3. Framework for Resolving
Rate Design Proposals

We evaluate PG&E's proposals in accordance with applicable statutory requirements and in the context of relevant economic changes over the past decade. Because PG&E seeks the most dramatic changes in its residential rate design in the last decade, it is useful to review relevant statutory and economic developments that have resulted in the current configuration of PG&E residential electric rates.

On February 1, 2001, Assembly Bill (AB) 1 from the First Extraordinary Session (Ch. 4, First Extraordinary Session 2001) (AB1X) was enacted, implementing measures to address rapidly rising energy costs resulting from the 2000-2001 energy crisis. For several years prior to the energy crisis, PG&E had previously applied a two-tiered residential rate structure, with the upper-tier rate set moderately above the lower-tier rate. This arrangement changed in response to California's energy crisis which resulted in rapid escalation in wholesale power costs.

With AB1X mandating that all residential electricity use up to 130 percent of baseline be capped at levels in effect on February 1, 2001, the Commission developed a rate design methodology so that investor-owned utilities could fully recover their respective residential revenue requirement allocations. In D.01-05-064, the Commission adopted a five-tier rate design for PG&E3 based on an increasing rate per kWh within each successive tier, or "block" of use. Given the restrictions required by AB 1X, all future residential rate increases were allocated to rates in Tiers 3 through 5, above the Tier 1 baseline and Tier 2 (130 percent of baseline) threshold.

To protect low-income households against these escalating costs, the Commission froze rates for the California Alternate Rates for Energy (CARE) program4 at July 2001 levels, after increasing the CARE discount from 15 to 20 percent. Non-CARE Tier 1 and 2 rates were also frozen in early 2001 and with one minor exception, these rates have remained constant through 2009. Non-CARE rates only became subject to certain statutorily limited increases starting in 2010. About half of PG&E's residential households and three-quarters of its residential kWh sales currently fall into these "protected" categories (i.e., Tiers 1 and 2).

In 2001, the Commission also replaced PG&E's two-tiered structure with a five-tiered structure. In view of the Tier 1 and 2 rate freeze, all residential rate increases between 2001 and 2009 had to be absorbed by Tiers 3, 4 and 5, (for usage exceeding 130 percent of baseline), representing less than one-quarter of all residential usage (i.e., non-CARE households consuming in Tiers 3, 4, and 5). PG&E's upper-tiered rates increased dramatically compared to those of the other California utilities. The increases in non-CARE upper-tier rates were not based upon cost of service, but were applied because statutory restrictions precluded recovering additional revenue requirements from Tiers 1 and 2.

Over time, the rate tier differentials have widened. Between 2001 and 2010, the differentials between the Tiers 2 and 3 expanded from about 5 cents to 15 cents, and Tiers 3 and 4 and Tiers 4 and 5 expanded from about 4 and 2 cents per kilowatt-hour (kWh), respectively, to about 13 and 7 cents per kWh. Between 2000 and 2009, the Tier 5 rate nearly doubled, increasing from 24.5 cents per kWh at the height of the energy crisis to 44.3 cents per kWh at the end of 2009. PG&E's current Tier 4 rate is still almost three times higher than the Tier 2 rate of 13.9 cents per kWh, constituting a subsidy paid by upper-tier to lower-tier consumers. (PG&E/Quadrini, Ex. 2, at 2-22, lines 11 to 15.) Upper-tier rates can produce very high bills when combined with high usage due to extreme temperatures.

A turning point occurred with the enactment of Senate Bill (SB) 695 (Chapter 337, Statutes of 2009) on October 11, 2009. SB 695 amended Pub. Util. Code Sec. 739.1, and added Sec. 739.9 to begin allowing limited annual Tier 1 and Tier 2 rate increases for both CARE (from 0 to 3 percent) and non-CARE customers (from 3 to 5 percent).5 In addition, D.10-05-051 consolidated Tiers 4 and 5 into a single Tier 4. PG&E has thereby realized some progress toward narrowing the disparity between upper- and lower-tiered rates.

