COM/CRC/MOD-POD/avs Date of Issuance 9/23/2008
Decision 08-09-038 September 18, 2008
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Investigation on the Commission's Own Motion into the Practices of the Southern California Edison Company to Determine the Violations of the Laws, Rules, and Regulations Governing Performance Based Ratemaking, its Monitoring and Reporting to the Commission, Refunds to Customers and Other Relief, and Future Performance Based Ratemaking for this Utility. |
Investigation 06-06-014 (Filed June 15, 2006) |
(Appearances are in Appendix A)
DECISION REGARDING PERFORMANCE BASED RATEMAKING (PBR),
FINDING VIOLATIONS OF PBR STANDARDS, ORDERING REFUNDS,
AND IMPOSING A FINE
TABLE OF CONTENTS
Title Page
DECISION REGARDING PERFORMANCE BASED RATEMAKING (PBR), FINDING VIOLATIONS OF PBR STANDARDS, ORDERING REFUNDS, AND IMPOSING A FINE 22
1. Background of Performance Based Ratemaking 22
1.1. Customer Satisfaction Standard 44
1.2. Employee Health and Safety Standard 55
5. Planners and Meter Readers 1111
6.1. "Selling the Survey" 1515
7. Falsification of Customer Contact Data 1919
8. Management of the Design Organization
Knew or Should Have Known of Data Manipulation 2525
9. Management Knowledge of Falsification 3636
9.1. Early Warning Signals 3838
10. Impacts of Selling the Survey, Data Falsification, and Data Manipulation 4444
10.1. Assumption 1: Invalid Numbers as a Proxy for Data Falsification 4545
10.2. Assumption 2: The Widespread Nature of Data Falsification by Planners Necessarily Impacted Survey Results 4545
10.3. Assumption 3: Customer Service Declined Over the PBR Period 4848
10.4. Assumption 4: Selling the Survey Results in an Upward Bias 4949
11. Customer Satisfaction for Meter Reading 5353
12. The Customer Satisfaction Refund 5454
13. The PBR Employee Health and Safety Incentive Mechanism 5757
13.1. Reporting of First Aid Incidents 5858
13.2. Reporting of OSHA Recordable Incidents 5959
Title Page
14. Revenue Requirements for Results Sharing in 2003, 2004, and 2005 6767
14.3. Results Sharing Amounts Not Paid and Other Issues 8989
18. Fines for Violating Statutes, Commission Decisions, and Rule 1.1 9898
19. The Appeal of the Presiding Officer's Decision 112112
19.1. SCE's Appeal - Due Process 113113
19.3. SCE's Appeal - Results Sharing 124124
19.5. The Reasonableness of the Fine 126126
20. Assignment of Proceeding 128128
21. Explanation of Changes Made to the POD Pursuant
to Pub. Util. Code § 1701.2(a) 128128
APPENDIX A - List of Appearances
DECISION REGARDING PERFORMANCE BASED RATEMAKING (PBR),
FINDING VIOLATIONS OF PBR STANDARDS, ORDERING REFUNDS,
AND IMPOSING A FINE
This decision concludes that Southern California Edison Company (SCE) employees and management manipulated and submitted false customer satisfaction data, and the data was used to determine Performance Based Ratemaking (PBR) customer satisfaction rewards for a period of seven years. Therefore, SCE is ordered to refund to its ratepayers all $28 million in PBR customer satisfaction rewards it has received and forgo an additional $20 million in rewards that it has requested. The decision also finds that SCE submitted false and misleading health and safety data, and the data was used to determine PBR health and safety rewards for a period of seven years. Therefore, SCE is ordered to refund to its ratepayers all $20 million in PBR health and safety rewards it has received and forgo an additional $15 million in rewards that it has requested. The decision further concludes that SCE should refund the portion of its 2003 to 2005 revenue requirement related to the utility's Results Sharing program that was affected by fraudulent data, which the decision finds to be $32,714,000. Finally, the decision orders SCE to pay a fine of $30 million for violations of the Public Utilities Code.
