12. Assignment of Proceeding
Susan P. Kennedy is the Assigned Commissioner and Douglas M. Long is the assigned Administrative Law Judge and principal hearing officer in this proceeding.
1. As a result of massive wildfires, on October 26, 2003, then-Governor Davis declared a state of emergency for San Diego County. The following day, October 27, 2003, President Bush also declared a state of emergency for San Diego County.
2. Approximately 3,200 power poles, 400 miles of wire, 400 transformers and more than 100 other pieces of related equipment were damaged by the fire and needed to be replaced by SDG&E. In total, SDG&E spent $71.1 million to replace lost equipment and restore service.
3. SDG&E's actions were reasonable when it activated its Emergency Operations Center. As a result of the damage, SDG&E decided it was necessary to call on other utilities for assistance to restore service. The use of mutual assistance crews and additional contractor personnel was necessary to restore service in a timely fashion. Senior management was involved in the oversight of the project and SDG&E systematically tried to reestablish service as quickly as possible.
4. Based on the high cost of premiums and limits on coverage, SDG&E had no reasonable insurance option to offset the costs of the Wildfires.
5. Resolution E-3238 established the Commission's requirements for invoking and applying the CEMA tariff provisions. SDG&E complied with these requirements by informing the Commission in a timely manner and establishing separate accounting and other controls for the Wildfires' costs. The company reasonably assumed that direct labor at straight -time (i.e., excluding overtime) was not includable in the Wildfire Account, but overtime labor and other costs incurred solely to restore service are incremental to existing costs already included in rates.
6. ORA's examination of SDG&E's actions was focused on ensuring that only incremental costs were included in the Wildfire Account. ORA found that SDG&E included in the Wildfire Account $9,416 for newspaper advertisements to thank the utilities that provided mutual assistance crews. This cost was not necessary to restore service and is not reasonably included in the Wildfire Account.
7. ORA did not review the reasonableness of expenditures for a cost causation perspective or from a cost reduction or avoidance perspective.
8. UCAN applies an additional reasonableness test to SDG&E's request that was not employed by ORA. UCAN proposes that costs incurred by SDG&E should be compared to a fair market price for the commodity.
9. SDG&E provided meals, beverages and snacks in large number to all workers, including, incidentally, some police, fire and other workers involved in fighting the Wildfires or SDG&E's efforts to restore services. SDG&E utilized established catering firms that it believed could provide adequate service in numerous locations throughout the affected service territory.
10. SDG&E's vendors charged for food service on the basis of the number of meals served, but the measurement was a standard assumption of the size of food portions that would constitute a meal. Many workers often ate the caterer's equivalent of multiple meals as a result of long hours and hard work. No accurate head-count was maintained. SDG&E did negotiate a generic 10% reduction to the bills from one major vendor after the Wildfires.
11. UCAN compared certain food service costs to other viable measures of market prices and thus applied a reasonable comparison standard to the costs incurred by SDG&E. SDG&E did not show that it made any analysis of the costs charged by vendors, and therefore it unreasonably relied on the vendor contracts to justify the reasonableness of the costs incurred. UCAN showed that SDG&E's vendors made excessive charges for drinks and snacks, including bottled water, Gatorade and Red Bull, exceeding the prices available to the vendors even at COSTCO, an accessible large retail/wholesale outlet, by $582,300.
12. SDG&E did not exercise reasonable control over all vendor costs and ratepayers should not have to pay $582,300 in excess of market prices.
13. The CEMA process as authorized in Resolution E-3238 allows SDG&E the opportunity to recover its reasonable costs incurred as a result of a catastrophic event. Without this ratemaking exception, SDG&E would have no option but absorb all of its Wildfires expenses and would only recover capital expense changes to rate base in a subsequent rate setting proceeding such as the next general rate case.
14. Seventy three percent of SDG&E's destroyed poles (2,096) were over 15 years old, which put them on a 10-year inspection and treatment cycle. No inspection will be needed on the new replacement poles during the next 10 years and this will avoid inspections at $34.29 per pole. Of those older destroyed poles, 30% were already inspected prior to the fire, so SDG&E avoided inspecting 1,235 destroyed poles at an estimated savings of $42,348. It is equitable to offset this clear future savings of $0.042 million against the much larger cost of $37.600 million requested by SDG&E under the CEMA ratemaking exception.
15. In order to allow for a full cost recovery, Commission ratemaking conventions allow SDG&E to increase its revenue requirement to collect from all customers the amount of revenue otherwise uncollectible from a few, plus the franchise fees it pays on the total revenue requirement. SDG&E correctly calculated the gross-up factor as: 1 / 1 - (3.67% + 0.266%) = 1.041.
16. The tree inventory maintained for vegetation management has increased since the Wildfires because damaged trees adjacent to the right-of-way are now monitored by SDG&E. Many damaged trees in the right-of-way were not physically removed and remain in the inventory.
17. The total cost of replacing long-lived assets destroyed by the Wildfires is higher because SDG&E expedited construction; this management decision resulted in incurring both higher costs, including overtime and mutual assistance, and additional costs, including meals and snacks, compared to slower methods of restoring service. All of the costs are allocated between maintenance, which is a current expense, and capital expenditures, which reflect installing long-lived assets in rate base.
18. SDG&E proposes to expense most of its support costs that are accounted for as overheads based on its interpretation of the applicable accounting standards that these costs were immediately "consumed" and should not be capitalized as a part of the costs of installing new long-lived assets in rate base. SDG&E cannot identify any specific accounting rule supporting its interpretation. Generally accepted accounting principles and ratemaking accounting authorized by the Commission require that all costs, including overhead and support services, associated with installing long-lived assets should be capitalized for recovery over their useful service life.
