FEA's Opposition

All but one active party joined in the settlement. That party, the Federal Executive Agencies, objects only to the inter-class revenue allocation proposal in settlement Section 2. That allocation includes caps and floors if the COS increase is under 12%, and adopting the COS SAPC for all classes if the SAPC reaches 12% or higher, to moderate the increases residential and street lighting customers could otherwise receive under the EPMC method. FEA expressly takes no exception to any other settlement Section.

FEA argues that the settling parties have failed to present evidence to justify their proposed caps and floors because their panel of four witnesses was made available only for cross-examination on the settlement and presented no direct testimony.⁵ FEA believes that no capping is necessary; and if capping is to be done, then the cap should be higher than 3% and the floor set to be symmetric with the cap. The specific cap and floor levels the settlement proposes, FEA maintains, are inconsistent with the body of Commission precedent the settling parties cite for support and inequitable as across the customer classes.

We believe the record is clear and sufficient on the purpose of the proposed caps and floors, the levels of proposed caps and floors, and the effects those caps and floors would have at the various possible SAPC levels.

ORA states the purpose of caps and floors: "The Joint Settlement on caps allows some movement towards marginal costs, but would also provide for rate stability and would minimize bill impacts to residential and streetlight customers."⁶ SDG&E's stated purpose is similarly straightforward: "Electric rates have been subject to highly volatile changes in recent years. SDG&E's proposal for allocation caps and floors correctly moves rates in a cost-based direction, while providing rate stability and moderating adverse bill impacts."⁷

Both FEA and SDG&E on brief correctly summarize from the evidentiary record the effects the settlement's proposed caps and floors would have if the COS proceeding were to generate an overall 0% system average change:

Table 1

Revenue Requirement Changes

FEA Position (EPMC) vs. Settlement at 0% COS Increase

As the possible increase from the COS proceeding rises from 0% (Table 1) to 9%, the 3% cap and 9% floor would rise with it so that, e.g., when the COS increase reaches 9% the residential and lighting classes would be 3% higher at a 12% increase and agricultural class would be 9% lower at 0%. With COS increases higher than 9%, the cap and floor would phase out until, at and above 12% COS increase, all classes would experience the SAPC.

Both sides cite past Commission decisions approving various cap and floor levels as precedents for their positions. FEA points in particular to two decisions we issued in 2001 at the height of the energy crisis in which we imposed increases on some customer classes that were far above what the proposed 3% cap and 9% floor in today's settlement would have allowed.⁸ Those decisions, FEA argues, show that "[T]he Commission has long since abandoned caps in the range of SAPC plus 3.5% to 5% on total revenues (or 8.75% to 12.5% on distribution revenues) in favor of `letting the chips fall where they may.'" Those, however, were extraordinary orders issued in response to extraordinary circumstances, and we give them no weight as precedent for FEA's position. Our view today aligns closely with that SDG&E expresses:

From SDG&E's perspective, an almost 10% increase to the residential class [exclusive of any additional increase from the COS proceeding] is inappropriate at this time. Rather, SDG&E supports a gradual movement toward cost-based distribution rates in this proceeding. The derived marginal cost basis used in the revenue allocation process can itself be volatile. The Commission should avoid imposing radical rate swings each time a cost study is produced with potentially differing results from the last adopted marginal cost study.⁹

We conclude that FEA's position in favor uncapped EPMC allocations would lead to unreasonable increases and decreases for some classes and should be rejected. The more moderate allocations proposed in the settlement are reasonable.