5. Substantial Contribution to Resolution of Issues
In evaluating whether a customer made a substantial contribution to a proceeding, we look at several things. First, we look at whether the Commission adopted one or more of the factual or legal contentions, or specific policy or procedural recommendations put forward by the customer (§ 1802(i)). Second, if the customer's contentions or recommendations paralleled those of another party, did the customer's participation materially supplement, complement, or contribute to the presentation of the other party or to the development of a fuller record that assisted the Commission in making its decision? (§§ 1802(i) and 1802.5.)
As described in § 1802(i), the assessment of whether the customer made a substantial contribution requires the exercise of judgment. In assessing whether the customer meets this standard, the Commission typically reviews the record, composed in part of pleadings of the customer and, in litigated matters, the hearing transcripts, and compares it to the findings, conclusions, and orders in the decision to which the customer asserts it contributed. It is then a matter of judgment as to whether the customer's presentation substantially assisted the Commission.4
Should the Commission not adopt any of the customer's recommendations, compensation may be awarded if, in the judgment of the Commission, the customer's participation substantially contributed to the decision or order. For example, if a customer provided a unique perspective that enriched the Commission's deliberations and the record, the Commission could find that the customer made a substantial contribution. With this guidance in mind, we address Aglet-TURN's claimed contribution to the decision regarding (1) financial modeling efforts, (2) risk analysis, (3) pension returns, (4) credit quality, and (5) SDG&E capital structure.
5.1. Financial Modeling Efforts
Aglet-TURN claimed a substantial contribution for its financial modeling efforts. Those efforts consisted of (a) financial models, (b) opposition to PG&E's use of a non-utility proxy group, and (c) opposition to SCE and SDG&E's use of a Fama French model.
Although Aglet-TURN conceded that their financial model results were given minimal weight, they nevertheless contended that their financial model results significantly contributed to the decision because they collaborated the financial model results of DRA and FEA and were within the ranges of inputs and results of other parties. Specifically, their 9.88% Capital Asset Pricing Model (CAPM) result was slightly higher than other ratepayer parties 8.80% to 9.56% range and consistent with the utilities 11.59% to 12.10% range. Aglet-TURN's 8.90% discounted cash flow result was lower than other ratepayer parties 8.99% to 9.14% range and utilities 10.30% to 11.11% range. Their 10.46% risk premium model result was higher than other ratepayer parties 9.77% to 9.88% range and lower that the utilities 10.86% to 11.34% range. Further, their selected risk-free rate of 4.89% was within the Commission's selected 4.78% risk-free rate.
SCE disagreed with Aglet-TURN's contention that their model results substantially contributed to a decision. That is because the Commission found that reasonableness of Aglet-TURN's financial model results could not be determined and concluded that those financial model results should be given minimal weight. SCE concluded that Aglet-TURN's requested compensation for its financial modeling efforts should be reduced or entirely denied.
The reasonableness of Aglet-TURN's financial model results could not be determined because they did not screen their proxy group and, unlike other parties, used different companies from their proxy group for each of their financial models. For example, they used 75 of the 82 companies in their proxy group for their CAPM financial model and 65 companies in their Discounted Cash Flow (DCF) financial model. Approximately seven of the companies included in their proxy group did not have investment grade credit ratings. Aglet-TURN also used different companies from their proxy group in each of their financial models that resulted in a mismatch because they did not have sufficient data to run the individual models with their entire proxy group. In other instances, Aglet-TURN deemed data, which they could not identify, not meaningful for inclusion in their financial models. It was for those reasons that we concluded that the reasonableness of Aglet-TURN's financial models could not be determined and that their results should be given only minimal weight in this proceeding. (D.07-12-049, mimeo., pp. 12 and 13, and Conclusions of Law 6 and 7.)
Our conclusion that the reasonableness of Aglet-TURN's financial model results could not be determined does not satisfy the § 1802(i) requirement that, in the judgment of the Commission, the customer's presentation has substantially assisted the Commission in whole or in part one or more factual contentions presented by the customer. Hence, § 1802(i) precludes us from finding that Aglet-TURN's financial model results substantially contributed to a decision.
