PG&E

PG&E requests that we approve a proposed settlement among PG&E, ORA, and CUE and that we reject Energy Division's findings and recommendations in its audit report. We address the audit issues in a subsequent section. Specifically, PG&E requests that we adopt the proposed settlement, approve the recorded entries to the TCBA, and approve the reasonableness of entries associated with QF contracts and other power purchase agreements, employee transition costs, pumped storage operations, geothermal operations, and water purchases for power production, and ISO/PX costs and revenues. PG&E asks that we make the following determinations:

1. the elements of PG&E's employee-related transition cost programs are reasonable and those programs addressed in the proposed settlement will not be subject to reasonableness reviews;

2. the proposed caps for severance and displacement, wage protection, and voluntary retirement incentives, management and employee relocation, management transition bonus and enhanced performance incentive plan, and industry restructuring incentive programs are reasonable;

3. costs associated with QF contracts and other power purchase agreements during the record period are reasonable and accurately recorded in the TCBA;

4. costs associated with pumped storage operations; geothermal operations, water purchases for power production, and ISO/PX cots and revenues are reasonable and accurately recorded in the TCBA;

5. future reasonableness review of pumped storage operations is unnecessary since PG&E operates Helms as required by the ISO;

6. PG&E may incur employee-related transition costs after the rate freeze ends; and

7. PG&E's entries to the TCBA during the record period are consistent with statute and applicable Commission decision.

PG&E has entered into a proposed settlement with ORA and CUE that resolves the contested issues regarding costs recorded in its TCBA during the record period. In addition, the proposed settlement entirely resolves the issue of employee-related transition cost recovery for PG&E employees at divested fossil and geothermal plants by establishing a package of employee severance, early retirement, relocation, and retraining benefits. The proposed settlement does not address employees assigned to the hydro or nuclear plants.

The settlement provides for rate recovery of the costs of specific programs related to employee-transition costs and caps ratepayers' exposure for the costs of these programs. PG&E would be allowed to recover actual costs of approved programs, but the utility cannot change the terms and conditions and the total costs of the programs cannot exceed the specified caps. For the record period, PG&E agrees to forgo recovery of $500,000 in employee-related transition costs. PG&E states that this is a 13% disallowance when compared to the $3.78 million requested recovery for the record period. PG&E would recover the actual costs of five uncontested employee-transition cost programs, subject to limited audit and verification in future ATCPs: bargaining unit retraining assistance, management career workshop, bargaining unit severance, management severance, and divestiture rotational assignment travel expense. No cost caps would be applied to these programs.

For contested programs, PG&E agrees to forgo future costs for its industry restructuring incentive program (expected to be approximately $175,000), and agrees to establish cost caps for its bargaining unit severance and displacement program (capped at $42.575 million), wage protection ($5.5 million), voluntary retirement incentive program ($10 million), bargaining unit and management relocation programs ($750,000), and management transition bonus and enhanced performance incentive plan programs ($7 million), and industry restructuring incentive programs. These cost caps apply to both divested fossil and geothermal facilities and to fossil units PG&E has not yet divested, such as Hunters Point and Humboldt power plants. Total cost caps would equal $67.26 million over the period 1998 - 2006, with additional costs eligible to be incurred for the five programs referred to above.

The settling parties contend that the settlement is reasonable in light of the whole record, consistent with the law, and in the public interest. ORA submitted an independent report on PG&E's application and is in a position to fairly represent the interests of all ratepayers. CUE represents the interests of employees. The settling parties represent that the settlement supports the Legislature's explicitly stated objective to protect utility employees from potential negative impacts of electric industry restructuring by ensuring that those employees directly affected receive adequate employment benefits (§§ 375(a) and 330(u)). In addition, the settling parties contend that the settlement supports both the Legislature's and the Commission's goal to facilitate a smooth transition to an unregulated marketplace by promoting safe and reliable operation of PG&E's generation facilities until they are transferred to the new owners (§ 363). Finally, the settling parties state that the settlement supports the goal of limiting ratepayer liability for transition cost recovery by setting caps on the amount of costs recoverable for various employee-related transition cost programs.

The settlement addresses other areas related to QF contract costs, other power purchase agreement costs, pumped storage operations, and geothermal and purchased water for power production. The settling parties agree that these costs have been reasonably incurred and accurately recorded in the TCBA. Based on testimony and additional information provided in settlement negotiations, settling parties have no objections to PG&E recovery of these costs. Furthermore, in compliance with D.97-11-074, PG&E treated fixed costs paid under fuel and fuel transportation contracts as going forward costs. Therefore, the settlement provides that PG&E may not recover through the TCBA the uneconomic costs of these contracts executed prior to December 20, 1995, or costs to buy-out or buy-down these costs.

