V. Revenue and Rate Impacts

We turn now to the recovery of cost and revenue undercollections resulting from baseline and rate design changes adopted in this proceeding.

1. Positions of the Parties

PG&E, ORA, and TURN recommend that no change be made to total electric rates in this proceeding and that issues regarding class allocation and rate design to collect the baseline-related undercollections be deferred to future rate proceedings. In D.03-07-029, we resolved the treatment of SCE's shortfalls due to the Phase 1 order and provided for the elimination of SCE's existing BBA. While SCE recognizes in its supplemental brief that a new balancing account will be needed if the Phase 2 order has revenue impacts, it does not address how the resulting undercollections should be recovered in a post-PROACT world. SDG&E proposes to recover its baseline-related shortfalls through residential rate increases to be approved in the Phase 2 decision. The smaller electric companies did not present electric rate proposals.

PG&E proposes that total electric rates not be changed at this time for any customers, since the Commission has not established the level of PG&E's generation revenue requirement or how it is to be paid by bundled service customers. PG&E proposes that its non-generation rate components be increased so that they recover their baseline-related shortfalls, but that there be equal and offsetting adjustments to generation rates so that total rates are unchanged. The changes to eliminate ongoing shortfalls in the non-generation rate components would be made soon after the Phase 2 decision, while rate changes to amortize existing non-generation undercollections could be made only after the final balances are known.

PG&E initially proposed that its baseline-related generation undercollections be transferred to its Procurement Surcharge Balance Account (PSBA). With the placement of non-generation shortfalls in rates, the transfer of generation undercollections to the PSBA would eliminate PG&E's baseline-related balancing accounts. ORA disagrees with this transfer because the PSBA is not customer class specific and such a transfer could result in allocation of the undercollection to all ratepayers rather than just to residential customers. ORA recommends that PG&E continue to accrue its generation undercollection in its baseline-related balancing accounts until the Commission addresses the responsibility for generation costs among rate groups. In response, PG&E agrees with ORA and now supports maintaining the generation component of its balancing accounts.

SDG&E proposes to recover its BBA undercollections through residential rate increases after the Phase 2 decision is issued. SDG&E proposes to increase distribution and CTC rates for all residential usage to recover the baseline-related distribution and CTC shortfalls, and to recover the baseline-related commodity28 undercollection from the top three rate tiers.

Because excess surcharge revenues are more than sufficient to eliminate BBA balances, TURN maintains that there is no "shortfall" and no need to adjust total rates as a result of the Phase 1 order. TURN proposes that all baseline-related balancing accounts be eliminated at this time. TURN supports adjustment of individual rate components other than generation or commodity rates in order to prevent undercollection of Commission-approved revenue requirements. Changes to these components would be offset by reductions in generation or commodity rates so that total rates are maintained at their current levels. Consistent with PG&E's earlier proposal, PG&E's BBA (and, presumably, CABA) balance would be transferred to its PSBA. SDG&E's BBA balance would be transferred to its Purchased Energy Commodity Account (PECA). With these changes, no baseline-related undercollections would be tracked on a prospective basis and any further rate setting would be left to the companies' general rate cases. Aglet supports TURN in these recommendations.

Several parties oppose SDG&E's proposal to increase residential rates at this time, raising both legal and policy concerns. PG&E, TURN, and ORA take the position that Water Code § 80110 added by AB 1X precludes increases in total rates for residential usage up to 130% of baseline. In their view, SDG&E's proposal to increase its distribution and CTC rate components for all residential usage, without offsetting reductions in other rate elements, would be impermissible because this would increase total rates for usage below 130% of baseline. SDG&E counters that AB 1X's 130% of baseline protection applies only to the commodity component of its residential rates. SDG&E argues that the intent of this provision of AB 1X was to protect residential usage up to 130% of baseline from rate increases to pay DWR costs. Since DWR costs are commodity costs, SDG&E concludes that the AB 1X protection is limited to only the commodity component of its rates.

