IX. Implementing Annual DWR Update Proceedings
A. Revisions of DWR Revenue Requirement
As prescribed in AB1X (Water Code Section 80134(a)), DWR will revise its retail revenue requirement at least annually. Consistent with the statute, we adopt a procedural plan for DWR to submit to the Commission updated forecasts of its retail revenue requirement on at least an annual basis.
The revenues provided to DWR from the charges that we implement in today's order (together with revenues that DWR has already collected from the utilities to date) will provide recovery of DWR's revenue requirements from January 17, 2001 through December 31, 2002.
We hereby schedule the next update of the DWR revenue requirement to be submitted to the Commission on June 1, 2002, with revised DWR charges to take effect on January 1, 2003. At that time, DWR will submit a revised annual revenue requirement forecast covering the period January 1, 2003 through December 31, 2003. The updated DWR charges that we subsequently implement to take effect on January 1, 2003 will therefore provide recovery of DWR's revenue requirement for that subsequent 12-month period of January 1, 2003 through December 31, 2003. We shall direct the ALJ to issue a further ruling, as necessary, setting forth the manner and process whereby the DWR update shall proceed.
B. DWR's Tracking of Forecast Versus Actual Cost and Revenue Variances
We acknowledge parties' concerns that DWR's revenue requirement is based on forecasts that may prove to be incorrect over time. Various parties have asked the Commission to require DWR to set up balancing accounts to true-up the difference between its total estimated and actual expenditures on a retroactive basis. Actual DWR monthly costs will depend on each utility's net short position, which in turn will depend on demand and plant availability and pending Commission actions regarding direct access. Balancing accounts will mitigate associated cost forecasting errors.
Because DWR is responsible for communicating to the Commission its revenue requirement and any subsequent adjustments, we expect DWR to take responsibility for identifying necessary periodic adjustments in its revenue requirement over time to reflect variances between actual and forecasted costs. We expect DWR to take into account the differences between actual and projected fund balances from prior periods when determining its retail revenue requirements.
AB 1X does not authorize DWR to collect more from ratepayers than its actual costs. Therefore, over time, the customers will pay no more than the cost of DWR service. In order to ensure that ratepayers are not overcharged, we will set up a process whereby the actual costs incurred will be compared with the forecast costs that were recovered through customer charges. Then, we will set prospective DWR charges for each service territory so that, over time, the DWR charges paid will approximate the actual costs incurred in providing DWR service to customers. We will also make provision for the utilities to amortize over or undercollections of past DWR revenue requirements, as explained below. We intend to conduct this process as part of an annual update processing of DWR's revenue requirement.
However, we note that DWR must have sufficient funds to carry out its mandates. Therefore, we expect that should events transpire whereby DWR is experiencing significant undercollections, that DWR will timely request changes to its revenue requirement in order to obtain sufficient funds at the times they are needed. Similarly, we would expect that if events result in DWR obtaining significant overcollections, that DWR would not wait unnecessarily for the next scheduled update to provide relief to ratepayers from excessive charges.
As discussed in the technical workshop and in DWR's August 1 response, DWR contemplates updates to the revenue requirement at least annually as required by AB1X. If there are significant prolonged variances between forecasted and actual revenue requirement, DWR states that it is likely that more frequent adjustments or exceptions to the annual adjustment would be made.
DWR states that, over time, the actual revenues that it collects will indeed track the actual net short energy requirements of the customers of each utility service area as well as the amount of self-provision of ancillary services. As discussed at the workshop, DWR will track its net short energy purchases and ancillary service purchases to compare against the projected accruals of the revenue requirement and will update projections on a monthly basis. DWR will use this monthly monitoring to determine if there should be any adjustment, up or down, in the revenue requirement and the associated recovery of that revenue requirement from the customers of the respective utilities. To the extent that any material differences arise, either positively or negatively, DWR will submit an adjusted revenue requirement to the Commission. We encourage DWR to work with the Commission and its staff to closely monitor this tracking process
There is general agreement that DWR should provide an accounting of its actual costs and should true-up its forecasts to actual. Parties disagree, however, as to how any true-ups of DWR's forecast-to-actual costs should be applied among the utilities. Specifically, parties disagree as to whether the adopted allocation percentages should be subject to true-up to reflect actual recorded percentages. PG&E proposes that while the Commission should recognize differences between DWR's forecasted versus actual costs in the aggregate, it should not readjust the adopted percentage allocation of DWR costs on an after-the-fact basis. PG&E proposes that DWR's actual costs, as tracked by DWR, be allocated among the three utilities in the same proportions that the Commission adopts in this proceeding to allocate DWR's revenue requirement. PG&E proposes that any difference between the amounts remitted by a utility on behalf of its customers and its customers' share of actual DWR costs would then be incorporated into the overall rates for that utility's service territory during an appropriate DWR update proceeding.40
PG&E suggests that the Commission might decide to review the adopted DWR allocation factors on a regular basis, perhaps annually. Should a utility believe that the adopted percentage for it is no longer appropriate and that adjustment should be made before the next scheduled proceeding, it would have the ability to file an application to request that the adopted percentage be modified. Aglet agrees with PG&E that the Commission should not true up the allocation percentages per utility.
