COM/CXW/eap H-3a

2/21/2002

Decision _________________

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Southern California Edison Company (E 3338-E) for Authority to Institute a Rate Stabilization Plan with a Rate Increase and End of Rate Freeze Tariffs.	Application 00-11-038 (Filed November 16, 2000)
Emergency Application of Pacific Gas and Electric Company to Adopt a Rate Stabilization Plan. (U 39 E)	Application 00-11-056 (Filed November 22, 2000)
Petition of THE UTILITY REFORM NETWORK for Modification of Resolution E-3527.	Application 00-10-028 (Filed October 17, 2000)

(See Appendix D for List of Appearances.)

TABLE OF CONTENTS

Title Page

OPINION 22

I. Overview 22

II. Regulatory and Statutory Mandates Relating to DWR Power Procurement 66

III. Joint Roles of CPUC and DWR in Implementation of DWR Requirements 1111

IV. Procedural Summary of DWR Revenue Requirement Implementation 1313

A. July 23, 2001 Update 1414

B. August 7, 2001 Update 1414

C. October 19, 2001 Preliminary Update 1515

D. November 5, 2001 Update 1616

E. February 21, 2002 Final Update 1717

V. DWR's Representations Concerning the Reasonableness of Its Revenue Requirement 1717

VI. Elements Comprising the DWR Revenue Requirement 2323

A. Long Term and Short Term Power Purchases 2424

B. Ancillary Service Costs 2727

C. Administrative, General, and Overhead 2727

D. Conservation/Load Management Costs 2828

E. Allowance for Uncollectibles 2929

F. Lead (Lag) Accrual to Cash 3030

G. Interim Loan Costs 3131

H. Deposits to Fund or Replenish Operating Reserves 3434

VII. Miscellaneous Considerations Relating to DWR Revenue Requirement 3535

A. Developments Subsequent to November 5 Submittal 3535

B. Responsibility for Payment of Franchise Fees 3636

C. Treatment of Direct Access Customers in Allocating DWR Revenues 4040

VIII. Allocation of Aggregate DWR Revenue Requirement Among the
Utility Service Areas 4141

A. Procedural Background 4141

B. Parties' Positions 4343

1. Overview 4343

2. Parties Supporting the Pro Rata Allocation Approach 4646

3. Parties Supporting Geographically Differentiated Cost Allocations 4848

a. SCE's Proposal 4949

b. SDG&E's Proposal 5252

4. ORA's Proposal 5555

C. Discussion 5757

1. Statutory Basis for Allocation Methodology 5757

2. Cost-Based Principles as a Basis for DWR Allocation Methodology 5757

3. Allocation of Administrative and Financing Costs 6060

4. Allocation of Power Procurement Commodity Costs 6060

a. Supply Portfolio Criterion 6060

b. Transmission Congestion Criterion 6262

c. Distinctions in the Allocation of Fixed Price Versus Short Term Purchases 7070

d. Allocation Based on Monthly Versus Hourly Cost Data 7171

e. ORA's Averaging Approach Criterion 7373

f. Postage Stamp Methodology 7474

g. Effects of Lag in Cash Payments in January 2001 7575

h. Effects of Differences in First Quarter 2001 Allocation for SDG&E 7777

i. Adopted Allocation Methodology 7878

IX. Implementing Annual DWR Update Proceedings 7979

A. Revisions of DWR Revenue Requirement 7979

B. DWR's Tracking of Forecast Versus Actual Cost and Revenue Variances 7979

C. Utility Balancing Accounts 8484

X. Implementation of DWR Revenue Remittance Procedures 8989

A. Establishment of a Separate Charge for DWR Electric Power 8989

B. Procedures for the Remittance of Funds to DWR 9191

C. Payment for Shortfalls in Prior Period DWR Remittances 9797

XI. DWR Revenue Requirement Implications for Utility Rate Needs 101101

XII. Rehearing and Judicial Review 102102

XII. Comments on the Alternate Decision 103103

Findings of Fact 103103

Conclusions of Law 111111

ORDER 116116

APPENDIX A

APPENDIX B

APPENDIX C

APPENDIX D

OPINION

I. Overview

This decision implements cost recovery of the revenue requirements of the California Department of Water Resources' (DWR) relating to its power purchase program pursuant to Assembly Bill 1 of the First Extraordinary Session (Stats. 2001, Ch. 4), hereafter referred to as AB1X. On November 5, 2001 DWR submitted to the Commission a revenue requirement of $10,003,461,000, representing the total to be collected from utility customers of the three major California utilities covering the period from January 17, 2001 through December 31, 2002. On February 21, 2002, DWR submitted a revised revenue requirement of $9,045,462,000, approximately $958 million lower than its November 5^th request. The revisions provided by DWR reflect comments from parties in this proceeding, and corrections to mathematical errors and calculations in DWR's prior submittals.

