X. "Historic Costs"

A. Parties' Positions

1. Separate Levelized Charge or Bond Charge

Current bundled customers, like current DA customers who were bundled service customers during portions of 2001, did not pay fully for the DWR's procurement costs during the historic period between, and including, January 17, 2001 and September 20, 2001. In order to reduce the immediate impact, DWR anticipated financing a part of the costs incurred at the highest rate levels by issuing bonds. Any DA customers that took bundled service during this historic period prior to DA suspension date bear responsibility for paying a fair share of costs representing that period.

No party has challenged the Commission's legal authority to hold DA customers responsible for the historic unrecovered DWR costs incurred during 2001 for DWR purchases that serve DA customers, at least for those DA customers that took bundled utility service for some period up to July 1, 2001. Several parties representing DA interests do object, however, to imposing charges for DWR undercollections covering periods of time that DA customers were not on bundled service during the period that DWR incurred its undercollections.

There is also disagreement concerning whether DA customers' responsibility for costs incurred up through and including September 20, 2001 should be limited only to the historic undercollection, or should cover the full amount of the Bonds that are being addressed in A.00-11-038 et al. to the extent that the total proceeds from the Bonds exceed amounts required to finance the DWR undercollection. Some parties propose that this historic revenue shortfall component be recovered as a separate levelized fixed charge amortized over multiple years. Other parties propose that instead of a separate levelized fixed charge, DA customers simply pay a pro rata share of the bond charge which will be determined in A.00-11-038 et al. Parties also dispute which categories of DA should pay for DWR undercollections. We discuss each of these issues in turn.

SCE states that these post-September 20, 2001 values understate the actual amount of DA load on SCE's system. According to information submitted to the Commission by SCE, the actual DA level for SCE currently exceeds 15%. This error in DWR's assumption could have a significant impact on both the Indifference Cost calculation and the DA CRS. The final DA CRS calculation should be based on the correct levels of DA load, not only for SCE but also for all of the IOUs, reflecting the actual DA load that exists at the time of such calculation.

Essentially, DWR treats the 11.6% incremental DA load as though it was on bundled service continuously from January through September, and then switched in its entirety to DA thereafter. The 11.6% is the maximum amount of DA load that was on bundled service, but it only contributed to DWR's undercollection while receiving bundled service. Since the aggregate DA load declined in July, then increased in September, the average incremental DA load was lower than 11.6%.

Between September 1999 and January 2001, direct access levels fluctuated between 12% and 16% of total statewide electric load before dropping to about 2% by June 2001.³³ This shift reflected the return of many DA customers to bundled service during early 2001. Between, and including, July 1, 2001 and September 20, 2001, however, approximately 11% of the total load of the utilities had shifted once again from bundled service back to direct access service. This shift to direct access after July 1, 2001 resulted in a reduced bundled customer load to shoulder any uneconomic costs.

Certain parties (e.g., PG&E) propose to apply the historic undercollection to all DA customers, even those that were receiving DA service prior to July 1, 2001. While PG&E acknowledges that continuous DA customers did not purchase DWR power, it argues that DWR's purchasing activities benefited all customers within the state, including DA customers, by stabilizing power markets and preventing the state power grid from going down. Most parties propose to exempt the approximately 2% of load that took DA prior to January 17, 2001 and remained on throughout 2001. We call this load "continuous DA."

A number of parties propose applying the bond charge to DA customers as a means of covering the historic DWR undercollection. SCE argues that the disadvantage in this approach is that the costs are not assessed on customers based on the amounts they contributed to DWR's undercollection. Customers contributed to the undercollection only to the extent they were on bundled service. Customers who were continuously on DA did not purchase any power from DWR and thus did not cause any of DWR's undercollections. By contrast, a customer who returned to bundled service in December 2000, then again switched to DA in September 2001, would have contributed to the undercollection for the entire time until September. A customer that took bundled service for only one month (i.e., switched from DA to bundled service in June, then switched back to DA in July) would have contributed very little.

As an alternative methodology for assessing historical cost responsibility, SCE suggests calculating individual customer bills using the following methodology. First, a DWR shortfall rate would be calculated for each month as the difference between the DWR cost of power and the utility-specific remittance charge. Second, this charge would then be multiplied by the portion of the customer's energy that was supplied by DWR that month, based on the daily usage and daily DWR energy provided.

