6. Memorandum Account Balances

Issue: What should be the disposition of balances in memorandum accounts created by D.01-01-056 (for penalties paid and due under interruptible tariffs between October 1, 2000 and January 25, 2001).

6.1 Background

Effective January 26, 2001, we granted waiver of penalties for an interruptible customer's non-compliance with interruption requests based on a threat to public health and safety. (D.01-01-056.) This waiver continued until lifted by subsequent order in April 2001. (D.01-04-006.) Also in January 2001, we directed that utilities not bill customers for already incurred penalties, and track all penalties in memorandum accounts, for the period from October 1, 2000 through January 25, 2001. We stated that we would later give consideration to the balances in these accounts, with the possibility of waiving past penalties as part of our reassessment of the interruptible program. (D.01-01-056, mimeo., pages 1-2.)

6.2. Memorandum Account Totals

PG&E reports a memorandum account balance of $7.0 million, with approximately $1.7 million accrued during November and December 2000, and approximately $5.3 million during the second and third weeks of January 2001. PG&E says, however, that the $5.3 million might end up being less for two reasons.

First, PG&E states that tariff restrictions do not allow non-compliance penalties in a given year to exceed 200% of the participant's annual incentive level. As a result, PG&E does not apply non-compliance penalties until the following year. PG&E says the estimated $5.3 million non-compliance penalty for 2001 maybe somewhat reduced for those customers where the penalty exceeds twice their annual savings.

Second, PG&E explains that its interruptible program has a two-tier penalty level. This structure rewards customers who have achieved complete compliance during the previous year by reducing their non-compliance penalty level in the subsequent year by half (from $8.40 per kWh to $4.20 per kWh). According to PG&E, 27 interruptible customers may have their penalty rate reduced during 2001 if the non-compliance penalties are waived for the period from October 1 through December 31, 2000. PG&E states that the lowering of the penalty rate would also somewhat reduce the estimated $5.3 million for 2001.

SCE reports that non-compliance penalties for the period October 1, 2000 through January 25, 2001 totaled $199.8 million, but that the memorandum account balance is zero. According to SCE, this results from application of the limited, special opt-out for SCE customers. (D.01-04-006.) SCE customers were permitted to opt-out back to November 1, 2000 and have their non-compliance penalties waived in exchange for paying the firm service rate. SCE says penalties totaling $181.5 million (out of the $199.8 million) were waived in exchange for customers opting-out back to November 1, 2000 and paying the firm service rate. SCE asserts that it billed customers who continued on the interruptible program the remaining amount of $18.3 million for penalties incurred from October 1, 2000 through January 25, 2001, after adjustment for an increase in FSL, if any.

SDG&E states that its memorandum account balance is $1.6 million. Of this amount, SDG&E says $1.4 million is unpaid and due.

6.3. Require Collection of Balances

We require collection of the balances in the memorandum accounts. We do this for several reasons. First, granting a wavier of penalties to those customers who committed to a load reduction but did not comply would be inequitable to those who similarly committed but did comply.

Second, it would be inequitable to those customers who funded the interruptible rate discounts. That is, interruptible rate customers receive a rate discount funded by other customers in exchange for agreeing to penalties for non-compliance. It would be unfair to provide benefits in the form of both discounts and waivers of penalties to interruptible customers without any compensation to non-interruptible customers in return.

Third, everyone suffered from energy shortages and high prices during the energy crisis in the fall of 2000 and spring of 2001. This included all ratepayers, not just interruptible customers. Interruptible customers tend to be large, sophisticated customers capable of measuring risks associated with opportunities (e.g., reduced energy prices). While we suspended non-compliance penalties going forward in January 2001, it is unreasonable to expect non-interruptible ratepayers to provide an economic cushion to interruptible customers retroactively to October 1, 2000.

Fourth, interruptible customers had the opportunity to opt-out. If they did not, they were obligated to perform only within the limits of the program.

Fifth, we determined that non-compliance penalties should be waived from January 26, 2001 through April 2001 based on a threat to public health and safety. This provided an economic cushion to interruptible customers because it was in the public interest. CMTA, CIU and others seek wavier of the penalties back to October 1, 2000, largely arguing this result would be equitable, but do not convincingly show that this is necessary to promote public health and safety.

Finally, non-compliance can be an issue at any time. It would send the wrong message to waive penalties now for a period that was not subject to a State of Emergency and did not involve jeopardy to public health and safety in the same way that it did beginning later in January 2001. We seek to provide clear and consistent treatment within programs. Thus, to be fair and reasonable to all parties, balances in memorandum accounts must be collected.

