13. Ratemaking

PG&E's pending general rate case is for test year 2007 and it excludes consideration of deploying AMI. The next triennial proceeding would therefore have a test year of 2010, which is one year before the earliest AMI full deployment in 2011. PG&E's next rate case will only have incomplete AMI data and clearly declining/short-lived costs for the incumbent metering system. Therefore, we put PG&E on notice that it must present as one option in the next general rate case the continuation of the balancing accounts and benefit guarantee adopted herein (appropriately escalated and adjusted) for the duration of the 2010 - 2012 rate cycle. In this way we can consider whether there is sufficient data to allow a reasonable forecast for AMI in test year 2010 or whether we should defer total integration of the AMI system into test year 2013.

PG&E proposes separate balancing accounts for the gas and electric departments. The balancing accounts will record the revenue requirement on an actual cost basis as AMI deployment occurs with an offset of the per-meter benefits as adopted here.52 In this way no costs are recovered in PG&E's revenue requirement before the AMI modules are installed and a complete billing route is converted. Based on the number of conversions, PG&E will offset the new revenue requirement by the per meter operational savings. (This avoids an inaccurate forecast of cost reductions in the pending rate case.) The demand response benefits are reflected indirectly through reduced procurement costs as demand response reduces critical peak consumption and are not recorded in the balancing accounts. DRA agreed with the proposal. We find PG&E's proposed balancing account mechanism, with a per meter benefit credit, to be reasonable because PG&E recovers its new AMI-related costs on an actual basis and it ensures ratepayer benefits are captured as meters are activated. We also allow, as an exception, that PG&E may record the costs of new construction pre-deployed AMI modules at the time of installation, as discussed elsewhere.

Most of the operational benefits identified by PG&E occur as AMI communications modules and other AMI equipment are activated and eliminate the need for manual metering reading. For both electric and gas, PG&E forecast operational benefits in the first four years of the project, and calculated the forecast operational benefits per activated meter per month. The operational benefits per activated meter per month are $1.7722/per meter per month for electric and $1.0366 for gas.53 DRA and PG&E now agree on the operating costs and operating benefits and we will adopt these monthly benefit per-meter rates for the gas and electric departments. TURN does not oppose these figures, but it expresses concern that it "will be very difficult to tease out in future rate cases whether the benefits forecast today actually materialize." (Opening Brief, p. 62.) TURN therefore prefers its amortization method discussed below.

The convention of this Commission is that long-lived assets added to rate base are depreciated over their useful life. (See the earlier discussion.) As depreciation accrues annually, the accumulated depreciation is a reduction to the rate base value used to calculate the cost of debt and equity recovered in the authorized rate of return. For example, an asset that originally cost $10,000, and four years later, has $2,000 in accumulated depreciation would have a net rate base value of $8,000. If the authorized rate of return on rate base is 12%, the return on investment to cover debt and equity would be $960.54

In this simple example, revenue requirement is the depreciation expense and return plus other operating costs and taxes. In the next year, if there has been another $500 of deprecation, rate base is reduced to $7,500 and the return is reduced to $900. Thus, with no other changes, rates would actually go down to reflect the $60 decrease in revenue requirement. In this example - the normal method used by the Commission - depreciation is a constant $500 for the life of the asset ($10,000 divided by 20 years). In the final 20th year of asset-life, the last amount of net rate base would be $500, with a 12% return of $60 included in revenue requirement. Thus the revenue requirement declines over the life of the asset.

Although there is a new rate base investment for AMI to be recovered from ratepayers in its revenue requirement, PG&E also captures the recovery of operational benefits in the early years in the balancing accounts as a per-meter offset. PG&E proposes in its next general rate case to adjust the operating and maintenance expense forecasts downward for the avoided or reduced operating costs that result from deploying the AMI. Once the test year revenue requirement is correctly forecast, PG&E would discontinue the balancing accounts including per-meter benefit offset.

TURN proposed an alternative recovery - a levelized fixed amortization -like a conventional home mortgage or car loan. Beyond using a constant mortgage style amortization instead of a declining rate base, TURN also proposes that the Commission should capture the full present value of all forecast operational benefits to be offset against the AMI costs.55 The original cost and interest net of lifetime operating benefits would be recovered by a constant or fixed amount - assuming the rate of return on rate base remained constant. TURN argues that the actual future benefits are so uncertain that its proposal is the only way to ensure ratepayers see a defined amount of benefit.56 This shifts the risk for any greater or lesser actual benefits entirely onto PG&E's shareholders for the life of the AMI system.

We are not persuaded by TURN that such a method is reasonable for either ratepayers or shareholders. PG&E focuses on the downside risk to shareholders and raises a plausible argument that some project costs could be subject to write-off for financial reporting purposes if their recovery is deferred or is uncertain.57 We need not go that far here and address the possibility of an impaired asset. We believe that the current cost of service rate setting regime gives us ample opportunity to seek out and to capture all operational cost savings that will result over the life of the AMI system in subsequent rate proceedings. We are not persuaded by TURN to alter our cost recovery methods. Nor are we persuaded that we should capture the forecast present value of all future savings at this time. We believe that there are other benefits that will emerge from AMI deployment that are not yet identified or implemented.

52 PG&E would record (1) actual AMI Project revenues from rates set in this proceeding as a credit to the account; (2) actual capital-related revenue requirements calculated on actual recorded plant additions as a debit to the account; (3) actual O&M expense as a debit to the account; (4) per meter forecast benefits as a credit to the account based on the number of meters activated and the meeting of other project milestones; and (5) interest calculated monthly based on the average account balance for the month. (Ex. 5, Ch. 2, p. 2-5.)

53 Ex. 11, Ch. 15, Attachment 1.

54 $8,000 x 12% = $960 - this is a simplified after-tax illustration.

55 Ex. 201, p. 36-38.

56 "The only way to ensure that today's ratepayers do not end up subsidizing a project based on benefits that fail to materialize is to more evenly spread out the costs and benefits over time." Opening Brief, p. 55.

57 TURN's Opening Brief, p. 82.

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