11. Incremental Cost Recovery
11.1. PG&E
PG&E is seeking authorization to recover the incremental costs it incurs from 2008 through 2010 to implement the default and optional PDP and TOU rates presented in this application.21
PG&E indicates that (1) the incremental nature of PG&E's forecasted costs is assessed relative to cost estimates previously adopted by the Commission in other proceedings; (2) costs that are not incremental, that have been approved in other proceedings, will be tracked and recorded in accordance with the cost recovery adopted on those proceedings; and (3) only the incremental costs are requested to be treated in accordance with PG&E's DPMA ratemaking proposal that is discussed later in this decision.
PG&E retained an independent external consultant, Pricewaterhouse Coopers LLC (PwC), to perform an analysis of PG&E's cost estimates to assess the incremental nature of the requested costs in this proceeding. According to PG&E, PwC applied a two-step approach to test whether PG&E's cost estimates included in the application were incremental to cost estimates approved by the Commission in prior proceedings, or were being considered by the Commission in then ongoing proceedings. PwC evaluated both the incremental nature of the activities underlying the cost estimates, and the incremental nature of the cost estimates relative to costs previously approved by the Commission in prior proceedings. PwC identified seven other proceedings for possible overlap with this proceeding in terms of incremental cost recovery:
· 2003 GRC (A.02-11-017);
· 2007 GRC (A.05-12-002);
· AMI Pre-Deployment (A.05-03-016);
· AMI (A.05-06-028);
· Demand Response (DR) 2006-2008 Program Years (A.05-06-006);
· DR 2009-2011 Program Years (A.08-06-003); and
· SmartMeter Program Upgrade (A.07-12-009).
PG&E further states that in order to evaluate the incremental nature of PG&E's cost request in this proceeding, PwC (1) undertook not only a review of the Commission decisions in each of the possibly related proceedings, but also undertook a detailed review of PG&E's submitted testimony and workpapers, prepared briefs, hearing transcripts and other documentation, including intervenor testimony and various filed reports as necessary; (2) developed a matrix of cost categories for each of the proceedings; and (3) conducted interviews with the witnesses and their supporting staff to understand the specific assumptions included in their respective costs estimates, and to reconcile these assumptions to the information presented in prior relevant proceedings and associated Commission decisions.
11.2. DRA
DRA states that it is not clear what, if any, analysis PG&E (or PwC) has done to determine how ratepayer funds PG&E has received in the past for Customer Education/Outreach/Service/Notification and IT activities were actually used for those activities, or whether PG&E has spent the funds effectively to implement dynamic pricing. DRA asserts that what is clear is that the Commission has already authorized vast sums of ratepayer money to fund Customer Outreach/Education/Service/Notification and IT capital and expense projects for PG&E to implement dynamic pricing, and PG&E has offered little other than generalities and unsubstantiated conclusions to justify adding another $160.2 million. DRA, therefore, recommends that the Commission approve zero ratepayer funding for Customer Education and Outreach, zero ratepayer funding for development of Notification Equipment, reduce PG&E's request for IT costs by $14 million in this case, and remove what DRA expects will be a $28 million IT request from PG&E's upcoming GRC.
IT costs and the development of notification equipment are discussed further in this decision. With respect to customer outreach costs, DRA notes that, for Customer Outreach and Education Activities, PG&E's request of $32.4 million from 2008 through 2010 in this proceeding is over and above $300 million PG&E was authorized in Customer Outreach and Education costs in the two AMI proceedings, the 2006- 2007 GRCs, and Demand Response programs for budget years 2008 and 2009 through 2011. Also, PG&E will be seeking still more ratepayer funding for Customer Education and Outreach in its 2011 GRC.
According to DRA, PG&E's testimony, workpapers and data request responses provide little, if any, verifiable information to determine whether PG&E's Customer Outreach and Education cost estimates are truly incremental or should be adjusted. Consequently, DRA reviewed the monthly and semi-annual AMI reports PG&E is required to file with the Commission. DRA states that it sought to determine whether costs PG&E seeks for activities in this case overlap with funding PG&E has received in other cases. According to PG&E's January 2009 AMI Semi-Annual Assessment Report, as of December 31, 2008, 42% of the budgeted SmartMeter project costs had been spent, while only 24% of the marketing and operations funds ($191 million) had been spent. According to the SmartMeter Steering Committee Update of June 19, 2009, 73% of the Customer costs for the budget year 2009 were still unspent as of May 2009. DRA indicates that PG&E still has $75 million in unspent funds from the AMI proceedings for Customer Acquisition and Marketing, and recommends no additional funding should be ordered here.
