3. Tiers of Review

Historic advice letter practice, as set forth in GO 96-A, has become inadequate in relation to the volume and variety of advice letters submitted for Commission review in recent years. For example, GO 96-A does not systematically distinguish advice letters from formal proceedings, or sort advice letters by type, or explain how, when, or by whom an advice letter would be approved or rejected. The proposed tier structure for advice letter review should improve this situation dramatically.

For all advice letters in the energy, telecommunications, and water industries, we propose to distinguish fundamentally between those advice letters that the reviewing Industry Division may approve or reject (and that may be deemed approved under certain conditions), and those advice letters whose disposition will require a Commission resolution. In short, we separate advice letters into two broad groups: advice letters disposed of by staff, where approval or rejection is ministerial; and advice letters disposed of by Commission resolution, where approval or rejection requires the exercise of discretion.

For water, the mode of disposition is the only generic distinction we make among advice letters. For energy and telecommunications, advice letters submitted for staff disposition are further divided between those that are "effective pending disposition," i.e., they may be implemented before approval ("Tier 1"), and those that are effective, and may only be implemented, on or after approval ("Tier 2"). Advice letters requiring a Commission resolution go to "Tier 3" under the Energy and Telecommunications Industry Rules.

As mentioned above, an advice letter may be deemed approved in limited circumstances. Only an advice letter that the utility has properly submitted for staff disposition (for water, the "Ministerial Tier;" for energy and telecommunications, Tier 1 or Tier 2) may be deemed approved. If such an advice letter is not timely protested, it will be deemed approved at the end of the "initial review period," unless by that date the reviewing staff either rejects the advice letter or states in writing that review of the advice letter is ongoing.⁴

The tier under which a utility submits an advice letter does not irrevocably dictate the mode of disposition of that advice letter. For example, an issue may arise in the review of a Tier 1 or Tier 2 advice letter that requires the exercise of judgment about the meaning of a statute, so instead of the delegation to staff normal for the tier, disposition of that advice letter would be by Commission resolution. (This change in mode of disposition generally will delay the disposition (due to the statutory public review and comment requirements that apply to Commission resolutions), but the utility will not have to re-submit its advice letter, nor will there be a new or extended protest period.) On the other hand, a Tier 3 advice letter may be clearly erroneous, e.g., it may contain errors of arithmetic or clear inconsistencies with the statute or Commission order that purportedly authorizes the advice letter. In those situations, Industry Division staff will reject the advice letter without going through the fuss and delay of putting a draft resolution before the Commission. Whenever disposition of an advice letter would be a ministerial act, staff has delegated authority under GO 96-B to make that disposition.

If a utility designates the wrong tier for an advice letter, the appropriate action is for the staff of the reviewing Industry Division to reject the advice letter without prejudice whenever the designated tier is lower than the proper tier.⁵ In other words, if the utility has designated for disposition by staff an advice letter that, under the applicable Industry Rules, belongs in the tier for advice letters to be resolved by the Commission, staff will reject the advice letter on that basis. The reason for rejection in this situation is that the utility improperly designating a lower tier could thereby gain improper advantages.

For example, where an advice letter is improperly submitted for filing under Tier 1, the utility generally will have implemented the action proposed in the advice letter without prior regulatory approval. If the action in fact was of a kind that requires prior regulatory approval, implementation without such approval may harm consumers, competitors, or both. Similarly, if a utility designates Tier 2 for an advice letter that should be designated Tier 3, the utility is saying that the advice letter could be deemed approved at the end of the initial review period, whereas Tier 3 advice letters, in fact, can only be approved and become effective pursuant to Commission resolution.

There is one situation where the designation of a wrong tier does not result in rejection without prejudice. Specifically, if a utility designates Tier 3 for an advice letter that should be reviewed under a lower tier, the reviewing Industry Division will approve or reject the advice letter under Tier 2. In other words, the utility cannot compel a Commission resolution on an advice letter that is subject to Industry Division disposition under this GO. However, by the utility's wrongly designating Tier 3 for an advice letter, that advice letter cannot be deemed approved.⁶

Along with tiers of review, GO 96-B introduces two major concepts already mentioned, namely, "effective pending disposition" (Tier 1 advice letters) and "deemed approved" (Tier 1 and Tier 2 advice letters). The following sections of today's decision contain a detailed explanation of these concepts in practice.

