5. Discussion
The California Manufacturers and Technology Association, the California League of Food Processors (CLFP), the Agricultural Energy Consumers Association, and the Indicated Producers support the utilities request to use the EPBR cost allocation method for recovering the costs of PP programs from their natural gas customer classes. The Division of Ratepayer Advocates (DRA), The Utility Reform Network (TURN), the Consumer Federation of California, the Disability Rights Advocates, and Latino Issues Forum oppose any change in the cost allocation methods used by the utilities for recovering the costs of their PP programs.
The utilities and their supporters recommend the EPBR method over the current cost allocation methods to rectify what they perceive to be an inequity in the utilities' business customer classes (commercial, industrial, electric generation and wholesale) paying a disproportionate share of the costs of PP programs in relation to residential customers.6 As an example of this perceived inequity, the utilities explained that a substantial increase in the costs of these programs over the years requires many of their large gas users to pay as much, or more, for the PP programs than for their basic gas transportation service and the surcharges are a significant proportion of the bill for other businesses as well.7 This is because, on a combined basis, business customers representing only 5% of the utilities total customers (approximately 500,000 business customers in comparison to 10 million residential customers) are paying close to half of the costs of the PP programs.8
The costs of the individual PP programs were substantially lower at the time the cost allocation methods were adopted for each program and represented only a small fraction of a customers' total bill for utility gas service.9 However, these programs have expanded over time, thereby increasing the costs of these programs. For example, CARE costs for the utilities have increased over 350%, from approximately $74 million in 2001 to almost $260 million at present and will likely rise further with higher commodity prices and increased outreach efforts.10
Adoption of the utilities' EPBR cost allocation method would shift approximately $90 million of the current costs of the PP programs to residential customers from commercial, industrial, electric generation and wholesale customers.11 To alleviate the impact of this additional cost on residential customers, the utilities propose to phase in this cost allocation change over three years. Residential customers of SoCalGas would pay an additional 0.8% in the first year, San Diego Gas & Electric Company's (SDG&E) residential customers 0.7%, and PG&E's residential customers 0.4%. Business customer classes of Southern California Gas Company (SoCalGas) would receive a 0.6% to 7.9% reduction in the first year with noncore commercial and industrial customers receiving the largest reduction, those of SDG&E a 1.4% to 7.8% reduction with noncore commercial and industrial customers receiving the largest reduction, and those of Pacific Gas and Electric Company (PG&E) a 0.2% increase for its small business customers and a 1.2% reduction for its large business customers.12
The following tabulation shows the difference in percentage of total costs each customer class would pay for PP programs between the current (ECPT, DB, and EPMC) cost allocation methods and the utilities proposed ECPM cost allocation method.13
Utility |
Cost Allocation Method |
Residential |
Commercial & Industrial |
Electric Generation & Wholesale |
SoCalGas |
Present |
50.8% |
44.4% |
4.8% |
Proposed |
78.4% |
21.3% |
0.3% | |
SDG&E |
Present |
57.1% |
40.0% |
2.9% |
Proposed |
83.8% |
15.7% |
0.5% | |
PG&E |
Present |
53.9% |
45.0% |
1.1% |
Proposed |
68.3% |
31.4% |
0.3% |
The utilities recommend the EPBR cost allocation method because of a belief that it (1) supports the California economy and competitiveness of California businesses and, (2) is an equitable and consistent method to distribute PP program costs.
