5. Settlement
PG&E and DRA filed a joint motion for the adoption of a proposed settlement (Attachment A) pursuant to the Commission's rules and precedents. The settlement has four parts:
(1) The reasonable total cost recoverable from this CEMA application is $15.5 million, consisting of $11.3 million in capital costs and $4.2 million in expenses. The revenue requirement resulting from these costs is $12.138 million in electric revenue requirements, including interest through December 31, 2010, franchise fees, and uncollectibles, to be collected in rates beginning January 1, 2008, with $9.333 million collected in rates in 2008, $1.431 million in 2009, and $1.374 million in 2010.3 Upon approval of this settlement by the Commission, PG&E will record the CEMA revenue requirement into the Distribution Revenue Adjustment Mechanism ($11.46 million) and to the Utility Generation Balancing Account ($503,0004) for rate recovery through the Annual Electric True-up advice letter.
(2) The Settling Parties agree that the Commission should find that it is reasonable for PG&E to recover $12.138 million as PG&E's total authorized revenue requirement in this application. It is difficult to tie the final settlement amount to specific outcomes for individual issues; however, the final settlement amount does reflect litigation uncertainty assessed by one or both parties. This uncertainty includes, among other issues, the ability of either party to prove whether or not PG&E's requested costs were incremental to the costs approved in PG&E's 2003 test year GRC settlement. The GRC rate case settlement was not fully disaggregated, and thus did not specify costs in terms germane to a CEMA analysis. This also includes the likely inability of PG&E to prove whether its requested costs properly include those costs incurred in counties without a disaster declaration.
(3) PG&E agrees that it shall not pursue any appellate relief, in any court of law, regarding the underlying facts and issues raised in this proceeding. PG&E further agrees that it will not pursue or support an application for rehearing of D.07-07-041, the decision denying the portion of PG&E's application requesting recovery for costs associated with the July 2006 heat storm. PG&E also agrees to not pursue or support a petition for modification of D.07-07-041, or to pursue or support any collateral attack upon D.07-07-041, as it relates to the July 2006 heat storm.
(4) The parties further agree that in future CEMA applications, PG&E will not include an allocation of capitalized Administrative and General (A&G) costs in the costs booked to the CEMA. In the future, PG&E will allocate its capitalized A&G costs to non-CEMA capital costs. (Settlement, pp. 3 - 4.)
5.1. Eligibility for CEMA Recovery
The 2005-2006 Winter Storms are eligible for CEMA treatment consistent with our long-standing CEMA policy. Following the October 17, 1989 Loma Prieta earthquake, the Commission adopted Resolution E-3238, dated July 24, 1991, which ordered that any utility, as defined by Pub. Util. Code § 216, was authorized to establish a "Catastrophic Event Memorandum Account." (Ex. 4.) The resolution described the conditions for invoking CEMA and its general operation. In compliance, PG&E filed Advice Letter 1367-E (for the electric department) on August 7, 1991. PG&E's initial CEMA tariff was effective on August 7, 1991.5
Resolution E-3238 described that the purpose of CEMA is:
... to record costs of: (a) restoring utility service to its customers; (b) repairing, replacing or restoring damaged utility facilities; and (c) complying with government agency orders resulting from declared disasters. (Mimeo., p. 1.)
The resolution discussed the need for an established account which would ensure there was no issue of retroactive ratemaking - that an in-place mechanism would provide a legitimate vehicle to recover eligible costs.
The resolution specifically discussed eligibility:
Because the intent of such [CEMA] is to capture for consideration for later recovery only those costs associated with truly unusual, catastrophic events such as the Loma Prieta earthquake, their use will be restricted to events declared disasters by competent state or federal authorities. Other events not so officially designated are outside the scope and intent of this authority and will not be considered for recovery under this mechanism. (Resolution E-3238, mimeo., p. 2.)
PG&E's current tariff similarly states:
The purpose of the CEMA is to recover the costs associated with the restoration of service and PG&E facilities affected by a catastrophic event declared a disaster or state of emergency by competent federal or state authorities. (Ex. PG&E-2, p. 1-1.)
