Dissent of Commissioner Carl Wood

I.

One of the many lessons learned from the energy crisis of the past few years is that the transfer of rents from ratepayers to market participants has been astronomical. As we sit here today, we now know that California was the victim of chicanery, incompetence and a criminal conspiracy whose far-reaching ramifications we are only beginning to understand. The guilty plea of Enron trader Timothy Belden a few weeks ago highlights the opportunities that electric deregulation offered the unscrupulous to rig bids, run up prices and extract from California ratepayers unconscionable sums of money, leaving California utilities on the verge of financial collapse. Two-and-a-half years after the beginning of the energy crisis, and long after many "market participants" are either in bankruptcy or exiting from the trading business, California ratepayers and utilities are still struggling to recover from the disastrous effects of electric deregulation. Electric energy deregulation has been completely discredited, its seller-side proponents exposed as incompetent, duplicitous, corrupt, and/or criminal.

I can understand why the proponents of a cap on the direct access cost recovery surcharge would want to avoid paying their fair share of these astronomical costs. But I do not approve. The Commission majority wants to sustain the economic viability of direct access contracts, but in order to do so it burdens the rest of California's ratepayers with the weight of multi-billion dollar subsidies. This is morally and legally indefensible. The energy crisis has been a crushing burden on the economy of the State of California and these companies are pillars of the California economy. However, the vigorous pursuit of recovery and restitution from the wrongdoers, not the shifting of costs to those less able to bear them, is the appropriate response. There is more than a full measure of pain for everyone involved. Sustaining illusions about direct access by subsidizing a few participants is neither a fair nor an intelligent way to deal with the problem. Equal sharing of the pain as directed by the Legislature is the only equitable way to carry the burden of the economic consequences of the crisis going forward.

II.

The need for this decision arises directly from the decision of the Commission in D.02-03-055 to permit direct access (DA) contracts entered into during the "gold rush" period between July 1, 2001 and September 20, 2001 remain in full force and effect. During that period, the Commission had pending before it a Proposed Decision (PD), issued during June 2001, to suspend implement ABX1 1 and suspend DA as of July 1, 2001. Shamefully, the Commission failed to act on that proposal for two and one-half months while a number of customers entered into DA contracts and thereby avoided the energy crisis surcharges and the elevated rates that resulted.

The order in D.02-03-055 permitted those contracts to stand, but made a solemn commitment to require payment by DA customers of their fair share of energy crisis costs. The majority breaks that solemn commitment in today's decision, approving a surcharge but adopting a cap that will prevent payment of the fair share of DA costs. That the charge will not take effect until 2003, more than nine months after the decision during which the DA customers' cost responsibilities were borne entirely by the bundled customers, is another failure by the majority. As appears below, the subsidy levels have reached proportions that will make it virtually impossible to repay due to the delay. The pragmatic argument of the majority - put something in place and adjust it during 2003 - might have been a proper course nine months ago. Today it is a hollow mockery.

The Governor and the Legislature have made it very clear that cost shifting and subsidies are not permissible devices for use in propping up DA. In his message accompanying the veto of proposed legislation shortly after the Commission's September 20 suspension decision,1 the Governor said:

"I am returning Assembly Bill 9XX without my signature.

This bill would authorize end-use customers to aggregate their electric loads as individual consumers with private aggregators or as members of their local community with community choice aggregators.

Last June, approximately two percent of the customer load in the territory served by the three investor-owned utilities (IOUs) was receiving power from direct access providers. The Public Utilities Commission (PUC) recently suspended direct access, but the percentage of load subject to direct access transactions grew to as much as 13 percent or more prior to the suspension. That growth creates a significant and unfair cost burden for those customers who continue to receive power from the IOUs and the Department of Water Resources.

This rapid growth in direct access necessitates more concise cost-containment provisions for the remaining IOU customers than those contained in this bill, and those provisions should apply to all direct access contracts.

