8. The Meaning of Life

The "life" of the proposed AMI system has been addressed - and disputed - by the parties in a variety of ways. In this section, we define and adopt several necessary measurements and uses of the term "life."

First there is the question of what is the AMI system's "operational" or "service" or "useful" or "functional" life? The parties all use different shades of meaning. We will consolidate all of these terms into one: useful life. We define useful life to mean the continuous period of time when the components and system of the AMI project operate correctly and reliably to perform their designed functions. In regulatory jargon, this is the period when a system is considered to be "used and useful."

We find PG&E persuasive that the useful life of the system is 20 years. This finding is supported in the testimony of both PG&E's in-house expert and the senior officials from DCSI, the AMI equipment supplier. This finding is further supported by the confidential warrantee data included in PG&E's contracts for the AMI system components.24 Without disclosing the confidential details, we find the warrantee to be sufficient to support the likelihood of a 20-year service life for the system in general. As with any complex system, individual components may fail early or last longer than the overall useful life. The AMI system's useful life does not depend on when the first component fails or how long the last meter-module can be coaxed to function. Its life depends on the system as a whole operating correctly and reliably. We therefore find a 20-year useful life is a reasonable forecast for the purposes of this decision.

The next term is "depreciable" life. The depreciable life is the period of time when ratepayers reimburse PG&E for the original long-term investment in long-lived assets.25 Normally the depreciable life approximates the useful life so that ratepayers reimburse PG&E equitably over the entire useful life - otherwise between different periods of time ratepayers may not pay for equipment still used and useful because it is already fully depreciated. This is a "matching" concept in accounting - to match the costs to the service provided and charge a price that includes all the costs to provide service over the appropriate useful life. PG&E's witness testified that the new AMI components do not exactly fit any existing and authorized depreciation category; they are most similar to equipment included in a communications equipment depreciation category with a depreciable life of 15 years.26

The PG&E witness testified there has not been a depreciation study for the AMI communications equipment - which is reasonable given the few deployments and the short service lives to-date. Any study now for PG&E would be highly speculative. PG&E was not persuasive that we should use the 15-year communications equipment depreciable life for the AMI project. TURN recommended a 20 year depreciable life, correctly based on the Federal Energy Regulatory Commission's uniform system of accounts requirements for depreciation. (TURN's Opening Brief, p. 57.)

Absent any persuasive contrary evidence, the depreciable life should match the useful life. We will direct PG&E to depreciate the AMI equipment over 20 years and we will set rates using a 20-year life depreciation schedule. Like all other depreciable property, PG&E can re-examine the depreciable life in its subsequent general rate cases when there is credible evidence that the life should be adjusted. PG&E currently files a general rate case triennially; therefore, there should be several opportunities for timely depreciation studies before the end of the useful life of the AMI system.

"Economic" life and "study period" are less synonymous than the previous types of lives. Again, the parties tended to confuse the record with these terms to support their particular viewpoints. We will define economic life as the period where the AMI system components correctly and reliably perform their designed functions and a new system would not be less expensive to own and operate. By contrast, the study period for this application - and as used in the predecessor rulemaking - was set as a matter of convenience and consistency at 15 years, so that all parties could use a constant period to forecast operational benefits, demand response benefits, and cost recovery. Fifteen years was also safely within an expected useful life before we had specific system proposals.

We asked for the 15-year study life solely as a consistent analytical tool and not as an expectation of absolute useful or economic life. PG&E presented its cost/benefit analysis in this proceeding based on a 20-year life consistent with its expectation of the selected system's useful life. TURN argues that the Commission should limit its review to a 15-year study period. DRA supports deployment regardless of a 15 or 20-year analysis.27

We chose to rely on the 20-year study because it more accurately reflects the likely useful life of the AMI system. Although longer-range forecasts may have a greater likelihood of deviating from actual results, a 15-year study is not significantly more accurate than a 20-year study, and it ignores the benefits contributed by a full quarter of the useful life of the AMI system.

Finally, there is a "technological" life. That is the period where we consider the AMI system to be fairly modern and possessing most but not necessarily all features and efficiencies of newer systems. PG&E's AMI system could still be used and useful but quickly become technologically obsolete.

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.

For this proceeding, we have determined that the AMI communications equipment selected by PG&E will most likely have a useful life of 20 years, and therefore we should use the same 20-year span as the depreciable life until some future depreciation study may justify a different estimated life. Additionally, we find that the cost effectiveness study period should match the useful life of 20 years. Using 20 years will balance the cost-benefit study's results with the likely useful life of the AMI system selected by PG&E.

24 Ex. 11C, Chapter 4 for confidential warrantee terms. Ex. 11, pp. 5-1 - 5-3 for 20-year useful life.

25 The original costs to install the AMI project (or any long-lived asset) in our cost of service rate regulation regime are included in rate base and PG&E has an opportunity to earn a reasonable return on the outstanding balance over the useful life. PG&E is authorized in this decision to recovery a portion of the costs as depreciation expense, which is included in the annual revenue requirement that also includes a reasonable rate of return. As depreciation accumulates over time, the rate base and return on rate base decline until the asset is fully depreciated.

26 Transcript, pp. 674 ff.

27 Transcript, pp. 1334 - 1335.

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