III. ADOPTION OF THE THREE CENT PER KILOWATT HOUR SURCHARGE

TURN's application for rehearing takes issue with the three cent per kilowatt hour surcharge adopted in the Accounting Decision. TURN argues that the Decision violates the substantial evidence rule, since the maximum level of surcharge

supported by the record was two cents per kWh, the amount of the rate increase
sought by each utility in this phase of the proceeding. As noted in the Accounting Decision, both PG&E and Edison claimed they needed to increase retail rates by an additional two cents per kWh. According to TURN, even if the Commission believed that each utility had met its burden of proof in support of its requested increase, the largest amount of increase it could award was two cents per kWh.

After reviewing the Accounting Decision and TURN's application for rehearing, we realize it is not clear as to how we arrived at the three cent increase, when it appears that all the Utilities asked for was two cents. After the Utilities filed their applications, wholesale energy costs continued to escalate, and the State Legislature passed emergency legislation, AB 1X, authorizing CDWR to step in and purchase power for the use of utility customers. AB 1X further directed the Commission to implement regulations for the DWR to be reimbursed for power purchases. This was the situation we faced at the time of the hearings in Phase I of this proceeding. Thus, we had to consider the Utilities' request for rate increases in response to the escalating energy crisis, as well as ensure that DWR was made whole for its power purchases.

While the Utilities limited their immediate requests to a 30 percent increase, the applications were based on recovery of past as well as future procurement costs and included trigger mechanisms for future rate increases of upwards to 76 percent for Edison's residential users by January 2003, and approximately 40 percent for PG&E's residential users by December 2001. We did not consider the Utilities' plans insofar as they provided for recovery of past procurement costs, since past recovery was not part of the Phase I hearings. As such, we did not have a complete record demonstrating exactly how much the Utilities would need on a going-forward basis only. However, it was apparent that some rate relief was necessary to make sure the Utilities could comply with their statutory duty to provide adequate electric service to their customers on a going-forward basis.

In addition, we also had to pave the way for the State to be reimbursed for its power purchases, and took that into consideration in evaluating the Utilities' request for rate relief. The Accounting Decision must be read in conjunction with its companion decision issued the same day, D.01-03-081, which directs the Utilities to segregate and transfer to DWR monies collected by the Utilities for power sold by DWR to the Utilities' retail end use customers. As we explained in the Accounting Decision, at the time we recognized that ordering the Utilities to reimburse DWR would increase financial pressure and further compromise the integrity of the state's electrical system. At the time, we also anticipated having to further allocate a portion of the rate increase to DWR once we obtained its revenue requirement and established the Fixed DWR Set Aside under AB 1X. In our discretion and judgment, therefore, we determined that a three-cent increase would accomplish these goals, in hope that further rate increases would not be necessary. This rationale is not clear, however, in reading the Accounting Decision, and thus we will modify the Decision to provide our reasoning behind the three-cent increase.

The other problem raised by TURN's rehearing application is the sufficiency of the record itself supporting the amount of the rate increase. As stated above, we recognize that the record was not complete at the time we issued the Accounting Decision. Unfortunately, the situation required an immediate response and we could not wait for firm numbers from DWR or the Utilities. In such situations, we have broad authority to act and grant relief in emergency circumstances on an interim basis, provided we make appropriate findings. The Supreme Court upheld our authority in this regard in at least two cases. See City

of Los Angeles v. PUC, 7 Cal.3d 331, 102 Cal.Rptr. 313 (1972); TURN v. PUC, 44 Cal.3d 870, 245 Cal.Rptr. 8 (1988). As these cases demonstrate, the Commission may raise rates on an interim basis where there is a showing of an emergency situation or undue hardship, and where further proceedings are underway.⁵

We have made appropriate findings to justify the interim rate increase as a response to an emergency situation, and have been further developing a record to support it. We made several findings supporting our determination that the current energy crisis and the financial problems facing the Utilities compromised the integrity of the state's electrical system. These include findings concerning excessive wholesale electricity prices that have jeopardized the financial viability of the Utilities and their ability to serve their customers (Findings of Fact 8, 20); the independent reviews of PG&E and Edison confirming the serious financial problems facing the Utilities (Findings of Fact 12-19); power sellers that will not or cannot sell additional power into California's grid (Finding of Fact 24); suppliers refusing to sell natural gas to PG&E, which it needs to purchase on behalf of its natural gas customers (Finding of Fact 24); and that blackouts across the state in March were attributable in part to the refusal of energy suppliers to sell electricity to the ISO and the utilities because of concerns that they might not be paid (Finding of Fact 26). We also found that pressure on utility finances would increase when the utilities begin to segregate revenues applicable to DWR purchases from existing rates and remit these revenues directly to DWR, as required by ABX1 (Finding of Fact 21).

This situation requires consideration of a number of complex issues that could not be immediately and fully addressed at the time we issued the Accounting Decision. We will have a full and considered review of the need and justification for the rate increase. A proceeding is underway to determine the revenue requirements of Edison, PG&E, and San Diego Gas & Electric related to retained generation, Qualifying Facilities (QFs), bilateral contracts, and ancillary services. This will give us firm numbers as to the Utilities' revenue requirements. In addition, we anticipated that a portion of these rate increases would be allocated to DWR upon receipt and analysis of DWR's revenue requirement. We are currently determining the calculation, allocation, rate design and implementation of DWR's revenue requirement and Fixed DWR Set Aside. Therefore, we will have a full consideration of these issues and a complete record justifying the need for the rate increase. Of course, we can then evaluate whether adjustments are in order if revenues exceed costs. Accordingly, we deny TURN's application for rehearing on this issue.