II. Positions of Parties

Formal comments on the workshop report were filed by municipal interests representing the City of San Jose (San Jose) and the League of California Cities (League). Informal letters were sent by the City of Sunnyvale (Sunnyvale), the City of Vacaville (Vacaville) and by Contra Costa County (Contra Costa).² PG&E, SCE and SDG&E also filed comments on the workshop report.

Sunnyvale registered dissatisfaction with the notification process for the PG&E workshop, claiming that the workshop was poorly noticed and poorly attended. Sunnyvale also expressed objection to D.03-02-032, based on Sunnyvale's belief that it would not receive the franchise fees to which it was entitled. Sunnyvale requested an immediate deferral of implementation of D.03-02-032 pending what it characterized as "properly noticed and conducted hearings."

Vacaville is concerned that PG&E's proposed methodology of calculating franchise payments to municipalities is inconsistent with the methodologies used by SCE and SDG&E. Although Vacaville would stand to benefit slightly from PG&E's proposal, it is concerned that other municipalities within PG&E's service area would stand to loose a significant amount of franchise fee revenue if the proposed change is implemented. Vacaville feels strongly that there should be uniform application of the Commission rules governing both the collection and remittance of franchise fee amounts, and not left to differing interpretations by the utilities. Given the statewide magnitude of the dollar amounts involved and the importance of franchise fee revenue to municipalities, Vacaville feels more time and consideration needs to be given to this important matter perhaps in the form of additional workshops, and that better notification of affected agencies be provided.

Contra Costa argues that PG&E should calculate surcharge revenues using the same percentage factor it uses for payment of franchise fees on other revenues which applies a "G-SUR" rate. Contra Costa computes that it would receive approximately 21.55% more surcharge revenues using the actual G-SUR rate compared to the 0.6% rate proposed by PG&E. Contra Costa also requested that PG&E provide definitions of various terms used by PG&E during the workshop in describing its proposed calculation approach. Contra Costa also requested that PG&E provide detailed support for its projected 2003 surcharge revenue from DWR sources applicable to Contra Costa.

The League believes that California cities need to better understand the statutory methodology for calculating the municipal surcharge due cities on DWR sales, and understand how each utility calculates the surcharge based on their interpretation of the applicable statutory provisions. To accomplish this, the League recommends that a workshop be held with representatives from each of the utilities, the Commission and local governments in each of the service areas. The League is concerned about the notification process and the disproportionately small number of government representatives that attended the April workshop, and propose to facilitate distribution of materials and notification of any further workshop on the surcharge fee calculation.

In its formal comments, San Jose claims that PG&E's workshop report should be disregarded because the workshop exceeded the limited scope of issues that were authorized to be addressed therein, as determined by ALJ ruling. San Jose contends that the workshop was granted for the sole purpose of resolving deficiencies in the billing system of PG&E relating to its ability to calculate DWR revenues. Instead, San Jose claims, PG&E used the workshop as an opportunity to attempt to recalculate the surcharges owed to the cities.

PG&E disputes San Jose's claim that its Workshop Report goes beyond the scope of issues for which the workshop was ordered. PG&E notes that the workshop was not simply intended to address billing system deficiencies, but also the amount of DWR-supplied power, the cost of that power, and the factor to be applied to the resulting revenues. PG&E also notes that the workshop notice specifically identified the question of how remittances are to be calculated as one of the discussion topics.

San Jose contends that PG&E's approach would deprive that municipality of almost 70% of the surcharge revenue due it, by applying a factor of 0.006368 rather than the 2% called for under its franchise agreement. San Jose argues that there is no credible basis for PG&E to deviate from the 2% obligation that is called for under its franchise agreement.

