PG&E

PG&E believes that the decision should be more specific regarding how pre-direct access net delivered energy should be calculated. We believe that the decision is already quite specific regarding the relevant calculations, and we do not understand the relevance of calculating delivered energy when the adopted allocation methodology uses supplied energy.²⁶ We will not make this modification.

PG&E recommends that the Commission reduce DWR's revenue requirement by $850 million "to reflect the fact that after January 1, 2003, DWR is not anticipated to be procuring power to meet the utilities' residual net short positions." [PG&E Comments, p. 3.] According to PG&E, once DWR is no longer purchasing to meet the utilities' residual net short, the requirement for DWR's Minimum Operation Expense Available Balance decreases from $1 billion to $150 million. While this a very attractive result, we cannot do as PG&E suggests, at least for the time being. As PG&E notes, we could only take such an action "once these reserves are no longer required." We cannot yet know with 100% certainty that such reserves are no longer required, and we must consult with DWR before undertaking such an adjustment.

DWR currently opposes PG&E's recommendation, stating that the proposed reduction in DWR's operating account balance and operating reserves can only happen after DWR has determined that it will not be responsible for procuring any of the utilities' net short in 2003, and after DWR has determined that a reduction in its operating account or operating reserve account will not result in an adverse impact on its credit rating, and after DWR has consulted with the Commission in accordance with the rate agreement concerning the reduction of the operating reserves, none of which have happened yet.

In the alternative, PG&E recommends that if we do not lower DWR's 2003 revenue requirement at this time, that:

[T]he Commission should make clear in the final decision that the final allocation of the DWR 2003 revenue requirement, to be determined as quickly as possible at the beginning of 2003, must reflect any reduction in DWR's revenue requirement due to the utilities' resumption of purchasing to meet their residual net short positions.

Indeed, the final decision should make clear that the early 2003 expedited proceeding to finalize the allocation of the DWR revenue requirement should reflect all reasonable reductions to DWR's 2003 revenue requirement, whether associated with changed circumstances that change the reserve requirements of the financing documents, DWR contract renegotiations, or any other reason. (PG&E Comments, pp. 4-5.)

We agree, and incorporate the recommended language.

In its comments, PG&E argues that the Proposed Decision should be modified so that variable DWR contract costs and ancillary services costs are remitted by each utility on an actual, incurred cost basis. PG&E contends that this approach is consistent with the Rate Agreement. DWR opposes PG&E's arguments, and counters that PG&E's proposals are neither necessary nor proper.

While we are sympathetic to the substance of PG&E's arguments, and support their goal of reducing costs to utility customers, PG&E fails to take into account provisions in the Rate Agreement that are reflected in the Servicing Order that the Commission has adopted for PG&E.

The Rate Agreement defines "Power Charges" as "charges imposed by the Commission upon Retail End Use Customers for electric power deemed sold to Retail End Use Customers by the Department." Under section 6.1 of the Rate Agreement the Commission agrees to impose Power Charges sufficient to provide moneys necessary to satisfy DWR's Retail Revenue Requirements and acknowledges that, as provided by Section 80112 of the Water Code, Power Charges are the property of DWR.

These concepts are further implemented in Section 2.3 of PG&E's Servicing Order, which provides, inter alia, that PG&E is acting solely as the servicing agent for DWR with respect to DWR Charges and that DWR retains title to all DWR Charges. That section further provides that "[t]o the extent any moneys are received by [PG&E] during the process of collection, and pending their transfer to DWR, the moneys shall be segregated by [PG&E] and shall be held in trust for the benefit of DWR." Section 2.2(d) of Service Attachment 1 to PG&E's Servicing Order addresses related topics, and provides that "the Consolidated Utility Bill shall (i) at all times contain a separate line item for Bond Charges and (ii) . . . contain a statement to the effect that the Consolidated Utility Bill includes Charges for power provided by DWR for which DWR is collecting "X" cents per kilowatt hour (where X = the current Power Charge)."

Thus, under the Rate Agreement, the Servicing Order, and the Proposed Decision, a Power Charge is established to recover all of DWR's revenue requirement that is not recovered by the Bond Charge. This Power Charge is imposed upon the end-use customer, is the property of DWR, and is to be segregated by PG&E and held in trust for DWR during the collection process.