SB 695-related provisions implemented on January 1, 2010, increased non-CARE Tier 1 and 2 rates by three percent (or 0.3 and 0.4 cents per kWh, respectively). In the summer of 2010, PG&E's upper-tier residential rates were reduced from their highest level of 49 cents per kWh to 40 cents per kWh. SB 695 produced further changes effective January 1, 2011, with a 3 percent increase to non-CARE Tier 1 and 2 rates, no increase to CARE Tier 1 and 2 rates, and rate decreases by 3.6 percent for Tier 3 and 2.6 percent for Tier 4.

PG&E proposes the following:

a) Establish a fixed customer charge of $3 for all non-CARE residential schedules (except E-8), and $2.40 for all CARE schedules (except EL-8);

b) Establish a CARE Tier 3 rate set equal to 150 percent of the CARE Tier 1 rate for usage above 130 percent of baseline, with further rate increases by 1.5 cents/kwh in 2012 and 2013, respectively. CARE usage exceeding 130 percent of baseline;

c) Collapse Tiers 3 and 4 into a single tier and charge only a Tier 3 rate for non-CARE usage exceeding 130 percent of baseline;

d) Lower residential electric baseline quantities from 60 to 55 percent of average usage (and from 70 percent 65 percent for all-electric customers) - the middle of the range allowed by law.

e) Establish flat generation and distribution rate components and implement rate tiering through a non-bypassable Conservation Incentive Adjustment (CIA) component; and

f) Other miscellaneous changes, including closing or consolidation of certain rate schedules and modifying certain eligibility requirements to qualify for low-income rate schedules.

PG&E's proposals in this proceeding would increase most residential customers' rates, representing lower-usage tiers that have been protected from prior increases, but would reduce the disproportionately high rates of the minority of customers in the higher-usage tiers. The resulting rates would be more comparable to the upper-tier rates of SCE and SDG&E.

PG&E's proposals would cause 40 percent of above-average CARE users to see bill increases of over 14 percent, averaging approximately $11.60 per month. (PG&E/Quadrini, Exh. 2, at 2-25, lines 10-19; PG&E brief at 21). The average bill increase for low-income customers would be 14 percent, with 46 percent of CARE customers seeing an increase from $2.40 to $4.20 and an additional 15 percent seeing average increases of $5.20.

Under PG&E's rate proposals, more than 99.7 percent of low income customers on Schedule EL-1 would receive bill increases.6 An estimated 86.5 percent of customers would receive bill increases of 10 percent or greater per year and 5.6 percent of customers would receive bill increases of 20 percent or greater.7

DRA and other parties representing low-income and/or disabled customer interests argue that PG&E's proposals would make rates for basic energy needs unaffordable for customers already struggling to pay existing bills. DRA recognizes the need to reduce pressure on upper-tier rates, but disagrees with PG&E as to how to accomplish such relief. DRA advocates (1) decreasing the revenue allocation to the residential class, (2) restraint in increasing revenue requirements in PG&E's GRC Phase I proceeding, (3) continuation of the residential rate design changes adopted in D.10-05-051, (4) reliance on the residential Tier 1 and 2 non-CARE rate increases allowed by SB 695, and (5) allocating a greater portion of revenue allocation decreases to Tier 4. (DRA/Khoury, Ex. 23, at 6-6, lines 3 to 19.)

DRA and TURN both believe that SB 695, which provides for measured and predictable rate increases to Tiers 1 and 2, and recent changes to eliminate Tier 5, should gradually reduce the high rates over time, if the utility revenue requirements are kept under control. (TURN/Marcus, Ex. 11, at 60.) TURN also argues that if revenue requirements to residential customers cause the average residential rate to go up by less than 3 percent, there will be lower percentage increases in Tiers 3 and 4 than in Tiers 1 and 2, while an increase of no more than 2 percent could allow decreases in Tiers 3 and 4. (Tr. at 198, line 20 to Tr. at 199, line 6, TURN/Marcus).