In Decision (D.) 95-12-063 as modified by D.96-01-009, the Commission introduced Performance Based Ratemaking (PBR) as an alternative to the prevailing model of cost-of-service regulation of the regulated investor owned utilities. We believed existing cost-of-service regulation had become too complex to allow us to regulate utilities effectively. Our goal was to have a regulatory process that encourages utilities to focus on their performance, reduce operational costs, increase service quality, and improve productivity. At the same time, we had to ensure that safety, quality of service, and reliability were not compromised. We believed that PBR could accomplish those objectives by providing clear signals to utility managers with respect to their business decisions and by helping them make the transition from a tightly regulated structure to one that is more competitive. Under PBR, utility performance is measured against established benchmarks. Superior performance, above the benchmark, would receive financial rewards, and poor performance would result in financial penalties to the shareholders. By providing financial incentives to utilities we expected they would be encouraged to operate more efficiently, reliably, and safely to maximize their profits. We wanted to seek new ways to reduce regulatory interference with management decisions and to allow utilities more flexibility in their day-to-day operations.
In 1993 SCE filed Application (A.) 93-12-029 proposing a PBR mechanism. While A.93-12-029 was pending, we issued D.95-12-063 and relied on standards adopted in D.95-12-063 in our consideration of A.93-12-029. The result was D.96-09-092, which established the PBR metrics for SCE, which form the basis for this investigation. In D.96-09-092, we adopted PBR standards for both rate and service incentive mechanisms. In this decision, we are concerned with service incentive standards.
In regard to service, we created three categories: service reliability, customer satisfaction, and health and safety. In this decision, we are concerned only with customer satisfaction and health and safety; service reliability has been deferred to the next phase of this investigation. The incentive mechanisms we are investigating are (1) customer satisfaction, as measured by third party surveys and, (2) employee health and safety, measured by the number of first aid incidents and lost time incidents.
1.1. Customer Satisfaction Standard
The customer satisfaction standard includes both rewards and penalties in four areas: field services, local business offices, telephone centers, and service planning. Customer satisfaction for PBR purposes is measured on a scale of 1 to 5+, with 1 being low. The customer satisfaction reward and penalty was based on the percentage of scores that were either 5 or 5+. The customer satisfaction incentive had a 64% benchmark (i.e., 64% of scores equal to 5 or 5+), a dead band of plus or minus 3%, and a 5% reward and penalty band in which the reward or penalty increases $2 million for each percentage point change in the average result. The maximum customer satisfaction reward or penalty is $10 million per year. To provide an incentive to avoid degradation in any one of the four areas, we adopted a floor penalty in the event customer satisfaction results decreased below 56% in any one of the four areas.
In D.02-04-055, we extended and modified SCE's PBR mechanism. The customer satisfaction incentive mechanism benchmark was increased from 64% to 69%, by averaging the then most recent nine years of survey results. That standard applied to customer satisfaction survey results for 2002 and 2003. Figure 1 summarizes the operation of SCE's customer satisfaction incentive mechanism.
