Walwyn Proposed Decision (Item 1)

III. Rate Design Principles and Goals

In the ACR issued on March 26, the following principles were set forth as a framework in designing the illustrative rate proposal:

- Base-rate differences among customer classes should be adjusted to reduce the disparity in prices paid for energy (on a per kilowatt hour basis) to ensure fairness in the prices paid for all energy purchased for California;

- For all customers, electric bills should be tiered to the amount of electricity used in order to promote conservation - the more you use, the more you pay for that extra electricity above a certain threshold of use; and

- For commercial customers with time-of-use (TOU) or other advanced meters, rates should be tiered to promote the greatest amount of conservation possible during summer peak hours.

After considering interested parties views⁴ on the rate design goals the Commission should pursue, President Lynch issued an ACR on April 11 that provided parties flexibility in constructing their own rate design proposals and established a hearing process to examine the proposals. As will appear from the discussion below, the original framework has been extensively modified in response to the submissions of parties.

We provided each witness an opportunity to address the rate design goals of equity and conservation as set forth in the March 26 ACR. In addition, as explained above, we invited three expert witnesses to offer testimony that evaluated how effectively each rate design proposals met these goals.

A. Equity

The goal of equity is essentially one of fairness, viewed in a broad context. Cost responsibility should be considered but only as one of the measurement criteria, and only when we have the reliable data to use in our analysis. In this proceeding, we will consider the unusual nature and large dollar amount of the surcharge increase, as well. Parties generally agree that we do not have the cost of service data necessary to consider cost-based equity⁵ here. There are two reasons for this. First, we do not have accurate information concerning the nature and extent of the costs relating to power purchases to date by CDWR on behalf of the utilities and their customers.⁶ These purchases are the primary basis of the three-cent surcharge authorized in D.01-03-082 and being allocated here. Second, the wholesale power market has been dysfunctional for approximately a year, such that costs are not the basis of the prices being charged. As PG&E states, "There is no basis for assuming that peak demands drive investment decisions in the current wholesale market."⁷

We agree with TURN that we should consider fairness in the broadest sense, viewing it as a social or policy construct far more than it is a matter of economics.⁸ The view that fairness encompasses social and political questions is shared by Peter Bradford, one of three outside experts invited by the Commission. Bradford cites to Professor James Bonbright's rate design principles, the sixth of which is: fairness of the specific rates and the apportionment of total costs of service among the existing customers.⁹ Further, Bradford states he would consider ability to pay as a measurement criteria in looking at equity as a rate design goal.

In recognizing the extraordinary burden we must allocate, we are convinced of the need to allocate this burden on an equal basis, in a manner that protects vulnerable customers and ensures no individual customers experience extreme hardship. The basis on which we allocate this increase should be understandable to all customers and appear reasonable to most customers. Following Bonbright's first principle, our rate design should have the related practical attributes of simplicity, understandability, public acceptability, and feasibility of application.

We are certainly conscious of the economic impact our decision will have on all sectors of California life - residential, retail and service businesses, agriculture, public services, and manufacturing and processing firms. We intend to design rates that provide price signals to which customers can respond, and thereby reduce the amount of the increase they will see on their bills. We will ensure that customers receive the public information and energy efficiency tools necessary to manage their energy usage in a manner that reduces their overall bill.

We are also cognizant of individual customer impact as a principle to be considered in designing equitable rates. As CIU states, "a second prong of the equity test is that no customer should receive very harsh impacts relative to others."¹⁰ ORA addresses this issue through its bill limiter proposal. CIPA believes that the equity goal will be met through (1) protection of low-income customers under the CARE customer exemption, (2) the Governor's proposal that agricultural rates be capped, and (3) the Legislature's exemption of residential usage up to 130% of baseline.

At this time, we do not intend to pursue the goal of reducing the disparity in prices paid for energy among customer classes. We do not have sufficient data to undertake this fundamental structural review now. We intend to revisit this goal in future proceedings.

