6. Discussion and Analysis: Should the Commission
Dismiss this Application?

The basic question before the Commission is whether the Commission should dismiss this application or proceed to hearings.

The major allegation of the Applicant is that there was a failure by PG&E, and implicitly by the intervenors, including the Division of Ratepayer Advocates (DRA) and The Utility Reform Network (TURN), to bring to the Commission facts concerning Smart Meter technology that should have indicated to the Commission that the technology was risky and should have led the Commission to reject PG&E's initial Smart Meter proposal. Applicant's remedy, consists of disallowing recovery in rates of the Smart Meter investments.

The record in the AMI proceedings, however, indicates that the Commission was aware of the risks associated with proceeding with the meter technology proposed by PG&E. The decision cites TURN for its position arguing that the Smart Meters have "an uncertain 20-year economic useful life." TURN also advocated that the Commission reject the use of Smart Meter technology.

More specifically, concerning the issue of rapid technological obsolescence, the decision discusses the major uncertainties and risks associated with the investment in new technologies:

Before the introduction of the personal computer it would have been hard to seriously project the impact, and the rate of change, we have seen in that tool on our personal and business lives. We lack the same vision of how metering and communications technology may change over the useful life of the AMI system. PG&E's current metering system with manual meter reading is functional; it also is used and useful, but it is technologically obsolete - once we accept that the proposed AMI technology works. But technological obsolescence alone is not sufficient to warrant replacing the system. That is why we apply an economic test - whether or not the present value of all benefits is greater than the present value of the revenue requirement paid by customers for new system for the useful life of the system. Although PG&E expects the system to remain in service for 20 years, only time will tell whether there will be significant unforeseen developments - good or bad - that may lead to an earlier or later replacement of the AMI system.²⁹

Thus, even if a lengthy proceeding were to show that the Commission did not have access to the specific facts cited by Applicant, the record indicates that the Commission did have access to facts concerning the uncertainty of this technology, considered the uncertainty, and acted in a reasonable fashion in face of this uncertainty.

Moreover, the facts alleged by the applicant, even if they were provided to the Commission during the proceeding leading to D.06-07-027, would not have clearly warranted a reversal of the policy adopted. For example, even if information about upcoming ZigBee software were provided in the record of that proceeding, it would not have been unreasonable, in the face of widespread delays in the availability of commercial software for the Commission to proceed exactly as it did.

Furthermore, the proceeding that led to the approval of the initial deployment of the Smart Meters was actively contested by parties supporting and opposing the deployment of this technology. The Commission, by law and precedent, relies on this open regulatory process where facts are brought to the Commission, weighed, and policy is adopted. The Commission followed this procedure in developing its AMI policy.

Regulators understand that there is never a guarantee that a decision adopted in the face of both economic and technological uncertainty will be viewed in retrospect as the best outcome. This is the context in which Commissioner Peevey's remarks to the Legislature "that allowing PG&E to go forward with the Smart Meter program was a half billion dollar mistake and that ratepayers are the individuals paying for this mistake"³⁰ must be interpreted. President Peevey's statement is an honest appraisal of a situation in which an ex-post-facto look at an ex-ante decision reveals that a better course of action could have been chosen. The statement reflects the common experience of regret over the outcome of a decision made.

In summary, the facts presented by the Applicant appear consistent with other facts presented in the proceeding and are not new facts that, if they were made available prior to D.06-07-027, would have resulted in a different decision. D.06-07-027 clearly acknowledges and accepts technological risks identical to those that the Applicant raises on an ex post facto basis. Moreover, the proceedings leading to D.06-07-027 and D.09-03-026 are not procedurally deficient and were fully litigated.

A second way of addressing the Application is to view it as asking the Commission to conduct a post-hoc reasonableness review on the AMI program proposed by PG&E and approved by the Commission. Although the Commission frequently creates a procedure that uses a post-hoc reasonableness review to ensure that a utility exercises reasonable care in a specified activity, in this instance the Commission rejected this approach and instead decided to develop a risk sharing mechanism to provide managerial incentives for efficient cost management and to limit the applicability of reasonableness reviews. Specifically, D.06-07-027 states at Conclusion of Law 5:

5. It is reasonable to adopt a 10% shareholder and 90% ratepayer risk sharing of cost overruns, not to exceed $100 million beyond the total project costs of $1.6846 billion, and only conduct a post-fact reasonableness review of any costs in excess of $1.7846 billion.³¹

Thus, the Commission elected to rely on a post-hoc reasonableness review only in the event that cost overruns exceeded a set amount.

In addition, the Commission specifically considered how to allocate the costs of the mechanical meters that became "stranded"³² when a program to replace these meters with newer meters was adopted and found that:

28. It is reasonable that the stranded costs related to the electromechanical meters deployed as part of PG&E's original AMI project should be covered by the risk based allowance authorized by D.06-07-027 for the original AMI project.³³

We conclude that the application, in addition to not providing facts that are clearly new and would warrant a different decision, does not raise any new issue that the Commission has not already considered.

In summary, the Applicant has not alleged facts that would warrant a reversal of either D.06-07-027 or D.09-03-026. Finally, the issue of whether to allocate the costs of the technology to the shareholders was considered in D.06-07-027, when it limited the use of a reasonableness review and elected to create an incentive mechanism to encourage managerial efficiencies.

²⁹ D.06-07-027 at 28-29.

³⁰ Id. at 3-4, footnotes omitted.

³¹ D.06-07-027, Conclusion of Law 5, at 66, emphasis added.

³² A "stranded cost" is a cost incurred by the utility for investment which is no longer "used and useful" and which the utility cannot recover in rates.

³³ D.09-03-026 at 192. Under these terms, the costs for the meters that are no longer useful would be paid out of the "risk based allowance" that was part of the original authorization of revenue requirement.