ORA's Proposal

ORA agrees that a rate indexing mechanism should be adopted, but otherwise prefers a PBR mechanism modeled after SoCalGas' PBR. ORA proposes that a stretch factor be added to SDG&E's proposed productivity factors, that a 25-basis-point deadband be adopted, and that a progressive sharing mechanism similar to SoCalGas' be adopted. ORA contends that there is little evidence to support the workings of SDG&E's proposed self-calibration mechanism, which has not been adopted by any other public utilities commission in the United States.

ORA recommends that a stretch factor of 100 basis points be applied to the productivity factors proposed by SDG&E. ORA points out that all other energy utilities operating under a PBR mechanism have stretch factors incorporated within their productivity factors. ORA dismisses SDG&E's use of the results of the Christensen Associates' study of the productivity of a national sample of utilities, which recommends a .92% productivity factor for electric and .68% for gas operations. ORA reminds us that the component utilities in this study consisted largely of utilities subject to traditional cost of service regulation. ORA contends that basing an average productivity factor on utilities under such traditional regulation results in only an average productivity factor, which is not appropriate to be applied to SDG&E. ORA recommends that we consider a paper prepared by the National Economic Research Associates (NERA) (Reference Item G). This study found that the average total factor productivity of electric utilities increased by 2.08% per year over the period 1984-1994, which is even greater than the 1.94% ORA proposes for electric operations.

While ORA admits that the mechanics of SDG&E's proposed escalation methodology may result in more challenging productivity improvements, ORA submits that this effect is irrelevant. ORA recommends that use of a utility-specific inflation index is appropriate because it reflects the actual inflationary pressures experienced by the distribution utility, rather than a more broadly based measure that reflects the performance of all sectors of the economy.

ORA asserts that SDG&E's proposed mechanism is inequitable and continues the results of the base rate PBR. In ORA's view, the fact that SDG&E was able to earn approximately $130 million above its authorized rate of return over the past four years, with ratepayers receiving approximately $11 million, is evidence that the previous PBR mechanism was overly generous to shareholders. ORA believes that a more equitable mechanism would have shared the $130 million equally between shareholders and ratepayers. ORA explains that the majority of the $130 million accruing to shareholders came from earnings within SDG&E's deadband. ORA fears that the wide deadband proposed by SDG&E in this proceeding could lead to similar results. Thus, ORA recommends that a 25-basis-point deadband be adopted for SDG&E, identical to that adopted for SoCalGas.

While ORA supports a rate indexing mechanism because this approach sends the proper signals to utility management to control costs of operation, ORA also recommends that any excess earnings above the authorized rate of return be used to accelerate the recovery of transition costs. Under ORA's proposal, these excess earnings would be credited to the Transition Cost Balancing Account (TCBA). "ORA does not believe that increasing electric sales should lead to higher profits for SDG&E absent some improved corporate performance that accompanies those increased sales." (ORA opening brief, at p. 14.)

ORA recommends the same progressive sharing approach adopted for SoCalGas. ORA maintains that this approach correctly aligns shareholder and ratepayer interests by awarding an increasingly higher proportion of earnings above the authorized rate of return to shareholders when SDG&E achieves more difficult efficiencies and cost savings.

ORA supports SDG&E's proposed Z-factor treatment, but also urges us to apply Z-factor treatment to Postretirement Benefits Other than Pensions (PBOPs). According to ORA, several decisions state that PBOP costs shall be recovered through a Z-factor adjustment in annual filings. If this approach is not adopted, ORA is concerned that unreasonable windfall profits will accrue to utility shareholders. ORA contends that the Z-factor ratemaking approach for PBOPs applies to energy utilities as well as telecommunication utilities.

ORA supports SDG&E's proposal to eliminate the GFCA, but recommends that it be terminated as of April 30, 1999, which is the date that coincides with the ending month of the account's annual cycle. The GFCA records the difference between authorized base revenue requirement and recovery of base revenues plus other charges related to the transportation and delivery of gas. The Commission authorizes the base revenue requirement and a recovery rate based on predicted volumes or gas sales as part of SDG&E's Biennial Cost Allocation Proceedings (BCAP). The purpose of the GFCA is to track expenses and revenues over an annual cycle and the account's over- or undercollection at the end of the cycle depends on how closely actual sales match forecasted sales.

ORA is concerned that SDG&E's proposal to terminate the account as of January 1, 1999 would result in considering only a partial yearly cycle for this last year, which would result in SDG&E accruing an undercollection of as much as $8 million, which would then have to be collected from ratepayers. This effect occurs because residential heating loads cause monthly revenues to accrue to the GFCA in a consistent annual pattern. Revenues collected December through March exceed recorded expenses, while revenues collected April through November are not equal to expenses. Therefore, the account's balance is generally closer to zero at the end of the winter heating season, and ORA recommends that this account be terminated at that time.