Aglet contests the settlement, stating that the settlement does not meet the fairness standard articulated in D.88-12-038, in which the Commission stated that the most important element in determining the fairness of a settlement is the relationship of the amount agreed upon to the risk of obtaining the desired result. Based on ORA's prepared testimony and Aglet's own testimony, Aglet states that disputed record period costs relate to more than $51 million out of the $68 million total for record period costs and total period cost caps, with $16.2 million of cost cap programs having no recorded costs in the instant record period and therefore having been subject to little analysis. Aglet explains that prior to evidentiary hearings, ORA and Aglet agreed to rate recovery of only $821,000 of record period employee-related transition costs and future expenditures for those programs that are not capped. Aglet contends that 75% of PG&E's employee-related transition cost programs are in dispute, yet the settlement would require PG&E to forgo only $675,000, or 1% overall. Aglet disputes the reasonableness of these costs, stating that many of the cost elements are high, unjustified by the evidence, or unnecessary to accomplish reasonable employee transition objectives.

Furthermore, Aglet disputes the implicit assumption by the settling parties that ratepayers should support employee transition benefits that offset completely the potential negative impacts on employees, stating that the availability of benefits should be commensurate with the potential negative impacts that employees really face. Aglet also contends that the balance of costs and benefits is skewed, because the proposed settlement unfairly benefits PG&E shareholders and new plant owners. PG&E employees receive benefits meant to mitigate potential job impacts stemming from restructuring and shareholders benefit from retention of a stable, motivated work force. Because the majority of employee transition costs are incurred during the two-year operations and maintenance period at each affected plant, the new plant owners benefit from retaining a stable work force, as well. Aglet admits that ratepayers benefit from the increased safety and service reliability that a stable work force can provide, but contends that it is unreasonable that ratepayers bear approximately 99% of disputed costs, as the settlement provides.

Aglet also contends that the scope of the settlement is too broad. Aglet states that the settlement addresses reasonableness issues for $68 million to $90 million in costs, but ORA and Aglet have reviewed approximately only $3.8 million in employee-related transition costs. In contrast, Aglet cites the Edison stipulation that addresses only record period costs. Aglet contends that it is not reasonable to address future record period costs or the reasonableness of employee benefit programs for which no costs were incurred during this record period. While Aglet agrees that employee transition costs will encourage safe, reliable service, Aglet contends that the settlement does not specifically identify the public interests that will be served by approval of this settlement, nor have settling parties justified the costs or caps of these programs.

Aglet is particularly concerned about the level of costs included in the Bargaining Unit Severance and Displacement Program. While the settling parties argue that these are severance payments and not retention bonuses, Aglet contends that this is not the case. Because the program payments do not depend on severance or job loss, Aglet argues that these payments must be retention bonuses that are not eligible for transition cost treatment.

PG&E, ORA, and CUE filed responses to Aglet's comments. Edison addressed these issues in briefs. ORA explains that its concerns with retention bonuses, as expressed in its initial protest and testimony, went to potential anti-competitive impacts and cross-subsidization of utility affiliates. Now that ORA fully understands the relationship of divestiture and the utilities' obligations under § 363, ORA's concerns are ameliorated. In addition, ORA is now comfortable with the amounts offered per employee as compared to PG&E's Voluntary Retirement Incentive program. ORA recognizes that the employees affected by electric restructuring have not volunteered to lose their jobs and that it will take a higher amount of severance pay to willingly attract employees to this program. ORA also notes that the VRI amounts are six years old and would need to be adjusted for inflation. ORA's concerns regarding over-generous management programs are addressed by caps on the program costs that were a specific subject of negotiation. ORA believes the settlement represents a reasonable compromise of the settling parties' positions.

Aglet argues that employee benefit packages should be individually tailored to each employee and that PG&E's package of benefits is unreasonable because they do not differentiate among those employees who actually lose their jobs, those who are retained by new plant owners, those who retire, or those who transfer to a PG&E affiliate. ORA, on the other hand, contends that it would be inefficient to investigate the employment status of individual employees and to determine whether the severance package was reasonable. ORA points out that such a requirement could create perverse incentives: if an employee knew that he or she were going to lose certain benefits if they obtained a new job after severance from PG&E, this would create an incentive for them not to take a job. ORA agrees that the Commission must monitor the status of employees who are hired by PG&E affiliates, but believes that the provisions regarding employee transfers to affiliates in the existing Affiliate Transaction Rules adequately protect ratepayers from abuse.

