12. PG&E's MRTU Capital Expenditures

PG&E is seeking reasonableness review of two capital projects: the initial implementation of MRTU (Release 1); and the 2009 pre-summer release. Both are IT projects carried out by PG&E's ISTS Department. The initial implementation of MRTU required modification to a wide range of PG&E systems used by PG&E's Front, Middle, and Back Office. The systems to be modified involved everything from "bid to bill." That is, they included everything from the systems PG&E's Front Office used to bid load and supply into the CAISO market, as well as the systems the Middle Office used to carry out its risk management control objectives, to the systems the Back Office used to settle with the CAISO and others. As discussed above, the timeline of the MRTU project was continually evolving, and business specifications were continually changing literally up until April 1, 2009, when MRTU was implemented. ISTS had to manage those changes.

PG&E employed a methodology, called the PG&E Delivery Method (PDM), to ensure proper quality of deliverables and to ensure that systems efficiently met the defined requirements. MRTU program management employed controls to ensure that forecasts were properly established and maintained; actual costs were accounted for in an accurate and timely fashion; all cost or schedule variances were explained; and any necessary corrections were made. PG&E used PDM to manage both the initial implementation of MRTU (Release 1) and the 2009 pre-summer release.

The majority of the ISTS capital expenditures incurred for the MRTU program were labor costs to plan, develop, test, and implement MRTU software and related processes. The remainder of the capital expenditures was for newly purchased software and computer hardware, including servers, networking devices, and system operating software.

MRTU required modification of PG&E's business and systems processes to support the requirements established by CAISO, affecting Front, Middle, and Back Office activities. For the first several of the IT-related projects (i.e., software development-related activities), the primary units of effort are RICEFs (Reports, Interfaces, Components, Extensions, and Forms). IT departments commonly use RICEFs as a mechanism to organize and track defined units of work associated with software development. Likewise, PG&E defines plans, forecasts, scheduled tasks, and status reports for these software development-related work streams in terms of RICEFs.

The Front Office projects that required ISTS support were:

· Forecasts, Bidding, and Scheduling System;

· CAISO MRTU Scheduling System (CAMSS), also known as GenManager; and

· Resource Optimizer.

This work stream involved 93 RICEFs, 57 of which were identified as high priority for initial implementation and the remaining 36 considered secondary regarding the timing of completion.

Middle Office projects that required ISTS support were:

· LMP Forward Price, Volatility and Correlation Modeling Tool;

· Deal Capture Systems;

· Power Plant Model;

· Open Position Model;

· To-expiration Value-at Risk Model; and

· Portfolio Reporting Application.

Each of the 77 RICEFs in this work stream resulted in multiple technical design documents and intensive development efforts.

Back Office projects that required ISTS support were:

· Market Settlement System for CAISO Settlements; and

· Qualified Facilities Information Center (QFIC) Settlement System for Electric Settlements.

Any changes CAISO made required PG&E and vendors to make changes to the appropriate systems and to perform additional testing, which caused schedule delays and increased costs.

In addition to the work just described, there were four major functions required to implement the MRTU program. These functions included the Middleware Team, whose deliverables involved the management of data transferred between or among applications or entities (e.g., between CAISO and PG&E). This work stream implemented the majority of the interfaces needed for MRTU. This work stream involved 24 RICEFs.

The PDM is the standard approach to system development at PG&E and was the methodology employed during the MRTU initiative. Not only were project plans developed by each PDM phase, but actual labor costs and effort were also tracked using these same phases. Table 1 below presents, by PDM phase, the total spent (in dollars) and effort (in hours), along with associated support categories. The figures in the table illustrate the complexity and significant effort associated with PG&E's MRTU implementation.

Table 1

Pacific Gas and Electric Company
MRTU Phase 1 Initiative
ISTS Labor by Project Phase - Recorded Figures
(000s of Nominal Dollars)

 

A

B

C

D

E

Line No.

