VI. Catastrophic Event Memorandum Account Costs

ORA argues that PG&E recorded as § 368(e) related expenses certain costs that are more properly recorded in the CEMA. ORA claims that PG&E recorded $23.9 million in § 368(e) accounts that should have been recorded in CEMA accounts in 1997. It claims that in 1998, PG&E recorded $28 million in § 368(e) accounts that should have been recorded in CEMA accounts. These costs were incurred to restore service after the 1997 New Year's flood and February 1998 storms. ORA is not recommending the Commission deny PG&E the opportunity to recover these costs, only that PG&E should seek recovery pursuant to § 454.9, rather than § 368(e). ORA emphasizes that CEMA costs are ineligible for recovery in a base revenue requirement, and that § 368(e) provides for enhancement to base revenues.

In addition, ORA argues that the expenditures were made merely to restore service, not to enhance service. ORA argues further that PG&E has utilized insurance proceeds to offset expenditures recorded as § 368(e) expenditures, when the Commission requires that insurance offset CEMA recovery.

ORA concedes that § 368(e) mentions "emergency response" as proper spending, but draws a distinction between CEMA-recoverable costs and § 368(e) emergency response costs. For example, CEMA-recoverable costs must be costs associated with a declared disaster. ORA argues that PG&E is commingling CEMA-related costs between two differing statutory provisions, and that the Public Utilities Code is not designed to give utilities various options as to how to recover the same costs. ORA points out that the proposed settlement in PG&E's application for recovery of CEMA costs (A.99-01-011) explicitly allows PG&E to request recovery of any CEMA-related costs excluded in this proceeding in a subsequent CEMA proceeding.

PG&E argues that, from a ratepayer perspective, the mechanism through which these costs are ultimately collected is irrelevant, and that it will promptly file a request for recovery through CEMA following a decision in this proceeding. PG&E also argues that ORA ignores the statutory language that includes emergency response among the activities that may be funded with the incremental revenues § 368(e) provided. PG&E also argues that the resolution that established CEMA (Res. E-3238) states that recovery may be limited by consideration of the extent to which the level of losses are already built into existing rates, and that recovery through § 368(e) means the losses are built into rates. It also argues that the costs are incremental to the 1996 GRC because in forecasting costs for GRC purposes, PG&E does not include costs associated with events like the 1997 New Year's flood and February 1998 storms.

Finally, PG&E argues that the amounts ORA identified as storm-related are overstated. PG&E states that it identified storm-related expenditures of $5.406 million for 1997 and $23.683 million for 1998.

TURN disputes PG&E`s assertion that ratepayers are indifferent to the mechanism used for recovery. TURN explains that the allocation of the underlying costs among various customer classes is likely to be very different as a result of the recovery mechanism. If these costs are recovered through CEMA, TURN states that they are likely to be recovered out of "headroom,"¹⁵ which results in a total EPMC allocation, or to be allocated by function to generation, distribution and transmission. If these costs are recovered in this proceeding, PG&E proposes to treat them as part of its distribution revenue requirement, which would result in the vast majority of these costs being recovered from residential and small commercial customers.

We agree with ORA and TURN that it is appropriate for PG&E to seek recovery of the storm-related costs in an application filed pursuant to § 454.9. PG&E acknowledges that the expenses and capital costs associated with restoring service after the 1997 New Year's flood and the February 1998 storms, are the kinds of expenses and costs that it would usually record to the CEMA. The costs and expenses eligible for recovery under § 368(e), on the other hand, are costs of a type that is usually included in base revenues, that enhance or improve transmission and distribution system safety and reliability, and that are incremental to the revenues authorized in the 1996 GRC. PG&E acknowledges that the revenues authorized in a GRC do not include the costs and expenses associated with declared disasters. It, therefore, acknowledges that its CEMA expenditures cannot meet the § 368(e) "incremental" criteria.

Finally, TURN has made it clear that choosing the correct mechanism for recovery is not just an exercise in regulatory precision. The mechanism determines the method of calculation for sharing these costs among customer classes.

The parties also dispute the amounts that should be referred to a CEMA application. As noted above, PG&E states that the amounts that ORA identified as storm-related are overstated.

Here, in summary, are the amounts in dispute:

Storm-Related Costs
($ Millions)

Dollars In Millions
	1997		1998		Total
	Capital	Expense	Capital	Expense
PG&E	$0.000	$ 5.406	$ 8.371	$15.312	$29.089
ORA	$4.300	$19.600	$12.922	$15.312	$52.134
Disputed Amount	$4.300	$14.194	$ 4.551		$23.045

PG&E explains the $4.551 million differences between its and ORA's 1998 expense figures. PG&E's 1998 storm-related expenses do not include $3.610 million of straight-time labor or $0.940 million of benefits associated with straight-time labor. PG&E argues that it is appropriate to include straight-time labor costs because these costs were part of the 1996 GRC-adopted amounts for the accounts identified by the Commission as eligible for § 368(e) treatment. Further, PG&E argues that straight-time labor costs do enhance transmission and distribution system safety and reliability by ensuring that the necessary personnel are available to respond during storms and other emergencies. ORA contests the exclusion¹⁶ of straight-time labor costs on four grounds:

1. that such costs are difficult to quantify;

2. that PG&E cannot determine what level of straight-time labor costs are incremental to what was in the 1996 GRC;

3. that the purported benefits associated with straight-time labor are unverifiable, soft benefits; and

4. that such costs and any benefits do not enhance system safety and reliability.

ORA explains the $4.3 million and $14.194 million differences between its and PG&E's 1997 expense and capital expenditures, respectively. It states that PG&E utilized insurance proceeds to offset these costs in this proceeding, and not just in the CEMA proceeding. PG&E conceded under cross-examination, ORA argues, that the Commission's interpretation of CEMA requires that CEMA recovery be limited by the amount net of insurance. ORA argues that to apply insurance proceeds to offset § 368(e) costs, rather than CEMA costs is, therefore, inappropriate. It also argues that PG&E should have adjusted its § 368(e) request for recovery downward by the amount it received in insurance proceeds.

PG&E claims it did record insurance proceeds against the accounts in which the costs were originally charged, but in 1998 rather than in 1997. Had it not, PG&E states that the amounts recorded in its § 368(e) balancing account for these CEMA-related costs would have been approximately $4 million higher.

We disagree with PG&E. We cannot pick and choose portions of CEMA related costs to be recoverable under § 368(e) because catastrophic events are, by definition, unforeseen. Again, it is unreasonable for PG&E to rely on rebuttal of ORA and TURN in light of the inadequate initial filing. Nor should it benefit by recovery under § 368(e) from aggregating CEMA costs with § 368(e) costs. We will exclude these costs with respect to § 368(e) recovery here and PG&E may, if it chooses, seek recovery by making an adequate showing of reasonableness in its CEMA application.

With respect to the disputed 1997 dollars, we agree with ORA that the insurance proceeds should be recorded in the appropriate CEMA accounts. This is consistent with our conclusion above that recovery of the storm-related expenditures should be brought before the Commission in a CEMA, or § 454.9 application. Therefore, we adopt ORA's figures and remove from § 368(e) recovery $4.3 million in 1997 storm-related expenses and $ 19.6 million in 1997 storm-related capital expenditures. PG&E may include, and justify in detail, those amounts in any new CEMA application it may choose to file.