5. Discussion
5.1. Is Any Increase in Tiers 1 and 2 Rates Justified?
In response to the notices mailed by the utilities, informing customers of the pending applications for retail rate adjustments, various customers sent letters to the Commission expressing objections to any increase in Tiers 1 and 2 rates.
Particularly in view of the difficulties experienced by retail customers, particularly residential customers, in paying their utility bills in the current economic recession, we are sensitive to concerns expressed over any rate changes. In this particular instance, however, we conclude that the rate adjustments that we authorize are appropriate and consistent with the intent of the recently enacted legislation. Moreover, we do not authorize any increases to Tiers 1 and 2 rates for CARE.
As a further limitation on the Tiers 1 and 2 rates, under 739.9(b), the rates charged to non-CARE residential customers for usage up to the baseline quantity, including any customer charge revenues, may not exceed 90% of the system-average rate. The utilities demonstrate that the rates they propose meet this requirement.10
While the increases in Tiers 1 and 2 rates that we authorize will result in higher rates for certain customers, such rate increases will be limited as provided in 739.9. Moreover, the intent behind the limited increases that are permitted is to bring the overall disparities among the various rate tiers into a more equitable relationship. These disparities have grown increasingly larger as a result of the cap that was placed on Tiers 1 and 2 rates beginning in 2001. Consequently, because of this cap, all rate increases applied to the residential customer class since 2001 have been borne exclusively by customers with usage in Tiers 3, 4, and 5. The cumulative effect of these rate increases applied exclusively to Tiers 3, 4, and 5 has produced a growing disparity in relation to Tiers 1 and 2.
5.2. Should residential rates for electric usage in excess of 130% of base line decrease when Tiers 1 and 2 rates increase?
PG&E, SCE, and SDG&E each propose to reduce their non-CARE Tiers 3, 4, and 5 rates by an annual amount that offsets the revenue increase from the Tiers 1 and 2 rate increases. Consistent with the Settlement Agreement on residential rate design in Phase 2 of its 2007 General Rate Case (GRC) (D.07-09-004), PG&E proposes that Tiers 3, 4, and 5 generation surcharges be reduced proportionately to ensure that residential revenue calculated at present rates is collected from the residential class with the rates being proposed. PG&E forecasts a net change of just $877 (or 0.03%) in revenues from direct access customers as a result of the rate changes proposed in its application, with some customers experiencing increases and others, decreases, as a result of the Commission-approved rate design methodology which includes revisions to distribution and generation component rates.
As required by the Settlement Agreement approved in D.09-08-028, SCE proposes to maintain a 3.5 cent/kWh differential between the rates applicable to SCE Tiers 3, 4, and 5.
SDG&E's proposed offsetting reduction to Tiers 3 and 4, is likewise consistent with the currently authorized rate design methodology adopted in D.08-02-034 (SDG&E's GRC Phase 2) and D.09-09-036 (SDG&E's Rate Design Window).
UCAN protests SDG&E's intent to decrease Tiers 3 and 4 rates,11 arguing that such a decrease contravenes the statutory requirements that rates be determined with observance of the principle that conservation is desirable. A similar issue applies to the proposals of PG&E and SCE. The joint applicants argue that UCAN's argument is misplaced and at odds with statutory requirements and Commission policies. The joint applicants argue that the cumulative effects of the rate cap since 2001 have resulted in very high electric retail bills for customers whose usage places them in the upper tiers. The proposed decreases in Tiers 3 and 4 rates would allow some movement toward rates that reflect the cost of providing service to residential customers. The joint applicants argue, however, that the proposed Tiers 3, 4, and 5 rate decreases would only begin to mitigate the inequities between lower and higher-usage rate tiers that have developed since 2001.
We conclude that offsetting the Tiers 1 and 2 increase with corresponding decreases to Tiers 3, 4, and 5 is reasonable and consistent with the statutory provisions of § 739.9. Accordingly, we find UCAN's protest is unjustified in objecting to such treatment. As stated in § 739(d)(1), although the Commission is required to provide for baseline rates that apply to the lowest usage block of an increasing block rate structure, the Commission "shall avoid excessive rate increases for residential customers, and shall establish an appropriate gradual differential between the rates for the respective blocks of usage" (emphasis added).