Phase

Total Actual Spend 2006-2009

% of Total Actual Spend 2006-2009

Total Actual Hours 2006-2009

% of Total Actual Hours 2006-2009

1

Plan

$379

1.0%

2,293

0.8%

2

Analyze

930

2.5

8,824

3.2

3

Design

4,672

12.3

41,661

15.1

4

Build

5,851

15.4

41,355

15.0

5

Test

10,002

26.4

74,881

27.2

6

Deploy

2,510

6.6

14,074

5.1

7

Stabilize

1,120

2.9

8,776

3.2

8

Project Management Office (PMO)

5,802

15.3

36,800

13.4

9

Technical Architecture

6,678

17.6

46,977

17.0

10

Total

$37,944

100.0%

275,641

100.0%

MRTU project labor was incremental to PG&E's existing work. PG&E did not have an adequate supply of IT employees with the appropriate skill sets to complete the MRTU project as well as other necessary IT projects. Therefore, it was necessary to retain outside contractors to provide the bulk of the staff for the project.

Approximately $0.8 million of the total IT capital costs was purchased software needed to meet the MRTU objective set forth by CAISO. PG&E's Front Office was required to purchase CAMSS (GenManager) software to communicate with and receive data from CAISO's new MRTU systems. It was also required to purchase Resource Optimizer software to determine the optimal manner in which to schedule/bid the MRTU markets. PG&E's Middle Office was required to purchase PowerGen Federal Executive Agencies (FEA) software to provide portfolio management functionality and open position calculations. Finally, PG&E's Back Office was required to purchase a new version of Market software to pull in data for approximately 3,000 nodes that replaced the three primary electric power delivery zones used prior to MRTU.

Approximately $2.5 million of the total IT capital costs were for purchased hardware infrastructure needed to support the new software applications, such as servers, network cards and cables, laptop computers, desktop computers, and computer monitors.

Approximately $4.1 million of the total IT capital costs relate to consultant costs to support the MRTU implementation effort. These consultants worked closely with the PMO, Front Office, and Back Office personnel in connection with their respective components of the ISTS MRTU program.

Approximately $5.1 million of the total IT capital costs relate to overheads, such as material burden, capitalized Administrative and General (A&G), and Allowance for Funds Used During Construction (AFUDC).

Following implementation of the first phase of MRTU, PG&E joined CAISO and other market participants in the next MRTU-related major effort. This phase, commencing in mid-2009, is called the MAP phase. It has been organized around several releases, each with a number of initiatives with a specific scope of effort, and with specific planned go-live dates.

The only release of the MAP phase that became operational in 2009 is the pre-summer release. Its scale was orders of magnitude smaller than Release 1. On the CAISO side, the pre-summer release included fixes to resolve variances or to implement system improvements, and changes to improve the flexibility of ADS (Automatic Dispatch System) including a new client (front end). As with the work for MRTU Release 1, the MRTU MAP pre-summer release followed the PDM. The total spent (in dollars) and effort (in hours), along with the associated support categories, during the pre-summer release of the MRTU MAP phase was $80,000.

PG&E determined its incremental MRTU implementation annual revenue requirements for this project based on the incremental MRTU expenditures PG&E made. Based on when the expenses were incurred, and when the capital expenditures were put into rate base, PG&E derived associated revenue requirements for the years 2008, 2009, 2010, and 2011. However, MRTU implementation cost recovery through rates will not begin until 2012; therefore, the amount PG&E is requesting to recover in 2012 rates, $18.3 million, is the sum of the following:

· Release 1 Capital Project: 2009 and 2010 annual revenue requirements of ($8.1) million, and $17.3 million, respectively.

· 2009 pre-summer release Capital Project; 2010, and 2011 annual revenue requirements of ($0.1) million, $0.1 million, and $0.1 million, respectively.

· Non-Demand Response Expenses: 2008 and 2009 annual revenue requirements of $2.4 million and $6.4 million, respectively.

· Demand Response Expenses; 2008 and 2009 annual revenue requirements of $0.1 million and $0.1 million, respectively.

PG&E used its Results of Operation model to carry out its revenue requirement calculation. This calculation takes into account whether expenditures are capital or expense-related. Among other things it takes into account depreciation schedules, rate of return, income, and tax depreciation assumptions. DRA raised two issues with PG&E's revenue requirements calculation. As discussed below, DRA's concern is misplaced. PG&E's revenue requirements calculations should be adopted.

On page 4 of DRA's Supplemental Opening Brief, DRA states:

The record indicates that PG&E recorded an incremental revenue requirement of approximately $932,000 for the discrete Record Years 2008 and 2009. PG&E's request for a revenue requirement of $18.3 million includes its estimate of the revenue requirement equivalent of MRTU implementation costs for 2010 and 2011, costs which cannot have been booked for purposes of memorandum account verification and reasonableness review in this proceeding.

