Pulsifer Revised Agenda Dec. Order Implementing Cost Recovery Allocation of Department of Water Resources Revenue Requirement.

VII. Miscellaneous Considerations Relating to DWR Revenue Requirement

A. Developments Subsequent to November 5 Submittal

By letter dated December 6, 2001, DWR advised Commissioner Brown regarding certain developments subsequent to November 5, 2001 that were relevant to the DWR revenue requirement. Most noteworthy among these developments was the issuance of a FERC order on November 7, 2001. On that date, FERC issued its Order Granting Motion Concerning Creditworthiness Requirement and Rejecting Amendment No. 40 (Order).¹⁷ The Order confirms that DWR, as the creditworthy party, is responsible for purchases by the ISO for the net short positions of SCE and PG&E. (Order, (mimeo) pp. 12-16.) The FERC concluded that "[w]e have repeatedly directed the ISO to enforce its creditworthy standards under the Tariff." The Order further states:

"The ISO is obligated under its Tariffs to invoice, collect payments from and distribute payments to DWR, as Scheduling Coordinator for all scheduled and unscheduled transactions made on behalf of DWR, including transactions where DWR serves as the creditworthy counterparty for the applicable portion of PG&E's and SoCal Edison's load."¹⁸

In its November 5 submittal, DWR qualified its ultimate responsibility for costs that require a creditworthy entity. In addition, DWR limited its responsibility to certain cost categories, and excluded many other ISO cost categories for which it should be responsible, at least in part, pursuant to the November 7 FERC Order. PG&E and SCE have argued that in compliance with the FERC Order, DWR's revenue requirement should be updated to include its full lawful obligations under the ISO's tariffs.

In its December 6 letter, DWR advised Commissioner Brown as to the effects of the FERC Order on its revenue requirements. DWR affirmed that the FERC ordered the ISO to bill DWR for ISO transactions with third party suppliers on behalf of the noncredit worthy entities PG&E and SCE. DWR indicated that the FERC Order caused the ISO to send it $956 million in invoices for the period January 17 through July 31, 2001.

DWR expects to make full payment of the ISO invoice for costs incurred in February 2001 under protest and expects to resolve disputed invoice charges for subsequent periods. As an attachment to its December 6 letter, DWR provided a summary of ISO invoices dated November 20, 2001 and the types and estimated amounts of additional costs being placed on DWR as a result of the FERC Order.

In its December 6 letter, DWR also provided miscellaneous updated calculations for other cost categories, including lead (lag) accruals to cash. DWR concluded, however, that the net effect of all the updated changes subsequent to November 5 was not significant enough to warrant a change in its previous $10.003 billion revenue requirement.

B. Responsibility for Payment of Franchise Fees

DWR's revenue requirement does not account for franchise fees associated with the power that it sells to utility customers. DWR believes that collection and payment of franchise fees are the responsibility of the utilities, and not DWR.

SCE takes exception to DWR's exclusion of franchise fees from its revenue requirement calculation. SCE currently pays franchise fees to cities based on the total amount of revenues billed to customers (total revenues include both SCE and DWR revenues). SCE indicates that under its rate design, each unbundled rate component (e.g., distribution, transmission, public purpose programs) is design-based on a revenue requirement that includes franchise fee payments. That is, each estimated revenue requirement is grossed up by the most recent Commission-approved factor to determine the revenue requirement that is used to set rate levels. On a monthly basis, in the applicable ratemaking mechanism, the actual revenue that is generated from rate levels is reduced by a franchise fee amount calculated using the adopted factor. The revenues that remain after franchise fees are removed are then available to recover the costs associated with the applicable rate component.

SCE states that if this same methodology is not applied to the DWR revenue requirement, the franchise fees that SCE is obligated to remit to cities will have to be recovered through another utility rate component, such as distribution, transmission, or URG. SCE claims that such treatment would result in undercollection of its costs. It calculates that implementing the Commission-adopted franchise fees and uncollectible accounts would result in SCE's share of the DWR revenue requirement (based on July 23 data) being increased from $5.803 billion to $5.869 billion.

SCE argues that to appropriately establish the DWR revenue requirement and associated rate component, DWR's estimated revenue requirement should be grossed up by the currently effective franchise fee rate. SCE proposes that the revenues generated from the DWR rate component would first be reduced by the franchise fee factor and retained by SCE in order to recover franchise fee payments made by SCE to cities.

SCE believes that since the DWR rate component would be established based on the grossed up (including franchise fee payments) revenue requirement, reducing the amount of DWR revenue by this factor would still enable DWR to recover its revenue requirement. SCE maintains that the remaining revenue after accounting for franchise fees would be remitted to DWR for recovery of its incurred costs. SCE proposes to apply the same methodology to uncollectible accounts expense.

