Oct 29, 2009
Executives
Gabe Togneri – VP, IR Peter Darbee – Chairman, CEO and President Chris Johns – President of Pacific Gas and Electric Company Kent Harvey – SVP and CFO Chris Warner – Chief Regulatory Counsel Jack Keenan – SVP and COO
Analysts
Paul Patterson – Glenrock Associates Jonathan Arnold – Deutsche Bank Lasan Johong – RBC Capital Markets Michael Goldenberg – Luminus Management Annie Tsao – AllianceBernstein Hugh Wynne – Sanford C. Bernstein & Company Michael Lapides – Goldman Sachs Ashar Khan – Incremental Capital
Operator
Good morning and welcome to the PG&E third quarter earnings conference call. At this time, I would like to introduce your host, Gabe Togneri, with PG&E.
Thank you and have a good conference. You may proceed, Mr.
Togneri.
Gabe Togneri
Thank you Monique, and good morning everyone. We issued our earnings release earlier this morning along with the usual supplemental tables and including the Reg G reconciliations.
The same information can be found in the 8-K report we furnished to the SEC this morning, and we will also file our joint Form 10-Q for the Corporation and for Pacific Gas and Electric Company today. I will remind you that our prepared remarks and the Q&A session to follow will include forward-looking statements based on assumptions and expectations that reflect information currently available to management.
Actual results may differ materially from those forward-looking statements. Important factors that may affect our actual results are described in our press release and in the reports we file with the SEC.
Those factors include the risk factors and other factors described in our annual report on Form 10-K for the year ended December 31, 2008, and our Form 10-Q reports. Leading the discussion today will be Peter Darbee, our Chairman, CEO, and President of PG&E Corporation; Chris Johns, President of Pacific Gas and Electric Company; and Kent Harvey, CFO for the Corporation.
Other key members of the team are here and they will participate in the Q&A session. And with that, I will turn things over to Peter.
Peter Darbee
Thanks Gabe and good morning. Thank you all for joining us today.
Mis-challenging [ph] economic environment, we have another solid quarter to report. Earnings from operations came in at $0.93 per share.
Today, we are reaffirming guidance for earnings from operations for 2009, 2010, and 2011. Our primary business is and will remain the regulated utility.
As a result, we have a total commitment to running that business and running it well. We continue to feel positive about the company’s progress on operational excellence, efficiency and work priorities.
As the context for our comments today, I would like to start by reiterating the main elements of our investment case. A primary focus is our plans for substantial rate base investment.
This investment is driven by our customers’ needs for safe, clean and reliable energy. It’s also shaped by our regulators and legislators’ policy objectives.
These include promoting energy efficiency, expanding renewable resources, and adopting new technologies that are critical for a low carbon economy. Our goal of environmental leadership not only aligns us with all of these important issues and constituencies, it also positions us well in a changing world.
Stability and transparency are also part of our value equation. Our cost of capital adjustment mechanism was recently extended by the CPUC.
It now runs through 2012, with an authorized ROE of 11.35% and an equity ratio of 52%. This provides more visibility and stability for our investors.
Revenue decoupling adds to that stability by keeping our revenues steady, despite a challenging state economy. It also motivates us to pursue customer energy efficiency programs.
This helps build closer relationships with our customers as we encourage them to use energy more efficiently. Additionally, we also have a mechanism in place for a number of years to ensure the pass-through of our procurement costs.
This has been tested by the volatility of gas prices in recent years and has proven to be dependable. All of this allows us to focus on running our business to the benefit of our customers and shareholders.
Chris will now provide you with some of the details on the company’s operations and ongoing projects, then Kent will take you through the financials and discuss recent regulatory events. Chris?
Chris Johns
Thank you Peter. I am going to cover operations and provide an update on state legislative activity.
Our two power plants under construction, Calusa and Humboldt, continue to progress on time and on budget. They are both scheduled to come on line in 2010.
We also recently announced the results of our 2008 long-term request for offers for conventional resources, which targets resource needs by 2015. There are four natural gas powered projects that we have recommended to the CPUC.