Other intervenors oppose PG&E's proposals based on concerns that reducing upper tier rates will impair incentives to be energy efficient or to move to solar technologies. Parties representing Community Choice Aggregators object to certain proposals deemed to be competitively unfair to their interests.

PG&E's proposed rate increases would be implemented at the same time that customers are seeking to cope with California's continuing economic difficulties. Various parties note that low-income customers increasingly cannot afford even current PG&E rates, as reflected in increasing levels of termination notices and involuntary service disconnections.

DisabRA calls attention to the Commission's obligation to protect the comfort and safety of low-income ratepayers. DisabRA contends that low-income households that budget every dollar have no reserve from which to pay higher utility rates of any amount, and that as a result, low-income customers will face greater risk of service disconnection for non-payment of bills or possibly to sacrifice other necessities to maintain electric service.

DisabRA argues that in light of the struggles faced particularly by low-income households already on the lowest rungs of the economic ladder, the historical context of frozen rates for low-income customers is meaningless. Whether or not CARE rates have been below cost over time, DisabRA argues that now is not the time to raise rates, and certainly not by the margin sought by PG&E. DisabRA described the hardships of disabled customers, many of whom are on the medical baseline program. Increasing rates during a recessionary period would be especially difficult for these vulnerable customers.

As a basis for its testimony, DisabRA conducted outreach within the disability community in the PG&E service territory, soliciting input from disability-related community-based organizations and disabled individuals. DisabRA provided the results of this outreach effort in the testimony of DisabRA's outreach coordinator. Through this outreach, DisabRA presented anecdotal accounts of various people with disabilities and others on low or fixed incomes who had great difficulty in paying their PG&E utility bills, and who were "forced to juggle any combination of vital living expenses..."8 DisabRA presented this testimony to show the potential harms and to relay fears expressed by low-income individuals with disabilities relating to the adoption of PG&E's rate proposals. DisabRA contends that although PG&E has the burden of demonstrating that its rate design proposals are affordable to low-income consumers, PG&E failed to conduct any affordability studies regarding its proposals.

KernTax and Kern County, representing Central Valley customer interests, support PG&E's rate proposals, however, arguing that the current structure places a discriminatory "climate tax" on residential customers based on where they live, the size of their home, and whether they have family at home during the day. KernTax and Kern County argue that residents in the Central Valley are being unfairly forced to subsidize customers residing in cooler climate zones whose usage is priced significantly below cost. They claim that the current formula for allocating costs among PG&E's 10 baseline usage allowance regions results in 48 percent of PG&E's E-1 customers (which account for more than 75 percent of E-1 power consumption) receiving an unfair "rate credit" of 31 percent, while the remaining 52 percent pay a discriminatory "rate surcharge" exceeding PG&E's cost by 119 percent.

PG&E contends, however, that the rate tier changes permitted by SB 695 will not be significant enough to rectify existing rate disparities. PG&E was not able to increase CARE Tier 1 and 2 rates in 2010 or 2011, since the CalWORKS index is suspended. (Tr. at 1024, line 27 to Tr. at 1025, line 1, PG&E/Quadrini; Tr. at 384, lines 22 to 27, PG&E/Keane.) For non-CARE Tiers 1 and 2, the 3 percent increase effective January 1, 2010 was only approximately 3/10ths of a cent for Tier 1 and 4/10ths of a cent for Tier 2. (Tr. at 198, lines 2 to 5, TURN/Marcus.) Cross examination Ex. 37 graphs the rates for CARE Tiers 1 and 2 and non-CARE Tiers 1, 2, 3, 4, and 5 for the last decade and includes the SB 695 increase for non-CARE Tiers 1 and 2 on January 1, 2010. Ex. 37 shows that the SB 695 rate change on January 1, 2010 was almost imperceptible compared to the rate differentials for Tiers 3, 4 and 5. PG&E points to this graph to illustrate the "limited ability" of SB 695 to help correct the rate inequities. (PG&E/Keane, Ex. 2, at 1-16, lines 10 to 14.) PG&E thus argues that its proposals for rate reform are needed now.

