STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

June 20, 2006 Agenda ID # 5767

Ratesetting

TO: PARTIES OF RECORD IN RULEMAKING 02-01-011

This is the draft decision of Administrative Law Judge (ALJ) Pulsifer. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. The Commission may act then, or it may postpone action until later.

When the Commission acts on the draft decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the draft decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure," accessible on the Commission's website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages.

Comments must be filed with the Commission's Docket Office. Comments should be served on parties to this proceeding in accordance with Rules 2.3 and 2.3.1. Electronic copies of comments should be sent to ALJ Pulsifer at trp@cpuc.ca.gov. All parties must serve hard copies on the ALJ and the assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail or other expeditious methods of service. The current service list for this proceeding is available on the Commission's website, www.cpuc.ca.gov.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:avs

Attachment

ALJ/TRP/avs DRAFT Agenda ID # 5767

Ratesetting

Decision DRAFT DECISION OF ALJ PULSIFER (Mailed 6/20/2006)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking Regarding the Implementation of the Suspension of Direct Access Pursuant to Assembly Bill 1X and Decision 01-09-060.

Rulemaking 02-01-011 (Filed January 9, 2002)

OPINION REGARDING DIRECT ACCESS AND
DEPARTING LOAD COAST RESPONSBILITY
SURCHARGE OBLIGATIONS

TABLE OF CONTENTS

Title Page

OPINION REGARDING DIRECT ACCESS AND DEPARTING LOAD COAST RESPONSIBILITY SURCHARGE OBLIGATIONS 22

I. Introduction 22

II. Issues Relating to DA CRS Obligations 55

A. DA CRS Undercollection Balances as of December 31, 2005 55

1. Parties' Positions 55

2. Discussion 77

B. Prospective DA CRS Market Benchmark Methodology Revisions 88

1. Parties' Positions 88

2. Discussion 1010

C. Use of Uniform Benchmark for Ongoing CTC and DWR Components 1313

1. Parties' Position 1313

2. Discussion 1616

D. Treatment of "Negative" Indifference Charges 1717

1. Parties' Positions 1717

2. Discussion 1818

E. Billing Adjustments Between Core and Noncore Bundled Customers 1818

1. For PG&E Customers 1818

a. Parties' Position 1818

b. Discussion 1919

2. For Edison's Customers 2020

a. Parties' Position 2020

b. Discussion 2020

3. For SDG&E Customers 2121

a. Parties' Position 2121

b. Discussion 2121

TABLE OF CONTENTS

Title Page

F. Status of the 2.7¢ DA CRS CAP 2121

1. Parties' Position 2121

2. Discussion 2424

G. Institution of the Power Charge Indifference Adjustment 2424

1. Parties' Positions 2424

2. Discussion 2525

H. Process for Future Updates of CRS Components 2727

III. Issues Relating to MDL CRS Obligations 2828

A. MDL CRS Accruals and Undercollections as of December 31, 2005 2929

B. Use of Market Benchmark for MDL CRS 2929

1. Parties' Positions 2929

2. Discussion 3030

C. Applicability of Total Portfolio Indifference Standard to MDL 3030

1. Parties' Positions 3030

2. Discussion 3333

D. Applicability of Credits for Individual Customers
that Migrate From Bundled to MDL 3535

1. Parties' Position 3535

2. Discussion 3737

E. Treatment of Negative CRS for MDL Customers 3838

1. Parties Positions 3838

2. Discussion 3939

F. Allocation of CRS Exemptions Among MDL Customers 4040

1. Parties' Position 4040

2. Discussion 4242

G. Conversion of MW Cap Into MWH Figure 4343

TABLE OF CONTENTS

Title Page

H. Protocols for Allocation of Exemptions for New MDL 4545

1. Parties' Positions 4545

2. Discussion 4646

IV. Comments on Draft Decision 4646

V. Assignment of Proceeding 4646

Findings of Fact 4646

Conclusions of Law 5252

ORDER 5454

Appendix 1 Adopted Procedure for Deriving Market Benchmark

Appendix 2 Required Data for Calculation of DWR Power Charge Component

Appendix 3 IOU CTC Total Portfolio Adjustment and New World
Power Requirements

Appendix 4 Protocols for Administering CRS Transferred Load Exemptions

Appendix 5 Appendix Tables setting forth CRS Accrual Rates

OPINION REGARDING DIRECT ACCESS AND
DEPARTING LOAD COAST RESPONSIBILITY
SURCHARGE OBLIGATIONS

I. Introduction

By this decision, we resolve various outstanding issues relating to the cost responsibility surcharge (CRS) methodology and the level of undercollections applicable to Direct Access (DA)¹ and Municipal Departing Load (MDL)² customers within the service territories of the investor-owned utilities (IOUs): Pacific Gas & Electric Company (PG&E), Southern California Edison Company (SCE), and San Diego Gas & Electric Company (SDG&E).

