IV. Discussion

The Stipulating Parties ask that the Modified Stipulation be accorded expedited treatment rather than being considered at the same time as other Phase 2 issues. In light of the substantial and on-going rate impacts of PG&E's residential rate structure on its larger common area accounts, we agree that separate consideration is appropriate.

A. Legal Standard

The Modified Stipulation would give PG&E's common area electric accounts the option of moving to commercial rate schedules rather than continuing to pay residential rates. While not a modification to the baseline program itself, this proposal arose because of the tiered rate design pegged to baseline allowances that was adopted for residential customers in D.01-05-064. As a result, we believe that the Modified Stipulation is appropriately considered in this proceeding.

Pursuant to Rule 51.1(e), the Commission "will not approve stipulations or settlements, whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law, and in the public interest."

In evaluating the Modified Stipulation, we follow the guidance in D.94-04-088 regarding settlements that are not all-party settlements:

"[W]e consider whether the settlement taken as a whole is in the public interest. In so doing, we consider individual elements of the settlement in order to determine whether the settlement generally balances the various interests at stake as well as to assure that each element is consistent with our policy objectives and the law." (D.94-04-088, mimeo. at 10.)

In keeping with that guidance, we consider key provisions of the Modified Stipulation and then address the settlement taken as a whole.

B. Choice Between Residential and Commercial Rate Schedules

1. Customer Impacts

The residential tiered rate structure adopted for PG&E in D.01-05-064 has a disproportionate effect on larger-usage common area accounts, compared to other residential customers. PG&E reported that 16 percent of electricity used in single-family detached housing falls within Tier 4 and Tier 5. At the same time, PG&E's work papers (Exhibit 104) indicate that 46 percent of electricity used by common area accounts falls within Tier 4 and Tier 5. The effect on larger-usage common area accounts is even greater, e.g., 96 percent of the usage of PG&E's 64 largest common area accounts (each consuming over 300,000 kWh per year) falls in Tier 5.² Because more of their usage falls within the upper tiers, common area accounts as a whole pay proportionately higher bills than other types of residential customers.

According to PG&E, about 10 percent of its 90,000 common area accounts would likely benefit from the settlement's proposed optional migration to commercial schedules. About 9,000 accounts would have yearly savings under commercial Schedule A-6 in excess of the cost of a new programmable TOU meter, i.e., $443. This assessment does not take into account that some common area accounts have an existing TOU meter that would only need to be reprogrammed for an $87 fee. PG&E calculated that almost 15,000 common area accounts would show at least some annual savings from switching to Schedule A-6, excluding any meter costs. Additional customers may benefit from switching to commercial schedules other than Schedule A-6; such customers are not included in PG&E's estimates.

Common area electricity costs are often passed on to a building's occupants indirectly, e.g., through increased rents or homeowners' association fees.³ Reporting that multifamily households use 45 percent less electricity than those living in single-family households, PG&E calculated that, even if common area usage could be allocated to individual multifamily dwelling units, the multifamily dwelling units would still use 35 to 40 percent less electricity than the amount used in single-family detached houses. PG&E contends, as a result, that the disproportionate imposition of surcharges on common area usage is unfair to the multifamily dwellings' occupants.

LIF/Greenlining contested the stipulation initially based on lack of information regarding the socioeconomic status of the common area accounts that would benefit from the stipulation. Because of the "zero-sum game" nature of baseline, LIF/Greenlining argued that the Commission must conduct a balancing test in determining if the settlement is in the public interest.

In response, PG&E presented information regarding the types of multifamily dwellings that have common area accounts and the demographic characteristics of their occupants. PG&E reported that over 80 percent of multifamily dwellings are apartments and that households in multifamily dwellings have average incomes about 25 percent lower than single-family dwellers.

2. Discussion

The evidence submitted in this proceeding indicates that PG&E's current residential rate design with increasing surcharges for usage over 130 percent of baseline allowances is not well suited for application to common area accounts, particularly those with very high usage. This rate structure, which is pegged to average usage of average households, does not reflect common area usage patterns. There is no realistic way for PG&E's larger common area accounts to avoid extensive over-baseline usage, regardless of how efficient they may become. As a result, mandatory application of the current residential rate design to PG&E's common area accounts does not meet the equity goals underlying its adoption.