PG&E argues that protection of low-income customers should not eclipse other principles of economic efficiency and equity. PG&E characterizes its proposed increases as being relatively small in absolute dollars. Given the existing below-cost levels of CARE bills, even a modest dollar increase can translate into a significant percentage change. PG&E argues, however, that such percentage figures do not translate into large dollar increases.

CLECA/CMTA argue that current CARE subsidies are unfair and should be reduced considerably. The CARE subsidy is funded by charging higher rates for all other customers, making it more difficult for commercial and industrial customers to compete in the marketplace, to sell their goods and services and to employ Californians. CLECA/CMTA witness Barkovich testified that large industrial customers' rates over the past decade were up 86 percent, with rates for non-firm large industrial customers up 127 percent. Meanwhile CARE rates have not increased since 1991 but have actually fallen by 46 percent in real, inflation-adjusted terms. CLECA/CMTA also argue that the revenue allocation between the residential class and all other classes is a problem, whereby other classes contribute an annual subsidy of approximately $500 million to the residential class.

The CARE subsidy is currently 2.5 times in excess of the statutory requirement of a 20 percent discount and will total more than $700 million this year, adding nearly 9 mills to the rates of all non-CARE, non-Street Lighting customers. The CARE subsidy has grown from just $30 million to its current proportions. The current effective rate for CARE usage above 130 percent of baseline is 20 cents lower that the current non-CARE Tier 3 rate and more than 30 cents below the non-CARE Tier 4 rate. The resulting CARE discounts of 67 percent and 76 percent respectively, contrast to the required 20 percent CARE discount. This rate differential is a primary factor accounting for the CARE subsidy amount.

As a result of the cap on rate increases for Tier 1 and 2 usage over the past decade, these rates are now 5-to-6 cents-per-kWh below the class average residential rate. Tier 1 and 2 usage rates now cover 70 percent of residential load. Effectively, just 21 percent of residential load has been available to absorb cost increases allocated to the class.

We resolve PG&E's rate proposals in accordance with applicable legal requirements and established ratemaking and energy policy principles. We consider whether the proposals are permissible under applicable law and if so, whether the proposals produce "just and reasonable" rates in conformance with Pub. Util. Code Sec. 451.9

In evaluating PG&E's proposals, we weigh and balance countervailing goals. We recognize, on the one hand, the importance of moving toward rates designed in relation to the costs of service. This concern becomes more pronounced in view of the large imbalance between upper versus lower-tiered rates over the past decade.

On the other hand, we recognize the importance of avoiding rate shock and keeping essential energy needs affordable, particularly for low-income households. California law requires that retail electric service remains affordable. Sec. 382(b) states, in part:

In order to meet the legitimate needs of electric and gas customers who are unable to pay their electric and gas bills and who satisfy eligibility criteria for assistance, recognizing that electricity is a basic necessity, and that all residents in the state should be able to afford essential electricity and gas supplies, the commission shall ensure that low-income ratepayers are not jeopardized or overburdened by monthly energy expenditures.

Our obligation to maintain affordable rates must be addressed in the context of California's ongoing economic crisis, high unemployment rates, and rising income inequality. Affordable electricity prices make it easier for poor Californians to pay their energy bills and maintain some degree of comfort and safety.

PG&E's claimed bill impacts assume that its proposed revenue allocation reductions to the residential class of 1.9 percent are adopted, but exclude any future revenue requirements increases requested in its GRC Phase I. Thus, if all of PG&E's proposals are adopted, depending on the effects of the GRC Phase I and subject to any revenue allocation changes adopted for the residential class, actual bill impacts of PG&E's rate proposals could be more extreme.