We conclude that rate adjustments made pursuant to § 739.7 and § 739.9 do not contravene any Commission policy or statute in favor of encouraging energy conservation. Customers who consume electricity in Tiers 3, 4, and 5 currently pay a higher per-unit rate for usage in those tiers in comparison to Tiers 1 and 2. After the approved rate increases in Tiers 1 and 2 are implemented, those rate tiers will still be significantly lower than Tiers 3, 4, and 5. Accordingly, customers with electricity usage limited to Tiers 1 and 2 will continue to pay a lower per-unit rate relative to the Tiers 3, 4, and 5 per -unit rates after the proposed rate adjustments are implemented.
If the increase in revenues resulting from raising the Tiers 1 and 2 rates were not used to reduce Tiers 3, 4, and 5, those revenue increases would otherwise flow through to other, nonresidential customers. Moreover, according to § 739.7, the most equitable allocation of the revenue increase is to reduce Tiers 3, 4, and 5 tiers. In this manner, any revenue adjustments from the Tiers 1 and 2 rate change will be retained within the residential classes.
5.3. Should the amount of authorized increase in Tiers 1 and 2 rates be 3% or 5%?
UCAN argues that the increase proposed to be implemented on January 1, 2010, be limited to 3%, rather than the 5% proposed by the utilities. DRA and TURN do not contest the proposed 5% increase.
UCAN argues that § 739.9 calls for the annual CPI percentage change to be calculated using the same formula as was used to determine the annual Social Security COLA on January 1, 2008. SDG&E uses the December 2008 COLA as the basis for its calculations of the applicable Tiers 1 and 2 rate increase. This COLA measures changes from the third quarter of 2007 to the third quarter of 2008. UCAN argues that the COLA used by SDG&E is not the most recent figures available. UCAN believes that the COLA released on October 15, 2009, reflecting a 0% figure, provides a more accurate measure for determining the rate increase, and is more reflective of the current state of the economy. The COLA figure of 0% released by the Social Security Administration on October 15, 2009, measures changes covering the period from the third quarter of 2008 to the third quarter of 2009.
Based on the use of this revised COLA figure of 0%, UCAN argues that the applicable Tiers 1 and 2 rate increases should be at the low end of the applicable range (i.e., 3%), rather than at the high end (i.e., 5%). The applicants argue that UCAN's position is contrary to the intent of SB 695, and would create an unfair result for residential customers.
According to § 739.9, the annual percentage change in the CPI shall be calculated using "the same formula that was used to determine the annual Social Security Cost of Living Adjustment on January 1, 2008." That formula is based on the CPI for Urban Wage Earners and Clerical Workers (CPI-W). Furthermore, the allowable change in Tiers 1 and 2 rates is linked to "the annual percentage change in the CPI from the prior year plus 1% (emphasis added).
The applicants each use the Social Security COLA of 5.8% effective on January 1, 2009, as the base CPI measure for its proposed 2009 rate adjustment. This 5.8% COLA represents the change in the average CPI-W from the third quarter of 2007 to the third quarter of 2008. Applicants assert that it thus satisfies the requirement in § 739.9(a) that annual non-CARE Tiers 1 and 2 rate increases be based on the change in CPI for the previous year.
Based on a 5.8% COLA, the "CPI-plus-1%" formula in § 739.9 equals a 6.8% increase in Tiers 1 and 2 rates. Since this amount exceeds the 5% cap under § 739.9, each of the utilities proposes to increase Tiers 1 and 2 rates by exactly 5% effective January 1, 2010, the maximum adjustment permitted under § 739.9(a).
Applicants state in their joint reply to protests that by accepting TURN's proposed condition on the timing of advice letters for future rate changes pursuant to SB 695, the utilities waived the opportunity to request any increase in the COLA for 2010. Applicants contend that if the Commission approves the utilities' proposed advice letter process, as modified by TURN, the next proposed residential rate changes would be effective January 1, 2011, and would reflect the 2011 COLA, not the 2010 COLA.
Applicants argue that the legislative intent of SB 695 was for a 2009 increase in Tiers 1 and 2 rates, as evidenced by the legislature's designation of the statute as "urgency," and as immediately effective. By requesting to defer the implementation of the 2009 rate increase until January 1, 2010 due to procedural and scheduling considerations, applicants assert that such deferral does not negate the legislative intent for a rate increase for 2009. Applicants thus contend that the use of the 2010 COLA, as proposed by UCAN, instead of the 2009 COLA, would nullify the legislative intent to implement immediate, sequential annual rate changes to mitigate the unfair rate differentials that currently exist.
