7. Ratemaking Treatment

PG&E proposes that all of the costs associated with its programs be recorded in its AMDRA and recovered annually through an AL filing requesting recovery, with one exception.¹⁸ PG&E proposes that any customer bill credits paid under the residential 20/20 program be reflected in PG&E's Utility Generation Balancing Account (UGBA). PG&E requests that cost recovery review of the amounts recorded in AMDRA and UGBA be limited to auditing that the amounts were spent on the approved programs, with no reasonableness review regarding implementation of the programs. After approval of AMDRA balances occurs (presumably after audit), PG&E would transfer the approved AMDRA balance to its Distribution Revenue Adjustment Mechanism (DRAM) for rate recovery. PG&E does not currently have a provision in its AMDRA to recover capital costs, although both SDG&E and SCE do, so PG&E asks to conform its AMDRA language to provide for recovery of capital costs.¹⁹ PG&E's cost recovery proposal is reasonable with the clarification that our limitation on review of the amounts recorded in UGBA is specific to PG&E's costs associated with its residential 20/20 program and is not intended to supersede any review required of non-demand response costs recorded in the UGBA.

SCE currently records costs for demand response programs in several different memo accounts. To simplify cost recovery, SCE proposes to establish a Demand Response Program Balancing Account (DRPBA) effective January 1, 2005 to consolidate the ratemaking for all programs. SCE would record all costs, except incentive costs, in the DRPBA. SCE proposes that in this proceeding the Commission adopt a specific 2005 Demand Response Program Revenue Requirement (excluding incentive and capital costs, grossed up for Franchise Fees and Uncollectibles to be recorded in the DRPBA, and ultimately, in SCE's distribution rate levels.²⁰ SCE proposes that the operation of the DRPBA be reviewed and audited annually in its Energy Resource Recovery Account (ERRA) Reasonableness proceeding.²¹ SCE proposes that any implementation costs from and credits paid under its Summer 2005 20/20 rebate program be reflected in SCE's ERRA.

We agree with SCE that only one account is necessary to accurately record and track costs associated with demand response programs, with the exception of 20/20 program costs; however, we prefer the approach PG&E has utilized of recording costs in a memorandum account and then transferring them upon approval into a balancing account for cost recovery. SCE should record its demand response program costs in its Advanced Metering and Demand Response Memorandum Account (AMDRMA), with the exception of 20/20 program costs, which should be recorded in the ERRA. In each annual ERRA proceeding, the AMDRMA should be audited and approved amounts should be consolidated with other approved revenue requirement changes for reflection in distribution rates.

In comments on the draft decision, SCE states its preference for recording costs in a balancing account so that it will be able to recover its costs immediately rather than after review. While we understand SCE's interest in timely recovery of costs for these programs, it remains appropriate to subject these costs to the narrow review described herein before they begin to be recovered in rates. We retain the ratemaking approach described in the draft decision.

Both TURN and SCE raise concerns about the equity of allocation of demand response program costs through distribution costs. TURN specifically is concerned that by allowing costs to be incorporated into rates through the normal allocation approach, rather than a generation allocator, more costs will be borne by residential customers than their share of program benefits. This is a possible result but we note that the programs we approve today contain a large share of funding for programs targeting at residential customers (20/20 and SCE's AC Cycling Program). We do not specify a particular cost allocation approach for these costs at this time.

SDG&E currently records all program costs associated with its CPP, Demand Bidding Program, HPO, and DRP programs in its AMDRMA. For 2005 programs, SDG&E proposes that O&M and capital expenditures and any customer capacity incentives, for programs it characterized as price responsive, be recorded in its AMDRMA, with energy incentive payments recorded in its ERRA. For reliability triggered programs, SDG&E proposes the creation of a new account, the Reliability Demand Response Programs Memorandum Account. SDG&E would record O&M, Capital, and capacity incentives in that account, with energy incentives recorded in the ERRA. In all cases, the approved recorded amounts would be transferred annually to SDG&E's Rewards and Penalties Balancing Account (RPBA) for amortization into distribution rates. We find SDG&E's approach to generally be reasonable but see no reason to create a new memorandum account to record costs associated with reliability triggered programs, independent of its pre-existing AMDRMA.

To the extent that any of the utilities need to modify the language of their AMDRA (PG&E) or AMDRMA (SCE and SDG&E) accounts to allow for recording a broader set of program costs, they should file an AL to implement this provision within 10 days of the effective date of this decision. Capacity incentive costs should be recorded in these accounts, with energy incentive costs recorded in PG&E's UGBA or SCE and SDG&E's ERRA accounts. Each utility should annually seek approval of the recorded amounts, subject to audit that the funds were spent on approved programs, and transfer the approved amounts to their appropriate ratemaking account (DRAM for PG&E, ERRA for SCE, and RPBA for SDG&E) for rate recovery.