In D.01-05-064, we declined to adopt a tiered rate design for PG&E's and SCE's commercial and industrial customers, expressing concern that "tiering would harm larger consumers to the benefit of smaller consumers within that class, without regard to their efficiency" (D.01-05-064, mimeo. at 37). In fact, this is what has happened to PG&E's largest common area accounts, which through historical circumstances are subject to the residential tiered rate design, while SCE's common area accounts are not. Despite the plight of PG&E's larger common area accounts, the vast majority of PG&E's common area accounts find residential classification to be beneficial.

Allowing PG&E's common area accounts to switch to commercial schedules would be equitable for PG&E's larger common area customers because it would ameliorate the negative effects of the mismatch between PG&E's current tiered residential rate design and the usage patterns of common area accounts. At the same time, making the switch optional protects smaller common area accounts from the rate increases they may receive if served through commercial schedules. Further, even if a common area account discovers that its rates are higher after switching to a commercial schedule, the Modified Stipulation provides a window of opportunity during which the customer may return to residential status.

Pub. Util. Code § 739⁴ mandates the utilities' baseline programs. Section 739(a) provides that "the commission shall designate a baseline quantity of gas and electricity which is necessary to supply a significant portion of the reasonable energy needs of the average residential customer." Section 739(d)(2) defines "residential customer" as "those customers receiving electrical or gas service pursuant to a domestic rate schedule, and excludes industrial, commercial, and every other category of customer." Common area customers who transfer to a commercial schedule would cease to be residential customers under § 739 and, therefore, their service would no longer be subject to that section. As a result, the Modified Stipulation is not counter to § 739.

Water Code § 80110, effective February 1, 2001, prohibits the Commission from increasing electricity charges for residential usage up to 130 percent of baseline quantities. Because it is voluntary, the proposed approach in which common area accounts self-select their classification and have an opportunity to return to residential status would not conflict with this statutory prohibition.

Finally, since the settlement would tend to help rather than harm lower-income customers, we find that it treats those customers equitably.

For these reasons, we conclude that the provisions of the Modified Stipulation that allow common area customers to take service on commercial rate schedules balance the interests of PG&E's common area and other residential customers and are consistent with our policy objectives and the law.

C. Treatment of New Common Area Accounts

The Modified Stipulation provides right-of-return windows for existing common area accounts for a period after the settlement is implemented. During these windows, common area accounts that migrated to commercial schedules would be allowed to return to residential status. However, it is not clear whether common area accounts created after that period that choose commercial schedules initially would be provided an opportunity to transfer to residential schedules at a later date.

The Modified Stipulation provides that return rights for common area customers could exist for a two-month window beginning 14 months after the Commission approves the stipulation (Term 7) and that ECHO could request that return rights be offered for a three-month window under certain conditions (Term 8). These terms would allow existing common area accounts a second opportunity to assess whether commercial classification is beneficial.

Lacking historical usage data, new common area accounts may not be able to determine at the outset what classification would be most beneficial to them. It would be equitable for them to be provided a right-of-transfer window comparable to the right-of-return window in Term 7 of the Modified Stipulation. Since it does not explicitly address the treatment of new common area accounts, the settlement should be construed to provide new common area accounts a right-of-transfer window. Each common area account created after the effective date of the settlement that chooses to be served through a commercial schedule should be provided a two-month window, beginning 14 months after it first elects a commercial schedule, during which it may choose residential status. Term 8 should apply to new common area accounts, but the right-of-transfer window should apply regardless of whether or when ECHO exercises Term 8.

PG&E should notify new common area accounts at the time of service initiation that they may elect either residential or commercial service and that, if electing commercial service, they may choose to transfer to residential service during a two-month window beginning after 14 months on commercial service. Notification of these terms should also be included in the bill inserts that PG&E sends to all residential and commercial accounts twice each year notifying them of their rate options. In addition, the right-of-transfer provisions should be reflected in PG&E's residential and commercial tariffs.

D. Meter Installation and Reprogramming

The Modified Stipulation provides that PG&E shall install TOU or demand meters, or reprogram existing qualified meters, on a first-come, first-served basis (Term 5). The original stipulation had allowed PG&E to give preference to larger common area accounts in the timing of meter installations and reprogramming, and the modification was developed in response to Aglet's concerns regarding the discriminatory effects of that preferential treatment. No party objects to the new provision in the Modified Stipulation, and we find that it balances equitably the interests of all common area accounts.