SCE's disagrees with PG&E's approach, proposing that both the total DWR costs and the percentage allocation be revised for each utility on an after-the-fact basis. SCE believes that truing-up the actual percentages will assure that no customers pay more or less than actual cost incurred to serve those customers. PG&E objects to truing-up the allocation percentages, arguing that it increases uncertainty, and raises the possibility of utilities' "gaming" their net open positions. More specifically, PG&E argues that an after-the-fact true up of the utilities' relative net short positions could create perverse incentives for utilities to change their net short positions.
PG&E argues that the utility may choose to increase its own share of net short in such an instance even when it was more economically efficient from an overall statewide perspective for DWR to procure the net short. PG&E believes that such a perverse incentive to minimize the net short is avoided if utilities are held to their adopted allocation percentages, and true-ups of allocation percentages to reflect utilities' actual net short positions are not permitted.
SCE responds, however, that by fixing the allocation percentages with no true up to actual, a perverse incentive is created under certain circumstances for utilities to underutilize URG even when it is economically efficient for the utility to do so. The incremental cost incurred by DWR in such an instance would be allocated among all three utilities rather than being assigned to the specific utility that caused DWR to procure more spot market power or ancillary services. SCE believes that DWR allocations should be trued up to reflect actual hourly cost data in order to provide the most accurate result with respect to cost causation.
TURN agrees with SCE that a true up based on actual net short loads would provide better price signals for the efficient operation of URG. TURN disagrees, however, with the true up based on actual hourly data, arguing that it creates serious problems in allocating many costs not related to pure spot market purchases.
On balance, we conclude that the true up of DWR's forecast-to-actual results should be allocated among the utilities based on their actual monthly net short position. We believe that, overall, the incentive to utilize URG efficiently will be better served by allocating DWR under or overcollections based on each utility's actual net short position covered by DWR.
We reject SCE's proposal, however, to compute the true up based on actual hourly cost data. Not only do we have doubts concerning the reliability of such hourly data, as discussed previously. We are also concerned that such an hourly true-up would provide perverse incentives for the utilities to game the operation of their URG in order to shift high-priced DWR purchases to other utilities.41
At the designated time for DWR to submit its revised forecast therefore, DWR will also submit its true-up of the prior periods' differences between forecasted and actual data. The difference between actual costs incurred and actual revenues collected by DWR will result in either an undercollection or overcollection. The total under- or overcollection in revenue requirement will be assigned pro rata to the customers of each utility based on the respective monthly net short positions actually covered by DWR. Any overcollection or undercollection will be taken into account in determining subsequent adjustments in DWR charges to be remitted.
C. Utility Balancing Accounts
It will not be necessary for each utility to maintain a separate balancing account to track its respective share of under or overcollections in DWR's actual costs since DWR will independently perform this function, as explained above. At the time of its update of revenue requirements, DWR will submit necessary information concerning its total under or overcollection of costs for the prior period. The under or overcollection shall be reported both in total, and disaggregated based on the net short position for each of the three utility service territories based on the pro rata allocation approach adopted in this decision.
Even though DWR will account for its own under and overcollections, however, each utility will still need to keep track of the actual portion of total monthly sales revenue billed to customers that is attributable to DWR power. The tracking of actual DWR kWh sales reflected in customer-billed revenues is necessary in order for the utilities to determine the residual portion of billed retail revenues available to recover URG-related costs. Because the actual percentage of customers' bills reflecting the net short position provided by DWR to customers will vary each month, the utilities will need to track this percentage monthly.
Accordingly, we shall authorize each of the utilities to track their recovery of URG-related costs in this manner through an applicable balancing account. To the extent that any of the utilities do not already have a balancing account mechanism in place to track recovery of URG costs (net of DWR remittances), we hereby authorize them to do so.
The Draft Decision on the URG revenue requirement would authorize each of the utilities to establish a "Revenue Shortfall Balancing Account" (RSBA) to track billed revenues against authorized URG revenue requirements. In order for entries into the RSBA to reflect an accurate measure of the shortfall or surplus in the URG revenue requirement, the billed revenues credited to the account must be net of any revenues attributable to DWR sales. Accordingly, in making entries into the RSBA, each utility must determine the portion of monthly kWh sales attributable to DWR, and subtract these sales from total revenues to be credited to the RSBA. The residual revenues credited to the RSBA will appropriately reflect only those revenues available to recover URG-related costs, and will exclude revenues that relate to DWR sales. Such DWR revenues are the property of DWR, and shall be segregated and remitted to DWR as prescribed in this order.
The amount subtracted from gross revenues shall be equal to actual DWR kWh sales multiplied by the applicable DWR charge per kWh as established in this decision. The applicable DWR charge includes both the amount applied to recover DWR costs incurred prospectively and the charge to amortize the shortfall in remittances to DWR for periods prior to the implementation date of this order. The Commission shall take into account the under or overcollection in the RSBA, as appropriate, in making any periodic adjustments to utility retail rates.