19. UCAN recommends an allocation factor for support costs based on the allocation of labor costs to reflect the correct split of costs between expense and capital. This method allocates 15.8% to current expense and 84.2% to capital expenditures. UCAN's proposal reasonably allocates support costs between expense and capital expenditures based on the labor devoted to current expense and long-lived assets.
20. SDG&E incorrectly allocates nearly all environmental costs to expense without regard to the split between operating expense and capital expense of direct labor and materials. UCAN's proposal reasonably assumes that environmental costs should follow labor costs in the absence of any convincing justification by SDG&E to expense the costs currently.
21. The appropriate allocation of support costs and environmental costs to capital expenditures still ensures that SDG&E has a reasonable opportunity to recover in rates its prudently incurred costs to restore service after the Wildfires.
22. Rate recovery of the current expense portion of the Wildfire Account should occur over a reasonably short period of time unlike the capital expenditure portion that should be recovered over the useful service life of the new assets. It will be less disruptive and more convenient to customers if the current expense portion is amortized over the 15-months from October 1, 2005 through December 31, 2006. This also strikes a balance between the respective SDG&E and UCAN proposals of 12 and 24 months.
23. SDG&E employees are eligible for incentive compensation under a performance evaluation plan where the actual incentive is based upon their performance in relationship to specific goals and objectives. SDG&E accrued $726,000 for incentive compensation, and allocated $426,000 as incremental costs to be recovered in the Wildfire Account. SDG&E did not demonstrate that employees were specifically awarded incentive compensation or that it was solely attributable to their performance during the Wildfires service restoration.
1. The disaster declarations issued by the Governor and the President for the 2003 Wildfires constitute an event declared to be a disaster by competent state or federal authorities for purposes of § 454.9.
2. Use of the Wildfire Account for recording and recovering the costs incurred by SDG&E to restore utility service to customers, repair, replace or restore damaged facilities, as caused by the 2003 Wildfires, is appropriate under the statute as written.
3. SDG&E alone bears the burden of proof to show that its costs were reasonable and are eligible for recovery under the CEMA tariff.
4. The Commission's Standard for Prudent Managerial Action is the appropriate standard to apply to the costs recorded in the Wildfire Account.
5. The Commission is not dependent on an intervenor performing any specific analysis before the Commission may determine the reasonableness of a pending matter.
6. Rate recovery of various support costs can be reasonably allocated between expense and rate base in proportion to the allocation of direct labor.
IT IS ORDERED that:
1. The reasonable total recoverable costs resulting from this Catastrophic Event Memorandum Account (Wildfire Account) application is $39.752 million to be collected in retail rates charged by San Diego Gas & Electric Company (SDG&E).
2. SDG&E's electric department expense portion and the 2003-2005 capital-related revenue requirement portion shall be amortized in rates beginning October 1, 2005 and ending December 31, 2006. The 2006-2007 capital-related revenue requirement shall be recovered as an annual adjustment to base margin rates effective January 1 of 2006 and 2007.
3. SDG&E's gas department Wildfire costs shall be recovered by transferring the gas department Wildfire Account balance to the Core and to the Noncore Fixed Cost Accounts. SDG&E shall file an advice letter to allocate the gas department's Wildfire costs between Core and Noncore. The Wildfire costs allocated to the Core and Noncore Fixed Costs Accounts shall be recovered in rates as a part of the ongoing operation of these accounts. The advice letter will be effective on the date filed subject to Energy Division determining that the filings are in compliance with this order.
4. SDG&E shall file a compliance advice letter with the Commission's Energy Division no later than 5 days prior to the effective date of the October 1, 2005 amortization described in Ordering Paragraph No. 2. SDG&E shall serve the advice letter on the service list for this proceeding. The advice letter shall include the calculations of the rate amortization to recover the current portion of the Wildfire Account and include a description of the recovery in the Preliminary Statement. The advice letter will be effective on the date filed subject to Energy Division determining that the filings are in compliance with this order.
5. SDG&E shall include the 2006 and 2007 capital-related revenue requirement in the advice letters filed to implement the authorized changes to 2006 and 2007 base margin rates as authorized in D.05-03-023.
6. Application 04-06-035 is closed.
This order is effective today.
Dated _____________________, at San Francisco, California.
APPENDIX A
Lists of Appearances
DAVID A. EBERSHOFF
Attorney at Law
FULBRIGHT & JAWORSKI, L.L.P.
865 S. Figueroa St. Ste. 2900
Los Angeles, CA 90017
(213) 892-9327
Fax # (213) 680-4518
Appearing for Apple Valley Water Company
Applicant
EDWARD N. JACKSON
PARK WATER COMPANY
9750 Washburn Rd.
Downey, CA 90241-7002
(562) 861-5902
Appearing for Apple Valley Ranchos Water Company
Applicant
JASON REIGER
Attorney at Law
CALIFORNIA PUBLIC UTILITIES COMMISSION
505 Van Ness Ave.
San Francisco, CA 94102
(415) 703-2262
Appearing for ORA
Intervenor
STATE SERVICE
YOKE W. CHAN
Office of Ratepayer Advocates
505 Van Ness Ave.
San Francisco, CA 94102
(415) 703-1909
Appearing for ORA
(End of APPENDIX A)
