BACKGROUND

SCE's Rate PBR Mechanism

The Commission adopted SCE's Rate PBR mechanism in D. 96-09-92. SCE's Rate PBR mechanism consist of:

1. a "Rate Indexing" formula for annually adjusting rates;

2. a Revenue Sharing Mechanism for allocating net gains and losses between ratepayers and shareholders;

3. a Cost of Capital Trigger Mechanism to automatically adjust the authorized ROE for changes in interest rates;

4. service quality performance incentives;

5. "Z factor" allowances for exogenous influences; and

6. a Monitoring and Evaluation Program

Under the Monitoring and Evaluation Program, SCE is required to file an annual performance report to detail its performance relative to the benchmarks established by the Commission and provide its rewards and penalty calculations. In compliance with D. 96-09-092, on March 31, 1999, SCE filed its 1998 PBR Report in Advice Letter 1373-E. Then on June 1, 1999, SCE filed Advice Letter 1373-E-A to revise its Average Customer Minutes of Interruption (ACMI) calculations from its original filing.

1998 is SCE's second year operating under the Rate PBR mechanism, and the first year that the mechanism applies only to SCE's electric distribution component.