IV. Discussion

A. Standard of Review for Settlements

We review this contested settlement pursuant to Rule 51.1(e) which provides that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest." We undertake this review by addressing each of these three elements.

B. Reasonable In Light of the Whole Record

In 2003, PG&E submitted prepared testimony in this investigation, including an amended Chapter 11. This chapter addressed the rate allocation and design necessary for implementing any rate reduction which was part of the bankruptcy settlement agreement. An August 19, 2003 ALJ ruling granted ORA's motion to strike PG&E's Chapter 11 because it was premature to consider rate design proposals at the same time the Commission was trying to reach a decision on the underlying PG&E and Commission staff bankruptcy-related settlement by the end of 2003. However, the August 19 ruling encouraged settlement of revenue allocation and rate design issues, and welcomed a Rule 51 settlement sponsored by the majority of the parties filed after hearings on the PG&E and Commission staff bankruptcy-related settlement were completed. The parties followed the ALJ's directive and tendered this Rate Design Settlement for our consideration.

Because PG&E's rate design testimony, Chapter 11, has been stricken from the record, the record also fails to include detailed responsive or alternative testimony from other parties on rate design issues. However, it is undisputed that the settling parties, who represent a wide spectrum of utility, residential, governmental, commercial, agricultural, industrial, and small customer interests, including bundled, DA, and customer generation departing load, should have diverse litigation positions on rate design issues, and they have chosen to compromise these diverse positions in a mutually acceptable manner. Therefore, this settlement is within the range of their various litigation positions. Furthermore, the resolution of some of the rate design issues in the settlement is interim, until the Commission addresses the broader rate design issues in Phase 2 of the PG&E general rate case. These factors weigh in favor of a finding of reasonableness, provided the settlement meets the other two settlement standards (consistent with the law and in the public interest).

Before discussing the two remaining standards, we also examine the reasonableness of the settlement in light of what the settlement articulates as its overriding principles: (1) that the primary criterion for allocating the revenue requirement decrease is to reverse the revenue surcharges ordered by the Commission in response to the energy crisis; and (2) that the allocation of the reduction will be based, to the extent possible given the level of the reduction, on the principles used to allocate Edison's post-PROACT revenue requirement reductions.

We compared the rate reductions from the settlement with the reductions which would have occurred if rates were reduced based on how the surcharge was placed.⁹ In the later case, assuming an $878 million reduction of revenue requirement as set forth in PG&E's advice letter filing, residential customers would receive a 6.2% rate reduction, whereas under the settlement these same customers are receiving a 4.4% decrease. Put another way, residential customers would receive 70% of a system average reduction if rates were reduced in the same percentage as the surcharge was placed, whereas under the settlement residential customers are receiving 50% of the system average decrease. The agriculture and streetlighting customers are receiving a rate reduction of almost twice what they would receive if their rates were reduced in proportion to their surcharge burden. The commercial class is receiving a rate reduction which is about 8% greater than it would have received if its rate was reduced in proportion to its surcharge burden. The industrial customer class has a generally consistent rate decrease in both of these scenarios. Furthermore, under the Edison PROACT decision, residential customers received about 60%, as opposed to 50%, of the system average decrease.

We find the settlement is within the range of a reasonable outcome in light of the facts that three of the settling parties are groups who represent, at least in part, residential customers, that the implemented rates are for an interim period, and that a settlement necessarily involves trade-offs of a number of factors. However, we note the above discrepancies with the settlement's overriding principles so that they can be explored more fully together with other issues in Phase 2 of PG&E's general rate case.

Finally, we note that the numbers PG&E uses in its advice letter filing to compute the decreases resulting from the settlement are its best estimates of its revenue requirements. PG&E explains that the revenue requirements subject to pending proceedings are estimates that will be trued up as they become certain. With a final decision in Phase 1 of PG&E's 2003 general rate case, we allow PG&E to revise its component revenue requirements for nuclear decommissioning (ND), public purpose programs (PPP), distribution, and non-fuel retained generation.

