5. A Process for Review of Project Co-Funding When an IOU Does Not Seek Commission Approval until after Securing DOE Grant

The ACR proposed to establish a memorandum account so that IOUs can book and track the costs and expenses associated with Smart Grid projects.

In addition, the ACR proposed that any project that has received DOE funding:

... would carry with it a rebuttable presumption that the project is reasonable. The state filing, however, should nevertheless itemize, to the extent possible, the costs and benefits accruing to California for the ratepayer share of the funding ... . Absent a clear and convincing showing of unreasonableness, the Commission would find the federally funded project to be "reasonable."⁴³

The ACR proposed applying a rebuttable presumption because both the DOE and this rulemaking seek to provide support for projects initiated consistent with EISA. Furthermore, the ACR noted that the public benefits that can derive from Smart Grid investments identified in the DOE FOA and NOI mirror those identified by the Commission in the OIR for this proceeding

The proposed Commission review of the IOU's project and associated costs would take place in the next General Rate Case (GRC), which would evaluate the IOU's showing. Those opposing recovery of project costs related to Smart Grid activities would have the legal burden to overcome the rebuttable presumption of reasonableness by demonstrating with evidence that the project is not a reasonable use of ratepayer funds. For projects approved in the GRC, the Commission would authorize the recovery of all costs in rates as the Commission deemed appropriate.

5.1 Positions of Parties

DRA, TURN and the CFC strongly oppose the use of the rebuttable presumption that relies on the DOE assessment to determine the reasonableness of a project.

DRA asserts that the use of a rebuttable presumption "is not lawful."⁴⁴ DRA's argument centers in large part on the Commission's responsibility, under § 454(a) of the Pub. Util. Code, to issue findings that a utility's request for a rate increase is just and reasonable. Specifically, DRA argues that "[b]y allowing IOUs to recover project costs from ratepayers before the Commission makes a finding that the expenditure is just and reasonable, the ... proposal would violate Public Utilities Code § 454."⁴⁵ DRA contends that the Commission's reliance on the DOE's authorization of funding for Smart Grid activities to authorize rate increases is unlawful because "[i]t is beyond the Commission's jurisdiction and authority to allow IOUs to spend California ratepayer dollars based on a finding by the DOE that federal stimulus dollars should be devoted to a Smart Grid demonstration project."⁴⁶ More specifically, DRA states that adopting a new rate requires a showing that the Commission's "decision is supported by substantial evidence."⁴⁷

TURN opposes the rebuttable presumption on the basis that "[i]t would be improper to alter the burden of proof with regard to the showing or reasonableness with respect to any costs associated with Smart Grid projects that are partially funded under ARRA."⁴⁸ TURN concludes that "the fact that the AC proposal does not even contain a ceiling on the potential costs that might be imposed on ratepayers as a result of this policy exposes ratepayers to significant risks that should not be imposed at this time."⁴⁹

CFC similarly opposes shifting the burden of proof away from the utility as "inconsistent with California law."⁵⁰ According to CFC, the Commission is "required to consider whether the utility's investment would 'minimize the cost to society' of the reliable energy services that are provided by natural gas and electricity."⁵¹ CFC also states a more general concern that a "utility cannot possibly know, ahead of time, the total amount of investment that will actually be required to perform a project for which DOE funding is required."⁵²

CLECA states that it "is concerned about the proposed rebuttable presumption of reasonableness in this case because it implicitly assumes that DOE's vision of Smart Grid is the same as California's."⁵³ It argues further that "[r]ates should not be increased without an opportunity for parties to evaluate utility proposals or actions."⁵⁴

SCE and PG&E both support the ACR's proposed rebuttable presumption of reasonableness. In response, SCE argues that the "ruling's proposed rebuttable presumption is consistent with California law."⁵⁵ SCE supports its argument by citing to the Public Utilities Code, stating that:

Section 454(b) grants the Commission important discretion in this area:

The commission may adopt rules it considers reasonable and proper for each class of public utility providing for the nature of the showing required to be made in support of proposed rate changes, the form and manner of the presentation of the showing, with or without a hearing, and the procedure to be followed in the consideration thereof.

Accordingly, the Ruling's proposed rebuttable presumption falls squarely within the authority granted to the Commission by Section 454(b).⁵⁶

SCE does not view the proposed process as an abdication of the Commission's regulatory authority to DOE. SCE instead argues that "the Commission will still evaluate Smart Grid projects using its traditional criteria, but place the burden on parties challenging the costs of the projects to show them to be unreasonable."⁵⁷

PG&E meanwhile supports the rebuttable presumption "because of the numerous findings, criteria and policies in support of Smart Grid projects in the Commission's adopted OIR in this proceeding, in the federal Recovery Act itself, and in DOE Smart Grid implementation documents ..."⁵⁸

PG&E further argues that "the rebuttable presumption should not be limited to GRC, but should be extended to the Commission's review of advice filings requesting approval of Smart Grid projects."⁵⁹ In advocating this position, PG&E identifies drawbacks that arise from limiting the use of rebuttable presumptions to GRCs. PG&E points out that the proposal to defer consideration of the recovery of Smart Grid funds to the next GRC is flawed because of their infrequency. To illustrate this point, PG&E states that its last GRC did not include funding for Smart Grid projects and that its next scheduled GRC "will not be decided until the end of 2010 or early 2011, after the likely deadline for PG&E to demonstrate that it has the matching funds required to receive DOE Smart Grid grants.⁶⁰ As a result, PG&E does not view this particular rate recovery process as one that is "reasonably available for PG&E's Recovery Act-funded projects ..."⁶¹

5.2 Discussion

Our review of the record in this proceeding, including the DOE FOA's, shows that DOE has adopted extensive requirements and a thorough review process. Moreover, the DOE is a federal agency with expertise in the energy area, including expertise specifically related to Smart Grid investments.