Figure 1 | ||
Operation of PBR Customer Satisfaction Incentive Mechanism (1997-2003) | ||
Reward Calculation (5&5 +) |
1997 - 2001 |
2002 - 2003 |
Reward |
Reward | |
Average of 5/5+ percentage for 4 categories |
68% - 72% $2 - $10 million |
73 - 77% $2 - $10 million |
· Planning |
Dead Band |
Dead Band |
· Phone Center |
Penalty |
Penalty |
· Field Delivery |
60% - 56% |
65% - 61% |
· APA/Business Offices |
($2) - ($10) million |
($2) - ($10) million |
Floor Penalty |
Penalty |
Penalty |
- Within any one category, penalty assessed if 5&5 + percentage less than 56%. |
55% - 51% ($2)-($10) million |
55% - 51% ($2)-($10) million |
- If floor penalty, reward not allowed. |
||
Bottom 2 Categories (1&2) - If average 1&2 percentage for 4 categories is greater than 10% then any rewards are voided. - No separate penalty assessed. |
Voids any rewards |
Voids any rewards |
1.2. Employee Health and
Safety Standard
The PBR employee health and safety standard was established in D.96-09-092 using historical first aid and Occupational Safety and Health Administration (OSHA)-recordable incident data for the period from 1987 to 1993. Based on that data, the benchmark was set at 13.0 injuries and illnesses (first aid and OSHA-recordable incidents) per 200,000 hours worked with a dead band of +/-0.3. The PBR standard was revised in 2002 following D.02-04-055 to use the most recent seven years of data and a new standard was set at 9.8 injuries and illnesses per 200,000 hours worked with a dead band of +/-0.3. In 2003, again, the most recent seven years of data was used to create a standard of 8.6 injuries and illnesses per 200,000 hours worked with a dead band of +/-0.3. Results above or below the dead band would result in rewards or penalties.
1.3. PBR Awards
SCE has received $28 million in customer satisfaction rewards and $20 million in health and safety rewards for 1997 to 2000. SCE has filed advice letter requests for $20 million in customer satisfaction rewards for 2001 to 2003; however, those advice letters are on hold pending the conclusion of this investigation. SCE has withdrawn its advice letters requesting $15 million in health and safety rewards for 2001 and 2002.
On March 11, 2003, an SCE senior vice president received an anonymous letter alleging that [electrical design] planners were manipulating the customer satisfaction survey process by providing erroneous customer contact numbers to the survey company, and that this manipulation of data resulted in inaccurate customer survey results. The letter further asserted that management was aware of this misconduct. On March 13, 2003, SCE's Audit Services began its review of the allegations. That review concluded that any problems with the survey were inadvertent.
On November 4, 2003, the senior vice president received a second anonymous letter alleging manipulation of customer contact data provided to the survey company. This letter made even more serious allegations, asserting that SCE managers had implicitly directed planners to incorrectly enter customer contact telephone numbers or to use the telephone number of a friendly contact, rather than a primary contact. This second anonymous letter also alleged that high-level directors and executives were aware of the misconduct. SCE retained outside counsel and initiated an independent investigation.
On March 8, 2004, SCE voluntarily met with the Commission's General Counsel to notify the Commission of its initial findings and SCE's continuing investigation. On March 15, 2004, SCE sent a letter to the Commission President Michael R. Peevey advising him of the ongoing investigation.
By April 28, 2004, the SCE investigation team had interviewed approximately 258 employees including supervisors and managers. SCE found that two planning supervisors and nine planners had engaged in misconduct. After further investigation, SCE concluded that a total of 20 additional SCE employees had changed customer contact information, or failed to report the misconduct of others that was known to them by virtue of their responsibilities. Of the employees investigated, SCE fired one, suspended seven without pay, reprimanded eleven, and required counseling for five. According to SCE, of the employees disciplined, eight were supervisors or managers. (Rosenblum, Exh. 1, p. 30.)
On May 25, 2004, SCE met again with the Commission to provide it with additional information and a status report on the investigation. SCE waived its attorney-client privilege with respect to its investigation report and interview notes.
SCE also decided to conduct internal investigations of the employee safety and reliability PBR mechanisms. SCE's General Counsel approved a preliminary investigation into the utility's recordkeeping and internal reporting practices related to the employee safety PBR mechanism. On July 8, 2004, after SCE's preliminary investigation revealed undercounting of first aid incidents, SCE initiated a full-scale investigation into the employee safety PBR mechanism.
On June 29, 2004, SCE received an anonymous letter suggesting that employees were "manipulating" certain reliability-related numbers. SCE's Law Department and Audit Services undertook an investigation of data gathering and reporting processes related to the reliability PBR mechanism.