Of the four, one is a combined cycle facility that was bid into the RFO as the turnkey project, that we would own and operate upon completion. It’s a 580-megawatt project located in our service area that if approved should be completed in 2014.
It is when our investment would occur. Capital costs are confidential at this point, but we will be able to share more information with you as the project progresses through the approval process.
We also recently opened our Grid Control Center, a new state-of-the-art facility focused on improving the operations of our transmission network. It will eventually consolidate 15 transmission dispatch centers throughout our territory and will allow us to modernize and get better information on what’s happening with our transmission grids.
It will also make us more efficient and effective in planning for maintenance and repairs and responding to transmission interruptions and outages. The center is housed in a lead silver certified building, which is 10% more energy efficient than the already aggressive California standards.
A common theme of ours over the past few quarters has been a focus on operational excellence in productivity and some belt tightening to mitigate some of the impacts of the economic slowdown. We have improved processes to productivity in several areas, and have trimmed employee-related expenditures, reduced vendor and consultant costs, and lowered fleet-related expenses.
As part of this broad company-wide effort, we have also reduced our workforce by a little over 2%. It will go through the financial implications of the reductions in just a couple of minutes.
Last thing I will mention on the operations side is that two weeks ago, we were hit by the strongest October storm on record in over 40 years. It’s very rare to experience this so early in the storm season.
Over 200 poles were damaged as were over 300 transformers, and we had 900,000 customers lose power. Our crews responded very well and had over 95% of the affected customers back on line in less than 24 hours, and the vast majority of those in substantially less time.
On the legislative front, Senate bill 695 was signed into law earlier this month, with support from various parties including PG&E. This will allow us the rate cap on the residential customers who consume the least amount of electricity.
You will recall that since 2001, residential rates at the Tier 1 and 2 levels of our 5 tier rate structure have been frozen. As a result, all increases in costs since then have been borne by the higher tiers.
This legislation addresses that imbalance and it allows the CPUC to reallocate some costs across the different usage levels. It partially reinstates direct access with limitations for industrial and commercial customers, while creating a more level-playing field by holding all providers to the same standard for resource adequacy, renewable generation in compliance with AB 32 greenhouse gas legislation.
In that same vein, we are going to share some information about a potential ballot initiative in June of 2010, in which we are actively involved. And it’s called the Taxpayers Right to Vote Act.
If passed, it would require two-thirds approval from local voters before public funding could be used to take over utilities assets. This major if we proceed forward would guarantee that voters have a voice in cases where local officials are expending scare resources in an effort to take over parts of utilities operations.
We believe taxpayers should have a say before the local government spends millions of dollars to get into the power business. We have faced potential takeovers multiple times over the last several years, and we have had to expend significant resources to oppose these efforts.
The success of this initiative if placed on the ballot could significant reduce the need for taxpayers and utilities to oppose these local government takeover attempts. Right now, the initiative is still being considered, and we will keep you updated as the initiative progresses.
With that, I will turn it over to Kent.
Kent Harvey
Thanks Chris, hello everybody. As we announced earlier this morning, PG&E Corporation earned $358 million, or $0.93 per diluted common share in earnings from operations in the third quarter.
On a GAAP basis, we earned $318 million, or $0.83 per diluted common share. This compares to $304 million or $0.83 per diluted share for the third quarter of 2008, and that’s on both GAAP and non-GAAP basis.
As Peter indicated, we are reaffirming our guidance for earnings from operations for 2009, 2010, and 2011. Table 4 in our supplemental earnings package shows the primary drivers of earnings from operations in the third quarter.
These include an increase of $0.06 per share relative to 2008, as a result of revenues associated with higher authorized rate base investments, an increase of $0.03 as a result of expenses incurred last year to defend our positions on local and statewide ballot issues with no similar expenses this year, an increase of $0.03 due to three smaller items about $0.01 each, that’s an incentive award for our core gas procurement program, lower uncollectibles and lower environmental accruals, and then an increase of $0.02 made up of miscellaneous items. Partially offsetting these increases was a reduction of $0.04 associated with higher shares outstanding compared to the third quarter of last year.
