11. Rate Phase - In

SCE's preferred proposal for an increase in rates is to implement the full Catalina gas revenue requirement in 2005, with no rate phase-in. Recognizing that the Commission would be reluctant to authorize so large an increase in a
single year, SCE offered a proposal that would phase in the increase over four years, with a substantial carrying charge for the deferred amounts. If SCE's proposed increases were implemented in 2005, ratepayers would pay rates based on an additional $727,482 over current base rates. Under its phase-in suggestion, rates would reflect an increase of $1,218,000, much of it in carrying charges for the deferred increases after 2005.

ORA urges that the authorized increase be phased in over a three-year period to mitigate rate shock and that no carrying charges be assessed against the deferred amounts. ORA notes that even under this proposal, Catalina ratepayers would incur an increase of about 100% over the next three years, and it argues that this is the maximum the local economy can absorb.

SCE comments:

Based on the cumulative losses to SCE over the 2005-2008 period, ORA's rate phase-in proposal can be summarized as "free gas for the summer." ORA's proposals are simply unreasonable. After years of losses on Catalina operations, ORA takes the view that SCE's shareholders should continue to shoulder the burden of even more losses. While it is true that these losses are not large in the context of SCE's entire utility operations, adoption of ORA's proposals contradict cost of service ratemaking principles. (SCE Opening Brief, at 21; footnotes omitted.)

There is logic in SCE's position. If SCE is not permitted to recover its revenue requirement on a forecast basis, then on a forecast basis SCE's investors will not earn their authorized return. If the deferred revenue requirement does not earn SCE's full cost of capital during the recovery period, then SCE's investors will be receiving a lower return than they could earn on comparable investments. This Commission has long been guided by the principle enunciated by the United States Supreme Court that utility investors must have a reasonable opportunity to earn a return on their investment that is comparable to other investments of similar risk.¹¹

On the other hand, we are dealing here with substantial costs that can be recovered only from a small group of 1,300 ratepayers. Unlike electricity rates, which have been "normalized" with mainland rates, the gas distribution rates in Catalina stand alone, since SCE operates no other gas services. A slavish application of investor earning principles in this case would work obvious harm on these few Catalina customers while having virtually no effect on SCE shareholders, given the size of the Catalina gas operation relative to the utility's overall operations.

As the Supreme Court said in its seminal Hope Natural Gas decision:

We held in Federal Power Commission v. Natural Gas Pipeline Co.... that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of "pragmatic adjustments." And when the Commission's order is challenged in the courts, the question is whether that order "viewed in its entirety" meets the requirements of the Act. Under the statutory standard of "just and reasonable" it is the result reached and not the method employed which is controlling. (Federal Power Commission v. Hope Natural Gas Company (1944) 320 U.S. 591, 602; citations omitted.)

We note that in 1987, the Commission in SCE's last Catalina gas rate case phased in an increase in installments over three years, without a carrying charge.¹² As here, the three-year phase-in was deemed necessary to avoid rate shock. SCE has waited 17 years to file this general rate case, apparently undeterred by a low or even negative rate of return during those years.¹³ Under these circumstances, we conclude that SCE has not made a persuasive case for attaching carrying charges to the deferred portion of its revenue increase.

At the public participation hearings, customers pointed out that SCE electric rates are normalized with mainland rates, and they asked why some similar arrangement could not be made for gas. The answer is that SCE has no other gas customers who can share in the Catalina costs. Nevertheless, we encourage SCE to consider other approaches that might ease the burden on SCE gas customers, up to and including statutory changes.