G(2) - Reg. Asset&Z-Factor

Note 10 - The Z-Factor Will Not Recover the Entire Regulatory Asset

D.92-12-015 authorized Pacific to recover via the Z-Factor its "incremental" SFAS 106 costs (i.e., total SFAS 106 costs less PAYGO costs), subject to the limitation that the Z-Factor could not exceed tax-deductible contributions to PBOP trusts. (46 CPUC 2d 499, 528, 533.) D.92-12-015 also required Pacific to record as a regulatory asset all SFAS 106 costs in excess of tax-deductible contributions. The PBOP Reg. Asset could be amortized in future years to the extent that tax-deductible contributions exceeded SFAS 106 Costs. (Id., 533.) The following scenarios demonstrate that the Reg. Asset would always include costs that could not be recovered via future Z-Factors. Hence, the Z-Factor was never going to recover all of the Reg. Asset. (See Notes 1 and 11 for caveats.)

Scenario 1

Scenario 2

Scenario 3

Total SFAS 106 Costs > Contributions > Incremental SFAS 106 Costs

Total SFAS 106 Costs > Incremental SFAS 106 Costs > Contributions

Total SFAS 106 Costs > Incremental SFAS 106 Costs = Contributions

55.

Total SFAS 106 Costs

$100

$100

$100

56.

Tax-Deductible Contributions

$75

$25

$50

57.

Regulatory Asset (Line 55 - Line 56)

$25

$75

$50

58.

PAYGO Costs

$50

$50

$50

59.

Incremental SFAS 106 Costs(Line 55 - Line 58)

$50

$50

$50

60.

Current Z-Factor Recovery of Incremental SFAS 106 Costs(Lesser of Line 56 or Line 59)

$50

$25

$50

61.

Incremental SFAS 106 Costs Included in Reg. Asset and Eligible for Future Z-Factor Recovery (Line 59 - Line 60)

$0

$25

$0

62.

Portion of Reg. Asset Not Eligible for Future Z-Factor Recovery (Line 57 - Line 61)

$25

$50

$50

Conclusion for Scenario 1: Although a Regulatory Asset of $25 is recorded, none of the Reg. Asset can be recovered in the future via the Z-Factor. This is because the Reg. Asset is composed entirely of current- year PAYGO costs, and PAYGO costs cannot be recovered via the Z-Factor per D.92-12-015, OP 8. All current-year incremental SFAS 106 costs are recovered via the Z-Factor in the current year.

Conclusion for Scenario 2: Although a Reg. Asset of $75 is recorded, only $25 of the Reg. Asset can be recovered via the Z-Factor in future years. (See Note 11 for caveat.) The remaining $50 of the Reg. Asset, which is equal to current year PAYGO costs, is not eligible for future Z-Factor recovery pursuant to D.92-12-015, Ordering Paragraph (OP) 8.

Conclusion for Scenario 3: Although a Reg. Asset of $50 is recorded, none of the Reg. Asset can be recovered via the Z-Factor. This is because the Reg. Asset is composed entirely of current year PAYGO costs of $50, and PAYGO costs cannot be recovered via Z-Factor pursuant to D.92-12-015, OP 8.

Note 11 - Eligibility of PBOP Regulatory Asset for Z-Factor Recovery

This Appendix's calculation of Z-Factors for 1997 & 1998 assumes that amortization of the PBOP Reg. Asset was eligible for Z-Factor recovery. (See Notes 1 and 10 for caveats.) This assumption may be wrong and should be evaluated in Phase 3B. In particular, D.92-12-015, OP 8, states that the Z-Factor should be based on the current year's SFAS 106 accrual. Decision 97-04-043 states that the Z-Factor was limited to a one-time change in PBOP costs equal to the difference between SFAS 106 costs and PAYGO costs in 1993. (71 CPUC 2d 653, 665, 671.) The only adjustments to the Z-Factor were to be future reductions to the Z-Factor to avoid a utility windfall as the difference between SFAS 106 costs and PAYGO costs declined over time. (Id., 668-69, 671.) Decision 97-04-043 does not (i) address if the PBOP Reg. Asset qualifies for Z-Factor recovery (and it might not), or (ii) state that the Z-Factor would provide enough revenues to recover the Reg. Asset.