B. Conservation

Conserving electricity means reducing the amount of electric power needed to serve customers. This is a fundamental rate design goal of this proceeding. The record demonstrates that power purchased in the wholesale market for all hours by CDWR and the Independent System Operator (ISO) to serve the customers of PG&E and Edison is prohibitively expensive, as we discuss more fully below.

The March 26 ACR also cited our goal of promoting the greatest amount of conservation possible during summer peak hours. The record reflects that summer peak is the time PG&E and Edison have the largest net short position and are therefore projecting a need for the most purchases from CDWR and the ISO to meet anticipated customer needs. We expected to have detailed information from CDWR, broken out by month and time of day, on the amount of power it had under contract, the prices it would be paying, and the amount of power it anticipated buying on the spot market. This information would allow us to determine the value of conserving energy in specific peak periods. Unfortunately, we have not yet received that information.

Several parties testified that they expect CDWR will have to purchase significant power on the spot market this summer. Our record provides information showing futures contracts for this summer being quoted at $200-$800/MW. As Dr. Borenstein testified, all energy purchased this summer will be expensive and power purchased in peak periods will be even more expensive.

The Governor's 20/20 program is designed to reward customers who reduce their overall electric consumption by 20% this summer. This incentive, combined with customer education, energy efficiency programs, and the price signal that higher rates will send customers, are effective tools to promote conservation. A reduction in total energy consumption will help protect Californians from blackouts and reduce the total financing needed by the state to purchase electricity.

To maximize the value of conserving energy at times of peak demand, we can strengthen the price signal we send customers for periods when demand is highest. We have some ability to do this now by increasing rates at peak periods for those customers on time-of-use (TOU) schedules. Without having CDWR's specific cost and supply information we are using our institutional judgement based on our expertise and experience to set the price premium for peak usage. This is also the basis for our determination that the traditional peak period of 6-8 hours accurately captures the specific peak time periods we need to address. Both of these findings may be modified when the CDWR provides us with more and better information.

We will address the issue of reliability through promoting our conservation goals and using interruptible programs that we are addressing in Rulemaking (R.) 00-10-002. We recognize that certain types of customers place an extremely high value on reliability and expect that these customers will be particularly receptive to peak reduction programs.

The Legislature authorized $35 million in AB 1X 29 for the CEC to install RTP metering systems on all commercial customers of PG&E and Edison with connected loads of 200 kW and above. When CEC completes this installation and the CDWR provides specific projections, the Commission will be better able to specifically target and provide more effective price signals.

Consistent with our principles of equity and conservation, we adopt a revenue allocation and rate design that achieve the following objectives: (1) reduce the need for procuring power and therefore reduce the amount of money California is paying wholesale generators for electric power; (2) allocate the unreasonable costs of this generation in a fair and understandable manner to all customers, recognizing the adverse economic impact our decision will have on all sectors of California life; (3) protect the most vulnerable customers; (4) ensure no individual customers experience extreme hardship; and (5) provide customers the necessary tools to manage their energy usage and reduce their energy bills.

⁴ At the April 2 PHC and in comments on April 6, 2001. ⁵ In defining equity as a rate design goal, several parties equated it solely with economic efficiency, stating customers should pay a rate that is in direct relationship to the marginal cost of serving them. Edison defines equity as charging various classes of customers based on the costs of providing service to them. Farm Bureau witness Illingworth noted her agreement with Edison's definition, stating revenue allocation should be based on the future costs to serve the loads of each class. 19 RT 2404. ⁶ In a May 2, 2001 letter to President Lynch, CDWR provided a revenue requirement figure of $9.2 billion but not the details necessary for rate design. ⁷ PG&E brief at 15. ⁸ Florio, TURN, 22 RT 2962. ⁹ Bradford, Energy Division, 23 RT 3001-2. Bradford states that the eight rate design principles laid down by James Bonbright, the preeminent utility economist of the mid-20^th century, have held up well over time and should be considered by the Commission here. ¹⁰ CIU brief at 4.