XVI. CRS Mitigation: Capping or Levelizing CRS

Various parties representing DA interests propose that the Commission consider the cumulative economic impact on DA customers of imposing CRS charges, and the potential risk of making DA uneconomic. The Commission has previously expressed that the DA program has value for California, and that efforts should be undertaken to avoid making DA uneconomic. Various parties propose that the DA CRS be capped at prescribed amount to limit the adverse economic effects on DA that would otherwise result from the increase in electricity charges that would be required to fully fund DA CRS, including the Bond Charges.

Other parties such as TURN and ORA state that the Commission must address the risk a cap places upon bundled ratepayers. Financing of the undercollection produced by a cap must come from somewhere. (PG&E cross-examination, Tr. 1, pp. 15-120, McDonald/DWR.) Bundled ratepayers will pay the financing costs by default if another group or entity does not. (RT. 3, pp. 299-302, Marcus/TURN.) The financing will occur at the short-term balancing account rate, which TURN has calculated to be about 7%. (Exh. 18.) If a DA surcharge cap is adopted, issues that must be addressed include (1) what level of cap should be set; (2) under what conditions should the level of the cap be reevaluated; (3) what components does it cover? and (4) in what order are costs collected? Questions also arise concerning how the deferred collections in excess of the cap should be financed, and by whom. What interest rate should be applied to the deferred charges, and how can the responsibility for funding the interest be assigned to preserve bundled ratepayer indifference?

D.02-07-032 (Decision) authorized SCE to establish a "Historical Procurement Charge" (HPC) in the matter of A.98-07-003. SCE was thereby authorized to apply the HPC to DA customers by reducing the DA customers' generation credit by 2.7 cents/kWh until the effective date of a Commission decision implementing a DA cost responsibility surcharge in the instant rulemaking (R.02-01-011). This reduction in the DA surcharge credit was intended to provide for equivalent contributions between bundled and DA customers for the recovery of SCE's past procurement cost undercollections.

In D.02-07-032, we noted the likelihood that DA customers would be subject to CRS in this proceeding, bond charges in A.00-11-038 et al., and "tail" CTC associated with Public Utilities Code Section 367, in addition to the HPC. We observed that the "pancaking" of surcharges in different proceedings may lead to DA contracts becoming uneconomic. Yet, we have also set forth our policy in D.02-03-055 that there is value in maintaining the DA market. To guard against DA contracts becoming uneconomic, we stated in D.02-07-032 that "there should be a cap on the total surcharge levels imposed on DA customers (including the impact of any changes to PX credits)." D.02-07-032 did not, however, set a specific overall cap, "in deference to other proceedings."

Parties present a divergent range of rate cap proposals. CLECA and CMTA argue that the combined effect of SCE's HPC, a charge to recover the DWR historical costs, a charge to recover the DWR Indifference Costs, and a charge to recover the above-market URG costs could make DA uneconomic.⁹⁷ Both parties argue that this is inconsistent with the direction of the Commission.⁹⁸ CLECA proposes caps of 2.0 cents/kWh for PG&E and 2.25 cents/kWh for Edison and 2.75 cents/kWh for SDG&E. Because of SDG&E's relatively higher costs, CLECA recommends a 20-year recovery period rather than a 15-year period. It was on the basis of the figures on Table 2 of CLECA's exhibit that Dr. Barkovich concluded that its proposed caps would accommodate full recovery of the HPC, the Bond Charge and the DWR charges over time.

CMTA proposes a uniform cap of 2.0¢/kWh be adopted, along with balancing accounts to reconcile CRS revenues and allocated costs. CMTA proposes that the Commission sequence the recovery of the various categories of costs under the cap with the HPC procurement costs receiving the highest priority, followed by uneconomic DWR and URG costs. Total charges would remain at the capped level until direct access customers had fulfilled their HPC obligation and were current on their contribution to uneconomic DWR and URG costs. CMTA's recommendation in this regard is consistent with the Commission's recent decision concerning SCE's HPC.⁹⁹