CMTA and others argue that collection of balances for PG&E is unreasonably harsh since collection will be 15 to 18 months after the event. To the contrary, the customers knew that they were subject to a penalty when they failed to comply with the interruption request. We directed utilities to defer collection pending our further consideration of the matter, but there was never a statement that penalties during the October 1, 2000 through January 25, 2001 time period were waived, only that the matter was being considered. (D.01-01-056.) In fact, there would have been no need to track the balances in memorandum accounts if the decision had already been made to waive the balances. There is no element of harshness, surprise or unfairness in now directing utilities to collect memorandum account balances.

6.3.1. SCE

SCE has already billed the $18.3 million in balances due for the period October 1, 2000 through January 25, 2001. No further action is needed.

We note, however, that SCE billed the balances prematurely. Some SCE interruptible customers presumably elected to opt-out in April 2001 on a current basis, or not opt-out at all but to remain in the program. Unlike customers who opted-out back to November 1, 2000, these customers did not make the decision to have penalties waived in exchange for paying firm service rates. Waiver of penalties for those customers was not resolved until now since the decision to opt-out in April 2001 or stay on an interruptible schedule was independent of the wavier of penalty issue. Similarly, penalties incurred, if any, by customers for failure to comply in October 2000 have not been addressed until now.

If we had come to another decision, we would order SCE to refund the $18.3 million collected or billed. We do not reach that result, however, so no such order is necessary. We encourage SCE to carefully read our decisions to avoid creating issues where none would otherwise exist.

6.3.2. PG&E

We direct that PG&E customers pay memorandum account balances but permit one variation. PG&E customers may make a one-time "opt-out" decision similar to the one offered to SCE customers. In PG&E's case, the decision is an accounting matter and will serve to reconcile the memorandum account balance, but it will not change the schedule upon which the customer was served after April 2001. It will also not disturb any change the customer might have made in the November 2001 opt-out period.

SCE customers in April 2001 were permitted the option to opt-out back to November 1, 2000. We permit PG&E customers to "opt-out" or reconcile these balances for essentially the same reasons (e.g., dysfunctional market). (See, D.01-04-006, mimeo., pages 13-19.) It would be unfair to PG&E customers to have let SCE customers undo the economic penalties that otherwise accrued, but not do the same for them. Further, some PG&E customers have facilities and accounts in SCE's service area, and some business competitors of PG&E customers are served by SCE. Uniform treatment between service areas promotes reasonable equity.

6.3.2.1. Reconciliation Period November 1, 2000 Through
April 30, 2001

The reconciliation should be for the period November 1, 2000 through April 30, 2001. We use November 1, 2000 for the same reasons we did so for SCE. This promotes administrative ease, customer understanding, and minimization of disputes over effective dates and resulting dollar amounts.

We select April 30, 2001 also in relation to the experience of SCE customers. SCE customers who elected to opt-out or change FSL back to November 1, 2000 made this choice in a 15-day window that ran through May 9, 2001 (then extended to May 29, 2001). An SCE customer could have elected as early as April 24, 2001 to opt-out and, effective immediately, be treated as a firm customer from November 1, 2000 on. Alternatively, the SCE customer could have made this decision as late as May 29, 2001. We apply a uniform date to end the reconciliation for PG&E customers for the same reasons we elect a uniform start date. April 30, 2001 is a reasonable uniform date to select within the range of dates applicable to SCE customers.

We also use April 30, 2001 as a uniform date to promote equity for PG&E customers. That is, the bargain with each November annual opt-out is reduced rates for the next 12 months in exchange for a maximum number of interruptions. PG&E's total annual hours of interruption were nearly fully used by the end of January 2001, and PG&E's customers had a very high rate of compliance. PG&E customers complied with the maximum number of interruptions, and are due rate discounts for the rest of the year. We select an early date within the range of dates for the reconciliation period to provide a reasonable balance of the remaining interruptible rate discounts.

Therefore, PG&E should conduct a one-time opportunity to reconcile account balances. Customers should be given a 15-day window to exercise this option beginning upon service of notice to customers. The option should permit the customer to elect total "opt-out" of the interruptible program, or a change in FSL, for the six-month period of November 1, 2000 through April 30, 2001. The customer may "opt-out" in whole or part, and have penalties waived in exchange for paying the firm service rate.

