II. The Rate Design Settlement

A. Overview

The entire Rate Design Settlement is attached to this decision as Attachment A.³ The parties explain that the purpose of the Rate Design Settlement is to provide as soon as possible to customers on an equitable basis the electric rate reduction resulting from the resolution of certain PG&E bankruptcy issues under the Modified Settlement Agreement approved by the United States Bankruptcy Court, Northern Division of California, and which the Commission entered into pursuant to the PG&E Bankruptcy Decision. According to the parties, expeditious Commission approval of the Rate Design Settlement would avoid the cost and delay of time-consuming litigation over allocation and rate design issues relating to implementation of approximately $799 million in rate reductions resulting from the PG&E Bankruptcy Decision and simultaneous revenue requirement changes from other proceedings.

The Rate Design Settlement provides that the tariffs implementing the rate reduction be effective January 1, 2004.⁴ PG&E explains that it will track in its balancing accounts and amortize in future rates any overcollection of revenue requirements collected from January 1, 2004 through the effective date of the new rates.

The Rate Design Settlement finally resolves certain issues, as set forth below, that would otherwise be litigated in Phase 2 of PG&E's general rate case or other Commission proceedings, and reaches an interim resolution of other rate design and allocation issues. The parties believe that the Rate Design Settlement provides a fair balance between their mutual desire to implement PG&E's rate reductions as soon as possible, while at the same time reserving for Phase 2 certain issues that they could not finally resolve at this time.

B. The Settlement's Key Provisions

The following are the settlement's guiding principles:

· The allocation of the PG&E revenue requirement reduction will be based, to the extent possible given the level of that revenue requirement reduction, on the principles and methods used to allocate the revenue reductions of Southern California Edison Company's (Edison) post-PROACT [Procurement Related Obligations Account], which the Commission approved in D.03-07-029 (Rate Design Settlement, Paragraph 1.);

· The primary criterion for allocation of the revenue requirement decrease is to reverse the allocation of the revenue increases ordered by the Commission in
D.01-01-018 and D.01-05-064 such that customer classes and rate schedules receiving the largest percentage increases in 2001 are afforded the largest percentage decreases now. Except as otherwise discussed below, the revenue allocations are interim, until the full generation cost of service study and final allocation rules are determined in Phase 2 of PG&E's general rate case. (Paragraph 2.)

In addition, the Rate Design Settlement contains the following provisions. Some of these provisions resolve issues permanently. Some provisions resolve issues on an interim basis, until the Commission can more fully address them in Phase 2 of PG&E's 2003 general rate case. The Rate Design Settlement:

· Allocates part of the revenue requirement reduction resulting from the PG&E Bankruptcy Decision to residential customers based on the principle that the residential class will receive a revenue allocation decrease equal to one-half the system average percentage change resulting from implementing the rate reduction provided by the PG&E Bankruptcy Decision. The agreement is interim until the Commission issues a decision on rate design and allocation issues in future proceedings, including Phase 2 of PG&E's general rate case. (Paragraph 6.);

· Provides that the revenue requirement associated with the Regulatory Asset (or a successor component, such as a Dedicated Rate Component) established by the PG&E Bankruptcy Decision will be allocated to all customers of PG&E on an equal cents per kilowatt hour (kWh), nonbypassable basis, with limited exceptions.⁵ Other than required by the Rate Design Settlement, the settlement provides that no customer shall be required to pay an additional amount for past undercollections to facilitate PG&E's emergence from bankruptcy. This provision does not apply to undercollections resulting from the operation of normal regulatory balancing accounts other than those associated with the rate freeze and stranded cost recovery.⁶ If approved by the Commission, the parties agree that the principles in this paragraph shall constitute a final resolution among the parties governing allocation of the Regulatory Asset, among customer classes, and shall not be subject to relitigation by the parties in a future Commission proceeding.⁷ (Paragraph 7.);

· Provides that with respect to the DA cost responsibility surcharge (CRS), an estimated revenue shortfall from DA customers of about $400 million for the period fourth quarter 2001 through the end of the year 2003, will be financed by bundled service customers, divided between large and small customers as required by the DA CRS decision, D.03-07-030. The level of the DA CRS shortfall in this paragraph shall be subject to true-up after the Commission approves the final DWR revenue requirements. (Paragraph 3.);

· Provides that the charge imposed on DA customers for recovery of the Regulatory Asset shall be recovered from such DA customers on a non-bypassable basis under the current 2.7 cent per kWh DA CRS cap pursuant to Commission decisions regarding the cap. This provision states that the fact of the establishment of this charge alone will not be used by any of the parties as a basis to increase or lift the cap. However, the parties may address the level of the cap in future proceedings in accordance with the criteria established in the DA CRS decision (D.03-07-030). This paragraph also establishes an order of recovery of costs under the DA CRS cap, and provides that these principles constitute a final resolution, as set forth above, on this issue. (Paragraph 8.);

· Provides that Customer Generation Departing Load that is not required by D.03-04-030, as modified by
D.03-04-041 to pay the DWR Power Charge shall bear no responsibility for costs of the Regulatory Asset. This provision defines Customer Generation Departing Load, explains that such load shall pay all charges for service actually taken under any otherwise applicable schedule following its departure in the same proportion to other customers, and provides that these principles constitute a final resolution, as set forth above, on this issue. (Paragraph 9.);

· Establishes principles for implementing additional rate changes, if necessary before revenue allocation and rate design principles are resolved in Phase 2 of PG&E's 2003 general rate case, such as would occur if Federal Regulatory Energy Commission (FERC) refunds or El Paso settlement refunds are received. For nongeneration revenue requirement changes, changes in any given component will be recovered as an equal percent change to the component that is changing, and total rates would change commensurately. For generation revenue requirement increases, the generation rates for all bundled service customers would increase on a system average percentage basis and total rates would increase commensurately.⁸ (Paragraph 10.)

The Rate Design settlement also resolves the $95 million "going forward" revenue shortfall for residential customers resulting from the Commission's approval of expanded baseline quantities for residential customers in
D.02-04-026. (Paragraph 5.) Under this settlement provision, the parties have also agreed to adjust commercial rates by $5 million to eliminate the shortfall resulting from the shift of Common Area Accounts to commercial rate schedules as directed in D.03-01-037. (Id.) However, the settlement fails to resolve the appropriate treatment of the historic Baseline Balancing Account (BBA) and Common Area Balancing Account (CABA), which issue will be addressed in a future Commission proceeding, such as Phase 2 of PG&E's general rate case. (Id.)

The Rate Design Settlement, until Phase 2 rates are adopted, also rolls into rates the 10% bill reduction provided to residential and small commercial customers in Assembly Bill (AB) 1890 and agrees that this item will no longer appear as a separate line item on customer bills. (Paragraph 4.) Finally, the Rate Design Settlement applies solely to cost allocation and rate design issues. It does not affect or waive any party's rights regarding the PG&E Bankruptcy Decision, including any rights to file a writ of review concerning this decision.