X. Implementation of DWR Revenue Remittance Procedures

A. Establishment of a Separate Charge for DWR Electric Power

The Commission's responsibility is to set the overall rate that electric customers see on their bills. However, parties generally agree that breaking this charge down to reflect a separate amount per kWh sold by DWR will make the rate structure more efficient. SCE and PG&E maintain that breaking out a DWR charge will eliminate the need for them to maintain their own balancing accounts for DWR payments and revenues. Instead, the actual amount of revenue that is generated by reference to the DWR charge and the amount of kWh sold by DWR would be remitted directly to DWR.

By letter to the Commission dated May 2, 2001, DWR has also stated that the charges set for recovery of its revenue requirements "should be independent of rates payable by retail end use customers for power purchased by such customers from the utilities, and by law, must be sufficient in order for the Department to recover the revenue requirements attached hereto." DWR stated that revenues resulting from such rates should be measured as a function of the amount of power sold by DWR, and not as a function of the amount of power sold by each respective utility. DWR specified the revenue requirement on a separately allocated and combined basis for the service territories for each of the three utilities.

We agree that it is reasonable to implement DWR cost recovery as an amount per-kWh that is attributable to sales by DWR.⁴³ Although the effect may be muted by the use of external financing proceeds to pay for procurement costs, establishing a per kWh charge for DWR will cause its revenues to vary in some proportion to the amount of energy it is procuring. This approach facilitates the independent calculation of charges that will be segregated and remitted directly to DWR. The forecasted net short position in mWh and the revenue requirement to be allocated to each utility provide the basis for the calculation of a system-wide amount per-kWh sold for electricity sold by DWR to the customers of each utility.

Accordingly, we shall direct each of the utilities to begin disbursing payment to DWR for its revenue requirement based on the relevant DWR charge, as adopted above, for each kWh sold by DWR to the utility's customers. Utilities shall begin calculating and distributing payments on this basis as applied to kWhs billed on and after March 15, 2002.

B. Procedures for the Remittance of Funds to DWR

We have previously adopted servicing agreements between DWR and each of SDG&E and SCE, and a servicing order relating to PG&E. These decisions provide for the utility services required by DWR to perform functions authorized by the Water Code.⁴⁴ The servicing agreements for SDG&E and SCE set forth the terms under which each utility will provide transmission and distribution of DWR power to electric customers, and provide billing, collection, and related services for AB1X-authorized power purchased by DWR.

The servicing agreement for PG&E also addresses details concerning the manner and timing of remittance of funds to DWR. In D. 01-09-015, as stated in Finding of Fact 25, however, the servicing agreement (in Section 2 of Attachment E) allows PG&E to seek Bankruptcy Court approval of the servicing agreement. The Bankruptcy Court has not yet approved PG&E's servicing agreement.

On December 6, 2001, an ALJ ruling provided notice that the Commission was considering implementing DWR remittance procedures for PG&E utilizing language from excerpts of the servicing agreement that PG&E negotiated with DWR, which was approved by the Commission in D.01-09-015. The pertinent excerpts were appended as an attachment to the ruling, specifying procedures for PG&E's remittance methodology.

PG&E filed a response expressing objections to the use of the language from the servicing agreement as a basis for remittance of proceeds that PG&E owes to DWR. PG&E claims that interim remittance arrangements that have been used up until now are adequate, and that it is inappropriate to extract sections of the servicing agreement out of context from the whole agreement.

PG&E argues that it would be unlawful for the Commission to implement the portions of the servicing agreement relating to remittance methodology. As a matter of federal bankruptcy law, PG&E argues, it must secure the Bankruptcy Court's approval before implementing any of the terms of the proposed servicing agreement. PG&E characterizes the Commission's implementation of the remittance language from its servicing agreement as an "end run" of the process for Bankruptcy Court review. PG&E submitted the servicing agreement to the Bankruptcy Court for its review on September 24, 2001.

