Issues Presented

Procedural Issues

In comments, parties raise certain procedural objections to SCE's Petition. First, Enron Wind Corporation (EWC) argues that SCE's Petition does not meet the requirements of Rule 47 of the Commission's Rules of Practice and Procedure. EWC argues that the petition must be summarily dismissed because the petition is neither timely nor consistent with the requirement that petitions contain declarations supporting new or changed facts relied upon in the petition. Rule 47 does not require petitions to modify to be filed within one year; therefore we find that SCE's Petition does not fail on the basis of timeliness. EWC is correct that SCE's Petition does not include a declaration supporting new facts relied upon. However, the facts asserted, that intrastate gas transportation costs have declined between 1996 and 2000, are easily verifiable from a review of Southern California Gas Company's tariffs. Commenters do not dispute the fact that these decreases have occurred. We will not reject the Petition on the basis of lack of declarations.

Second, EWC and the Independent Energy Producers (IEP) argue that evidentiary hearings are required in order to modify D.96-12-028. We note that no hearings were held leading up to the adoption of D.96-12-028. The parties have clearly laid out their substantive arguments against SCE's recommended course of action in their comments. We do not find that there are disputed facts at issue regarding SCE's proposed modification to the factor that require evidentiary hearings.

Finally, we must determine whether modifying the factor is permitted under § 390(b) or D.96-12-028. SCE argues that the Commission has discretion to modify the factor because § 390(b) "directs the Commission to implement `a formula'; it does not tell the Commission the details of the formula to implement." (SCE Petition, p. 15.) SCE also points out that "Section 390(b) itself says nothing about such a factor." (SCE Petition, p. 16.) SCE argues that the "Commission's incorporation of the Factor into the Transition Formula equation is highly significant. It both establishes a precedent for including components in the Transition Formula that are not specifically prescribed by the statute and provides authority for modification of the Transition Formula to incorporate a revised Factor..." (SCE Petition, p. 16.)

CCC argues that SCE's proposal to modify the Factor conflicts with § 390(b) because SCE is attempting to modify the starting price, Pbase, indirectly through modification of the Factor. CCC argues that modification of the starting price would clearly conflict with § 390(b) and therefore, modification to the Factor, as proposed by SCE, is not appropriate. CCC states: "[b]ecause adjusting the Starting Price to reflect a decrease in intrastate transportation rates would conflict with the provisions of Section 390(b), so would adjusting the Factor so that the SCE Formula yields SRAC prices that reflect a decrease in intrastate transportation rates from the historical rate incorporated in the Starting Price." (CCC August 28, 2000 Comments, p. 5.) IEP supports this argument.

CCC also argues that, "under D.96-12-028 the only element of the SCE Formula that may be properly modified to reflect changed market conditions is the set of gas border price indices used in calculating increases in SCE's avoided variable costs." (CCC August 28, 2000 Comments, p. 6.) FPL Energy, LLC (FPL) and Caithness Energy, L.L.C. (Caithness) filed joint comments that state that D.96-12-028 "provides no opportunity for altering any other aspect of the formula, including the gas factor." (FPL/Caithness August 28, 2000 Comments, p. 6.) Cogeneration Association of California (CAC) also supports this position.

SCE argues::

Section 390(b) does not expressly refer to a "factor," and most certainly does not require adoption of any factor, much less the one approved by the Commission in D.96-12-028. Indeed, ..., the Commission's approval of a Transition Formula containing a "factor" when none is expressly required or authorized by Section 390(b) can only mean that the Commission has already interpreted Section 390(b) as allowing it sufficient latitude to incorporate the "factor" in the SCE Transition Formula. [Citation omitted.] If the Commission had that discretion in the first instance, it clearly can now exercise the same discretion to modify the "factor" without running afoul of section 390(b). (SCE September 27, 2000 Comments³, p. 34.)

CAC acknowledges that it "was by agreement of the parties, including Edison, that the gas Factor and other features of the Transition Formula were provided and adopted by the Commission," and that § 390 does not include a factor. (CAC August 28, 2000 Comments, p. 8.) CCC and IEP's arguments focus on the merits of modifying the Factor in the manner specifically proposed by SCE not the legality per se of modifying the Factor. We will consider the merits of those substantive arguments below.

