Decision (D.) 00-02-046, issued in February 2000, resolved most of the issues in PG&E's test year 1999 GRC while leaving certain issues open for further consideration. One category of such remaining issues pertains to PG&E's business and accounting system. Ordering Paragraph 13 of D.00-02-046 provides the following:
Upon completion of the SAP AG (SAP) business system verification audit, ORA shall file a report setting forth its findings, conclusions, substantive recommendations, and any procedural recommendations for formal Commission consideration thereof. Comments may be filed 15 days after the filing of ORA's report. The [Administrative Law Judge (ALJ)] will make a determination of whether and how to proceed formally thereafter.
Ordering Paragraph 21 of D.00-02-046 provides that these consolidated proceedings shall remain open pending disposition of, among other things, "issues pertaining to the ORA verification audit of PG&E's SAP business system."
ORA's examination of the SAP System primarily covered the years 1998 and 1999, although certain transactions were traced to 1996, the year that the SAP system became operational. The examination included a review of the system's Financial, Control (CO), FERC (Federal Energy Regulatory Commission), and Materials Management modules. On June 6, 2000, ORA filed its audit report (SAP Report) in response to Ordering Paragraph 13, concluding as follows:
In conclusion, ORA is of the opinion that PG&E's SAP Business and Accounting System fairly presents its internal bookkeeping, as well as the components of its recorded FERC accounts. However, because of the intimate details associated with the use and performance of the system, ORA emphasizes the need for continuous technical support, in all future proceedings. (SAP Report, p. 6-5.)
As a result of its examination of the SAP System, ORA made the following recommendations (SAP Report, p. 1-3):
A. That PG&E provide complete documentation in the way of supporting invoices and explanations for expenses included in its accounts, as reflected in the FERC and CO modules.
B. That PG&E continue to provide continuous technical support for ORA in its use of the SAP business and accounting system.
C. That PG&E be directed to restate its M&S inventory balances for 1996 through 1998, so as to properly reflect vendor discounts afforded.
D. That PG&E be directed to adjust its recorded 1997 ratebase, as a result of the overstated inventory balance, in the amount of $10.5 million.
E. That PG&E keep ORA informed of any new modules or upgrades that it may create pertinent to SAP.
F. That PG&E be subject to critical review of expenditures incurred for any modifications or upgrades to SAP.
G. That PG&E provide, during future onsite reviews, not only similar access to SAP as provided during this review, but readily available technical staff to assist in the access to appropriate SAP data.
PG&E filed comments on the SAP Report on June 21, 2000. No other comments were filed. PG&E found the report to be a fair and balanced assessment of the SAP System, and it agreed with ORA's basic conclusions regarding the validity of the SAP System and the need for PG&E to provide continued technical support to Commission auditors. Apart from certain minor technical clarifications, PG&E took issue only with ORA's conclusion that PG&E's M&S inventory balances are overstated, and ORA's recommendations for a restatement of the M&S balances and a rate base adjustment of $10.5 million. PG&E took the position that ORA's reasoning on the issue was flawed, although it could not say that ORA's assertions regarding M&S inventory balances were totally without merit. PG&E recommended that a joint PG&E/ORA investigation of this issue be conducted, and that PG&E and ORA jointly report their conclusions to the ALJ. PG&E recommended that any adopted rate base adjustment be made effective from the date of the order adopting such adjustment.1
In a ruling issued on July 11, 2000, the ALJ directed PG&E and ORA to pursue a joint investigation of PG&E's M&S inventory balances and any other issues related to ORA's recommendations in the SAP Report for a rate base reduction. By letter dated August 22, 2000, submitted on behalf of PG&E and ORA, PG&E announced that it had met with ORA several times and that they had completed their investigation of the M&S inventory balances.2 The letter summarizes their investigation results and areas of agreement as follows:
1. The problem ORA identified in its report was a result of incorrect goods receipt postings that occurred in 1997. Incorrect goods receipt postings typically occur when a duplicate goods receipt is posted for the same material or service or when a goods receipt overstates the goods or services actually received. This results in a temporary difference between the amount accrued on the books versus the actual cash payment. The temporary difference is eventually corrected, but often not within the same year.
2. Historically, prior to the implementation of SAP, incorrect goods receipt postings primarily affected M&S inventory balances. In its past GRCs, PG&E made adjustments to its M&S inventory balances to account for this temporary timing difference. With the implementation of SAP, however, this timing difference also affected expense and capital to a greater extent than in the past.
3. The 1997 imbalance identified by ORA was accounted for in four areas on PG&E's books: M&S inventory, expenses, capital, and clearing.
4. The M&S portion of the imbalance ($2.7 million) was already removed from rate base in PG&E's showing in the 1999 test year GRC as an "unbilled liability." Thus, no further action is needed for this portion of the imbalance.
5. The expense portion of the imbalance ($4.1 million) was booked in 1997. PG&E and ORA agree that, to the extent that 1997 recorded data was relied upon as the basis for 1999 GRC distribution expense estimates and the imbalances were present in that 1997 recorded data, the resulting GRC-adopted electric and gas revenue requirements should be reduced. However, only the distribution portion of the imbalance should affect the GRC revenue requirement. The portion of the imbalance that is charged to other Unbundled Cost Categories (UCCs), such as Gas Transmission, Electric Transmission, Or Electric Generation, does not affect the GRC revenue requirement. Further, because the Commission did not adopt PG&E's estimates in many instances, there is uncertainty regarding the amount of the imbalance that was ultimately included in the GRC-adopted expenses. Thus, PG&E and ORA have reached a compromise and agree that only fifty percent of the distribution portion of the expense-related imbalance ($1.1 million) should be removed from the revenue requirement.
6. The capital portion of the imbalance was included in rate base. PG&E and ORA agree that rate base should be adjusted to remove the capital portion of the imbalance. However, only the distribution portion of the imbalance should affect the GRC revenue requirement. The distribution capital portion of the imbalance is $1.6 million.
7. The portion of the imbalance that is shown as clearing in 1997 is allocated to expense and capital using the 1997 ratio of expense to capital. Thus, PG&E and ORA agree that the portion of clearing that flowed to distribution capital ($0.4 million) should be removed from rate base and fifty percent of the portion of clearing that flowed to expense ($0.3 million) should be removed from the electric and gas revenue requirement.
8. The total distribution capital amount that should be removed from rate base is $2 million. The total distribution expense amount that should be removed from the revenue requirement is $1.5 million.
9. PG&E has agreed to make process improvement to minimize the magnitude of these temporary timing differences on PG&E's financial books in any given period.
The August 22, 2000 letter noted that PG&E and ORA disagreed on whether the agreed upon ratemaking adjustments should be made effective retroactively to January 1, 1999.
On September 27, 2000, the ALJ issued a ruling providing parties opportunity to comment on the recommendations set forth in the August 22 letter, including the issue of whether the proposed revenue requirement adjustments should be made effective January 1, 1999 as proposed by ORA. PG&E and ORA filed comments. PG&E filed a reply to ORA's comments.
1 On August 1, 2000, the ALJ circulated a draft decision that would have made the electric revenue requirements associated with M&S inventory balances subject to reduction, and related gas rates subject to refund, effective as of the date of adoption of that decision. ORA filed comments proposing that the effective date be January 1, 1999. PG&E filed a reply in opposition to ORA's proposal. The draft decision was subsequently withdrawn from Commission consideration. 2 A copy of the August 22 letter is attached to an ALJ ruling issued September 27, 2000.