In this decision, we determine how DWR revenue collections are to be allocated among the customers of the three major California electric utilities: Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE), and San Diego Gas & Electric Company (SDG&E), and we establish procedures to implement the collection process. DWR will collect its revenue requirements through charges remitted from billings to retail customers of the three major electric utilities based on designated per-kWh charges as set forth in this decision. We allocate the total DWR revenue requirement among each of the three major utilities' service territories as follows:¹

($000's)

Utility Revenue Allocation % Allocation

PG&E	$ 4,507,238 49.8%
SCE	$ 3,553, 841 39.3 %
SDG&E	$ 984,383 10.9%
Total	$ 9,045,462 100%

The allocations specified above include all funds sought to be recovered at this time by DWR. Specifically, we are including in rates a portion of costs DWR assumes it would incur if its bonds are not issued. DWR has stated that it will issue bonds by June of this year, but its November 5 revenue requirement request does not incorporate this assumption. Instead, DWR assumed that it must continue to make quarterly interest and principal payments, for the duration of 2002, on interim financing it obtained in June of 2002. Once the bonds are issued, the interim loan can be repaid in full, making it unnecessary to make the quarterly payments, which are in the revenue requirement.

By including these uncertain costs, DWR greatly increased the revenue requirement needed to be recovered from ratepayers. As discussed elsewhere in this decision, there are a number of other issues identified by parties that indicate that DWR's request is inflated. The end result is a revenue requirement sufficiently large that it may likely lead to rate increases. A significant portion of these contingent costs have been removed by DWR in its February 21, 2002 update to its revenue requirement.

DWR has the ability to propose changes to its revenue requirements as conditions change, and the Commission has the authority to modify the costs allocated in this decision to reflect future updates. The Commission will authorize DWR to recover its costs at the time necessary for DWR to carry out its requirements. If DWR's bonds are not issued, DWR should at that time seek to recover these costs. However, as reflected in DWR's recent update, it should not be necessary for DWR to include in rates at this time such costs that DWR does not expect to incur.

As described below, we agree with the goal of allocating DWR costs in relation to the costs of providing service. We do not believe, however, that segregating disproportionately higher priced DWR power for allocation exclusively to northern California consumers is a proper or fair application of traditional cost-based ratemaking policies. The primary purpose of the Public Utilities Act is to insure the public adequate service at just and reasonable rates without discrimination. (Pub. Util. Code §§ 451 et seq., 761; see also United States Steel Corp. v. Public Utilities Com., 29 Cal. 3d 603, 610 (1981), quoting Pacific. Tel. & Tel. v. Public Utilities Com. 34 Cal.2d 822, 826 (1950).)

However, the allocation issue here, involving costs incurred by a single entity (i.e., DWR) purchasing power on behalf of customers in three separate utility service territories is novel, and is not addressed by traditional cost-based ratemaking procedures as typically applied. Nonetheless, the allocation approach we adopt is consistent with the philosophy underlying traditional cost-based ratemaking. Our adopted approach allocates DWR costs primarily in relation to the relevant cost driver, namely the net short position by utility.

Our allocation recognizes the integrated nature of power procurement undertaken by DWR for California utility customers, but also adjusts for utility-specific differences, where applicable, as proposed by SCE. As a basis for the utilities to remit revenues to DWR in accordance with these allocations, we adopt a per-kWh charge for customers in the service territory of each utility of 9.295 cents/kWh for PG&E, 9.744 cents/kWh for SCE and 7.121 cents/kWh for SDG&E. These adopted DWR charges form the basis for the utilities to remit funds to DWR that they are currently collecting.

We do not, however, change the overall level of retail rates for PG&E, SCE, or SDG&E in today's order. We will address the need for any change in rates for SDG&E customers in order to meet DWR's costs of serving SDG&E customers in a separate docket (Application (A.) 00-10-045 et al).² For SCE and PG&E customers, any need for a change in overall rates charged to customers as a result of this decision cannot be addressed until after we issue our decision on utility retained generation (URG) issues and other issues related to the existing freeze on those utilities' rates.

We note that the high DWR contract prices now in effect in California reflect the exorbitant wholesale electricity costs caused by the crisis experienced in electric purchased power markets over the past year. These prices measure, in part, the terrible price California has paid to restore stability. Individual Commissioners and Governor Gray Davis have previously endorsed contract renegotiations to reduce prices that were set when market prices were at or near their peak. (Exhibit 160, Weil, p. 4.) DWR now forecasts that from October 1, 2001 through the end of 2002, average DWR contract prices will be 3.3 times average residual net short prices. (Reference Item C, DWR, November 5 revenue requirement document, p. 16, Table 6; compare DWR contract costs to residual net short costs for Q4 2001 and all of 2002.) DWR assumes that residual net short energy will be purchased in spot markets.

It is our hope that the actions of DWR and the utilities, as well as the efforts of public and private parties involved in cases at the Federal Energy Regulatory Commission (FERC) and in the courts to reduce costs, will be successful, and that we will be able to revisit the DWR's revenue requirement to lower these charges in the future.

We also note the concerns raised by parties in our proceeding regarding the accuracy and validity of significant portions of the revenue requirement submitted by DWR and other factors affecting the allocation of costs to utilities. As with potential refunds of generator overcharges, we hope and anticipate that DWR will promptly submit revisions regarding its revenue requirements in the event its actual revenue requirements are less than those reflected in its November submittal. We also note that in R.02-01-011, the assigned ALJ has issued a proposed decision that would suspend direct access as of July 1, 2001. Should the Commission adopt this proposed decision, it would likely have the effect of reducing the rate impact of DWR's revenue requirements on all customers of the Investor-owned Utilities.