Rate Indexing

The rate indexing mechanism is captured in the following formula:

Rate_(n) = (Rate _(n-1) * (1+ Esc - X)) + or - Z

where Rate = electric distribution rate component or gas base rate component;

n = year for which rates are being determined

Esc = escalation or inflation factor

X = productivity factor; and

Z = exogenous factors to be either added or subtracted

SDG&E argues that a rate indexing mechanism is simpler and more direct than either a revenue requirement indexing mechanism or a revenue-per-customer indexing mechanism. Each rate component is adjusted annually according to the above formula. A revenue requirement indexing formula applies an index to a total revenue requirement. The resulting revenue requirement is then used to establish rates through use of a forecast of kilowatt hours or therms delivered. Balancing accounts are used to true-up the revenue amount when subsequent actual volumes do not match. These mechanisms often include a component to account for customer growth. A rate mechanism usually does not include such a component and applies an indexing formula directly to rates.

SDG&E argues that a rate indexing mechanism is appropriate because the Commission has eliminated the Electric Revenue Adjustment Mechanism (ERAM), which was the balancing account used to true-up the revenue requirements for recorded sales versus forecast sales on the electric side. SDG&E also proposes to eliminate the Gas Fixed Costs Account (GFCA) as of the beginning of 1999. If both of these accounts are eliminated and a rate indexing mechanism is used, SDG&E asserts that it is now subject to the risk of variations in delivery quantities. If actual delivered throughput (whether kilowatts or therms) differs from the throughput used to determine the initial starting rate, SDG&E will either gain revenue through greater sales or lose revenue if sales are less than forecast. Because there is no adjustment for customer growth, SDG&E is at risk to recover the costs of new customers out of the revenue stemming from the increases in volumes delivered.