As you know, due to higher equity issuance in the first half of the year from our 401(k) and drip programs, in August, we shifted these programs to open market purchases. Up until that time, the programs had provided $228 million of cash.
We will continue to monitor our equity needs going forward, but I currently expect we will resume new issuance for our 401(k) and drip programs in early 2010. We don’t expect to meet the issue any new blocks of equity until 2011.
I want to take a moment to go through the items impacting comparability and I will refer you to the Reg G reconciliation table. The first item is our tax settlement and they have provided a positive impact to GAAP earnings of $0.18 during 2009.
This amount actually increased by $0.03 from last quarter as a result of recording the state benefit associated with the tax settlement. The second item of recovery of cost associated with valuing our hydro facilities, and now it’s fully reflected in the second quarter and had a positive impact on GAAP results of about $0.07 a share.
The third item is the accelerated gas system integrity survey and associated maintenance work. This one is a big undertaking and we have been ramping up our effort during the year.
We spent about $23 million on this during the third quarter and that brings us to a total of $54 million for the first three quarters of the year. And when all is said and done on this one, we expect that we will utilize the upper end of our range of up to $100 million, but a portion of this may spill over into the first part of next year.
We have added an additional item impacting comparability associated with the cost of the workforce reduction that Chris mentioned. The employees who are affected qualify for severance and the overall cost is estimated to be $57 million and $70 million pre-tax, which is about $0.09 to $0.11 per share of a range.
We have reflected $0.09 in the third quarter results. We expect that some adjustments from implementation will be included in the fourth quarter.
A few quick updates on the regulatory front. First, as Peter mentioned, we received a positive decision in our cost of capital case two weeks ago.
The PUC approved the settlement we filed with the division of ratepayer advocates, and that extends the adjustment mechanism for our ROE and maintains our current capital structure, both through 2012. In September, we filed a gas transmission in storage rate case, which covers 2011 through 2014, and we have requested a first year revenue increase of about $67 million.
And then, finally, we continue to expect to file our 2011 general rate case late this year. We hope that both the PUC [ph] and the gas transmission case resolve near the end of next year.
With that, I will turn it back over to Peter.
Peter Darbee
Thanks Kent. Over the past couple of years, many of you have heard me outline the elements of our strategy.
This strategy has helped us to sharpen our focus and has led to positive results like solid earnings, the earnings that we reported today. The five key elements are the following; one, understanding our customer needs better than ever before; two, delivering on operational excellence; three, working constructively with regulators and policy markers; four, being an environmental leader; and five, supporting our communities.
Today, I am going to elaborate on one of these elements, understanding our customers and their needs. We recognize that our customers are not all the same, in other words, they are a heterogeneous group.
They have different needs and expectations and that means they value different services from PG&E. We have made a significant commitment to understanding exactly what those references are, so that we can use this information to better target and customize our offerings.
For instance, through our research, we have learnt that there is a segment of our residential customer base that wants to hear more from us through e-mail and text messaging. These customers are particularly interested in energy efficient appliances and the Internet is their first source of information.
For them, we provided tailored online programs that can analyze their usage and help provide concrete suggestions for reducing their bills. Another segment of residential customers prefer to learn about our services through television commercials or in-store promotions.
They benefit from our in-store rebates on products like home appliances. They are also interested in programs that will help them manage their bills like our bounce payment plan.
By understanding our customers’ individual needs and preferences, we can more successfully develop and market all of our programs and services. We look forward to continuing to apply this kind of customer insight as we move ahead with the next three-year push on energy efficiency.
Last month, we received a final decision from the CPUC, setting a budget of $1.3 billion for 2010, 2011, and 2012 energy efficiency programs. We are excited to begin their implementation.
No other state in the country has committed as much the energy efficiency and demand response as California. This decision allows us to take energy efficiency to an even higher level and we see opportunities as we investigate new programs.
We continue to work on efficiency codes and standards, to meet new construction appliances and equipment as efficient as possible. As in the past, incentives are a critical component of keeping California the leader in energy efficiency.