As shown in Table 2-4, there is no difference between DRA's and PG&E's estimate of the revenue requirement needed to recover PG&E's MRTU capital costs and operating expenses for 2008, 2009, 2010, and 2011. The revenue requirement for 2008 and 2009 is $932,000 ($2.484 million - $1.552 million = $932,000) and for 2010 and 2011 is $17.4 million ($17.343 + 0.026 - $17.369 million).

The $18.3 million requested by PG&E is for revenue requirements associated with the MRTU implementation expenditures PG&E has presented for review in this proceeding: 1) the two MRTU implementation capital projects completed and put into rate base before the end of 2009 (MRTU initial release and 2009 MRTU pre-summer release); and 2) the incremental MRTU implementation expenses incurred prior to the end of 2009. Thus, all of PG&E's cost recovery request is associated with already incurred expenditures; none of it is for "projected expenses."

PG&E's cost recovery proposal is to bring PG&E current on the recovery of the annual revenue requirements associated with the MRTU implementation expenditures being reviewed in this proceeding. PG&E's $18.3 million cost recovery request includes the 2008 and 2009, and the 2009, 2010, and 2011 annual revenue requirements associated with the two MRTU implementation capital projects completed in 2009.

Review of PG&E's workpapers reveals that, in fact, DRA's figure of $932,000 represents the 2008 and 2009 revenue requirements associated with the MRTU expenditures that PG&E has presented for review here. In other words, DRA's cost recovery proposal would include recovery of only the 2008 and 2009 annual revenue requirements associated with the MRTU implementation expenditures being reviewed. DRA's proposal would exclude recovery of the 2010 and 2011 revenue requirements associated with the two MRTU implementation capital projects.

PG&E requests that it be brought current with respect to cost recovery of the revenue requirements associated with incremental MRTU expenditures covered in this application, namely, incremental MRTU expenditures PG&E had made prior to the end of 2009. The incremental expenditures include both expense items incurred prior to the end of 2009, and two MRTU capital projects that became operational prior to the end of 2009: Release 1, covering the initial release of MRTU; and the Pre-Summer 2009 Release, a follow-up project that went live later in 2009.

As shown in Table 2-4 of Exhibit 11, reproduced below, the revenue requirements that PG&E is requesting associated with those expenditures are approximately $18.3 million. For the incremental MRTU expenses, the annual revenue requirements are for 2008 and 2009. For the Release 1 capital project, the associated revenue requirements are for 2009 and 2010. For the Pre-summer 2009 Release capital project, the associated revenue requirements are for 2009, 2010, and 2011.

Table 2-4
PACIFIC GAS AND ELECTRIC COMPANY (PG&E)
MARKET REDESIGN AND TECHNOLOGY UPGRADE IMPLEMENTATION
COMPONENTS OF PG&E'S COST RECOVERY REQUEST
ANNUAL REVENUE REQUIREMENT REQUESTED BY PG&E
($ IN MILLIONS)

Line No.

MRTU Cost Category

2008

2009

2010

2011

PG&E's Cost Recovery Request

1

Release 1 Capital Project

-

(8.084)

17.310

-

9.226

2

Pre-Summer 2009 Release Capital Project

-

(0.026)

0.033

0.026

0.033

3

Non-Demand Respond Expense

2.429

6.424

-

-

8.853

4

Demand Response Expense

0.055

0.134

-

-

0.189

5

Total

2.484

(1.552)

17.343

0.026

18.301

DRA believes PG&E's recovery should be limited to $932,000. DRA argues that $932,000 is the approximate sum of the revenue requirement equivalent of PG&E's verified MRTU implementation costs for the Record Years 2008 and 2009. The dispute is whether PG&E should also be allowed to recover its estimate of the revenue requirement equivalent of MRTU implementation costs for 2010 and 2011 for an additional $17,368,000.