San Jose asserts that PG&E's proposed methodology directly contravenes state law and D.03-02-032 based on its interpretation of legislative intent behind the municipal surcharge to protect revenues to municipalities as gas and electric service to retail customers was opened to non-utility suppliers. PG&E does not view the general intent of the municipal surcharge as necessarily requiring that remittance levels exactly equal what would have gone to municipal entities if utility service had not been unbundled. Instead, PG&E argues, Section 6353 identifies certain elements to be used in the calculation of the surcharge amounts.³ Specifically, Section 6353(d) sets the surcharge fee at the level adopted by "the commission in the energy transporter's most recent proceeding in which those factors and surcharges were set." This statutory language provides a specific reference for where the rate is set and who sets the rate, i.e. the most recent adopted rate set by the Commission.

PG&E believes its interpretation of D.03-02-032 conforms with the Commission's findings and the law. The Commission found that the franchise statutes did not apply, but that municipal surcharge statutes do. Thus, PG&E has looked to Section 6353 for guidance in implementing the municipal surcharge under D.03-02-032. And the applicable statutory language requires the utility transporter to use the last commission adopted franchise fee surcharge for the utility. When the Commission authorizes a modified or new methodology for the surcharge, PG&E believes that new factor will become the proper one to use under Section 6353.

San Jose argues that PG&E should not recalculate surcharge remittances prior to 2003 paid to municipal entities. PG&E agrees that it should not recalculate prior surcharge payments, but disagrees with the reasoning offered by San Jose. PG&E believes that when payments have been made in the past, they have been proper under the decisions in effect at the time. For instance, prior to D.03-02-032, PG&E remitted surcharges to municipal entities per the rate prescribed for each individual municipality in their respective franchise agreement. PG&E believes that because the approach it followed was required on an interim basis by D.02-02-052, payments made pursuant to that Decision should not be recalculated. PG&E's next payment, for 2003, will not be due until early 2004. At that time, PG&E agrees to employ whatever method the Commission directs to be used for the payment to be made in 2004.

SCE and SDG&E agree with PG&E's interpretation of D.03-02-032 that the calculation and collection of franchise fees from retail customers relating to DWR charges should be based on the franchise fee factor adopted in each utility's general rate case. SCE and SDG&E disagree, however, with PG&E's interpretation as to the remittance of surcharges to municipalities relating to DWR revenues. While PG&E would use the same general rate case franchise fee factor for calculating the municipal surcharge fee due to each municipality, SDG&E and SCE, by contrast, believe Pub. Util. Code §§ 6352(d)⁴ and 6354(b)⁵ require them to remit surcharges to municipalities per the rate prescribed for each individual municipality in their respective franchise agreement. The SCE/SDG&E methodology includes DWR revenues in the calculation of franchise fees as if the DWR charges were part of the utility's gross revenues.

Prior to issuance D.03-02-032, PG&E used the SCE/SDG&E approach. PG&E believes that that approach was required, on an interim basis, by D.02-02-052. There does not appear to be any disagreement on the approach that was to be used prior to D.03-02-032.

PG&E has interpreted D.03-02-032 differently from SCE and SDG&E. PG&E expresses no objection to the SCE/SDG&E interpretation so long as the Commission makes it clear that the SCE/SDG&E approach is the approach the Commission wants PG&E to take in remitting municipal surcharges for electric power sales by DWR. PG&E believes there is a value in using a consistent approach for all of the power provided by DWR to the customers of the state's electric utilities.

If the Commission directs PG&E to use the SCE/SDGE approach, this will not create any difficulties in the payment of the appropriate amounts to cities and counties. For 2002, PG&E made its payments pursuant to D.02-02-052, which adopted the SCE/SDG&E method on an interim basis. Payments for 2003 will not be due until early 2004, so PG&E agrees to employ whatever method the Commission directs for that payment.

Regardless of what method it directs be used, PG&E asks that the Commission make clear that if the adopted approach is successfully challenged in court, that should not create any disallowance that would fall upon the utility's shareholders.

PG&E does not believe any more workshops or other investigative activities are necessary⁶ for the Commission to make its final determination, particularly if the Commission adopts the SCE/SDG&E approach. The essence of that approach is that DWR revenues are treated as PG&E revenues for calculation of payments to cities and counties. The effect is that payments to cities and counties are unaffected by the fact that DWR is providing some of the power consumed by the utilities' customers.