On the demand response side, smart meters will enable time-abuse pricing for more of our customers. Once again, understanding customer needs in the design phase is critical to the success of these programs.
Over the longer term, developments like plug-in electric cars will change the shape of our load, making time-abused pricing even more important. Last week, I was in Detroit at a major gathering of key players in the development of electric cars.
My estimate was that there were more than 500 people of this conference. The group was made up of auto manufacturers, supporting vendors, engineering firms, utilities, investors and of course potential customers.
I sensed an excitement that tells me that the wired use of electric cars is soon going to be a reality. These innovations are going to be adopted first in places like San Francisco, Berkeley Marine, and the South Bay, and that of course is PG&E territory.
So, we will continue to spend a lot of time working with our customers, industry and technology specialists, and our regulators so that we can plan to be ready for that future. This will help us invest wisely to benefit our customers and shareholders alike.
And with that, we are now ready to take your questions.
Operator
(Operator instructions) Our first question comes from the line of Paul Patterson with Glenrock Associates. You may proceed.
Paul Patterson – Glenrock Associates
Good morning. Can you hear me?
Peter Darbee
We can.
Kent Harvey
Yes, Paul.
Paul Patterson – Glenrock Associates
My interest sort of was peaked by this initiative that you guys are doing. I mean, for years, you have been meeting of these initiatives to take over the muni supplies parts of your system and they always seem to have not worked.
Am I worried about that, I mean, has there ever been a successful attempt to take the muni supplies in the last 10 or 15 years?
Peter Darbee
Not in the recent past. We clearly taken a position that we value of our customers very much and we are going to stand up and resist efforts to take over our customers, and those efforts by municipal government.
Paul Patterson – Glenrock Associates
Okay. Now, with $0.03 I guess that you were impacted by in 2008, but you are not getting any impact this year, is that correct?
Peter Darbee
Nominal impact this year.
Paul Patterson – Glenrock Associates
Okay. And what made you – I don’t remember this kind of a legislative or initiative efforts that you guys are making, what spurred you guys to come up with this, anything in particular or is there anything we should be thinking about?
Peter Darbee
What occurred to us was we were repeatedly faced with this and we were spending significant amount of money year-after-year. And so, we asked ourselves, what would be something that could discourage this over the longer term, and we also asked ourselves if government, you know, wants to raise taxes, it requires a 66 and two-thirds vote, if government were to use taxpayer money to take over private enterprises, we thought that they were on to be the first of voted the people, and secondly, it ought to be a recently high hurdle.
Paul Patterson – Glenrock Associates
Okay. That makes a lot of sense.
The severance expense, what kind of benefit do you expect to see from some – the severance plan in 2010?
Kent Harvey
Yes, Paul, this is Kent. I will just sort of briefly cover kind of the factors that are affecting us.
First of all, the economy has reduced our new business hookups and so, as a result, those parts of our business where we have lower volume than before, so that is a driver. And now, I think as we have talked about for some time, we have been looking at ways to reduce lower priority work and to find efficiencies in our processes, and so, I think this reflects all of those factors really.
The reductions we expect will give us efficiencies, say next year, roughly in the $30 million range when you look at the expense component of it.
Paul Patterson – Glenrock Associates
Okay. $30 million pre-tax, right?
Kent Harvey
That’s correct.
Paul Patterson – Glenrock Associates
Okay, great. Thanks a lot.
Operator
Thank you Mr. Patterson.
Our next question comes from the line of Jonathan Arnold with Deutsche Bank. You may proceed.
Jonathan Arnold – Deutsche Bank
Good morning.
Peter Darbee
Good morning Jonathan.
Jonathan Arnold – Deutsche Bank
I will just pick up on that last question first. So, the $30 million pre-tax of benefit in 2010, is that something you were just thinking about within the context of the range that you have on 2010 guidance, or is this something that’s helping to push you up within the range as you look at your expectations for next year, or keep you in the range?
Kent Harvey
Yes, and this is Kent again. Yes, we do view it as consistent with our guidance range for 2010.