3.1 Concepts Underlying Tier 1

Advice letters are an informal procedure used by the Commission to deal with types of utility requests that are usually minor, noncontroversial, or otherwise appropriate for processing without hearings or a formal evidentiary record. Most often an advice letter is submitted to effect a tariff change to comply with a prior Commission order, or to document the specific implementation of a utility program for which the utility already has general authorization by statute or Commission order. No protest is ever filed in the large majority of advice letters. Also, in many instances, approval or rejection of an advice letter is ministerial, i.e., reviewing staff can determine the advice letter's validity through objective review of the supporting materials and authority cited by the utility. The Commission may lawfully delegate such determinations to its staff.

In proposing the concept of advice letters "effective pending disposition" (i.e., implemented at some time before their approval), we had in mind certain of those advice letters whose review and disposition can be delegated to our staff. The Energy and Telecommunications Industry Rules specify those subject matters that, under the current regulatory structure in those industries, seem appropriate for handling by means of advice letters that are effective pending disposition. We expect that our creating this new "tier" for the review and disposition of such advice letters will both help the Commission and the stakeholders to focus their resources on more controversial matters and ensure that less controversial matters do not fall through the cracks. With thousands of advice letters submitted to the Commission each year, improving the efficiency of our review process has great benefits for everyone.

The main reason to allow many advice letters to go into effect pending disposition, however, is to better accommodate innovation and competition in the marketplace. According to some commenters, a utility that must publicly announce and then await regulatory approval for a new product or service will often find that competitors are able to copy the program before the utility has had any significant chance to benefit from its initiative. As a result, the incentive to innovate is reduced, nominal competitors tend to "me too" each other so that prices move in lockstep, and any genuinely innovative advice letter is correspondingly more likely to elicit protests from competitors who hope to gain time to catch up with similar proposals of their own. By allowing certain types of advice letters to take effect before regulatory approval, we can fulfill our responsibilities while giving greater scope to market forces.

3.2 Tier 1 in Operation

Most commenters share our enthusiasm for the "effective pending disposition" concept, but their comments demonstrate the need to address certain questions about how the concept works in practice. These questions are: Must the utility implement such an advice letter immediately, or can the utility await approval? What is the procedure when, during review of such an advice letter, an issue arises that must be resolved by the Commission? Finally, what is the procedure when the utility mistakenly or deliberately requests the "effective pending disposition" tier for an advice letter that in fact does not qualify for such treatment? We address these questions below, in the order stated.

· An Advice Letter Whose Subject Matter Qualifies for Tier 1 May Be Submitted Under Tier 2 ("Effective Upon Staff Approval") if the Utility Chooses.

A necessary condition to our allowing any advice letter to go into effect before it has received our approval is that the utility must be prepared to undo any actions the utility has taken to implement the advice letter if the advice letter ultimately is not approved. The kinds of remedies that are appropriate will depend on the particular advice letter.⁷ Beyond such remedies as we may require, the utility in this situation will likely suffer loss of credibility and good will - losses that may be very damaging in a competitive marketplace.

We think the severity of these potential losses helps to ensure the integrity of the Tier 1 process.⁸ However, some commenters feel that there may be gray areas where the propriety of a Tier 1 designation is not clear. In any case, they suggest that a utility that prefers to obtain prior regulatory approval should not be forced to implement an advice letter in advance of such approval.

There is a simple way to address this concern, namely, allow the utility submitting an advice letter that would qualify for Tier 1 to nevertheless submit the advice letter for processing under Tier 2 (effective upon staff approval). We have made changes to the General, Energy, and Telecommunications Rules to give utilities this choice.

· Industry Division Staff Will Prepare a Draft Resolution for the Commission's Consideration If an Issue Arises in Advice Letter Review That the Commission Must Address.