Parties' dispute over the size of the CPI adjustment turns on the interpretation of what time period represents "the prior year" for measuring the CPI under the statute. Public Utilities Code Section 739.9 allows the Commission to increase Tiers 1 and 2 rates by the annual percentage change in the CPI from the "prior year" plus 1 percent, but not less than 3% and not more than 5%.
The utilities interpret the "prior year" to refer to the CPI change from the "from the third quarter of 2007 to the third quarter of 2008," even though the effective date of the proposed rate change is in January 2010. Since the resulting CPI change exceeds the 5% cap, the utilities derive a Tiers 1 and 2 rate increase of 5%.
The utilities' interpretation of the "prior year" is not consistent with the statute since it applies CPI figures reaching backward as early as part of 2007. Since the effective date of the rate adjustments is January 1, 2010, we conclude that the applicable CPI for the "prior year" is the percentage change from the third quarter of 2008 to the third quarter of 2009. This period correctly reflects the CPI change for the "prior year" preceding the effective date of the rate change on January 1, 2010. The use of any earlier measurement periods to derive the increase would conflict with the statutory formula for computing the allowed change in Tiers 1 and 2 rates based on the "prior-year" CPI change.
The utilities also argue that the Tiers 1 and 2 increase was supposed to go into effect immediately, because the statute was an urgency statute. Because the statute only authorizes, but does not require, an increase in rates for Tiers 1 and 2, even the urgency clause does not make any rate change effective immediately. It only happens when the Commission decides to grant a rate change. Thus, the urgency clause of the legislation does not justify using an earlier period for computing the "prior-year" CPI change based on figures dating back to the third quarter of 2007.
Since the CPI change from the third quarter of 2008 to the third quarter of 2009 was 0%, the applicable Tiers 1 and 2 increase under the statutory formula is the 3% floor. Accordingly, we approve a 3% increase for Tiers 1 and 2 rates, with a corresponding decrease to the remaining tiers by the same amount to achieve revenue neutrality.
A 3% increase in Tiers 1 and 2 rates is minor especially considering the difference in rates customers currently pay for usage below 130% of baseline and those rates for usage in Tiers 3 through 5. Further, as shown in table in the introduction to this decision, even the rates for Tiers 1 and 2 that PG&E proposes in this proceeding are only slightly higher than the comparable rates charged in 2001. The applicants have demonstrated that the rates they propose for electricity usage up to baseline quantities (i.e., Tier 1) do not exceed 90% of the system average rate, and thus comply with § 739.9(b). The 3% Tiers 1 and 2 increases that we authorize are thus compliant with §739.9(b). We therefore grant the applicants' request to increase Tiers 1 and 2 rates effective on or after January 1, 2010 for non-CARE residential customers, but we limit the Tiers 1 and 2 increase to only 3%, instead of the 5% proposed by the applicants. We concurrently authorize offsetting decreases to the higher-usage tiers by 3% in order to yield a revenue-neutral result for the overall residential class.
5.4. No Change in CARE Residential Rates
The utilities propose no increases to CARE residential Tiers 1 and 2 rates. We agree with this result. The Commission has authority under 739.1(b)(2) to increase CARE rate schedules for electricity usage up to 130% of baseline quantities by the annual increase in benefits provided under the CalWORKs program for the fiscal year in which the rate increase would take effect, but not to exceed 3% per year. The benefit amounts provided under the CalWORKs program are subject to an annual cost of living adjustment, effective July 1st of each year, as provided under Section 11453(a) of the Welfare and Institutions (W&I) Code. The cost-of-living adjustment for the CalWORKs program has been suspended for the 2009-2010 fiscal year as a result of the state's financial problems. (See Section 11453(c)(5) of the W&I Code).
As required by § 739.1(b)(4), the CARE Tier 3 rate will continue to receive a 20% discount from the non-CARE Tier 3 rate, excluding the DWR Bond Charge, CARE Surcharge, and any applicable California Solar Initiative charges or other exempt charges.