In contrast, under PG&E's recommended approach, the Commission would now set a per kilowatt Power Charge that does not cover ancillary services costs or variable DWR contract costs. Instead, the utility would somehow pay these costs to DWR on an actual incurred basis. PG&E does not explain how this could be done while still recovering these costs directly from end-use customers as part of a Power Charge that is stated on the customer's bill to be in the amount of X cents per kilowatt hour. Rather, it appears that under PG&E's approach these costs would be paid by the utility to DWR. Such an approach would be in contravention of the Rate Agreement that requires these costs to be recovered directly from end use customers.

In its reply comments, PG&E argues that if it is acceptable for the utilities to remit surplus sales revenue to DWR on an actual basis, then it should be acceptable to remit variable contract costs and ancillary service costs on an actual basis. This argument ignores the distinction between remitting revenues and "remitting" costs. It is acceptable to remit revenues on an as-received basis because revenues are recovered outside the Power Charge (per the Operating Order), from buyers other than end use customers. In contrast, it is not acceptable to remit costs (e.g., ancillary services costs) on an as-incurred basis because costs must be collected through the pre-established Power Charge, which in turn must be collected from ratepayers (per the Servicing Order).

We cannot, and accordingly do not, adopt the modifications requested by PG&E relating to remittance of variable contract costs and ancillary services costs.

While PG&E states that the calculation approach used by the Commission regarding surplus sales is reasonable, PG&E states that the "operational implementation" of the Commission's treatment of surplus sales should be addressed in a different proceeding, rather than in the context of the allocation of DWR's revenue requirement. It is not entirely clear what PG&E is requesting, as PG&E does not make any specific recommendations. We make no changes in this area other than minor wording clarifications.

PG&E recommends that the language of the decision be modified to reflect the interaction of this proceeding with the Direct Access Cost Responsibility Surcharge (DA CRS) addressed in D.02-11-022. PG&E refers to workshops that were anticipated in that decision. Consistent with the Joint Ruling issued on December 10, 2002 in this proceeding and in R.02-01-011, we will implement a DA CRS of 2.7 cents/kWh on January 1, 2003, prior to the modeling implementation workshops.

PG&E requests, similarly to SCE, authorization to use the half-cent per kWh Catch-Up Surcharge to partially offset the increase in DWR's revenue requirement. However, PG&E's situation differs from that of SCE, and PG&E has not shown that it actually needs the revenues from the Catch-Up Surcharge in order to avoid a rate increase. At this time we will not grant PG&E's request relating to revenues from the Catch-Up Surcharge.

PG&E asserts that some numbers in the Proposed Decision do not appear to match the record. PG&E is correct that Lines 16 and 17 in Appendix A were mislabeled, and they have been relabeled. PG&E observes that "with respect to Table C, as is noted in the Assistant Chief Administrative Law Judge's Ruling Regarding Proposed Decision Of ALJ Allen And Alternate Proposed Decision Of Commissioner Lynch, multiplying the power charge by the DWR delivered energy does not give the DWR revenue required from customers. PG&E is unable to confirm that this is consistent with DWR's request." (PG&E Comments, p. 14.)

The difficulty noted by PG&E regarding the "transparency" of the calculation of DWR's revenue requirement stems from the complexity of the financial model submitted by DWR in support of its August 16^th Determination. For this reason, it is not possible to confirm the accuracy of the power charges with the simple calculation described by PG&E, as sensible at that approach may seem. DWR assumes that it will receive ratepayer funds 45 days after power is delivered to ratepayers. Thus, even though the DWR power charges will change on January 1, 2003, the revenue collected via these charges is not assumed to begin reaching DWR until February 15, 2003. Prior to that day, DWR's daily receipts from ratepayers in 2003 are calculated using the power charges that are currently in effect, which are somewhat lower than the charges adopted in this decision. This is why simply multiplying the retail DWR sales in calendar 2003 by the IOU-specific power charges does not produce a result equal to the DWR revenue required from customers, as PG&E expected: the last 45 days of the revenue collected by the 2003 power charges will in fact reach DWR in calendar year 2004, because of the assumed lag in receipt of revenues.

In its Reply Comments, PG&E for the first time presents a proposal to create a proxy for the unavailable DA-in modeling run, so that the Commission can incorporate an estimate of what PG&E calls "pre-direct access direct energy." (PG&E Reply Comments, pp. 4-5.) This is a new recommendation on a complex and somewhat controversial topic, and its presentation in Reply Comments fails to provide an adequate opportunity for other parties to address it. We will not implement PG&E's proposal.