SCE produced three investigation reports and provided the reports to Commission staff as soon as they were completed. SCE's PBR Customer Satisfaction Investigation Report (Exhibit 11) is dated June 25, 2004; SCE's PBR Illness and Injury Record Keeping Investigation Report (Exhibit 12) is dated December 3, 2004; and SCE's PBR System Reliability Investigation Report (Exhibit 13) is dated February 28, 2005.
This Commission's Consumer Protection and Safety Division (CPSD) also conducted an investigation of SCE's customer satisfaction data falsification and manipulation. CPSD prepared a written report, in which it found a larger scale of misconduct and manipulation than reported by SCE. After considering both SCE's report and CPSD's report, on June 15, 2006, the Commission opened this investigation. Among other issues, the Commission ordered a hearing to determine:
1. The extent to which SCE employees may have increased PBR rates from 1997 through 2003 though data falsification and manipulation.
2. The appropriate refund or other relief associated with the falsification and manipulation.
3. Other increased rates or other damages if any, wrongfully caused, and the refunds and other relief associated with such wrongdoing.
4. The reasons for the data falsification and manipulation.
5. The appropriate statutory penalties, if any, to levy against SCE for its administration of customer satisfaction PBR and SCE's inappropriate monitoring and reporting of the PBR program.
6. Whether the Commission should permit SCE to continue future PBRs, and if so under what conditions and PBR modifications.
At the prehearing conference (PHC) held on July 25, 2006, it was agreed that the hearing would cover all phases of customer satisfaction, health and safety, survey techniques and responsibilities, corrective action, and refunds and penalties. Because of the complexity of the investigation, we left open the possibility that a Phase 2 would be needed for unresolved issues, including system reliability.
The OII itself focuses primarily on the customer satisfaction incentive mechanism and the employee health and safety mechanism, and mentions the system reliability mechanism as a subject for review in a later phase of this proceeding.
Public hearings were held starting November 6, 2006. In addition to SCE and CPSD, the parties that participated are the Commission's Division of Ratepayer Advocates (DRA), The Utility Reform Network, (TURN), the Utility Workers Union of America Local 246 (UWUA), and The Greenlining Institute (Greenlining). A POD was issued October 1, 2007; oral argument before the Commission, en banc, was held January 30, 2008, and the matter submitted.
All parties agree that manipulation of data has occurred-SCE to a lesser degree; all other parties to a greater degree. All parties opposed to SCE support the position of CPSD in one or more particulars. Rather than discuss each party's position on each issue, we discuss primarily CPSD's position and refer to other parties when there is a significant difference. SCE has offered to refund or forgo $49.4 million in rewards and recommends that it be fined a statutory penalty of $2.5 million. CPSD and the other parties recommend a range of refunds, PBR penalties, and statutory penalties that could cost SCE a maximum of $305 million. The breadth of the recommendations can be observed in the following table of proposed refunds, PBR penalties, and statutory penalties.
TABLE 1 | ||||||
SCE |
DRA |
CPSD |
TURN |
GREENLINING |
UNION | |
Refund of Planning Rewards (PBR) |
Yes $12 million |
Yes $48 million |
Yes $12 million |
Yes |
Yes |
No Position |
Refund of Rewards (meter reading PBR) |
Yes $2.4 million |
Yes (included above) |
Yes $2.4 million |
Yes |
Yes |
No Position |
Refund of Rewards (Employee Safety) |
Yes $35 million |
Yes |
Yes |
Yes |
Yes |
Yes |
Maximum PBR penalty (Employee Safety) |
No |
No Position |
Yes $35 million |
Defer Consideration |
Yes |
No Position |
Maximum PBR penalty (Planning and meter reading combined) |
No |
No Position |
Yes $21 million |
Defer Consideration |
Yes $21 million |
No Position |
Refund of Results Sharing Revenue |
No |
Yes |
Yes |
No Position |
No Position |
No Position |
Safety Committee formation |
Opposed |
No Position |
Supports Committee |
No Position |
Supports Committee |
Proposed Committee |
Statutory Penalties |
$2.5 million |
No Position |
Up to $102.2 million |
Defer Consideration |
Up to $102.2 million |
No Position |
Total |
$51.9 million |
$171.25 million |
$305.85 million |
$83 million |
$217.6 million |
$45 million |
The four areas which comprise the customer satisfaction portion of PBR are: (1) service planning, (2) local offices, (3) telephone centers, and (4) field delivery (field services representatives and meter readers). Service planning and local offices are part of the Design Organization.1 The call centers, field service representatives (FSRs), and meter readers are part of the Customer Service Business Unit (CSBU).
