2. Background
In Decision (D.) 95-12-063, as modified by D.96-01-009, the Commission introduced 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. (D.08-09-038, pp. 2-3.)
SCE's PBR mechanism applied to the period from 1997 through 2003 with respect to three performance incentive mechanisms: (1) customer satisfaction, which measures customer satisfaction with transactions with SCE via a survey; (2) system reliability, measured as average customer minutes of interruption (ACMI) and frequency of interruptions (Frequency); and (3) employee health and safety, measured as the number of first aid incidents and Occupational Safety and Health Administration (OSHA) recordable lost time incidents per 200,000 employee hours worked. In addition to these three performance mechanisms, among other things, SCE's PBR mechanism included a cost of capital adjustment mechanism and a net revenue sharing mechanism.2 In D.04-07-022, the Commission adopted successor incentive mechanisms for employee safety, measured by OSHA-recordable lost time incidents per 200,000 employee hours worked, and system reliability, measured by System Average Interruption Duration Index, System Average Interruption Frequency Index, and Momentary Average Interruption Frequency Index. These incentives applied to SCE's results in 2004 and 2005 when SCE no longer operated under a comprehensive PBR ratemaking mechanism.
SCE received information from an anonymous informant or informants two times in 2003 regarding wrongdoing related to the customer satisfaction surveys that applied to the Planning organization, which was one of four components that were factored into the PBR overall customer satisfaction results. After conducting an investigation of the Planning organization, SCE conducted investigations of all four components of PBR customer satisfaction results. SCE later extended its investigation to include the PBR employee health and safety and system reliability mechanisms. SCE provided its internal investigative reports to the Commission for customer satisfaction (dated June 24, 2004), employee health and safety (dated December 3, 2004), and system reliability (dated February 28, 2005).
The CPSD initiated an investigation on behalf of the Commission. On June 15, 2006, the Commission issued Order Instituting Investigation 06-06-014 (PBR OII), ordering an inquiry into the three PBR metrics that were the subject of SCE's internal investigative reports. The OII was split into two phases. Phase 1 covered issues related to customer satisfaction, employee safety, and results sharing; was the subject of hearings in November 2006; and was submitted when reply briefs were filed on February 14, 2007.
Pending the outcome of Phase 1, a procedural schedule for Phase 2 was established. During 2007, CPSD conducted discovery related to SCE's system reliability incentive mechanism. In accordance with the Phase 2 schedule, on September 21, 2007, SCE served its Phase 2 prepared testimony. In its testimony, SCE asserted that its system reliability reported results for ACMI and Frequency were reliable.3
On October 1, 2007, the Commission issued the Presiding Officer's Decision (POD) on Phase 1 issues. Appeals of the POD were filed by SCE, CPSD, and the Greenlining Institute. The procedural schedule for Phase 2 was suspended pending the outcome of the appeals of the POD. On September 23, 2008, the Commission issued D.08-09-038 (the Phase 1 Decision), which addressed the appeals of the POD and resolved issues related to the PBR customer satisfaction, PBR employee health and safety, and results sharing. The Phase 1 Decision ordered SCE to:
· Refund with interest to ratepayers all $28 million PBR customer satisfaction rewards SCE had collected for the period 1997 through 2000 and to forgo recovery of $20 million in rewards that SCE had calculated or requested for the period 2001 through 2003.
· Refund with interest to ratepayers all $20 million in PBR employee health and safety rewards SCE had collected for the period 1997 through 2000 and to forgo $15 million in rewards that SCE had requested or calculated for the period 2001 through 2003.
· Refund with interest to ratepayers results sharing revenues of $32.714 million that SCE had collected subject-to-refund pursuant to D.04-07-022.
· Pay a fine of $30 million to the General Fund of California.4
Following the issuance of the Phase 1 decision,5 Administrative Law Judge (ALJ) Barnett issued an October 8, 2008 ruling that listed remaining issues for consideration in Phase 2 of the OII. The ruling listed four issues: (1) system reliability and customer satisfaction for call centers, field delivery other than meter reading, and in-person services, (2) whether the Commission should permit SCE to continue PBR and, if so, under what conditions and modifications, (3) investigate the total costs that CPSD and its legal representatives have incurred because of CPSD's investigation and discuss whether the costs are recoverable from SCE, and (4) whether the Commission can reward a whistleblower.6
On December 11, 2008, SCE provided notice to all parties of a telephonic settlement conference to be held on December 18, 2008. The following parties participated in the settlement conference: SCE, CPSD, the Division of Ratepayer Advocates (DRA), Pacific Gas and Electric Company, San Diego Gas & Electric Company, and the Coalition of California Utility Employees. SCE and the Settling Parties executed this Settlement Agreement on or after January 12, 2009.
2 The revenue sharing mechanism applied through May 20, 2003, when rates established by D.04-07-022, for SCE's 2003 General Rate Case, were made effective.
3 SCE's February 28, 2005 "PBR System Reliability Investigation Report" has previously been included in the record for Phase 1 as Exhibit 14.
4 D.08-09-038, Ordering Paragraphs 1 - 3, at 141.
5 No party filed an application for rehearing of the Phase 1 Decision.
6 Administrative Law Judge's Ruling Settling Phase 2 Prehearing Conference for October 31, 2008, pp. 1 - 2, October 8, 2008.
