4. Should the Commission Approve the Incremental Cost Methodology for Calculating the Service Fees?
The Application asks the Commission to approve SCE's cost-causation principles and incremental costing methodology used to develop the proposed DA service fees. SCE states that its cost-causation principles "are simply that the individuals who cause the costs to the system should pay for those costs."35 SCE contends that its proposed service fees were developed using the incremental cost that SCE incurs to provide services to ESPs and DA customers. SCE defines incremental cost as "the cost to provide one incremental unit of service that is not already included in SCE's base rates set by the [GRC] proceeding."36
SCE states that in determining the costs to provide billing services, for example, SCE excludes the costs of activities necessary to provide billing services to bundled service customers, such as the billing system's hardware and maintenance costs, and billing envelopes. SCE states that it only includes those additional costs incurred solely for the purpose of providing additional billing services to ESPs, such as the additional work required when an ESP does not submit its billing information on a timely basis, and the cost of remitting customer payments to ESPs. SCE contends its incremental costing approach is consistent with the method used to develop its original DA service fees in 1997, and is also consistent with the methods used by PG&E and SDG&E to develop their DA service fees.37
SCE states that it implemented its costing methodology in three steps.38 According to SCE, it first identified all operational areas within the company involved in providing services to ESPs and DA customers. SCE identifies these operational areas as the Billing, Meter Reading, Call Center Operations, ESP Services, Meter Services, and Information Technology organizations. Each of these organizations identified all the activities they perform to support DA functions, the amount of time required to complete those activities, the frequency with which each activity occurs, and the labor classification of the employees performing the identified activities.
SCE used one or more of three methods to determine the labor and other costs required to perform an activity. These methods are: (1) analyses of historical records; (2) time and motion studies; and (3) estimates derived from operational expert analysis (OEA).
The use of historical data relies on logs to track the time to complete a particular task. The time required to perform a task using historical data is determined by dividing the number of person-hours by the number of tasks completed. Time and motion studies rely on the direct observation and measurement of an employee performing the task by management personnel. OEA-derived estimates are based on the experience and judgment of personnel who perform the activity.
Once SCE has determined the amount of time required to perform the activities supporting DA functions, SCE calculates labor costs to perform each service. SCE does this by multiplying the amount of time to complete an activity by the activity's frequency of occurrence and by the labor rate for the personnel performing the activity. Labor rates consist of 2006 direct labor costs based on an employee's labor classification including related labor overhead costs.39
Labor overhead costs include paid absence (vacation, sick time, jury duty, paid holiday, or other covered absence); pension and benefits (employee welfare and benefit plans, including the costs of post-retirement benefits), payroll taxes, workers' compensation; supervisory overheads; corporate administrative and general (A&G); vehicle costs (if applicable); and computer workstation costs (if applicable).40 Corporate A&G includes Human Resources, Law, Financial, and other.
Finally, SCE identifies and quantifies the cost of equipment such as meters, or materials like postage, paper and envelopes needed to perform the identified activities.
4.1. Does the Methodology Used to Develop the Proposed Fees Ensure DA Services are Provided in an Efficient Manner?
SCE states that it used an in-depth, analytical process to determine the incremental costs to provide each DA service. AReM and CMTA contend that SCE has failed to determine the most efficient means of providing DA services.41 According to AReM, SCE's "tops down" approach simply assumes that its current staffing is appropriate and necessary and then seeks to spread those costs among DA customers based on various fees and charges.42 AReM and CMTA complain that SCE does not look at existing processes to find ways to improve and provide them more economically and efficiently.43
AReM contends that the appropriate approach to developing DA service fees is to first identify the tasks needed to serve DA customers and ESPs, and then determine what level of staffing is required. AReM and CMTA state, for example, that notifying customers of the acceptance or rejection of a Disconnect Direct Access Service Request (DASR) via email may be more efficient and cost effective than SCE's use of U.S. Mail. AReM and CMTA contend that SCE does not have the financial incentive to explore providing DA services more cost effectively.
SCE responds that it provides DA services in an efficient and effective manner, and that it looked at identifying ways to increase operational efficiencies, improve processes, and reduce costs.44 SCE points to improvements it made in processing UDC Consolidated Billing exceptions as an example. SCE states that it investigated automating DA services, and did so when it was cost-effective. SCE contends, however, that it is not cost-effective at this time to automate many DA processes because of the low volume of transactions, and that automating would increase costs for DA participants.
