V. HPC Proposal

A. Calculation of HPC

SCE proposes to establish an HPC for use in determination of the DA credit, based on the starting PROACT balance as verified by the Commission's Energy Division. SCE says, as described above, DA customers contributed to, and are responsible for, the PROACT balance in the same manner as are bundled service customers. Currently (since June 3, 2001) only bundled service customers are making payments towards the recovery of PROACT balance. The proposed HPC will recover the DA customers' share of SCE's procurement related obligations over a two-year period. This is consistent with the expected end of the recovery period for the balance of the PROACT from bundled service customers.

To calculate the HPC, the PROACT balance is first amortized, with interest, over two years. This annual revenue requirement for the HPC is then allocated to individual rate groups based on each group's contribution to SCE's procurement related liabilities. For most of the period from June 2000 to September of 2001, SCE's procurement costs, and the DA credit, exceeded revenues recovered through the generation component of retail rates. The net effects of this for both bundled service and DA customers were negative CTC contributions (as reflected in the negative Transition Revenue Account, or TRA, balance) and increased liabilities for SCE. The contribution of each rate group to these negative monthly TRA balances are summed over 2000 and 2001 for each of SCE's 13 rate groups. The ratio of each rate group's total to SCE's system total is used to allocate the annual revenue requirement of the amortized PROACT balance among rate groups. Each rate group's allocation of the total HPC revenue requirement is then divided by the 2002 sales forecast for that rate group to calculate the HPC. These allocation factors and resulting rates are shown in Table 1 below.

B. Modification to the Energy Credit

DA customers are currently credited the generation rate component of their OAT. This credit includes all surcharges adopted by the Commission since January 2001, in excess of 4¢/kWh. As a result, DA customers make no contribution to either going-forward power procurement costs (which includes the cost of both past and future DWR power purchases) or SCE's procurement related obligations, unlike bundled service customers who are currently fulfilling their obligation. SCE proposes to modify the currently effective credit calculation by subtracting the HPC from the generation rate of the DA customers' OAT before it is credited to them. The HPC would have the effect of lowering the credit paid to DA customers and contributing to the recovery of the PROACT balance.⁵ This lower credit is consistent with SCE's current weighted average energy cost, as evidenced by the surplus being contributed by the bundled service customers toward the recovery of the PROACT balance and still represents a system average DA credit of about 8.5¢/kWh. Upon authorization, SCE would modify its tariffs to include the HPC, by rate schedule.

Given that SCE has actually paid $148 million of such credits and owes, by its own calculation, another $243 million, CLECA submits that SCE should not be permitted to collect an average of 2.466¢ per kWh for 24 months from direct access load that is roughly 14% of SCE's total load. The charge, as proposed by SCE, is expected to generate more than $540 million over the 24-month period, $150 million more than SCE asserts it will provide in credits and $394 million more than it has paid to date. It appears to CLECA that direct access customers are being asked to pay more than their fair share.

CLECA argues that there is likely to be a serious mismatch between a customer's serving ESP during the high cost period and its serving ESP today. SCE's proposal places a very significant burden on current direct access customers to recover costs SCE incurred to provide credits to ESPs in the past. The customer may or may not have a contract with the same ESP who provided the service and received the credit in 2000, and it may or may not have completely different pricing and other contractual terms that make impossible any adjustment of the benefit and burden. It is unlikely that the ESP and the customer will have contracted to apportion this new cost element.

Finally, CLECA questions whether SCE should be permitted to recover these costs from anyone. It was SCE's decision to agree to take the market risk that the ESPs had acquired through their contracts with customers. Customers should not have to make SCE whole for that decision. It was the ESPs with whom SCE agreed to credit the excess over the frozen rates, it was the ESPs to whom SCE paid the credits, and it was the ESPs who benefited from the credits, not SCE's direct access customers. SCE should be directed to look to the ESPs for recovery.

CLECA's position is without merit. The amount SCE will collect from DA customers depends upon the amount of energy used by DA customers. The more they use the more the PROACT balance will be paid down during the two-year period. DA customers who return to bundled service will pay the bundled rate. The revenue retained by SCE's proposed modification to the energy credit is not meant to equal the amount SCE paid and is obligated to pay for negative credits. Should DA current use be less than prior use, the total amount DA customers will be charged will be less than the negative credits paid by SCE. The proposed HPC applies to meter usage going forward. It does not reflect customer use in the past.

The formula is discussed above, in Section V. The other points made by the parties are irrelevant. The "mismatch" between customers served today and those served during the high cost period is not pertinent. Current customers pay current rates. The PROACT balance was fixed in the Settlement Agreement and is to be recovered through "retail rates." It is too late to argue that those costs should not be recovered from anyone.

C. Overcollection

The PROACT balance of approximately $3.8 billion is recovered through two revenue streams. The first is from bundled customers who currently pay the frozen rates plus a 4¢/kWh surcharge. The "Surplus" as defined in the Settlement Agreement is applied to reduce the PROACT balance. Bundled customers have been contributing to the PROACT balance since September 2001 in the amount of approximately $250 million per month. The second is from DA customers. These customers have been paying nothing toward the PROACT balance and will not pay anything until this proceeding is concluded.

Under SCE's proposal, DA customers will pay a share of the PROACT balance commensurate with the proportion of SCE's total system load that is served through direct transactions. For example, if 15% of SCE's system load is served under DA contracts, then DA customers will pay approximately 15% of the PROACT balance. If 5% is served, then DA customers will pay 5% of the PROACT balance.

Under SCE's current method for crediting DA customers, these customers only pay for transmission, distribution, and other non-generation costs. Therefore, the amounts paid by these customers exactly offset the costs associated with serving these customers and they do not contribute any surplus to the recovery of the PROACT balance. Under SCE's HPC proposal, these customers will not be credited with the entire generation rate component of their OAT. This results in HPC revenues being credited to the PROACT.

The HPC will be effective for the full 24-month period. The amount recovered through the HPC after the PROACT balance is recovered will be credited to the procurement cost account for bundled service customers. It is necessary for DA customers to pay their share of PROACT for two complete years out of fairness to bundled customers, regardless of when SCE recovers its PROACT balance. Otherwise, because of the delay in implementing the HPC, should the PROACT balance be recovered in less than the two-year HPC period, bundled customers would have paid a disproportionate share of the PROACT. Should the PROACT balance be recovered in less than the two-year HPC period, the excess amounts paid by DA customers will be credited to bundled customers.

Should the frozen rates contemplated in the Settlement Agreement be removed prior to the expiration of the two-year HPC period and there is no longer a generation credit to be given to DA customers, then SCE would convert the reduction to the credit to a charge on the DA customer's bill. For example, rather than reduce the generation credit from 11¢/kWh to 8.5¢/kWh, SCE would add 2.5¢/kWh to the DA customer's transmission and distribution bill. After the PROACT balance is recovered, and until the two-year HPC period is completed, the 2.5¢/kWh charge would be credited to the bundled customers.