6. Cost-Benefit Analysis
6.1. Incremental Cost/Benefit Analysis
PG&E has presented its estimate of the incremental costs and benefits associated with the Upgrade as detailed in Tables 1 and 2 below. PG&E's estimate of incremental costs is $841 million (PVRR), while its estimate of incremental benefits is $1,063 million (PVRR). By PG&E's estimates, incremental benefits of the Upgrade exceed incremental costs by $222 million, and the Upgrade is thus cost effective. As discussed further on in this decision, other parties disagree with PG&E's definition of incremental costs and benefits, as well as with PG&E's quantification of costs and benefits.
Table 1 |
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PG&E's Estimates of Incremental Costs |
||
Incremental Costs | ||
Nominal |
PVRR | |
(Dollars in thousands) | ||
Deployment Costs |
||
Meter Devices (Less HAN and Electromechanical |
$ 310,757 |
$ 486,358 |
Meter Upgrades) |
||
HAN Retrofit |
32,032 |
29,676 |
Electromechanical Meter Retrofit |
37,312 |
40,431 |
Information Technology |
48,433 |
52,589 |
Title 24 Program Costs |
- |
37,906 |
Peak Time Rebate Costs |
18,342 |
27,592 |
Project Management |
15,318 |
17,954 |
Training |
1,697 |
1,592 |
Risk Based Allowance |
57,371 |
55,568 |
Subtotal |
$ 521,262 |
$ 749,666 |
Operations and Maintenance Costs |
||
Operations and Maintenance |
$ 5,129 |
$ 49,435 |
Risk Based Allowance |
582 |
521 |
Subtotal |
$ 5,711 |
$ 49,956 |
Other Costs |
||
Technology Assessment |
$ 37,900 |
$ 35,285 |
Risk Based Allowance |
7,580 |
6,249 |
Subtotal |
$ 45,480 |
$ 41,534 |
Total Incremental Costs |
$ 572,453 |
$ 841,156 |
Table 2 |
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PG&E's Estimates of Incremental Benefits |
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Incremental Benefits | ||||||
Annualized |
PVRR | |||||
(Dollars in thousands) | ||||||
Operational Benefits |
||||||
Integrated Connect/Disconnect Switches |
||||||
Avoided Field Visits |
$ (6,682) |
$ (114,702) | ||||
Improved Cash Flow |
(969) |
(11,174) | ||||
Reduced Bad Debt |
(2,429) |
(26,756) | ||||
Tax Benefit from Meter Replacement |
n/a |
(11,799) | ||||
Subtotal |
$ (10,080) |
$ (164,431) | ||||
Energy Conservation/Demand Response Benefits |
||||||
Electric Conservation |
n/a |
$ (311,881) |
||||
Gas Conservation |
n/a |
(167,190) | ||||
Peak Time Rebate |
n/a |
(290,222) | ||||
A/C Cycling |
n/a |
(129,401) | ||||
Subtotal |
n/a |
$ (898,694) | ||||
Total Benefits |
n/a |
$ (1,063,125) | ||||
PG&E considers any costs and benefits related to its total AMI project (original plus Upgrade) that were not specifically included in the original AMI project cost/benefit analysis to be incremental for the purposes of justifying the cost effectiveness of the Upgrade. For instance, the PTR program will be functional with the completion of the Upgrade. The costs and benefits of the PTR program were not included in the original AMI project cost/benefit analysis. PG&E has therefore included the PTR program in the cost/benefit analysis used to justify the cost effectiveness of the Upgrade. As described above, using this definition of "incremental" and PG&E's estimates of costs and benefits results in the cost effectiveness scenario where Upgrade proposal benefits exceed costs by $222 million.
DRA believes that Upgrade benefits that could have been achieved by the original AMI system that was approved by the Commission in D.06-07-027, should be excluded from the cost-effectiveness analysis for the Upgrade. For instance, DRA excludes PTR benefits from the Upgrade analysis because, in its opinion, PTR can be implemented with the functionalities of the meter equipment that was included in the original AMI project. DRA argues that, if benefits could have been achieved by the original system, they are not truly incremental benefits made possible with the Upgrade. Using this definition of "incremental" and DRA's estimates of costs and benefits results in a cost effectiveness scenario where Upgrade proposal costs exceed benefits by $76 million.
