Attrition

Attrition is the year-to-year decline in a utility's earnings caused by increased costs which are not offset by increased rates and sales. In order to protect utility shareholders from the effect of attrition to some extent, the Commission has adopted a ratemaking mechanism called the ARA mechanism. The ARA mechanism was described in D.85-12-076 to "provide utilities with the reasonable opportunity of achieving their authorized rates of return during years in which they are not permitted under the Commission's rate case plan procedures to file for general rate relief but in which they still face volatile economic conditions." (D.85-12-076, Finding of Fact 1, 19 CPUC2d 453, 476.) (Cited in Re PG&E D.92-12-057, 47 CPUC2d 143, 273.)

D.85-12-076 presents a full discussion of the attrition mechanism to that time. The decision recognized that volatile economic conditions had lessened and that a new procedure should be considered:

"In determining the extent of any reform, we must also weigh the fact that the four energy utilities which are parties to this proceeding have been placed on a three-year rate case cycle. (See Resolution ALJ-151, June 6, 1984.) These companies are thereby required to forego general rate relief during two years in exchange for timely rate decisions in a third year. If the rate case cycle had not been extended to three years, we would be inclined to abolish attrition as TURN proposed or to declare a moratorium on attrition allowances as Legal Division proposed. But such a step would subject the utilities to a lengthy period without any general rate relief. Moreover, we are concerned about eliminating attrition without first undertaking a broader review of our overall procedures governing general rate relief." (19 CPUC2d at 466.)

The mechanics of the attrition filing were set forth in Re PG&E D.93887 (7 CPUC2d 349) discussion (pp. 394-398) and Appendix E (at p. 523). The method provides for an advice letter filing, just prior to the attrition year, by the utility seeking increased rates based on the escalation of general rate case forecasted expense and rate base. The escalators are conventional indexes such as CPI and DRI. Attrition was requested and the advice letter mechanism was adopted in PG&E's recent general rate cases (D.89-12-057, 34 CPUC2d 199, 301-303; D.92-17-057, 47 CPUC2d 143, 305, Appendix C, pp. 338-354.) PG&E did not request an attrition increase in its test year 1996 GRC.

The attrition mechanism has been considered a fairly simple routine procedure. An attrition adjustment is usually requested in a general rate case; if granted it is based on forecasted numbers adjusted for inflation; and the attrition year rates are authorized by Commission resolution in response to an advice letter filing. In contrast, the Commission decision (D.00-02-046) regarding PG&E's Test Year 1997 GRC and 2001 attrition was not routine. First, it required PG&E to file an application rather than the usual advice letter; second, it limited the attrition increase to just the third year of the rate case cycle, denying attrition for year 2000; third, it instituted a number of reporting requirements that are not normally a part of an attrition proceeding. In the policy section of the decision, the Commission said:

"According to the timing of the Rate Case Plan, PG&E should file an application for the attrition allowances authorized here to provide a vehicle for enabling us to determine whether the additional costs we have authorized in this decision, in fact, reflect PG&E's normal operation. The attrition allowance should be accompanied by reports documenting maintenance expenditures, including vegetation management as agreed to by PG&E in its settlement of the Rough and Ready fire investigation, I.98-07-009, pipeline safety and replacement, reliability related maintenance and capital, new business activity and related investment, as well as operation and maintenance expenditures related to distribution customer service activities. These reports are intended to assure us and the public that authorized revenues are being expended for the purposes intended, and that actual earnings reflect authorized returns. (D.00-02-046, p. 55 (emphasis added).)

We were concerned that "given the history of divergence between authorized revenues and actual expenditures in mission critical areas outlined elsewhere in this decision, we will require enhanced levels of monitoring and reporting between the effective date of this decision and the 2002 GRC to be filed pursuant to this decision, to assure that we have `gotten it right' before authorizing the withdrawal of Commission scrutiny and reducing the monopoly cost transparency represented by PBR." (Id., p. 53, (emphasis added).)

In the attrition section of the decision, we said:

"Giving weight to the concern that there not be a disincentive for efficient management created by an ARA and mindful that an audit of test year 1999 capital additions will give us insight into the forces growing PG&E's rate base, we will approve PG&E's proposed attrition mechanism only in part. The attrition year 2000 proposal is denied. The attrition year 2001 proposal is granted to the extent that PG&E may file for an attrition year adjustment as proposed, with the caveat that the rate base component may be modified to reflect the results of the audit of 1999 distribution capital spending. (Id., pp. 472-473, (emphasis added).)