Comments on the issue of franchise fees were also filed by the City of San Diego and by the City and County of San Francisco, jointly with eight other municipalities (San Francisco et al.). San Francisco et al. state that franchise fees collected from electric service revenues are a vital source of funding for public services by local municipalities throughout the state. Moreover, under California law, municipalities are entitled to charge franchise fees as compensation for the use of public property to provide utility service. San Francisco et al. argue that the Commission should (1) clearly state that franchise fees must be paid on revenues associated with power purchased by DWR for utility customers, as well as on utility revenues; and (2) address how the collection and payment of such fees will occur. The City of San Diego goes farther, and argues that the Commission should require DWR to include a provision for franchise fees in its revenue requirement.

Although no party, nor DWR, has questioned the legal right of municipalities to franchise fees, the dispute over franchise fee remittances related to DWR power sales raises a number of legal and factual issues that have not been satisfactorily resolved by parties' comments. These questions include the legal right of municipalities to be paid franchise fees on DWR power sales, and the legal obligation of DWR to collect and remit franchise fees associated with its power sales. There are also unresolved questions over the utilities' obligations to remit franchise fees to municipalities on DWR power sales, and the extent to which current utility rates already include a provision for such franchise fees.

The proposal of the City of San Diego that we simply order DWR to collect franchise fees ignores the applicable legal statutes that assign responsibility to DWR-not the Commission-for determining the amount of its revenue requirement. Therefore, such a proposed order is not legally defensible or enforceable. Consequently, we shall adopt interim measures to enable the municipalities continue to receive franchise fees associated with DWR power sales pending further determinations of an appropriate course of action. In accordance with our continuing jurisdiction over the electric utilities, we direct the utilities to bear interim responsibility for remitting franchise fees to the municipalities for DWR power sales. Since we are not increasing the level of retail rates at this time, the utilities shall use funds generated from sales of power at existing rate levels in order to remit the franchise fees associated with DWR power sales.

We shall authorize each of the utilities to establish a memorandum account to track franchise fee payments that are made to the municipalities associated with DWR power sales. The purpose of these memorandum accounts is to ensure that the utilities are made whole for any franchise fee payments made on behalf of DWR that are not already included in retail rates. We shall expressly prohibit, however, any double recovery of franchise fees on DWR sales from utility customers. We shall determine a further disposition of the franchise fee issue following subsequent analysis of the legal and factual issues involved.¹⁹ In this decision, we do not reach the issue of whether franchise fees are owed on revenues associated with DWR sale of power, but rather order the utilities to maintain the status quo until this issue is resolved. We shall direct the ALJ to issue a procedural ruling on the legal and factual issues pertinent to franchise fee remittances on DWR sales.

C. Treatment of Direct Access Customers in Allocating DWR's Revenues

During the evidentiary hearings on revenue allocation, the ALJ ruled that issues relating to Direct Access customers' potential responsibility for a portion of the DWR revenue requirement were relevant in the determination of allocation issues. The ALJ also ruled, however, to defer consideration of Direct Access issues to a later phase of this proceeding. Accordingly, the allocations of revenue requirement adopted in this order do not take into account any potential impacts of Direct Access customer responsibilities for bearing a portion of DWR cost responsibility.

We believe that the potential impacts of Direct Access customers' responsibility for a share of the DWR revenue allocation should be addressed on a timely basis. The Commission is addressing the implementation of suspension of direct access in A.98-07-003. On December 24, 2001, a joint ruling was issued in this proceeding and in A.98-07-003, transferring the issue of cost responsibility of direct access customers for the DWR revenue requirement into this proceeding. We direct the ALJ to issue a procedural ruling for addressing on a timely basis the issue of Direct Access customer responsibility for DWR charges in the determination of revenue allocation. Any true-up of revenue allocations in a subsequent update proceeding will remain subject to the outcome of any subsequent order we may issue addressing Direct Access customer responsibility for DWR charges.

¹⁷ 97 FERC ¶61,151. ¹⁸ Id., (mimeo) p. 14. ¹⁹ In D.01-10-035, the decision denying City of San Diego's rehearing application of D.01-09-059, the Commission indicated that the tariffs filed by SDG&E merely preserved the status quo by including franchise fees due to municipalities from revenues associated with DWR's sale of power to SDG&E customers. However, preserving the status quo does not resolve the legal and factual issues raised. D.01-10-035 notes that "any issues relating to franchise fees are more appropriately addressed in a proceeding involving all three utilities." (D.01-10-035, at p. 3.)