V. Litigation Positions

Since we have rejected the proposed settlement agreement, we next consider the litigation proposals of the parties. Unfortunately, we also find each litigation proposal, as submitted, to be unsuitable for permanently allocating the costs of the DWR contracts.

The primary litigation proposals of PG&E and SCE, while not identical, are based upon the inequitable Cost-Follows-Contracts methodology and invite significant re-litigation. For the reasons discussed above, we reject a pure CFC approach. The proposals of ORA and SDG&E are based upon the allocation methodology adopted for 2003 in D.02-12-045. However, the ORA proposal is somewhat incomplete, and SDG&E incorporates additional self-serving resource assumptions in its proposal. Neither provides a solid foundation for a permanent methodology.

Having rejected the settlement proposal, as well as each party's primary litigation proposal, we turn, finally, to SCE's "alternative" litigation proposal. We believe that this proposal, with the adjustments we describe below, can serve as the foundation for an equitable method to permanently allocate the costs of the DWR contracts.

As we have observed previously, the DWR contracts at issue were signed at a time of crisis, confusion, and uncertainty, rendering our traditional notions of cost causation inappropriate. In large part we are "spreading the pain" of a unique occurrence, for which our standard methods are ill-suited. Accordingly, we must find another way to reach a fair allocation. We believe that Edison's "alternative" litigation proposal, as described in its Opening Brief, provides the best starting point of all the proposals before us:

As an alternative proposal, SCE proposes an AMC cost allocation methodology whereby all avoidable DWR contract costs and wholesale energy revenues continue to be allocated on a CFC basis, as required by Decision No. 02-09-053. Annually, however, the Commission would allocate the forecast AMC costs associated with the contracts allocated to all of the IOUs (SCE footnote: An annual determination of the AMC costs on a forecast basis is necessary as a ten-year projection of such costs will be unreliable in the later years).

The AMC costs, including gains and losses on hedge transactions that the IOUs enter into as DWR's limited agent, would then be allocated to the IOUs based on their fixed percentage share of the net-short obligations that DWR sought to serve when it entered into its long-term contracts in early 2001. (SCE Opening Brief, p. 6-7.)

Edison's proposal is sound in theory, but its choice of allocation percentages is flawed. Based on the record in this case, we are convinced that a fair outcome is one that allocates the above-market cost burden of the DWR contracts equally to all IOU customers. The cost allocation percentages we adopt must accomplish this, and those percentages that do not accomplish this will be rejected. We believe that the allocation percentages that are adopted should yield a result that impacts similarly situated customers equally, regardless of their location in the state. The customers themselves will perceive such an outcome as fair.

As a guide to evaluating the various allocation methodologies, several parties recommended the use of a "fairness yardstick" or "fairness metric," against which allocation proposals could be measured. Not surprisingly, there was some divergence among the parties among what should be considered fair. More fundamentally, the cost allocations that resulted from various methods varied dramatically.

To achieve a fair result, we will allocate the burden of the DWR contracts, their "above-market costs", to the customers of the IOUs based on the forecast usage of the customers who will be billed for these costs. This is the usage that is not exempted, under Assembly Bill (AB)1X (Chapter 4 of the Statutes of 2001-02 First Extraordinary Session), from paying DWR power costs: all usage except residential usage up to 130% of baseline, CARE, and medical baseline. The table below provides that "non-exempt" bundled usage for each IOU. The allocation percentages shown in this table are permanently adopted.

FORECAST NON-EXEMPT BUNDLED LOAD, 2004

We turn next to the above-market costs themselves. SCE submitted a projection of above-market DWR contract costs in its December, 2003 testimony (Exhibit 04-28). SDG&E criticized SCE's estimates, but did not submit its own estimates of these costs. Parties have expressed a strong preference that the allocation we adopt today be permanent, and SCE's explanation of its methodology is credible. Accordingly, we adopt the only estimate of above-market costs that is in the record in this proceeding, SCE's Exhibit 04-28. Appendix A shows how SCE's annual forecast of above-market costs shall be pooled and re-allocated between PG&E, SCE and SDG&E each year from 2005 through 2013, using the adopted percentages.

Implementation of this approach will be straightforward. Every year when DWR submits its annual revenue requirement request to the Commission, it will be allocated between the customers of PG&E, SCE and SDG&E by starting with DWR's forecast of total contract costs in each IOU territory, and then making the adjustments to that are shown in Appendix A. This annual adjustment achieves an equal distribution of the above-market costs to ratepayers in the three IOU service territories. DWR's non-contract costs shall be allocated as described in the next section of this Decision. To illustrate this approach, Appendix B provides an illustrative calculation of the expected DWR contract allocations based on this method, for 2004 through 2013.⁹ Appendix C shows the calculation of the IOU power charges under this methodology for 2004.

Finally, as is the case today, each annual revenue requirement allocation shall also reflect a "true-up" of DWR's total costs between the three IOU service territories that reflects actual costs incurred for the most recent year for which complete data is available (e.g., the 2005 DWR revenue requirement allocation will be adjusted for the true-up prepared using 2003 actual data, and so on for future years). The above-market cost calculations, and resulting annual adjustments, that are calculated in Appendix A are permanent, and will not be trued up. However, we will allow adjustments to the above-market calculations adopted in this order if any DWR contracts are renegotiated from 2004 onward. The Settling Parties, in their comments to the Proposed Alternate Decision of Commissioner Brown, request that Section 8 of the settlement, the provisions relating to DWR contract renegotiations, be adopted. This is not necessary under the approach we adopt today. Rather, whenever any DWR contract is renegotiated, the IOUs shall work together to estimate the resulting annual benefits of the renegotiation. These benefits shall be allocated to each IOU using the equal-cents-per kWh allocators we adopt today, and used to adjust the Annual Adjustments shown in Appendix A of this decision. This process, when necessary, can occur as part of the annual DWR revenue requirement proceedings before the Commission.

⁹ These estimates are provided for illustrative purposes only. They are based on energy modeling that DWR provided in support of its 2004-only revenue requirement, which was also used to prepare Exhibit 04-Comp, the Comparison Exhibit in this proceeding. In practice, DWR will update its annual forecast of expected contract costs as part of its annual revenue requirement requests to the Commission.