Our Challenges

Achieving our vision depends on setting clear direction, adhering to our values and managing the business to deliver on our goals. It also depends on anticipating and continuously adapting to an array of ever-evolving, real-world challenges affecting our industry and society at large.

Along the way, we, like every large company today, inevitably encounter tough choices. We have to assess and adjust priorities. We have to balance competing or conflicting stakeholder interests. We have to consider trade-offs between immediate versus long-term objectives. We have to acknowledge and work within the practical boundaries imposed by time, economics, technology, government, human resources or other factors.

Because one important window into a company's corporate responsibility performance is the way it resolves the tensions that arise as these challenges converge, we believe it is important to share some of the most significant challenges our industry, and we at PG&E, face.

This section—newly added in this year's report—identifies several of these industrywide issues that are especially important to achieving our vision and the actions we are taking to address them. While we recognize this list is not comprehensive, our hope is that by providing insight into these areas, we also will give stakeholders a clearer lens through which they can understand and evaluate our overall performance.

Industrywide, rising costs of equipment, along with many other factors, are contributing to increased utility construction costs. Photo: Lewis Stewart

Better, Faster and More Products and Services

We believe that PG&E's ability to respond effectively to some of the most important trends in the industry hinges on borrowing and integrating best practices and cultural strengths that help drive some of the most successful competitive companies. The demand for higher levels of customer service, the growing role of innovation, the need to find efficiencies to help relieve cost pressures for customers, competition in global markets for human capital and raw materials—all are examples of realities that require new approaches to our business, streamlined processes and advanced technologies, as well as an expanded set of skills and talents.

As a 100-year-old company steeped in legacy practices and operating in a highly regulated environment, adapting our culture and our processes to these new realities constitutes a substantial undertaking.

We have embraced this challenge and are working across the business to perform better, faster and more cost-effectively. However, last year, setbacks in some areas reminded us that this will be a long-term, difficult change. Several important changes did not deliver the improvements we had anticipated, creating difficulties for our employees and customers.

A primary focus moving forward is on improving our execution, an area where we see significant opportunities to do better. With this in mind, we are monitoring and managing our performance with greater discipline than ever before. We are also devoting increased resources and attention to employee engagement, safety, better training on new tools and processes, thorough root-cause analyses of problems and stricter management accountability for following rigorous processes and improving results.

Developing Equitable and Effective Carbon Controls

We believe the adoption of mandatory, national carbon controls is urgently needed and inevitable in light of the risks of global warming. We also believe these policies may be the single greatest factor influencing the direction of the energy industry in the decades ahead. Eventually, addressing global warming will require a fundamental change in the way energy is produced, delivered and consumed in this country, and throughout the world.

Making a smooth transition to a low-carbon economy will be an enormous and complex challenge. It will require an approach that accelerates technology development and deployment, encourages timely action and recognizes that, ultimately, energy consumers, workers and communities will need help in making this transition.

PG&E is working at the state, regional, federal and international level to advance policies and responsible solutions that achieve these goals using a market-based approach. Market-based solutions can help to advance technology solutions and achieve environmental goals most cost-effectively. For example, we support a so-called "cap and trade" strategy that would set a limit on overall emissions and create a market for the buying and selling of emissions allowances among market participants.

Until a clear national program and international framework have been established, the uncertainty will make it challenging for companies to move forward with many longer-term investment decisions and technology choices. In this period of uncertainty, PG&E will continue to make investments on behalf of its customers that reduce the risks associated with future carbon regulation, while also allowing us to provide innovative products and services that both help to manage costs and reduce greenhouse gas emissions.

Making Smart, Sustainable Infrastructure Investments

A substantial portion of the nation's utility infrastructure is aging, inefficient and/or overburdened, increasing the risk of service interruptions for customers. Consequently, replacing and upgrading equipment and facilities in order to improve reliability and capacity is a major priority for many gas and electric companies today, including PG&E. Industrywide, the capital demands are estimated to range from approximately $700 billion to upwards of $1.3 trillion over the next 15 to 20 years to help meet a projected 30 to 45 percent increase in demand and improve reliability. These investments will be made and costs incurred by business and energy consumers alike. The question is, will business make the right choice today that will last into the future?

Indeed, PG&E expects to invest $13.6 billion from 2008 through 2011 in its system—one of the largest capital investment programs in the industry.

Balancing the nation's utility investment needs against the need to keep energy costs affordable for customers represents a challenge for the entire industry, especially in light of other factors putting upward pressure on energy prices (e.g., higher materials costs, increasing costs associated with alternative energy sources).

Additionally, the industry's challenge is also to work with regulators, customers and other stakeholders to ensure we are making long-term capital investment decisions that take into account questions of environmental and economic sustainability. Investments that appear to be more cost-effective today may turn out to be uneconomic in a carbon-constrained world. PG&E is working to manage this by making investments today that we know can serve the economic needs of the 21st century, including those that support the smart grid, advance energy efficiency and support renewable technologies.