The advice letter PG&E filed implementing the settlement proposes an $18 million increase to DA customers. While it is reasonable to approve a decrease based on this information on an expedited basis, in order that utility customers can receive actual decreases as soon as possible, we are not as comfortable approving an increase in this case on such a basis. We therefore reject without prejudice PG&E's proposal in its advice letter to implement an increase to DA customers by virtue of this decision. Rather, we direct PG&E to (a) track the $18 million dollars associated with its projected increase to these customers, as well as any other undercollection necessitated by the deferred increases or forecast decreases resulting from this decision, in an appropriate regulatory account, or accounts, and (b) to prepare billing changes resulting from this decision, the Modified Settlement Agreement, and D.03-12-035 for implementation after a decision in Phase 1 of PG&E's 2003 general rate case. With this modification to PG&E's implementation of the Rate Design Settlement, we find that the settlement is reasonable.

C. Consistent With the Law

The settlement complies with statutes and prior Commission decisions. However, it is useful to examine several of the settlement's provisions in light of prior Commission decisions to illustrate why we believe the settlement is consistent with them.

1. DA CRS Cap

D.03-07-030 established the level of the DA CRS cap for the period subsequent to July 1, 2003. This decision determined that the current level of the cap should be 2.7 cents/kWh, and established provisions for continued monitoring and periodic readjustment of the cap, as needed, to assure bundled customers are made whole by 2011. This decision also stated that the order of collection of the DA CRS elements for PG&E is as follows: DWR bond charge, competition transition charge (CTC), and the DWR power charge. (See
D.03-07-030, Ordering Paragraph (OP) 15.

In response to the PG&E Bankruptcy Decision, Paragraph 8 of the Rate Design Settlement adds another item, the Regulatory Asset, to the items to be collected from the DA CRS. Under Paragraph 8, the parties agree that the charge imposed on DA customers for recovery of the Regulatory Asset (or a successor dedicated rate component) shall be recovered from such DA customers on a non-bypassable basis under the current 2.7 cent cap. The parties furthermore state 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."

D.03-07-030 included Edison's Historical Procurement Charge (HPC) as an element to be collected from the DA CRS cap. It is reasonable for the cost allocation of the Regulatory Asset and the HPC to be roughly similar. Therefore, including the Regulatory Asset as an element to be collected from the DA CRS is consistent with the intent of prior Commission decisions. Furthermore, Paragraph 8 recognizes and is consistent with the Commission's criteria for modifying the level of the cap, stating that the parties "may address the level of the cap in future proceedings in accordance with the criteria established in the DA CRS Decision 03-07-030."

We also note that Paragraph 8 states that parties cannot use the establishment of the charge imposed on the DA customers for the recovery of the Regulatory Asset, alone, as a basis to increase or lift the cap. We interpret this language to mean that while parties cannot use this factor, alone, as a basis to increase or lift the cap, the parties can use this factor in conjunction with the other factors set forth in D.03-07-030 as a basis to increase or lift the cap.

Paragraph 8 adds the Regulatory Asset as second on the list of elements the Commission authorized to be collected from PG&E's DA CRS.¹⁰ This is consistent with the cost allocation treatment used for Edison's HPC. (See OP 15 of D.03-07-030.)

2. Baseline Issues

The Commission's approval of expanded baseline quantities for residential customers in D.02-04-026 caused a reduction in the revenue received from residential customers because of the relative increase in the percentage of residential sales covered by Tier 1 and 2 rates. Paragraph 5 of The Rate Design Settlement adjusts residential rates to eliminate the $95 million "going forward" revenue shortfall for residential customers resulting from D.02-04-026. The settlement also agrees 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. (See Rate Design Settlement, Paragraph 5.)

Based on the settlement, we understand that, because residential rates have been adjusted to eliminate the shortfall, with the implementation of the above proposals, there will be no further accruals to the BBA resulting from the baseline quantity changes adopted in D.02-04-026, nor will there be further accruals to the CABA due to D.03-01-037, except for ongoing interest accruals. However, we note that today's decision does not address accruals to these accounts that may result due to the pending Final Opinion on Phase 2 Issues in R.01-05-047. The treatment of the historic BBA and CABA balances also remains an open issue to resolve in a subsequent proceeding (such at Phase 2 of PG&E's general rate case).

