VI. Costs to be Allocated
Finally, it is not enough to simply determine allocation percentages. We must also clearly identify the specific costs to which those allocation percentages are applied. The categories of costs that have been discussed in this proceeding include total contract costs, unavoidable costs, avoidable costs, and above-market costs. Total contract costs include the avoidable costs, unavoidable costs, and above-market costs of the DWR contracts. For each individual contract, however, the relative proportions of each of these components can vary.
Avoidable costs were allocated on a CFC basis in D.02-09-053. In general, the parties have not recommended changing that allocation. In D.02-12-045, we allocated total costs and subtracted out the previously allocated avoidable costs to come up with a residual allowance of fixed costs. SDG&E recommends continuing to use that method. The settling parties prefer to base an allocation on above-market costs. While we do not adopt the above-market cost methodology, its proponents raise some valid criticisms of the calculation approach used in D.02-12-045.
SCE argues that the method used in D.02-12-045 (and advocated by SDG&E) treats avoidable contract costs as an economic burden, when in fact such costs should be considered an economic benefit: "Avoidable contract costs should only be incurred when they are projected to be less than the market value of the energy dispatched. As a result, avoidable contract costs will not be incurred when it is uneconomic to dispatch." (SCE Reply Brief, pp. 4-5)
SCE correctly points out that the residual calculation approach results in the customers of SDG&E, which has the largest percentage share of dispatchable contract energy, being allocated the smallest percentage share of the unavoidable contract costs. (Id., p. 5.) While SCE does not support a "prorata" allocation, SCE argues that if a prorata allocation is used, the current residual calculation approach is unfairly biased. (Id.)
According to SCE,
The Commission has already properly determined that avoidable contract costs should follow the physical contract allocation to ensure that least-cost incentives are maintained. As such, it is not necessary or useful to aggregate the DWR revenue requirement to implement a "prorata" allocation, and then residually determine the allocation of unavoidable contract costs by subtracting forecast avoidable contact costs. This proceeding has been established to allocate DWR's unavoidable contract costs. If a prorata methodology is to be implemented, it should be on the unavoidable contract costs only, and not incorporate avoidable contract costs which are actually an economic benefit to customers. (Id., pp. 5-6.)
While we do not necessarily agree with every aspect of SCE's argument, the criticism of the residual calculation approach is generally well founded. In addition to the problems noted by SCE, in the course of this proceeding we have found that the parties are indirectly re-litigating the allocation of the avoidable costs of DWR's contracts, as the total cost approach we adopted in D.02-12-045 creates a direct link between the allocation levels of the unavoidable and avoidable costs.
Accordingly, we adopt SCE's alternate recommendation that the allocation factor be applied only to the unavoidable cost component of the DWR contracts.17 Ironically, SDG&E made this same proposal during litigation of the 2003 revenue requirement allocation, but the Commission rejected it at that time. (D.02-12-045, pp. 12-14.) The methodology the Commission adopted for 2003 (and that SDG&E continues to advocate) actually resulted in a more favorable allocation for SDG&E than SDG&E's own. (Id., Table A, p. 18.)18
17 ORA proposes that gas tolling costs associated with must-take contracts be considered avoidable costs. We rejected this same proposal in D.02-12-045 (p. 17), and we reject it again here.
18 The rate increase that SDG&E will see as a result of the allocation we adopt today is largely a reflection of the favorable allocation that SDG&E received for 2003.