In this customer satisfaction phase of the OII, our primary concern is with service planning and meter readers. SCE's planners perform the distribution engineering and design work for customer electrical needs, such as revising service designs due to road widening or home remodeling. A service planner's typical duties include determining what is required for new or upgraded service, defining the needed materials and labor, and ensuring that both regulatory and electrical service requirements are met (including the applicable General Orders of the Commission, SCE standards, and local codes and ordinances). Planners act as the project managers for the design of customer electrical facilities, including providing status reports and clarifying issues that arise during the work.
Planners begin and control their work through meter orders and work orders. A meter order is an electronic record created to initiate and track a request to install, replace, or remove a meter or to facilitate a customer's billing rate change. Typically, a meter order is created by the Design Organization when it receives a request for new service or a change of service.
Work orders are used for a number of different and generally more extensive activities, including SCE maintenance work and customer requests such as relocation of a meter or electrical planning for new housing tracts and commercial developments. A work order contains information such as customer or project name, billing or project address, material and labor estimates, taxes and other project costs, expected project start date, and project design notes. The work order is used to monitor project status and is updated by the planner and other SCE personnel as the project moves forward. Work orders are used for both short-and long-duration projects.
Meter readers carry a hand-held recording device used primarily to record the meter usage they observe as they travel from meter to meter on their routes. Meter readers have no direct access to customer contact information. The device has a set of five buttons that allows information to be gathered for use in a survey or study. Buttons 1, 3, 4, and 5 are reserved for various SCE studies or surveys not related to customer satisfaction (e.g., a study about dangerous dogs at customers' homes). The Number 2 button is used in connection with the customer satisfaction survey. When a meter reader has a "meaningful or memorable" interaction with a customer the meter reader is supposed to depress this key. The interaction can be positive, neutral, or negative. In either case, the meter reader should depress the Number 2 button. Once that key is pushed, a letter advising the customer that he or she might be surveyed and expressing hope that 5+ service has been provided is sent to the customer. The survey sample for meter reading is drawn only from customers identified by the meter reader by pushing the Number 2 key. Thus, the pool of surveyable meter reading transactions is determined by the meter readers themselves. SCE recognizes that the problem with the meter reader data collection process is self-evident. There is no practical way to ensure that meter readers are properly recording both good and bad customer contacts. Thus, SCE has offered to refund all meter reading rewards.
Maritz Research (Maritz), an independent survey company, performs telephone surveys for SCE 10 months a year. Twice a month, usually beginning in late January, and ending in late November, SCE electronically provides Maritz with a database of randomly selected work and meter orders to be used as a pool of customers for the survey. Using a computerized sample preparation program, Maritz then excludes duplicate transactions, customers who have been surveyed within the prior three months, 1-800 phone numbers, contact numbers that are clearly invalid (i.e., telephone numbers with non-numeric characters, or with an area code of 1 to 200, 555, 411, or 911, etc.), and transactions with incomplete contact numbers. Maritz then conducts telephone surveys using the remaining customer contact numbers. The survey lasts an average of about seven minutes. After answering general questions about the project, customers are asked to rank their overall satisfaction with the individual planner's work or the project using a six-point satisfaction scale, from "Delighted (5+)" to "Completely dissatisfied (1)."
After Maritz completes its quota of surveys it then provides SCE with the survey responses, including a summary of scores, as well as a summary of actual comments made by customers called "verbatims."
