2010 FERC Form 1 - Pacific Gas and Electric Company

Name of Respondent
PACIFIC GAS AND ELECTRIC COMPANY
This Report is:
(1) X An Original
(2) A Resubmission
Date of Report
(Mo, Da, Yr)
04/08/2011
Year/Period of Report
2010/Q4
NOTES TO FINANCIAL STATEMENTS (Continued)
Balance at end of year $ 714 $ 673 $ 75 $ 712 $ 652 $ 37
The component of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2010 for
PG&E Corporation and the Utility is $39 million, with the remaining balance representing the probable deferral of taxes to later years.
PG&E Corporation and the Utility do not expect that the total unrecognized tax benefits would significantly change within the next 12
months.
PG&E Corporation and the Utility recognize accrued interest and penalties related to unrecognized tax benefits as income tax
expense in the Consolidated Statements of Income. Interest income net of penalties recognized in income tax expense by PG&E
Corporation in 2010, 2009, and 2008 was $3 million, $19 million, and $24 million, respectively. Interest income net of penalties
recognized in income tax expense by the Utility in 2010, 2009, and 2008 was $3 million, $14 million, and $11 million, respectively.
As of December 31, 2010, PG&E Corporation and the Utility had accrued interest income of $8 million. As of December 31,
2009, PG&E Corporation and the Utility had accrued interest expense and penalties of $11 million and $12 million, respectively.
Federal subsidy for Medicare Part D
PG&E Corporation and the Utility receive a federal subsidy for maintaining a retiree medical benefit plan with prescription
drug benefits that is actuarially equivalent to Medicare Part D. For federal income tax purposes, the subsidy was deductible when
contributed to the benefit plan maintained for these benefits. On March 30, 2010, federal healthcare legislation was signed eliminating
the deduction for subsidy contributions after 2012. As a result, PG&E Corporation and the Utility recognized an expense of $19
million in 2010 to reverse previously recognized federal tax benefits (recorded as an increase to income tax provision and a reduction
to deferred income tax assets for subsidy amounts included in the calculation of accrued retiree medical benefit obligation).
Tax settlements and years that remain subject to examination
On September 29, 2010, PG&E Corporation received the Internal Revenue Service (“IRS”) examination report for the 2005
to 2007 audit years and resolved all matters except for a few items that will be discussed with the IRS Appeals office. Included in the
2005 to 2007 audit was the resolution of the change in accounting method related to the capitalization of indirect service costs for
those years. As a result, PG&E Corporation recorded a $25 million reduction to income tax expense during 2010.
In tax year 2008, PG&E Corporation began participating in the Compliance Assurance Process (“CAP”), a real-time IRS
audit intended to expedite resolution of tax matters. The CAP audit culminates with a letter from the IRS indicating their acceptance of
the return. The IRS partially accepted the 2008 return, withholding two issues for further review. The most significant of these relates
to a tax accounting method change filed by PG&E Corporation to accelerate the amount of deductible repairs. While the IRS
approved PG&E Corporation’s request for a change in method, the IRS will audit the methodology to determine the proper deduction.
This audit has not progressed significantly because the IRS is working with the utility industry to resolve this matter in a consistent
manner for all utilities before auditing individual companies. On December 14, 2010 the IRS accepted PG&E Corporation’s 2009 tax
return without change.
In 2009, PG&E Corporation recognized an income tax benefit of $56 million from settling a claim with the IRS related to
1998 and 1999. Additionally during 2009, PG&E Corporation recognized $12 million in California benefits, of which $10 million was
attributable to this settlement and $2 million was attributable to the 2001–2004 IRS settlement. (The 2001–2004 IRS settlement
resulted in a $154 million tax benefit related to National Energy & Gas Transmission, Inc. (“NEGT”) and was recorded as
discontinued operations in 2008.) PG&E Corporation received total cash refunds of $605 million in 2009 related to these settlements.
The California Franchise Tax Board is auditing PG&E Corporation’s 2004 and 2005 combined California income tax returns,
as well as the 1997-2007 amended income tax returns reflecting IRS settlements for these years and claim filings that apply only to
California. It is uncertain when the California Franchise Tax Board will complete the audits.
PG&E Corporation believes that the final resolution of the federal and California audits will not have a material adverse
impact on its financial condition or results of operations. PG&E Corporation is neither under audit nor subject to any material risk in
FERC FORM NO. 1 (ED. 12-88) Page 123.27