The "opt-out" for PG&E customers, however, does not change the service the customer received beginning May 1, 2001. That is, the customer was in fact, and remains, an interruptible customer from May 1, 2001 through the November 2001 opt-out period. Further, whatever decision the customer makes now regarding reconciliation of the memorandum account balance will not disturb the customer's decision in November 2001 to have remained in, or opted-out, of the interruptible program.

6.3.2.2. Tolling of Curtailment Events and Program
Turnover

PG&E also points out the issue of whether or not to count curtailment events in the memorandum account period toward the tolling of compliance. If the events are counted, and the customer complied, the non-compliance penalty in the subsequent year is reduced by half. On the other hand, if the events are counted, and the customer did not comply, the penalty remains at its full level. Similarly, if the events are not counted, the resulting compliance rate will be affected, and that may change the subsequent non-compliance penalty.

The events in this case should not be counted toward compliance. That is, we took an extraordinary action for SCE customers, and we do so for PG&E customers, because of the unique market circumstances in late 2000 and early 2001. Just as we now allow PG&E customers to reconcile balances for those extraordinary events, we do not tally the unusual experiences during those events in a way that penalizes the customer for later events. As long as the customer met compliance criteria during periods other than the memorandum account period, the subsequent non-compliance penalty should be reduced by half.

Finally, ORA states that it does not object to an opt-out for PG&E customers back to November 1, 2000 similar to that provided SCE customers but that doing so would be unfair to PG&E's other ratepayers. This would be the case, according to ORA, since SCE customers who elected to opt-out were restricted from participating in another interruptible program for 12 months. ORA points out that PG&E customers cannot be similarly restricted. Rather, ORA says the PG&E customers will opt-out to avoid penalties, but still receive interruptible rate discounts.

We do not find this to be an impediment to our adopting the "opt-out" or reconciliation option for PG&E customers. The restriction for SCE customers was to "prevent unreasonable turnover between similar programs without benefit to the state." (D.01-04-006, mimeo., page 19.) The reconciliation option provided here does not involve the same issue of turnover between programs.

6.3.3. SDG&E

We direct SDG&E to bill its customers for memorandum account balances since SDG&E interruptible customers were free to switch to another tariff at any time. The only exception is customers on the interruptible tariff for 12 months or less. Those customers were not allowed to change schedules until the end of the year. We provide the same opt-out option for these SDG&E customers that we provide PG&E customers, and direct SDG&E to perform the same notice to its customers.

6.4. Ratemaking

TURN recommends that we direct utilities to return collected memorandum account balances to ratepayers. Otherwise, TURN fears that these non-compliance penalties may end up with shareholders. We decline to adopt this proposal.

TURN offers no compelling reason to disturb existing ratemaking treatment. As SDG&E points out, the balance in the memorandum account should be treated just as it otherwise would be treated absent the Commission action to suspend collection of some non-compliance penalties. To do otherwise would be to select one source of revenue gains but ignore revenue shortfalls. We decline to engage in a separate, complex balancing of various revenues without a very convincing reason to reverse existing regulatory treatment.

6.5. Cal Steel Petition for Modification

Cal Steel petitions for modification of D.01-04-006 with respect to the manner in which interruptible customers are permitted to "opt-out" of the program in favor of firm service. Specifically, Cal Steel asks for modification of the rule governing calculation of the amount of interruptible discount which must be repaid when a customer opts-out of the program. This in turn is related to the amount due from the memorandum account balances. SCE opposes Cal Steel's petition, and offers an alternative. We adopt SCE's alternative in part.

6.5.1. Cal Steel's Situation

Cal Steel is an SCE I-6 customer with an FSL of 5 MW, average load of 38 MW, and momentary peak load sometimes more than 60 MW. Due to plant improvements and expansions over the past 10 years, Cal Steel found it was unable to reduce its demand to 5 MW during curtailments called in Summer 2000, but did reduce demand to between 6.5 MW and 8.5 MW. Cal Steel says it was prevented from adjusting its FSL or opting-out of the interruptible program during the normal opt-out window in November 2000 due to Commission suspension of that window. (D.00-10-066.) In spite of its best efforts to comply with curtailment requests, Cal Steel says it became subject to penalties of about $1.3 million due to its inability to reach the 5 MW FSL during November and December 2000, and January 2001, even though it substantially complied each time.

Cal Steel says it changed its preference from the interruptible program to the OBMC program because of its concern for the safety of plant, equipment and employees in the event of an unannounced rotating outage. Cal Steel reports that it was not permitted to participate in both an interruptible program and OBMC, however, so it opted-out of the interruptible program when allowed to do so in April 2001. (D.01-04-006.) To avoid penalties of about $1.3 million, Cal Steel elected to opt-out back to November 1, 2000, and repay the interruptible discount of $669,318.

