Z-Factor Treatment

We will adopt Z-factor treatment only for those costs successfully meeting the nine criteria previously adopted for Edison and SoCalGas. In D.96-09-092, we determined that unexpected events which meet the following criteria would be recoverable as an adjustment to the annual update rule:

1. The event causing the cost must be exogenous to the utility.

2. The event must occur after implementation of the PBR.

3. The utility cannot control the cost.

4. The costs are not a normal cost of doing business.

5. The event affects the utility disproportionately.

6. The PBR update rule must not implicitly include the cost.

7. The cost must have a major impact on the utility.

8. The cost impact must be measurable.

9. The utility must incur the cost reasonably.

We need not consider reopening the PBR structure in the event that significant changes are made to the responsibility of the utility for providing services or equipment at this time, as UCAN suggests, but we can certainly consider such impacts at the comprehensive review, as discussed below.

When a potential Z-factor event occurs, SDG&E must promptly advise us of its occurrence by advice letter and establish a memorandum account for the event. The notification shall provide all relevant information, including a description, amount involved, timing, and how the event conforms to the nine adopted criteria. We will review all such events in the comprehensive review.

For each event, SDG&E's shareholders will absorb the first $5 million per event of otherwise compensable Z-factor adjustments. This deductible is separately applied to each Z-factor event. The $5 million deductible should be a one-time deductible per Z-factor event, even if the costs associated with the event are incurred in more than one year.

We will adopt both the 150-basis point voluntary offramp and the 300-basis-point mandatory offramp for earnings below the authorized rate of return. This approach will ensure that there is a mechanism to protect both ratepayers and shareholders from significant deviations in anticipated earnings. In addition, this approach provides increasing incentives to SDG&E because it retains 100% of earnings for increments above 300 basis points above the benchmark. Therefore, SDG&E or ORA may file a motion for voluntary suspension if SDG&E reports net operating income that is at least 150 basis points below its authorized rate of return. If SDG&E reports net operating income indicating a return of 300 or more basis points below its authorized rate of return, the PBR mechanism will be automatically suspended, and we will require SDG&E to file an application which will lead to a formal review of the mechanism.

We adopt the exclusions recommended by the cost of service settlement. Pursuant to D.98-12-038, certain costs will not be included in the PBR mechanism, but are subject to other forms of ratemaking. Tree-trimming expenses are not included in the PBR sharing mechanism, but are subject to a one-way balancing account. As described in D.98-12-038, if SDG&E achieves and documents a 50% reduction in tree-trimming expenses from its 1999 budget, SDG&E may request termination of this balancing account treatment. For the duration of the PBR period, revenues and incurred expenses for tree trimming will be excluded from the indexing mechanism and from recorded base rate revenue expenses before SDG&E calculates its actual earned rate of return for revenue sharing purposes. Costs attributable to senior executive retirement plans or executive bonuses are also excluded from the indexing mechanism and from earnings sharing during the PBR period. The costs for the NGV program will be excluded from the year 2000 update rule because they are recovered under the NGV balancing account, which is expected to be eliminated at the end of 2000. Future costs related to the CEMA and the Gas Hazardous Substance Cost Recovery Account will be recovered through those respective balancing accounts, not through the PBR. The cost of service settlement also provides that there is not ratepayer contribution to pension expenses.

We agree with SDG&E that exclusions should be kept to a minimum. UCAN recommends that the DSM and research, development and demonstration (RD&D) one-way balancing accounts should be excluded from the PBR. SDG&E states that such one-way balancing accounts are subject to a separate ratemaking treatment and therefore should not be included in the PBR calculation. In effect, these accounts are excluded from the PBR. UCAN also argues that payments made if utility employees are transferred to affiliates should be excluded from the PBR. This appears to be settled in the cost of service settlement, which provides that affiliate payments for such purposes are refunded to ratepayers through the PBR as an offset to any reward SDG&E earns or as an adder to any penalty SDG&E pays. The cost of service settlement also provides that SDG&E may recover $10.2 million for generation-related franchise fees. If a different recovery mechanism for such fees is authorized in the future, the amount included in electric generation will be adjusted accordingly.

Direct access implementation costs are being addressed in A.98-05-006. The cost of service settlement provides that if SDG&E is not allowed to recover such costs as § 376 costs, SDG&E will record these costs in a new memorandum account and seek recovery through a separate application. UCAN also argues that known and measurable nonrecurring expenses, such as hazardous waste expenses and Year 2000 computer expenses should be excluded from the PBR. The cost of service settlement addresses both issues. Hazardous waste expenses are referred to the Hazardous Waste collaborative. Year 2000 computer expenses are settled at $1.2 million and are not escalated.

In D.92-12-015, we ordered annual adjustments to Z-factor recovery for PBOP costs for telephone utilities under the New Regulatory Framework (NRF). The cost of service settlement identified $1.43 million in PBOP overcollections to be refunded for the years 1993-1997. ORA recommends that SDG&E submit annual requests for PBOP recovery under the Z factor, rather than including PBOP costs within the PBR mechanism itself. SDG&E contends that PBOP costs, just like any other one-time, discrete event, must adhere to the Z-factor criteria. SDG&E asserts that the cost of service settlement resolves the PBOP overcollection issue. Even if it were still an issue, this overcollection would not qualify because it does not meet the $5 million Z-factor deductible.

No Z-factor treatment was adopted for PBOPs in SoCalGas' PBR mechanism. It appears that Z-factor treatment applies to the change due to accounting differences, which was a transition from cash-basis to accrual accounting, as confirmed in D.97-04-043, mimeo. at p. 23. We will not adopt Z-factor treatment for PBOP recovery.