SCE acknowledges that for this methodology to work, the Commission would need to adopt it for all three utilities. If only one utility were to implement this methodology, the other utilities would receive some of the benefits of the reduction in the Bond requirements. If individual customer responsibility is assessed, then it would have to be collected in a lump-sum and the funds used to reduce the size of the Bond requirements. This methodology would also have to apply to all DA customers. If DA customers were allowed to select whether they would pay the Bond Charge in full, or pay off their individual cost responsibility and then pay only a portion of the Bond Charge, there would be a problem of adverse selection. Customers that owed only a little, or nothing, as a result of spending little or no time as a bundled service customer would choose to pay off their obligations, and avoid the portion of the Bond Charge to recover the 2001 DWR cost undercollection. Customers that owed a lot as a result of spending a lot of time on bundled service would opt to pay the Bond Charge. The net effect would be that a cost shift could occur to the detriment of bundled service customers.

CEC proposes an alternative approach that would identify the specific costs attributable to each customer on the basis of actual determinations of the customer's status as a bundled or DA customer during the period from June 2000 to the present. CEC notes that DWR contracts have both avoidable and unavoidable elements. CEC believes that the unavoidable costs per unit can be converted into a lump sum using historic consumption levels for each customer. CEC does not know what billing systems modifications would be required to implement its proposal, but does not believe that a major change would be required over current systems.

CIU also proposes a recovery approach designed to charge each DA customer only for the portion of the period covered by the DWR historical undercollection during which the customer was taking bundled service. Each customer would accordingly pay a different charge equal to the overall levelized charge multiplied by the percentage of time that the DA customer was on bundled service. CIU witness Chalfant computed the average portion of time that DA customers were on bundled service between January 17 through September 30, 2001, representing a ratio of 74%. The resulting charge would be 0.313 cents per kWh, billed to each customer for the percentage portion of the historical period the customer was on bundled service for the nine months between January and September 2001. (Chalfant Rebuttal (CIU) Exh. 33, p. 5.) CIU assumes amortization over a 20-year period.

During the Bond Charge Proceedings in A.00-11-038 et al.,³⁴ EPUC claimed that a bond issuance of $8.2 billion was sufficient to recover the past DWR undercollection amount.³⁵ CMTA calculates that bonds issued in this amount would translate into a bond charge of 0.284 cents/kWh. CMTA proposes that incremental direct access customers pay only that portion of the bond charge attributable to the past undercollection and that the amount appears to be less than 0.3 cents/kWh based on the record in A.00-11-038 et al. and in this case.

CMTA proposes that the incremental DA customers' allocated share of the 2001 undercollection should be adjusted to reflect the fact that the full 11.6% increment of load did not take bundled service for the full January - September 2001 period.³⁶ The average level of direct access load during the January-September period was a simple average of 4.7%.³⁷ However, rather than using this simple average, CMTA witness Beach recommends calculating cost responsibility for direct access customers on a month-to-month basis based upon the percentage of DA load in each particular month.³⁸ The responsibility of DA customers for the DWR undercollection thus would be prorated based on the number of months individual customers received bundled service during the January through September 2001 timeframe and on the portion of the undercollection that DWR incurred in each month. CMTA calculated a total allocation of $687 million of the uneconomic historic costs to direct access customers,³⁹ resulting in a levelized annual charge over a 20-year period of $2.85 per MWh (0.285 cents per kWh).⁴⁰

2. Claimed Double-Counting of Bond Charge

CLECA now claims that imposing the Bond Charge on DA customers would risk double recovery of ongoing costs. CLECA argues that DWR is sizing its bond issuance at a level that exceeds that necessary to recover its undercollection during the first three quarters of 2001. At bond closing, funds will be set aside in several reserve accounts associated with DWR's ongoing power procurement function.