Realizing the Full Potential of Clean Energy Alternatives

The renewable energy sector is currently attracting historic levels of interest and investment. Currently, 26 states, including California, are pursuing goals to increase the percentage of their energy that comes from renewable resources.

We are working to meet California's current renewable energy targets. PG&E has been signing contracts to add new supplies of renewable energy to its energy mix at a faster rate than ever before. PG&E is on track to meet the state's objectives.

The nation's success in harnessing the full potential of renewable power will also depend on solving some challenges currently holding back progress.

For example, it is essential that stakeholders work cooperatively to support the building of new transmission lines to connect renewable energy facilities, often in remote locations, to population centers. PG&E is currently exploring such projects in California's Central Valley and the upper Northwest.

Other important support for renewables includes extending tax incentives for developers, so that investors have a clearer picture of the long-term financial returns on renewables investments. These benefits help offset capital costs for renewables that in many cases remain high relative to conventional sources. PG&E is advocating such measures with federal policy makers.

Finally, it is important to nurture the continuing development of new and existing technologies, including the development of energy storage solutions that can help address the intermittent nature of some renewable supplies, like wind. PG&E is actively assessing and supporting these new technologies.

Advancing Energy Efficiency and Demand Response

California has kept per capita electric energy use flat for the past 30 years, while the rest of the country has seen per capita energy use increase by, on average, 50 percent over this same period. Many factors account for this disparity, including California's codes and standards for energy-efficient buildings and appliances, as well as a regulatory philosophy that treats energy efficiency as the first option for addressing growing energy needs and provides significant incentives for utilities. Achieving comparable energy efficiency gains in other parts of the nation will require state and federal policies that encourage energy efficiency in similar ways. For example, a recent study by McKinsey & Company found that the unlocked potential for energy efficiency in the U.S. could achieve upwards of 30 percent of the greenhouse gas emission reductions in proposed federal legislation and also generate positive economic returns.

In fact, at PG&E, over the next decade, our plans call for meeting more than half of the energy demand growth in our service area through improvements in energy efficiency. We also expect to significantly increase the use of demand response options to drive down peak energy needs. Both of these solutions are vital to offsetting the need for new power generation and to creating a sustainable energy future. Maximizing these opportunities will require meeting a series of other challenges, ranging from developing and deploying new technology to driving changes in consumer behavior.

A recent U.S. Department of Energy report forecasts a significant shortage in qualified electrical lineworkers over the next decade. Photo: Lewis Stewart

Tapping the full potential of these resources will depend on ongoing collaboration with regulators, industry groups and manufacturers, customers and other stakeholders to adopt smart efficiency incentives and assist with the advancement of more efficient technologies.

One way we are working to address this issue is through our Emerging Technologies program, which is currently helping to shepherd approximately 60 energy efficiency technologies through development and commercialization.

On demand response, challenges we are working to address include improving the technology infrastructure to enable more demand response options, as well as working with the state to find ways to integrate demand response as a resource in the state's energy market.

Satisfying Demand for Natural Gas

One of the most salient developments in the utility industry over the past decade has been the nation's—and California's—growing demand for natural gas, driven in part by the increasing use of natural gas for power generation.

We see this trend accelerating. Global competition for gas is continuing to rise and domestic supplies are becoming tighter. Moreover, many U.S. power generators are turning away from coal for new power generation in view of concerns over greenhouse gases and an uncertain regulatory paradigm, leaving even greater reliance on gas-fired generation as one likely alternative.

Together, these developments create a threat of increasingly constrained gas supplies and higher prices for customers in the future. PG&E is working both to increase supplies and manage demand to help mitigate this prospect.

For example, we are investing in technologies to create utility-scale supplies of renewable natural gas from biogas sources, such as California dairy farms. We are also exploring investments to bring gas into California from other regions. These include projects that would link up with proposed facilities to import liquefied natural gas (LNG) from overseas.

As we pursue these efforts, a major factor in our success will be our ability to work through myriad regulatory challenges and local concerns. Infrastructure projects inevitably raise controversies and objections. As always, our challenge is to work cooperatively with stakeholders to find solutions that address concerns and still allow us to deliver for customers.

Recruiting and Training a New Generation of Workers

Many of the nation's skilled workers in utility jobs are rapidly nearing eligibility for retirement. By one estimate, the industry could be facing the need to replace nearly half of its skilled workforce over the next five years. The numbers are similar for PG&E; roughly 42 percent of our employees will be eligible for retirement in the next five years.

Recruiting and training the next generation of these skilled workers represents a significant challenge. Many of these jobs require specific skills and lengthy apprenticeships. Furthermore, in keeping with our commitment to our communities, we are seeking candidates from within our service area to help us better reflect the diversity of our customer base.

Last year, we designed an innovative new workforce development program to help address this need. PG&E's PowerPathway™ program partners with California community colleges, government, labor, foundations and other community-based organizations to prepare individuals for a rewarding career with competitive wages in these high-demand energy sector positions specific to PG&E's hiring needs.