We shall also direct the utilities to establish their own separate balancing accounts to assure that differences between forecasted and actual DWR revenue requirements allocated to each utility service territory are properly adjusted in retail rates collected from customers over time. The utilities' balancing accounts shall be trued up, pursuant to a subsequent Commission order, no later than during each annual update proceeding for DWR.
Parties disagree about the process for maintaining utility balancing accounts and true-ups. There is general agreement that DWR should provide an accounting of its actual costs and should true-up its forecasts to actual. Parties disagree, however, as to how any true ups of DWR's forecast-to-actual costs should be applied among the utilities. Specifically, parties disagree as to whether the adopted allocation percentages should be subject to true up to reflect actual recorded data. PG&E proposes that while the Commission should require balancing accounts to track differences between DWR's forecasted versus actual costs in the aggregate, it should not readjust the adopted percentage allocation of DWR costs on an after-the-fact basis. PG&E's proposes that DWR's actual costs, as tracked by DWR, be allocated among the three utilities in the same proportions that the Commission adopts in this proceeding to allocate DWR's revenue requirement. PG&E proposes that any difference between the amounts remitted by a utility on behalf of its customers and its customers' share of actual DWR costs would then be incorporated into the overall rates for that utility's service territory during an appropriate DWR update proceeding.42
PG&E suggests that the Commission might decide to review the adopted DWR allocation factors on a regular basis, perhaps annually. Should a utility believe that the adopted percentage for it is no longer appropriate and that adjustment should be made before the next scheduled proceeding, it would have the ability to file an application to request that the adopted percentage be modified. Aglet agrees with PG&E that balancing accounts should be used to adjust total DWR costs to actual, but not to revise the allocation percentages per utility. Aglet witness Weil proposes that the balancing account be interest-bearing and incorporated into the tariffs of each utility.
SCE's disagrees with PG&E's approach, proposing that both the total DWR costs and the percentage allocation be revised for each utility on an after-the-fact basis. SCE believes that truing up the actual percentages will assure that no customers pay more or less than actual cost incurred to serve those customers. PG&E objects to truing up the allocation percentages, arguing that it increases uncertainty, and raises the possibility of utilities' "gaming" their net open positions. More specifically, PG&E argues that an after-the-fact true up of the utilities' relative net short positions could create perverse incentives for utilities to change their net short positions.
As an example, assume that the average DWR cost being allocated to a utility service territory for its net short position is $100/mWh, and that each utility is allowed to true up their DWR allocation percentage to reflect the difference between forecasted and actual net short. In such a case, a utility could have an incentive to reduce its net short merely to maximize its customers' savings through the true up process. The utility may choose to increase its own share of net short in such an instance even when it was more economically efficient from an overall statewide perspective for DWR to procure the net short. For example, if DWR's actual incremental cost for the net short turned out to be only $50/MWh while the utility's incremental cost was $95/mWh, the utility would have a peverse incentive to capture the incremental savings for customers in its service territory of $5/mWh (i.e., $100-$95/mWh) through the true up. Thus, paying the $95/mWh for additional power would work to the advantage of the customers in that utility's service territory even though it would be economically more efficient from a statewide perspective for DWR to procure the power at $50/mWh. Such a perverse incentive to minimize the net short is avoided if utilities are held to their adopted allocation percentages, and true ups of allocation percentages to reflect utilities' actual net short positions are not permitted.
We shall authorize each of the utilities to establish balancing accounts to track revenues remitted to DWR from customers in each service territory and costs allocated from DWR based on charges established in this order. We agree that the allocation percentages adopted in this order should not be subject to true up to avoid incentives for inefficiencies as discussed above. The difference between estimated and actual total DWR expenditures will be applied among utility customers using the originally adopted allocation percentages.
For purposes of balancing account tracking, each utility shall segregate kWh sales of URG power versus sales of DWR power. The utility shall credit each month the revenues that are attributable to that portion of total sales that are provided by DWR on an actual basis. The revenues shall be equal to actual billed kWh sales attributable to DWR multiplied by the charge per kWh adopted in this order. Such revenues are the property of DWR, and shall be remitted to DWR as prescribed in this order.
At the designated time for DWR to submit its revised forecast for the coming year, DWR will also submit its true up of the prior periods' differences between forecasted and actual data. The difference between actual costs incurred and actual revenues collected by DWR will resulting in either an undercollection or overcollection. The total under-or-overcollection in revenue requirement will be assigned pro rata to the customers of each utility based on the allocation percentages adopted in this order. Any overcollection or undercollection will be taken into account, as appropriate, in determining subsequent retail rate adjustments.
Aglet recommends that balancing accounts established by the utilities should be interest bearing and should be reflected in the filed tariffs of the utilities. Applying interest will properly recognize the time value of money related to funds owed to or due from customers. Accordingly, we shall direct the utilities to add appropriate provisions to their filed tariffs, as necessary, establishing balancing accounts to recognize over- and undercollections of URG-related costs consistent with this order. The authorized balancing accounts shall bear interest on the same basis as is applicable to other utility balancing accounts.