TURN and CCSF agree with DRA's definition of incremental. TURN also notes that, as early as May 2005, PG&E stated to the Commission (justifying its original authorization) that its proposed AMI system could accommodate, not only the rates that were identified by the Commission, but also any future dynamic tariffs that might be contemplated by the Commission over time. Thus, according to TURN, it is analytically incorrect to apply demand response benefits to this "AMI Upgrade" because (a) PG&E's original technology choice clearly is able to measure hourly data necessary for implementing a PTR and (b) PG&E has testified to the Commission that its original AMI technology had the technical flexibility to accommodate any future changes in to dynamic rates.
In response, PG&E states that "incremental costs" are costs beyond what were identified in the original project, "incremental benefits" are benefits beyond what were originally identified original and incremental costs should equal total costs, and original benefits and incremental benefits should equal total benefits. PG&E asserts that DRA's definition of incremental is unduly restrictive and unreasonable, because it eliminates any benefits that could have been achieved with PG&E's original AMI technology even though such benefits were not counted in the first case and it undervalues the benefits that will be achieved through the HAN device and IHDs.
PG&E adds that DRA's thesis is further undercut by the fact that the level of conservation and demand response benefits PG&E claims in the Upgrade could not have been achieved without the further expenditures contained in the Upgrade. While the original technology certainly created the foundation for such benefits, further expenditures for IT and the HAN were still required.
PG&E also states that DRA's position is fundamentally unfair in that DRA penalizes PG&E for being a leader in bringing advanced metering to California and implementing its SmartMeter program in two phases and DRA's approach denies PG&E the ability to count benefits that its SmartMeter Program will generate - benefits that SCE and SDG&E are able to count in their respective business cases. PG&E argues that it should not be treated differently than the other California IOUs just because PG&E's project is being deployed in two phases.
Parties agree that an incremental analysis is the proper way to analyze the cost effectiveness of the Upgrade. In its application showing, PG&E justifies the Upgrade on an incremental basis, and DRA and the other parties have evaluated PG&E's request assuming an incremental analysis, but defining "incremental" differently than PG&E, as described above.
There is much to be said for DRA's definition of incremental. Certainly if the Upgrade were cost effective under that definition, all parties would agree that it would be economically justified. However, there are factors that lead us to believe that, for the purposes of this proceeding, DRA's definition of incremental based solely on functionality is unduly restrictive.
First of all, DRA rejects all PTR benefits as estimated by PG&E under the assumption that all PTR related benefits could have been achieved through the original AMI project. DRA makes this assumption based primarily on the time differentiation function of the original AMI project. We agree with PG&E that PTR benefits are augmented by the HAN functionality. 12
Also, PG&E correctly points out that the levels of conservation and demand response benefits PG&E claims in the Upgrade cannot be achieved without the further expenditures contained in the Upgrade. Much of the PTR program costs and associated IT costs, as contained in PG&E's Upgrade request, are essential for obtaining the conservation and demand response benefits as justified and forecast by PG&E. Those costs were not included in PG&E's original AMI case, so it is highly likely that, without these Upgrade expenditures, the benefits would not be derived to the extent estimated by PG&E, if at all. From that standpoint, PG&E's use of incremental makes some sense in that the realized benefits directly derive from the incremental Upgrade costs, even those benefits that might be associated with the original AMI project functionality. It might make more sense to have assigned or allocated PTR program and associated IT costs to both the original AMI project and the Upgrade. That would be a way to determine the truly incremental PTR costs associated with the Upgrade, assuming that PTR would have been provided as part of the original AMI project. We only note that such an analysis was not done.
Furthermore, DRA's definition of incremental results in PTR benefits not being recognized at all for SmartMeter program cost effectiveness purposes. For PG&E, PTR program benefits were not included in the original AMI case and, under DRA's proposal, would not be included in the Upgrade. We note that the PTR program was recognized as a benefit in the cost effectiveness analyses for both SDG&E and SCE in their AMI proceedings, and we see no reason to treat PG&E any differently. Under PG&E's definition of incremental, all appropriate AMI benefits are included in either the original AMI case or Upgrade cost effectiveness analyses.