In support for its position, TURN points out that AB 1X was amended to remove language that would have limited the rate protection to only "the electric procurement portion of" electricity charges. SDG&E replies that removal of these words from the bill signifies that the Legislature intended the bill's protection to apply "to the entire commodity charge and not just to the procurement portion of the commodity charge." SDG&E also notes that AB 1X provides protection for "electricity charges" rather than "total rates." In response, TURN states that there is no separate "procurement portion" of SDG&E's commodity charge and no justification or evidence supporting SDG&E's artificial distinction.

Both sides cite prior Commission orders as supporting their respective positions regarding the residential rate protection afforded by AB 1X. SDG&E points to the Commission's statement in D.01-09-059 that, "Because of the mandatory capping of prices in the first two tiers, i.e., all usage up to 130% of the baseline is capped at 6.5 cents per kWh, increases to the residential rate are limited to the upper three tiers i.e., Tiers 3, 4 and 5." (D.01-09-059, mimeo. at 37.) Because SDG&E's commodity rate was 6.5 cents per kWh at that time, SDG&E interprets this statement to mean that the AB 1X protection only applies to commodity increases. TURN cites language in several orders, including a statement elsewhere in D.01-09-059.

ORA objects to SDG&E's proposal to increase total rates for CARE and medical baseline customers. LIF/Greenlining also opposes any increases for CARE customers, on the basis that they are low-income, have a high energy burden, and are the most at-risk customers.

TURN recommends that, if the Commission allows recovery of baseline-related revenue shortfalls at this time, the undercollections be allocated using one of the methodologies adopted in D.01-05-064 and D.01-09-059 for allocation of residential surcharge shortfalls.29 TURN argues that there is no basis for keeping baseline-related electric surcharge undercollections within the residential class because the Commission never adopted a formal surcharge revenue requirement by customer class. TURN urges that, if the Commission orders the collection of additional revenues from the residential class, the Commission consider current residential rates a maximum cap which cannot be exceeded and that all such obligations should be deferred until rates are to be decreased, e.g., when surcharges are reduced.

Taking the opposite view, ORA, PG&E, SCE, SDG&E, CLECA, and Farm Bureau oppose any allocation of residential baseline-related shortfalls to other customers. These parties assert that baseline-related shortfalls are very different from the surcharge exemptions granted in D.01-05-064 and D.01-09-059, which were made in the context of "the largest single electric rate increase ever imposed by the Commission" and with AB 1X protection for residential usage up to 130% of baseline. Farm Bureau asserts that the surcharges were instituted to pay for energy procurement costs incurred on behalf of all customers, whereas baseline allowances solely benefit residential customers, and that it would be fair and equitable to allocate all baseline-related shortfalls solely to the residential class. CLECA maintains that baseline was created to establish a clear economic incentive for residential customers to use less power and that, except for the surcharge exemptions, the Commission has kept shortfalls due to baseline rates within the residential class. These parties submit that there is no valid reason to shift residential customers' revenue responsibility to other customers.

Parties that oppose allocation of any portion of the baseline-related undercollections outside the residential class are concerned about the potential effect on business customers. SDG&E contends that further increases in what it characterizes as the existing cross-subsidy from business customers to residential customers would worsen the business climate in California leading to job losses. CLECA urges that the Commission ensure that commercial and industrial customers, "who have suffered the brunt of the increases resulting from the energy crisis," not be hit again by shortfalls created by changes in residential rate design. Farm Bureau asserts that the allocation of any of the residential class revenue shortfall to other customer classes would result in desperately needed rate reductions being delayed for non-residential customers. Farm Bureau also argues that collection of the shortfall from only the residential class would be consistent with the Commission's long-standing policy of recovering costs from the customers who cause them.

SDG&E, PG&E, SCE, and ORA oppose TURN's recommendation that generation or commodity overcollections be used to eliminate BBA balances. SDG&E argues that the existence of overcollections in one balancing account, e.g., the PECA, should not prevent recovery of undercollections in another balancing account, e.g., the BBA. SDG&E asserts that the small customers' portion of current commodity overcollections is being used to pay down AB 265 undercollections and that, if some of the PECA revenues were used for another purpose, the recovery of the AB 265 undercollection would be delayed. SDG&E also contends that use of commodity overcollections to pay off baseline shortfalls would result in cross-subsidies among the customer classes.