Moreover, this bill does not clearly authorize fees to cover costs that may result when direct access customers return to service with an IOU, which would create new and unanticipated procurement obligations for the IOU. Those new procurement obligations could come about solely because the direct access provider no longer chooses to provide service to its customers because of rising electricity costs, and instead passes that burden on to the IOU and its customers.

Any efforts to allow direct access must be equitable for all stakeholders."

The Legislature has similarly expressed its intent that all customers pay their fair share of energy costs, regardless of the identity of their supplier. Recently, the Legislature enacted AB 117, which was signed into law on September 24, 2002. Stats. 2002, Chapter 838, effective January 1, 2003. AB 117 provides a limited exception to the suspension of DA mandated in AB 1X by permitting community aggregation programs. In enacting this limited exception, the Legislature expressed its intention that all DA customers pay their fair share of energy costs, without cost shifting.2 Public Utilities Code section 366.2(d), as added by that statute provides:

This language parallels the language of Ordering Paragraph 3 of D.02-03-055, which ordered that:

The Legislature's adoption of our ordering language in D.02-03-055 evidently reflects their expectation that we will make good on our commitment to develop a DA surcharge that will result in bundled customer indifference and will prevent cost-shifting. Imposing an arbitrary cap on the surcharge frustrates that expectation and breaks faith with the commitment in D. 02-03-055.

A cap cannot limit the ability of the utilities and DWR to recover their costs. If the DA customers do not pay, then the bundled customers will. The Commission has covenanted in the Rate Agreement that there will be no shortfalls in DWR's recovery of power and bond charges. The Commission cannot permit any shortfall, and if a shortfall should occur the Commission must take some action to avoid it including imposing all the costs on bundled customers. Otherwise it could be argued that the Commission has breached this covenant, which would have consequences for the bonds and could possibly trigger a claim of default or lawsuits against the Commission. An argument that the utilities - rather than ratepayers -- could cover the shortfall is contrary to ABX1 1, which provides that the end use customers are responsible for payment of DWR charges, not the utilities.3

III.

The methodology for calculating cost responsibility ably developed by Judge Pulsifer and adopted both by today's decision and by my rejected Alternate Decision (hereafter AD) determines the fair share of costs for DWR power, DWR energy bonds and utility retained generation ("tail CTC" under AB 367) attributable to DA customers. The methodology was proposed by the California Large Energy Consumers Association (CLECA) and involves a calculation of total system costs including the DA consumption and excluding the DA consumption, and assigns to the DA customers only the difference between the two calculations of total system costs. This involves a number of embedded assumptions and policy determinations favorable to DA customers.

Applying that methodology in a manner that is consistent with the cost calculations in the record both of this proceeding and of the proceeding for establishing the 2003 revenue requirement for the Department of Water Resources in A.00-11-038, it is apparent that there has already been a huge cost shift as a result of direct access migration during the summer of 2001. DA customers have paid nothing toward the costs of DWR energy and utility retained generation since September 20, 2001. Bundled customers have advanced the following amounts for the DA customers in the rates they have paid since that time.

2001-02 Bundled Customer Advances4

2001- DWR Power5 36,996,000 30,960,000 10,403,000 78,359,000

2001- URG6 24,586,000 46,846,000 4,907,000 80,239,000

2001- Total 65,482,000 77,806,000 15,310,000 158,598,000

2002- DWR Power 410,711,000 374,570,000 120,395,000 905,676,000

2002-URG 114,762,000 177,209,000 21,201,000 313,172,000

2002 Total 525,473,000 551,779,000 141,596,000 1,218,848,000

2001-02 Totals 590,955,000 629,585,000 156,906,000 1,377,446,000

Statewide Total Subsidy $1,377,446,000

A DA CRS that takes effect on January 1, 2003 must cover at least these costs already advanced so that bundled customers may receive the bill credit that the majority describes (at pages 67-68) as required as necessary to maintain bundled customer indifference with respect to those costs that they have already advanced for the DA customers. The advance occurred directly as a result of our order in D.02-03-055, which permitted customers who switched to DA during the period between July 1 and September 20, 2001 to avoid paying their share of costs through bundled rates, but with the requirement that they would pay their fair share through a DA CRS.