3. Bill Format

Paragraph 4 of the Rate Design Settlement provides that the credit for the 10% bill reduction will now be rolled into rates and no longer shown as a line item on customer bills, and we approve this provision. Although we discuss the protests more fully below, we address here one issue raised by AReM to which PG&E agrees. In its comments on the settlement, AReM states that the Commission should condition approval of the settlement on PG&E's showing all components of DA rates on the customer's bill. In its response, PG&E agrees with AReM, and states it is planning to show the CTC, Regulatory Asset, the DWR bond charge, and the DWR power charge separately on DA bills. However, as stated in the settlement, PG&E will not show the 10% discount on DA or bundled bills.

We are pleased that PG&E is planning to show the above listed charges separately on DA bills and direct that it do so. We further direct PG&E to show the separate charges, excluding the DWR power charge, on bundled customers' bills as well. Because PG&E's bundled customers' bills currently show the DWR remittance rate, it is not necessary to show the DWR power charge on bundled customers' bills. We want as much transparency in billing format as possible, and this desire is reflected in past Commission decisions specifying components to be separately identified on a customer's bill. (See e.g., D.97-08-056, 74 CPUC2d 1, Ordering Paragraph 31.)

4. General Comments

The settling parties represent that the Rate Design Settlement is consistent with the law, and our approval of the settlement relies on this representation. To the extent necessary, we have discussed certain parts of the settlement to demonstrate why we believe they are consistent with the law. We view that other aspects of the Rate Design Settlement not discussed above are also consistent with existing law. To the extent the advice letter implementing the settlement does not comply with existing law, PG&E is directed in its supplemental advice letter filing discussed below to revise the settlement's implementation in a manner consistent with existing statutes and Commission decisions.

In summary, we conclude that the Rate Design Settlement is consistent with the law.

D. In the Public Interest

The Rate Design Settlement is a reasonable compromise of the settling parties' respective positions. The Rate Design Settlement is in the public interest and the interest of PG&E's customers. The settlement avoids the cost and delay of further litigation and brings rate relief to customers. It does so while not unduly burdening the resources of any party, nor the Commission, whose resources are presently engaged in other proceedings, including PG&E's 2003 general rate case.

There is an overall rate reduction of about $799 million for bundled customers. In addition, bundled customers are owed additional money by DA customers which is not available to these customers at present because of the DA CRS cap as provided in Commission decisions such as D.03-07-030. This money will be paid back when the cap can accommodate it.

Table 1 shows the current revenue by customer rate group and the settlement revenue by customer rate group, with totals.¹¹

TABLE 1

Pacific Gas and Electric Company

Plan of Reorganization Settlement Rates

Appendix I

Illustrative $815 Million Reduction in

Bundled Service Rates

The Rate Design Settlement provides for the continuation of the 10% bill reduction provided to residential and small commercial customers in AB 1890, but eliminates this item as a special line item on customer bills and rolls it into rates. The Rate Design Settlement, like the Edison post-PROACT rate reduction, maintains the AB 1X rate protections for consumption up to 130% of Baseline by reducing Tier 1 and 2 rates by 10%. This interim change would leave bills unchanged for residential users consuming up to 130% of Baseline. The Rate Design Settlement does not address the issue of whether or not to continue the 10% bill reduction credit for PG&E customers, and proposed rates do not assume either the ultimate continuation or expiration of the credit after the interim rates approved by this decision are no longer in place.

In summary, we conclude that the Rate Design Settlement is in the public interest.

E. Miscellaneous

The settlement agreement states that it applies solely to cost allocation and rate design issues and does not affect or waive any party's rights regarding the PG&E Bankruptcy Decision, including any rights to appeal that decision. We note that generally, parties to our proceedings file applications for rehearing and writs of review, not appeals, of Commission decisions, and read the use of the term "appeal" as generically referring to the usual discretionary review process for Commission decisions provided by law. (Pacific Bell v. Public Utilities Com. (2000) 79 Cal. App. 4^th 269, 277-279.)