II. Background

A. Procedural Background

On August 30, 2000, the California Legislature enacted Assembly Bill (AB) 265 (Stats. 2000, Ch. 328) as part of an effort to stabilize electric rates during the height of the energy crisis. AB 265 was signed into law on September 6, 2000 by Governor Davis as an urgency statute.

AB 265 provides, among other things, that the Commission establish an energy rate component ceiling of 6.5 cents per kWh for SDG&E's smaller customers. See Public Utilities Code § 332.1(b).¹ AB 265 also authorized the Commission to establish an accounting procedure to "track and recover the reasonable and prudent costs of providing electric energy to retail customers" that are "unrecovered through retail bills due to the application of the [rate] ceiling." (§ 332.1(c).) In addition, AB 265 requires that the "accounting procedure shall utilize revenues associated with sales of energy from utility-owned or managed generation assets to offset an undercollection, if undercollection occurs." (§ 332.1(c).)

On September 7, 2000, in response to AB 265, the Commission established a ceiling of 6.5 cents per kWh for the energy component of electric bills for SDG&E's residential, small commercial, and lighting customers in Decision (D.) 00-09-040. In accordance with § 332.1(b), this rate ceiling was made retroactive to June 1, 2000, and is to remain in place through December 31, 2002. AB 265 allows the Commission to extend the rate ceiling through December 2003, and to adjust the ceiling rate. (§ 332.1(b).)

AB 265 also directed the Commission to establish a voluntary bill stabilization plan for larger customers by allowing them to elect to have the energy component of their bills set at 6.5 cents per kWh, subject to true-up after a year (former § 332.1(f)). The Commission established a voluntary program for larger customers in D.00-12-033.

Senate Bill (SB) X1 43 (Stats. 2001, Ch. 5), and subsequently, AB X1 43 (Stats. 2001, Ch. 6),² replaced the voluntary rate ceiling of 6.5 cents per kWh for SDG&E's larger customers in former § 332.1(f), with a mandatory frozen rate of 6.5 cents per kWh for all customers who are not subject to § 332.1(b). This frozen rate was to be made retroactive to February 7, 2001. The Commission implemented this portion of AB X1 43 in D.01-05-060. In addition, D.01-05-060 authorized SDG&E to establish a memorandum account to record the revenues and revenue shortfalls associated with this frozen rate. Since the voluntary bill stabilization program for larger customers was replaced with the frozen rate requirement, and because no customer was enrolled in the voluntary program, the Commission terminated the voluntary bill stabilization program in Ordering Paragraph 6 of D.01-09-059.

As a result of the AB 265 rate ceiling for small customers, as implemented by D.00-09-040, SDG&E accumulated an undercollection of hundreds of millions of dollars in the Energy Rate Ceiling Revenue Shortfall Account (ERCRSA).³

In D.01-11-029, as part of the settlement agreement resolving the reasonableness of SDG&E's procurement practices from July 1, 1999 through February 7, 2001, SDG&E reduced the undercollection balance in the ERCRSA by $100 million.

In D.01-01-061, the Commission directed the utilities to use all electricity resources under their control, i.e., utility-retained generation (URG), to serve existing customers at cost-based rates. SDG&E filed an application for rehearing of D.01-01-061 seeking clarification that the requirement to use URG at cost-based rates did not apply to the energy acquired in the intermediate term contracts that were entered into by SDG&E with Illinova Electric Power Marketing (Illinova), Louisville Gas & Electric Power Marketing, Inc. (LG&E), and Pacificorp. SDG&E's application for rehearing was denied in D.01-05-035. D.01-05-035 ordered SDG&E to comply with the URG order in D.01-01-061 by making the appropriate accounting adjustments to the intermediate term contracts.

On June 5, 2001, SDG&E filed a Petition for Writ of Review (Writ Petition) of D.01-01-061 and D.01-05-035 with the State Court of Appeal, while reserving its right to have its claim determined in federal court. The Writ Petition requests that the Court of Appeal issue a peremptory writ of mandate directing the Commission to correct the two decisions to specify that intermediate term contracts are the property of SDG&E's shareholders, and that the contracts may not be taken to serve SDG&E's retail customers at cost. SDG&E filed a subsequent complaint in federal District Court for declaratory and injunctive relief against the Commissioners. The complaint alleges that D.01-01-061 and D.01-05-035 constitute an unconstitutional taking, violate the Commerce clause, are preempted by federal law, and violate substantive and procedural due process.