5.1. California Economy and Competitiveness
of California Businesses
The utilities and their proponents for the EPBR method testified that, for a variety of reasons, the cost of doing business in California is higher than in most other states and places many businesses at a competitive disadvantage resulting in a growing concern for California businesses. They highlighted the impact of the high cost of doing business in California by noting that between 2001 and 2006 California loss approximately 287,000 manufacturing jobs.14 This represented a 16.3% loss of manufacturing jobs over a five-year period. However, that loss of manufacturing jobs does not by itself demonstrate that the loss of jobs resulted from the high cost of doing business in California. This is because the United States, as a whole, lost 13.9% of its manufacturing jobs over the same time period.15
Nonetheless, the utilities consider energy related costs to be among the many reasons that the cost of doing business in California is high in comparison to other states. They identify a major component of those energy costs to be PP program surcharges. In 2000, the California State Legislature passed AB 1002 making the costs of PP programs a non-bypassable surcharge applicable to all gas customers in California (except municipalities offering their own programs and gas producers using proprietary pipelines), including those taking service from interstate pipelines. Although this action established a level playing field in California, the utilities complain that the cost of utility PP program surcharges relative to other states was not addressed.16
From 1993 to 2007 PG&E's average cost of gas increased 259% and SoCalGas' 200%. During this same time period, the industrial customers of PG&E experienced a 1,518% increase in PP program surcharge costs in contrast to its residential customers 145% increase, and SoCalGas' industrial customers a 1,414% increase in contrast to its residential customers 186% increase.17
The utilities provided examples to illustrate that the costs of PP programs have already adversely impacted California businesses and influenced business decisions in California, including finding ways to avoid paying PP program surcharges. These examples include the Guardian Glass proceeding, City of Vernon (Vernon), alternative service providers, and feedback from business customers. To enable California businesses to be more competitive with businesses in other states and to improve the California economy, the utilities and their supporters urge that the current cost allocation methods used to distribute the costs of the PP programs be replaced with their proposed EPBR method.
The Guardian Glass proceeding involved Guardian Industries Corporation (Guardian) needing to upgrade its fuel oil facility to use clean-burning natural gas or to relocate its manufacturing operation out of California. Decision (D.) 06-04-002 found that it would cost Guardian more to do business at its present location than to relocate outside the state, with a key difference being rates for natural gas service. California gas service rates were found to be higher due to taxes, fees, and PP program surcharges totaling approximately 3.0¢ per therm, of which 60% or 1.8¢ was for gas PP program surcharges, compared to 0.2¢ per therm for its out-of state competitor.18
By D.07-09-016, the Commission concluded that it did not have authority to discount the non-bypassable PP program surcharges but did have the authority to discount Guardian's transportation rate, fixed charges, and fees. The Commission approved a discounted transportation rate without reducing the PP program surcharges to keep that business in California.
Vernon is a wholesale customer of SoCalGas which built its own gas distribution system. Its customers are primarily commercial and industrial customers. Customers have switched from SoCalGas to Vernon on the basis of transportation rate savings. Those industrial customers that switch to Vernon pay from $10,000 to $20,000 to connect to Vernon's distribution system. That additional cost to the industrial customer is recouped in less than a year through savings from not paying the PP program surcharges, which represents 20% to 30% of the transportation bill for a medium-sized industrial customer.19
However, the utilities did not present any evidence to substantiate that those customers, representing a very miniscule portion (less than 0.05%) of SoCalGas' business, switched to Vernon because Vernon was charging lower or no PP program surcharges.20 Further, the Commission authorized SoCalGas to charge its Vernon customers reduced core commodity rates to mitigate any benefit a business might experience by migrating to Vernon and to enable it to compete with Vernon.21
Some businesses in the State take service from interstate pipelines (alternative service providers), not subject to this Commission's jurisdiction. Customers of these providers are required to pay their share of the costs of PP programs to the Board of Equalization (BOE). The utilities represent that the customers of alternative service providers may not be paying their PP program surcharges because the BOE has not yet forwarded any PP program surcharges that it may have collected since 2004.22
The BOE is collecting and processing PP program surcharges from these customers. Therefore, there is no risk that any of SoCalGas' customers will successfully switch to an interstate pipeline to avoid paying PP program surcharges. Customers of the alternative service providers also represent a very miniscule portion (less than 0.05%) of SoCalGas' business.23
Business customers' feedback came by way of statements at the various pubic participation hearings and formal evidence. For example, CLFP membership, consisting of California processors engaged in the canning, freezing, and drying and dehydrating of fruits and vegetables, are dependent on gas. Their energy use typically accounts for up to 10% of total production costs, and in some cases such as fruit drying can account for as much as 40% of total production costs. As a result, natural gas tariff rates have a direct impact on the economic viability of food processors and their ability to compete in international markets. In the case of California tomato processors, a one cent per therm increase in PP program surcharges will add approximately $1.4 million in total annual costs to the fifteen California tomato processors which collectively handle approximately eleven million tons of tomatoes a year. It requires 13 therms of natural gas to process one ton of raw tomatoes.24
There is no dispute that the cost of doing business in California is higher than many other states. This is supported by a California Competitiveness Project study which showed that the costs of doing business in California are 30% higher than in other Western states. The components of this 30% are 16% for employee costs, 6% State regulatory costs, 5% energy, 3% property, and 1% taxes. The study did not identify whether gas costs more in California than the other Western states.25 However, these additional costs of doing business in California must be weighted against the advantages of doing business in California. These advantages include leadership in innovation, technology, RD&D; connection to the Pacific and World markets; and, a favorable climate and high standard of living.26
The utilities, and their supporters asserted that the current methods used to allocate the costs of PP programs are a burden to California businesses and one reason many businesses consider leaving the state.27 Unable to substantiate this claim, EPBR supporters clarified that they believe such costs are an important factor considered by businesses and do impact the decisions made by business customers.