In D. 01-09-015, we noted that if PG&E wished to seek Bankruptcy Court approval of its servicing agreement, it was free to do so. Nonetheless, we also noted that D. 01-09-015, approving PG&E's servicing agreement, was an order of this Commission that implements emergency legislation of the State of California. In carrying out its responsibilities to implement emergency legislation relating the DWR revenue requirement, the Commission has authority to establish procedures it deems appropriate for the remittance of funds to DWR. Moreover, the servicing agreement concerns DWR's property, not PG&E's. The remittance methodology measures of the servicing agreement simply entail ordering PG&E to act as the collection agent for DWR.

In the interests of facilitating PG&E's process of seeking Bankruptcy Court approval of the servicing agreement, however, we shall forbear at this time from implementing the provisions of the servicing agreement relating to remittance methodology. Nonetheless, our forbearance does not constitute any admission or judgment concerning the Commission's lack of jurisdiction to implement whatever remittance measures may be called for in the interests of complying with applicable statutory mandates.

For the present time, we shall not require PG&E to implement the provisions in its servicing agreement relating to the remittance of funds. Instead, until further order from this Commission or action from the Bankruptcy Court approving PG&E's servicing agreement, we shall direct PG&E to remit funds using the same interim procedures that it has been using up to the present time for remittance of funds to DWR.

In its comments, DWR seeks to remove a parenthetical clause, "(exclusive of Imbalance Energy)," from Section 4 of the Attachment B remittance methodology.⁴⁵ DWR argues that FERC recently confirmed that DWR, as the creditworthy party, is responsible for such charges.⁴⁶ For this reason, DWR argues PG&E should be remitting revenues to DWR for Imbalance Energy.

DWR also argues that any remittance order should require PG&E to provide an accounting for, and to remit to DWR, all DWR revenues received in respect of imbalance energy prior to the effective date of the order. Finally, DWR believes the remittance order should contain an express requirement for PG&E to deliver all power made available by DWR. If DWR is responsible for procuring all imbalance energy and other ancillary services, DWR expects assurances that such energy and other services is delivered to retail end use customers.

SCE also filed comments in response to the December 6, 2001 ruling. SCE does not address the appropriateness of the Commission adopting this remittance methodology for PG&E, as this issue is currently before the U.S. Bankruptcy Court. However, SCE questions whether DWR is asking the Commission in its comments to make the same change to SCE's servicing agreement with DWR. For example, DWR requests that the Commission incorporate "Section 2.2(d), Section 4.1, Section 4.2, and Section 6 of Attachment E" of the PG&E servicing agreement into any remittance order for PG&E. With respect to Sections 4.1 and 4.2, DWR states these "are the general provisions concerning remittances which should be applicable to all three investor-owned utilities."⁴⁷ Section 4.2 of the PG&E servicing agreement, which DWR would make applicable to all three investor owned utilities, states that the "Utility shall determine the Daily Remittance Amount in the manner set forth in Attachment B hereto." DWR proposes to change Attachment B to include remittance for Imbalance Energy. SCE argues that the Commission should not entertain any "back-door" attempt by DWR to unilaterally change the mutually agreed-upon and Commission-approved servicing agreement between SCE and DWR.

Issues associated with DWR's responsibility for Imbalance Energy charges, among other things, and the remittance of revenues to cover those costs, were not resolved in the negotiations that formed the basis for the servicing agreement for SCE. It was agreed that those issues would be considered at a later point in time. For the past six months, SCE has been negotiating with DWR regarding DWR's responsibility for ISO charges incurred to serve SCE's customers, along with other issues. SCE currently has a proposal before DWR to resolve these issues.⁴⁸ The Commission should not, based on the incomplete record before it, short-circuit that process and unilaterally change SCE's servicing agreement with DWR.

