10. Analysis of the Settlement Agreement

10.1 Cost-Effectiveness of the Settlement Agreement

As discussed above, the Settlement begins with the SDG&E AMI application, and makes specific modifications. The cost-effectiveness evaluation thus starts with the SDG&E business case. After considering newly-quantified benefits, we have found that the SDG&E business case is not cost-effective, as it has costs of between $38.5 million to $49.5 million more than its benefits.

The Settlement itself does not specifically discuss how or if its provisions would be cost-effective. However, the Settling Parties February 23, 2007 Response to ALJ Gamson's Ruling (Exhibit 64) and the February 27, 2006 evidentiary hearing provide sufficient record information to evaluate the cost-effectiveness of the Settlement.

The Settlement provides that SDG&E costs for 2007-2011 (inclusive) will be $572 million, subject to specified contingency and sharing proposals. This figure is not directly comparable to SDG&E's proposal AMI cost of $741 million over 34 years, or DRA's proposed cost of $607 million over 17 years. Nor is it directly comparable to our calculated cost of SDG&E's AMI Project, which is $583 million over 17 years. Instead, the $572 million figure is intended to represent SDG&E's expected expenditures, in nominal dollars, for 2007-2011, and is used as a starting point for the risk-sharing mechanism of the Settlement. The Settling Parties state that post-2011 expenses would be reviewed in general rate cases for future years. By contrast, the figures we have used for cost-effectiveness analysis encompass the life of the Project.

In Exhibit 64, the Settling Parties show the cost of the Project, using the assumptions incorporated into this decision, increases from $583 million to $652 million due to the additional functionalities (e.g., HAN and remote connect/disconnect) provided for in the Settlement. Exhibit 64 shows these functionalities increase the benefits of the Project from $508 million to $666 million. Because our analysis differs slightly from the figures used in Exhibit 64, we have found $502 million in benefits from SDG&E's proposal instead of $508 million. Adding in the additional functionalities from the Settlement, total Project benefits in our analysis are now $660 million. Therefore, we find that SDG&E's proposal, as modified by the Settlement, provides a net benefit of $8 million ($660 million in benefits minus $652 million in costs).

Further, we have found $32 million to $43 million in newly-quantified benefits for SDG&E's proposal, which would also occur with the Settlement but which the Settling Parties testified are not counted in the Exhibit 64.¹²¹ In total, we find between $692 million and $703 million in benefits. Compared to the total cost of $652 million, we find between $40 million and $51 million in net benefits for the Settlement Agreement.¹²²

Overall, we find the figures from the Settlement to be reasonable and compatible with the record. Therefore, with the modifications of the Settlement Agreement, we find SDG&E's proposal to be cost- effective.

10.2 Reasonableness of the Settlement Agreement

In approving the Settlement Agreement, Rule 12.1(d) requires the Commission find the Settlement Agreement to be reasonable in light of the whole record, consistent with the law, and in the public interest. In addition, D.92-12-019 (46 CPUC2d 538) (where the Commission originally articulated policy regarding review of all-party settlements), calls for review to determine if the Settlement Agreement includes information sufficient to allow the Commission to determine its overall reasonableness.

Here, the Settlement Agreement commands unanimous sponsorship of all active parties, thus conferring a greater sense of deference to the Settling Parties. The Settling Parties are fairly reflective of the affected interests: DRA represents ratepayer interests, especially residential and small commercial/industrial customers; UCAN also represents residential and small commercial ratepayer interests, and since 1984 has been the most active non-governmental ratepayer advocate in SDG&E matters before the Commission. Thus, the parties to the Settlement represent the full panoply of ratepayer interest affected by this application. These are "parties ideally positioned to comment on the operation of the utility and ratepayer perception" as required by D.92-12-019, 46 CPUC 2d.

We will evaluate the Settlement Agreement by the factors set forth in Rule 12.1(d) and D.92-12-019.

10.2.1 Does the Settlement Agreement Include Sufficient Information to Determine its Overall Reasonableness?

The Settlement starts with the SDG&E proposal in its application, and makes specified modifications. The Settling Parties fully developed their positions before settlement and submitted prepared testimony and additional information requested by the ALJ. The Commission held eight days of evidentiary hearings, which assessed the strengths and weaknesses of parties' positions. SDG&E's application contained sufficient detail to evaluate its reasonableness; however, we have found that we cannot approve SDG&E's application. The modifications contained in the Settlement are fairly detailed, and were explained more fully in Exhibit 64 and through responses to ALJ questions at the February 27, 2007 evidentiary hearings. The totality of the information provided is sufficient to allow us to determine the overall reasonableness of the Settlement and to permit us to discharge our future regulatory obligations with respect to the parties and their intentions.

10.2.2 Is the Settlement Agreement Reasonable in Light of the Whole Record?

The key aspects of the Settlement Agreement are set forth in Section 4 above. The Settlement does not bring new issues into the proceeding, nor does it seek to formulate new Commission policy. The record shows that the resolutions of particular issues adopted in the Settlement are within the range of positions taken by parties on such issues as discussed in detail in this decision. On the central issue of cost-effectiveness, the calculations supporting the Settlement are consistent with the litigation positions taken in the proceeding. Moreover, on discrete issues, the Settlement generally adopts some result that was specifically recommended by one party or another in their testimony. The Settlement generally does not introduce new concepts or mechanisms outside the litigated record. It is also apparent that the Settlement reflects give-and-take. As an example, the allocation of revenue responsibility between customer classes is a central issue in this application. The issue is resolved in the Settlement by adoption of a compromise between DRA and SDG&E's initial recommended allocation proposals.

10.2.3 Is the Settlement Agreement Consistent With the Law?

The Settling Parties represent that no term of the Settlement contravenes statutory provisions or prior Commission decisions.¹²³ The Settling Parties reached Settlement in accordance with Rule 12.1 of the Rules. We have reviewed the Settlement and find it to be consistent with the law.

10.2.4 Is the Settlement Agreement in the Public Interest?

We have found that the Settlement Agreement is consistent with our criteria for implementability and cost-effectiveness. We will ensure that our functionality criteria are met through required Commission review of advice letters.

The Settling Parties contend the Settlement Agreement benefits ratepayers and serves the public interest by resolving issues in a collaborative fashion. For example, the public interest will be further served by the establishment of the TAP. The TAP will serve to advise SDG&E in the implementation of the AMI project and consider emerging AMI technologies such as those identified in the EPIC study, referenced in the UCAN and SDG&E testimony and briefs. Further, the Settling Parties have a long history of taking opposing positions. We find that the Settling Parties have used their collective experience to produce a sound outcome without the need for further commitments of scarce time and resources.

¹²¹ 8 RT 942-943.

¹²² The Settling Parties estimate total net benefits of between $14 million and $192 million. See the February 23, 2007 Response to ALJ Gamson's February 16, 2007 Ruling, p. 6, (Response #3).

¹²³ In D.00-09-037, the Commission based its finding that the third criteria had been met on representation by the settling parties that they expended considerable effort ensuring that the Settlement Agreement comports with statute and precedents and did not believe that any of its terms or provisions contravenes statute or prior Commission decisions.