IV. Proposed Ratemaking & Accounting

The Commission routinely decides on an individual company basis the electric and natural gas procurement costs, the retail rate recovery of those costs, and other ratemaking issues to ensure that ratepayers pay the lowest reasonable rates. As a part of routine regulatory processes, the Commission equitably allocates costs among customer classes. The reasonable and prudent commodity costs of the utilities acquired for retail sale to customers are recovered in rates established by the Commission in standard, recurring formal proceedings. The proposal here is, for the most part, to rely initially upon the mechanisms established in these routine proceedings for credits or offsets to the costs as a way of benefiting the public utilities' natural gas and electric ratepayers with the consideration provided to them under the Settlement.

For Direct Access (DA) electric customers, there is an established mechanism, the Cost Responsibility Tracking Account (DACRTA), used to recover certain specific costs from DA customers. We believe that the portion of the proceeds from the settlement, allocable to these customers, can be equitably and reasonably recovered using the DACRTA mechanism, as discussed further, below.

A. CDWR Revenue Requirement

The Commission has an adopted process for the recovery of CDWR's revenue requirement for long-term energy contracts and other related costs.⁴ There is an explicit and detailed Rate Agreement between the CDWR and the Commission. We expect that to the extent CDWR receives consideration under the Settlement, that the benefit will be passed through to retail customers as an adjustment to CDWR's revenue requirement, which, under the terms of the Rate Agreement, will result in an adjustment in retail rates. The Allocation Agreement explicitly provides in paragraph 4(c)(ii), that all consideration received by CDWR "shall be used solely to reduce amounts which contribute to CDWR's revenue requirements." Therefore, the Commission proposes that all electric ratepayers of the California public utilities, including the DA customers, will benefit from the consideration that CDWR receives under the Settlement, to the same extent that they bear a share of CDWR's revenue requirements in the rates the utilities charge to them. This benefit to the electric ratepayers will be an automatic result from the lower CDWR revenue requirements resulting from the El Paso consideration under the Settlement (compared to what the revenue requirements otherwise would have been).

B. Electric Utility Accounting

The utilities currently have fairly recent accounting mechanisms embedded in their tariffs, as approved by the Commission, to record the costs and revenues associated with the ongoing provision of retail electric service to customers. The Commission has implemented the necessary ratemaking for CDWR to recover its revenue requirement for retail electricity sold to the customers of PG&E and Edison; and it has established cost of service ratemaking for utility retained generation (URG)⁵, by establishing a rate base and allowing the utilities an opportunity to recover their operating costs. There is also an extensive program as a result of AB 57,⁶ and the Commission's own initiative, to allow the utilities to procure wholesale energy beyond their URG resources with an allocation of pre-2003 CDWR long-term contracts integrated into their procurement portfolios.

For certain utilities, the use of these existing accounting mechanisms is the most efficient means to implement the recovery of the Settlement proceeds over time. The Commission proposes to require the respondent utilities to file advice letters with amendments to their tariffs adding a specific provision for the El Paso Settlement revenues to be used as a credit to the accounts summarized below.

We are also concerned that the Settlement should not affect the determination of any regulatory reward or penalty incentive mechanisms in place for electric or gas utilities and so we will explicitly order that all incentive determinations are to be exclusive of the effects of the Settlement revenues.