V. The Energy Resource Recovery Account (ERRA)

For Edison and SDG&E (the electric utility), the Commission proposes that the Settlement revenues should be credited to their ERRA accounts in order to expeditiously reflect the value of the Settlement as a reduction to electricity procurement costs. Each of these two electric utilities has an ERRA account, as described below. Since their electric ratepayers would pay for these electricity procurement costs in their future rates, the crediting by these utilities for the El Paso consideration they receive under the Settlement will inure to the benefit of their electric ratepayers.

A. Edison

Edison's ERRA was established pursuant to D.02-10-062. The purpose of the ERRA is to record its: (1) URG fuel costs, and (2) purchased power-related expenses.

B. SDG&E

SDG&E's ERRA, adopted by D.02-10-062 and D.02-12-074, provides full recovery of the Utility's energy procurement costs associated with fuel and purchased power, URG, ISO related costs and costs associated with its residual net short procurement requirements to serve its bundled service customers.

C. PG&E

In the Commission's plan of reorganization in PG&E's pending bankruptcy proceeding⁷, the Commission has proposed that a regulatory asset be added to PG&E's rate base as a means to recover in rates PG&E's previously unrecovered costs. In addition, the rate stabilization proceeding is pending before the Commission after the Commission's D.02-01-001 granted limited rehearing of D.01-03-082. In D.02-01-001, p.25, the Commission stated, " we must also determine the extent and disposition of stranded costs left unrecovered, and will address this in proceedings subsequent to our determinations regarding the rate freeze." Without regard to the likelihood of the outcome of either the bankruptcy proceeding or rate stabilization proceeding, we recognize that PG&E's ratepayers will have to pay for a certain amount of PG&E's unrecovered costs, which were previously known as PG&E's "stranded costs," in order for PG&E to emerge from bankruptcy as a financially healthy company.

At this point in time, we do not know the amount of unrecovered costs or the means under which the costs will be recovered in retail rates. We therefore propose to require PG&E to place the proceeds of the El Paso settlement attributed to PG&E's electric customers into an interest bearing memorandum account until these cases are resolved. We do this because it is our belief that the consideration for electric customers received by PG&E from the El Paso settlement should be used as a credit or offset to previously unrecovered costs that would ultimately be borne by ratepayers. PG&E's electric ratepayers should be the beneficiaries of the El Paso consideration allocated to PG&E for its electric damages to the extent that PG&E's ratepayers must ultimately pay for any of PG&E's previously unrecovered costs that resulted from the extremely high prices for electricity and natural gas during the energy crisis. Therefore, we propose to require PG&E to place the consideration it receives from El Paso, which is allocated to PG&E for electric damages, into a memorandum account until we determine the extent to which PG&E's electric customers' retail rates will recover PG&E's previously unrecovered costs, which could then be partially offset by the settlement proceeds.

D. DA Customers

The Settlement addresses the damages to ratepayers from extremely high natural gas prices, which were also a contributing cause of extremely high electric prices, for the period from March 1, 2000 through May 31, 2001. During this period there were a number of customers (and a portion of the utilities' system load) who did not purchase electricity from the utilities but were instead served by several alternative energy service providers. These customers were called DA customers, and they received a credit on their bill for the "savings" by the utility in its wholesale procurement program. These savings were the avoided costs of the utility (avoided because the utility did not purchase power to serve them) and the savings were therefore subtracted from the bill that was otherwise applicable under the utilities' tariffs for full-service customers.

For Edison, the purpose of the Direct Access Cost Responsibility Surcharge (DACRS) described in its tariffs is to track the difference between: (1) recorded DACRS Revenues, and (2) authorized DACRS Obligations, pursuant to D.02-11-022 and D.02-12-045. Pursuant to D.02-11-022, the authorized DA CRS-related Obligations include the CDWR Bond Charge, the CDWR Power Charge, ongoing Competition Transition Charges (CTC), and its Historical Procurement Charge (HPC). Edison's account is the DACRS Tracking Account.

