Walwyn Proposed Decision (Item 1)

IV. Revenue Requirement Increase

Determining the revenue requirement increase is the first step in allocating revenue and designing rates. Determining the exact price increase to be implemented for each nonexempt rate schedule offered by the Edison and PG&E first requires calculating the incremental revenue each utility must collect. In a typical rate case, we would determine the per kWh increase for each rate schedule as the ultimate product of allocating a known increase in costs or revenue requirement. Here, however, the unprecedented current circumstances described in our earlier decisions, D.01-01-018 and D.01-03-082, preclude us from knowing actual cost increases or revenue requirement. We do not know the costs of wholesale power being purchased to serve electric customers, in part because the CDWR has not yet established its revenue requirements. Nevertheless, we must expeditiously determine a revenue requirement and implement the surcharge.¹¹ The surcharge revenues are subject to refund, as provided in D.01-03-082, should the anticipated costs not materialize.

The incremental revenue requirement created by the surcharge authorized in D.01-03-082 is a function of the sales to which the revenue requirement increase applies. The sales forecasts used by both Edison and PG&E were prepared solely by the respective utilities. Due to the extremely compressed schedule for this proceeding, these forecasts were not thoroughly reviewed by the other parties, as would be the normal course in a proceeding implementing a rate case of this magnitude. Due to the lack of review, Aglet requests that we limit the use of these forecasts to the rate increase at issue in this proceeding. We agree. In addition to the usual uncertainty present in any forecast, the time available has not allowed the utilities even to account for known or predictable future events.¹² Consequently, we must acknowledge that these forecasts, while the best evidence available, should only be used for the limited purposes of this proceeding.

Having concluded above that we will use the sales forecasts provided by the utilities, we must determine whether the rate design is applicable to both the 1¢/kWh increased authorized in D.01-01-018 and the 3¢/kWh increase authorized in D.01-03-082. In addition, we must determine whether the sales to which the surcharge is applied for purposes of determining the incremental revenue requirement properly include sales exempt from paying the surcharge.

In D.01-01-018, we authorized PG&E and Edison to impose for 90 days an Emergency Procurement Surcharge (EPS) of 1¢/kWh for all applicable sales of electricity. We directed PG&E and Edison to implement the increase as adopted; that is, add a 1¢/kWh surcharge to all applicable sales. In D.01-03-082, Ordering Paragraph 6, we made the EPS permanent and, in Ordering Paragraph 1, we authorized an additional surcharge of 3¢/kWh. For the latter surcharge, however, we declined to adopt a similar across-the-boards approach and instead undertook this process to consider rate design proposals tailored to encourage conservation by allocating more of the surcharge to higher volume users' "tiered rates."

Some parties have advocated that we include the revenues to be collected from the EPS in this rate design effort. Specifically, those parties would calculate the incremental revenue requirement by multiplying forecasted sales by 4¢/kWh, rather than 3¢/kWh.

Aglet stated that the rate design adopted in this phase should be applied to the full four-cent increase because considering only the three-cent increase would tend to obscure the "full impact of the heroic rate increases customers will bear." CLECA/CMTA argued that while the Commission did not have the opportunity to evaluate revenue allocation and rate design for the one-cent surcharge when it was adopted, the Commission should use this phase for that purpose.

The Commission adopted the one-cent surcharge on January 4, 2001, which applies to all sales except to customers eligible for the CARE program. On February 1, 2001, the California Legislature enacted and the Governor signed AB1X, which created another exemption. Among other things, AB1X prohibits increases to rates effective on January 5, 2001, applicable to residential usage below 130% of baseline usage. Because the Legislature adopted the 130% exemption after we adopted the 1¢ surcharge, the 130% exemption does not apply to the one-cent surcharge. Stated another way, usage below 130% is not exempt from the 1¢ surcharge. Such usage is, however, exempt from the 3¢ surcharge. Thus, the two surcharges are subject to different exemptions. While there may be some administrative ease in folding the two surcharges into one, the differing exemptions preclude this seeming simplification. Moreover, in D.01-03-082, we clearly identified the 3¢/kWh as subject to a new rate design approach. The EPS is already reflected in the rates that are used as the starting point for the rate design being considered in this proceeding. Therefore, the revenue allocation and rate design we discuss here applies to the three-cent increase.

Edison calculates the incremental revenue to be recovered by multiplying 3¢/kWh times total forecasted system-wide sales for 2001 of 83.78 billion kWh. This results in an annual revenue increase of $2.513 billion. Similarly, PG&E applies 3¢/kWh increase to all forecasted sales for 2001. PG&E determined that its annual incremental revenue requirement is $2.46 billion. Because we agree that the revenue requirement increase should apply only to the 3¢/kWh adopted in D.01-03-082 and because we agree that we will use the utilities' sales forecasts for our determinations in this decision only, these revenue requirement increases are an accurate estimate of what is required.

Most parties apply the surcharge amount to all forecasted sales, including those sales that are exempt from paying it. In this way, the revenue requirement is determined based on an average of 3¢/kWh, recognizing that some kWh sales will carry no surcharge and others will carry a substantially higher surcharge.

Aglet agrees that under usual circumstances exempting certain sales from cost recovery responsibilities would yield a shortfall that other customers would have to make up. Aglet contends that in this unusual proceeding there is no legal or policy requirement to recover revenues that the utility would have achieved if there were no exempt sales. Because the surcharge is not based on quantified costs, there is no absolute need to collect that revenue. TURN agrees that all usage that is exempt from paying the surcharge should similarly be exempt from determining the revenue requirement. TURN contends that the first step in a proper methodology for allocating the rate increase to residential customers is to exclude the protected usage, as determined by the Commission and the Legislature.

In adopting the three-cent surcharge in D.01-03-082, we did not specifically address this issue in the context of calculating a revenue requirement. We simply applied the rate increase "to all power costs incurred after the effective date of this decision." There is no way of knowing actual procurement costs at this point in time. However, we have clearly stated that CDWR is to receive the full amount the utilities collect from all customers for each kWh of power provided by CDWR. It is reasonable to base the revenue requirement on applying the surcharge to forecast system-wide sales. Therefore, while we reiterate our commitment to ensuring that the exempt sales do not pay the surcharge, for purposes of determining the overall revenue requirement, all sales should be included.

¹¹ TURN states that the term "incremental revenue amount used for surcharge allocation" is more illustrative of the actual process involved here. ¹² For example, neither PG&E nor SCE modified their respective sales forecasts to include any reduction in sales as a result of the customers' conservation efforts, or for increased numbers of CARE-eligible customers due to the increased income standards adopted in D.01-01-018. While such modifications would typically be included in a thorough sales forecast, such modifications would greatly exceed the time available and the scope of this proceeding. We endorse the assigned ALJ's determination excluding SCE's attempt to include a proposal to re-instate the Electric Revenue Adjustment Mechanism (ERAM) from the record of this case.