidance of $3.15-3.25/share.

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