TURN responds that the Commission regularly requires companies to net overcollections in one balancing account with undercollections in another account, citing SDG&E's own example that a portion of the AB 265 undercollection is being eliminated by transferring overcollections from other balancing accounts. TURN states that it does not oppose the use of true commodity overcollections to repay AB 265 undercollections but that such overcollections should be calculated after netting out SDG&E's BBA balance. TURN asserts that many factors affect the amount of commodity overcollections, including levels of direct access, weather, economic conditions, and changes to baseline quantities. TURN maintains that merging SDG&E's BBA with its PECA would eliminate the fiction of tracking expected surplus revenues that are not actually being collected. The actual surplus could then be used to pay off the AB 265 balance. Regarding SDG&E's concerns about cross-subsidization, TURN submits that if, as it recommends, non-commodity rate components are adjusted to collect all approved non-commodity revenue requirements and commodity rates are reduced by equivalent amounts, the residential class will pay its entire share of these non-commodity costs.

2. Discussion

a. AB 1X Restriction on Electric Rates

As a threshold issue, we address first whether SDG&E's proposal to increase total rates for all of its residential usage would be legally permissible. SDG&E alone among the parties in Phase 2 argues that AB 1X's rate protection for usage up to 130% of baseline applies only to the commodity component of its residential rates.

Water Code § 80110 added by AB 1X provides in part that,

We have consistently interpreted this AB 1X restriction to provide protection for total charges for residential usage up to 130% of baseline, for utilities subject to the provisions of Water Code § 80110. As we explained in the Phase 1 order:

More recently, we confirmed that Water Code § 80110 continues to apply following DWR's bond sale and explained that,

While AB 1X does not define the "electricity charges" protected by Water Code § 80110, the bill's legislative history clearly supports our conclusion that the term refers to total retail rates. A contemporaneous Senate committee analysis describes the Senate amendment adding Water Code § 80110 to AB 1X as "insulat[ing] residential usage up to 130% of the baseline allowance from any potential rate increase." Other legislative analyses consistently characterize Water Code § 80110 as prohibiting "any future rate increase" or "any potential rate increase" for usage up to 130% of baseline. Similarly, the Governor's press release announcing the signing of AB 1X states that the bill "(p)rohibits any future rate increase for residential customers for usage up to 130 percent of baseline usage." None of these statements are qualified in any respect or indicate that the rate protection is restricted in the manner SDG&E suggests. To the contrary, they support our view that the statutory protection applies to total rates.

Contrary to SDG&E's assertion, the removal from AB 1X of language that would have limited the rate protection to "the electric procurement portion of" electricity charges is not informative of legislative intent. AB 1X was introduced, amended several times, and adopted within a very short time in response to the emergency conditions California was facing. The phrase "electric procurement portion of" was inserted to qualify "electricity charges" on January 30, 2001 and was removed by a subsequent amendment the very next day. Committee analysis of the amendment removing the phrase explained that, "This bill contains a provision which insulates residential usage up to 130% of the baseline allowance from any potential rate increase. Language taken in the committee last night inadvertently modified and confused that provision." Based on the committee explanation and considering the haste of the amendment and its retraction, we find that the phrase's brief existence should be given no weight in an analysis of legislative intent.

When the Legislature was considering AB 1X, it was clearly aware of the fact that electric rates have several components. AB 1X itself added statutory sections that reference "component rates" (Water Code § 80114) and the "generation related component of the retail rate" (§ 3605). AB 1890 mandated the separation of electric rates into individual rate components (§ 368(b)). AB 265 and AB 1X 43 imposed restrictions (§ 332.1(b) and (f)) on "the energy component of electric bills" for SDG&E. We find the lack of comparable qualifying language in Water Code § 80110 to be a further indication that the intent of this section is to prohibit any rate changes that would increase total rates for residential usage up to 130% of baseline amounts.