While we recognize the economic difficulties particularly facing low income households, we are also concerned that higher-usage customers bear a disproportionate burden of cost subsidies. For almost two decades, CARE rates capped while the consumer price index has increased by approximately 51 percent. Thus, CARE customers' bills have declined in real terms by a significant amount. (PG&E/Quadrini, Ex. 2, at 2-26, line 15 to at 2-27, line 2.) The average CARE rate, adjusted for inflation, is 46 percent lower than it was in 1991.10 Even with a combination of the proposed CARE Tier 3 rate, the proposed change in baseline quantities and the proposed $2.40 customer charge, the average CARE rate in the first year following this decision, in nominal terms, would be slightly above where it was in 1991.

With more CARE customers and CARE usage than ever before, CARE discounts have risen above the longstanding historical target of 20 percent of the rate. The discounts now range from 29 to 30 percent in the lower two tiers and up to 76 percent in Tier 4. (Id., at 2-27, lines 3 to 7.)

More than one million households participate in PG&E's CARE program and receive CARE discounts on their electric service. CARE Tier 1 and 2 rates may not increase in the near future because the index specified in Section 739.1 for CARE is not expected to trigger increases in those tiers. (Id., at 6, lines 13 to 16; Tr. at 384, lines 22 to 27, PG&E/Keane.) Thus, existing CARE statutory restrictions provide certain rate affordability protections for low-income customers for their baseline.

We take all of these factors into view in addressing PG&E's proposals. We disagree with those positions that categorically oppose any rate increases that affect low-income customers. We recognize the merits of approving some movement toward rectifying cumulative imbalances between CARE and non-CARE rates. By moving toward rate levels that align more closely with costs, rate levels will necessarily increase for the most economically vulnerable customers. Yet, because these rate imbalances developed over a period of several years, we cannot immediately rectify all such imbalances without risking undue rate shock, particularly for low-income households. In this regard, we decline to approve all of PG&E's proposed rate changes. Instead, our adopted rate design changes produce an appropriate balancing of interests while keeping overall rate levels reasonably affordable.

Another important criterion for rate design is to encourage energy efficiency and use of renewable resources consistent with the Commission's Energy Action Plan. Thus, our adopted rate design measures preserve price signals that promote achievement of energy efficiency and related energy resource goals.

We take into account the statistics cited by CLEC/CMTA, cited above, concerning the significant increases in the CARE discounts over the past decade, and the related disproportionate increase in cost burden progressively borne by other customers over the same period.

3 In D.01-05-064 and D.01-09-059, the Commission adopted the same residential tier structure for PG&E, SCE, and SDG&E: Tier 1: For kWh use up to 100 percent of baseline;

Tier 2: For kWh use from 100 percent to 130 percent of baseline; Tier 3: For kWh use from 130 percent to 200 percent of baseline; Tier 4: For kWh use from 200 percent to 300 percent of baseline; Tier 5: For kWh use over 300 percent of baseline. The first two tiers are used to measure usage up to 130 percent of baseline.

4 The CARE program provides assistance to low-income electric and gas customers with annual household incomes no greater than 200 percent of the federal poverty guideline levels. (See Pub. Util. Code Sec. 739.1 4)(b)(1)).

5 Non-CARE rates may increase by the change in the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), published by the U.S. Department of Labor, Bureau of Labor Statistics, compared to the previous year plus 1 percent (but no more than 5 percent and no less than 3 percent). CARE Tier 1 and 2 rates can increase by the annual increase in benefits under the California Work Opportunity and Responsibility to Kids (CalWORKs) program, but no more than three percent.

6 Exhibit 23, at 6-14:21-22.

7 Exhibit 23, at 6-15:2-5.

8 See Reyes/Disability Rights Advocates Testimony at 5.

9 Unless otherwise noted, subsequent statutory section references are to the California Public Utilities Code.

10 PG&E Ex. 1, at 3-5.

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