Other than the Guardian case, a unique situation where a manufacturing company needed to convert a fuel-oil facility to a clean natural gas facility, there is no evidence to substantiate that PP program surcharges may impact business decisions to leave California. PP program surcharges were only one component of California gas service costs that impacted Guardian's business decision to consider leaving California. The other components of California gas service costs cited by Guardian were fixed charges, taxes, and fees.28
There is also no dispute that the costs of PP programs have increased over the years. However, there is little, if any, evidence to support the contention that PP program surcharges are a reason that the cost of doing business in California is higher than other states. The Guardian and Vernon cases are unique cases resolved by the Commission, as previously addressed. Although there may be a delay in the forwarding of PP program surcharges to the utilities from the customers of alternate service provides, those customers are not avoiding any payment of PP program surcharges.
Feedback from the utilities business customers does substantiate that PP program surcharges are a measurable amount of the cost of doing business. However, they are not the most significant component. As cited in the California Competitiveness project study, employee costs are the largest component of doing business in California in comparison to other states. The cost of gas is an unpredictable significant component of doing business and can be a major component of doing business. From January to July of 2008, the core procurement cost of gas from a low of .68¢ to a high of $1.22 per therm.29
Noticeably absent from evidence is a discussion of whether PP programs benefit California businesses. Although the CARE and LIEE programs were primarily established to assist low income customers with their energy needs, other programs like EE, RD&D, and SGIP were established to reduce energy consumption and costs for all customers by making energy usage more efficient, developing energy science and technology, and promoting clean and efficient self-generation and cogeneration resources.
There is no conclusive evidence that the costs of PP programs adversely impact the California economy or competitiveness of California businesses.
5.2. Equitable and Consistent
Distribution of Cost
The utilities and their supporters contend that EPBR method is the best method of equitably spreading the costs of PP programs across all customer classes because it departs from a total usage-based cost allocation method to an allocation method that captures usage differences along with differences in the cost to serve the applicable customer class, utility base costs.30 Applicants undertook a reality check of their proposed EPBR method by correlating their funding method with how the California General Fund derives its revenue.
Applicants assert that the PP programs advance desired societal goals similar to the state's use of its General Fund, rather than benefiting one particular customer class. Therefore, the PP programs, if funded by the state, would have been funded through the General Fund.31
Given that the revenue source of the General Fund is tax revenues obtained from a variety of sources such as personal income taxes, retail sales and use taxes, and corporate taxes, applicants contend that these same sources of funds should be viewed as a standard by which the fairness of a cost allocation for PP programs can be measured. Their analysis of 2005-2006 General Fund revenues shows that approximately 63% of those revenues came from the residential sector and 37% from the non-residential sector.32 Hence, the utilities conclude that their EPBR method which will increase SoCalGas' residential customers' share of the PP programs to 78% from 51%, SDG&E's residential customers share to 84% from 57%, and PG&E's residential customer share to 68% from 54% is more in line with the sources of funds for the state's General Fund.
There are two major flaws in applicants' use of the California General Fund for its reality check. The first flaw is the applicant's assumption that if the state funded these PP programs such funding would come from the General Fund. As testified to by TURN, there are many examples of social programs financed from fees or special funds that do not reflect a general tax distribution. For example, the low-income lead poisoning program is financed entirely by fees on paint manufacturers, school construction is often funded by developer fees, and most environmental programs are funded from fees on businesses. The largest social program on the federal level, Social Security, is funded equally between employees and employers.33
The second major flaw in their reality check is their conclusion that residential customers provide 63% of the General Fund revenue and businesses 37%. Even applicants acknowledge that the individual percentage they derived is high because some types of businesses such as sole proprietorships and partnerships are not considered corporations and, thus, the taxes that they pay are recorded as the personal income of their owners and appear in the personal income tax category.34 TURN identified other General Fund revenue sources such as rents and royalties, farm income, capital asset sales, and interest and dividends that cannot be so easily allocated.35 Under applicants' funding proposal for PP programs, residential customers would bear an even larger cost share of the PP programs than the 63% General Fund individual benchmark derived by applicants. Residential customers of SoCalGas would be required to pay 78% to fund the PP programs, SDG&E 84%, and PG&E 68%.