In rebuttal, PG&E states that DRA's recommended reduction of Customer Education and Outreach costs contains several major errors, including:
· DRA inappropriately compares PG&E's PDP estimate for Customer Education and Outreach efforts to costs for a different, broader scope of customer and marketing activities included in PG&E's SmartMeter Program. With respect to the $75 million identified by DRA, the Commission adopted PG&E's forecast of $54.8 million for SmartMeter customer acquisition, of which $11.9 million had been spent through June 2009;
· DRA fails to differentiate between PG&E's education and outreach activities for different customer classes such as residential, small and medium C&I, and large C&I;
· DRA fails to consider the planned timing of PG&E's estimated customer acquisition costs (i.e., relative to SmartMeter endpoint deployment) anticipated at the time of PG&E's original AMI filing; and
· DRA misrepresents the amount of PG&E's "unspent budget" for customer and marketing costs included in PG&E's SmartMeter Program budget and fails to acknowledge the significant residential customer acquisition costs that will necessarily be incurred as PG&E completes its full deployment of SmartMeter endpoints.
In response, DRA asserts the following:
· If the $75 million figure is comprised of costs for activities that are not comparable to the Customer Education and Outreach estimates in this PDP application, PG&E was authorized $54.8 million for activities that even PG&E says are "potentially comparable." According to PG&E, $11.9 million of that had been spent as of July 2009, thus, PG&E still has approximately $42.9 million left;
· There are, or should be, synergies between AMI and PDP. PG&E could use those synergies and apply the unspent Customer Acquisition and Marketing and Outreach and Education funds from the AMI decisions to the Peak Day Pricing program. If, and when, those funds are exhausted, PG&E can file an application to request more;
· PG&E has pointed to nothing in the Commission's AMI decisions that states that the funding cannot be applied as DRA recommends; and
· PG&E's track record for "planned timing" supports Commission adoption of DRA's recommendation.
11.3. TURN
TURN indicates that it did not devote the resources necessary to fully evaluate PG&E's incremental cost analysis, but its limited inspection of customer outreach and education showed that PG&E's incremental cost methodology maximized the calculation of additional incremental costs.
TURN notes that DRA focused on actual expenses on customer acquisition in the AMI proceeding and as a result recommended that the entire $32.4 million was unnecessary due to the over $40 million in unspent funding for SmartRate customer acquisition activities. Based on a review of the record, TURN supports DRA's recommendation and offers the following points:
· It is a general principle of utility ratemaking that the utility has discretion to shift funds among projects and cost categories, absent specific Commission direction that funds earmarked for a particular purpose must be recorded in a memorandum account and cannot be shifted to another purpose without authorization. For example, the Commission has imposed fund shifting limitations on energy efficiency and demand response programs;
· TURN is not aware of any fund-shifting limitations imposed in the AMI decision, D.06-07-027. Indeed, upon further questioning PG&E's witness admitted that his statement was based merely on the fact that the Commission adopted a stipulation in the AMI case that identified $54 million for marketing costs. The Commission adopted a total cap on costs for purposes of reasonableness and cost sharing; and
· TURN believes that the cost cap does not prevent PG&E from spending the money on other activities, but rather requires that PG&E keep accurate track of the costs spent on activities authorized pursuant to the AMI decision.
In the event that DRA's recommendation is not adopted, TURN proposes two alternatives.
First, TURN notes PG&E's methodology for determining the overlap with the AMI decision for small and medium C&I customer outreach and education, where PwC took a forecast of $17.6 million for total customer acquisition spending in 2010 and Jan/Feb 2011 and multiplied it by 9.2%, the percentage of small and medium C&I and agricultural customers the SmartRate program that PG&E plans to market. TURN asserts that it is inaccurate to multiply the total spending by a "percentage of customers" number because the unit acquisition costs are very different. Per customer acquisition costs for residential customers were forecast at $90, while per customer acquisition costs for C&I customers were forecast at $225. Multiplying total spending on both classes by number of customers to calculate the overlap of just the C&I costs ignores this basic difference. TURN also notes that in the original AMI case PG&E had forecast that C&I customers would represent 5.1% of the total number of customers accepting the SmartRate, but marketing costs for C&I customers represented 11.9% of total marketing costs. Therefore, TURN recommends that, at a minimum, the adjustment should be based on the 11.9%, which results in a reduction of $2.09 million, or $470,000 more than PG&E.
However, rather than this $2.09 million reduction, TURN believes it would be more appropriate to use a $2.49 million reduction based on the original AMI budget forecast. TURN states that PG&E had forecast $6.522 million for customer acquisition expenses for small C&I customers in the AMI proceeding, and this was the amount embedded in the $54.8 million and if one used the authorized costs in an incremental cost analysis, one would most likely disallow the $2.490 million forecast in the AMI case for C&I customer acquisition in 2010, plus some portion of the $0.487 million forecast for 2011.