SDG&E's contention that in D.01-09-059 we interpreted the AB 1X limitation to apply only to the commodity rate component is incorrect. In that decision, we were only considering changes to SDG&E's commodity rates. Our statement that SDG&E's usage was capped at 6.5 cents per kWh was correct in the context of that decision. SDG&E's interpretation would contradict our unqualified statement elsewhere in the same decision that "Water Code § 80110 prohibits rate increases for residential customers for usage up to 130% of baseline allowances in existence when AB1X was enacted." (D.01-09-059, mimeo. at 28.)

We conclude that SDG&E's proposal to increase its distribution and CTC rate components for all residential usage without offsetting decreases in other rate components for usage up to 130% of baseline is counter to AB 1X. In analyzing SDG&E's proposal, it has come to our attention that SDG&E has implemented several uncontested increases in non-commodity rate components, with the effect that its total rates for residential usage up to 130% of baseline now exceed the total rates for such usage when AB 1X became effective on February 1, 2001. While we allowed those component rate increases to become effective, we conclude based on the above analysis that SDG&E's total rates for residential usage up to 130% of baseline amounts currently do not comply with AB 1X.

Any electric company that takes power from DWR or is otherwise bound by the provisions of Water Code § 80110 and whose total rates for residential usage up to 130% of baseline are higher than when AB 1X was enacted should adjust its rates prospectively to comply with this statute, as we have interpreted it previously and affirm in this decision. Each utility bound by Water Code § 80110 should make a compliance advice letter filing within 30 days of the effective date of this order informing us regarding its compliance with the rate protection provision of this statute and, if necessary, adjusting its rates to bring them into compliance. As discussed below, we agree with SDG&E and other parties that rate components other than the commodity or generation component should be set to recover their authorized revenue requirements. As a result, any utility whose rates are not in compliance with Water Code § 80110 should reduce its generation or commodity rates for usage up to 130% of baseline so that total rates for such usage are no higher than they were when AB 1X became effective.

b. Treatment of Electric Undercollections

We are reluctant to raise any customer's total electric rates at this time in light of the additional hardships that such rate increases could cause. California is still experiencing the aftermath of the extraordinarily high and volatile wholesale electric prices that reigned in 2000-2001. While wholesale prices have declined and stabilized to some extent, we are striving to maintain the most reasonable retail prices possible while returning the utilities to financial health. Although electric rates were reduced somewhat for SCE with the recovery of its PROACT balance, upper tier rates are still at levels never seen in California before the energy crisis.

The first general rate proceedings to return the larger utilities to cost-of-service ratemaking are underway. New electric revenue requirements will be established in the pending general rate case proceedings. While SCE's PROACT balance has been recovered, other generation and procurement costs remain in various balancing accounts. Similar to our findings in D.02-12-064 for SDG&E, it may be possible to provide revenue neutrality for the changes adopted in this proceeding without an increase in total electric rates. In light of these conditions, we do not find that it would be reasonable to raise total electric rates at this time.

Several parties propose that non-generation rate components be increased to maintain the revenue requirements adopted previously for these components, with equal and offsetting adjustments to generation rates (or commodity rates for SDG&E) so that total rates are unchanged. The full unbundling of rates is beneficial because it conveys the underlying cost elements of electricity usage. We agree with and adopt these parties' proposal, which is consistent with our action in other instances, e.g., D.02-10-019, in which generation rates have been set residually to maintain total rate levels.

Because the shortfalls resulting from the large household program and the treatment of residential common area accounts adopted today are not fully known, we provide that their impacts will be accrued in the utilities' BBAs and CABAs for later recovery. However, the revenue impacts of baseline modifications to exclude seasonal residence usage can be determined, so it is appropriate to adjust non-generation electric rates concurrently with the baseline changes in order to maintain revenue neutrality for these rate components, with offsetting adjustments to generation rates so that total rates are unchanged. Generation revenue losses due to the baseline changes should be accrued in the utilities' BBAs for later recovery.

