Ancillary Services

DWR asserts that it continues to have authority to obtain and pay for ancillary services, and estimates its 2003 cost for doing so at approximately $170 million. In its August 16 Determination, DWR notes that: "If the Department is not required to pay for ancillary services costs in 2003, the total revenue requirement would decrease by $170 million." (Determination, p.31.) There is some consensus, some dispute, and possibly some confusion amongst the parties on this issue.

SDG&E proposes in its testimony that the $170 million be removed from DWR's revenue requirement. According to SDG&E, each utility should be responsible for the cost of providing ancillary services for its bundled load. In addition to administrative simplicity, SDG&E argues that each IOU should decide for itself how to provide ancillary services, and notes that DWR has not entered into contracts for ancillary services, but rather has relied upon the ISO to provide them.

Conceptually, PG&E agrees with SDG&E that the utilities should be responsible for their respective ancillary service obligations. However, PG&E believes it is premature to remove ancillary services costs from DWR's 2003 revenue requirement before PG&E and SCE are restored to creditworthiness. PG&E would not object to SDG&E's proposal if it were to be applied only to SDG&E, but does object to applying SDG&E's proposal to PG&E. Accordingly, PG&E would leave the $170 million (or at least some portion of that amount) in DWR's revenue requirement to provide creditworthy backing to the utilities, but each utility would be responsible for the costs DWR incurs on behalf of its customers.¹⁴ PG&E recommends that DWR's revenue requirement for ancillary services be allocated separately, and not subject to the allocation methodology otherwise adopted here.

In its Opening Brief, SCE states that it agrees with SDG&E, but its description of what it proposes sounds more like PG&E's position. In its Reply Brief, SCE essentially states that this issue should be left to the individual utilities to address with DWR or the ISO.

TURN agrees with SDG&E and PG&E that ancillary services costs should be allocated to the utility for which those ancillary services are purchased. TURN is neutral between the two proposals, and sees no direct impact to ratepayers from choosing one over the other, as either proposal would result in payment coming from the utility that uses the services. ORA does not appear to distinguish between the PG&E and SDG&E proposals.

There appears to be consensus among the parties on one aspect of this issue: each utility should be responsible for the cost of ancillary services provided to its customers, regardless of whether those ancillary services are provided by the utility or by DWR. In theory, we agree with all parties that a general allocation methodology should not be applied to the cost of ancillary services, but rather each utility should pay for ancillary services provided to its customers; if DWR provides those services, then the utility customers receiving those services should pay DWR.

Unfortunately, this is an area where the gap between theory and practice is larger in practice than it is in theory. In response to the parties, DWR asserts that the estimated costs of ancillary services should remain in its 2003 revenue requirement, and that it is reasonable to continue to include them in the revenue requirement. (DWR Memorandum, dated October 23, 2002.) DWR's insistence at keeping the $170 million in forecast ancillary services costs in its revenue requirement, coupled with the terms of the Rate Agreement, leave us no choice but to leave those dollars in place, to be passed on to the ratepayers. Even though we agree with SDG&E that there is no need for the $170 million to remain in the DWR revenue requirement, we cannot remove them.

We urge DWR to reconsider its demand for $170 million in ratepayer money for ancillary services. DWR's supplemental determination should look closely at the assumptions used in its forecast of costs for ancillary services. All utilities should provide DWR with current data, assumptions, and forecasts relating to DWR's potential ancillary services costs, so DWR can consider that information in preparing its supplemental determination.

There are significant real-world differences between the utilities on this issue (including creditworthiness, self-provision of ancillary services, invoicing, and other administrative issues). This renders a generalized allocation approach less appropriate, but DWR's simplistic approach to ancillary services leaves that as our only choice.

DWR's estimate of ancillary services costs did not distinguish between the utilities. DWR estimated a cost of ancillary services based upon volumes of delivered energy, and DWR's total estimated cost for ancillary services did not take into consideration differences such as the relative creditworthiness of SDG&E and PG&E.

Were our allocation to take into consideration differences between the utilities, such as the actual amount of ancillary services provided by DWR, it would result in a reduction of the costs of ancillary services for some utilities, such as SDG&E. But DWR's refusal to reduce the total dollar amount of its revenue requirement for ancillary services would render the resulting allocation inequitable. Under DWR's approach, the pie remains the same size even if a large slice of it is removed.

This means that we cannot allocate the costs of ancillary services in the manner recommended by the parties, which we prefer. Instead, we can only apply a more generalized allocation methodology. Accordingly, we will allocate DWR's $170 million for ancillary services using the same approach we have adopted for allocating DWR's fixed costs. We will revisit this allocation approach during our evaluation of DWR's supplemental determination, in the hopes of implementing an allocation that results in each utility being responsible for the cost of providing ancillary services for its bundled load.