IV. SCE'S Procurement Related Liabilities

SCE asserts that it is clear that DA customers have contributed to SCE's procurement-related liabilities in the same manner as bundled service customers. Until the June rates were implemented, DA customers were receiving a credit based on SCE's weighted-average energy cost. To the extent this energy cost continued to exceed the generation rate component of frozen rates, SCE continued to incur a liability to fund both energy purchases for bundled service customers and energy credits for DA customers. With the subsequent drop in market energy and gas prices, SCE has received positive revenues from bundled service customers toward reducing its procurement-related obligations, while DA customers have contributed nothing to the recovery of the liabilities to which they contributed.² SCE states that the proposed HPC is designed to rectify this inequity.

A. Equivalence of Impact on SCE's Liabilities

SCE explained its position with an example: Consider a bundled service customer with 1000 kWh usage during a particular billing cycle and an average rate of 10¢/kWh, resulting in a total bill of $100. If $40 of this total amount is for recovery of non-generation transmission and distribution costs (T&D) then the customer contributed $60 to recovery of SCE's procurement costs and uneconomic or stranded generation costs. As long as the price of power procured for this customer was less than 6¢/kWh, the customer contributed positively to SCE's recovery of its transition costs. When the price of energy rose above 6¢/kWh the customer did not contribute anything to recovery of transition costs and in addition, SCE started accumulating its procurement-related liabilities. For instance, if SCE had to procure energy for this customer at 14¢/kWh, the customer contributed $80 [(14¢/kWh - 6¢/kWh) x 1000 kWh] to SCE's procurement-related liabilities for the billing cycle. In other words, from the customer's original bill of $100, $40 went to pay non-generation costs leaving only $60 to cover generation costs. Because SCE incurred $140 for the cost of procuring energy for this customer, SCE was left responsible for $80 in procurement-related liabilities for this bundled customer.

SCE continued: Now consider a similarly situated DA customer. This customer's bill was first calculated just as for a bundled service customer ($100), and then the customer was credited for the cost of procured energy. When the cost of power was 3¢/kWh, the DA customer would have received a credit of $30, leaving a net bill of $70. If the cost of power were 14¢/kWh as in the previous example, the DA customer would have received a credit of $140, resulting in a credit bill, or payment from SCE of $40. Adding in the $40 of non-generation costs incurred, SCE would be responsible for a total liability of $80, exactly the same impact as the bundled service customer. SCE borrowed to pay these liabilities as long as it was creditworthy. Starting January 5, 2001, SCE could not borrow money and stopped making such payments. What SCE was not able to pay became a procurement-related liability to the ESPs performing consolidated billing. DA customers with dual or UDC consolidated billing continued to net their negative (credit) bills against subsequent positive bills from SCE even after SCE became non-creditworthy.

CLECA argues that SCE has failed to establish the responsibility of current direct access customers for recovery of a portion of its procurement undercollection amount. It says payment of direct access credits in excess of the generation rate component of frozen tariff rates occurred only because in 1999 SCE voluntarily entered into a stipulation with representatives of the ESPs to change the manner of calculating the direct access credit. The stipulation permitted the direct access credit to float with the PX price, going above the frozen rate level if necessary. No customer group asked for that stipulation and none signed it. It was strictly an arrangement between SCE and the ESPs, one in which SCE agreed to remove the "zero minimum bill" provision from its tariff in exchange for the ESPs' dropping their demand to see the input data used by SCE to establish the monthly credit.

CLECA also contends that direct access customers generally received no benefit from the application of this billing methodology. It points out that among the SCE large commercial and industrial direct access customers in December 2000, the vast bulk of the accounts were using the ESP consolidated billing option. Under this arrangement, SCE sent its bill for transmission and distribution services directly to the ESP and looked entirely to the ESP for payment. When the amount of the direct access credit exceeded the frozen tariff rate, SCE provided a net credit. Until January 5, 2001, SCE would write a check for the accumulated credit balance to the ESP. CLECA believes that under this billing option, the net credit went to the ESP; it did not go to the customer. A review of the testimony of the witness sponsored by CLECA does not support this conclusion.

