Background

PSREC filed an application on October 3, 2001 to amend its CPCN. PSREC requests approval to transfer four customers currently served by LMUD to PSREC service. A fifth customer, a new federal prison under construction, would be added in the future. Customers to be transferred reside within the Sierra Army Depot (SIAD) in Herlong.² On February 25, and March 1, 2002, PSREC, in response to questions by the assigned Administrative Law Judge, filed supplemental information to its application. The supplemental information provides additional details regarding the physical and economic changes anticipated as a result of the transfer of service territory and customers from LMUD to PSREC, and a copy of the Electric and Economic Stabilization Planning Agreement between PSREC and LMUD executed July 25, 2001.

PSREC states that it currently serves about 5,000 square miles of territory, 6,500 customers and has about $33 million in physical plant, and that the proposed transfer will add approximately 35 square miles of new territory, and about $10,000 in new physical plant. PSREC asserts that the proposed transfer of customers and service territory has benefits both for PSREC and for LMUD. The benefits for PSREC are a result of distribution economics that allow PSREC to add the four new customers, but only incur minor amounts of additional distribution costs. PSREC explains that the transfer of territory and customers will not require any new PSREC utility service staff since the transferred territory is adjacent to the existing PSREC service territory. As a result, the gross revenues provided by the four transferred customers less the cost of power, payments to LMUD and minimal distribution costs result in an estimated net benefit to PSREC of $700,000 per year. As explained by PSREC, this net benefit will decrease the amount of future rate increases for existing PSREC customers by an estimated 8%. This means that rates for all customers projected to increase by 12% in 2004, will only increase by 4% due to the net benefit provided by the four new customers. In addition, PSREC projects significant electric rate reductions for the four transferred customers. These rate reductions are a result of the substantial difference between LMUD and PSREC rates. Current LMUD rates are 40% to 50% greater than comparable PSREC rates. Although LMUD is projecting a rate decrease, the amount of the decrease will be less than the current 40-50% differential. As a result, PSREC estimates that the electric rates of the four transferred customers after the LMUD decrease will continue to be less than LMUD rates.³

PSREC's application states that the proposed transfer of customers and service territory also provides benefits to LMUD and its customers. First, as a result of the transfer LMUD will be able to abandon its current distribution line to these customers. The abandonment of this distribution line constructed in the 1940s will reduce LMUD maintenance costs. Secondly, LMUD will avoid having to invest millions of dollars in line extensions at the far end of its system to serve the new federal prison. Investing millions of dollars at this time is particularly troublesome for LMUD since it was greatly impacted by the problems affecting the California power market and needs to conserve cash to comply with bond requirements. Thirdly, LMUD will receive $105,000 per year from PSREC as a result of the negotiations regarding the proposed customer transfer.⁴

The supplemental information provided by PSREC describes other indirect benefits achieved as a result of the proposed transfer of customers and service territory. These indirect benefits are a result of the lower electric rates realized by two of the transferred customers, SIAD and the new federal prison. As explained by PSREC, SIAD announced that without lower electric rates, which impact SIAD operating costs, it would attempt to self-generate its energy. SIAD faces the alternative possibility that due to high operating costs it might close during the next round of military base closures, thus impacting 400 jobs in Lassen County. PSREC contends that the proposed transfer of SIAD from LMUD to PSREC service provides desired lower energy rates and reduces the potential for closure or self-generation. As also described in the supplemental information provided by PSREC, LMUD faced the possibility that the new federal prison would not become a LMUD customer. In order to serve the new prison, LMUD would need to invest millions of dollars in line extensions and upgrades of its system. PSREC argues that it is likely these costs would be charged to the prison and that the prison would view such increased costs as excessive. PSREC further argues that if future federal legislation allows federal entities, including the prison, to "shop" for lower electric rates, LMUD could lose the prison as a future customer. PSREC contends that these potential outcomes for SIAD and the federal prison provide further arguments supporting PSREC's request to extend its service territory. PSREC concludes that as a result of extending its service territory and adding these new customers to PSREC service, both LMUD and PSREC will operate more efficiently thus improving the economy of Lassen County.

PSREC states that it does not generate any energy, but that as a member of the Northern California Power Agency (NCPA) it receives all power through Pacific Gas and Electric Company (PG&E). PSREC also states that NCPA has analyzed and modeled the impact of the proposed transfer of customers and service territory from LMUD to PSREC, as well as future growth in PSREC's system for the next ten years. Currently, PSREC projects a peak load of 26 megawatts (MW) for its existing system, an additional 4 MW with the transfer of the four new customers, and 2 MW in 2003 due to completion of the new federal prison. A summary of NCPA's energy load analysis is attached as Exhibit B to PSREC's February 25, 2002 supplemental information. The analysis assesses the impact of an additional load of 10 MW during the peak summer loading period on PG&E's transmission system supplying energy to PSREC. The analysis indicates no appreciable problems on the system and that the loading is well within the capacity of the lines involved.

PSREC indicates its only system concern regarding future energy growth is maintaining adequate voltage in Lassen County. Although PSREC has already installed a voltage regulator to insure adequate voltage for the five new customers, excessive customer growth beyond 2004 could cause voltage problems. In order to maintain adequate voltage PSREC has identified two solutions. The first solution is an interconnection or intertie between the PSREC and LMUD electric systems. PSREC indicates LMUD has already committed to supporting this intertie if necessary. The second solution is to expand the current Demand Management System (DMS) program used by PSREC to reduce voltage demand. PSREC states that the current DMS program has sufficient participants to avoid voltage problems through 2004. PSREC believes that an expanded DMS program could solve future voltage problems, and possibly indefinitely postpone any interconnections or interties with other utilities.

PSREC states that the switching of the system from LMUD to PSREC does not pose any additional safety risks beyond normal utility operations. PSREC states this switching is a simple procedure requiring coordination between PSREC and LMUD and can be accomplished in about one hour.