Michael Phillips, written 12/21

Supplemental declaration in PG&E GRC

-- Executive Compensation hearings.

The CPUC has on record the audited 2002 PG&E financial statement which has a cover letter from Deloitte & Touche LLP dated February 24, 2003. The cover letter states: "We have audited the accompanying consolidated balance sheets of PG&E Corporation and subsidiaries.... Our responsibility is to express an opinion on these financial statements based on our audits." Deloitte & Touche LLP then proceeds to give their unrestricted opinion: "In our opinion, such consolidated financial statements present fairly, in all material respects, the respective consolidated financial position of the Company (for 2000, 2001 and 2002)... in conformity with accounting principles generally accepted in the United States of America."

It is my expert observation that Deloitte & Touche LLP and PG&E have jointly misled the public, shareholders and the CPUC in the audited 2001 and 2002 annual reports concerning executive compensation. PG&E appears to have deceived the CPUC in the 2003 GRC hearings concerning executive compensation.

The data of relevance to the CPUC, in this declaration, concerns executive compensation as reported in the Contra Costa Times of Dec. 13, 2003. Writing in that issue, Rick Jurgens states that an $80 million retention bonus plan was approved by the PG&E Board in December of 2000, effective January 22, 2001 and reported in bankruptcy "court filing: on the seventh and last page of one of seven exhibits appended to a May 25, 2001, declaration by PG&E's vice president for human resources." The Contra Costa Times further reports that the compensation becomes payable on December 31, 2003. This compensation should have been reported in the 2001 or 2002 PG&E Annual Report.

The distinction between misleading and deceiving requires three elements. Deception requires (1) awareness on the part of the deceiver of the state of mind of the deceivee, (2) awareness by the deceiver that the deceit is not insignificant to the deceivee and (3) self awareness that the deceiver is acting deceptively.

PG&E appears to meet criterion (1) (awareness on the part of the deceiver of the state of mind of the deceivee). In a statement in the 2002 PG&E Annual Report, PG&E identifies "adverse changes in the electric power and ...energy markets ...including: ... Loss of confidence in energy companies due to increased scrutiny by regulators, elected officials, and investors as a result of a string of financial reporting scandals:" (Page 9, 2002 Annual Report). PG&E is clearly aware that regulatory bodies are highly concerned about deceitful reporting by Utilities. This meets the first criterion of awareness of deception, as contrasted with ignorance or naivete.

PG&E appears to meet criterion (2) ( awareness by the deceiver that the deceit is not insignificant to the deceivee) PG&E is very careful to report corporate agreements that have effects in the tens of millions of dollars. On page 15 of the 2002 Annual Report, PG&E describes an arrangement with General Electric Company to terminate a purchase agreement for a master turbine that has termination fees of $22 million to $34 million. This citation makes clear that the PG&E Annual Report inherently recognizes multi-million dollar agreements as warranting public reporting and as having an effect on the financial statement. The omission of an $80 million executive bonus is not inconsequential for an Annual Report.

Most importantly, PG&E also appears to meet criterion (3) for deception: (self awareness that the deceiver is acting deceptively). On page 87, the 2002 PG&E Annual Report cites an accounting standard for stock based compensation. The accounting standard "requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results."

In terms of this last point, I have read roughly two million words on more than three hundred pages in the 2000, 2001, and 2002 PG&E Annual Reports and I can not find a clear description, much less a prominent disclosure of the $80 million retention bonuses that take effect on December 31, 2003. I also can not find any disclosure on the part of Deloitte & Touche LLP whether Deloitte & Touche participated in designing undisclosed executive compensation packages.

This matter of deceptive data is of importance to the CPUC for one reason: the entire package of financial information presented to the CPUC must be recognized as unreliable. Unreliable financial data can result in CPUC rate decisions that are wrong and, in many cases, harmful to rate-payers.

The potential harm to rate-payers does not come directly from the issue of undisclosed stock bonuses paid to executives; that failure to disclose, primarily affects shareholders. The harm to rate-payers comes from the consequences of pervasive deceit on the part of the executive staff of a regulated utility.

In my filed testimony of May 1, 2003 I make a clear point that the level of actual and perceived executive compensation has a direct bearing on the wage level of the corporation, the vulnerability of the corporation to buyout and the encouragement of anti-productive behavior on the part of company workers. Actual and perceived executive compensation has a direct bearing of the functioning of a business enterprise.

I reiterate my testimony of May 1, 2003 and encourage the CPUC to demand a new and independent study of PG&E executive compensation.