SCE believes that adopting a cap is appropriate, and consistent with the Commission's intention to maintain DA as a viable customer option. SCE believes, however, that a 2.0¢/kWh cap is too low, and that the cap should initially be set at a level to at least allow the recovery of SCE's HPC (of approximately 2.5¢/kWh, though the actual rate varies by rate group) and the Bond Charge. SCE believes that setting the cap at 3.0¢/kWh will allow recovery of both of these items, with the condition that the first part of the revenues go to the Bond Charge (and to DWR) and the rest of the charges go to recovery of SCE's PROACT. Recovery of the PROACT will help SCE regain its credit worthy standing which was a top priority of the Settlement. Once the PROACT is recovered, SCE can reduce its charges to reflect the underlying cost of service, benefiting all customers. Setting the cap at 3.0¢/kWh will also accelerate the recovery of PROACT and allow the DWR above-market costs to be recovered sooner, which will benefit bundled service customers.

SCE argues that it should not be required to finance any deferred collections of DWR revenue requirement attributable to DA customers in excess of a cap. Because the amounts collected for DWR power are the property of DWR, and not the IOUs, SCE argues that DWR should be the entity financing these undercollections. DWR disagrees, however, arguing that DWR has no ability to issue additional bonds or to borrow additional monies to carry shortfalls in DA CRS obligations. DWR proposes that it be paid first from any funds collected under a cap, with IOUs bearing the risk for covering their remaining costs through any remaining funds.

PG&E believes that a cap of 4 cents/kWh would be reasonable, based on the comparative level of bundled rates that would be the alternative for DA customers. PG&E proposes that the Ongoing CTC be deemed to be recovered first, then the DWR Bond Charges, leaving any shortfall attributable to the DWR. PG&E also proposes that the cap be differentiated by voltage level for Rate Schedule E-20, consistent with underlying rates themselves, to reflect the differing line losses at different voltage levels.

If a DA surcharge cap limits the revenues recovered from DA customers for the DWR revenue requirement, then DWR must either receive less than its total revenue requirement for that year from customers, or must collect the DA shortfall from bundled customers. In the latter event, however, bundled customers would pay more than was allocated to them under the indifference calculation for that year.¹⁰⁰

PG&E proposes that DWR issue bonds to finance that shortfall. It is within DWR's authorized purpose for issuing bonds. Further, the $11.9 billion total bond issuance contemplated by DWR,¹⁰¹ which does not take the effects of a cap into account, is well below the statutory limit of $13.4 billion set on DWR's total bond issuance.¹⁰² This approach would require the active participation of DWR in developing the bond issuance to finance the cap. PG&E notes that DWR understands the concept, and did not raise immediate objections.¹⁰³

With DWR funding the shortfall, customers would then be able to take advantage of the interest rate at which DWR can issue bonds, according to PG&E. Under this approach, bundled customers provide the same amount each year as they would to DWR if there were no cap. DA customers pay less in the early years, and more in the later years as they bear responsibility for the bonds issued to finance the effects of the DA surcharge cap.

PG&E states that under the other approach, bundled customers would provide more to DWR in the early years, relative to the uncapped calculation, and less in later years. An "interest rate" would have to be established, to determine how much additional cost responsibility DA customers would have to bear in the future to "pay back" bundled customers for the extra amount they bore in the early years.

SDG&E favors levelization of annual fixed charges as a preferred approach to mitigating DA CRS, particularly given the relatively higher DWR costs experienced within its service territory. Levelization defers the impact of high-cost contract obligations in the early years to later years. SDG&E is also amenable to an overall cap on DA CRS in conjunction with levelization of the DWR component. SDG&E believes that a 2.7 cent rate cap, encompassing the individual rate components of the DA CRS, DWR Bond Charge, HPC Charge, and ongoing tail-CTC, would more than cover its costs if its positions were adopted, as set forth below:

DWR Ongoing 1.26 cents

DWR Bonds 0.51

HPC 0.00

CTC 0.70

2.47 cents

However, based upon updated DWR revenue requirements, SDG&E believes the Commission may well adopt a DWR Bond Charge higher than that proposed by SDG&E, pursuant to the terms of the DWR Bond Servicing and/or Rate Agreement(s). To the extent that this occurs, and results in the aggregate sum of the rate components exceeding the 2.7 cent cap, such a cap would result in an underrecovery of one or more SDG&E components under the cap.¹⁰⁴

SDG&E states that under-recovery would result from the fact that, once adopted, the DWR Bond Charge becomes a non-bypassable charge that must be recovered pursuant to the DWR Bond Servicing Agreement. In much the same fashion, the ongoing tail-CTC is also a non-bypassable charge that must be recovered. For PG&E and SCE, an HPC charge is expected to remain fixed for a period of one or more years. Consequently, the only remaining element to be under-recovered is the DA CRS.