In certain respects, DRA's definition of incremental is essentially at odds with the manner in which the Commission evaluated the AMI requests of SDG&E and SCE. Even though both SDG&E and SCE each filed only one application, an incremental analysis based on functionality could have been applied in determining the reasonableness of the requests. For example, based on what was authorized for PG&E in its original AMI application, the Commission could have analyzed SDG&E's and SCE's need for the additional functions (higher functioning solid state meters, integrated load limiting connect/disconnect switches and HAN Gateway devices) based on the specific cost effectiveness of those additional functions. In doing so, the Commission could have determined that CPP, PTR and certain aspects of electric conservation could be achieved with a basic system similar to that in PG&E's original AMI proposal and should not count as benefits to be associated with the proposed additional functionality of the HAN gateway, integrated connect/disconnect switches or advanced solid state meters. The Commission could have sought the minimal functionality, and least cost, that would be necessary to implement proposed benefits. However, the Commission did not go down that path in the case of either SDG&E or SCE. If it had, certain of the newer technologies and additional functionalities may well have been determined not to be cost effective and rejected.
Viewing costs effectiveness as we did for SDG&E and SCE and as proposed by PG&E provides for a certain amount of discretion on our part with respect to ensuring that our actions are consistent with good public policy and the overall long-term interests of the ratepayers. We support the concept of the new technologies and believe it would be inappropriate to reject them for PG&E simply because PG&E made its proposal in two phases as opposed to one phase.
For these reasons, PG&E's definition of incremental is reasonable and is in many ways consistent with the way the Commission viewed cost effectiveness for SDG&E and SCE. We will use it in our cost effectiveness analysis of the Upgrade.
6.2. Total Cost/Benefit Analysis
In its rebuttal testimony, PG&E raised the concept and issue of a total cost benefit analysis, when it evaluated the total of its original AMI case costs and benefits and its proposed Upgrade costs and benefits and compared the total results with those in the AMI cases for SDG&E and SCE.
According to PG&E, on a total basis, its SmartMeter program costs are $3.099 billion (including technology evaluation), while the most conservative benefit figure is $3.426 billion,13 which results in benefits exceeding costs by 11%. PG&E compares this to SDG&E and SCE where a range of projected benefits resulted in benefits exceeding costs by a range of 6% to 8% for SDG&E and 0.6% to 18.6% for SCE.
DRA opposes PG&E use of total cost/benefit comparisons, first of all, because there is insufficient information in the record to adequately compare PG&E's per meter costs with those of SCE and SDG&E. Beyond this, there is the significant question of whether applications for major capital expenditures should be evaluated on a total basis that includes the costs and benefits of a prior case. According to DRA, economists generally favor performing cost-benefit analyses on an incremental basis. The reason for this is because, even if a project can be justified on a total basis, if an incremental investment has a negative net present value, going forth with the incremental project dilutes the costs and benefits of the initial project. Economists aim to maximize the net present value, and this requires that each increment stand or fall in terms of whether it adds net present value to the overall project.
Furthermore, DRA states that looking at both AMI cases on a total basis is extremely difficult to do in the post-rebuttal stages of the proceeding, and to now be asked to look at the case on a total cost and benefit basis is a violation of DRA's due process rights because an entirely different kind of analysis would have been required. DRA states that if it were to evaluate PG&E's case on a total basis, it would need to consider inefficiencies that have been produced by PG&E changing technologies and vendors after deploying more than half a million endpoints, adding that the most obvious inefficiency is the need to discard either entire endpoints or internal parts of endpoints and the additional labor costs involved in doing so. DRA concludes that if the Commission believes that this would be a preferable way to view PG&E's case, then it should reject the current application and ask PG&E to file a new case in which the analysis is presented on a total basis.
In response, with respect to DRA's argument that the costs of the other IOUs are not directly comparable, PG&E states that, even if some allowance were made for the differences, the inescapable conclusion remains that PG&E's overall costs for both phases compare favorably to SCE's and SDG&E's costs. More specifically, according to PG&E, this result further demonstrates that PG&E is managing all aspects of its project - original project, transition and Upgrade - in a reasonable manner.