In its December 6 letter, DWR reports that it is paying the ISO, under protest, certain disputed amounts and that those disputed amounts were not included in its revenue requirement request. The dispute is as to whether DWR or the utilities are responsible to pay these amounts to the ISO. We have not considered or decided in this proceeding who should pay the ISO. However, we will not allow circumstances to develop such that ratepayers pay both DWR and utilities for same ISO costs

With respect to the utilities' obligations to remit funds to DWR for imbalance energy, we recognize that negotiations are still ongoing. Through these negotiations, parties and DWR are attempting to delineate financial responsibility for such costs. We do not seek to interfere with or prejudge the final outcome of those negotiations. Nonetheless, for purposes of implementing this decision, the charges to be remitted to DWR are based on the revenue requirement that has been submitted to us. This revenue requirement reflects the total amount of DWR energy, including scheduled and real-time imbalance energy, delivered to customers. In implementing DWR charges in this decision, however, we make no prejudgment concerning the ultimate responsibility for the disputed costs that are the subject of these ongoing negotiations. DWR has expressed its intention to take into account the final allocation of financial responsibility for costs set forth in agreements with PG&E, SCE, and SDG&E in determining its subsequent revenue requirements, both for truing up prior costs and for projecting future costs.

In the case of SDG&E, pursuant to its Restated Letter Agreement with DWR, executed on June 18, 2001, DWR accepted responsibility for the costs of SDG&E's net short scheduled energy and out-of-market energy from February 7 through April 5, 2001. SDG&E accepted responsibility for balanced energy, ex post costs during this period. From April 6, 2001 through December 31, 2002, however, DWR will be responsible for the costs of all real time energy provided to customer in SDG&E's service territory.

For PG&E, we shall direct that PG&E follow the remittance procedures based on the relevant language extracted from its servicing agreement, as set forth in the December 6, 2001 ALJ ruling. We shall also require PG&E to account for and to remit to DWR, all DWR revenues received with respect to Imbalance Energy prior to the effective date of the November 7, 2001 FERC order. Although PG&E's servicing agreement, itself, has not been approved by the Bankruptcy Court, we conclude that the relevant language extracted from the servicing agreement, as identified in the December 6, 2001 ALJ ruling, provides an appropriate basis for the collection and remittance of funds to DWR. We also conclude the requirement to include Imbalance Energy is reasonable in that DWR is responsible for procuring all Imbalance Energy and other ancillary services for customers in PG&E's territory.

For SCE and SDG&E, we shall simply direct that they make payments in accordance with their approved servicing agreements. Unlike PG&E, those servicing agreements are already in effect and prescribe how funds are to be remitted. We hesitate to interfere with the ongoing negotiations that are in progress between SCE and DWR regarding responsibility for ISO charges without further record development as to all of the ramifications involved.

C. Payment for Shortfalls in Prior Period DWR Remittances

Since the DWR revenue requirement that we implement herein spans a 24-month period that includes both retrospective and prospective components, the DWR charges that we implement must necessarily include a provision to make up any shortfalls in remittances to DWR for those periods prior to the effective date of this decision. The shortfall amount is a function of the difference between the interim funds for prior periods that have been previously been remitted by each utility compared with the revenue requirement allocated to each respective utility covering that period prior to implementation date of this decision.

For each utility, a separate one-time payment from each utility shall be required to reimburse DWR for its shortfall in costs that have already been incurred from the period when DWR began procuring power on behalf of the customers of that utility's service territory up through the date when the prospective monthly payment of charges prescribed in this order takes effect. These payments shall be made out of amounts previously collected by the utility from customers pending allocation between DWR and the utility. In prior orders, we have established interim amounts that each utility was to pay to DWR pending the final determinations made in the instant order.

The separate lump sum payment for DWR procurement costs prior to March 1, 2002 shall be calculated as follows. The per kWhr charges for each utility's customers adopted in this order multiplied by the applicable DWR sales to those customers for the applicable period beginning on or after January 17, 2001 through March 1, 2002 shall determine the amount to be remitted for that utility. From this amount, the utility shall subtract the amounts that have already been remitted to DWR on an interim basis. Each utility shall then remit additional funds to DWR as a lump sum payment, for any shortfall in the amounts already remitted for DWR power delivered.

PG&E and SCE should already be collecting and remitting to DWR an amount determined by multiplying the sum of their utility-specific generation rate and the energy surcharge rates as authorized by the Commission in D.01-05-064 by the volume of power delivered to their customers on behalf of DWR since June 1, 2001.⁴⁹ The utility-specific DWR charges we have calculated in this order indicate that PG&E and SCE need to remit to DWR an amount above the funds they have already remitted since the energy surcharges took effect on June 1, 2001. For SDG&E we established an initial generation rate component of 6.5 cents/kWh in D.01-05-060. In D.01-09-059, we adopted an interim rate increase for SDG&E that provided for remittance of DWR charges at the rate of 9.02 cents/kWh for sales on and after September 30, 2001. Each utility's subsequent remittances to DWR for power sales prior to March 15, 2002 shall be net of any funds that have already been remitted for DWR sales on that interim basis.