In its reply brief, PG&E states that it would agree to the $2.09 million reduction proposed by TURN, but not the alternative proposal of a $2.490 million reduction. It appears that PG&E disagrees with the larger reduction because it is at odds with PwC's analysis which incorporated the use of judgment to modify authorized AMI amounts by the use of more recent budgets.
11.4. Discussion
In general, we agree with the customer class differentiation argument that PG&E offered regarding DRA's proposal to eliminate funding in this proceeding for customer outreach and education. In the AMI filing PG&E's forecast of customer acquisition costs of $54.8 million was adopted and according to PG&E, approximately $48.2 million (88%) was anticipated to be used for residential customers.22 By imputing its adjustment whereby $32.4 million in PDP costs for customer education and outreach for non-residential customers would be taken from the approximate $42.9 million remaining in the AMI authorization for customer acquisition, the DRA proposal would leave only $10.4 million (24%) for residential customer acquisition activities.
We are not convinced that, in this case, it is reasonable to redirect previously authorized acquisition funds for residential customers to non-residential customers merely because of the availability of unspent funds. It might be reasonable, if it were determined that certain amounts previously authorized for residential related activities would ultimately not be necessary. Certainly PG&E has the obligation to spend ratepayer-provided money in an optimal, cost-effective manner, and the Commission should encourage such redirection of funds if necessary. However, in this case, it has not been shown that it is necessary. DRA is not advocating that education and outreach to residential customers be limited or reduced in any way. Its recommendation is based primarily on the fact that there are unspent AMI funds available at this time. However, PG&E has presented convincing evidence that the actual spending of customer acquisition costs authorized by its AMI decision has been delayed due to delays in the deployment of SmartMeters. Without good cause, we do not believe it is an effective use of the Commission's resources to deplete previously authorized funds for residential customer acquisition activities, and then have PG&E request the same funding in a later proceeding. We will not adopt DRA's proposal to fund all customer outreach and education for PDP from unspent AMI funds.
However, in considering the evidence on this issue, we are not convinced that PG&E's quantification of $1.62 million as the overlap between this proceeding and the AMI proceeding, with respect to small and medium C&I customer acquisition costs, is reasonable. By PG&E's own evidence, the AMI decision incorporated PG&E's forecasted budget of $2.49 million for small and medium C&I customer acquisition activities for 2010. The record is scant as to why this adjustment should be reduced. PG&E is not arguing that the total amount of $6.522 million budgeted at that time for small and medium C&I customer acquisition activities should be modified in any way, but rather that the $2.49 million amount for 2010 was based on an assumed timing of electric meter deployment that was subsequently modified and an adjustment which reflects a revised AMI budget should be used.
We do not know the details of PG&E's AMI budget changes that may have impacted its $1.62 million proposed adjustment, which was calculated by multiplying a $17.6 million forecast times 9.2%, and we are concerned with the result that appears illogical. As PG&E has indicated, customer acquisition expenditures authorized by its AMI decision have been delayed due to delays in the deployment of SmartMeters. Assuming that it is true that expenditures were not eliminated but delayed, it is logical to conclude that there would likely be more money, not less, available in 2010 for small and medium C&I customer acquisition activities than the $2.49 million originally forecasted by PG&E. Therefore, we believe it is reasonable to increase rather than decrease the $2.49 million amount to better estimate what should be reflected as AMI funding for small and medium C&I customer acquisition activities in 2010, and to reflect that better estimate in determining incremental costs for this proceeding.
PG&E's revised SmartMeter deployment forecast indicates that 1,662,000 meters will be deployed in 2010, as opposed to 1,037,000 meters indicated in the original meter deployment forecast.23 That is, the delay in meter deployment would result in an approximate 60% increase in the number of meters that would be deployed in 2010. To reflect the revised meter forecast, the associated delay in customer acquisition expenditures, and the likely availability of more small and medium C&I customer acquisition funds for 2010, we will increase the originally forecasted small and medium C&I customer acquisition expenditure amount of $2.49 million for 2010 by the same 60% and deduct the resulting amount of $3.98 million in determining incremental costs for 2010 in this proceeding.
In all other respects, we conclude that PG&E's incremental analysis, including that related to (1) foundational work and (2) large C&I and large agricultural customers, is reasonable.
21 Such recovery is in accordance with D.08-07-045, Ordering Paragraph 14, which states that: "PG&E shall seek recovery of incremental expenditures required to implement dynamic pricing incurred before 2011 in the application(s) in which PG&E proposes the specific dynamic pricing rates and shall provide the necessary justification."
22 Exhibit 7 at 48, Table 4-1.
23 See Exhibit 7 at 4-9, Figure 4-1.
