III. Discussion

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." As the utilities have demonstrated, the implementation of successful economic development projects would 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.¹⁴

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. ¹⁵

As indicated above, the derived benefits from a successfully implemented EDR program appear to sufficiently satisfy the ratepayer benefit test. Despite these apparent ratepayer benefits, Aglet contends that one of the utilities' primary measurements of ratepayer benefits-the Ratepayer Impact Measure (RIM) test-could be adversely impacted by even a relatively low level of free-ridership. The utilities argue, however, that the "free-rider" rate would have to be as high as 75% for the enhanced EDR program not to benefit ratepayers.¹⁶ As the utilities have demonstrated, past experience with the existing Schedule ED, in conjunction with the additional eligibility limitations proposed for the enhanced EDR program, indicates that the actual level of free-ridership would be substantially below the 75% break even level. ¹⁷ It is reasonable to assume, therefore, that Aglet's concerns of relatively low levels of free-ridership adversely impacting ratepayer benefits are unfounded. Past experience dictates that although the EDR system will inherently attract a small number of free-riders, these aberrations will be insufficient to offset the widespread ratepayer benefits that the incentives will entail.

To ensure that free-ridership does not approach this 75% threshold, however, the utilities have proposed a number of preventative measures. First, they propose requiring potential applicants to file an affidavit stating that:

1. But for receipt of the discounted development rate the Applicant's load would not have been located, added, or retained within California;

2. The load to which the Agreement applies represents kilowatt-hours (kWh) that either (i) do not already exist in the State of California, or (ii) the Applicant considered relocating to a location outside of the State of California;

3. Applicant has discussed with the Company the cost-effective conservation and load management measures the Applicant may take to reduce their electric bills and the load they place on the Utility System. (See Attachment A).

The proposed affidavit serves to address two key concerns expressed by several of the parties. First, it requires the applicant, under penalty of law, to assert that were it not for the Agreement, it would have either failed to expand, relocate or add its load in the State of California. Next, it addresses the legitimate concern of expanding demand on an already overburdened utility system. Furthermore, by requiring the applicant to discuss the cost-effective conservation and load management measures it could take to reduce its impact on the utility system, the utilities are making a concerted effort to comply with the Commission's goals of conservation and demand side management. Although a simple "discussion" between the applicant and the utility may not be enough to ensure that any of the available conservation measures are actually pursued, it does demonstrate a desire on behalf of the utilities to keep potential EDR participants apprised of the Commission's conservation goals and methods for meeting these objectives.

Although we believe that the utilities should make every conceivable effort to persuade EDR customers to meet the Commission's identified conservation and efficiency objectives, we recognize that a majority of EDR applicants may be seeking relief from high energy rates because they are facing difficult financial constraints. These constraints may limit an applicant's ability to focus on the Commission's goals of energy efficiency and demand side reduction. For this reason, we will not order the utilities to require new EDR applicants to assume the necessary costs of participating in structured energy efficiency or conservation programs. Rather, in an effort to guarantee that "discussions" with EDR applicants do not become mere formalities, we will ask the utilities to provide a more detailed summary of what cost effective conservation and demand management measures might be presented to the class of EDR applicants. These summaries will be included as part of the utility compliance measures detailed below.

Additionally, in an effort to ensure that applicants are not tempted to falsify their affidavits and thereby engage in free-ridership, the utilities have advocated for the imposition of liquidated damages in cases of misrepresentation or fraud. These liquidated damages will be equal to 200% of the cumulative differences between (i) the bills calculated under the ED rate to the date of termination and (ii) bills calculated under the OAT.

For cases of early termination (excepting business closure or reduction of load without relocation), liquidated damages equal to the cumulative differences between (i) the bills calculated under the ED rate to the date of termination and (ii) bills calculated under the OAT less 15%, plus interest on that difference at the 90-day commercial paper rate.

