The PBR Indexing Formula
We must choose between two proposals for the indexing formula: a rate indexing formula or a revenue-per-customer formula. We adopt the rate indexing approach. A primary purpose of PBR regulation is to provide the proper incentives to SDG&E management. We assume that SDG&E management will then act on those incentives. The rate indexing approach provides an incentive to increase sales. The revenue-per-customer approach attempts to mute this incentive by eliminating the opportunity to profit from sales increases which do not result from management actions.
However, we prefer a Rate Indexing mechanism for several reasons. First it is a simpler mechanism, requiring fewer calculations and adjustments. Second, it is closer to the Edison mechanism which is more comparable in this instance to the SDG&E situation; the SoCalGas revenue/customer index was substantially dictated by the Global Settlement. Third, the NRDC environmental concerns are being addressed through other policies. SDG&E is required by AB 1890 to spend $32 million/year on demand-side management and energy efficiency programs. SDG&E has been operating under a rate indexing method throughout its PBR experiment; no party represents that SDG&E has failed to put forth appropriate efforts to achieve energy efficiency. There are other related policies implemented for similar environmental purposes; for example, the California Energy Commission has allocated many millions for renewables credits and other related programs designed to mitigate plant emissions. The rate indexing method also comports with our goal of using PBR mechanisms to assist the utilities in making the transition from a tightly regulated structure to one that is more competitive. We will adopt the rate indexing mechanism and address any potential windfall by an adjustment to the mechanism. While recommending a rate index, ORA also recommends that all excess revenues be used to offset transition costs. ORA proposes this approach because of the concern that SDG&E could earn windfall profits due to a sales increase, but admits that we have rejected this approach in D.97-10-057. ORA also advocates eliminating the GFCA, but proposes delaying its elimination due to concern over another potential windfall because of timing. ORA thus strongly caution us against a potential sales windfall. As discussed below, we will adopt a modification to the sharing mechanism to mitigate against this windfall.
We eliminated the ERAM and Energy Cost Adjustment Clause (ECAC) balancing accounts because of changes in the regulatory environment. Under our adopted PBR, it is also appropriate to eliminate the GFCA, to eliminate balancing account treatment for sales volatility. While SDG&E now argues that a wide deadband is required to absorb the risk of sales volatility, it would be inappropriate to now allow SDG&E a large deadband to essentially absorb the "risk" of sales volatility, when it can generally be expected from historical trends that sales will increase, and under a rate index SDG&E will have an incentive to increase sales when advantageous to shareholders. We will adopt ORA's proposal to terminate the GFCA, however, we must determine the most appropriate date on which to do so.
SDG&E proposed ending the gas margin component of the GFCA on January 1, 1999, and establishing another account for the remaining portions of the GFCA. ORA agreed that the GFCA should be eliminated, but proposed ending the GFCA on April 30, 1999. ORA's position is that the GFCA should be terminated as of whatever month the GFCA began operation to more accurately account for seasonal adjustments. It was later determined during hearings that the GFCA was initially established in May 1988, but that it may have been implemented to close out several other accounts, and there may have been a change in the way the account was calculated in August 1991.
SDG&E opposed during hearings an April 30th termination date simply to avoid "customer confusion" about an additional rate change. SDG&E stated that "... if you look at the way balancing accounts are set up, it doesn't really matter when you terminate the balancing account." (Trans. pg. 247.) However, in its Reply Brief, SDG&E stated that an April 30th termination date would "...harm SDG&E because a revenue shortfall would occur during the first quarter of 1999." (SDG&E Reply Brief, pg. 16.) Later, in its Comments on the Alternate Proposed Decision of Commissioner Bilas, dated March 11, 1999, SDG&E stated that it would not be able to collect its authorized gas revenue requirement in 1999 if the GFCA was eliminated on April 30, 1999. SDG&E stated that it would under-recover its 1999 gas authorized margin by $30 million. SDG&E's forecast of its under-recovery, and its concerns regarding the 1999 calendar year shortfall were not made on the record as written or oral testimony.
The main purpose of the GFCA is to allow SDG&E to recover its authorized gas margin while balancing out the effect of actual gas sales compared to forecasted sales. The account itself balances primarily gas margin with actual revenues. As shown by Exhibit 16, the account is generally undercollected from the spring through late fall, and then overcollected in the winter through early spring. Not considering the other components of the GFCA, if the account balance is near zero, then SDG&E will have recovered its authorized gas margin through that point in time. The amortization of the GFCA balance also impacts the amount of the balance at any point in time.
It is difficult to determine from the record evidence of this case the exact starting date for the GFCA since the GFCA was not an entirely new account when it was established in May 1988. Our D.87-12-039 ordered that the GFCA be established, partly in accordance with a settlement filed in I.86-06-005. The GFCA balance was a consolidation of previously existing accounts, the Consolidated Adjustment Mechanism (CAM) and the Supply Adjustment Mechanism (SAM). SDG&E has stated in its Reply Brief and in its Comments on the Alternate Decision that the SAM was established in August 1978. In addition, it appears that the types of costs which have been included in the GFCA, and the manner in which the balance has been calculated, has changed over the years.
We generally agree with ORA that it is appropriate for SDG&E to go through a full "cycle", but we are not able to determine from the record exactly what that cycle should be. SDG&E voiced its concerns about a forecasted under-recovery of its authorized revenue requirements not in testimony subject to rebuttal, but after hearings were concluded. Its testimony was that it really does not matter when the account is terminated, that the GFCA may have been a consolidation of other accounts, and that changes to the method of calculation were made in August 1991. Based on the record in this proceeding, we find that the most appropriate resolution of this matter is to simply end the GFCA as the balance next approaches zero. This would allow SDG&E to fully recover its authorized gas margin under the GFCA, while allowing for the impact of actual gas sales compared to forecasted sales. SDG&E should file an advice letter the month before it forecasts the balance will next approach zero, but no later than November 1, 1999. The advice letter should include the termination of the GFCA and an amortization methodology for any remaining balance.
SDG&E explained in its testimony (Exhibit 14, p. 14-5) that the GFCA reflects the recovery of the base cost revenue amounts and other charges related to the transportation and delivery of gas. These "other" charges represent the carrying cost of storage inventory, the recorded transportation charges billed to SDG&E by SoCalGas, and amounts collected for the recovery of franchise fees and uncollectibles. SDG&E proposed that the only GFCA component which should be discontinued is the base cost balancing component, while the "other" costs and revenues should continue to be recorded in a new account. This proposal was unopposed, and we will adopt it.
Using the rate indexing methodology, rates will be determined as follows. The "starting point" for electric distribution and gas rates will be the 1999 authorized rates as determined in the Cost of Service portion of this proceeding in D.98-12-038. In subsequent years, through 2002, electric distribution and gas rates will be determined by multiplying the "update rule" formula, i.e. 1 + inflation - productivity, by the previous year's rates. This formula will be applied to each electric distribution and gas transportation rate and rate component, as described in Exhibit 82, pg. PBR13A-2. Consistent with our policy to use the most recent sales forecast, SDG&E shall file an advice letter after the new sales forecast is adopted in A.98-01-031, SDG&E's Biennial Cost Allocation Proceeding (BCAP) to update the gas sales forecast in the PBR.
We are not adopting SDG&E's proposal for a "permanent" rate adjustment if a revenue sharing adjustment is needed. If a revenue sharing adjustment results from SDG&E's previous year's performance under the PBR, this will be made as a "one-time" adjustment to the rates calculated using the update rule. SDG&E shall file an advice letter by October 1 of each year to implement the rate adjustment.