Given the estimates of DA load calculated by Navigant for each utility, this results in DA CRS surcharges for 2003, representing only repayment of 2001-02 advances by bundled customers, as follows:

However, a DA CRS that does not cover current costs for 2003 and beyond - including the bond charge that begins effective January 1, 2003 - will result in a new advance by bundled customers, who will be paying the utility and DWR charges for DA customers in their current bills. For 2003, the Navigant model develops the following levels of cost responsibility:

DA Customers Cost Responsibility in 2003

DWR Bond Charge7 52,945,000 39,555,000 9,259,000

DWR Power Charge 413,975,000 450,454,000 117,731,000

URG 109,613,000 167,593,000 20,009,000

Totals 576,533,000 657,602,000 147,088,000

Statewide Total $1,381,223,000

The surcharge required to pay these costs would be:

During 2003, the DA customers will not pay these charges, or any amount close to them. At the 2.7 cent cap approved by the majority, DA customers will pay the following amounts:

DA Customer Payments in 2003 @ 2.7 cents/kwh

PG&E -- $284,715,000 (on DA load of 10,545 Gwh)

SCE -- $133,926,000 (on DA load of 7,878 Gwh)8

SDG&E -- $49,788,000 (on DA load of 1,844 Gwh)

At the end of 2003, therefore, bundled customers will have advanced the following amounts to subsidize the energy service of the DA customer:

Unreimbursed Advances by Bundled Customers for DA Customer Costs

01-02 590,955,000 629,585,000 156,906,000

2003 576,533,000 657,602,000 147,088,000

less 2003 contribution (284,715,000) (133,926,000) (49,788,000)

Totals 882,773,000 1,143,261,000 254,206,000

Statewide Total $2,280,230,000

If these amounts were not being carried in the rates of the bundled customers, those rates could be reduced by as much as 1 cent per kilowatt-hour in 2003. The general level of rates in California is too high. This would be welcome relief indeed.

IV.

The effect of any cap is to create an exemption from payment of the full amount of those costs by direct access customers. This especially affects the bundled business customers, which are direct competitors of similarly situated direct access business customers. The adoption of any cap creates a circumstance of preference, disadvantage, and prejudice whose only rationale is discrimination. That discrimination is exacerbated by adopting TURN's recommendation that any financing of the cap will be retained within the same customer classes. What this suggests is that similarly situated businesses will be treated grossly differently because rates for certain bundled customer business classes will have to increase, since there is no headroom within customer classes to absorb huge accrued under collections. This kind of discrimination is clearly illegal.

Public Utilities Code Section 453 constitutes a legal barrier to adopting the kinds of cap enacted by the majority.9 This statutory provision prohibits granting unreasonable preferences to any customer or class of customer. It is another obstacle for the proponents of a cap. Pub. Util. Code, §453.

The purpose of the DA CRS is to assure that the DA customers as a class and as individual customers pay their fair share of the costs of the service provided to them by DWR and the utilities during the energy crisis. The Governor, in the veto message quoted above, noted the enormous cost shifts that had occurred as the result of rapid migration to DA service during Summer 2001. When the Commission voted to ratify that migration in D.02-03-055 it made a commitment to cost recovery from DA customers through a surcharge "in lieu of" a rollback.

The effect of a cap is to create an exemption from payment of the full amount of those costs by DA customers. As a result, bundled customers pay both their own share of costs and some portion of the DA customers' share. This is as true of the bundled customer businesses which are direct competitors of DA customer businesses as it is of the captive residential customers. This circumstance creates a "preference, disadvantage, prejudice...," U.S. Steel v. PUC, 29 C.3d 603, 611 (1981), which violates section 453, Andersen v. Pacific Bell, 277 Cal App. 3d 277, 285 (1988), unless a rational basis for the discrimination can be shown. U.S. Steel v. PUC, 29 C.3d 603, 610-14 (1981) and cases cited therein.