To the extent that a DA CRS revenue recovery shortfall is caused by the cap, SDG&E believes the shortfall should then be recovered from that IOU's bundled customers and tracked for that IOU. At such time that adequate headroom exists under the cap, DA customers should reimburse bundled customers for that shortfall with interest calculated at the 90-day commercial paper rate. This headroom would develop over time as a result of the completion of the collection of the HPC charge, and possible changes in the level of the DWR Bond Charge and ongoing tail-CTC.

TURN and ORA raise the concern as to how the capping of DA CRS could adversely affect bundled ratepayers who could potentially be burdened with shouldering the financing costs of excessive deferrals of DA cost responsibility.

Discussion

In accordance with the directives in D.02-07-032, we conclude that a cap on the DA CRS needs to be adopted.

One consideration in setting a cap is to limit the charges imposed on DA to avoid making DA uneconomic. Yet, the evidence presented on this issue was limited to subjective judgment and anecdotal accounts of discussions with industry representatives. Based on this limited evidence, we find little basis to quantify the relationship between the level of a cap and the number of DA contracts that may become uneconomic. In the absence of persuasive empircal evidence concerning the economic sensitivity of DA to various levels of caps, we must weigh the potential impacts of adopting a cap at either the high end or low end of parties' recommendations. Not only do we consider the adverse impacts of imposing a cap that is either too high or to low, we also consider whether effects will be experienced now or in the future. Another consideration is who will pay the interest charges to finance the excess portion of the CRS above the cap. We conclude that in order to preserve bundled ratepayer indifference, the interest charges required to finance the cap must be borne by DA customers. If bundled customers were required to fund interest charges to finance DA customers' cap, they would no longer be indifferent since those interest charges would increase total bundled customers' costs. Therefore any cap that is imposed must include within it any interest charges required to finance the excess above the cap.

The timing is also a relevant consideration in setting a cap. The potential risk to bundled customers of setting a low cap is in the potential for large undercollections to build up to a point where bundled customers would be forced to absorb at least some of the debt because DA customers would be financially unable to pay it. This risk grows as a function of time. Thus, bundled customers exposure to this risk is felt less initially and more over time as any potential undercollection builds up. The timing effects just the reverse in the case of DA customers. The potential risk to the DA program in setting a high cap is felt more at the front end when CRS is initially established. If the initial cap is set too high to permit DA contracts to remain economically viable, the risk is that those DA customers will leave the DA program. Because the level of the CRS is projected to be lower in the latter years of the DWR contracts, there will be more flexibility to adjust the cap in the future as compared with today when costs are comparatively high. The balance of risks associated with a cap favors setting an initial cap on a more cautious basis. In D.02-07-032, the Commission has already stated that a cap of 2.7 cents/kWh may be a reasonable cap. Thus, the DA community is already aware of this preliminary figure as at least a potential starting point for a cap.

Parties failed to present any convincing evidence that this preliminary assessment should be significantly raised, particularly as initial DA CRS is set. Parties proposing caps as high as 4 cents/kWh did not provide persuasive evidence that a cap this high could be imposed without conflicting with the Commission's goal of seeking to avoid making DA uneconomic. Although certain comparisons were made with bundled rates to argue that a 4 cents cap would still be less than bundled rates. We do not find such a comparison to constitute proof that DA contracts could survive such a increase in electricity charges. It is not clear that the choice facing DA customers is necessarily bundled versus DA rates. In the face of sufficiently high bundled rates, the choice may instead be between DA rates or departing the utility system permanently either through business failure or relocation outside of California.

