V. Litigation Positions

Since we have rejected the proposed settlement agreement, we next consider the litigation proposals of the parties. Unfortunately, we also find the litigation proposals to be unsuitable for permanently allocating the costs of the DWR contracts.

The primary litigation proposals of PG&E and SCE, while not identical, are based upon the inequitable Cost-Follows-Contracts methodology and invite significant re-litigation. For the reasons discussed above, we reject a pure CFC approach. The proposals of ORA and SDG&E are based upon the allocation methodology adopted for 2003 in D.02-12-045. However, the ORA proposal is somewhat incomplete, and SDG&E incorporates additional self-serving resource assumptions in its proposal. Neither provides a solid foundation for a permanent methodology.

Having rejected the settlement proposal, as well as each party's primary litigation proposal, we turn, finally, to SCE's "alternative" litigation proposal. We believe that this proposal, with the adjustments we describe below, can serve as the foundation for an equitable method to permanently allocate the costs of the DWR contracts.

As we have observed previously, the DWR contracts at issue were signed at a time of crisis, confusion, and uncertainty, rendering our traditional notions of cost causation inappropriate. In large part we are "spreading the pain" of a unique occurrence, for which our standard methods are ill-suited. Accordingly, we must find another way to reach a fair allocation. We believe that Edison's "alternative" litigation proposal, as described in its Opening Brief, provides the best starting point of all the proposals before us:

As an alternative proposal, SCE proposes an AMC cost allocation methodology whereby all avoidable DWR contract costs and wholesale energy revenues continue to be allocated on a CFC basis, as required by Decision No. 02-09-053. Annually, however, the Commission would allocate the forecast AMC costs associated with the contracts allocated to all of the IOUs (SCE footnote: An annual determination of the AMC costs on a forecast basis is necessary as a ten-year projection of such costs will be unreliable in the later years).

The AMC costs, including gains and losses on hedge transactions that the IOUs enter into as DWR's limited agent, would then be allocated to the IOUs based on their fixed percentage share of the net-short obligations that DWR sought to serve when it entered into its long-term contracts in early 2001. (SCE Opening Brief, p. 6-7.)

Edison's proposal is sound in theory, but its choice of allocation percentages is flawed. Based on the record in this case, we are convinced that a fair outcome is one that allocates the above-market cost burden of the DWR contracts equally to all IOU customers. The cost allocation percentages we adopt must accomplish this, and those percentages that do not accomplish this will be rejected. We believe that the allocation percentages that are adopted should yield a result that impacts similarly situated customers equally, regardless of their location in the state. The customers themselves will perceive such an outcome as fair.

As a guide to evaluating the various allocation methodologies, several parties recommended the use of a "fairness yardstick" or "fairness metric," against which allocation proposals could be measured. Not surprisingly, there was some divergence among the parties among what should be considered fair. More fundamentally, the cost allocations that resulted from various methods varied dramatically.

To achieve a fair result, we will allocate the burden of the DWR contracts, their "above-market costs", to the customers of the IOUs based on the forecast usage of the customers who will be billed for these costs. This is the usage that is used to allocate the annual DWR bond costs, which are collected from ratepayers on an equal-cents-per-kWh basis. PG&E identified this usage in its December, 2003 testimony (Exhibit 04-32, p. 2-11) :

PACIFIC GAS AND ELECTRIC COMPANY
PROPOSED ALLOCATION PERCENTAGES FOR 2004
INCOME AND FUTURE REFUNDS OF DWR RESERVE ACCOUNTS

We believe that the above-market cost burden of the DWR contracts should be shared by the same ratepayers that pay the DWR bond charge. In the DWR bond charge phase of this proceeding, Decision 02-12-082 imposed the bond charge on residential sales up to 130% of baseline in all three service territories, leaving only all medical baseline and California Alternate Rates Energy (CARE) eligible customer usage "exempt" from the bond charge. In that decision, we found that a bond charge imposed equally on all non-exempt kilowatt-hours has a simple structure that is easy to implement and is transparent and fair to all that must pay it. The same logic applies here, and we will allocate the above-market costs of the DWR contracts in the same fashion.

As described below, the annual shares of responsible load shall be re-calculated annually to determine that year's allocation of the updated above-market costs of DWR's contracts. Procedurally, SCE presents a range of approaches to annually implement and AMC-based cost allocation:

In order to actually prepare a [mark-to-market] evaluation to determine the AMC costs for each year, SCE recommends that the Commission allow the IOUs to develop a joint-use model. If a joint-use model cannot be developed by the IOUs, SCE recommends that the Commission adopt Henwood Energy Services' ProSym model to calculate the annual AMC costs. (footnotes omitted) This model has been utilized widely by DWR and the IOUs in the determination and allocation of DWR's annual revenue requirement and in the Long-Term Resource Adequacy Phase of Rulemaking No. 01-10-024. Most of the assumptions utilized in the ProSym model should be non-controversial. In particular, the pricing terms of the DWR contracts are public and all the IOUs have access to the same market forward curves (i.e., market price outlooks). The only issue that may prove controversial is the method to value contract optionality, which would be the reason for the IOUs to develop a joint-use model, but SCE has already made it clear that getting the MTM calculations close to actual value through ProSym is significantly better than not attributing any value or burden to the DWR contract energy received by customers (footnote omitted). Nevertheless, if the parties could not agree on assumptions, the Commission could consider evidence supporting alternative assumptions in the annual proceedings implementing the allocation of DWR's revenue requirement.

For 2004, the Commission can either utilize the data provided in Table VII-3 (Errata) [Exhibit 04-28], or allow the IOUs to provide updated assumptions. If such a process is utilized, the IOUs will need an additional 15 business days to make relevant adjustments to the assumptions, and validate the ProSym above-market DWR cost model run. The results could then be provided to the Commission in a compliance filing. (SCE Opening Brief, p. 17.)

We adopt the implementation approach outlined by SCE, as follows: for 2004, we direct the IOUs to provide updated above-market cost estimates to the Commission in a compliance filing, on the 15^th business day following the date of this decision. The Commission's Energy Division shall be included by the IOUs in their discussions as they prepare this filing, so that we may act on it promptly after receipt.

Pending the compliance filing submission by the IOUs of the final results of the allocation methodology we adopt today, an illustrative calculation of the results, and the resulting power charges that shall serve as the basis for IOU remittances to DWR, is provided in Appendix A.