6. Project Management

PG&E provided extensive testimony on the integrated project management structure and controls it intends to use to manage the project. PG&E has assigned senior management for oversight of the project and ensured that managers with appropriate expertise are accountable for project performance to an Executive Steering Committee. PG&E's project management process includes audits and performance reviews by PG&E's Internal Audit staff and an outside consultant (PricewaterhouseCoopers).10 No party objected to PG&E's proposed project management structure and we find this structure to be reasonable for AMI deployment.

As a part of the project costs, PG&E included what it described as a Risk-Based Allowance or a contingency of $128.8 million. If one part of the project exceeds budget then there is a process for project managers to "draw-down" or authorize the use of the contingency to complete the project. In effect, by approving the proposed budget, the Commission explicitly allows PG&E the discretion to spend $128.8 million to address delays, overruns or other unforeseen contingencies as a part of the reasonable costs of the project. DRA supports the contingency. (PG&E's Opening Brief, p.14, and the stipulation in Ex. 28.)

TURN is concerned that ratepayers will have a variety of significant risks, as well as risks of cost overruns, in excess of the risk-based allowance included in the forecast. (TURN's Opening Brief, pp.10 - 17.) However, most of TURN's argument appears to be an attempt to rehear the initial Rulemaking. TURN opposes the AMI project as too broad, too complex, and unnecessary to achieve the operational benefits that may be accomplished with an unidentified but simpler automated metering reading.

TURN is unpersuasive and repetitive on the matter. For example, we disagree that the equipment is new or untested. (TURN's Opening Brief p.10.) PG&E's witnesses from DCSI demonstrated that DCSI has several successful deployments that have operated for several years. We are also not persuaded that the arguments by TURN concerning information technology project delays and overruns are directly applicable here. TURN has not shown that its anecdotal information on large informational technology applications is applicable to the AMI project. We therefore approve the inclusion of a risk-based contingency in the approved project cost forecast.

In addition to the risk-based allowance included in the deployment cost forecast, PG&E and DRA stipulated (Ex. 28) to project cost recovery even if the Commission adopted a different revenue requirement than agreed to between PG&E and DRA. The stipulation includes:

1. $1.6846 billion of project costs would be deemed reasonable and recovered in rates without any after-the-fact reasonableness review.

2. 90% of up to $100 million in project costs beyond the $1.6846 billion, if any, would also be deemed reasonable and recovered in rates without any after-the-fact reasonableness review. The remaining 10% will be absorbed by PG&E's shareholders.

3. Costs in excess of $100 million over the $1.6846 billion will be recoverable only if approved by the Commission in a reasonableness review.

The stipulation also provides for cost overruns due to events beyond PG&E's control which may be recovered by PG&E, with Commission approval, without the 10% shareholder penalty described above. These include material changes in the project's scope by governmental or regulatory actions, delay in approving this application beyond September 21, 2006, delays caused during deployment by cities and local governments, and force-majeure events.11

We note that the force-majeure paragraph includes a descriptive list including two items, "transportation accidents" and "strikes or other labor disturbances..." (Ex. 28, p. 3.) where it is conceivable that PG&E could be a participant rather than an innocent victim as it would be during an earthquake (also on the list). PG&E must clearly demonstrate that any claim of force-majeure was in fact beyond PG&E's ability to anticipate or control.

Force-majeure should only include transportation accidents when PG&E can demonstrate that it was neither intentionally nor negligently responsible for any transportation accident-related delays to the project.

We are also concerned that the force-majeure language might excuse PG&E's actions during a labor dispute with its own workforce. Therefore, we will exclude from the force-majeure list "strikes or other labor disturbances" involving PG&E, or its vendors or contractors.

We will only allow PG&E to seek recovery of costs due to transportation accidents or labor disputes, in the event that all overruns exceed the $100 million shared range and PG&E can demonstrate the reasonableness of its actions and costs at the time. However, PG&E cannot recover these costs as force-majeure.

We find that the modified stipulation concerning overruns is reasonable. Under this modified stipulation PG&E will have an incentive (the 10%/$10 million exposure) to minimize and mitigate overruns. There is also an administrative efficiency to avoid litigation when a $90 million exposure for the ratepayer represents an added 5.34% of the forecast $1.6846 billion in project costs. We therefore adopt the stipulation on overruns, as modified for force-majeure.

TURN suggests that PG&E should deploy AMI equipped meters in new construction to avoid duplicate efforts when a territory is subsequently fully converted to AMI. As a concept, we agree duplication should usually be avoided, but there is no hard data to support an absolute requirement at this time. Therefore, we direct PG&E to consider where it may be appropriate to pre-deploy AMI equipped meters (such as in a new tract home construction or small commercial developments). Where PG&E pre-deploys AMI for new construction, it may record the costs in the balancing account at the time of deployment and defer recording the per-meter benefits until the entire territory is converted. We will allow costs into the balancing account so that PG&E has no disincentive to defer reasonable early installations. We recognize that the benefits do not accrue until the entire territory is converted to the AMI network. (See also the later ratemaking and balancing account discussion.)

