Monitoring and Evaluation and Comprehensive Review

While SDG&E believes that its current PBR mechanism was effective, ORA, UCAN and other parties strongly disagree with this conclusion. We wish to establish clear objectives related to monitoring and evaluation, building on SDG&E's and UCAN's stipulation. We adopt the reporting requirements proposed by SDG&E and UCAN. By February 15 of each year, SDG&E will file an annual electric distribution report that addresses the performance indicators and earnings sharing results for the previous calendar year. This report will be filed by advice letter with the Commission's Energy Division. Within 45 days after the end of each calendar quarter, SDG&E will submit quarterly reports to the Energy Division and interested parties that address the 12-months-to-date sharing and year-to-date performance indicator results

D.98-12-038 adopted a settlement agreement regarding cost of service issues that included an agreement that the agreed-upon levels of revenues, sales, expenses, and rate base would be in effect for the years 1999 through 2002, subject to any adjustments made by the Commission. We adopt this same time period for the PBR mechanism. We note that SoCalGas' PBR also expires at the end of 2002. SDG&E is required to file a cost of service study for the year 2003 no later than December 21, 2001, which will trigger a cost of service review in 2002.

SDG&E and UCAN believe that a cost of service review in 2002 precludes the necessity for a mid-term review. We agree. However, we wish to proceed with developing thoughtful monitoring and evaluation criteria. D.97-07-054 called for a comprehensive evaluation of SoCalGas' PBR mechanism because of the merger application, among other factors. The merger of Enova Corporation and Pacific Enterprises is complete, but we have not yet fully explored the ramifications of combining these two utilities. In addition, the rate freeze for electric service should be nearing an end by the end of 2001 and competition in generation may become more prevalent. We will assess these issues in the comprehensive review of SDG&E's PBR mechanism so that we might better understand the effect of incentives in the changing regulatory environment. In addition, D.96-11-021 requires that the utilities develop performance indicators related to maintenance, repair, and replacement of major electric distribution facilities. In the Performance Indicator Settlement agreement, parties have agreed that SDG&E will gather data for the purposes of developing an electric system maintenance performance indicator. The comprehensive review provides an appropriate forum for SDG&E to present the data collected and to begin the process of discussing appropriate performance indicators related to maintenance, repair, and replacement.

SDG&E and UCAN agree that the PBR mechanism performance over the 1999-2001 time frame should be timely reviewed so that this analysis can be factored into the 2002 cost of service proceeding. We will adopt this recommendation, but will accelerate the process. In order to adhere to the requirements imposed on the Commission by Senate Bill 960, SDG&E shall file an application to develop evaluation criteria for the formal comprehensive review by June 30,2000. The evaluation process shall begin in mid-2000 with workshops facilitated by the Energy Division. The goals of this workshop are to develop appropriate evaluative criteria that can be expressed in measurable terms for the comprehensive review. This workshop should result in a workshop report to be filed with the Commission by year-end 2000. This approach will allow the Commission time to assess and adopt the recommended criteria for evaluating SDG&E's PBR mechanism.

We prefer that the Energy Division conduct the comprehensive review of the PBR mechanism. If a consultant is hired to conduct an independent evaluation, the Energy Division must be in charge of the RFP and the selection process, and it must administer the contract. We often order the utilities to pay for such reviews (see, e.g., D.96-09-032) with these costs later recovered from ratepayers. It is reasonable that the cost of an independent consultant be capped at $400,000 and shared equally between the ratepayers and shareholders, as SDG&E and UCAN suggest. SDG&E will be able to submit its own evaluative report at the same time other parties or the independent consultant submit their reports.

We agree with the goals and objectives articulated by SDG&E and UCAN, and will look to the workshops to further define these goals. Monitoring and evaluative criteria must be developed so that each goal and objective can be measured. Only then will we have a true picture of the effectiveness of incentive regulation. Therefore, evaluation of the distribution PBR mechanism should be based on considering whether the adopted mechanism achieves the following goals:

· Provide adequate incentives and remove disincentives to reduce costs and operate efficiently;

· Demonstrate simplified and streamlined regulatory oversight for the Commission and SDG&E;

· Provide a reasonable opportunity for the utility to earn a fair rate of return;

· Allow management to focus primarily on costs and markets rather than on regulatory proceedings;

In order to evaluate whether these goals have been achieved, these parties recommend that the following questions be asked and examined. We ask the Energy Division to explore these questions in workshops and to work with parties to develop measurable forms to answer these questions:

Is SDG&E reducing costs and operating efficiently?

Are risks and rewards fairly balanced for SDG&E?

Are the interests of shareholders and customers aligned?

Are competitive services included in the PBR? What are the links between cost-of-service, competitive services, and monopoly services?

How should we evaluate the structure of the PBR mechanism and its applicability as the market structure changes?

Does the PBR mechanism remain appropriate for the monopoly utility given that competitive markets exist to provide the same services that are targeted?

Does the PBR mechanism result in utility actions that are inconsistent with the PBR goals? How can such unintended consequences be addressed?

What reporting requirements would improve future evaluation efforts?

Are there other goals that should be considered in assessing PBR performance?

No later than December 21, 2001, SDG&E shall file an application with its cost of service study for 2003. This application will trigger the formal comprehensive review of the distribution PBR mechanism. SDG&E should consider the goals and evaluative criteria established at Energy Division workshops in filing this application, as well as the criteria delineated in D.97-07-054. In this way we can ensure that SDG&E's distribution PBR mechanism is meeting our intended goals and furthering our regulatory policy.

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