The installment payments for DWR procurement costs prior to March 15, 2002 shall be calculated as follows. The per-kWh charges for each utility's customers adopted in this order multiplied by the applicable DWR sales to those customers for the applicable period beginning on or after January 17, 2001 through March 15, 2002 shall determine the revenue requirement for that period. From this amount, the utility shall subtract the amounts that have already been remitted to DWR on an interim basis through March 15, 2002. The remainder shall represent the prior period shortfall owed to DWR. Each utility shall then begin remittance of the shortfall owed to DWR as monthly installment payments over the following six-month period, to make DWR whole for power delivered prior to March 15, 2002.

The payment of prior months' shortfalls in the utilities' remittances to DWR through monthly installments will mitigate the adverse impacts of repayment that would otherwise result from a one-time lump sum payment. A six-month amortization period for remittance of past DWR underpayments strikes a reasonable balance between meeting DWR's cash needs and mitigating cash flow issues for the utilities under a more accelerated amortization schedule.

The servicing agreements that have been adopted for each of the utilities prescribe in Section 13.2 that the utility "will not be required at any time to advance or pay any of its own funds in the fulfillment of its responsibilities...."

The DWR remittance charges that we implement in this order do not require any of the utilities to advance their own equity funds. To the extent, if any, that the provision in current retail rates designated for DWR energy sales is insufficient to cover the DWR remittance in any given month, the utility will record such shortfall as an undercollection in its RSBA (or other applicable balancing account). A debit entry for an undercollection recognizes that billed retail revenues (after deducting the revenues attributable to DWR sales) are insufficient to cover URG revenue requirements. The utility will be made whole for the undercollection in the balancing account since ratepayers ultimately are responsible for such undercollections through subsequent retail rate adjustments. Thus, even to the extent that the funds remitted to DWR by the utility may temporarily exceed the provision covering DWR sales collected through current retail rates, the excess amount remitted to DWR does not constitute an advance of utility investors' funds. Rather, all DWR remittances are provided by ratepayer funds. Any temporary cash flow timing differences between DWR remittances and collections in rates from customers will ultimately be reconciled through subsequent retail rate adjustments.

DWR will receive from each utility the revenues that the utility collects on behalf of DWR, based on the fixed DWR charge per kWh as noted above. The per-kWh charge payable to DWR shall remain fixed, even though the actual percentages of system sales supplied by DWR will vary each month. However, the retail rate applied on each utility customer's bill will not fluctuate from month-to-month merely due to changes in the percentage of sales supplied by DWR each month. Such monthly fluctuations on customer bills would cause undue customer confusion. Instead, the respective share of sales attributable to DWR versus utility URG sales shall be segregated through the balancing accounts that we have directed to be established elsewhere in this order.

With fixed retail tariffed rates and a fixed per kWh charge payable to DWR, there is, in effect, an amount that the utility is entitled to receive for its own account for the kWhs that it supplies to its retail customers. We will call this amount the "imputed utility rate." To the extent that the actual percentage of DWR sales to each utility's retail customers is either less than or exceeds the forecast percentage of DWR sales to those customers for any month, the customers' bills for that month will not reflect exactly the imputed utility rate for the kWhs the utility provides. The balancing account mechanisms that we have authorized elsewhere in this order are intended to ensure that over time, the utility recovers its imputed utility rate by segregating the effects of DWR sales and providing for a true up of estimated to actual DWR sales and allocated costs.

As noted above, although the end user's retail rates will not fluctuate to reflect monthly differences in DWR sales, the rate per kWh that is included in the bill for the power that the utility itself provides through URG sources (i.e., the "effective utility rate") will vary from month to month. By truing up the utility balancing account at a later date, we will ensure that the utility bills, and its customers pay, (over time) the imputed rate for utility-supplied power.