The working figure during the Bond Charge hearings for the size of the bond issuance was $11.1 billion,⁴¹ although DWR indicates that the bond issuance may reach $11.9 billion. DWR's witness in the Bond Charge proceeding, Montague, testified that the undercollection during the first three quarters of 2001 was about $7.3 billion.⁴² Since then, the DWR has generally recovered revenues sufficient to meet its ongoing revenue requirement.⁴³

This $7.3 billion shortfall has been temporarily covered by the DWR through loans from the State's General Fund and an interim loan, the outstanding balances of which are to be repaid at bond closing.⁴⁴ The total amount of these two loans, however, exceeds the total amount of the revenue shortfall for the initial nine-month period. Witness Montague stated that DWR's Power Fund was expected to have a positive balance of more than $2 billion in mid-August 2002.⁴⁵

CLECA claims that a substantial portion of the bond proceeds will be going to fund the DWR's ongoing power procurement operations, and to provide credit support for its priority contracts. Exhibit 106 in the Bond Charge case shows more than $1.7 billion of power procurement reserve and similar accounts will be funded at bond closing, out of Power Fund balances. CLECA thus argues that the establishment of a Bond Charge for DA customers based on the full bond issuance amount is likely to result in a double recovery.

CLECA seeks a reduced Bond Charge for DA customers to reflect only what it believes is the amount necessary to recover costs associated with DWR's historic underrecovery of roughly $7 billion, rather than the full $11 billion bond issue. DWR indicated that a hypothetical bond offering of $8.6 billion would provide full recovery of the undercollection with funding for bond related accounts but without funding any of the DWR's power purchasing program reserve that the rating agencies will require in order to secure the DWR's desired level of investment grade ratings on the bonds.⁴⁶ On this basis, CLECA contends that a bond issuance of between $8.2 and $8.6 billion would suffice to fully cover DWR's historic undercollection.

CLECA argues that the Commission could establish a reduced Bond Charge applicable to DA customers by use of the ratio of the size of the $8.2 to $8.6 billion offering to the $11.1 billion offering (or $11.9 billion, if that is the final figure) times the cents per kWh bond charge rate established for the larger offering. In other words, if the full offering results in a rate of 0.47 cents/kWh, the smaller offering would result in a rate of 0.36 cents/kWh.⁴⁷ Under CLECA's proposal, this would be the Bond Charge applicable to all customers, including DA customers, for the portion of the overall bond issuance that, according to CLECA, is dedicated to repayment of the historic undercollection. For bundled customers, the Commission would then add an incremental Bond Charge to recover the costs of the portion of the bond issuance CLECA claims is dedicated to support ongoing procurement activities. This is the overall revenue requirement amount, less the revenue from the 0.36 cent Bond Charge, divided by bundled sales. The result is an all-in Bond Charge for bundled customers of approximately 0.5 cents/kWh.⁴⁸

If the Commission declines to create a differential Bond Charge, CLECA asks that some adjustment of DWR CRS be made in this proceeding. CLECA also supports a proposal of SCE witness Collette to apply the excess portion of the Bond Charge to cover the entire January 2001 through December 2002 period.⁴⁹

The IOUs, ORA, and TURN disagree with CLECA's claim that the bond charge would constitute double counting. They argue that DA customers should bear the same pro rata share of Bond charges as bundled customers.

3. Discussion

We conclude that legal authority exists for the Commission to issue an order applying a Bond Charge to DA customers to the extent they are found to bear cost responsibility for the historic portion of unrecovered DWR costs underlying the Bonds. Under the terms of AB1X, the revenue shortfall for the historic period is to be financed through the sale of State of California Bonds. In D.02-02-051, the Commission adopted a "Rate Agreement" governing the terms by which the Bonds would be administered. As stated in D.02-02-051:

Under the Act, the Commission has an obligation to impose charges on electric customers that are sufficient to compensate DWR for its costs under the Act, including procuring and delivering power, and paying bond principal and interest.

The adopted Rate Agreement establishes two streams of revenues. One stream of revenues will come from Bond Charges imposed on electric customers, and is designed to pay for bond-related costs. The second stream of revenues will come from Power Charges imposed on electric customers who buy power from DWR, and is designed to pay for the costs that DWR incurs to procure and deliver power. Both streams of revenue are necessary for DWR to issue bonds with investment-grade ratings.