The survey standard is communicated to the customer by Maritz in the following language:
"Throughout this interview, we'll be asking you about your satisfaction with the service Edison provides and about their performance in providing customer service. We will be using a scale of one to five or five-plus for satisfaction. Five for `Completely Satisfied,' which means that all of your needs were met. Four for `Somewhat Satisfied,' which means that most of your needs were met, but a few were not. Three for `Neither Satisfied nor Dissatisfied,' which means that some of your needs were met and some were not. Two for `Somewhat Dissatisfied,' which means that most of your needs were not met. One for `Completely Dissatisfied,' which means that none of your needs were met. Or you can say five-plus for `Delighted,' which means that all of your expectations were truly exceeded."
6.1. "Selling the Survey"
CPSD contends that SCE's Design Organization skewed survey results by "selling the survey" to customers from 1997 through 2003, and that such activities invalidated survey results and violated established survey principles. At the outset, we recognize that the term "selling the survey" has a somewhat different meaning to the parties and covers a wide range of conduct. From SCE's interviews and CPSD's examinations under oath planners' efforts to sell the survey generally fall into the following major categories:
1. Planners distributed to customers collateral materials, including flashlights, ballpoint pens, coffee cups, and golf balls, with slogans such as "5+ Customer Satisfaction."
2. Planners advised customers that they may be surveyed by an outside company on their level of satisfaction with SCE's service, and explained the survey scale.
3. Planners did #2, but also said they hoped they had provided 5+ level of service and that they would receive a 5+ survey score, and
4. Planners did #2, but also indicated that a score less than a 5 would not count, would be a failing score, or might lead to disciplinary action taken against the planner.
In each of the communications described in Categories 1, 2, 3, and 4, the planner could request that the customer contact the planner or the planner's supervisor to let them know what could be done to achieve a 5 or 5+ level of satisfaction. SCE management approved of efforts in Planning to sell the survey by engaging in the conduct described in Categories 1, 2, and 3.
CPSD considers that it is proper for planners to inform SCE customers that they may be surveyed, but what is improper and violates accepted survey standards is SCE's direct request to customers for high survey scores. All survey experts in this case agree that the latter communication is inappropriate:
(SCE) Cooper Tr. 4, p. 550: "Telling someone . . . if you give me a score less than five, I will be fined. That's a bad practice."
(SCE) Kaufman Tr. 2, pp. 255-56: "Selling the survey by saying, `anything less than a five-plus is a failure,' would not be condoned. It is very common within the industry, particularly when a study methodology is transaction based and tied to incentives, it is quite common.'"
(Greenlining) Mermin, Tr. 3, pp. 344-45: "Selling the survey by telling the customer what the desired score was on the survey, would create an upward bias."
CPSD asserts that SCE's management directed employees to aggressively sell the survey in ways that violated appropriate techniques. Employees accomplished this by requesting from the customer a 5 or 5+ survey result. CSPD says SCE's management authorized planners to tell customers that any grade less than a 5 or a 5+ was a failure or did not count. As a result, from 1997 through 2003, SCE manipulated and skewed survey results, artificially inflated survey outcomes, and received PBR rewards. According to CPSD, SCE had no legitimate reason to request customers for high survey scores. Maritz, the independent survey company, was solely responsible to explain the survey and its scale to customers it surveyed.
CPSD placed in the record (Exh. 90) dozens of excerpts of testimony of SCE employees2 describing how they were instructed to sell the survey. We include four excerpts:
CS1148 (Regional Planning Manager)
"In selling the survey, he would tell the customers to please give us a 5+. If the customer was not inclined to do so, he would ask the customer what can be done to change his or her mind. He also explained that a score of 4 was a zero and stressed the 5+."
1 The Design Organization is sometimes referred to as the Planning Organization. The names are interchangeable.
2 To protect the privacy of employees all parties have redacted employee names (with some exceptions) and substituted a number.