Applicants have not substantiated that the California General Fund should be viewed as a standard by which the fairness of a cost allocation of the PP programs can and should be measured.
Applicants contend that the EPBR would result in each applicable customer class paying the same percentage mark-up of their transportation cost to fund the PP programs and provide for a more equitable allocation of mandated program costs over time, including cost escalation.36
DRA and other parties opposing use of the EPBR method contend that EPBR does not follow basic costing principles because the PP programs do not have any direct relationship to base revenue, as being proposed by applicants. Further, adoption of the EPBR will be detrimental to most ratepayers and to the PP programs. It will be detrimental to most ratepayers in the sense that, when fully phased-in, residential customers will be required to shoulder an additional $90 million cost of the PP programs currently being paid for by business customers, based on current program cost.37 It will be detrimental to the PP programs in the sense that all of the programs' costs would get reallocated to a smaller group of captive customers, where the rates would become intolerably high, or the programs would be underfunded and eventually collapse.38
Concern about program viability are properly addressed as part of the periodic review of individual program goals and budgets. Concern about ratepayer detriment is an issue in this proceeding to the extent that a PP program cost allocation method may not be fair and equitable for all customers.
The currently adopted cost allocation methods for the PP programs were adopted for different reasons at various times, as summarized in the background discussion and in Appendix A of this decision. For example, the direct benefits allocation method was adopted for the EE program so that the program cost would be directly assigned to the customer classes for whom the programs are designed.39
Applicants seek to replace these cost allocation methods with a single cost allocation method irrespective of a program's intended purpose and which customer class or classes benefit from the program. Adoption of such a method defies a basic costing principal of assigning costs to those who will benefit, whether direct or indirect.
Cost allocations of the PP programs should be fair and equitable. As such, costs should be allocated to customer classes in a manner that appropriately assigns costs relative to the expected share of program benefits. The EPBR method precludes any consideration of an individual program's purpose and intended benefit.
Applicants have not substantiated that its EPBR method is more reasonable than the cost allocation methods currently being used to recover the costs of PP programs. Therefore, it should not be adopted.
6 Exhibit 1, pp. 1-13, and Exhibit 3, pp. 11-18.
7 Exhibit 1, pp. 1-13.
8 Exhibit 3, p. 19.
9 Id., p. 6.
10 Exhibit 1, p 1-6 and Exhibit 3, p. 8.
11 Id., pp. 3-4 and pp. 4-3.
12 Id., pp. 3-5 and p. 4-4.
13 Application, p. 5.
14 Exhibit 1, pp. 1-9.
15 Exhibit 52, p. 4.
16 Exhibit 1, pp. 1-10.
17 Exhibit 3, p. 15.
18 D.06-04-002, mimeo., p. 2.
19 Exhibit 1, pp. 1-11.
20 Pub. Util. Code § 898 mandates a municipality such as Vernon to collect PP program surcharges from all of its customers unless it offers low-income programs itself.
21 Reporter's Transcript Vol. 7, pp. 293-294.
22 Exhibit 1, pp. 1-11.
23 Exhibit 19, p. 7.
24 Exhibit 47, pp. 5-6.
25 Exhibit 52, p. 6.
26 Id., pp. 7-8.
27 Exhibit 1, p. ES-1.
28 D.06-04-002, mimeo., pp. 1-2.
29 Exhibit 20.
30 Exhibit 1, pp. 1-13.
31 Id., pp. 2-1.
32 Id., pp. 2-2.
33 Exhibit 50, p. 4.
34 Exhibit 1, pp. 2-2.
35 Exhibit 50, p. 5.
36 Exhibit 1, pp. 1-14.
37 Exhibit 65, p. 34.
38 Id., p. 36.
39 CPUC2d 63, 414 at 456.