5.5. Category and timing of advice letter for requesting future Tiers 1 and 2 rate changes.
The utilities proposes to use Tier 1 advice letters as the vehicle to request future rate adjustments under the provisions of §§ 739.1 and 739.9. Advice letters are categorized as either Tiers 1, 2, or 3. Tier 1 advice letters are effective pending Energy Division disposition. Tier 2 advice letters are effective only after Energy Division approval. Tier 3 advice letters are effective only upon the issuance of a resolution by the Commission approving them.
General Order (GO) 96-B, Energy Industry Rule 5.1(3) states that a "change in rate....pursuant to an index or formula that the Commission has approved for use in an advice letter by the utility submitting the advice letter...." is a matter appropriate for a Tier 1 advice letter. The applicants argue that Tier 1 advice letters are an appropriate means of making future rate adjustments pursuant to SB 695, and consistent with the methodology presented in the applications.12
The Applicants argue that Energy Division would only need to determine as a technical matter whether the proposed future rate changes are within the scope of what the Commission has authorized, pursuant to GO 96-B, General Rule 3.5. Applicants argue that the Energy Division could extend the review period, or prepare a draft resolution for the Commission's consideration in response to the advice letter filing, if deemed necessary.
DRA's protest focuses on the future yearly advice letter filings proposed to be used for making subsequent rate adjustments pursuant to SB 695. DRA states that the utilities have separately described "modified tier 1" advice letters in discussions with DRA and TURN. DRA recommends that this issue be given serious consideration in this proceeding. DRA recommends that sufficient time be allowed for advice letter filings to be reviewed before rate changes are adopted by the Commission. At the same time, DRA also understands the utilities' concerns that rate changes are not delayed unnecessarily. DRA thus recommends that the issue of which type of advice letter is used in future filings be fully examined in this proceeding.
TURN does not oppose the use of advice letters for making annual rate changes under SB 695 provided that (a) the Commission retains discretion to deny requests for such increases, and (b) the utilities file such advice letters at least 45 days in advance of the intended implementation date.
The utilities agree to the conditions proposed by TURN with respect to the timing of the annual advice letters. They believe that this will provide sufficient opportunity for review of the advice letters before rate changes are implemented. The utilities argue that Tier 1 advice letters are an appropriate means of making future changes consistent with SB 695 so that the changes can be implemented without undue delay.
The Tier 1 advice letter designation is meant for routine or compliance-type filings where rates or changes have already been approved by a resolution or decision, and the utility is merely notifying the Commission that it is implementing the change. The change automatically goes into effect on the effective date, usually within 30 days of filing.
We conclude that for rate adjustments in compliance with SB 695, it is more appropriate for Tier 2 advice letter filings to be used. Energy Division would need to perform a careful review to ensure that the appropriate CPI increase is used to determine the rate increases for residential Tiers 1 and 2, and that decreases in the upper tiers offset the increases for the lower tiers so that the changes are revenue neutral for residential customers as whole. Energy Division review is also needed to ensure consistency among the three utilities. With a Tier 2 advice letter, the requested rate changes would take effect only after Energy Division indicates its approval. A formal resolution would not necessarily be required, however, to implement a Tier 2 advice letter.
An advice letter with improperly developed rates should not become effective pending disposition by the Energy Division, as would be the case with a Tier 1 advice letter. We note that § 739.9 establishes that the Commission may increase rates for Tiers 1 and 2 based on the CPI. The law does not require the Commission to do so. If protests on an advice letter proposing increased Tiers 1 and 2 rates are filed, the controversy should be resolved by the Energy Division or by Commission order if necessary before new rates take effect.
Given that the utilities agree to submit their advice letters by November 15th of each year, 45 days prior to an expected effective date of January 1, there should be sufficient time to address any protests, data requests, or issues that might arise during review of the advice letters. For automatic rate adjustments to go into effect, as would be true under a Tier 1 designation, the Commission should first have approved each year's specific rate changes. However, the rate changes will be different each year depending on the CPI. Additionally, it would set an improper precedent if Tier 1 advice letter filings were to be allowed for this type of rate adjustment filing. Therefore, we shall require a Tier 2 advice letter filing for future rate adjustments to implement provisions of SB 695.
10 See the testimony of PG&E witness Breckenridge at p. 5; testimony of SCE witness Garwacki at p. 7; and testimony of SDG&E witness Davidson at pp. 4 and 5.
11 SDG&E has a 4 tier rate structure, while PG&E and SCE have a 5 tier system.
12 See Joint Reply to Protests at 4-5.