If you remember back to our analysts conference earlier in the year, we laid out a number of assumptions and ranges that would be consistent with the overall guidance range we were providing, and one of those was that we would seek out and obtain efficiencies in future years. And so, for 2010, I think our range was $50 million to $60 million of efficiencies and this is a big step in that direction.
Jonathan Arnold – Deutsche Bank
Okay, thank you. And then on a different topic, there seems to have been some noise in the state around some of the – out of the political arena, pushing back on the Smart Grid cost and effectiveness of the meters being put in, can you comment at all on that whole area and whether we should – and how concerning you find that area of focus from the politicians?
Chris Johns
Hi Jonathan, this is Chris Johns. What we really saw there and this was in the central part or the central valley part of our service territories down around Bakersfield and the Fresno areas, and what the concern that was that arose was really around customers and their bills.
They had some concern about some of their bills that they were seeing in the summertime, and when we went down and investigated that, what we really found was a couple of things. One is, is that there were a couple of rate changes that occurred late last year and early this year, and if you could recall within our state, we have a tiered system by different tiers, and the first two tiers are frozen, so that most of the rate changes affect the third, fourth and fifth tiers, which are the higher end users.
The second thing that we found is, is that this summer was at least in one or two of the months was a little bit higher than we have seen in the past summers. So, we saw for instance down in Bakersfield, I think we had 17 days of temperatures over 100 degrees versus about half of that number last year.
And so, when you combine those, you saw some pretty good increases in our customers’ electric bills for one or two of the months during the summertime. And so, we went through the process of explaining that.
Now, a couple of people that maybe that was because of their meters, because maybe they had a new meter in there, but we have pointed out is, is that the meters we had down in Bakersfield are the same meters that have been there for about 2, 2.5 years. And so, we have really done a lot of reach out with our customers to help them get a better understanding of the factors around the rate changes and around the temperatures and their impacts on their bills.
And so, that’s really what the issue has been. We have done a lot of testing on our meters to provide people the facts around the circumstances down there.
And so, we feel pretty confident about the performance of those meters in our area.
Jonathan Arnold – Deutsche Bank
Okay. And I will ask one final thing if I may, you mentioned of the rate tiering issue, what’s the timing for this to actually be implemented, would it be as part of the 2011 GRC rate implementation or could this happen sooner than that?
Chris Johns
Yes, as you are alluding to, there was a law that got passed, you know, just recently signed by the Governor, that allows for the gradual increasing of the Tiers 1 and 2, so took the freeze off of that. We have gone ahead and made a filing with the CPUC to implement the first part of that gradual change, and we have done that filing.
It will have to go through the process, we would like it to take the impact, I think in the first quarter of next year, beginning of next year is where we would be targeting.
Jonathan Arnold – Deutsche Bank
So, it’s a separate track from the rate case basically?
Chris Johns
Yes, yes.
Jonathan Arnold – Deutsche Bank
All right. Thank you.
Operator
Thank you Mr. Arnold.
Our next question comes from the line of Lasan Johong with RBC Capital Markets. You may proceed.
Lasan Johong – RBC Capital Markets
Thank you. Just following up on that last question, I am assuming that the Tier 1 and Tier 2 unfreezing of the rates means that you are going to basically redistribute the revenue within the 5 tiers as opposed to, I suppose increasing Tier 1 and Tier 2, which would give a benefit to PG&E.
Chris Johns
Lasan, this is Chris Johns again. Yes, absolutely, when we are talking about this, it’s really rate design and the revenues in total stay the same.
It’s just a matter of distribution around who pays at what levels of usage.
Lasan Johong – RBC Capital Markets
Perfect. Second question, in your 8% compound annual growth rate estimate going forward, what RPS spend value you are assuming, is it the old 20% by 2010 or is it the 33% by 2020?
Kent Harvey
Our guidance range is that we have done for 2009, 2010, and 2011. I don’t believe we have really identified the renewable standard as a key underlying assumption in that respect for our earnings from operations.
For most through the current time, for most of the compliance we have been doing, most of that has been contract and that’s the pass-through cost with customers. As you know, we have proposed a votable take program that would include investments by the company, and that is actually – those investments are reflected in the 2011 number, but only to a small extent, because the majority of that investment would be after that guidance period.
