34. Cost Recovery Mechanism

PG&E proposes the following ratemaking treatment:

· Revenue requirements reflecting the actual incremental costs incurred to implement dynamic pricing will be recorded into the DPMA on a monthly basis through December 2010.

· Upon Commission approval of this Application each month through December 2010, PG&E will transfer the recorded balanced from the DPMA to the DRAM for subsequent recovery in rates through PG&E's AET advice filing process.

· The Commission will review forecast costs and associated revenue requirements for 2008-2010 in this Application, and as a result of that review, these forecast costs and associated revenue requirements will be deemed reasonable, and will not be subject to after-the-fact reasonableness review. If actual costs and associated revenue requirements recorded in the DPMA exceed the forecast, then PG&E proposes to file for recovery of the difference through a traditional after-the-fact reasonableness review application.

· Rate components covering the dynamic pricing project will be revised annually in the AET advice letters, or as otherwise authorized by the Commission. Cost recovery will occur through the DRAM and will be consolidated with the AET. Rates set to recover the DPMA costs will be determined in the same manner as rates set to recover other distribution costs, using adopted methodologies for revenue allocation and rate design.

As discussed above in Section 33.6, this decision adopts PG&E's cost recovery proposal relating to the characterization of these incremental PDP costs as part of the distribution function and the methodology for allocating the revenue requirements to customer classes. It does not appear that there is any opposition to the other aspects of PG&E's proposed cost recovery mechanism, as described above.

In general, the mechanism is reasonable and will be adopted with the following clarification. This decision does not address the reasonableness of costs, in excess of $31,264,000, to transition from CC&B Version 1.5 to Version 2.3. Recovery of any excess costs will be through an after-the-fact reasonableness review as described earlier in this decision. Also, CC&B upgrade costs aside, to the extent that actual capital expenditures exceed the amounts authorized by this decision, PG&E can request cost recovery in an after-the-fact reasonableness review. Such review can be either combined with or separate from the CC&B reasonableness review.

In its comments to the PD, PG&E requested that revenue requirements associated with any capital costs above the approved cost estimate for PDP IT be recoverable through the DPMA and DRAM until the 2014 GRC, once recovery is authorized via a reasonableness review. PG&E states this is appropriate, since the reasonableness review proceeding is likely to conclude in 2012 at the earliest. That request is reasonable. Also, the use of the DPMA and DRAM beyond 2010 is reasonable for costs that are authorized by this decision for 2010, but are actually incurred in 2011, provided it is shown that such costs are not included in PG&E's 2011 GRC authorization.

Where costs approved in other proceedings will be used for PDP implementation, PG&E proposes that the actual costs approved for recovery in the earlier proceeding will be tracked and recorded as authorized in the earlier decision, but only up to the amount authorized for recovery in the earlier case. Amounts spent in excess of that amount for those activities will be recorded in the mechanisms approved for this case, the DPMA, for recovery as an incremental cost associated with the 2009 RDW. PG&E asserts that expenditures are accounted for as the Commission has approved them, and since PG&E is only recording actually incurred costs for recovery, PG&E will not over-collect its actual costs. PG&E's proposal to coordinate cost recovery where there is overlap between costs approved in earlier proceedings and the incremental costs in this proceeding is unopposed, reasonable and will be adopted.

PG&E also proposes that if the final decision in this case orders changes in PG&E's proposal for PDP that increase costs, PG&E will evaluate the cost, scope and timing implications of the changes approved by the Commission, and seek an increase to the level of cost recovery requested in this proceeding, as necessary. Rather than adopting PG&E's proposal, we direct that any such costs should be treated as cost overruns and requested in an after-the-fact reasonableness review, if necessary. At this point, there is no record on what the magnitude of such costs will be and whether the activities or projects that PG&E might undertake are optimal and reasonable. Rather than adopting costs that have not been fully litigated, we prefer to use the reasonableness review to ensure that only appropriate costs incurred in this manner are included in rates.

Finally, PG&E notes that if the Commission should change its view about the implementation of PDP or the scope of this project as proposed by PG&E in this application, then there is a possibility that parts of the dynamic pricing project may become stranded. To provide reasonable certainty that it will recover its costs, PG&E requests that the Commission adopt a policy that PG&E should be able to recover expenditures as long as the expenditures were made pursuant to, and consistent with, the specific dynamic pricing spending authority and guidance provided by the Commission. This proposal is apparently unopposed. We will grant PG&E's request with the provision that any such capital expenditures should be identified in PG&E's immediately following GRC. There should be an opportunity to determine whether those expenditures were reasonably incurred and PG&E acted reasonably when it became aware that any such parts of the project might be stranded.