Discussion
Although SCE contends that it provides DA services efficiently, we believe that further improvements can be made. For example, AReM's and CMTA's recommendation that notifying customers of the acceptance or rejection of a DASR via email rather than by U.S. Mail is an example of a process improvement that is likely possible, less costly than existing processes, and a more efficient means of providing notification. However, we do not have enough information at this time to conclude that SCE should be directed to implement this change.
D.97-10-087 recognized that additional changes and refinements to DA processes would be necessary, and established the Rule 22 Tariff Review Group (Working Group) to see how the adopted DA tariff provisions were working, and to make recommendations on how the tariffs should be changed.45 D.97-10-087 directed the original Working Group to file a report with the Commission in the Anticipated Proceeding at least once every six months, and more frequently if needed.
The Working Group was to be terminated on December 31, 1999, unless extended by a Commission order. Although no Commission order formally extended the life of the Working Group, the Commission has convened the Working Group to address certain DA issues after the date the Working Group was originally scheduled to terminate.
For example, D.03-05-034 directed the Working Group to address and report on implementation details associated with the switching rules and the process of notifying grandfathered DA customers concerning their options for returning to DA.46 D.03-05-034 also directed the Working Group to address the issue of developing a tariff-based solution to provide for repayment of an appropriate share of the accrued undercollection from DA customers returning to bundled service. The Working Group was later directed by D.04-07-025 to develop an affidavit form and process whereby DA customers beyond a designated minimum load must attest to their contractual DA load limits and that they have not exceeded contractual limits.
Advances in technology make it possible to continuously improve the processes used for delivering DA services efficiently, and such improvements are among the issues that the Working Group was established to address. However, because the Working Group is comprised of utilities and other entities which have not participated in this proceeding, they have not had an opportunity to address the issue of reconvening the Working Group.
In addition, the process improvements that should be considered pursuant to this decision are specific to SCE's DA services, and focusing parties on SCE-specific process improvements at this time will likely be a more efficient and productive undertaking. Therefore, it is more appropriate at this time to direct SCE, AReM and CMTA to meet to consider issues surrounding DA process improvements, including the timing for implementing any recommended improvements that may not be cost effective now at the currently low DA volumes but which may become cost effective if the suspension on enrolling new DA customers is lifted and the volume of transactions increases.
Therefore, we will direct the Energy Division to convene and facilitate a meeting between SCE, AReM, CMTA, and other interested parties for this purpose within sixty (60) days of the effective date of this decision. Additional meetings may be scheduled thereafter, as appropriate. Participants will not be compensated for their participation or reimbursed for their out-of-pocket expenses.
We will also direct SCE, AReM and CMTA to submit a joint report that identifies specific potential process improvements, proposes recommendations for SCE's DA process improvements, and recommendations for an ongoing process to consider possible future process improvements that reflect the needs and interests of all DA market participants in SCE territory. Participants may submit with the report their comments addressing any disagreements or reservations that participants may have with any recommendations or other aspects of the report. The report should be submitted in R.07-05-025, and will be considered if, and when, Phase III of that proceeding is commenced.
4.2. Is the Methodology Used for Calculating the Proposed Fees Appropriate?
AReM and CMTA agree with SCE's definition of incremental cost, but contend that SCE's methods for calculating incremental costs are neither reasonable nor consistent.47 AReM and CMTA state that SCE's methodology is casual and discriminatory, that SCE's OEA is inadequate, and that SCE should not charge ESPs for its errors or SCE-initiated activities.48
SCE responds that the service fees were calculated using valid, reliable and accurate methods to recover actual costs from those who cause those costs to be incurred, its OEA is sufficient, and that the proposed fees do not include allowances for SCE errors.49
Discussion
Although SCE's cost-causation principles are generally consistent with the Commission's requirements, D.97-10-087 also determined that only those non-recurring costs that vary with the number of ESPs should be recovered in fees for non-discretionary services.50 This is because all UDC customers were given the ability to choose as a result of the DA program, and, to the extent those costs are eligible for recovery, it is therefore appropriate to recover those costs from all customers. D.97-10-087 determined that requiring only those that exercise their choice to pay all the costs of having choice would result in unreasonable service fees for non-discretionary services and would impede the efficient operations of the market.