Peter Darbee
But I want to add, we have been working for a number of years towards 20% by 2010 and indicated that it would require the utilization of the FLEX provisions for PG&E to get there. But really pretty much the state, the legislature, the Governor, the commission have been operating under the view that California Energy Policy supports 33% by 2020.
And so, as we lay out our plans, we are focused on that next hurdle that needs to be met by 2020. And so, that’s assumption underlying our business.
Lasan Johong – RBC Capital Markets
So, I don’t want to put words in your mouth, but can I kind of summarize what you just said or let me summarize what I just heard. It sounds like there’s upside to your earnings potential?
Peter Darbee
No, I think Lasan, you should listen to what we said and you could draw conclusions, but I don’t want you to announce conclusions that you reach and say the company’s conclusions. What I just want to reaffirm what we have said is we have been operating under 20% by 2010, and then we have been focused on 33% by 2020, that’s what we have said.
Lasan Johong – RBC Capital Markets
Okay, fair enough. One last question for me.
You mentioned potential equity issue in 2011, are we talking about just a continuation of the drip program, or are we talking about a secondary non-deal (inaudible) type big chunk of equity?
Kent Harvey
At this point, our focus has been on the drip and the 401(k) programs, and we have turned them off for this year as I said earlier, because our issuance exceeded our expectations for the first part of the year. I indicated that we would expect to resume, that was next year.
I also when I was talking about block equity, that was in addition to the 401(k) and drip program, and we do have the potential to meet that as early as 2011.
Lasan Johong – RBC Capital Markets
And I am assuming that would be going towards funding your cap growth program?
Kent Harvey
That’s correct.
Lasan Johong – RBC Capital Markets
Fantastic. Thank you very much.
Operator
Thank you Mr. Johong.
Our next question comes from the line of Michael Goldenberg with Luminus Management. You may proceed.
Michael Goldenberg – Luminus Management
Good morning.
Kent Harvey
Good morning Michael.
Peter Darbee
Good morning Michael.
Michael Goldenberg – Luminus Management
I just had a quick question on diluted shares outstanding. Now, I understand your basic share count is roughly 360, and then fully diluted for the converts would be – I am sorry – 370, and roughly 370 basic and fully diluted would be 390.
However, for year-to-date, I thought the way you are supposed to calculate is take, since you have about 50% payout ratio, roughly half the income 600 million gets divided over 370 and the others roughly another 600 million gets divided by 390 over the course of the year, and you would get somewhere about 380 diluted shares outstanding. So, while I understand, while the Q3 shares that fully diluted were 387, I don’t understand why the nine months are also 387, especially in the previous reports, it was closer to 370?
Kent Harvey
Michael, this is Kent. You have raised an incredibly arcane calculation that is very complex to follow.
So, let me acknowledge that upfront. And this is probably one where we could spend some time offline walking through the complexities of this calculation.
There is a seasonal impact that adds to what would already be complex. So, the impact that we show in the walk that we have here for the third quarter, for example, shows that we had additional shares that were issued between the third quarter of ’08 and the third quarter of ’09, and then also because the third quarter earnings are higher than other quarters.
The two class calculation allocates a higher proportional weight to the diluted plus participating securities share count in the calculation, and it creates a lot of complexity when you look at each quarter.
Michael Goldenberg – Luminus Management
Let’s simplify that. For full 2009, you expect fully diluted to be around 380 or 390?
Kent Harvey
We haven’t provided a specific forecast of our share count for full year, Michael.
Michael Goldenberg – Luminus Management
Okay, all right. I guess I am still confused, but maybe we can take that offline.
Kent Harvey
Yes, that would be great, because frankly, I couldn’t follow all of your numbers, too. It’s hard on this phone.
Peter Darbee
We would be happy to do that offline, Michael.
Michael Goldenberg – Luminus Management
Thank you.
Operator
Thank you Mr. Goldenberg.
Our next question comes from the line of Annie Tsao with AllianceBernstein. You may proceed.
Annie Tsao – AllianceBernstein
Good morning.
