4. Discussion
4.1. Standards of Review
We have reviewed settlements as far back as at least 1988.3 In doing so, we have often acknowledged California's strong public policy favoring settlements. This policy supports many worthwhile goals, such as reducing litigation expenses, conserving scarce resources of parties and the Commission, and allowing parties to reduce the risk that litigation will produce unacceptable results.
In assessing settlements we consider individual settlement provisions but, in light of strong public policy favoring settlements, we do not base our conclusion on whether any single provision is the optimal result. Rather, we determine whether the settlement as a whole produces a just and reasonable outcome.
We have specific rules regarding approval of settlements:
"The Commission will not approve stipulations or settlements whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law, and in the public interest." (Rule 51.1(e).)
In addition, Settling Parties offer the May 13 Settlement as an all-party settlement. As first articulated in 1992, we condition our approval of an all-party settlement on the following factors:
a. The settlement agreement commands the unanimous sponsorship of all active parties;
b. Sponsoring parties are fairly reflective of the affected interests;
c. No settlement term contravenes statutory provisions or prior Commission decisions; and
d. The settlement conveys sufficient information to permit the Commission to discharge future regulatory obligations with respect to parties and their interests.4
Settling Parties argue here that the May 13 Settlement meets the all-party tests. Further, they contend that the May 13 Settlement plus the 5 Supplemental Settlements meet the broader tests of being reasonable in light of the whole record, consistent with law, and in the public interest. We agree as explained below.
4.2. May 13 Settlement
Settling Parties assert that the May 13 Settlement meets all four all-party settlement tests. We agree. First, Settling Parties are all the active parties on the issues that are the subject of the May 13 Settlement.
Second, Settling Parties include residential, small commercial, large commercial, agricultural and industrial customers. These parties are fairly reflective of the affected interests.
Third, no term of the settlement contravenes statutory provisions or prior Commission decisions. This is examined further below.
Lastly, the record contains the direct and rebuttal testimonies of all parties. The May 13 Settlement, in combination with the record, contains sufficient information to permit the Commission to discharge its future regulatory obligations with respect to the parties and their interests.
4.3. May 13 Settlement plus the 5 Supplemental Settlements
Settling Parties contend that the May 13 Settlement plus the 5 Supplemental Settlements meet the tests of being reasonable in light of the whole record, consistent with law, and in the public interest. No party recommends rejection of any settlement. We conclude the settlements meet our tests for approval, and merit adoption.
4.3.1. Reasonable in Light of the Whole Record
The record consists of over 80 exhibits, plus testimony at evidentiary hearing over two days from panels of expert witnesses in support of individual settlements. The Administrative Law Judge (ALJ) asked specific questions of Settling Parties, answered both in writing and by panelists. The record is thorough and supports the settlements.
Regarding marginal costs, Settling Parties argue that the primary purpose of determining marginal costs in this proceeding is to establish the cost of service for revenue allocation to customer class. Settling Parties disagree on particular marginal costs and the magnitude of revenue changes needed to bring customer classes to their full cost of service. Nonetheless, Settling Parties state they generally agree that the residential class is bearing less than its full cost of service, and most non-residential classes are bearing more than their full cost of service. With this general concurrence regarding costs, Settling Parties agree to a revenue allocation that brings electric rates into better alignment with PG&E's costs of service to each customer class while at the same time tempering the magnitude and abruptness of changes to any one customer class. They do so without agreeing to particular marginal costs, and recommend that none be adopted here.
In support, Settling Parties assert that, since the GRC revenue allocation is revenue neutral, the larger the increase to residential customers the larger the decrease to all other customers. Parties disagree on the cost of service, the magnitude of the revenue changes needed to align revenues with full cost of service, and the merits of various measures used to mitigate the adverse effects of large increases. The following table, however, shows the spectrum of Settling Parties' litigation positions on the cost of service, revenue allocation after recommended mitigation, and the settlement result for the residential class:
TABLE 2
POSITIONS ON RESIDENTIAL CLASS
AVERAGE BUNDLED RATE INCREASE
PARTY |
FULL COST OF SERVICE |
RESULT AFTER MITIGATION |
TURN |
6.5% |
2.5% |
ORA |
5.3% |
3.0% |
PG&E |
15.3% |
11.9% |
CMTA/ICP |
16.0% |
16.0% [2] |
SETTLEMENT |
Unknown [1] |
About 4.5% [3] |
[1] Parties do not agree on specific marginal costs, and thus the full cost of service resulting from the settlement is unknown.
[2] No mitigation is recommended.
[3] Parties state it may be greater than 4.5%, but only to a limited degree and over a period of time (e.g., 11 other revenue changes to take effect on January 1, 2006, and others to take effect before the decision in Phase 2 of PG&E's 2007 GRC).
