6. Need for Cornerstone
According to PG&E, this filing is fundamentally about the policy question of whether PG&E should undertake the work, as proposed, to provide customers with a new level of improved reliability. Prior to filing the Cornerstone application, two Commissioners expressed concern about PG&E's level of reliability.5 PG&E states that it took these comments seriously and developed Cornerstone, a 7-year program that is designed to (1) improve reliability through fundamental changes in system design; and (2) reduce SAIDI for PG&E's customers by 25 percent and SAIFI by 33 percent.
PG&E states that its reliability performance over the past four years has been better than the adequate service standard established in its 1999 GRC (D.00-02-046). Also, its performance has been generally consistent with the more stringent targets established by the Commission as part of PG&E's 2005-2007 Reliability Incentive Mechanism (D.04-10-034). However, according to PG&E, the outages during the heat storm of 2006 prompted it to explore ways to improve reliability performance, and the 2007-2008 storm season reinforced the need to improve performance.
After considering its reliability performance, PG&E decided the most prudent approach would be to focus on strengthening the grid, increasing its flexibility, and installing automation to improve base reliability. PG&E believes that its customers will be best served by improving base reliability thereby providing performance benefits every day of the year - not just during extreme events. However, PG&E adds that the proposed infrastructure will also help reduce the duration and extent of outages during extreme or lower probability events and provide long-term benefits to its customers.
As indicated previously, CUE, ESC, and CCSF generally do not dispute the need for Cornerstone, while TURN, DRA, and CFBF argue that there is no demonstrated need for the proposed program.
6.1. Discussion
To begin, we note TURN's statement regarding the identification of Cornerstone as a way out of the hole created by the shortfall in its "Business Transformation" efforts. DRA also noted references linking Cornerstone with PG&E's attempts to reach an 8%+ compound annual growth in earnings per share. We understand that discussions with, and presentation to, investors would likely include the identification of specific planned projects and the relationship of such projects with respect to earnings and potential growth in earnings. We do not know whether or not Wall Street-related motivations for Cornerstone were significant or overriding in PG&E's formulation of the scope and cost of Cornerstone. However, our determinations in this proceeding are devoid of such concerns. This decision addresses the need for improving PG&E's electric distribution reliability, not the need for maintaining or increasing shareholder earnings.
With respect to PG&E's statement that whether or not it should proceed with Cornerstone and provide its customers with a new level of improved reliability is fundamentally a policy question, our overarching policy is that PG&E must provide reliable electric service to its customers. However, that alone is insufficient reason for approving Cornerstone. We also have the obligation to ensure that rates are reasonable. Whether characterized as a policy or a basic ratemaking principle, for a capital program or project such as Cornerstone, there must be a compelling demonstration of need. A broad policy such as the desirability of maintaining or improving electric distribution reliability can only be implemented at the program or project level if there is demonstrated need for the particular programs or projects. PG&E has the burden to demonstrate such need for Cornerstone. After considering the evidence, we conclude that the need for Cornerstone has not been demonstrated.
First of all, the scope and costs of Cornerstone are substantial. While the revenue requirements for the years 2010 through 2016, as calculated by PG&E, amount to $1.1 billion, cost recovery for the project will extend far beyond that timeframe and result in a revenue requirement totaling closer to $6 billion. Also, while the outages during the heat storm of 2006, the 2007-2008 storm season, and Commissioners' comments with respect to outages are reasonable factors for PG&E to consider in evaluating the state of its electric distribution reliability, these factors alone are not sufficient for determining that a program of Cornerstone's magnitude is necessary. PG&E acknowledges that Cornerstone will not prevent infrastructure failures, but states that, in general, the proposal will allow PG&E to restore service to customers faster and to isolate impacted lines to minimize the number of customers affected by such failures. While reducing the impacts of outages is a worthwhile goal, as discussed later in this decision, a significantly less costly program from that proposed in Cornerstone can still capture a substantial amount of such benefits. There is no good evidence to indicate what level of overall improved reliability is necessary or appropriate. Without knowing this, there is no way for us to determine that a program as substantial as Cornerstone is necessary.
While historical SAIDI and SAIFI comparisons indicate that PG&E's reliability is lower than specified comparison groups, there are reasons for the discrepancies, and the Commission has previously stated:
As we have found in previous decisions, it is not particularly useful to compare utilities with different customer counts, different geography and weather patterns, different system configurations, not to mention different methods of calculating SAIDI, SAIFI, and MAIFI. Given these factors, it is extremely unlikely that any two utilities would ever achieve similar performance results; therefore, we are reluctant to place much faith in such comparisons. We believe that the more appropriate comparison to make is a comparison between PG&E's historical performance and its current performance.6
PG&E has not provided any compelling reasons for changing this previous determination. The data simply shows that, with all the indicated qualifications, PG&E's electric reliability is lower than groups of other utilities. It does not demonstrate the need to narrow that gap to any particular level, if at all.
At this point, the more compelling evidence, with respect to the need for Cornerstone, is that:
1. PG&E's current electric distribution reliability is at least adequate, as established by the Commission in D.00-02-046.
2. Projects necessary to maintain this adequate level of electric distribution reliability are addressed in PG&E's GRCs, including the current 2011 GRC.
3. A value of service (VOS) study was conducted by PG&E in 2005.7
4. In the 2005 VOS study, it is indicated that current PG&E customers in all classes report in high numbers that the service they are receiving meets or exceeds their expectations for service quality and that most customers participating in the research are receiving acceptable service, as a function of outage frequency, for service interruptions of all types.8
5. There is no new VOS evidence that supersedes the 2005 VOS study.
The preponderance of evidence does not support the need for a program with the scope and cost of Cornerstone. For that reason, PG&E's request for cost recovery of Cornerstone will be denied.
5 Commission President Peevey and Commissioner Simon made comments on PG&E's reliability performance at the July 26, 2007 Commission meeting.
6 D.04-10-034, at 73.
7 The 2005 Value of Service Study Pacific Gas & Electric Company, dated December 14, 2005, was prepared for PG&E by Freeman, Sullivan & Co. The Executive Summary is contained in Exhibit 103.
8 See Exhibit 103, Executive Summary, at 6.