DRA asserts that PG&E's proposal for recovery of estimated revenue requirements for 2010 and 2011 should be rejected because, according to DRA, the proposal is inconsistent with the Commission's explicit directive regarding recovery of MRTU implementation costs. Resolution E-4093 defines the required treatment of PG&E's MRTU implementation costs within an ERRA reasonableness proceeding, as follows:

The MRTU Memorandum Account (MRTUMA) will record PG&E's incremental capital-related revenue requirements as well as incremental operations and maintenance (O&M) expenses associated with implementing the CAISO's MRTU initiative. The CAISO has targeted MRTU Release 1 by February 2008 and MRTU Release 2 in 2009. PG&E shall seek recovery of amounts recorded in the MRTUMA in Energy Resource Recovery Account (ERRA) reasonableness proceedings. PG&E shall submit to the Energy Division 30 days prior to each MRTU release, its best estimate of the amounts it expects to record in the MRTUMA. (Emphasis added.)

DRA's witness said the $932,012 revenue requirement reflects PG&E's actual or booked capital and operating and maintenance expenses for MRTU implementation in 2008 and 2009. The $18.3 million PG&E is requesting consists of the equivalent revenue requirements for PG&E's capital and O&M expenses for MRTU implementation for years 2008, 2009, 2010, and 2011. PG&E has not booked its 2010 and 2011 MRTU implementation costs yet PG&E nonetheless continues to seek recovery of these costs. DRA concludes that the PG&E request should be denied at this time, but that PG&E may seek recovery of its 2010 and 2011 MRTU implementation costs after these costs have been booked and verified in future ERRA filings.

Accordingly, DRA contends, review of MRTU costs is limited to incremental costs for the discrete years in which those costs were actually recorded. According to DRA, such review would be consistent with the established Commission practice regarding memorandum accounts in which only verifiable historical expenditures are evaluated for reasonableness, as opposed to unverifiable prospective expenditures.

PG&E took a broader view of the issue. As PG&E's witness explained, the operating expenses associated with a capital project that go into the annual revenue requirements continue for several years after the project goes into rate base. These operating expenses do not represent additional expenditures. They represent the net tax, franchise fees and uncollectibles (FF&U) expense, and depreciation associated with the capital project, all recovered over the life of the asset. PG&E's request is to bring cost recovery current, insofar as possible, once reasonableness review has occurred. DRA proposes to lag recovery of the 2010 revenue requirement associated with the MRTU Release 1 (initial implementation) capital project, and the 2010 and 2011 revenue requirements associated with the Pre-summer 2009 capital project, to a later time period, even though the reasonableness review of these capital projects will have been completed in this proceeding. Once the reasonableness review of these projects has been completed, according to PG&E, there is no reason to continue to lag cost recovery. (Ex. 1, 1-2.)

In this ERRA proceeding (A.10-02-012), PG&E requested cost recovery of revenue requirement through 2011 because at the time the proceeding was filed in February of 2010, PG&E anticipated a 2010 end-of-year decision that would enable the revenue requirement request to be reflected in January 1, 2011 rates. Approval of PG&E's request at the end of 2010 would have allowed PG&E to be brought current, during 2011, with respect to the incremental MRTU expenditures being reviewed for reasonableness in this proceeding.16

This approach, PG&E believes, is consistent with how the Commission treats another memorandum account for cost recovery purposes, the CEMA. For example, in D.09-10-046, the Commission reviewed certain CEMA expenditures, and authorized the recovery in 2010 rates, not only of the 2008 revenue requirement associated with these expenditures, but also of the 2009 and 2010 revenue requirements. In other words, D.09-10-046 authorized PG&E to be brought current with respect to cost recovery once reasonableness review of the CEMA expenditures had occurred. This is exactly analogous to what PG&E proposes here.

PG&E also refers to another CEMA decision, D.08-11-045, covering requested cost recovery for both capital costs and expenses. In that proceeding, the Commission reviewed CEMA expenditures associated with January 2008 storms. The Commission approved a settlement that provided for PG&E to recover $12.6 million in 2009 rates and $2.3 million in 2010 rates. Just as in D.09-10-046, in D.08-11-045 all expenditures being reviewed had already been incurred at the time of review, but the associated revenue requirements stretched out into the future, and the authorized recovery allowed PG&E to be brought current.

PG&E submits this is exactly the cost recovery treatment PG&E is requesting here. PG&E states it should be authorized to be brought current with respect to the cost recovery of the revenue requirements associated with the incremental MRTU implementation expenditures being reviewed in this proceeding, just as PG&E was authorized to be brought current with respect to the cost recovery of the CEMA expenditures that were reviewed in D.09-10-046 and D.08-11-045.