Peter Darbee
Good morning Annie.
Annie Tsao – AllianceBernstein
Can you comment on the quarter, how is your uncollectible and going forward, can I expect your O&M is sustainable and then it can also come of the uncollectible that you were talking about?
Kent Harvey
Annie, I did comment that in the third quarter. Our uncollectibles were actually slightly better than the third quarter of last year when we had begun seeing some of the impacts obviously from the economy in the state, and we are very encouraged by that.
You may remember earlier in the year, we had a significant negative year-over-year impact, and we worked really hard to mitigate it, both by helping customers into the assistance programs that we have, as well as trying to get them earlier in the process, so that we could better manage the bad debt. And so, we believe that our efforts have been paying off, and our objectives is to try to continue to mitigate that impact for the remainder of the year and into next year.
Annie Tsao – AllianceBernstein
And can you also talk about your renewable RPS, and how far you are talking about 20% by 2010, how far are you down on the path right now?
Chris Johns
Annie, this is Chris Johns. We have right now 14% of our energies being delivered from renewables, but in addition to that, we have contracted for over 20% to come on line.
And as Peter said, the law requires us that 20% by 2010, but it has flexible compliance provisions that allow by 2013. The real issue for us is that we have got the contracts out there like I said in excess of 20%, but because of the economy and some of the other impacts of getting permits and transmission, we are not positive that all of those contracts will come on line.
That’s why you continue to see us do more contracts, seeing and look for opportunities like our TV programs, own it, and quite frankly, we also know that we have to do the 33%, and so, those will all be part of getting us to that next level.
Annie Tsao – AllianceBernstein
Thank you.
Operator
Thank you Ms. Tsao.
Our next question comes from the line of Hugh Wynne with Sanford C. Bernstein & Company.
You may proceed.
Hugh Wynne – Sanford C. Bernstein & Company
Hi, I just wanted to ask a question regarding the legislation that you mentioned that would partially reinstate direct access for industrial and commercial customers. Do you see any economic consequences of that legislative change on your earnings outlook, or do you feel that you are completely protected by the decoupling of revenues from megawatt hour sales?
Kent Harvey
This is Kent, let me take a crack at that one. With direct access, what we are talking about is our customers would continue to be customers for the distribution of the energy.
That really wouldn’t change, in this case, customers would rely on third parties in order to provide the commodity component of their service. And for us, the commodity component is not what we really earn our money on, we earn our allowed return on our net investment in our rate base.
And most of our commodity activity that purchase this part of our commodity activity really is a pass-through of cost without any profit component. So, in that respect, we wouldn’t expect any significant impact on our ongoing earnings capability.
Hugh Wynne – Sanford C. Bernstein & Company
Is there any impact on potential investments in generation plant for reliability requirements or not?
Kent Harvey
I think that kind of gets into the magnitude of the direct access that we are talking about here. And maybe I can ask Chris Warner, probably just talk a little about the specifics of the legislation.
Chris Warner
Hugh Wynne – Sanford C. Bernstein & Company
So, basically since the distribution megawatt hour sales will be unaffected, no impact in your view on revenues, and any impact on the potential construction of new generation plant you feel are limited by the provisions of the law, is that more misread?
Kent Harvey
The way it works is it’s actually what you would think of as a second order or maybe third order impact. So, what you would do is you would plot out what you expect future generation over the next 10 or 15 years, then you identify what would be your erosion due to direct access or what would be the level of direct access, and then that would reduce the total generation load that PG&E would have to provide for and then you would have to make an assumption about of that load, how much do you expect would be provided by third parties as contracting, and how much provided by generation that the company would own, and then you would look at the capital investment associated with that.
That’s how you want to think about it. To date, I think we have provided about a third, maybe a little bit more than a third of the incremental new generation that’s been provided, in let’s say the last five to eight years.
Hugh Wynne – Sanford C. Bernstein & Company
Great, that’s very helpful. Thanks very much.
Operator
Thank you Mr. Wynne.
Our next question comes from the line of Michael Lapides with Goldman Sachs. You may proceed.