E. Customer Notice

Terms 12 and 13 of the Modified Stipulation provide that PG&E will provide written confirmations and historical bill analyses to common area customers who would save at least $100 per year exclusive of meter charges and that all other common area customers will be notified through a bill insert of their option to transfer to a commercial schedule. No party objects to this provision in the Modified Stipulation, and we find it to be reasonable.

PG&E's witness stated that he assumed that the bill inserts would go to all residential customers in case some common area accounts are not identified as such in PG&E's billing system, but that "that's one of the details we haven't worked out yet." (Tr. at 954-955.) In order to ensure that all common area accounts are notified of their option to transfer from residential to commercial schedules, we require that PG&E send the bill insert to all residential customers who do not receive the separate written confirmations and historical bill analyses, regardless of whether PG&E's billing system identifies them as common area accounts.

F. Revenue Shortfall

Assuming that the 9,000 largest common area accounts would migrate to commercial Schedule A-6, PG&E calculated that these customers would save about $18 million per year, which consists of approximately $13 million in surcharge savings and $5 million in other rate savings. Actual revenue shortfalls may vary because PG&E's estimate is based on the A-6 schedule and because the number of migrating customers and their usage levels may differ from the assumed amounts.

The Modified Stipulation provides that revenue shortfalls would be tracked in a new balancing account. Recovery of both the uncollected balance and any expected ongoing revenue shortfalls would be "effected through whatever Commission decision first determines both class allocation and rate changes needed for revenue neutrality in R.01-05-047."

In its comments, Aglet asserted that balancing account treatment of the revenue shortfall should be temporary and should end on the effective date of a revenue requirement decision in PG&E's test year 2003 general rate case. Aglet also recommended that, if the Commission approves the stipulation, allocation of the revenue shortfall should be referred to PG&E's upcoming general rate case. In response, PG&E stated that it agrees that the balancing account should be temporary. PG&E also reported that it and Aglet now agree that related cost allocation issues should be resolved in Phase 2 of this proceeding.

In D.02-04-026, we authorized the use of balancing accounts to track any under-collection or over-collection resulting from the Phase 1 baseline changes, and we deferred cost allocation issues to Phase 2. Consistent with our findings in Phase 1, balancing account treatment of revenue shortfalls resulting from the Modified Stipulation is reasonable. We approve a CABA for that purpose.

We agree with the Stipulating Parties that revenue shortfalls due to the Modified Stipulation, including shortfalls reasonably booked in the CABA and expected ongoing revenue shortfalls, should be fully recoverable. The expected revenue shortfall is relatively modest, and its recovery will not have a significant impact on other ratepayers. We will address allocation and cost recovery issues on an integrated basis with other baseline-related cost impacts in our upcoming decision on remaining Phase 2 issues. We will also address termination of the baseline-related balancing accounts at that time.

G. The Settlement Taken as a Whole

Based on our review of the evidentiary record and the provisions of the Modified Stipulation, we find that this settlement should be adopted.

The testimony showed that PG&E's residential tiered rate structure has caused disproportionately high bills for larger common area accounts and that the Modified Stipulation would ameliorate the negative effects of the mismatch between the residential rate design and common area account usage patterns. PG&E also established that the Modified Stipulation would tend to help rather than harm lower-income customers and that it would have no significant impact on other ratepayers. We are convinced that the settlement balances the various interests at stake.

While the settlement was not sponsored by all parties in Phase 2, at the end of the evidentiary hearings in Phase 2, no party actively opposed the settlement. This fact supports our conclusion that the Modified Stipulation is in the public interest.

We have some concerns regarding protection of the interests of new common area accounts, and require that the settlement be construed to provide them a right-of-transfer window comparable to the right-of-return window for existing common area accounts in Term 7 of the Modified Stipulation. We also take steps to ensure that all common area customers are notified of their option to transfer to commercial schedules. With these protections, we conclude that the settlement and concomitant revisions to PG&E's tariffs are consistent with the law, reasonable in light of the whole record, and in the public interest.

Separate from the Modified Stipulation, other common area issues are under consideration in Phase 2, including whether baseline allowances should be modified for residential common area accounts and the treatment of other utilities' common area accounts. We will consider these remaining issues based on the record developed during Phase 2. Our approval of the Modified Stipulation does not constitute approval of, or precedent regarding, any issues remaining in Phase 2 or in any future proceeding.