We agree that Settling Parties' proposal is reasonable in light of the whole record. Even without determining specific marginal costs, the record shows that charging full cost by any party's measure means increases to the residential class, with offsetting decreases to other classes. Parties agree, however, on a revenue allocation that moves rates closer to cost while mitigating adverse effects.5 The approximate 4.5% increase is below even the smallest "full cost" increase, and thereby "moves rates substantially in the direction of full cost of service without (in all likelihood) overshooting the mark by anyone's measure." (May 13, 2005 Motion to Adopt Settlement, page 3.) The approximate 4.5% increase is squarely in the mid-range of the outcomes recommended in the parties' litigation positions. These outcomes are reasonable in light of the whole record.
Particular rate design outcomes are also reasonable in light of the whole record, often reflecting the position of one or another party, or a compromise between PG&E and parties active on particular issues and rate schedules. For example, PG&E sought an increase in CARE customer rates and ORA proposed no increase for low-income residential CARE customers. The settlement provides for no increase. Similarly, PG&E sought increases in customer charges for Schedules A-1 and A-6 while NRDC and ORA both recommended no increase. The settlement provides for a moderate increase.
All parties had the opportunity to review the results of other settlements for impacts on their interests, and no party objects to any settlement. For example, Setting Parties state that settlements on master meter discounts and streetlight non-energy charges were negotiated only by the few parties active on these issues, but all parties had the opportunity to review the results for impacts on their interests and no party raises an objection. This is similarly true for residential, small light and power and all other settlements.
4.3.2. Consistent with Law
Settling Parties assert that the May 13 Settlement with the 5 Supplemental Settlements comply with all laws and Commission decisions. We agree.
For example, Settling Parties point out that the Commission's currently adopted revenue allocation principles for incremental revenue changes after February 2004 apply only "prior to the adoption of rates in Phase 2 of PG&E's 2003 GRC [i.e., this proceeding]..." (D.04-02-062, Attachment A, Paragraph 10.) Thus, this decision governs revenue allocation and rate design for all matters addressed herein (e.g., various specified rate changes before,6 on, and after January 1, 2006).
Further, Settling Parties state that the Settlements are consistent with Water Code § 80110 (adopted as part of Assembly Bill 1X in January 2001) by providing that revenue requirement changes within the residential class are allocated entirely to usage in excess of 130 percent of baseline. Settling Parties assert that the ERB Settlement continues methods prescribed in D.03-07-028 and D.04-02-062, in a manner consistent with the requirements of Senate Bill 772 and the Public Utilities Code. Settling Parties point out that changes to baseline quantities in the Settlement Agreement are consistent with Public Utilities Code § 739 (regarding baseline),7 and D.05-06-029 (regarding gas seasonal redefinition, moving April from winter to summer). The Settlement is consistent §§ 739.1 and 739.2 (regarding CARE), § 739.5 (regarding residential master meter submetering), and § 739.7 (regarding an appropriate residential inverted tier rate structure). PG&E and Settling Parties state in response to several questions that the resulting rates are just, reasonable, and nondiscriminatory, in compliance with §§ 451 and 453.
No party provides any contradictory information. We conclude the Settlements are consistent with law.
4.3.3. In the Public Interest
Settling Parties assert the May 13 Settlement with 5 Supplemental Settlements is in the public interest. We agree.
The settlements are a reasonable compromise of Settling Parties' respective litigation positions. The settlements avoid the cost of further litigation, and conserve scarce resources of parties and the Commission. The settled revenue allocation moderates potentially harsh bill impacts while better aligning rates with costs. PG&E will soon make a marginal cost showing in Phase 2 of its 2007 GRC. 8 Parties will there have a full opportunity to litigate calculation of specific marginal costs, for which a decision is not needed and not reached here.
The Settling Parties' recommended overall residential class increase is reasonable. Absent the May 13, 2005 Settlement, rates on January 1, 2006 would be allocated via the RDSA, and the residential class average bundled rate would decrease by 2.4%. (See Table 1 above.) This would be inconsistent with moving rates to cost. Even with its own proposed mitigation, applicant sought an overall 11.9% increase in the residential class average bundled rate compared to rates at March 1, 2005 levels. (Exhibit 11, Attachment 2, page 3.) The May 13, 2005 Settlement, however, results in only a 2.1% increase from rates at March 1, 2005 levels. (Table 1 above.) This moves rates toward costs but substantially moderates adverse effects.