For SDG&E, the description in its tariff is slightly different. The purpose of its DACRS Memorandum Account⁸ is to track the shortfall in CDWR Power Charge payments and Competition Transition Charges (CTC) resulting from the establishment of the interim 2.7 cents/kilowatts per hour (kWh) DACRS rate cap on applicable Direct Access customers pursuant to Commission D.02-11-022 and D.02-12-045. To the extent DA obligations for the sum of the DWR Bond Charge, DWR Power Charge and CTC are not fully recovered from the 2.7 cents/kWh rate cap, the DACRS Memorandum Account will track the Power Charge and CTC under-collections. Any shortfall resulting from the DWR Bond Charge is recorded in a separate Bond Charge Balancing Account.

To the extent that the DA customers of the utilities must help pay for their previously unrecovered costs, the DA customers, just like the full-service customers, should receive as a credit or offset a fair share of the consideration received by the California electric utilities under the Settlement. Therefore, for Edison and SDG&E, we propose to allocate the proceeds, when they are paid under the Settlement, to the ERRA for full service customers and the DACRTA for DA customers based on the relative percentage of full-service and DA to total kWh system deliveries in the preceding 12 months prior to their first receipt of consideration under the Master Settlement Agreement.

For PG&E, the DA customers should also receive their fair share of the consideration under the Settlement to the extent that the DA customers help pay for PG&E's previously unrecovered costs. As discussed above, PG&E will place the El Paso consideration in a memorandum account for the future benefit of PG&E's ratepayers once the Commission determines the extent to which the full-service ratepayers and DA customers will pay for PG&E's previously unrecovered costs.

E. Natural Gas Utility Accounting

The Commission currently has well established accounting mechanisms in place to record the costs and revenues associated with the ongoing provision of retail natural gas service to core customers. The accounting treatment for natural gas procurement embedded in their tariffs, as approved by the Commission, has been stable in recent years and the companies have very consistent accounting and ratemaking mechanisms, as shown below. The Commission proposes to require the natural gas utilities (i.e., PG&E, SoCalGas, SDG&E, and Southwest) to file advice letters with amendments to their tariffs adding provisions for applying the El Paso Settlement revenues as a credit to the accounts summarized below.

F. The Purchased Gas Account (PGA)

The purpose of the PGA is to record the cost associated with gas purchased for the utility's Gas Supply Portfolio (the inventories of gas purchased for resale) and revenues from the sale of that gas. Each of the natural gas utilities has a PGA. The PGA is a long-established account, compared to the new ERRA, and individual company descriptions are not included here. We propose that Settlement revenues attributable to core gas customers shall be credited to this account in order to expeditiously reflect the value of the Settlement as a reduction to core gas procurement costs.

G. Core-Elect and Core-Subscription Customers

During the March 1, 2000 through May 31, 2001 timeframe, some non-core gas customers were served by the utilities' core gas portfolios even though these customers could have otherwise procured their own gas. These non-core customers were called "Core Elect" and "Core-Subscription" customers. To the extent that these customers are still served by the gas utilities' core portfolios, they will receive the benefit of the credit from the El Paso consideration to the gas utilities' PGA. However, during or subsequent to the winter of 2000/2001, some of the non-core customers, who had previously purchased natural gas from the utilities' core portfolios, may have purchased their own natural gas supplies either by choice or because the core subscription option was eliminated before the highest price-spikes were incurred. To the extent that customers in this group are eligible to submit claims under the Settlement to seek consideration in the Superior Court's claims process for non-core customers, we propose that these customers should not receive a share of the California natural gas utilities' consideration under the Settlement. On the other hand, we propose that non-core customers, who were previously core-elect or core subscription customers during the entire above-mentioned time period but are no longer purchasing their gas from the utilities, should be able to submit a request for a refund or credit with the utilities based upon their purchases from the utilities' core portfolios (in therms) during the period at issue, as shown on their bills. The Settlement consideration can be allocated to a fractional-cent per therm for all throughput. This refund rate is discussed below in the core aggregation section.

As discussed elsewhere, we propose to account for the Settlement proceeds allocated to gas customers by initially recording the revenues in the PGA. Any refunds or credits by the utilities to these non-core customers should then be booked to the PGA as an expense, which has the effect of reducing the settlement revenues attributable to the remaining core customers.

