IV. Standard

Section 368(e) directs PG&E to restrict its expenditures to those that enhance⁶ transmission and distribution system safety and reliability. The parties do not dispute that in D.96-12-077, the Commission interpreted the code to require these expenditures to be incremental to expenditures authorized in PG&E's 1996 GRC. Nor do the parties dispute the specific accounts at issue, as laid out in D.96-12-077, Attachment A. It is also clear that parties agree that in D.98-12-094, the Commission interpreted "enhance," in the context of § 368(e), as not restricting PG&E's expenditures to only new activities.

PG&E argues that § 368(e), D.96-12-077, and D.98-12-094 only require PG&E to do three things to be assured recovery from ratepayers of the § 368(e) revenues it spent: (1) establish the balancing account; (2) to detail the accounting that it would use to track the incremental funds authorized in § 368(e) in a manner distinct from funds authorized in the 1996 GRC; and (3) incorporate specific tariff language and the specific accounts and capital programs set forth in Attachment A of D.96-12-077.

PG&E does not believe that it must demonstrate that the expenditures enhance transmission and distribution system safety and reliability. In support of its position, PG&E argues that in D.96-12-077, the Commission expressly rejected the Office of Ratepayer Advocates' (ORA) and The Utility Reform Network's (TURN) request that PG&E be required to describe in detail the intended uses of the revenue increases and how the revenues will be applied to enhancements to system safety and reliability.

PG&E is partially correct that in D.96-12-077, the Commission directed PG&E to establish a balancing account and specified the transmission, distribution, and capital-related accounts where the incremental revenues could be recorded. But PG&E downplays the stated purpose of the Commission's direction: to track PG&E's expenditure of the incremental revenues and to assist the Commission in performing its later ratemaking duties. PG&E characterizes the decision as setting out all of the requirements for recovery of § 368(e) expenditures from ratepayers, and that the listing of the accounts established a "work-saving proxy." PG&E is wrong. Rather, D.96-12-077 establishes a balancing account that will allow the Commission to meet the requirements of the latter part of § 368(e), specific to disposition of excess revenues. The decision affirmatively states that "[p]roceeds from the base revenue increases authorized in § 368(e) are to be used only to enhance transmission and distribution system safety and reliability." (70 CPUC2d 207 at 232, Conclusion of Law 10.)

Contrary to PG&E's argument, the decision does not expressly reject ORA's and TURN's request for descriptions of the intended uses of the revenue. Instead, the decision makes no mention of the request. PG&E is correct that the Commission did not adopt the request, but that does not preclude ORA and TURN from arguing that PG&E must demonstrate now that the expenditures were for safety and reliability enhancements.

In D.98-12-094, upon consideration of rehearing of D.96-12-077, the Commission characterized § 368(e) as allowing PG&E to devote the incremental revenues to activities with the purpose of improving the safety and reliability of PG&E's transmission and distribution system. Establishing a tracking account does not eliminate the restriction on the use of the incremental revenues to activities that "enhance" (as stated in § 368(e)) or "improve" (as stated in D.98-12-094) the safety and reliability of PG&E's transmission and distribution system. Absent a consideration of whether the incremental revenues were spent on enhancements to safety and reliability, the Commission could not fulfill the requirements of § 368(e). We read § 368(e) to provide the incremental revenues for enhanced safety and reliability, not enhanced spending authority.

Further, we agree with ORA that PG&E's interpretation would not give meaning to all of the language of the statute. It directs how the increased revenues are to be used. The statute contemplates that some revenues may not be used, or may be used improperly, and provides for an accounting of any revenues that are not expended for the stated purpose.

For these reasons, our consideration of whether the incremental revenues were spent on authorized activities will include consideration of whether:

(1) costs recorded were incremental to the costs authorized in the 1996 GRC;

(2) the activities enhanced or improved transmission and distribution system safety and reliability; and

(3) the costs were reasonably incurred.

Setting aside the disagreements among the parties on the standard that must be met pursuant to § 368(e), we note that all parties were advised that the Commission would consider the reasonableness of the expenditures. The ORA 1997 and 1998 Reports identified the reasonableness of the expenditures as an issue in this proceeding, and in its Protest, ORA again raised the issue. At the prehearing conference (PHC) held in this proceeding on May 17, 1999, when the parties and the Assigned Commissioner and Administrative Law Judge (ALJ) were discussing the proper scope of the proceeding, the reasonableness of the expenditures was highlighted. In the Scoping Memo and Ruling, the Assigned Commissioner and ALJ stated that "[n]othing in § 368(e) changes the Commission's longstanding obligation to ensure that the rates are just and reasonable (§ 451)." (See June 24, 1999 Ruling, p. 2.) PG&E chose to not make an affirmative reasonableness showing, but rather, to continue to argue whether such a showing is required. PG&E only provided a showing on the activities and accounts that were challenged, and then, only in rebuttal testimony.

Because of PG&E's failure to make an affirmative reasonableness showing, TURN argues that the Commission should address the disputed amounts based on the record developed in this proceeding and direct PG&E to supplement the record. Under TURN's proposal, the decision on the record developed to date would be an interim decision. The supplement PG&E would file after the issuance of the interim decision would address all of the expenditures included in its 1996 and 1997 compliance reports that are not specifically allowed or disallowed in the interim decision. In the supplement, PG&E would have to demonstrate not only that the costs are incremental but also that they were incurred for reasonable activities that enhance transmission and distribution system safety and reliability.

