Wood Revised Alternate Dec. Opinion implementing cost recovery allocation of the California Department of Water Resources Revenue Requirements

V. DWR's Representations Concerning the Reasonableness of Its Revenue Requirement

In its responses to parties' data requests, DWR stated that it is not obligated by law to provide information regarding its revenue requirement "in public workshops before the staff of the Commission," but has done so on a voluntary basis.¹² In its comments on the Proposed Decision, DWR states that it has consistently informed the Commission and interested parties that it intends to cooperate with the Commission so that the Commission may fulfill its obligations to implement AB1X. DWR asserts that it is not obligated by law to provide information regarding its revenue requirement in public workshops before the staff of the Commission, but has done so on a voluntary basis. DWR believes that there is no basis under law for the Commission to disallow any costs it has incurred to meet its emergency procurement obligations, and no basis for parties other than DWR to undertake the "just and reasonable" determination of its revenue requirement. ¹³

In its transmittal letter to Commissioner Brown dated November 5, 2001, DWR stated that it has determined that the revenue requirement contained in its latest submittal is "just and reasonable." DWR states that its revenue requirement is based on reasonable forecasts and proposes to work with PG&E and Edison to seek a balance between self-provisioning of ancillary services and their respective net short energy and ancillary service costs. DWR agrees that such cost tradeoffs would be reflected in future adjustments of its revenue requirement. Similarly, DWR agrees that any necessary revisions to its natural gas price forecasts that result in a lower revenue requirement will be incorporated prospectively.

DWR prepared its revenue requirement in cooperation with its consultant, Navigant Consulting (Navigant), which prepared the forecasts of net short energy requirements that support the revenue requirements. The financial model used by Navigant has been reviewed by Montague DeRose & Associates (financial advisor to DWR), Public Resources-Advisory Group (financial advisor to the State Treasurer's Office), and analysts of JPMorgan. PriceWaterhouseCoopers has completed an independent audit of the mathematical accuracy of the financial model. These reviews pertain principally to the financial results of the models.

DWR provides the following information relevant to its determination that its revenue requirements are just and reasonable:

· DWR used a competitive solicitation method for obtaining power supply bids.

· Power purchases by DWR are at cost and DWR is a governmental agency that receives neither equity return nor any form of economic return for its energy purchases.

· Projected spot market purchases not obtained via contract are estimated based upon a competitive, marginal cost, market clearing price projection.

· DWR's revenue requirement will be adjusted or trued-up over time to reflect only those costs which are actually incurred by DWR for power supply acquisition and administration.

· Actual and projected costs are below prior cost estimates submitted to the Commission in May 2001 and earlier market projections.

Water Code Section 80100 sets forth the relevant considerations for DWR when it undertakes to purchase power, following its consultation with the Commission, utilities and public agency utilities:¹⁴

(a) The intent of the program is to achieve an overall portfolio of contracts for energy resulting in reliable service at the lowest possible price per kilowatt hour.

(b) Contract supplies should fit each aspect of the overall energy load profile.

(c) As much low-cost power should be secured as possible under contract.

(d) The duration and timing of contracts made available from sellers must be considered.

(e) The length of time sellers of electricity offer to sell such electricity must be considered.

(f) As much firm and nonfirm renewable energy as possible should be secured.

Parties filed comments regarding DWR's latest update on November 13, 2001. The November 5, 2001 revenue requirement is the basis for the revenue allocation evidentiary hearings that were conducted, and also is the basis for the implementation of charges to be remitted by the three utilities as authorized in this order.

The parties take issue with DWR's representation that its revenue requirement is "just and reasonable." Parties generally claim that DWR still has not provided adequate documentation to explain and support its revenue requirement. Parties assert that they have not been permitted a thorough review and analysis of the methodology and assumptions underlying the DWR revenue requirement.

Various parties protest DWR's continued failure to provide detailed workpapers to its revenue requirement determination, or to provide complete responses to data requests. The October 26, 2001, Assigned Commissioner's Ruling directed DWR to provide supporting workpapers with its November 5 Revenue Requirement. Although DWR provided an updated CD-ROM disk containing the results of its computer modeling, it failed to provide detailed workpapers as to key assumptions, factors and calculations forming the basis of its revenue requirement. DWR explains that its consultant was unable to provide the production simulation model used in the development of the revenue requirement due to restrictions imposed by a licensing agreement. Output from the production simulation run underlying the revenue requirement, however, was provided to parties. Additionally, DWR did not provide parties access to a proprietary natural gas price forecasting model. Historical detailed spot purchase prices were provided only for the period ending three months prior to the submittal date of the revenue requirement determination. DWR did not provide spot purchase data covering the three months prior to submittal date of its revenue requirement on the basis that such data was commercially sensitive. Appendix B of this decision sets forth comments of the parties on specific elements of DWR's revenue requirement forecast with which they take exception. Appendix B of this decision sets forth comments of the parties on specific elements of DWR's revenue requirement forecast with which they take exception.