In addition, we acknowledge the arguments of QFs that D.96-12-028 limits our ability to revise the Transition Formula. We disagree that the Commission's invitation to parties in D.96-12-028 to petition to modify the border indices precludes parties from seeking modification of D.96-12-028 on any other grounds. The Commission never indicated that a change in the border indices was the only basis on which to seek a modification of that decision, but rather spelled out requirements if that particular change was sought. These arguments would be obviated by legislative clarification.

Pub. Util. Code § 1708 provides the Commission with the discretion to "rescind, alter, or amend any order or decision made by it" after an opportunity to be heard. Parties have not identified disputed facts. Therefore we find that the Commission has the discretion to modify the factor, should it choose to do so, without evidentiary hearings.

Substantive Issues

First, we must determine whether we should modify the factor as proposed, or in some other manner. For example, we must determine whether all elements that made up the "factor" (IER, burnertip gas prices, and variable O&M) should be considered in modifying the "factor" or whether changes to intrastate transportation rates should be looked at in isolation from other elements of the formula.

The factor was developed so that changes in border gas prices would be reflected in SRAC prices in a proportional manner to how changes in border gas prices affected SRAC prices under the index methodology. In order to emulate the results under the index methodology, a factor was required, because SRAC prices did not change on a one-for-one basis with border gas prices.

In considering whether to update the factor we must decide whether it is appropriate to try to make today's avoided costs emulate avoided costs calculated under the index methodology. The index methodology was developed during a time that utilities owned gas-fired generating facilities and operated those plants on the margin. Gas purchased to fuel those plants represented an element of SCE's avoided cost. SCE has since sold off almost all of its gas-fired generating facilities and no longer procures substantial amounts of gas. To meet incremental electricity needs, SCE no longer turns to its own facilities as it did in the past, but instead turns to the electricity market. Thus it is unclear that going forward, the statutory requirement to base SRAC payments on California border gas prices accurately represents SCE's avoided cost of electricity. Arguments about how SCE would have procured gas today and comparisons to how it procured gas prior to selling its generating units do not add much value to solving the problem of how to calculate SRAC on a going forward basis. However, § 390(b) currently requires us to calculate SRAC using gas prices as the primary input, effectively trying to mimic the index methodology.

There is no reason the Transition Formula should not be updated periodically as major inputs change. However, updating just one element does not retain the balance established by the formula. Therefore, we find it appropriate to update all elements of the proposed monthly factor formula, not just the intrastate gas cost component as proposed by SCE.⁴ With the exception of the IER and variable O&M, all elements can be calculated based on tariffed rates or published indices. The IER has historically been controversial to calculate. CCC suggests that the IER has increased; SCE counters that generating efficiency has improved and that the IER has likely decreased.

We will convert SCE's fixed factor to a formula, effective with the next regularly scheduled SRAC posting. However, we do not have a sufficient record to update the IER or variable O&M components, so changes to the monthly factor will be subject to possible upward adjustment based on our review of the IER and variable O&M. On May 1, 2001, parties should serve concurrent opening testimony proposing how to calculate the incremental system heat rate and variable O&M for SCE. Reply Testimony should be served on May 21, 2001. Evidentiary hearings will be scheduled shortly thereafter. Any downward adjustments to the IER and/or variable O&M should be made on a going forward basis from the point in time of that decision. If the decision adopts revisions to the IER and variable O&M would increase the monthly factor, the IER and variable O&M revisions should be made effective with the first posting that includes a monthly factor. In the meantime, the monthly factor shall be calculated using 9,140 Btu/kWh as proposed by SCE.

As we have decided that modification of SCE's factor is appropriate, we must consider whether modification to the "factors" of SDG&E and PG&E is appropriate. No party has proposed that PG&E's factor requires updating. SDG&E did ask that its factor be modified in the same way as SCE's factor. Unlike SCE, SDG&E did not present information in its comments to allow us to determine whether changes to inputs in the factor have changed. Therefore, we decline to make this modification for SDG&E at this time. SDG&E may renew its request in a fully supported petition. At this time we will not adjust the factors of PG&E or SDG&E.