Governor Schwarzenegger's three declarations of emergency are appropriate triggers for PG&E to invoke the CEMA tariff. Based upon the record, the Commission would, but for the settlement, determine whether PG&E incurred the costs as a result of the catastrophe and whether those costs are recoverable under the CEMA tariff.
5.2. The Settlement is Reasonable
The settlement proposes that PG&E would not recover its full request. The settlement is a reduction of $7.34 million compared to PG&E's request of $22.84 million. The settling parties note that the recent settled general rate case did not fully disaggregate the revenue requirement and therefore there is a reasonable dispute over the incremental amount spent by PG&E. Additionally, there were litigation risks to both sides, for example, the disputed allocation of overhead costs to CEMA-eligible restoration and repair work.
We have reviewed Ex. DRA-1, the testimony served by DRA, as well as the original, supplemental, and rebuttal testimony served by PG&E. There was no guarantee that litigation of the issues raised by DRA would have resulted in any adjustment to the revenue requirements as significant as proposed in the settlement which is acceptable to all parties. We can reasonably determine that the settlement outcome is within the reasonable range of possible litigation outcomes. We therefore can find the settlement to be reasonable based on the record. (Rule 12.1(d).)
The settlement does not violate any code or law and is therefore consistent with our settlement rules.
Rule 12(a) includes the requirement that a settlement "shall not extend to substantive issues which may come before the Commission in other or future proceedings." The all-party settlement requirements state that the settlement must provide "the Commission with sufficient information to permit it to discharge its future regulatory obligations with respect to the parties and their interests." Rule 12.5 states that a settlement is not a precedent unless otherwise "expressly" adopted by the Commission. With these three proscriptions we must examine the settlement's fourth provision: "... that in future CEMA applications, PG&E will not include an allocation of capitalized Administrative and General (A&G) costs in the costs booked to the CEMA."
The Uniform System of Accounts provides:
Overhead Construction Costs.
A. All overhead construction costs, such as engineering, supervision, general office salaries and expenses, construction engineering and supervision by others than the accounting utility, law expenses, insurance, injuries and damages, relief and pensions, taxes and interest, shall be charged to particular jobs or units on the basis of the amounts of such overheads reasonably applicable thereto, to the end that each job or unit shall bear its equitable proportion of such costs and that the entire cost of the unit, both direct and overhead, shall be deducted from the plant accounts at the time the property is retired. (Emphasis added, http://www.ferc.gov/legal/acct-matts/usofa.asp.)
DRA argued in its testimony that the general rate case fully provided PG&E's overhead costs (Ex. DRA-1, p. 6.) thus we could conclude any CEMA activity is unlikely to generate incremental overhead costs. One of the accepted practices in CEMA recovery is to only allow recovery of incremental costs because by the very definition of a CEMA-eligible event, it was unforeseen and thus incremental to existing ratemaking provisions. While we are cautious about any settlement proscribing future ratemaking, we find this agreement is a useful clarification of which costs are, or are not, incremental costs and therefore should be included or excluded from CEMA recovery. We therefore find that the settlement does not interfere with the Commission's ability to discharge its future CEMA regulatory obligations and we can expressly adopt this settlement component to constrain PG&E's future CEMA applications. This adoption is an appropriate deviation, for good cause, under Rule 1.2, from the provisions of Rule 12.1(a) which provides that settlements should not address substantive issues in subsequent proceedings.
3 The revenue requirement numbers include interest calculated at the actual 90-day commercial paper rate through August 2007, and at the August 2007 90-day commercial paper rate thereafter on the unamortized balance through 2010. The numbers will change slightly over time as the forecasted 90-day commercial paper rate is replaced by the actual 90-day commercial paper rate in each month following August 2007. (Settlement Footnote 4.) Post 2010 the capital costs will be included in ratebase and recovered in subsequent general rate cases.
4 "These numbers only total $11.963 million because they assume interest only through December 31, 2007, when the revenue requirement numbers are assumed to be transferred to the [Distribution Revenue Adjustment Mechanism] and [Utility Generation Balancing Account], using the same assumptions as [Settlement] footnote 1." (Settlement, Footnote 5.)
5 PG&E's current CEMA tariff is included in Ex. PG&E-2, pp. 1-1 and 1-2.