Each company that has a BBA or CABA, except SCE,30 should adjust its non-generation rates to reflect the on-going effects of previously authorized changes that are currently being accrued in its BBA or (for PG&E) CABA, and to amortize existing undercollections of non-generation revenue requirements, with offsetting reductions in generation rates so that total rates are unchanged. The utilities should file advice letters within 30 days with this effect. Additional rate adjustments and termination of the baseline-related balancing accounts may then be made in the general rate cases or other appropriate proceedings.

We will defer issues regarding allocation of generation undercollections and rate design to collect such shortfalls to each company's general rate case or other appropriate proceeding, e.g., the gas Biennial Cost Allocation Proceeding (BCAP) for SDG&E and SoCalGas, and SDG&E's electric rate design window proceeding. In those proceedings, we can examine these issues in a broader context, both as to theory and effect, and whether mitigation measures are needed to avoid excessive bill increases for any customer class or segment. While we may find it necessary to raise total rates for some customers following these comprehensive reviews, at least we will be confident that the rate increases are really needed and that they are being implemented in a way that does not threaten the affordability of electric bills. If schedules will not permit consideration of the recovery of the generation undercollections in the proceedings that are already underway, consideration of this issue at a later date will have the benefit of the comprehensive analyses that will have transpired in those proceedings.

Several parties argue that generation undercollections arising from this proceeding should be recovered from the residential class. These parties draw a distinction between baseline-related shortfalls and the revenue shortfalls due to surcharge exemptions for CARE and medical baseline customers and for residential usage up to 130% of baseline. However, the two types of shortfalls are not unrelated. The need for the rate protections adopted in this proceeding arises in large part due to the effect of the surcharges on vulnerable groups of residential customers whose needs were not addressed by the existing surcharge exemptions. Our goal of allocating costs and designing rates on the basis of cost causation must be tempered by equity and affordability principles, as mandated by § 739(c). Further, as we have recognized previously, customers did not cause the recent exorbitant wholesale prices, which bore no relationship to the cost of production. It would be appropriate to consider recovery of generation undercollections after there has been an opportunity to review current costs and to consider cost allocation and rate design issues in a more comprehensive fashion.

Until that time, it is prudent to maintain the generation portions of the baseline-related balancing accounts. Transferring this portion of the account balances to other accounts, as TURN suggests, would lose the information regarding the source of these undercollections. We are cognizant of the dispute regarding whether these amounts actually constitute shortfalls when there are overcollections in other generation accounts, and our characterization of these amounts as shortfalls or undercollections should not be viewed as prejudging this issue or the disposition of these amounts. While, as pointed out by TURN, many factors affect the amount of generation overcollections or undercollections, we believe that this information should be retained until our comprehensive assessments in the general rate cases or other appropriate proceedings.

1. Positions of the Parties

PG&E proposes to adjust residential gas rates using rate design methods adopted in its 2000 BCAP decision (D.01-11-001). Because the Phase 1 decision ordered decreases as well as increases in gas baseline quantities, PG&E reports that gas undercollections are relatively small, approximately $6 million. PG&E estimates that the total revenue increase to amortize the balance in the BBA and to prevent further undercollections would be about $12 million, with residential rate increases of less than 1%. PG&E asks that the rate change to correct gas rates for on-going shortfalls be made soon after a Phase 2 decision. PG&E states that it would require two months after that change is made to determine the final BBA balance, and proposes to change rates to amortize the BBA balance when seasonal changes to baseline quantities are made or in combination with other rate changes. PG&E agrees with Southwest that a 12-month amortization of the BBA balance is reasonable.

SDG&E and SoCalGas propose to increase residential gas rates using rate design methods adopted in their most recent BCAP decision (D.00-04-060). They anticipate that rate increases of about $136,000 (about 0.1%) for SDG&E and about $2.6 million (about 0.2%) for SoCalGas will be needed to incorporate the baseline changes in ongoing rates and amortize the BBA balances.

