FEA's Proposal

FEA recommends a rate index similar to that in place for Edison. FEA believes that a rate index is logical and straightforward and opposes a revenue-per-customer approach. FEA contends that the proposed productivity factor for electric operations is too low and recommends a Multi-Factor Productivity (MFP) analysis yielding a productivity factor of 1.17%.

FEA prefers Edison's progressive sharing mechanism based on return on equity, but does not oppose the use of SoCalGas' progressive sharing based on a benchmark rate of return. FEA asserts that SDG&E's proposed deadband is too wide and would allow SDG&E to reap substantial benefits. FEA explains that this proposed deadband is equivalent to $24 million in revenues and $14.5 million in operating income, assuming a tax rate of 40%. While acknowledging that the deadband encompasses both gains and losses, FEA is concerned that the first $14.5 million of benefits (or losses) would go to shareholders before customers see any benefits. FEA assumes that since the PBR is designed to encourage improvements in productivity, SDG&E would tend to seek out efficiencies and earn in excess of its benchmark rate of return, all things being equal.

FEA points out that the deadbands for other mechanisms are significantly more narrow than 100 basis points. Edison has a PBR with an earnings sharing deadband of 50 basis points above or below authorized return on equity. Since equity comprises approximately 50% of SDG&E's capital structure, a 50-basis-point deadband on return on equity translates to a 25-basis-point deadband on authorized rate of return. The SoCalGas earnings sharing deadband is 25 basis points above the benchmark rate of return, but has no similar deadband for losses.

FEA believes SDG&E's proposed 20% calibration mechanism is inequitable to customers. FEA recommends a progressive sharing mechanism, as is currently in place for both Edison and SoCalGas. FEA asserts that this progressive structure is more reasonable because it provides customers with the benefit of most of the initial savings gains, which are those most easily accomplished. As more difficult efficiency gains are achieved, shareholders appropriately retain more earnings.

FEA believes that the self-calibrating mechanism benefits customers only in circumstances where there is a large one-time savings which is not repeated in subsequent years. As Exhibit 6 demonstrates, FEA expects that productivity benefits would compound over time. FEA doubts the tax savings benefit of the self-calibration mechanism alleged by SDG&E. FEA maintains that for tax purposes, it is immaterial whether the utility makes a one-time refund to ratepayers or reduces rates by the same amount.

FEA states that Exhibits 100 and 101 demonstrate that the Edison and SoCalGas PBR mechanisms are more favorable to customers than the SDG&E proposed approach. SDG&E's mechanism benefits consumers where earnings are below the authorized rate of return, which is contrary to PBR expectations.