The witness for CLECA testified that DA customers did not benefit from the higher DA credits. She said "I am somewhat familiar with DA contacts, and I am generally familiar with the nature of some of the pricing arrangements agreed to by DA customers during the relevant period. In many of these cases, the customer was quite careful to protect itself against the possibility that energy prices might increase and that the sum of the charges under a DA transaction might exceed the otherwise applicable frozen tariff rate. They did so by choosing pricing that involved a small discount from the otherwise applicable frozen tariff rate (OAT minus), rather than a discount from the PX prices." She said the effect of "OAT minus" pricing effectively shifted the risk of increasing market prices for power away from the customer and on to the ESP. The ESP was committed to supply power to the customer at the customer's frozen tariff rate less a percentage discount, typically in the 1% to 3% range. Because the pricing under the contract was not tied to PX prices, the customer was insulated from the possibility that a sudden natural gas price increase or other factors might drive up the PX prices to levels that exceeded its frozen OAT rate. As between the DA customer and the ESP, the DA credit was irrelevant; the pricing was strictly OAT minus a discount, and any DA credits actually paid were kept by the ESP. She said "under the ESP consolidated billing feature, the ESP assumed all of the customer's payment obligations to SCE, and SCE rendered the bill to the ESP and looked to that entity for payment." She concluded, therefore, "if SCE is seeking to recover procurement costs in excess of the average generation costs embedded in the frozen rates, it should look to the parties to whom it paid or will pay the PX or DA credit. If DA customers did not receive these credits directly from SCE, there is no reason to require customers to pay the HPC."

CLECA's presentation is not persuasive. Rather than supporting the proposition that DA customers did not benefit from the DA credit, it proves the contrary. The DA customer entered into an agreement by which the ESP priced its electricity at a discount to the applicable frozen tariff rates. In exchange, the DA customer gave its right to receive the DA credit to the ESP. The DA customer bartered its DA credit for a fixed electric rate. It could not be any clearer that the DA customer benefited from the DA credit.³

B. The Settlement Agreement

The Settlement Agreement between SCE and the Commission, approved by the Federal District Court on October 5, 2001, specifically identified SCE's procurement related liabilities. The unpaid credit bills which resulted from market energy prices in excess of SCE's generation rate are reflected in Schedule 1.1 of the Settlement Agreement as a procurement related liability to the DA customers' ESPs. The amounts SCE borrowed to pay the credit bills prior to January 5, 2001 or to purchase energy for current DA customers while they received bundled service are reflected in other line items of Schedule 1.1. The Settlement Agreement specifically identifies a starting balance for the PROACT that SCE is entitled to recover. The PROACT balance of $3.577 billion as of August 31, 2001 was verified by the Commission's Energy Division on November 2, 2001.

The pertinent portions of the Settlement Agreement and Stipulated Judgment which pertain to this proceeding are:

A. Settlement Agreement

ARTICLE 2

RATE STABILIZATION AND COST RECOVERY

Section 2.1 Procurement Related Obligations Account (PROACT).

(a) The CPUC will establish the Procurement Related Obligations Account (PROACT) by order. The opening balance thereof will be the excess of SCE's Procurement Related Liabilities as of August 31, 2001 over SCE's cash and cash equivalents on hand as of such date, less the sum of $300 million. . . . The Parties estimate that the balance of the PROACT as of the date hereof is approximately $3.3 billion.

(b) SCE will apply all accrued Surplus⁴ to the PROACT on a monthly basis or such periodic basis as may be established by the CPUC, . . .

. . .

(d) During the Recovery Period from and after September 1, 2001, all Surplus shall be applied to the PROACT. . . .

Section 2.2 Recovery of Procurement Related Obligations. The Parties hereby agree that during the Recovery Period SCE shall recover in retail electric rates its Procurement Related Obligations recorded in the PROACT. The Parties acknowledge that they each currently project that the maintenance of Settlement Rates will likely result in sufficient Surplus for SCE to recover substantially all of its unrecovered Procurement Related Obligations prior to the end of 2003. . . . (Emphasis added.)

Section 2.9 Intended Effects. The CPUC shall adopt such decisions or orders as it deems necessary to implement and carry out the provisions of this Agreement, it being understood that this Agreement and the Stipulated Judgment contemplated hereby shall be binding and irrevocable upon the Parties, notwithstanding such future decisions and orders of the CPUC. It is the intent of the Parties that SCE actually recover Procurement Related Obligations recorded in the PROACT, without offset, as rapidly as possible during the Rate Repayment Period consistent with the terms hereof, and in any event during the Recovery Period. (Emphasis added.)