Michael Lapides – Goldman Sachs
Hi guys, quick question. Over the years, you had projects where you had signed a PPA with a third party who is going to build it and sell the power back to weather conventional or new.
Over the last few years, several of those projects have run into some stumbling blocks, just would love if you could give an indication of where some of those projects are and whether you actually need that capacity, and if you are not going to get it from the original contract winner, where you are likely to get that supply?
Jack Keenan
Yes, thank you. This is Jack Keenan.
I would be glad to answer that one. In August, middle of 2004, we did have two contracts failed to produce power plants, totaling approximately 300 megawatts.
You may remember in our 2008 long-term RFO, which was 800 to 1,200 megawatts, we were allowed to make up that additional approximately 300 megawatts. We actually have submitted applications to the PUC for just over 1,500 megawatts that were – we have had one approved so far and we are waiting for approval on the other three plants to be built in the future.
So, that’s how we are making up for that, and we still have one of the plants of 2004, the Russell City plant that was delayed, but that we expect to come on line in 2012.
Michael Lapides – Goldman Sachs
Okay. Thank you.
Jack Keenan
Sure, you are welcome.
Operator
Thank you Mr. Lapides.
Our next question comes from the line of Ashar Khan with Incremental Capital. You may proceed.
Ashar Khan – Incremental Capital
Good morning. Question, could you just remind us, the earning incentive revenues, how much are expected to be booked in the fourth quarter, how much were booked last year and for next year, could you just update us on that, please?
Kent Harvey
Yes. So, last year, we ended up receiving an incentive a little over $40 million.
This year, we have filed a settlement that would result in an incentive of approximately $77 million. The PUC staff issued recommendations for what ranges they thought were reasonable.
It was initially issued at zero to $20 million. However, they broadened their ranges later on in the subsequent filing, and their range ended up being quite broad zero to $90 million.
So, this is one we hope to get it resolved by the end of the year. And it’s really going to depend on how that comes out of the PUC at this point.
Ashar Khan – Incremental Capital
And Kent, what could we expect next year?
Kent Harvey
Well, our guidance range is for both of this year and next year that we provided earlier in the year. Actually, assume a range for CEE incentives of between zero and $30 million for both 2009 and 2010.
Ashar Khan – Incremental Capital
Okay. So, if it comes, is that going to be the final resolution, is that going to be an air marker where the earnings end up, so the earnings have become up higher than 30 I guess toward the 70, then you are at the higher end of the range, is that going to be the big variance in terms of --?
Kent Harvey
Yes. In terms of our fourth quarter factors, that is an uncertainty at this point in our results for the fourth quarter.
Ashar Khan – Incremental Capital
And you are expecting what we should hear about this, now in December or next month?
Kent Harvey
We are hopeful that we will see a proposed decision in the near future, and we are hopeful that we could resolve it before the end of the year.
Ashar Khan – Incremental Capital
Okay, thank you very much.
Peter Darbee
The State of California has really indicated energy efficiency is very important and they want to be a leader in California, and so, I think certainly certain member of the CPUC understand that if we were to be a leader, we need to create a dependable and understandable energy efficient incentive program. And so, we have certainly been encouraging them in that direction and I think certainly Wall Street would support that point here.
Ashar Khan – Incremental Capital
Peter, I was only trying to get a sense as to with three quarters of the year done, where you are expecting to come in the range of the earnings guidance, so I guess this could be a one big chunk where it could move you really to the top end or you could come to the midpoint or something.
Peter Darbee
I think what we laid out at the beginning of the year was zero to 30, and so certainly where we come out relative to zero to 30 will impact on where we come out in the range. And if we were to come out above that, I think you can draw the conclusions that we are following.
Ashar Khan – Incremental Capital
Thank you.
Operator
Thank you Mr. Khan.
Once again, ladies and gentlemen, if you would like to ask a question, press star followed by one. There are currently no additional questions waiting from the phone line.
Peter Darbee
All right. In that case, I will thank you all for taking your time to join us this morning, and I know in a few days, we will probably see many of you at the EEI Finance Conference.
So, please travel safely and we will see you there.