ORA also maintains that Aglet's calculation of the relative benefits and costs of the settlement undervalues the ratepayer benefit associated with cost caps. Aglet looks only at the maximum amounts that could be recovered under the settlement. ORA reminds us that PG&E's recovery is limited to its actual costs, not the forecast costs, and that actual costs may be well above the cost caps. ORA also clarifies that the settlement provides for the approval of various programs as eligible for recovery under § 375 and that benefit packages offered to individual employees are reasonable. However, for other record periods, ORA maintains that the questions of whether individual employees qualify for these programs and whether all the expenses recorded for these programs were appropriately booked to these accounts is left open to review and litigation, if necessary.

CUE agrees with ORA and argues that it is more efficient to determine that the programs are reasonable now, rather than requiring parties to litigate the same issues year after year. CUE maintains that the structure and individual elements of the programs won't change. CUE strongly believes that the settlement is in the public interest and is consistent with the law. CUE states that in § 375(b), the Legislature specifically endorsed employee transition cost recovery by explicitly providing recovery for those employees performing services in connection with § 363.

PG&E disputes Aglet's contention that the disallowance is disproportional to the potential cost impact of the proposed programs. PG&E contends that the Commission often finds costs reasonable without disallowance and in this case, is reviewing a negotiated settlement, rather than individual expenditures. PG&E argues that Aglet has presented no evidence to support rejecting the settlement and maintains that the programs and costs addressed in the settlement are consistent with legislative intent, as expressed in §§ 330(u), 363, and 375.

Edison points out that Aglet joined the stipulation between Edison, ORA, and Aglet in supporting the recovery of a negotiated amount for retention bonuses that were paid to Edison's employees directly impacted by industry restructuring. Edison believes that retention bonuses are appropriate because they are intended to mitigate the potential negative impacts directly related to critical employees' severance by inducing them to delay that severance and forgo opportunities they might have otherwise taken. Edison recommends that we reject Aglet's argument that PG&E retention bonuses are not eligible for transition cost recovery.

We will adopt the proposed settlement. We agree that the provisions of the settlement are consistent with the law and that the terms are reasonable.

The Legislature has clearly expressed its intent to protect utility employees from potential negative impacts related to electric restructuring and divestiture of generating plants. Section 330(u) states:

The transition to expanded customer choice, competitive markets, and performance based ratemaking as described in Decision 95-12-063, as modified by Decision 96-01-009, of the Public Utilities Commission, can produce hardships for employees who have dedicated their working lives to utility employment. It is preferable that any necessary reductions in the utility work force directly caused by electrical restructuring, be accomplished through offers of voluntary severance, retraining, early retirement, outplacement, and related benefits. Whether work force reductions are voluntary or involuntary, reasonable costs associated with these sorts of benefits should be included in the competition transition charge.

Section 363 reads, in relevant part:

In order to ensure the continued safe and reliable operation of public utility electric generating facilities, the commission shall require in any proceeding under Section 851 involving the sale, but not spinoff, of a public utility electric generating facility, for transactions initiated prior to December 31, 2001, and approved by the commission by December 31, 2002, that the selling utility contract with the purchaser of the facility for the selling utility, an affiliate, or a successor corporation to operate and maintain the facility for at least two years. The commission may require these conditions to be met for transactions initiated on or after January 1, 2002. The commission shall require the contracts to be reasonable to both the seller and the buyer.

Finally, § 375 reads, as follows:

(a) In order to mitigate potential negative impacts on utility personnel directly affected by electric industry restructuring, as described in Decision 95-12-063, as modified by Decision 96-01-009, the commission shall allow the recovery of reasonable employee related transition costs incurred and projected for severance, retraining, early retirement, outplacement and related expenses for the employee.

(b) The costs, including employee related transition costs for employees performing services in connection with Section 363, shall be added to the amount of uneconomic costs allowed to be recovered pursuant to this section and Sections 367, 368, and 376, provided recovery of these employee related transition costs shall extend beyond December 31, 2001, provided recovery of the costs shall not extend beyond December 31, 2006. However, there shall be no recovery for employee related transition costs associated with officers, senior supervisory employees and professional employees performing predominantly regulatory functions.

Based on the plain language of these code sections, we conclude that the programs described by the settlement are consistent with the law. Although the settlement provides for the determination that various employee-related programs are reasonable beyond this record period, we believe that this approach is generally consistent with legislative intent. We find that the settlement is in the public interest because it appropriately considers and balances the interests of employees, ratepayers, and shareholders. Although we recognize that shareholders certainly benefit from a stable work force, the law clearly provides that ratepayers bear the burden of offsetting potential negative impacts on employees by defining these costs as transition costs. We cannot agree that because PG&E was required to divest at least 50% of its fossil generating plants, the employees impacted by the divestiture of the second 50% of the fossil plants are precluded from enjoying the benefits of severance, outplacement, and other such programs.

