NRDC's Proposal

NRDC recommends that a revenue-per-customer indexing mechanism be adopted, rather than a rate indexing approach. NRDC contends that SDG&E's proposed approach creates perverse incentives, because it would reward SDG&E for load building and sales increases. As demonstrated in Exhibit 24, a 2% sales increase results in an $11.8 million increase in revenues, which approximates a 5% increase in profits. NRDC maintains that because a rate indexing mechanism creates penalties (in terms of reduced profits) for reduced sales, this approach would create a disincentive for SDG&E to pursue energy efficiency and other demand-side management (DSM) measures. NRDC explains that the utilities will have a continued role in administering DSM programs until the end of 1999 and may continue to act as contract administrators after that time. NRDC asserts that such disincentives could lead to discouraging affiliates from investing in energy efficiency or promoting energy consuming appliances, as has occurred for other utility distribution companies. For these reasons, NRDC predicts that a rate indexing mechanism will have adverse environmental impacts.

NRDC therefore supports UCAN's proposal for a revenue-per-customer indexing methodology. For electricity, the rates in the current period would be adjusted for three factors in order to determine rates for the next period. First, current period rates would be multiplied by the update rule (i.e., 1+ escalation - X). Second, this result would be multiplied by customer growth (1 + customer growth). Third, this result is divided by (1 + growth in weather adjusted sales per customer). The revenue-per-customer methodology requires deriving two calculations: customer growth and weather-adjusted sales per customer, which can be obtained from recorded data. NRDC notes that this approach is similar to that adopted for SoCalGas.

NRDC observes that certain concerns were expressed in Edison's PBR proceeding regarding the revenue requirement indexing approach, which included the need for controversial sales forecasts or balancing accounts, the need for customer forecasts, incremental cost forecasts, and growth allowances, which are all eliminated in the revenue-per-customer mechanism. While acknowledging ORA's support for the rate indexing approach, NRDC explains that ORA criticizes the "windfall profits" SDG&E stands to benefit from under this approach and ORA proposes that earnings above the authorized rate of return be applied to the TCBA to pay off transition costs as quickly as possible. (Exhibit 24, p. 1-8.)

NRDC also recommends that a distributed resources performance indicator be adopted. Distributed resources are also known as distributed generation. On December 17, 1998, we instituted Rulemaking (R.) 98-12-015, in which we defined distributed generation as follows:

"Also referred to as `distributed energy resources' (DER) or `distributed resources' (DR). [Distributed generation] generally refers to generation, storage, or demand-side management (DSM) devices, measures, and/or technologies that are connected to or injected into the distribution level of the transmission and distribution (T&D) grid (i.e., "below" the bulk power transmission system). Micro-turbines, fuel cells, photovoltaics, wind turbines, and flywheels are some examples of [distributed generation] technologies. Because these devices are more modular and flexible than a large central power station, they can be located at the customer's premises on either the system side or the customer side of the meter, or at other points in the distribution system such as a UDC substation. [Distributed generation] covers a wide range of technologies and is not exclusively limited to cogeneration." (R.98-12-015, mimeo. at p. 2.)

Because distributed generation has the potential to offer significant environmental and economic benefits and because the UDCs may have an important role to play in facilitating the use of these resources, NRDC advocates implementing a performance indicator rewarding SDG&E for such facilitation. NRDC maintains that SDG&E has no incentive to facilitate the use of distributed generation under current regulation and would have a disincentive to encourage distributed generation under a rate index. Even under a revenue-per-customer approach, NRDC believes that SDG&E would be neutral in encouraging use of distributed generation technologies. Therefore, NRDC recommends implementing a performance indicator which applies a reward or penalty of $3 million to provide the necessary incentive. NRDC proposes that this performance indicator be adopted in the PBR proceeding, but that details of the performance indicator be developed in the rulemaking. NRDC recognizes that it is somewhat unusual to propose such a placeholder, but asserts that it is important to do so now rather than wait until the term of this PBR has expired to develop such an incentive mechanism.