We adopt updated DA CRS undercollection balances as of December 31, 2005, based upon the consensus reached by the interested parties, and resolve issues concerning the process to determine CRS obligations on a prospective basis.

The Commission, in D.02-03-055, suspended DA for new contracts executed after September 20, 2001, but permitted preexisting DA contracts to remain in effect, on the condition that bundled utility customers

would not be adversely impacted.³ Specifically, we required that bundled customers be indifferent due to customers migrating from bundled to DA load, and that there be no cost shifting. To prevent cost shifting, we adopted a methodology in D.02-11-022 to capture the relevant costs in the form of a CRS to be assessed on designated DA load. The CRS incorporates, among other elements, a California Department of Water Resources (DWR) power charge and the ongoing competition transition charge (CTC).⁴ The CRS measures the change in total portfolio costs attributable to serving customer load that migrated from bundled to DA status (known as DA-in/DA-out modeling).

We previously resolved certain issues concerning the methodology for the DA cost responsibility obligations in D.05-01-040, which adopted CRS obligations for 2001-2003. In the instant order, we update the level of CRS undercollections through December 31, 2005, and adopt revised measures for determining CRS obligations prospectively.

By ruling dated March 30, 2005, the Administrative Law Judge (ALJ) prescribed a process to develop the record to true up CRS obligations for 2003 and to compute updated CRS forecasts for 2004 and 2005.⁵ A "Working Group" was formed for this purpose, overseen by the Commission's Energy Division, and representing various parties' interests involved, to engage in consensus building. The "Working Group" consisted of the IOUs, parties representing DA customers,⁶ parties representing MDL customers,⁷ and consumer groups, i.e., Division of Ratepayer Advocates (DRA)⁸ and The Utility Reform Network (TURN). DWR also participated by providing modeling support through its consultant, Navigant, Inc. While the Working Group reached consensus on several issues relating to CRS obligations, particularly for DA customers, parties did not reach agreement on a number of issues relating to the derivation of MDL CRS obligations.

By ruling dated February 23, 2006, the ALJ formally incorporated into the record in this proceeding the "Final Report of the Working Group to Calculate the CRS Obligations Associated with Municipal Departing Load and Direct Access." (Report.) The ruling also incorporated a February 15, 2006, letter to the assigned ALJ and from PG&E, SCE, and Municipal Departing Load parties. The letter clarified parties' positions with respect to certain of the recommendations set forth in the Report. Parties were also provided an opportunity to file comments on the Report. Opening comments were filed on March 8, 2006 with reply comments filed on March 17, 2006. No evidentiary hearings were required. These materials constitute the record that forms the basis for the instant order.

¹ DA load customers purchase electricity from an independent electric service provider, and receive only distribution and transmission service from the utility. "Bundled" customers, however, rely on the utility for all these services. Therefore, distribution and transmission charges are "bundled" with a charge for the procurement of energy supplies.

² Departing Load (DL) generally refers to retail customers who were formerly IOU customers but now receive energy, transmission and distribution services from publicly owned utilities, self-generation or other means. Municipal Departing Load (MDL) refers to departing load served by municipal utilities and irrigation districts, as defined in Pub. Util. Code § 9604(d)), for which a CRS applies pursuant to D.03-07-028 and related Commission orders. Unless otherwise stated, all statutory references are to the Public Utilities Code.

³ We suspended DA pursuant to legislative directive, as set forth in Assembly Bill No. 1 from the First Extraordinary Session (AB 1X). (Stats. 2002, 1^st Extraordinary Sess., ch. 4.) AB 1X was enacted to respond to the serious situation in California when PG&E and SCE became financially unable to continue purchasing power due to extraordinary and unforeseen increases in wholesale energy prices. DWR assumed responsibility for acquiring power supplies on behalf of the IOUs' retail end use customers.

⁴ The purpose of CTC is to recover the costs authorized by § 367(a)(1) - (6). These costs include power acquired from third parties under contracts that were in effect on December 20, 1995, at a price that exceeds the current market price of electricity and qualifying facilities (QF) restructuring costs.

⁵ The calculations made for CRS obligations for 2004 were made on a "forecast" basis, utilizing data consistent with the forecast DWR revenue requirement adopted for the year 2004.

⁶ DA load interests were represented by Alliance for Retail Energy Markets (AReM), California Large Energy Consumers Association (CLECA) and California Manufacturers & Technology Association (CMTA).

⁷ MDL interests were represented by the California Municipal Utilities Association, City of Corona, City of Rancho Cucamonga, Hercules Municipal Utility, Merced and Modesto Irrigation Districts, South San Joaquin Irrigation District, Turlock Irrigation District, and Northern California Power Agency.

⁸ At the time the Report was issued, DRA was known by its previous name, the Office of Ratepayer Advocates.