An alternative substantial contribution provision set forth in § 1802.5 provides for a finding of significant contribution if a customer materially supplements, complements, or contributes to the presentation of another party may be fully eligible for compensation if the participant makes a substantial contribution to a commission order or decision. However, we concluded in the decision that Aglet-TURN's financial model results should only be given minimum weight in this proceeding. Given that conclusion, there is no basis to make a finding that Aglet-TURN's financial model results materially supplemented, complemented, or contributed to another party's showing.
Aglet-TURN's financial modeling efforts did not substantially contribute to a decision and did not materially supplement, complement, or contributed to the presentation of another party that substantially contributed to a decision. (Conclusions of Law 6 and 7.)
Aglet-TURN also claimed a substantial contribution for the Commission's adoption of its opposition to PG&E's CAPM and DCF model results based on a proxy group of non-utility companies. We concur with Aglet-TURN on this issue. (Exhibit 55, p. 19, and Conclusions of Law 8 and 9.)
Aglet-TURN further claimed a substantial contribution for the Commission's decision to place no reliance on the Fama French financial model results of SCE and SDG&E. We also concur with Aglet-TURN on this issue. (Exhibit 55, pp. 20 and 21, and Conclusions of Law 19 and 20.)
5.2. Risk Analysis
Aglet-TURN claimed a substantial contribution relating to business and regulatory risks. In regards to business risks, Aglet-TURN claimed a substantial contribution for its business risks testimony. Aglet-TURN, along with other parties, identified electric procurement as a primary business risk facing the energy utilities. Based on its analysis of electric procurement, Aglet-TURN added basis points to their financial model results, thereby providing support for an increase in ROEs to compensate the utilities for business risks. Although its recommended ROEs were not adopted, its business risks assessment assisted the Commission in concluding that SCE and PG&E's base ROE should be increased by 50 basis points and SDG&E's by10 basis points to reflect additional business risks. (Conclusions of Law 23 and 24.)
In regard to regulatory risks, Aglet-TURN claimed a substantial contribution for addressing the California regulatory climate and the impact of that climate, along with past experience, of regulatory disallowances applicable to operating expenses and rate base. Although the utilities and other parties addressed the California regulatory climate, Aglet-TURN's position was specifically identified in the decision and helpful in concluding that the utilities ROEs should be increased 10 basis points to reflect California regulatory risks. (Conclusions of Law 25.)
Aglet-TURN also claimed a substantial contribution on its regulatory climate discussion that led the Commission to reject SDG&E's request to earn SCE's authorized ROE on SDG&E's San Onofre Nuclear Generating Station (SONGS) investments. The rejection of SDG&E's position was based, in part, on Aglet-TURN's testimony regarding the upfront ratemaking treatment involving SONGS 1 and 2 steam generator replacement projects. Aglet-TURN made a substantial contribution to a denial of SDG&E's capital structure proposal and resulted in our conclusion that SDG&E had not substantiated a need to set an ROE on its SONGS investment equal to that of the company-wide ROE of SCE. (Conclusions of Law 26.)
Overall, Aglet-TURN significant contributed in our assessment of business and regulatory risks and impact of such risks on the utilities ROE.
5.3. Pension Returns
The issue of pension returns was a carry-over issue from PG&E's test year 2007 general rate case (D.06-06-014). In that proceeding, the Commission ordered PG&E to explain and compare the equity markets data it used to prepare its requested ROE and the pension costs reported in its most recent Form 10-K. That requirement resulted from a premise of TURN's that there should be a correlation between PG&E's then 11.35% authorized ROE and then 8.5% projected return on pension trust equity investments.
In response to that order, PG&E provided direct testimony in this proceeding that demonstrated pension fund returns are related to market value of assets held in a pension fund while a utility's ROE is applied to a book value rate base. Based on PG&E's testimony, we concluded that the Employee Retirement Income Security Act dictates that pension funds must be diversified whereas a utility's ROE is based on risks specific to a utility's operations. (Conclusions of Law 30.)