DRA states, consistent with its view of the directive of Resolution E-4093, it did not conduct a reasonableness verification of forecasted expenditures for 2010 and 2011. Similarly, regardless of the scope of the Commission's reasonableness review regarding costs in an unrelated proceeding pursuant to different Commission resolution, the Commission's analysis and authorized recovery in this proceeding must be guided by the specific language of Resolution E-4093. Accordingly, the Commission should only review the reasonableness of and allow recovery for the revenue requirement equivalent for PG&E's MRTU expenditures actually incurred and recorded in Record Years 2008 and 2009.

Under the facts of this proceeding, we find PG&E's position reasonable. We will authorize recovery of the MRTU revenue requirement in the amount of $18.3 million, as shown in Table 2-4 subject to an audit as detailed below. All the capital projects giving rise to the $18.3 million became operational in 2009 and were recorded in PG&E's books in 2009. The $18.3 million (less $932,000) is for capital related revenue requirements for 2010 and beyond. Those revenue requirements consist of taxes, FF&U, and depreciation, all associated with verified capital projects. Our authorization will permit PG&E to bring current cost recovery of these capital projects, to the extent possible.

The audit of PG&E's $18.3 million MRTU costs must be completed within 12 months from the effective date of this decision. This audit will be paid for by PG&E, and performed by an independent auditor chosen by the Commission's Division of Water and Audits - Utility Audit, Finance, and Compliance Branch (DWA). The resulting audit report must be filed by DWA as a compliance filing in PG&E's 2010 ERRA proceeding (or a consolidated proceeding addressing MRTU costs) and served on the service list of that proceeding. Within 30 days of the audit being filed, PG&E must file and serve a response to the audit. DRA and any interested party may then file and serve a reply to such response within 20 days of PG&E's response.

The Audit must include but not be limited to the following items:

1. Compliance with requirements of the Resolution in which the MRTUMA was authorized (Resolution E-4093);

2. Verification that amounts recorded in the MRTUMA since inception have been spent on the incremental costs of the MRTU program;

3. Verification that amounts recorded in the MRTUMA since inception are incremental to the amounts otherwise authorized by this Commission for PG&E's Information Technology program;

4. Verification that amounts recorded in the MRTUMA since inception have not been spent on non-MRTU Information Technology programs; and

5. Verification that amounts recorded in the MRTUMA are separately identified in PG&E's accounting system.

In rate cases, when costs have been incurred, there is always a lag before recovery; it is in the nature of the procedure. Here the revenue requirements were incurred in 2010 and 2011; under PG&E's proposal it will begin recovery of costs in 2012; under DRA's proposal the recovery would start in 2013, at the earliest, and perhaps later; but the numbers would not be expected to change. To the extent possible we should set rates so that the ratepayers who benefit from the capital expense should be those who pay for it; that is, shorten the lag.

DRA argues that PG&E's position is contrary to Res. E-4093, which states:

"PG&E shall seek recovery of amounts recorded in the MRTUMA . . . . " (Emphasis added.)

Yet, in D.09-10-046, this Commission authorized rates that included items that had not been recorded during the year in question.

The capital projects at issue in this ERRA proceeding are in operation, are in rate base, have been recorded in the MRTUMA, and have been reviewed and found reasonable by DRA. We see no reason to delay recovery of the requested revenue requirements.

DRA states that PG&E's revenue requirement request of $18.3 million is artificially low, due in part to the tax treatment of some portions of these expenditures. While DRA is correct that tax treatment has an effect on the requested revenue requirement, DRA errs in concluding that PG&E's revenue requirement is artificially low.

PG&E's revenue requirement request is lower than it would otherwise be due to favorable tax treatment for portions of PG&E's MRTU implementation expenditures. According to Revenue Procedure 2000-50 (2000-2 CB 601), the costs of developing software so closely resemble the kind of research and experimental expenditures that fall within the purview of Internal Revenue Code Section 174, that the Internal Revenue Service believes they warrant similar account treatment. By following this treatment, and using the flow-through accounting method for internally developed software, PG&E's customers benefit by having to pay a lower rate in the first year of cost recovery than they would if PG&E did not classify any of its internal software development costs as "research and development" for tax purposes. This treatment is appropriate, and should be reflected in the revenue requirements adopted in this proceeding.

16 PG&E reflected the 2011 revenue requirement associated with Release 1 in PG&E's 2011 GRC request, and so did not include that amount in its request in this proceeding. (Ex. 11, at 1-6 through 1-7.)

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