A proper incremental cost methodology should accurately identify costs and appropriately assign those costs to the cost causers. Accurate assignment of costs is necessary to send the appropriate price signals in a competitive market. These costs should be properly assigned to those who cause the costs so that customers are sent a true price signal of how much their electricity choices actually cost, and to avoid cost shifting or inappropriate cross-subsidization.
SCE's costing approach appropriately focuses initially on identifying costs attributable to DA services as distinguished from "bundled service."51 For example, SCE states that it is proposing certain DA service fees "so that the costs of providing DA services are recovered from those who cause the costs to be incurred rather than requiring other ratepayers to subsidize these services."52 SCE's costing approach appropriately identifies the operational areas providing services to ESPs and DA customers which incur DA-related costs.
SCE goes a step further in that, once a particular cost is identified as DA-related, SCE attributes those costs either to DA customers or to ESPs. However, in certain cases SCE's method of attributing costs either to DA customers or to ESPs inappropriately assigns to ESPs costs caused by end-use customers.53 As such, SCE's methodology which imposes fees on ESPs when end-use customers independently exercise choice is not appropriate because it assigns costs to those who do not cause the costs to be incurred. This approach does not comply with D.97-10-087.
With respect to non-discretionary services and with few exceptions, once costs have been assigned to end-use customers or ESPs, SCE largely abandons its cost causation principles and does not further attribute costs to the cost causers within those groups.
SCE acknowledges that processing "exceptions" (processes that are not built into the Customer Service System) are more costly and time consuming than providing routine services. For example, SCE states that DA billing exceptions are more complex and time-consuming because of the need to interface with third parties.54 Nevertheless, SCE embeds the costs of processing exceptions in the proposed DASR, Monthly Account Maintenance Fee (MAMF) and certain other fees regardless of whether those proposed to pay the fees cause the exception procedures to be required.55
For example, SCE proposes to charge all ESPs the MAMF, of which the largest cost components of that fee represent costs for processing exceptions and providing other "as requested" services for individual ESPs that are not caused by all of the ESPs that are proposed to pay the fee. Recovering the costs for processing exceptions caused by particular ESPs or end-use customers equally from all ESPs is inconsistent with SCE's cost causation principles, and with the Commission's instructions to UDCs to develop fees that recover costs from those who cause those costs to be incurred.56
Because the methodology SCE uses for developing certain proposed fees results in fees that assign costs to those who do not cause those costs to be incurred, SCE's methodology which imposes fees on all ESPs when only certain ESPs request or require the services included in those fees is unreasonable and should not be approved.
35 SCE Opening Brief, Footnote 6, p. 2.
36 Exh. SCE-1, p. 11.
37 The scope of this proceeding does not consider the DA services or fees of other utilities.
38 Exh. SCE-1, p. 11.
39 Exh. SCE-1, p. 12.
40 Exh. SCE-1, pp. 16-17.
41 Exh. AReM/CMTA-1, pp. 4, 7-8. AReM Opening Brief, pp. 5-8, 11. CMTA Opening Brief, pp. 2-3. AReM Reply Brief, pp. 3, 7-10.
42 AReM Opening Brief, pp. 4-5.
43 AReM/CMTA-1, pp. 9-10.
44 TR 21:21-24:24. SCE Opening Brief, pp. 6-7.
45 Among other things, the Working Group was tasked with looking into the feasibility of allowing new DA customers to contact UDCs directly to have the ESP of their choice provide DA service in the same way that new telephone customers do when selecting an interexchange carrier. (76 CPUC2d, 329.)
46 D.03-05-034, pp. 14, 44-45.
47 Exh. AReM/CMTA-1, pp. 5-6.
48 Exh. AReM/CMTA-1, pp. 4, 7-8. AReM Opening Brief, pp. 5-8, 11. CMTA Opening Brief, pp. 2-3. AReM Reply Brief, pp. 3, 7-10.
49 SCE-2, pp. 1-13. SCE Opening Brief, pp. 4-13, SCE Reply Brief, pp. 2-15.
50 76 CPUC2d, 307.
51 Some discretionary services, including meter reading and metering services, apply to both DA participants and bundled service customers.
52 SCE-1, p. 19.
53 This issue is further discussed in Section 9 concerning the proposed DASR fees.
54 SCE-1, p. 13.
55 SCE-1, pp. 28, 29, 31, 32- 34, 36-38, 40-41, 46.
56 For example, Resolution E-3582 states, "Fees for exception services send appropriate pricing signals and should apply statewide at the earliest possible date. (FOF 33.)