Cal Steel says repayment of the full discount is unfair since it was 95% compliant with requested interruptions during this period, and that repayment of the discount should be adjusted to reflect the degree of compliance. Cal Steel recommends a minimum of 80% compliance to qualify for this adjustment. If modified as requested, Cal Steel says it would owe SCE about $33,466 rather than $669,318.

6.5.2. Adopted Alternative

We decline to adopt Cal Steel's proposal. We agree with SCE that Cal Steel's proposal places an unreasonable administrative burden on SCE. It requires SCE to review, revise, and recalculate rate discounts for all customers who opted-out by applying a scaling factor based on complex calculations of actual performance. The proposal would create unknown but possibly significant revenue impacts on SCE and, in many if not all cases, require SCE to refund already repaid discounts in part or full. It would also require similar treatment for PG&E, given our decision above regarding reconciliation of memorandum account balances. This would unreasonably increase the administrative complexity for PG&E.

The dilemma faced by Cal Steel in large part resulted from our decision in April 2001 not to permit a customer to participate in both a capacity based interruptible program and OBMC. (D.01-04-006, Attachment A, Item 2.4.9.) We changed that decision within weeks after Cal Steel made its decision to opt-out by permitting OBMC participants who are the only customers on their circuit to also participate in a utility operated capacity interruptible program. (D.01-05-090, Ordering Paragraph 2.)

SCE proposes that the remedy is to modify D.01-05-090, and allow customers placed in that unique situation to return to the I-6 schedule effective November 1, 2000 at a higher FSL, effectively eliminating noncompliance penalties while permitting participation in both programs. We agree. This approach is less complex, and does not penalize the few customers placed in this unique dilemma due to the timing of our decisions.

We modify D.01-06-087 (which modified D.01-05-090) to permit such customers to return to Schedule I-6. They may do so back to November 1, 2000 at a higher FSL (higher than when they were originally on Schedule I-6), thereby effectively eliminating noncompliance penalties. (See Attachment D, Item 2.4.9.5.) The customer must pay the appropriate firm and interruptible rates based on the selected FSL for that period (i.e., repay interruptible discounts for the portion of the load that is converted to firm, in exchange for waiver of non-compliance penalties). We also modify D.01-06-087 to reflect the fact that the DBP replaced the Voluntary Demand Response Program (VDRP) in July 2001 pursuant to D.01-07-025. (See Attachment D, Items 2.4.3 and 2.4.10.) Further, we modify D.01-06-087 to reflect our allowing an interruptible customer to participate in OBMC after meeting its monthly obligation, subject to limitation during an overlapping event. (See Section 3.6.2.7 above, and Attachment D, Item 2.4.9.4.)

We allow the customer to determine the FSL effective November 1, 2000, and decline to adopt SCE's proposal to base the FSL on the maximum load recorded during relevant periods. The customer must live with the adjusted FSL not only for the period from November 1, 2000 through April 30, 2001, but also for the period after May 1, 2001. We let the customer "replay" the decision based on allowing participation in both programs. We are not persuaded by SCE that the customer's options must or should be limited to promote efficiency, equity, or any other objective. To the contrary, equity is promoted by allowing the customer to make the most reasonable choice after elimination of the timing dilemma caused by our two decisions.

We also excuse May and July 2001 from this recalculation. Schedule I-6 curtailments were called in these two months. Cal Steel and other similarly situated customers, however, had left I-6 and were on OBMC. It would be unreasonable to retroactively apply a penalty for those two months for failure of the customer to comply with I-6 interruptions when the customer was not an I-6 customer at that time.

We also clarify that this decision does not affect the November 2001 opt-out period. Pursuant to this order, the customer may adjust FSL back to November 1, 2000, and participate in both I-6 and OBMC. In November 2001, however, the customer would have had its annual I-6 adjustment opportunity. In this case, these few customers may now exercise their November 2001 adjustment. This is because they have been operating as firm customers on OBMC since about May 2001. It will have no actual effect on their operations if they opt-out in part back to November 1, 2000, and then make another opt-out adjustment in November 2001. It is equitable, however, to allow these customers to have the November 2001 adjustment just as any other customer, since we now allow them to make an election back to November 1, 2000 which affects the decision with which they would otherwise have been presented in November 2001.

SCE should notify Cal Steel and any other similarly affected customer of the change made herein within 30 days of the date of this order. Customers should have 15 days to make accept or reject this opportunity.