II. The Need for Economic Development Rates

SCE and PG&E assert that California's business climate is one of the most unfriendly in the nation, with the cost of doing business the fourth highest in the nation. At the same time, California's regulatory environment is one of the most burdensome in the nation. Utility costs in California exceed the national average, and exceed the average utility costs in the western states which directly compete with California for businesses and jobs. All these negative factors have contributed to the migration of jobs and economic activity from California to other states. Utility costs are playing a more important role in attracting business to other states. Some states' economic development agencies specifically target California businesses.

While California's economy, on a stand-alone basis, is currently rated as the fifth or sixth largest in the world, the California Business Roundtable (CBRT) reports that "California's regulatory environment is the most costly, complex, and uncertain in the nation."⁸ Worker productivity, venture capital funding, higher education facilities and California's concentration of science and technology give California distinct advantages over many locations. However, California is often overlooked when it comes to a company's decision to relocate or to expand. A major factor is the cost of doing business. Other western states are becoming the preferred locations for businesses to expand and establish new facilities due to their lower costs and fewer regulatory burdens.

Various studies maintain that the cost of electricity is one of the main contributors to the cost of doing business in California. However, it is not the only high-cost issue facing California companies. High workers' compensation costs, employee costs, taxes, property costs, etc., add to the burden of doing business in California. It has been suggested that electric rates alone cause one sixth of an estimated 30% cost premium for doing business in California.⁹ Economic development corporations outside California highlight California's higher electricity costs as one of the major reasons to move into their states. In the NCBER study, the "cost of occupancy and utilities "in Los Angeles County is identified as the third-highest factor cited in relocation decisions.¹⁰ Utility costs, as a factor contributing to business relocation decisions, are only exceeded by the overall costs of doing business and insufficient room for expansion.¹¹

The Milken Institute notes that other states are aggressively attempting to lure manufacturers away from California by highlighting their lower business costs, particularly electricity and tax rates.¹² By comparison, California's electricity rates are exceptionally high. At the time the Milken Institute report was released, California had electricity costs that were double the national average and were the highest rates in the contiguous United States.¹³ Rates have since been reduced from their high point during the energy crisis, but for rates in effect as of July 1, 2003, SCE had the fourth highest commercial electric rate and eighth highest industrial rate of 166 investor-owned electric utilities included in the analysis.

Section 740.4(h) of the Pub. Util. Code requires the Commission to allow recovery through rates of expenses and rate discounts supporting economic development programs to the extent that ratepayers "derive a benefit from those programs." SCE and PG&E believe that ED rates will benefit utility ratepayers in two ways.

First, the utilities state that successful economic development projects benefit ratepayers directly by increasing the revenues available to contribute to the utilities' fixed costs of doing business, thus lowering rates to other customers. The ability to offer a rate that is lower than the tariff rate, but higher than marginal costs, helps to maintain or attract CTM for the benefit of ratepayers to the extent that the customers would not otherwise remain or locate within the utilities' service territory absent the incentive. If the customer chooses a location outside of the utilities' service territory, its CTM is zero, thus depriving other ratepayers of the positive CTM that would have been made available from the rate offering.

Second, the utilities contend that in addition to direct benefits to other ratepayers, economic attraction and retention activities also provide indirect benefits to ratepayers in the form of increased employment opportunities and improved overall local and economic vitality. Local communities benefit from the economic multiplier effect resulting from local spending by newly employed, or continuously employed, workers where the businesses locate. One of the indirect results from the strengthened economic base is the fuller use of the utilities' transmission and distribution facilities which further reduce rates.

ORA, in evaluating the need for ED rates, questions whether a different type of program might be more effective in meeting the goals of retaining businesses in California or whether different classes of customers, such as small businesses, are more in need of an ED rate. ORA questions whether such a program will foster the overall goal of improving the California economy and increasing jobs in California. It contends that while parties cite a variety of formal studies and informal opinions to support their own position, either for or against ED rates, in the end the need for such programs appears to be subjective. ORA has concluded, however, that while all the questions about the need for ED rates cannot be answered in the affirmative with absolute confidence, such a program could bring benefits to ratepayers, but only if such a program contains safeguards to prevent free-riders by being carefully targeted at businesses which are at risk of leaving the State or not locating in California.

Merced ID argues that it is not clear that the utilities have met their burden of proof that any of their ED rate proposals should be adopted. However, it says that if we adopt an ED rate program we should not tilt the competitive playing field in favor of the utilities nor shift costs to other ratepayers. Merced ID's traditional district boundaries are entirely encompassed within PG&E's service territory. As a result, Merced ID and PG&E compete head-to-head for customers. Merced ID asserts that PG&E's proposed ED rate could result in tilting the competitive playing field in PG&E's favor, in unqualified customers using the ED rate, and in cost-shifting under the ED rate at a relatively high level given the depth of the discounts offered. Merced ID contends that factors other than energy drive business location decisions.