The Commission has learned about many of the benefits to ratepayers that will be derived from modernizing the electric grid through our Smart Grid rulemaking. The DOE identifies similar benefits in its FOA's.

Specifically, DOE's FOA for the SGIG program describes that the program is intended to enable measurable improvements in areas including:

· Reliability of the electric power system;

· Electric power system costs and peak demand;

· Consumer electricity costs, bills, and environmental impacts;

· Clean energy development and greenhouse gas emissions; and

· Economic opportunities for businesses and new jobs for workers.⁶²

Similarly, the DOE's FOA for the SGDP program states that the goal of the program is to collect and provide information to:

· Reduce system demands and costs;

· Increase energy efficiency;

· Optimally allocate and match demand and resources to meet that demand; and

· Increase the reliability of the grid. ⁶³

The DOE's objectives are consistent with our policies, including the Energy Action Plan and state law, including Assembly Bill 32. Thus, it is reasonable to conclude that IOU projects that receive DOE grants will be beneficial to the IOU's ratepayers and further California's clean energy policies.

Projects that received DOE awards will also be attractive from a cost perspective since utilities will have the opportunity to make investments that are beneficial to ratepayers and have only 50% of the cost (or less) fall to ratepayers.

The unique circumstances associated with the Recovery Act, including the DOE's rapid timeline for reviewing projects, granting awards, and starting construction, warrant rapid action on projects by this Commission. We therefore adopt a Tier-3 advice letter process for the review of those projects that have received a DOE Smart Grid Recovery Act award. Staff shall issue a draft resolution for Commission approval recommending that the incremental costs for a specific project are justified if the following conditions have been met:

1. The DOE has selected the project to receive an award;

2. The project furthers one or more of the benefits to IOU ratepayers identified in this section (i.e. the five listed benefits for SGIG grants and the four listed benefits for SGDP grants);

3. The requested incremental ratepayer funding for the project does not exceed $30 million;

4. The utility attests that ratepayer funding does not exceed 50 percent of the total project costs;

5. The utility attests or otherwise demonstrates that it has sought third-party funding, in addition to DOE funding, and indicates what third-party co-funding it has received;

6. The utility has provided a detailed itemized budget for the project and included a reasonable explanation of how the budget was developed; and

7. The utility attests or otherwise demonstrates that the costs are necessary for the project.

If the conditions above are met, the Energy Division shall prepare a resolution approving the project for consideration by the Commission. A party protesting the Advice Letter should demonstrate that the Advice Letter does not meet the conditions set forth.

Pursuant to General Order (GO) 96-B , a matter that requires an evidentiary hearing may only be considered in a formal proceeding such as application.⁶⁴ We do not anticipate any material contested issues of fact in the case of Advice Letters reviewed under the adopted process, thus an Advice Letter process is appropriate in this case. However, if the Energy Division determines that a protest raises a material contested issue of fact then Energy Division should reject the Advice Letter without prejudice as required by GO 96-B, Rule 5.3. The utility can then refile its project as a formal application.

Standard Commission processes will apply for reviewing final projects costs and for including project costs in rates.

Projects for which incremental IOU ratepayer costs exceed 50% of the total project costs or for which incremental IOU ratepayer costs exceed $30 million do not qualify for a Tier-3 review process. They must proceed via application.

We adopt these procedures because of the unique circumstances of the Recovery Act and the Smart Grid grants. This decision and the procedures we adopt in it set no precedent for future Commission decisions.

⁴³ ACR at 10.

⁴⁴ DRA Comments at 6.

⁴⁵ Id. at 7.

⁴⁶ Id.

⁴⁷ Id. at 8.

⁴⁸ TURN Comments at 7.

⁴⁹ Id.

⁵⁰ CFC Comments at 3.

⁵¹ Id., emphasis in original, which cites Pub. Util. Code § 701.1(a).

⁵² Id. at 6.

⁵³ CLECA Comments at 5.

⁵⁴ Id. at 6.

⁵⁵ SCE Reply at 3.

⁵⁶ Id. at 4.

⁵⁷ Id.

⁵⁸ PG&E Comments at 5.

⁵⁹ Id.

⁶⁰ Id. at 2.

⁶¹ Id.

⁶² United States Department of Energy, Financial Assistance Funding Opportunity Announcement: Smart Grid Investment Grant Program (SGIG) (DE-FOA-0000058), June 25, 2009, p. 7.

⁶³ U.S. Department of Energy, Financial Assistance Funding Opportunity Announcement: Smart Grid Demonstration Program (SGDP) (DE-FOA-0000036), June 25, 2009, p. 6.

⁶⁴ See Rule 5.1 and Rule 5.2 of GO 96-B (provisions adopted by D.01-07-026 (July 12, 2001), D.02-01-038 (January 9, 2002), D.05-01-032 (January 13, 2005), D.07-01-024 (January 25, 2007), D.07-09-019 (September 6, 2007), D.08-05-019 (May 15, 2008), Resolution ALJ-221 (August 21, 2008), Resolution W-4749 (March 26, 2009), and D.09-04-005 (April 16, 2009)).