Application (A.) 00-10-045, which was filed on October 24, 2000, seeks approval of several proposed measures related to AB 265. Among the proposed measures are converting the 6.5 cents per kWh ceiling for AB 265 customers to a frozen rate, and establishing guidelines for SDG&E's energy procurement. A.01-01-044, which was filed on January 24, 2001, requests authority to assess a surcharge of 2.3 cents per kWh on electric bills of its residential, small commercial, and street lighting customers in order to amortize the balancing account undercollection resulting from the establishment of the 6.5 cents rate ceiling in AB 265. In later testimony, SDG&E revised the surcharge to $0.00349 per kWh.⁴ These two applications were consolidated in an oral ruling made at the February 16, 2001 prehearing conference held in San Diego.

Hearings were scheduled on the surcharge and related issues in an Assigned Commissioner's Ruling (ACR) dated April 30, 2001. However, on June 18, 2001, Governor Davis issued a news release announcing that DWR, SDG&E, and SDG&E's parent company, Sempra Energy (Sempra), had signed a Memorandum of Understanding (MOU) to settle numerous outstanding issues. In order to implement the MOU, several implementing decisions had to be issued by the Commission. In an ACR dated July 7, 2001, the schedule for the consideration of the surcharge, and the other issues raised in the two applications, was suspended to allow time for consideration of the MOU. The ruling noted that if the MOU was implemented, a majority of the issues in the two applications would be moot. SDG&E noted in its July 16, 2001 motion to implement the MOU that if the implementing decisions provided for in the MOU were issued, the existing ERCRSA undercollection would be eliminated without the need for a surcharge. In an August 2, 2001 ACR, a schedule was established to allow the Commission to consider the individual components of the MOU before the end of 2001.

Although some of the implementing decisions were adopted by the Commission, the Commission rejected that portion of the MOU which would have settled the Writ Petition. Thus, in the ACR of March 28, 2002, the suspension of the surcharge issues ordered in the July 5, 2001 ruling was vacated, the scope of issues was updated, and a new schedule to process the two applications was established. Updated testimony was submitted by SDG&E and the other parties. Evidentiary hearings were held on June 24, 2002 through July 2, 2002, and the litigated issues were submitted on August 7, 2002 with the filing of the reply briefs.

SDG&E's updated testimony referenced that it had accrued a $168 million overcollection in its Transition Cost Balancing Account (TCBA) allocated to AB X1 43 customers. SDG&E indicated that it would file an advice letter seeking approval to return the overcollection to the AB X1 43 customers. SDG&E filed Advice Letter 1405-E on May 10, 2002. The advice letter requests expedited approval to return to AB X1 43 customers the $168 million overcollection in the TCBA as of March 31, 2002, including accrued interest. SDG&E seeks to return the balance over a 30-month amortization through a line-item credit on the customer bill.

In response to Advice Letter 1405-E, on November 7, 2002, the Commission issued Resolution E-3781 approving SDG&E's request to return the $168 million overcollection to AB X1 43 customers as a line item credit on their bills.

Although the surcharge issues were put on hold, the Commission took action to establish a DWR charge of 9.02 cents per kWh, for energy sold by DWR to SDG&E's retail end-use customers. This charge results in a remittance rate to recover DWR's revenue requirement and a system-average increase of 1.46 cents per kWh charged by SDG&E to its customers to collect the DWR revenue requirement. (See D.01-09-059.)

On June 14, 2002, SDG&E transmitted a letter to the Commissioners proposing that the federal litigation that it filed against the Commission regarding the intermediate term contracts be settled. Under the proposed settlement, SDG&E agrees that it will write off, and not collect from customers, $24 million of the current balance in SDG&E's Energy Revenue Shortfall Account (ERSA). The proposed settlement also provides that the $173 million in profits from the intermediate term contracts that SDG&E accrued prior to the Commission adoption of D.01-01-061, will remain the property of SDG&E for the sole account of its shareholders. The proposed settlement also provides that the $199 million in profits from the intermediate term contracts that SDG&E has booked to the benefit of ratepayers since the Commission adoption of D.01-01-061, or will book pursuant to the settlement, will remain with ratepayers. A copy of this proposed settlement is appended to this decision as Attachment 1.