The Conclusions of Law contain the following language:

44. An Attrition Rate Adjustment (ARA) is a component of the Rate Case Plan that adjusts some elements of cost of service during the course of the rate case cycle for the purpose of sustaining utility earnings at an adequate level.

46. Allowance of an ARA adjustment for 2000 is unreasonable.

47. Allowance of an ARA adjustment for 2001 is reasonable. (Id., p. 540.)

Finally, the Ordering Paragraphs provide that:

14. PG&E's request for authority to implement Attrition Rate Adjustments for 2000 is denied.

15. PG&E's request for authority to implement Attrition Rate Adjustments for 2001 is granted, subject to modification to take into account the results of the 1999 capital spending audit and to recognize amounts recorded in the VMBA. (Id., p. 545.)

PG&E argues for a literal reading of the ordering paragraphs and conclusions of law, which would suggest that this is simply a routine attrition proceeding with an automatic increase except for minor adjustments to account for the capital spending audit and the VMBA.

ORA, on the other hand, reads the ordering paragraphs and conclusions of law in conjunction with the text of the decision which indicate that the Commission is interested in a more thorough review of the application to assure itself and the public that "we have gotten it right" in the GRC decision, (Id., p. 53), that the additional expenditures authorized by the GRC decision "reflect PG&E's normal operations" (Id., p. 54), and that "actual earnings reflect authorized returns." (Id., p. 55.) Achieving these objectives entails a level of review atypical for an attrition proceeding.

In our opinion, ORA's analysis has "gotten it right." By requiring an application rather than an advice letter filing; by omitting a finding of the amount of the attrition year increase; and by requiring the use of selected recorded numbers rather than forecast numbers, we were seeking more detail, more accuracy, and less routine. To the extent there is ambiguity in D.00-02-046, the better course is to favor the more detailed analysis required for an application over the more routine advice letter.

At the outset, it is necessary to decide whether the 2001 ARA increase should be determined based on two years of cost growth. PG&E calculated its 2001 electric revenue requirement increase based on two years (2000 and 2001) of cost growth for expense and rate base-related items. It argues that the 2001 ARA was authorized to recover PG&E's 2001 costs, so PG&E's 2001 ARA request is based on 2001 rate base and escalated expense. There have been two years of rate base growth and expense inflation since 1999, the test year for PG&E's last GRC, and the basis of this attrition year request. Since there have been two years of cost growth, PG&E argues that it is logical to base the ARA on that growth.

ORA and Aglet contend that the implication of the Commission's denial of attrition relief in 2000 is that PG&E cannot escalate expense or rate base-related items for Year 2000 in calculating its attrition for Year 2001. ORA calculates that eliminating escalation for year 2000 reduces PG&E's request by $35 million. ORA maintains that the Commission's language on this point is clear. Giving weight to the concern that there not be a disincentive for efficient management created by an ARA ". . .we will approve PG&E's proposed attrition mechanism only in part. The attrition year 2000 proposal is denied. The attrition year 2001 proposal is granted to the extent that PG&E may file for an attrition year 2001 adjustment as proposed..." (D.00-02-046, pp. 472-473; also see Conclusion of Law 46 and Ordering Paragraph 14.) In ORA's opinion, allowing PG&E to recoup in 2001, the attrition that was denied in 2000 contravenes the goal of giving the utility an incentive for efficient management. In denying attrition for 2000, the Commission implicitly found that 1999 authorized rates were reasonable for 2000.

In simplified form assuming 3% inflation in 2000 and 3% inflation in 2001, the respective positions look like this:

	1999 Authorized Expenses	2000 Expenses	2001 Expenses
ORA	100	100	103.00
PG&E	100	103	106.09

ORA's analysis is correct. In the GRC, we found test year 1999 forecasts to be reasonable and denied attrition for year 2000, implicitly finding the 1999 forecasts to be reasonable for year 2000. Attrition increases are based on forecast years. In this circumstance, the forecast year 2000 is the same as forecast year 1999, and the attrition year is 2001. We reach this result because in D.00-02-046, we specifically found that attrition was denied for year 2000. Consequently, PG&E's attrition increase is reduced by approximately $35 million.