TURN supports this "middle-ground" approach by bounding it with two alternatives. First, TURN argues that an appropriate, but difficult-to-justify, response to PG&E's failure to demonstrate the reasonableness of its expenditures might be to completely deny PG&E any recovery. But, as TURN acknowledges, § 368(e) intends for PG&E to be provided with some money to be used to enhance its system safety and reliability, and approving no cost recovery for that purpose would be hard to justify as consistent with the statute. Second, TURN proposes that the Commission may even wish to apply a "time-saving proxy"⁷ for determining the likely reasonable level of costs that should be recovered under § 368(e). The proxy would be determined by calculating a percentage by comparing the total amount of disallowance proposed by TURN and ORA, and the total adopted disallowance for those disputed expenditures. This percentage could then be applied to the remainder of the § 368(e) expenditures PG&E seeks to recover. The Commission could then allow recovery of that reduced amount and avoid the supplement and related proceedings.

TURN argues that PG&E is asking the Commission to approve all expenditures that have either not been challenged or where the Commission agreed with PG&E's position. This approach is flawed, TURN argues, because it would relieve PG&E of the burden of demonstrating that its expenditures were consistent with the statutory directive, and it would effectively shift the burden of proof away from PG&E.

PG&E claims that TURN did not raise any issue regarding the reasonableness of PG&E's costs prior to closing argument. It argues that TURN should have moved for the Commission to direct PG&E to include a specific showing on reasonableness shortly after the issuance of the scoping memo ruling, rather than waiting until briefs to argue for a supplemental showing. Alternatively, PG&E argues, TURN could have issued data requests questioning the reasonableness of the level of costs. It also could have raised the reasonableness of PG&E's costs in its filed testimony. PG&E states that while it bears the burden of proof, ORA and TURN bear the burden of producing evidence to support their specific recommendations. It goes on to say that TURN failed to recommend any specific adjustments to PG&E's requested recovery based on unreasonableness.

PG&E is missing the point of the TURN argument. Nowhere in its initial showing, comprised of two reports and its application, does PG&E state or demonstrate that the costs for which it seeks recovery were reasonably incurred. The activities associated with the costs are nowhere described in those documents except by the account name in which the costs were entered, notwithstanding PG&E's statements that the reports "detail" the spending of system safety and reliability funds. It is only in rebuttal testimony that PG&E describes in any detail the activities associated with the costs, and then only for those costs that ORA or TURN challenge. By this approach, PG&E has effectively tried to put the burden on ORA and TURN to prove the costs are unreasonable. PG&E all but concedes that it has shifted the burden when it argues on brief that:

"TURN has failed to recommend any specific adjustments to [Pacific Gas and Electric Company's] Section 368(e) recovery based on unreasonableness, let alone provide any evidence to support specific recommendations." (PG&E Reply Brief, p. 36, emphasis added.)

PG&E goes on to argue that TURN cannot ignore the issue of reasonableness after having asked the Commission to include it in the scope of the proceeding. That is correct, but it is perhaps more important that the Applicant - the party that admittedly bears the burden of proof - not ignore an issue included in the scope of the proceeding.

PG&E has chosen to ignore its responsibility to demonstrate that its § 368(e) costs were reasonably incurred. It argued at the PHC, where the scope of the proceeding was discussed, that it need only demonstrate that the additional funds were used for enhancing transmission and distribution system safety and reliability, and that the funds expended were incremental to the funds authorized in the 1996 GRC decision. It argues that merely recording the expenditures in the accounts identified by the Commission constitutes demonstrating the funds were used for safety and reliability enhancement.

After hearing that argument, the assigned ALJ and Assigned Commissioner ruled "this is the appropriate proceeding to consider whether PG&E reasonably incurred the costs for which it now seeks recovery." (Scoping Memo and Ruling, June 24, 1999, p. 2.) In the face of that ruling, PG&E continued to present its case, with the introduction of rebuttal testimony and in evidentiary hearings. Pursuant to Rule 2.6 of the Commission's Rules of Practice and Procedure, it could have amended its initial showing to address the issue of reasonableness. It chose not to amend its showing, and so the Commission must consider the reasonableness of PG&E's § 368(e) expenditures absent a direct showing by PG&E, and with a rebuttal showing on the portion of expenditures that were challenged.

We agree with TURN that complete rejection of any recovery of expenditures made to purportedly enhance transmission and distribution system safety and reliability is not justified on this record. We also regard such an approach contrary to our understanding of § 368(e). While the code is written to account for revenues that are not used, or are recorded improperly, it contemplates that some amount of reasonably-incurred additional expenses will be recoverable. However, to the extent that PG&E deliberately and after repeated notice made no argument in support of its expenditures, we find the use of rebuttal testimony to be inadequate for making a prima facie case and as a result, we disallow recovery for all reasonable challenges raised by ORA and TURN. The disallowances and deferrals are summarized below and detailed in the next section.

We disallow:

1. $27 million for administrative and general (A&G) expense in 1997 and 1998;

2. $450,000 for advertising expenses in 1998;

3. $499,295 in automatic meter reading (AMR) costs in 1998;

4. $5.6 million in 1997 and $13.9 million in 1998 for common plant capital expenditures;

5. $7.01 million in 1997 and $ 6.3 million in 1998 for Distribution and Customer Service Support (DCSS) expenses;

6. $2.06 million in 1997 restructuring-related expenses;

7. $2 million in 1998 pole treatment expenses;

8. $929,000 in 1998 capital expenditures for meter reading vehicles;

9. $940,000 in 1998 expenses and $1.46 million in 1998 capital expenditures for Year-2000 compliance; and

We defer to a separate future application:

1. Catastrophic event-related costs, capital and expense:

a. $4.3 million in expenses and $19.6 million in capital expenditures for 1997; and

b. $12.922 million in expenses and $15.312 million in capital expenditures for 1998.

We reject ORA and TURN's proposed prior-period adjustments for cash accounting by PG&E for various tree-trimming expenses.