With respect to DRA's argument that a total cost/benefit analysis does not include inefficiencies, PG&E states that its analysis includes all costs, including for example retrofit costs, one of the inefficiencies that DRA identifies.
TURN asserts that the Commission should disregard any attempts to analyze the SmartMeter Upgrade project on a total cost basis, because there is insufficient data in the record to accurately engage in such an analysis. According to TURN, because costs and benefits that have been recorded so far are not on schedule with the costs authorized in D.06-07-027, in order to evaluate the Upgrade on a total project basis, PG&E would need to file the costs and benefits that have actually been recorded since the date of implementation of D.06-07-027 to today and reevaluate the total project costs going forward. TURN also asserts there are additional costs that have not been included in either the original AMI or Upgrade filings.
In response, PG&E indicates that it is true that the timing is different, but the fact remains that both costs and benefits were delayed. Further, PG&E indicates that, in spite of delays, it still intends to complete the whole project within the budget established by the Commission and to obtain the same benefits. In answer to TURN's argument that there are additional costs that will need to be added to the project cost, PG&E states that this assertion is wrong and that PG&E has included all known costs in its cost-benefit analysis.
We agree with DRA and TURN that the record in this proceeding is insufficient for determining the cost effectiveness of PG&E's SmartMeter program on a total basis, especially when comparing PG&E with SDG&E and SCE. We do note though that PG&E has proposed an incremental analysis as discussed above, which is its principal justification for the Upgrade. It provides the total cost comparisons as additional justification for its request.
In concept, we do agree with PG&E that the original AMI costs and benefits plus the Upgrade costs and benefits would equal the total costs and benefits. However, it is uncertain whether all costs and inefficiencies have been included or not. Certainly the inefficiencies identified for the Upgrade would be reflected and TURN has not provided solid evidence of costs that have been omitted, but because PG&E's Upgrade proposal was not presented on a total basis, those types of issues were not necessarily analyzed in any detail. There is therefore some uncertainty as to whether all costs and inefficiencies are reflected correctly when looked at in total. For that reason, we would not use a total cost analysis as the basis for approving or rejecting the Upgrade. However, we see no reason why a total analysis cannot be used to show whether or not the cost effectiveness of PG&E's SmartMeter program is in the range or generally comparable to that of SDG&E and SCE. Our use of total analysis results will be limited to that.
6.3. Future Upgrade Cases
DRA recommends that the Commission provide clear directives to PG&E on how to present future upgrade cases. That is whether any such request should be presented on a total basis or on an incremental basis. DRA also believes there should be limitations on how frequently PG&E should be allowed to file upgrade applications.
In response, PG&E states that it has no plans for a further project upgrade. PG&E indicates that its goal was to achieve equivalent technology throughout the State. That goal will be accomplished by this decision. PG&E also indicates that the Upgrade will facilitate upgrades of both firmware and software, which means that in the future PG&E will be able to update both the functioning of the endpoint and initiate future programs without the necessity of visiting the endpoint. PG&E asserts that this aspect of the Upgrade should permit the current technology to perform capably well into the future even in the face of major advancements in technology.
With the authorization of the Upgrade and for the reasons cited by PG&E, we do not expect to see any further upgrade applications associated with the SmartMeter Program. We will not however prohibit or limit any such filings or prescribe the manner in which any such filings should be made. Future Commission actions should be guided by the circumstances that exist in the future, not on circumstances as they exist today. However, we expect that any future requests to upgrade the SmartMeter Program should be critically reviewed with the understanding that our interpretation of cost effectiveness in this proceeding is appropriate for the circumstances that exist today and may well be inappropriate for circumstances that exist in the future.
12 For instance, TURN indicates that PG&E could have implemented PTR without the HAN functionality, but PG&E would have to spend and additional $5.7 million per year on marketing without HAN to achieve the same awareness level target.
13 PG&E states the benefit figure is conservative because it continues to use the figure of $52/kW-yr for the avoided cost of capacity for the initial portion of the project. If the figure were increased to $85/kW-yr as was done for the second portion of the project, the benefits increase to $3.598 billion. PG&E adds that if remote programmability benefits are also included, the benefits figure increases to $4.118 billion.