All of the Industry Rules separate advice letters generally between those whose subject matter seems to be within staff's delegated authority to review and resolve, and those whose subject matter seems to require resolution by the Commission itself. There will be instances, however, where the utility submitting an advice letter has properly designated one of the lower (i.e., staff disposition) tiers and yet, because of the nature of an issue raised by a protestant or discovered by staff, the advice letter requires exercise of discretion to approve or reject, and so must go to the Commission.

If staff determines that a Tier 1 advice letter will require disposition by the Commission, staff will so notify the utility and any protestants by the end of the initial review period. The staff notification does not act to suspend the effectiveness of an advice letter already in effect; however, the notification will extend the review period and prevent the advice letter from being deemed approved.⁹

Unfortunately, delay in disposition is almost inevitable if a Tier 1 advice letter requires a Commission resolution, because Industry Division staff will have to write a draft resolution, place it on the Commission agenda, and (in many instances) circulate it for public review and comment pursuant to Pub. Util. Code § 311(g)(1). Nevertheless, proposed GO 96-B will improve significantly on current practice in that the utility and any protestants will have better information on the status of pending advice letters and will know the steps for concluding the review process.

We emphasize that a change in the mode of disposition from a staff notification (the usual mode of disposition for advice letters in Tier 1 or 2) to a Commission resolution (the mode of disposition for advice letters in Tier 3) does not in itself trigger a new protest period. Finally, the foregoing discussion relates to advice letters that were properly designated Tier 1 or 2. We turn now to the problem of an advice letter improperly designated Tier 1.

· An Advice Letter Improperly Designated Tier 1 Will Be Rejected Without Prejudice and May Require Remedial Action.

Because a utility can implement a Tier 1 advice letter before receiving regulatory approval, the improper submittal of an advice letter under Tier 1 is consequential. We see two likely scenarios for this mishap. First, there may be a good faith issue over whether a given advice letter meets the requirements for Tier 1. Second, the improper submittal may be knowing and deliberate, e.g., for the sake of competitive advantage.

As we discussed earlier, we expect that few utilities would run the risk of having to undo an action taken to implement an advice letter improperly designated Tier 1. The costs, the damage to the utility's reputation, and the possibility of sanctions (especially in our second scenario) should give pause to any management that contemplates running this risk. Nevertheless, we need to be clear on how staff will respond, should either of these scenarios occur.

Whenever an issue arises over whether an advice letter was properly designated Tier 1, the reviewing Industry Division will analyze the issue, and if staff determines that the Tier 1 designation was improper, staff will reject the advice letter without prejudice, its effectiveness will cease, and the Commission will further direct the utility regarding any other remedial actions necessary to undo the advice letter. If staff is unable, before the end of the initial review period, to determine the propriety of the Tier 1 designation, staff will so notify the utility and any protestants prior to the date that the advice letter would otherwise be deemed approved.

3.3 Advice Letters Deemed Approved

Historically, and still today, many advice letters are simple and uncontroversial, as when a utility submits revised tariff sheets to implement specific directions in a statute or Commission order. The revised tariff sheets are readily checked for conformity with the authority cited, and the large majority of such advice letters do not elicit any objection from the reviewing Industry Division or third parties. The "deemed approved" concept is carefully tailored to this situation.

The concept, in brief, is that an advice letter will be deemed approved at the end of the initial review period¹⁰ if the advice letter satisfies all of the following conditions. First, the advice letter is one whose subject is suitable for Industry Division disposition, pursuant to the applicable Industry Rules. Second, the advice letter is unprotested, i.e., no protest has been submitted within the 20 days following the date of filing. Third, there has been no disposition, and the Industry Division has not extended the review period or suspended the advice letter. The General and Industry Rules govern the types of advice letters that may be deemed approved. In particular, the "Ministerial Tier" under the Water Industry Rules, and Tiers 1 and 2 under the Energy and Telecommunications Industry Rules, list the types of advice letters that may be deemed approved.

When an advice letter is deemed approved, no written disposition is necessary; however, the approval will be reported in the Commission's Daily Calendar. Conversely, there will be a written disposition (approval or rejection) for all advice letters except those deemed approved.