III. Discussion

There are literally dozens of factors that influence a siting decision in addition to electric pricing. The site selection worksheet of the California Business Investment Services (CalBIS), a division of the California Employment Development Department, lists over three dozen. (Exhibit 28.)

The joint utility proposal calls for CalBIS to perform a preliminary review of applicants, but leaves it to the utility to perform the final review and determination. CalBIS approval will be necessary but not sufficient for eligibility. Merced ID opposes this portion of the joint utility proposal. It argues that CalBIS is not truly an independent arbiter; its job is to provide reasons for a business to stay or locate in California. Nor have the utilities developed with CalBIS the procedure to be used for verification. Further, Merced ID argues, the utilities will not be independent decision-makers. Despite utility protestations to the contrary, there is a clear benefit to utility shareholders in retaining or attracting load. Allowing the utility the discretion to make the final decision provides no assurance that only truly eligible customers will be offered the rate.

It is instructive to consider the experience of one potential recipient of PG&E's proposed ED rate. On August 13, 2004, in this proceeding, PG&E filed a motion to provide interim rate relief to a customer, Amy's Kitchen, considering expansion and relocation outside of California. Amy's Kitchen has its corporate headquarters in Santa Rosa, as well as all of its production facilities. It employs 700 people and makes 120 products that generate annual revenues of approximately $100 million. Amy's Kitchen moved into its current 107,000 square foot facility in 1995. There is no room left in which to expand. Now the company needs approximately 80,000 more square feet of production space to keep up with projected demand for its products. Amy's Kitchen, at the time of the motion, was considering different siting alternatives: (i) expand new operations out-of-state while maintaining existing operations in Santa Rosa; (ii) move existing operations out-of-state and expand operations at that consolidated out-of-state location; and (iii) keep existing operations in Santa Rosa and expand operations there as well. The cost of electricity in the out-of-state proposals has been as low as 4 cents/kwh.

Amy's Kitchen uses approximately 8,400 MWh annually and receives electric service under PG&E's E-19S rate schedule. In 2003, Amy's Kitchen paid approximately $1.2 million in electricity charges. If PG&E's 2003 GRC Phase II rate design proposal (A.04-06-024) is adopted, with an approximate 10% rate reduction for the schedule serving Amy's Kitchen, PG&E estimated that Amy's Kitchen would pay about $927,000 per year for electricity. Factoring in a 25% EDR reduction would reduce Amy's Kitchen's first year electric bill by approximately $232,000, to $695,000.

On November 30, 2004, PG&E filed its request to withdraw its motion for an interim decision for Amy's Kitchen, stating that Amy's Kitchen has decided to locate its expansion project in Oregon, keeping its existing facilities in California. PG&E's request to withdraw its motion was granted on December 15, 2004.

We observe that Amy's Kitchen, a company that could expect to receive a GRC electric rate decrease of about 10%, plus a further EDR 25% decrease, still opted to locate its expansion facilities in Oregon. The lesson learned from the experience of Amy's Kitchen and the PG&E and SCE ED tariffs is that electric rates alone are not a primary cause of relocation. Of course, this result is not extraordinary; all parties agree that it takes more than a low electric rate to influence relocation. The Bain & Company report (Exh. 6) bears this out.¹⁹ Our concern is with a tariff reduction that can be triggered by an affidavit subject to approval by the utility. We emphasize the word "tariff." We do not object to rate reductions to attract or retain business. We are in accord with the legislative precept to "encourage economic development." (Pub. Util Code § 740.4(a).) But a tariff as proposed by the utilities will, for the most part, only encourage free riders. When anticipated savings are multiples of $100,000/yr. there is a great incentive to qualify. The utilities' proposals make it too easy. However, the magnitude of those potential savings should be an incentive to file an application with the Commission and present a compelling case for a deviation from the OAT. In a persuasive case there would be no need for the utility to bear 25% of the shortfall.

The Bain report shows electricity costs are not the sine qua non of location decisions by California businesses. Bain ranks electricity costs third in a study of the increased costs of doing business in California, relative to other western states, outweighed by more than four to one by employee and regulatory costs. (Bain & Company, p. 3.) The study shows that the costs of doing business in California

are 30% higher than in other western states. The components of the 30% are:

Employee costs	16%
State regulatory costs	6
Electricity	5
Property costs	3
Taxes	1
Total	30%

Even if we were to assume that California today has a poor business climate, the evidence that a five-year declining 25% - 0% electric rate tariff discount will attract or retain business is slight. What is persuasive is that an ED tariff will attract free riders.