The Rate Agreement provides that the Commission may impose Bond Charges on DA customers only after (1) the Commission issues an order that provides for such charges, and (2) the order becomes final and unappealable.⁵⁰ This proceeding is the designated forum for the requisite Commission order addressing whether, or to what extent, such Bond Charges may or should be imposed on DA customers. The actual determination of the revenue requirement and per-customer bond charge applicable to DA customers, however, is being addressed and implemented in A.00-11-038 et al. (the "Bond Charge" phase), subject to the outcome of the instant rulemaking proceeding.⁵¹

As stated in D.02-02-051, the imposition of Bond Charges on the electric power sold by ESPs to DA customers would help ensure the recovery of DWR's Bond-Related Costs and thereby improve the security of the bondholders. We noted in D.02-02-051, however, that the issues associated with the imposition of Bond Charges on ESP power were too complicated and time consuming to address at that point. We placed parties on notice in D.02-02-051 that we planned to consider in a future proceeding whether to impose Bond Charges on the electric power sold by ESPs, and if so, how to do it.

Among the issues to be considered are whether Bond Charges should apply to (1) ESP power delivered to customers that have never received power from DWR, and (2) ESP power delivered by a generator that is not connected to the grid. The instant proceeding has been designated for these determinations. In this decision, and as previously noted, we make no determinations relating to departing load.

D.01-09-060 was also issued to facilitate the issuance of State of California bonds at investment grade necessary to ensure the repayment of the expenditures made from the State's General Fund to pay for DWR power for the utilities' customers. These expenditures were made to help weather the energy crisis confronting all retail end-users statewide. (D.01-09-060, pp. 4 & 8 (slip op.); see also, Water Code, § 80000.)

By charging all affected customers, including DA load, for their respective share of the Bonds, we will be consistent with our goal of achieving bundled customer indifference. We conclude that it is also economically appropriate and reasonable to impose Bond Charges on those DA customers that took bundled service during the period covered by the undercollections incurred up through September 20, 2001. Since bundled customers will be paying for their share of the historic undercollections in the form of a bond charge, it is appropriate that DA customers also satisfy their obligation for a share of the historic undercollection in a similar manner. This approach is consistent with our goal of achieving bundled customer indifference as a result of shifts in DA load. Bundled customers would not be indifferent if they were paying for undercollections on a different basis than were DA customers.

Bond charges finance the unrecovered portion of electric power purchases undertaken by DWR. As explained in D.02-02-051, Water Code Section 80110 expressly provides that DWR is entitled to recover in electricity charges amounts sufficient to enable it to comply with Section 80134, which provides for the revenues to be pledged for support of bonds that DWR is authorized to issue pursuant to Section 80130. Along with our broad regulatory powers under the California Constitution and the Public Utilities Code (see generally, Cal. Const., XII, §§ 5 & 6; Pub. Util. Code, §§ 451, et seq. & 701), Water Code Section 80110, specifically provides us with the authority to impose charges on retail customers to recover DWR-related costs, including a Bond Charge.

In its comments, CLECA argues that DA Customers should only be financially responsible for a portion of the Bond Charge. CLECA argues that imposition of a Bond Charge on DA Customers for an $11.9 billion bond issue will "over-recover DWR's $7.3 billion of procurement undercollection costs for the first nine months of 2001." CLECA argues that a total issuance of no more than $8.6 billion would be adequate, complete with repayment reserves, to recover the historical undercollection, and that the "extra" $3.3 billion is for the purpose of funding future procurement under the long term contracts. In essence, CLECA argues that DA customers should not be responsible for any costs associated with the various operating reserves shown on Exhibit 106 in the Bond Charge Proceeding. However, CLECA's comments misunderstand the structure of the bond deal and fail to mention important aspects of the evidence.

CLECA bases its argument on DWR's Response to Data Request No. 3 in Exhibit 3 in the Bond Charge Proceeding. However, that Response expressly states that the hypothetical $8.6 million bond issue "does not reflect the

financing of any of the Department's power purchasing program reserves, the funding of which will be a condition of the rating agencies in order to secure the Department's desired level of investment grade ratings on the bonds." Indeed, an investment grade rating on the Bonds is required by Water Code Section 80130. Thus, the funding of the various operating reserves at closing is a pre-requisite to actually issuing these bonds.⁵² The rating agencies insisted on the setting aside of such large sums in these accounts in order to give the bonds favorable credit ratings. Without these large set-asides, the bonds would have had lower ratings, or perhaps could not have been issued at all. Lower ratings would have increased the interest on these bonds thus increasing their cost to DA customers. In short, DA customers receive a substantial benefit from these set-asides as they will enable the bonds to be issued with favorable ratings. Furthermore, CLECA has not established that these reserve-type funds will in fact be used to fund ongoing DWR operating costs, it has simply assumed that that is the case. Of course, there is some risk that these funds may be used for these purposes; that is why the rating agencies have required them to be set aside.