The proposed liquidated damages penalties are severe. In most cases, the types of businesses applying for EDR exemption will be those operating on thin margins or facing difficult cost constraints. The prospect of incurring damages equal to 200% of the cumulative differences between their normal bills and their bills under the EDR, a sum that could equal hundreds of thousands of dollars, will undoubtedly provide a moment of pause for any applicant considering engaging in either fraud or misrepresentation. The same can be said of the proposed penalties for early termination. Although these penalties are not as severe as those for fraud or misrepresentation, they will almost certainly act as a deterrent to any applicant contemplating abusing the EDR system for short-term gains.

As a final measure for limiting free-ridership, the joint utility proposal calls for CalBIS¹⁸ 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. It also states that the utilities have failed to develop with CalBIS the procedure to be used for verification. Further, Merced ID argues, the utilities will not be independent decision-makers.

In this instance, as an entity whose traditional district boundaries are entirely encompassed within PG&E's service territory, and thereby competes directly with the utility for customers, it is evident why Merced ID might attempt to discredit the third-party review process. Despite Merced ID's concerns, it is clear that CalBIS has the expertise and staff to identify and screen legitimate economic development candidates, and its position as the state's preeminent evaluator of economic development issues gives it unique and early access to would-be EDR applicants. Additionally, because coordination with the utilities is already within the scope of its work, CalBIS would not require payment for its services. These factors illustrate how the Joint Proposal's third party review could act as both a cost-effective and vigilant deterrent to free-ridership.

In evaluating the role of EDR in a business expansion setting, 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 had 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.

Amy's Kitchen's decision to expand its business out of state, rather than at its headquarters in Santa Rosa, indicates the need for the Commission to develop a uniform structure for the application of EDR. In PG&E's August 13, 2004 Motion for an Interim Decision to apply the enhanced Schedule EDR to Amy's Kitchen, the utility indicated that the company needed to make a decision on its expansion project by November 2004. When the Commission had not made a decision on the motion by November, Amy's Kitchen executives were forced to decide on its expansion without the opportunity to consider reduced electricity rates.

Although it is not clear whether the failure to attain a timely Commission decision on the application of EDR was the decisive factor in Amy's Kitchen's decision to expand out of state, it is evident that company executives were forced to make a crucial evaluation without factoring EDR savings into their calculation. The fact that the Commission's current policy of evaluating EDR applications on a case-by-case basis may have been responsible for a prominent California business locating a major expansion out of state is reprehensible, and illustrative of the shortcomings of the current regime. By giving utilities the discretion to extend EDR to qualified candidates, the Commission will be taking an important step toward ensuring that energy rates no longer act as a hindrance to companies looking to do business in California.

Finally, the Commission feels compelled to address the issues of reporting regulations and compliance standards in regard to the utilities' proposed EDR programs. While we feel it important to give the utilities the latitude to offer admission to the EDR program as they see fit, we also recognize the significance of maintaining the Commission's oversight role in this matter. For this reason, starting in 2006 and stretching until the program's sunset date in 2009, we will ask the utilities to provide the Commission with an annual compliance report detailing all EDR applicants, the contents of the CalBIS review for these applicants, the conservation and demand side management options discussed with these applicants, the applicants' decisions to accept or reject these measures, and the utilities final selection of EDR candidates. In the end, we believe this compliance filing will help ensure that the EDR program is functioning in a fashion that is both attracting, expanding and retaining business in California, and preventing the type of free-ridership that may undermine these goals.

Additionally, in an effort to reach the goal of promoting economic development on a statewide basis, we will also require San Diego Gas and Electric (SDG&E) and Southern California Gas Company (SoCalGas) to file applications that are consistent with the EDR programs approved for PG&E and SCE. We believe that by requiring these two utilities to participate in the EDR process we will ensure that qualified applicants in these service areas do not miss out on the benefits proffered to those in the PG&E and SCE service areas.

¹⁸ CalBIS is the lead State government office responsible for helping domestic and foreign corporations make direct investments in California. CalBIS works to expand, attract and retain business in California.