UCAN's Proposal

UCAN believes that a PBR mechanism must demonstrably benefit customers and should be designed to put downward pressure on rates. UCAN argues that the PBR mechanism should model competition where it does not exist and that the interests of the ratepayers are a critical consideration in approving a PBR proposal.

UCAN recommends that a revenue-per-customer index method be adopted for a PBR mechanism to last five years, expiring at the time when the merger savings mechanism expires. UCAN asserts that the revenue-per-customer methodology counters SDG&E's incentive to increase sales, is consistent with Christensen Associates' study of productivity estimates, avoids the problem of windfalls accruing to SDG&E, and sends proper signals regarding costs, i.e., to reduce utility energy service costs per customer. UCAN explains that the revenue-per-customer approach can be implemented using recorded data, although it agrees that a demand forecast is necessary for purposes of retaining the GFCA.

UCAN asserts that a PBR mechanism must distinguish between monopoly and competitive services and therefore recommends that three separate PBR mechanisms be adopted. UCAN asserts that under a single PBR mechanism, SDG&E could cross-subsidize efficiency losses in one area with gains in another and recommends that the PBR mechanisms should be separately unbundled into electric wires, electric metering and billing, gas pipes, and gas metering and billing.

UCAN believes that SDG&E's proposed productivity factors are too low. UCAN states that SDG&E's current productivity level is 1.5% and should not be decreased to .92% on the electric side. UCAN explains that an X factor or an indexing method should be selected so that ratepayers are at least as well off under PBR regulation as they would have been under traditional ratemaking. Because SDG&E's electric revenues will increase more rapidly than the increase in the number of customers as throughput per customer grows, UCAN asserts that SDG&E's revenues are weighted towards throughput. Therefore, Christensen Associates' model which is based largely on number of customers served is inappropriate.

UCAN agrees that a "base" productivity factor of 0.92% for electricity and 0.68% for gas, assuming revenue per customer, is appropriate. UCAN also recommends that a stretch factor be applied to these base figures and argues that stretch factors are appropriately applied to industries facing competitive pressure. UCAN recommends a stretch factor of 0.75% for electric and gas distribution and 1.00% for metering and billing, because communications technologies and impacts of competition are improving productivity more rapidly. As adjusted for issues addressed by the cost of service settlement and to remove one-time costs, as demonstrated in Exhibit 32, updated by Exhibit 33, UCAN proposes a productivity factor of 1.9% for the PBR applying to electric wires (electric distribution), 2.0% for the PBR applying to electric and gas metering and billing, and 2.2% for the PBR applying to gas pipes (gas transmission and distribution).

UCAN believes that it is critical to adopt a similar sharing mechanism as is established for SoCalGas. UCAN asserts that SDG&E and SoCalGas share gas service persons, customer service functions and allocate common administrative and general (A&G) costs. Therefore, UCAN agrees with ORA that a progressive earnings sharing mechanism similar to SoCalGas' should be adopted, with a 25-basis-point deadband for electric and gas distribution and no sharing of losses, but recommends that the GFCA be retained.

UCAN recommends a different deadband for electric and gas metering and billing functions. UCAN proposes that a deadband of after-tax profits above the benchmark rate of return equal to 1% of total metering and billing revenues be used for earnings sharing in the proposed metering and billing PBR. UCAN explains that this figure is approximately equal to the combined electric and gas distribution deadbands as a percentage of revenue and reflects the GFCA.

UCAN recommends that ratepayers receive 70% of incremental sharing immediately above the deadband, which would decline linearly to a 10% ratepayer share at 300 basis points above the benchmark, or 10% of revenue for metering and billing. This approach would encourage savings by SDG&E while ensuring that ratepayers obtain significant sharing over a wide range of outcomes.

UCAN recommends that the GFCA be retained because gas sales fluctuations are largely weather driven. More importantly, UCAN believes that eliminating the GFCA creates perverse incentives under any PBR mechanism, but particularly under SDG&E's calibrated sharing mechanism. According to UCAN, very cold weather could increase sales and result in a large cash surplus accruing to SDG&E, which must then be spent or returned to customers. UCAN maintains that this perverse incentive prompts SDG&E's proposal to implement a wide deadband, but argues that retaining the GFCA eliminates risk and has the advantage of narrowing the deadband required by SDG&E.

UCAN agrees that Z factors should be limited to those costs successfully meeting the nine criteria adopted for Edison and SoCalGas. UCAN proposes limited Z factors and offramps and maintains that public purpose programs should be excluded from PBR treatment, as well as direct access costs, pensions, premium payments made by affiliates for labor transfers and intellectual property, generation-related franchise fees, and nonrecurring costs. UCAN asserts that we should also consider reopening the PBR structure in the event that significant changes are made to the responsibility of the utility for providing services or equipment. UCAN argues that the 150-basis-point voluntary offramp should be removed, but that the 300-basis-point offramp be expanded to 400 basis points.