While we would like to further moderate the increase to residential customers, all parties agree that residential customers are paying less than their cost and some increase is reasonable. There is no testimony to the contrary. Parties representing residential customers assert they made reasonable tradeoffs of a moderate overall revenue increase with mitigation measures (e.g., not exceeding any party's estimate of full cost, retaining the total at less than energy crisis levels) plus favorable individual rate elements (e.g., no increase for CARE, no Tier 4 for medical baseline). We think the Settling Parties' judgment is consistent with the public interest, and we will not disturb their compromise result.
We would also like to further reduce commercial, industrial and other rates. Parties representing those customers accept a more moderate decrease. We will not second guess the results satisfactorily and voluntarily reached by all Settling Parties.
We also note that individual rate elements are consistent with the public interest. For example, Settling Parties agree to reinstate residential Tier 5. This provides a powerful conservation incentive for the largest residential users, assists with satisfying other Settlement parameters, and is in the public interest.
Similarly, demand and energy charges for light and power customers were disputed. EBMUD sought lower levels of maximum demand charges and higher levels of TOU energy charges, thereby providing greater incentives for usage management to avoid these charges. PG&E recommended charges based on its marginal costs. Most other parties favored higher maximum demand charges and lower TOU energy rates. The Settlement represents a compromise that sets the maximum demand charge half way between what would have been determined based on the RDSA method and the level recommended by PG&E. This is a balance that minimizes bill impacts while still adjusting total rates and TOU rate differentials to apply updated and more accurate cost-based prices. The result will motivate load-shifting, energy efficiency and conservation, and is in the public interest.
In furtherance of the public interest, we implement this order by requiring applicant to provide the following additional notice. The Supplemental Light and Power Settlement provides for eliminating Schedule E-25 effective May 1, 2006. The bill impact analysis shows that two accounts currently on Schedule E-25 are subject to reduced bills if they move to Schedule E-19. (Exhibit 55.) Customers on Schedule E-25 need sufficient notice of their rate options prior to closure of this schedule in order to make reasonable decisions. To provide this opportunity, PG&E should serve written notice on all Schedule E-25 customers no later than 90 days prior to May 1, 2006. The notice should inform them of the closure of this schedule along with their rate options. Consistent with the provisions for closing Schedule AG-7 contained in the Supplemental Agricultural Settlement, the notice should include rate analyses to assist Schedule E-25 customers select the best alternative rate schedule.
4.4. Conclusion
The May 13, 2005 Settlement is an all-party settlement and meets our tests for adoption. The May 13, 2005 Settlement plus the 5 Supplemental Settlements, taken as a whole, are reasonable in light of the whole record, consistent with law, and in the public interest. The Settlements produce just and reasonable results and merit our adoption.
3 See, for example, D.88-12-083 (30 CPUC2d 189), D.90-08-068 (37 CPUC2d 346), D.92-12-019 (46 CPUC2d, 538), D.93-04-056 (49 CPUC2d 72), D.93-12-016 (52 CPUC2d 317), D.96-01-011 (64 CPUC2d 241), D.98-04-064 (80 CPUC2d 1), D.03-12-035, D.04-02-062, D.04-05-055, D.05-03-022, D.05-06-016, and D.05-06-032.
4 D.92-12-019 (64 CPUC 2d 538, 550-551).
5 Settling Parties state that among the ways this is accomplished is "by linking mitigation of the residential rate level resulting from this proceeding to the peak level of residential electric rates during the recent energy crisis." (May 13, 2005 Motion to Adopt Settlement, pages 1-2.) More specifically, "...rates resulting from the Phase 2 allocation as set forth in Table 2 of the [May 13] Settlement Agreement...already set residential rates for purposes of this proceeding at the energy crisis level, less $26 million (the estimated residential class share of the second series of the energy recovery bonds)." (Exhibit 48, Answer 5.3 at page 9.)
6 If the May 13, 2005 Settlement is rejected, parties recognize that allocation of revenue changes before January 1, 2006 will revert back to principles adopted in the RDSA. In fact, the May 13, 2005 Settlement states parties' understanding of this treatment. For example, parties state that the DWR allocation effective June 1, 2005 will be adjusted to RDSA principles reflected in AL 2647-E-A, rather than the allocation in the May 13, 2005 Settlement actually implemented via AL 2647-E-B, if the May 13, 2005 Settlement is rejected. (May 13, 2005 Settlement at § V.3.a, pp. 10-13; also see Resolution E-3933 adopted May 26, 2005.)
7 All statutory references are to the Public Utilities Code unless stated otherwise.
8 That showing is due about March 1, 2006. (See letter dated September 1, 2005, from Commission Executive Director Steve Larson to PG&E granting PG&E a Rule 48(b) request to defer its marginal cost showing from Phase 1 to Phase 2 of its 2007 GRC; proceeding number TEND 1205.)