Yolo/Cities all have contested pending condemnation proceedings to acquire PG&E's service territory and displace PG&E as the incumbent utility. They collectively request that the Commission direct PG&E to defer deployment in their locations because they believe the AMI technology will be an unnecessary cost burden to them by endangering the acquisition or needlessly raising the assessed acquisition value of PG&E's distribution facilities. They further argue the AMI system could be useless to them.12

PG&E has indicated that its system-wide deployment will take five years to complete but it is unwilling to delay deployment in the Yolo/Cities prospective territories.13 The record does not show precisely when PG&E intends to convert the Yolo/Cities territories. Based on a data response in discovery PG&E may install AMI modules in the disputed territories sometime between July 2007 and August 2008. (Ex. 701, p. 4.)

SMUD filed an annexation application to the Sacramento County Local Agency Formation Commission on July 29, 2005. On November 18, 2005, this Commission issued a resolution finding the annexation would not substantially impair PG&E.14 (Ex. 701, p. 1.) Yolo County may have an election on SMUD annexation in November 2006. We can avoid needless expense by deferring AMI deployment in the Yolo/cities territories until the election is resolved.

We therefore direct that (1) PG&E shall refrain from installing AMI infrastructure in the potential Yolo/Cities annexation territories before the November 2006 election, and (2) in the event the Yolo County election approves the SMUD annexation, PG&E shall not install AMI infrastructure in the annexation territories without further direct authority from this Commission. Furthermore, if the annexation election fails, PG&E may not install AMI infrastructure in the annexation territories until any legal challenge of the election is final.

DRA proposed that PG&E should report the status of the project on a regular basis and DRA should be able to actively monitor the project. (Ex. 101, Ch. 2, p. 2-29 and DRA's Opening Brief, pp. 14 - 15.) PG&E responded that the Commission would receive sufficient details in the ongoing balancing accounts. (Ex. 5, Ch. 2, p. 2-5.) Later in the proceeding there was a near-stipulation (Ex. 34-P) where PG&E would provide DRA and the Energy Division a regular summary report of the following information as is provided to PG&E's Executive Steering Committee on the status of the Project: (1) Project status; (2) progress against baseline schedule including equipment installation and key milestones; (3) actual Project spending vs. forecast; and (4) risk-based contingency allowance draw-down status (discussed elsewhere in this decision).15

The parties did not reach closure on the stipulation text by the ALJ's imposed deadline of five work days after the close of hearings. (Transcript, pp. 1380 - 1384.) It is not necessary for the parties to agree in order to find the proposed stipulation's reporting to be a reasonable and useful tool to the Commission and perhaps DRA. No party objected to any specific component of the proposal. Therefore, we will adopt the proposed reporting disclosure illustrated in Ex. 34-P and direct PG&E to serve copies on DRA and the Energy Division. PG&E may submit these reports pursuant to Pub. Util. Code § 583.

We find that PG&E has demonstrated it will use an appropriate management structure to effectively control the AMI project. With the addition of a regular summary report on the status of the Project provided to the Energy Division and DRA (containing the same information provided to PG&E's Executive Steering Committee) the Commission will have timely access to necessary project information including untoward events, schedule delays or cost overruns. We therefore approve the project management component of the AMI deployment project, modified for possible early installation in new construction and deferring deployment in the Yolo/Cities territories.

10 Ex. 11, Ch. 2, p. 2-9, and transcript, pp. 234 - 237.

11 Force-majeure clause: "A contractual provision allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled." (Black's Law Dictionary, 7th edition, p. 657.)

12 Ex. 701.

13 PG&E's Opening Brief, p. 25, PG&E suggests that it is "premature" to direct PG&E to delay deployment. But this is precisely the right time to provide guidance: before PG&E deploys the AMI equipment in territory which it may forfeit to SMUD.

14 Resolution E-3952. See Finding 11: "A potential rate impact of this magnitude would not substantially impair PG&E's ability to provide adequate service at reasonable rates within the remainder of its territory." ( http://www.cpuc.ca.gov/WORD_PDF/FINAL_RESOLUTION/51504.DOC).

15 Ex. 34-P, lines 10-19. (Various suffixes were used for certain exhibits: C denotes Confidential exhibits, W for work papers related to the root exhibit, E for errata and P for Provisional. All exhibits identified and received in the transcript - regardless of the supplemental numbering notations - are a part of the formal record for this proceeding.)

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