The only rationale offered for a cap is that in the absence of a cap the DA program will fail because DA contracts will be rendered uneconomic. In other words, the cap proponents are explicitly contending for a preference in tariffed electricity charges in order to sustain an otherwise non-viable program of which they are the sole beneficiaries. The only stated rationale is therefore, discrimination and preference for their own sake. This violates the statute. As the California Supreme Court said in the U.S. Steel case:

...

The only rationale offered for a cap, even a completely arbitrary cap as proposed in the PD, is that in the absence of a cap, the direct access program will fail because direct access contracts will be rendered uneconomic. It serves no one to continue the illusion that direct access is a viable and rational goal. These accrued costs and their grossly discriminatory imposition reveal the ugly truth about excessive and needless cross-subsidies that direct access customers have required from bundled customers during the energy crisis.

Although there is not a shred of evidence in the record to support it, the majority has suggested that if the level of the charge is maintained for a long enough period of time, the cross-subsidy could be considered as a loan from the bundled customers to the DA customers, which will be paid back in full with interest over time. The able discussion by Judge Pulsifer of the uncertainties inherent in long-run forecasting through the use of computer models in this case gives ample reason for doubting the fifteen or twenty year forecasts that underly such an argument. But characterizing the rank discrimination in rates between two similarly situated businesses as a loan from the victim of undue discrimination to the beneficiary of undue preference founders on the fact that this "loan" was never assented to by the "lender." This rationale provides no basis for the discrimination.

V.

The DA cost responsibility and DA CRS levels that must be established for 2003 are crushing, the direct result of our decision to permit expanded DA to persist and our delay in putting a DA CRS in place. DA customers escaped cost responsibility for far too long during 2001 and 2002. They should be paying the piper now, or rather repaying the bundled customers who suffered high rates and the further injury of subsidizing the DA customers' costs during 2001, 2002 and, now, in 2003. We should explore ways to mitigate the impacts on DA customers of repaying the bundled customers, while not continuing to foster the illusion that DA is viable, if it is in fact not viable without massive subsidies.

/s/ CARL WOOD

Carl Wood

Commissioner

San Francisco, California

November 7, 2002

1 Governor's Veto Message on October 14, 2001 of Assembly Bill 9 of the 2001-2002 Second Extraordinary Session (AB 9XX). 2 On the same day Governor Davis signed AB 80 (Havice) and SB 1755 (Soto), chapters 837 and 848, respectively. AB 80 adds section 366.1 to the Public Utilities Code, which contains language identical to the language contained in section 366.2 and discussed in the text. SB 1755 adds new sections to the Water Code relating to electric service by certain types of public water agencies, and provides limited CPUC jurisdiction over otherwise non-jurisdictional entities to prevent shifting of costs to utility customers. 3 Water Code section 80104. 4 These numbers differ slightly from the numbers published in my Revised Alternate Decision of October 30, 2002. The differences are due to a refinement of the arithmetical treatment of URG costs. 5 The ongoing costs of CDWR contracts and purchases of electricity and natural gas. 6 Utility Retained Generation (URG) is the ongoing cost of utility long-term contracts signed at high rates pursuant to CPUC orders. DA customers are proportionally responsible for these costs pursuant to statute. PU Code sections 367, 368, 369, 370. 7 This is the proportional share of DA customers of the charge that will be established in 2003 to pay for the CDWR bonds that are being sold to repay the state for its power purchase advances. 8 In D.02-07-032 the same majority declared that 1 cent of Edison's Historical Procurement Charge (HPC) approved in that decision as a DA customer contribution to the back debts of SCE, would come under the cap. This has the effect of reducing DA customer contribution to DWR and URG costs by $78,780,000 annually. The HPC decision remarked that when a similar charge was developed for PG&E, DA customers' contribution to DWR and URG costs were similarly going to be reduced. 9 Public Utilities Code section 453 provides in pertinent part:

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