The other reason cited for the 4 cents cap is to avoid the build up of excessively high DA undercollections that could become the burden of bundled customers. While we acknowledge the validity of concerns regarding the potential risk of bundled customers becoming burdened with excessively large undercollections, we view this risk as a potential problem that could grow over time, but not as an impediment to setting a cap lower than 4 cents, as we adopt below, at least for an initial period. We reserve the option of revisiting the potential size of the cap or the terms under which it will apply after conducting a further inquiry into the potential means of financing the cap and ensuring that DA customer will bear responsibility for financing the cap and for paying off any undercollections over time.

We also conclude that the 2.0¢/kWh cap proposed by CLECA and CMTA is too low to cover the requisite components of CRS without triggering unduly large deferred balances.

In the absence of any positive evidence to the contrary other than subjective opinions of certain witnesses, we conclude that an initial cap set at the level of 2.7 cents/kWh represents an appropriately cautious starting point for a cap, particularly at the very beginning of instituting these charges. In the interest of caution, we find it prudent not to impose any abrupt change from the level the Commission has previously referenced as possibly being a reasonable cap value. A cap at this level will promote a bridge on continuity with the preliminary assessment on this issue that the Commission made in D.02-07-032. Thus, we conclude that an initial cap of 2.7 cents/kWh is consistent with the overall goal of seeking to preserve the economic viability of the DA program. We reserve the option to revise the cap prospectively if we determine that future action is necessary to protect bundled ratepayers against the risk of excessive undercollections.

The DA surcharge cap should cover the surcharges considered in this proceeding: the Ongoing CTC; the DWR Bond Charge; the DWR power charges with SCE's HPC. When the Commission addresses PG&E's Historic Undercollection Charge (HUC), we must then consider how the DA surcharge cap relates to those charges

Funds remitted under the cap shall be first applied to pay the bond charge, and secondly, to pay the 2003 DWR power charge. These sources must have first claim on the funds because by law, DWR is entitled to timely reimbusement for both its bond charge and power charge. To the extent that DA customers do not pay for their share of these charges, they will have to be covered by bundled customers, and such a result would not promote bundled ratepayer indifference. Although certain parties have suggested that DWR might be able or willing to assist in financing at least some portion of DA customers' share of DWR power costs in excess of a cap, DWR has claimed that it is not able to engage in such financing. Moreover, the 2003 DWR revenue requirement has already been submitted to the Commission in A.00-11-038 et al. for implementation, and no source of financing has been built into that revenue requirement to accommodate the financing of a cap.

To the extent that funds provided by DA customers under the 2.7 cents/kWh are not sufficient to cover both the bond charge and to pay for DA customers' share of the 2003 DWR power charge, any shortfall will have to be remitted to DWR from bundled customers' funds. To the extent that any bundled customers' funds are used to remit any portion of the DA share of 2003 DWR power costs, an interest charge shall be assessed on DA customers to secure funds to reimburse bundled customers for the use of their money. The interest charges due to bundled customers for the advance of such funds shall be deducted from the gross proceeds from the DA CRS paid under the 2.7 cents/kWh cap, and credited against the bundled customers pay to DWR. To the extent that after payment of the DWR-related obligations, there are insufficient funds remaining to pay the utilities for above-market URG-related costs, the utilities shall arrange financing for that amount. The utilities shall be reimbursed for their financing costs by DA customers.

The interest rate to be charged to DA customers for the financing of the cap shall be at the interest rate applicable to other utility balancing accounts. We believe further inquiry is appropriate regarding longer term arrangements for financing of the DA caps. Possible means of financing might include securitization of the debt resulting from the DA caps.

Consideration should be given to alternatives such as having DA customers provide some form of security or collateral to support the repayment of debt generated by the caps. The goal of such collateralized security will be to provide protection against bundled ratepayers bearing potential risk for nonpayment by DA customers, and to attract sources of financing for the debt under favorable arrangements.

As another measure to protect bundled ratepayers, we shall require that any DA customer that returns to bundled service must still pay off their share of the unrecovered DA CRS charges resulting from the cap. We direct the ALJ to issue a procedural ruling on outstanding issues relating to the cap.