	Note 10 - The Z-Factor Will Not Recover the Entire Regulatory Asset

	D.92-12-015 authorized Pacific to recover via the Z-Factor its "incremental" SFAS 106 costs (i.e., total SFAS 106 costs less PAYGO costs), subject to the limitation that the Z-Factor could not exceed tax-deductible contributions to PBOP trusts. (46 CPUC 2d 499, 528, 533.) D.92-12-015 also required Pacific to record as a regulatory asset all SFAS 106 costs in excess of tax-deductible contributions. The PBOP Reg. Asset could be amortized in future years to the extent that tax-deductible contributions exceeded SFAS 106 Costs. (Id., 533.) The following scenarios demonstrate that the Reg. Asset would always include costs that could not be recovered via future Z-Factors. Hence, the Z-Factor was never going to recover all of the Reg. Asset. (See Notes 1 and 11 for caveats.)









		Scenario 1		Scenario 2		Scenario 3
		Total SFAS 106 Costs > Contributions > Incremental SFAS 106 Costs		Total SFAS 106 Costs > Incremental SFAS 106 Costs > Contributions		Total SFAS 106 Costs > Incremental SFAS 106 Costs = Contributions



55.	Total SFAS 106 Costs		$100		$100		$100

56.	Tax-Deductible Contributions		$75		$25		$50

57.	Regulatory Asset (Line 55 - Line 56)		$25		$75		$50

58.	PAYGO Costs		$50		$50		$50

59.	Incremental SFAS 106 Costs(Line 55 - Line 58)		$50		$50		$50

60.	Current Z-Factor Recovery of Incremental SFAS 106 Costs(Lesser of Line 56 or Line 59)		$50		$25		$50

61.	Incremental SFAS 106 Costs Included in Reg. Asset and Eligible for Future Z-Factor Recovery (Line 59 - Line 60)		$0		$25		$0

62.	Portion of Reg. Asset Not Eligible for Future Z-Factor Recovery (Line 57 - Line 61)		$25		$50		$50


	Conclusion for Scenario 1: Although a Regulatory Asset of $25 is recorded, none of the Reg. Asset can be recovered in the future via the Z-Factor. This is because the Reg. Asset is composed entirely of current- year PAYGO costs, and PAYGO costs cannot be recovered via the Z-Factor per D.92-12-015, OP 8. All current-year incremental SFAS 106 costs are recovered via the Z-Factor in the current year.



	Conclusion for Scenario 2: Although a Reg. Asset of $75 is recorded, only $25 of the Reg. Asset can be recovered via the Z-Factor in future years. (See Note 11 for caveat.) The remaining $50 of the Reg. Asset, which is equal to current year PAYGO costs, is not eligible for future Z-Factor recovery pursuant to D.92-12-015, Ordering Paragraph (OP) 8.



	Conclusion for Scenario 3: Although a Reg. Asset of $50 is recorded, none of the Reg. Asset can be recovered via the Z-Factor. This is because the Reg. Asset is composed entirely of current year PAYGO costs of $50, and PAYGO costs cannot be recovered via Z-Factor pursuant to D.92-12-015, OP 8.



	Note 11 - Eligibility of PBOP Regulatory Asset for Z-Factor Recovery

	This Appendix's calculation of Z-Factors for 1997 & 1998 assumes that amortization of the PBOP Reg. Asset was eligible for Z-Factor recovery. (See Notes 1 and 10 for caveats.) This assumption may be wrong and should be evaluated in Phase 3B. In particular, D.92-12-015, OP 8, states that the Z-Factor should be based on the current year's SFAS 106 accrual. Decision 97-04-043 states that the Z-Factor was limited to a one-time change in PBOP costs equal to the difference between SFAS 106 costs and PAYGO costs in 1993. (71 CPUC 2d 653, 665, 671.) The only adjustments to the Z-Factor were to be future reductions to the Z-Factor to avoid a utility windfall as the difference between SFAS 106 costs and PAYGO costs declined over time. (Id., 668-69, 671.) Decision 97-04-043 does not (i) address if the PBOP Reg. Asset qualifies for Z-Factor recovery (and it might not), or (ii) state that the Z-Factor would provide enough revenues to recover the Reg. Asset.