Testimony in support of a relationship between pension fund and ROE returns provided by Aglet-TURN and the FEA were rejected. We instead concluded that pension fund equity return assumptions are not comparable to the ROE used in utility ratemaking. (Conclusions of Law 31.)
Although Aglet-TURN acknowledged that they did not prevail in this issue they seek compensation on the basis that they made a comprehensive showing in response to PG&E's testimony and thereby contributed to a review of "a topic that is worth exploring."5
Aglet-TURN's position on this issue was to have the Commission find that returns on utility pension funds be used as a factor when setting utility rates of return. (Exhibit 52, p. 8.) However, as acknowledged by Aglet-TURN, they did not prevail in this issue.
A topic that may be worth exploring does not justify compensation unless a party's showing on that topic was used in a decision on that topic. PG&E substantiated in its direct showing that the objectives of a pension fund are fundamentally different from that of an equity investor in a single utility and that the risk profiles are not comparable. More importantly, PG&E substantiated that pension fund returns are related to market value of assets held in the pension fund while a utility's ROE is applied to a book value rate base. (D.07-12-049, mimeo., p. 44.)
Although Aglet-TURN may have provided a comprehensive showing in response to PG&E's testimony, that testimony had no impact on our decision of this issue. (Conclusion of Law 31.) To make a finding of significant financial contribution as set forth in § 1802(i) one or more of the factual or legal contentions, or specific policy or procedural recommendations put forth by Aglet-TURN would need to be adopted. Aglet-TURN acknowledgment that they did not prevail in this issue and a lack of reliance on their testimony in deciding this issue, we can not find that Aglet-TURN make a substantial contribution on this issue.
5.4. Credit Quality
Aglet-TURN represented that they substantially contributed to the decision because they provided Standard & Poor's (S&P) credit quality guidelines for the record and assessed the impact of utility requested returns and financial projection on credit measures. They further contended that they were the only parties to submit evidence on utility financial projections and credit quality.
Although SCE acknowledged that Aglet-TURN was the only party that provided a copy of S&P credit guidelines in this proceeding, similar S&P guidelines were submitted in the utilities prior ROE proceeding (A.05-05-006). SCE also identified various exhibits of applicants SCE, SDG&E, and PG&E to demonstrate that Aglet-TURN were not the only party that submitted utility financial projections evidence.6
SCE is correct. The credit quality information furnished by the utilities were in response to a prior Commission order requiring utilities, as part of their annual costs of capital applications to include testimony on credit ratios, credit ratings, and capital structure impacts, including credit rating information from Moody's and S&P.7 However, Aglet-TURN provided a different perspective of credit quality that significantly contributed to a decision on a fair and reasonable ROE. (Conclusion of Law 27 and Appendix A.)
5.5. SDG&E Capital Structure Proposal
Finally, Aglet-TURN claimed a substantial contribution for its participation in a rejection of SDG&E's proposed capital structure rebalancing mechanism. In that rejection, the Commission relied on Aglet-TURN's cross-examination of SDG&E that debt equivalence and Financial Accounting Standards Board Interpretation No. 46 (FIN 46) are economic costs and not accounting costs. (D.07-12-048, p. 40, and Findings of Fact 32.) The Commission also relied on Aglet-TURN's discovery requests and cross-examination of SDG&E's witness to conclude that the impact of SDG&E's debt equivalence and FIN 46 should be considered along with its other risks in arriving at a fair and reasonable ROE. (Exhibit 3, Reporter's Transcript Vol. 3, pp. 211 through 213, and Conclusions of Law 28.)
Given that the capital structure proposal pertained only to SDG&E, SCE and PG&E should not be required to contribute to an award on this issue. SDG&E should be required to fully compensate Aglet-TURN for the time it spent on this issue.
4 See D.98-04-059, 79 CPUC2d, 628 at 653.
5 Compensation request, p. 10.
6 See, for example, Exhibits 2, 4, 23, 25, and 26.
7 D.04-12-047, mimeo., p. 47, Ordering Paragraph 6.
