Decision 02-02-029 February 7, 2002

Before The Public Utilities Commission Of The State Of California

Application of Southern California Edison Company (E 3338-E) for Authority to Institute a Rate Stabilization Plan with a Rate Increase and End of Rate Freeze Tariffs.	Application 00-11-038 (Filed November 16, 2000)
Emergency Application of Pacific Gas and Electric Company to Adopt A Rate Stabilization Plan. (U 39 E)	Application 00-11-056 (Filed November 22, 2000)
Petition of THE UTILITY REFORM NETWORK for Modification of Resolution E-3527.	Application 00-10-028 (Filed October 17, 2000)

ORDER DENYING REHEARING

OF DECISION (D.) 01-10-067

On November 29, 2001, Pacific Gas & Electric Company ("PG&E") applied for rehearing of Decision (D.) 01-10-067 ("Decision"). D.01-10-067 rejects PG&E's proposals to determine PG&E's prospective utility retained generation ("URG") revenue requirement based on the market valuation of the retained generation assets, and/or undercollections in PG&E's Transition Cost Balancing Account ("TCBA"). The Decision concludes that neither amount should be used in the initial determination of PG&E's prospective URG revenue requirement in this phase of the URG proceeding.

We have carefully considered all the arguments presented by the parties and are of the opinion that good cause for rehearing has not been demonstrated. Accordingly, we are denying PG&E's application for rehearing.

As an initial matter, we note that PG&E's arguments assume that the holdings in the Decision are much broader than they are, or that we were obligated to resolve a broader range of issues than we did. D.01-10-067 simply holds that we are not considering market valuation or past undercollections in this phase of the URG proceeding, but that such recovery is not foreclosed. It does not reach any final conclusions about the recovery of PG&E's uneconomic costs, PG&E's retail rates, or whether the AB 1890 market valuation requirement is still viable. PG&E fails to point to any persuasive authority that requires us to consider transition costs in our current determination of PG&E's URG revenue requirement.

PG&E contends that the structure of our proceedings is a "shell game" on the part of the Commission, and a means of evading compliance with AB 1890. Not only are PG&E's allegations of improper motives unjustified, they are also irrelevant to PG&E's claims of legal error. It is a settled principle that if a law or action is legally valid and adequately supported, allegations of improper motive on the part of the government body responsible for it are not relevant to a legal review of that action. (United States v. O'Brien (1968) 391 U.S. 367, 382; New Orleans Pub. Serv. v. Council of New Orleans (5^th Cir. 1990) 911 F.2d 993, 1004.)

I. AB X1-6 AND MARKET VALUATION
REQUIREMENT

PG&E argues that the Decision errs in concluding that under AB 1890 and AB X1-6 market valuation is not required for determining the prospective URG revenue requirement. According to PG&E, since AB X1-6 prohibits the utilities from selling their generation assets, the only way that PG&E can recover the market value of those assets, as AB 1890 contemplates, is for market valuation to be the basis for the URG revenue requirement. PG&E alleges that the failure to use market valuation is inconsistent with previous Commission holdings that market value should be used "to reduce the ratepayers' liability for uneconomic generation assets." (D.00-03-019, at 38-39.)

PG&E also maintains that the Commission misinterpreted AB X1-6 as overruling the market valuation requirement of AB 1890. PG&E claims that the only way to reconcile the two statutes is for the market valuation requirement to remain in effect, and for PG&E to be allowed to recover this amount through its URG revenue requirement. According to PG&E, the Commission's interpretation of AB X1-6 leads to a confiscatory result and is in error.

PG&E's theories fail for a number of reasons. First, as the Decision clearly explains, the market valuation reference in Public Utilities Code section 367 (b)¹ only applies to the calculation and recovery of uneconomic costs and not ratemaking for URG assets. (D.01-10-067, at 8.) The Decision correctly concludes that this section does not require that market valuation be used in the instant URG revenue requirement determination.

Second, PG&E fails to understand that, in the wake of AB X1-6, the measurement and recovery of transitions costs contemplated by AB 1890 is no longer viable since there is no "transition" to a competitive market for the retained assets. The costs of these assets are now to be recovered in the traditional manner. For this reason, PG&E's reliance on pre-AB X1-6 Commission decisions concerning market valuation is misplaced. Furthermore, as we stated in
D.01-10-067, "PG&E's interpretation would convert an `opportunity' to recover stranded costs into a `guarantee' by converting stranded costs into rate base." (D.01-10-067, at 11.)

Third, regardless of whether there are still transition costs, and whether PG&E is entitled to recover them, the Decision does not set any final rates nor does it foreclose the possibility that market valuation, or transition cost recovery in some other form, will be incorporated into PG&E's URG revenue requirement. The Decision simply concludes:

In this phase of the rate stabilization proceeding (RSP), we are establishing a URG revenue requirement on a prospective basis. PG&E's proposal raises issues dealing with the sale of assets and uneconomic costs, issues which are unrelated to determining a prospective URG revenue requirement.

(D.01-10-067, at 11.) Because no final rates were set, and the recovery of remaining stranded costs was not foreclosed, PG&E's contention that the Decision is confiscatory is entirely without merit.

Notably, despite PG&E's arguments, the Decision also does not conclude that the section 367 (b) market valuation requirement has been entirely overruled by AB X1-6. Again, the Decision's holdings on market valuation are limited to the conclusion that AB 1890 and AB X1-6 do not require that the Commission use market valuation as the basis for determining PG&E's prospective URG revenue requirement. As explained in the December 21, 2001 Assigned Commissioner Ruling from Commissioner Lynch, we are currently considering the issue of whether the AB 1890 market valuation requirement has been entirely overruled. We did not resolve that issue in D.01-10-067.

PG&E fails to provide any authority that would require the Commission to structure our proceedings to address the issue of the recovery of market valuation of its generation assets in this phase of the proceeding. We have the discretion to structure our proceedings in a rational manner, and PG&E can identify no legal error in limiting this phase of the proceeding to prospective URG costs. Although we will need to address the issue of recovery of PG&E's stranded costs at some point, there is no clear relation between these past costs and the prospective URG revenue requirement. Therefore, the Commission is justified in focusing on the issue of establishing a prospective URG revenue requirement and excluding PG&E's request to consider recovery of stranded costs incurred in the past. Moreover, the Commission is not obligated to use any single methodology in order to arrive at reasonable rates. (Duquesne Light v. Barasch (1989) 488 U.S. 299, 314.)