However, we note that Reference Exhibit 1a in the Bond Charge Proceeding describes what will happen to a large portion of these funds. The majority of the initial deposit to the Operating Account consists of an $850 million increase to the Minimum Operating Expense Available Balance. This additional cushion in the Operating Account is only required so long as DWR continues to procure the Residual Net Short. As soon as that responsibility has been transferred to the investor-owned utilities, the Minimum Operating Expense Available Balance requirement will be reduced by $850 million (even if DWR continues to be responsible for long term contracts). At that time, the freed up funds can be used to "either retire the additional debt issued to fund the higher account balance or can be used for more immediate ratepayer relief. The Commission, after consultation with the Department, will be responsible for determining the use of the excess amounts." (Reference Exhibit 1a in the Bond Charge Proceeding.) If the funds are used to retire debt, DA customers responsible for paying Bond Charges will certainly benefit. If the funds are used for more immediate ratepayer relief, the extent to which DA customers may benefit will depend on whether that relief comes in the form of a reduction to Bond Charges or Power Charges, or both, an issue that has not yet been decided.

CLECA likewise ignores the fact that the Operating Reserve referenced in Exhibit 106 is set aside to cover the contingency that the Operating Account may not be sufficient to fund all operating costs. Thus, CLECA has not established that absent this contingency the sums in the Operating Reserve Account will ever be used to fund DWR's ongoing power purchases.

In sum, CLECA has established neither that any of the bond proceeds will be used to fund future DWR operating costs nor that it is unfair for DA customers to pay full Bond Charges.

We, therefore, disagree with CLECA and other parties claiming that imposition of the full bond charge on DA customers represents double-counting. We decline to apply a reduced per-kWh charge to DA customers to exclude the portion of the Bond Charges that CLECA claims to be in excess of the historic undercollection.

We also decline to adopt the proposal of SCE that a portion of the proceeds from the DWR bonds in excess of the historic undercollection amount be used to fund DA customers' obligation for DWR power charges from the date of DA suspension through December 31, 2002. Those bond funds have already been designated for other purposes as explained above, and, thus are not currently available to reimburse bundled customers for DA customers' DWR's obligations for Power Charges during the historic period up through December 31, 2002. Bundled customers will have already paid their share of DWR power costs during the period from September 21, 2002 up through December 31, 2002 and will also be required to pay their pro rata share of the full bond charge. It would violate the goal of bundled customer indifference if DA customers are not required to bear responsibility both for reimbursing bundled customers for their share of DWR costs from September 21, 2001 through December 31, 2002 as well as for the full bond charge.

In order to ensure that bundled customers receive proper credit for the time value of money associated with funds they have already paid to cover the DA customers' portion of the pre-2003 DWR power charge, interest charges must continue to accrue on those payments until bundled customers receive credit in the form of an offset reduction in their DWR power charge. SCE's proposal would not provide for any immediate reduction to bundled customers' remittances for power charges. DWR would instead retain the use of the proceeds from the bond charges and would use it according to its own discretion.

We thus do not find SCE's alternative proposal to be a suitable or reasonable means of applying bond funds. SCE's approach would result in an inconsistency between bundled versus DA customers with respect to collection of Bond Charge and the DWR Power Charge for the period from September 21, 2001 through the end of 2002. DA customers should bear a proportionate share of the entire revenue requirement for the Bond Charge and not simply that portion limited to the amortization of the undercollection.

DWR has determined the total revenue requirement that is required to fund the bonds and specific Bond Charges are being set in A.00-11-038 et al. Since the bundled customers' share of the bond revenue requirement will be based on the full size of the bonds, DA customers should rightly bear their responsibility on a similar basis. We thus conclude that the DWR "historical costs" should be separated from DWR ongoing costs and should be recovered from DA customers through the Bond Charge.