11. Cost Recovery

PG&E proposes the following regulatory ratemaking treatment for the Cornerstone costs:

· Rates will be set initially to recover forecast Project costs, with true-up to actual costs achieved through a proposed new balancing account.

· PG&E requests that the Commission find the forecast costs for the initiatives in this Application reasonable. If, after completing four years of Project work, PG&E's forecast of costs to Project completion has increased, PG&E will request Commission approval of the revised forecast.

· Distribution revenue requirements and rates covering this Project will be revised annually in the Annual Electric True-Up (AET) advice letters, or as otherwise authorized by the Commission, to include the forecast revenue requirement for the year in the Distribution Revenue Adjustment Mechanism (DRAM) base revenue amount and an adjustment for the difference between the forecast and recorded revenue requirement.

PG&E believes this proposal fairly balances risks between shareholders and customers, while allowing the Project to proceed in a timely manner, consistent with Commission direction. Furthermore, with this proposal, PG&E's shareholders will also receive assurance of cost recovery in a timely manner.

While DRA is recommending no ratepayer funding for Cornerstone, if funding is authorized, DRA recommends a one-way balancing account to track the expenditures. DRA also opposes PG&E's proposal that after four years of project work, PG&E can seek recovery of additional expenditures through its fifth annual report. DRA states that PG&E's proposal is equivalent to giving PG&E a signed blank check, as this would provide PG&E a second opportunity to seek additional funding for the same project through an annual report without any credible opportunity for DRA and other intervenors to review and analyze the reasonableness of any requested additional costs. Therefore, DRA is recommending that, if the Commission authorizes funding for Cornerstone, the Commission adopt a firm funding level over the life of the project in which PG&E cannot recover expenditures above the Commission authorized funding level. Additionally, the one-way balancing account allows for the return to ratepayers of any authorized Cornerstone funding that is not spent by the utility.

Similarly, if the Commission opts to approve some spending and permits PG&E to institute separate ratemaking for Cornerstone, TURN recommends the following:

1. A balancing account should be a one-way balancing account. PG&E should not be provided an opportunity to spend more than any amount that is adopted as part of a ratemaking mechanism that is separate from the GRC.

2. The balancing account should be balanced on a yearly basis-if there is underspending in a particular year, the balance must be returned to ratepayers in the concurrent year, and not at the proposed end of the program.

3. The Commission should adopt the amount of funding it decides is appropriate, decide how much of that amount should be in spent in each year of the program, and then only allow recovery for the first three years of the program. This will give PG&E a chance to prove its performance. If it does prove its performance in the first three years of the program, then it can come back in the subsequent rate case and request whatever additional funding it might need for a reasonable extended program.

11.1. Discussion

Because of the way in which this application is resolved, it is necessary to modify PG&E's cost recovery proposal. First of all, as opposed to PG&E's request for a six-year cost recovery authorization (2011-2016), the cost recovery authorized by this decision is for the period 2011 through 2013 only. From 2014 on, issues related to increasing electric distribution reliability will be addressed in the GRC process.

To ensure that authorized funds are used as intended, we will adopt PG&E's proposal to initially set rates based on the adopted forecast of costs and to establish a new balancing account. As described earlier, PG&E has flexibility in how it spends authorized funds, with respect to the specific projects that are initiated and completed. Also, in determining optimal spending, we will give PG&E the flexibility of moving funds from one year to another, within the three year period. As proposed by PG&E, distribution revenue requirements and rates covering the projects authorized by this decision will be revised annually in the AET advice letters to include the forecast revenue requirement for the year in the DRAM base revenue amount and an adjustment for the difference between the forecast and recorded revenue requirement. However, beginning in 2014, use of a separate balancing account to accumulate revenue requirements will end and project costs should be recovered through the GRC process.

PG&E should control its expenditures to remain within the three year capital and expense amounts adopted by this decision. We will therefore not provide the opportunity as part of this proceeding for PG&E to recover any costs in excess of what is authorized over the 2010 through 2103 period. However, to the extent that PG&E does not spend the adopted amounts, appropriate refunds or credits to ratepayers should be made.

With respect to reasonableness, due to the flexibility that PG&E has in spending authorized funds, we are not able to determine at this time whether or not the company's decisions regarding the specific projects to fund and when to construct them are reasonable. For that reason, we will require PG&E to submit annual reports as discussed below. Other than that, expenditures authorized by this decision will be subject to the same reasonableness standards as for projects that are forecasted and adopted in the GRC process. That is, once completed, there is no requirement for a reasonableness showing or review. However, parties are not precluded from raising issues of reasonableness as part of future GRC proceedings where the recorded costs of the projects are embedded in rates. Whether or not PG&E optimized its expenditures in a reasonable manner might be such an issue. If necessary, we can make prospective adjustments to rates in the future.

Since no party objects to the results of operations model that PG&E used to calculate the revenue requirements for this proceeding, it is reasonable for PG&E to use that model to calculate the revenue requirements for the expenditures adopted by this decision. PG&E should include the details of the revenue requirement calculations in the advice letter that implements Cornerstone related rate changes for 2011.