We acknowledge parties' disagreements regarding the manner in which DWR has sought to fulfill its procedural and substantive obligation to "conduct" any reasonableness review under Section 451, and to make a determination that its revenue requirement is reasonable. In our role as the agency responsible for allocating utility revenues to recover DWR's revenue requirement, we have worked cooperatively to facilitate the development of DWR's revenue requirement. We have provided for multiple opportunities through workshops and written comments for DWR and parties to this proceeding to interface and exchange information relevant to the determination of the DWR revenue requirement. We believe that this process has been productive in improving the quality of information underlying the DWR revenue requirement. The Commission is very appreciative of the prompt and diligent response by parties to the DWR submissions and offerings.

We note that forecasts of costs included in DWR's revenue requirement submission are projections that may or may not materialize. However, as provision is made for subsequent adjustments of the DWR revenue requirements in periodic updates, variances between forecast and actual results can be taken into account in revising DWR charges prospectively. An overcollection in one year, for example, would reduce the next year's revenue requirement and the charges needed to recover it. We recognize that unanticipated undercollections may require relatively rapid responses on the part of DWR and the Commission to ensure that we meet the statutory requirement of providing DWR with the funds at the time they are needed for DWR to meet its obligations. We intend to continue to cooperate with DWR to facilitate the process of accurately identifying relevant costs and implementing necessary recovery measures as mandated by statute.

In any event, the Legislature has expressly committed the determination of whether DWR's power procurement costs are just and reasonable to DWR, and not to the Commission. Accordingly, determination of the justness and reasonableness of DWR's total costs under Section 451 is beyond the scope of this order. We make no independent verification as to whether each cost element of Water Code Section 80100 has been appropriately considered by DWR.

The role of the Commission under the AB1X, however, is to establish utility charges to recover the costs of authorized DWR activities once the revenue requirement has been determined by DWR, at the time they are needed. As a result, it is proper for us to implement utility charges, as adopted in this order, to enable DWR to recover its revenue requirement as authorized under AB1X.

However, we do note that parties have raised a number of valid concerns regarding DWR's revenue requirement, which continue to go unresolved. Many parties have pointed to the double collection of hundreds of millions of dollars in financing costs contained in DWR's request. Parties have questioned the assumptions DWR has used for the cost of gas that drive the cost of many of DWR's purchases. Parties also allege that DWR has greatly overstated the need for funds to deal with timing differences between DWR's payments and receipt of revenues. Reasonable concerns have been raised regarding DWR's forecast of sales, and suggesting that DWR's assumptions do not reflect any of DWR's costs being allocated to direct access customers, or the potential for direct access customers to be returned to utility service. As addressed above, the Commission is not empowered to resolve these issues. However, we urge DWR to timely revise its revenue requirements as more accurate information regarding DWR's actual costs and revenues become known.

We summarize below the principal elements comprising the DWR revenue requirement, and then take up the process of converting the power purchase program into a set of charges that, when applied to sales volumes, will produce revenues to pay for DWR AB1X-authorized costs. As determined in Section VIII below, we establish the percentage allocation of the DWR revenue requirement to be assigned to each utility service territory. We then translate the percentage allocation into a cents-per-kWh charge that will form the basis for remittance of funds to DWR by each utility that covers the period from January 17, 2001 through December 31, 2002.

¹² See Letter Dated August 1, 2001 from Director of DWR to Energy Division Chief of the Commission, providing DWR Responses to Data Requests, page 28, response to Aglet Question 3. ¹³ See Letter Dated August 1, 2001 from Director of DWR to Energy Division Chief of the Commission, providing DWR Responses to Data Requests, page 28, response to Aglet Question 3. ¹⁴ An issue has been raised as to whether DWR carried out the requirement under AB1X that it consult with the Commission, the utilities, and public agency utilities concerning the need for power before it began to implement its power procurement program. It is not necessary to resolve this issue in making the determinations set forth in the instant order.