Aglet contends that this settlement does not meet the fairness standard established in D.88-12-083, in which the Commission stated that the most important element in determining the fairness of a standard is the relationship of the amount agreed upon to the risk of obtaining the desired result. (30 CPUC2d 189, 267.) Five of the programs in question have cost caps; five programs would have no cost caps; one program would have no additional entries after this record period. (See Attachment D.) The settling parties explain that PG&E developed the caps by estimating the costs based on the number of employees eligible for each program and the timing of the operations and maintenance contracts required under § 363.

Aglet asserts that it is difficult to assess ratepayer exposure, but based on the maximum cost caps plus record period costs and the settled disallowance, at a minimum, ratepayers could be assessed $67.6 million. We agree with Aglet that it is difficult to assess total ratepayer exposure under these programs. If, however, we compare the record period actual costs with the proposed disallowance, we see that the settlement results in an actual disallowance of approximately 13 %. Neither the Commission nor any of the parties has a crystal ball to determine the actual costs PG&E may incur for these programs. However, based on legislative intent, we are convinced that the proposed programs are indeed lawful and reasonable. We agree with ORA:

All the settlement does is support a finding that the structure of the employee benefit programs described in PG&E's testimony are eligible for recovery under P.U. Code § 735[sic]4 and that the benefit package offered to individual employees of the programs are reasonable. The questions of whether in other record period individual employees qualify for payments under these programs, and whether all the expenses recorded for these programs were appropriately booked to these accounts are left open to be reviewed, and litigated if necessary, in future ATCP proceedings. (ORA's reply brief at p. 16.)

When parties representing varying interests agree on a negotiated outcome, we believe it is an indication of the reasonableness of the proposal. ORA is charged with representing the interests of all ratepayers; CUE represents employees' interests; and PG&E, of course, represents the interests of its shareholders.

We agree with PG&E, ORA, and CUE that, taken together, §§ 363 and 375 imply that employee-related transition costs can be incurred after the rate freeze ends. We recognize that some of these costs will be incurred after the required two-year contract period for operations of the plants. We note that we cannot determine with certainty a date beyond which the occurrence of such costs would be unreasonable, but clearly recovery must occur no later than December 31, 2006.

In addition, we are concerned about the cost caps vis-a-vis employee programs for its hydroelectric and nuclear plant employees. As Aglet points out, the settlement excludes hydro and nuclear workers from the programs addressed in the settlement, but similar programs may in fact be applicable to these employees. Aglet states that the relevant bargaining unit agreement makes this clear. We do not have the record before us to make a determination regarding rate recovery of costs for workers at hydroelectric and nuclear plants, but we caution settling parties that we will be quite mindful of the program cost caps and additional impacts on ratepayers as we review other such employee-related programs and potential settlements.

We recognize that the unions have been very involved in negotiating programs to ensure that experienced workers remain in the facilities pending final sale and extending through the two-year operations and maintenance contracts. As PG&E explains in Exhibit 33, for the Bargaining Unit Severance and Displacement Program:

The current Union agreements provide for a severance payment of four weeks of pay, plus one week's pay for each year of service, up to a maximum of 52 weeks. . . .

The IBEW negotiated an additional severance and displacement program for certain Union members located at a facility scheduled for divestiture. The additional severance and displacement program provides payments at various times after the CPUC approval of divestiture, which is referred to as the `trigger date.' The program anticipated that the § 851 process could take several years. The payment schedule for employees remaining at a facility after the approval of the § 851 process is the following:

The $50,000 payment is made in conjunction with an employee's displacement or layoff, and therefore may be paid prior to year four in conjunction with the application of the demotion and layoff provisions of the appropriate collective bargaining agreement. (Exhibit 33, pp. 3-27 - 3-28.)

In Exhibit 40, PG&E explains that the cap was developed based on the number of employees and the duration of the operations and maintenance agreements required by § 363. For the plants included under this program, no employee would receive the $15,000 payment and most employees would receive $70,000 in payments. The cap is based on these figures and a total of 465 bargaining unit employees working at facilities that have been divested. PG&E explains that 58 of those employees have had their positions eliminated; 113 work in support roles or work at fossil plants not scheduled for divestiture. PG&E also estimates that 33 employees currently on disability leave or leaves of absence may have contractual rights to positions at the divested facilities.

We have no wish to interfere in the collective bargaining process, nor do we find that employee retention bonuses are strictly eliminated from eligibility as employee-related transition costs. The Legislature clearly intended both that a stable workforce be retained in order to ensure reliability after divestiture and that the new competitive market be up and running in short order.

4 We assume ORA means § 375.

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