Comments on the proposed settlement of the federal litigation were solicited in an assigned Commissioner's ruling dated June 18, 2002. Comments on the proposed settlement were filed by the City of San Diego, the Utility Consumers' Action Network (UCAN), and the Office of Ratepayer Advocates (ORA). An opportunity for the public to comment on the surcharge and the proposed settlement of the federal litigation was provided at public participation hearings in San Diego on August 14, 2002, and in Carlsbad on August 28, 2002. This Decision adopts the proposed settlement.

B. Background Of Accounts

SDG&E currently has three accounts which deal with URG costs, Competition Transition Charge (CTC) revenues, and the AB 265 revenue shortfall. These three accounts are the TCBA, the Purchased Electric Commodity Account (PECA), and the ERSA.

The TCBA was originally established in January 1998 to calculate SDG&E's transition cost recovery, consistent with AB 1890.⁵. When SDG&E's rate freeze transition period ended on June 30, 1999, the TCBA was revised to reflect only the recovery of ongoing transition costs.

The ERSA, formerly called the Energy Rate Ceiling Revenue Shortfall Account (ERCRSA), records the difference between the 6.5 cents/kWh statutory electric commodity rate ceiling and the actual commodity rate calculated by SDG&E's Schedule EECC (Electric Energy Commodity Cost). That is, the ERSA keeps track of the AB 265 undercollection. ⁶(See D.00-09-040 at p. 7; D.01-09-059 at pp. 40-41.) The applicable portion of the CTC revenues and other overcollections recorded to the TCBA are used to partially offset the AB 265 undercollection in the ERSA.

The PECA (Purchased Electric Commodity Account), which was formerly called the ISO/PX Balancing Account, was established in July 1999 to provide for the full recovery of all of SDG&E's power procurement costs, i.e., PX (California Power Exchange) and ISO (California Independent System Operator) related costs, on behalf of bundled service customers. (See D.99-10-057, pp. 24-25.) As a result of D.01-01-061, SDG&E's URG costs were included in the PECA. Currently, SDG&E's URG costs are recovered through the PECA from the residual revenues from the Schedule EECC rates after disbursements are made to DWR for the power it procures for SDG&E's retail customers.

Prior to January 1998, SDG&E's energy costs were entered into SDG&E's Energy Cost Adjustment Clause (ECAC) balancing account and were balanced against the revenues from the ECAC portion of the AB 1890 frozen rates. The ECAC balancing account was terminated on December 31, 1997 because the AB 1890 transition period began. Once the transition period began, the energy costs above the PX market-clearing price were to be booked to the TCBA.

However, the TCBA did not begin on January 1, 1998 because the commercial operation of the ISO and the PX was delayed. Since the PX did not begin operations until April 1, 1998, for the first three months of 1998, SDG&E continued to acquire energy from resources other than the PX to serve its customers. During that three-month period, the Implementation Delay Memorandum Account (IPIDMA), was established by the Commission to record, among other things, fuel and purchased power costs for those three months.

Once the ISO and the PX began operation in March 1998, the mandatory bid/buy took effect and the IPIDMA was terminated. In D.99-04-058, the Commission granted SDG&E's request to transfer the balance in the IPIDMA to the TCBA.

C. The Intermediate Term Contracts

In late 1996 and early 1997, SDG&E entered into power purchase contracts with: (1) Illinova; (2) LG&E; and (3) PacifiCorp. These contracts are referred to in this proceeding, and in the federal litigation, as the intermediate term contracts.

The Illinova contract was executed on October 22, 1996, and provides for the sale of power for three years from January 1, 1997 to December 31, 1999. The contract provides for the sale of system firm capacity and energy of 275 megawatts (MW) in 1997, 200 MW in 1998, and 200 MW in 1999, at the respective prices of 1.47, 1.59, and 1.7 cents/kWh.

The PG&E contracts consist of two contracts for the sale of power for 1998, 1999, 2000 and 2001. These contracts were executed on March 11, 1997. The first contract provides for the sale of energy of 50 MW per year for 1998 through the end of 2001 at the price of 1.975 cents/kWh per year. The second contract provides for the sale of energy of 100 MW per year for 1998 through the end of 2001 at the price of 1.95 cents/kWh per year. LG&E assigned both of the contracts to Avista Energy, Inc. (Avista) in October 1998.

The PacifiCorp contracts consist of four contracts for the sale of power for 1998, 1999, 2000 and 2001. These contracts were executed on March 24, 1997. The contract provides for the sale of firm energy of 100 MW in 1998, 1999, 2000, and 2001 at the price of 1.645 cents/kWh in each year.