B. The Stipulated Judgment

. . .

3. As a party to the Agreement, the Commission (as distinct from the individual Defendants) joins in and agrees to be bound by all of the terms of this stipulated judgment. The CPUC agrees to waive any defense it may have to the Court's jurisdiction based upon the Eleventh Amendment, or other defense, for purposes of this case only.

. . .

E. Future Effect

1. The Agreement that is incorporated herein provides for SCE to recover certain costs in retail rates over time. An essential element of this stipulated judgment is to provide certainty that SCE will be able to recover such costs in accordance with the Agreement. SCE and the CPUC contemplate that third parties will rely on such certainty in extending credit to SCE. Accordingly, enforcement of this stipulated judgment and the Agreement are essential in order to restore SCE's creditworthiness, which is in the interest both of SCE and of the CPUC. (Emphasis added.)

2. The parties and their respective successors and assigns agree to be bound by the terms of this stipulated judgment and agree not to contest its validity in any subsequent proceeding. Defendants recognize that market prices may fluctuate, that state or federal law may be modified, and that other circumstances may change, and nevertheless intend that this stipulated judgment be binding and enforceable in the future in accordance with its terms. (Emphasis added.)

3. The Court enters this stipulated judgment and Agreement as its judgment, and retains jurisdiction to enforce the judgment in the future, as may be necessary.

Kroger and Sempra contend that the HPC proposal should be denied because the Settlement Agreement does not refer to or authorize the HPC. 7-Eleven states that the PROACT is only to be recovered from retail, or bundled customers. Those contentions have no merit. The PROACT balance includes SCE's liabilities and undercollections caused by the DA credit. The Settlement Agreement authorizes the recovery of the PROACT balance from retail customers through retail rates. DA customers are retail customers and pay retail rates. The HPC is merely the method of paying the PROACT balance for these customers. It results from the Settlement Agreement.

Kroger claims that the HPC violates Public Utilities Code Section 368(a), which prohibits the post rate-freeze recovery of undercollections incurred during the rate-freeze period. This claim is irrelevant. The Settlement Agreement between SCE and the Commission mooted any argument that SCE's undercollections should not be recovered through retail rates. The Settlement Agreement specifically permits SCE to recover the PROACT balance from customers through retail rates. As we said, DA customers are retail customers and pay retail rates.

Kroger also contends that the HPC would constitute retroactive ratemaking because SCE seeks to adjust DA customers' rates to make up for past unreasonable rates. EPUC claims that the PROACT is defective because it was created only after SCE incurred its undercollections. Both arguments are irrelevant. This proceeding is to implement a settlement approved by the federal court. We are not here to rehash past positions.

C. Securitization

Some parties have suggested that the PROACT balance be securitized and recovered over a longer time period. It is not clear whether these parties are seeking the securitization of the entire PROACT balance or only the DA customers' share of it. The Settlement Agreement does make an allowance for the Commission to approve securitization of all or a part of the PROACT balance "in order to reduce the retail rate impact" (Settlement Agreement, Section 2.2 (c)). In any case, to reduce the associated financing costs and assure the repayment of bonds necessary for securitizing the PROACT balance, SCE believes that some form of legislation will be required. Given the lead time required for passage of legislation and issuance of bonds, the administrative costs of issuing the bonds, and the short expected time for recovery of the PROACT balance from bundled service customers, SCE does not support the securitization option for DA customers. In addition, as described below, even with the HPC deducted from the current DA credit, DA customers will continue to receive a credit of about 8.5¢/kWh.

If it is determined that direct access customers are to be held liable for repayment of a portion of the undercollection amount, CLECA recommends securitization of the entire $3.577 billion (or the amount remaining unrecovered at the time of this decision). It says securitization has several advantages over the SCE proposal. First, it is contemplated in the Settlement Agreement. Second, it would provide immediate funds to pay off SCE's creditors and would restore the utility to financial health at an earlier date. Third, if the period were five years, it would permit an immediate rate reduction of perhaps 1.25¢ to 1.5¢ per kWh for all customers, bundled and direct access.

In our opinion, securitization is not a reasonable option, the parties suggesting it propose terms as long as five years. This is contrary to the Settlement Agreement's standard to collect the PROACT "as rapidly as possible." (Section 2.9.) Two years, as proposed by SCE is a reasonable period. It is consistent with the expected recovery of the bundled customers' portion of the PROACT balance.