The significant conclusion derived from the experience of PG&E and SCE in regard to ED rates is that when rates in California skyrocketed in 2000-2001, all EDR customers returned to conventional tariff billing. They did not leave the state. Today SCE serves at least 21 of its original 27 EDR customers and PG&E serves 27 of its original 36 EDR customers, with an additional 3 former PG&E EDR customers being served by Merced ID. Of 63 EDR customers 51 are still taking electric service at the same location in California. There is no evidence that any of the twelve former customers are operating out of state.

While these statistics can be interpreted in various ways, depending upon purpose, a simple analysis shows that customers listed in Exhibits 30 and 31 took advantage of low EDR when available, and after electric rates spiked to unprecedented highs, almost all stayed put. Low rates attracted 63 customers; high rates failed to disperse them. It is apparent that a high electric rate, by itself, will not compel movement. The utilities concede this and have proposed a procedure to include other factors in determining eligibility, such as affidavits and third-party verification.

The EDR options proposed will be open to all customers over 200 kW of load who clearly demonstrate that they qualify under the tariff eligibility criteria. Each customer's situation will be somewhat different, but the standard for eligibility will remain the same. Each customer will be required to state, under penalty of perjury, that the customer's load would not have remained or would not have expanded or located in California "but for" receipt of the discounted rate. Should the customer be found to have misrepresented its qualifications for the EDR, the customer's agreement shall be terminated and the customer will be liable for liquidated damages. The affidavit would be simple and brief. From the examples in evidence we expect it to resemble the affidavit in Attachment A.

To ensure that applicability is appropriately administered, the utilities propose that ED rates be offered only after the approval of the State of CalBIS as part of a comprehensive economic development proposal for competitive business attraction, expansion, or retention projects. The utilities believe that offering ED rates only after the approval of CalBIS as part of a state economic development proposal will minimize the likelihood of potential free riders, i.e., companies that accept the incentive but would have located, expanded, or retained their operations in the utility's service territory even without the incentive. The involvement and approval by CalBIS would help ensure that the incentive will not be made available in those instances where its relevance is questionable. Regardless of CalBIS' recommendation, the utilities will make the final decision on eligibility.

CalBIS is charged with attracting business to California and restraining business from leaving California. We share the concern of Merced ID, Aglet, and others that CalBIS is not truly an independent arbiter, but may be overly willing to qualify prospective customers for ED rates. In our opinion, the proposed ED rates are an attractive lure that will draw free riders. We do not agree that a simple affidavit with review by CalBIS are adequate safeguards to prevent free ridership. The sums are large; the affidavit is simple; and the proposed reviewer is one charged with attracting and keeping business in California. Only by placing barriers to eligibility will we be able to separate those who actually meet the ED criteria from those merely willing to sign an affidavit that they meet the criteria. We are ever mindful that the revenue shortfall caused by free riders will be recovered from all other utility customers.

Our concern regarding the appropriateness of ED rates is not limited to the ease of manipulation. Our concern extends to resource planning, demand management, and energy efficiency programs. We must carefully consider the effect of a policy to encourage load on our policies to reduce load.

We observe that in Res. E-3707-A, dated January 23, 2002, we discussed ED rates where we said:

"In a real sense, EDR rates are no longer appropriate for today's markets. EDR tariffs were originally adopted in a time of excess capacity, and their purpose (i.e., to retain or increase load) was reasonable. The shortage of generation experienced in Summer 2000, uncertain balance in Summer 2001, and likely shortage in Summer 2002, undercut the justification for EDR tariffs. With recent initiatives encouraging load management, along with the California Independent System Operator seeking demand responsiveness, it is inappropriate to offer discounts in order to increase the load in California without demand responsive components. Therefore, the EDR tariffs should be closed to new customers." (Res. E-3707-A, pp. 4 - 5.)

The California electricity market has not changed sufficiently since those words were written so as to make them obsolete.

This Commission is currently considering many forms of energy efficiency to reduce load. Rulemaking (R.) 01-08-028 examines energy efficiency policies, administration, and programs. SCE's A.05-02-029 seeks approval of its energy efficiency program to reduce demand.²⁰ We are reviewing PG&E's procurement practices in R.04-04-003. The California Energy Commission

forecasts that in the event of a very hot summer in 2005, Southern California will need additional resources to maintain acceptable levels of operating reserves. High electric prices tend to reduce demand; low prices tend to increase demand. To approve a 25% rate reduction under the relaxed strictures proposed by the utilities is sure to attract free riders and increase electric demand.