Southwest anticipated that new rates resulting from its pending general rate case (A.02-02-012) would become effective on January 1, 2003 and would reflect its updated baseline quantities so that there would be no ongoing shortfalls. Southwest proposes that its BBA balance, which it estimates to be about $520,000, be amortized over 12 months. Southwest proposes an equal cents per therm surcharge applicable to all residential usage, which it estimates would be $0.00870 per therm in its Southern California Division and $0.00027 in its Northern California Division. Southwest states that this approach is equitable and can be applied easily to all volumes.

TURN states that, because there are no gas surcharges or statutory protections for gas rates, it does not oppose the recovery of gas baseline-related shortfalls from residential customers. TURN did not present testimony on gas rate design but recommends in its opening brief that any gas rate increases be limited to Tier 2 consumption with no recovery from CARE or medical baseline customers. TURN argues that there is no good rationale for making smaller gas users pay more, and receive no benefit, from the updating of gas baseline quantities. TURN states that its proposal would also provide valuable conservation signals. TURN points to the explicit identification in the baseline statute of the need to "avoid excessive rate increases for residential customers" and "the principle that electricity and gas services are necessities, for which a low affordable rate is desirable," as support for its proposal.

SDG&E and SoCalGas respond that TURN's proposal is not based on record evidence and ignores the fact that the utilities' approach reflects currently approved rate design methods. SoCalGas and SDG&E recommend that, if the Commission deviates from current rate design methods, the rate changes should be adopted only on an experimental basis pending their next BCAP, on the basis that the BCAP, not a baseline proceeding, is the appropriate forum in which to determine gas rate design methodology.

Southwest asserts TURN's proposal would have a significant impact in Southwest's Southern California Division, which has a much greater baseline shortfall than the Northern California Division and where approximately 21% of residential customers are CARE customers.

2. Discussion

Conditions are markedly different for gas compared to electricity rates, with no surcharges and no statutory restrictions. As discussed earlier in this decision, we do not find that rate relief is needed to maintain the affordability of gas rates for any identified group of residential customers. For these reasons, we see no need to deviate from existing ratemaking practices for recovery of shortfalls due to gas baseline-related changes. These shortfalls should be recovered from the residential class, with rate changes based on previously adopted gas rate design principles to the extent feasible.

We authorize PG&E, SDG&E, and SoCalGas to use the rate design methodologies adopted in their most recent BCAPs to adjust residential gas rates to reflect baseline-related shortfalls on an on-going basis and to amortize gas BBA balances over 12 months.

Because Southwest's general rate case has not concluded, it is reasonable to allow Southwest to adjust gas rates to reflect the on-going effect of baseline adjustments and to amortize its BBA. Lacking an up-to-date gas rate design for Southwest, we find that its proposal to adjust rates on an equal-cents-per-therm basis is reasonable.

Several small gas utilities did not participate in this proceeding. They may adjust their residential rates to provide revenue neutrality for the adopted baseline-related changes in a manner consistent with policies adopted in their most recent gas rate design proceedings or, if that is not feasible, on an equal cents-per-therm basis.

Gas revenue neutrality should be established for the on-going effect of gas baseline-related changes through rate changes effective at the beginning of the first seasonal baseline period following their implementation. Amortization of gas BBA balances should commence at the time of the first seasonal baseline change or other change in residential gas rates after the final BBA balance is known.

28 Generally speaking, SDG&E's commodity rate component is comparable to PG&E's and SCE's generation rate components.

29 In D.01-05-064, we allocated the shortfall caused by exempting PG&E's and SCE's residential sales below 130% of baseline and all sales to CARE and medical baseline customers from the 3 cents per kWh surcharge approved in D.01-03-082. The adopted allocation spread the shortfall one-third to the residential class, one-third to commercial customers, and one-third to industrial customers (the "1/3 - 1/3 - 1/3" formula). In D.01-09-059, we allocated SDG&E's residential shortfalls on an equal cents per kWh basis among all non-exempt sales.

30 This requirement does not apply to SCE because the balance in SCE's BBA is currently being amortized pursuant to the PROACT settlement adopted in D.03-07-029.

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