H. Core Aggregation

Some gas consumers were part of the core aggregation program during the March 1, 2000 through May 31, 2001 timeframe. Those core customers, who had purchased natural gas at that time from core aggregators but who now purchase natural gas from the gas utilities, will receive the benefit of the El Paso consideration that the utilities credit to their PGA. On the other hand, there are certain core customers, who purchased natural gas from core aggregators between March 1, 2000 and May 31, 2001 and who still purchase natural gas from core aggregators. This latter group would not receive the benefit from the credit in the utilities' PGA. Core aggregation customers pay a core aggregation transportation charge that the gas utilities charge for the transportation of the gas provided by the core aggregators. We propose that each natural gas utility, which has core aggregators transporting natural gas on the utilities' facilities, should book the proportional share of the Settlement consideration attributable to core aggregation customers in a new memorandum account, the El Paso Settlement Memorandum Account (EPSMA), until the appropriate ratemaking proceeding where the memorandum account balance can be used to partially offset the utility's allocated revenue requirement recoverable in the authorized tariff rate for the core aggregation transportation charge. We propose that these customers should receive a proportional share of the California natural gas utility's Settlement consideration based upon their class' share of the utility's total system natural gas throughput, excluding non-core volumes, for the 12 months immediately prior to the time that the utility first receives the consideration. The Settlement consideration can be allocated to a fractional-cent per therm for all deliveries, excluding non-core, to all customers served by the respondents with the core aggregators' share recorded in the EPSMA until it can be credited against the core aggregation transportation charge.

I. Incentive Mechanisms

The Commission has adopted a variety of incentive regulatory mechanisms, for several utilities, intended to act as an incentive to further reduce costs or improve services beyond the levels expected in either base rate-related proceedings (usually a general rate case (GRC) or a cost of service (COS) proceeding) or for energy procurement proceedings for the acquisition of natural gas or electricity. Fundamentally, the utilities are provided an opportunity to find various efficiencies or to negotiate exceptional prices and thereby benefit in whole or part from the resultant savings. We believe, that with respect to the Settlement, the utilities should not receive an unintended or unearned benefit (or an unearned detriment either). Therefore in adopting a recovery mechanism for the Settlement, the determination of any incentive mechanism should be calculated as if the Settlement payments had not occurred.⁹

J. Income Tax Effects

The refunds from the Settlement should have no tax effect on the utilities. We believe this to be correct because in the prior periods when the over-charges were incurred, the utilities booked the excess costs into their balancing accounts in effect at that time. SDG&E, SoCalGas, PG&E's gas department, and Southwest were not affected by an AB 1890 rate freeze at the time and thus they were able to pass through all of their costs to retail customers. For PG&E's electric department and Edison, they would have booked the costs into the then current Transition Revenue Accounts (TRA) and Transition Cost Balancing Accounts (TCBA) and would have been subject to recovery under the AB 1890 accounting paradigms. Subsequently, Edison has been recovering its costs through its PROACT account and its HPC charge to DA customers. For PG&E, its final cost recovery should be resolved in its pending bankruptcy proceeding or in the Commission's rate stabilization proceeding.

By crediting the Settlement consideration received by the utilities in their balancing accounts cited above, the Commission's proposed rule will set retail rates so as to avoid over-collection: El Paso Settlement revenues received over time will equal reasonable procurement costs, or in the case of PG&E, the recovery of previously unrecovered costs. For income tax purposes, revenues should equal expense and there should be no tax liability as a result of the Settlement.

Because the Commission is requiring that the El Paso consideration received by the California public utilities inure to the benefit of their ratepayers, we cannot see a basis for the utilities to be taxed for any of the consideration under the Settlement. If, nevertheless, the utilities are taxed for the consideration under the Settlement, even though the utilities' shareholders will not receive the benefits from the consideration under the Settlement, we propose that the utilities should be able to adjust the consideration they receive to the extent they are taxed for it. Therefore, the Commission proposes to allow the utilities to adjust the consideration such that only the net revenues will be a credit to their ratepayers. Alternatively, the utilities should be made whole by being allowed to recover the costs associated with any tax liability for this consideration in the utilities' next ratemaking application before the Commission.