III. SDG&E's Petition for Modification of D.04-12-014

In its petition for modification of D.04-12-014, filed on January 11, 2005, SDG&E makes several arguments to support modification of that decision. They are, generally, as follows:

· The decision represents an unwarranted shift of the cost burden onto SDG&E customers, since because of SDG&E's relatively small size, any reassignment of costs creates a disproportionate burden on its ratepayers.

· The decision's reliance on a locked-in ten-year forecast of above-market costs is misplaced, since the forecast is flawed and unreliable.

· The decision adopted a methodology that was not subject to adequate evidentiary review.

In general, we agree with SDG&E that any shift in cost burden towards their customers has a disproportionate rate effect because of the size of SDG&E's territory relative to the other two utilities. However, we do not agree with SDG&E's claim that $800 million is shifted to their customers. The $800 million figure represents a calculation based on the amount shifted from the prior methodology adopted in D.04-01-028. However, that methodology did not impose any burden on SDG&E ratepayers for the above-market costs of DWR contracts, and thus also represented an inequitable cost shift onto the ratepayers of PG&E and SCE. Thus, although we agree with the overall thrust of the SDG&E argument, we do not agree with their calculation of the dollar impact to their customers.

Second, we agree with SDG&E's argument that basing our allocation methodology on a ten-year forecast of above-market costs, as in D.04-12-014, was misplaced. As SDG&E argues, it is impossible to determine in advance the equity of this approach, because changing market conditions will cause variations in the calculation over time in a manner that we cannot now predict.

SDG&E's third argument, that the D.04-12-014 methodology was not adequately subjected to evidentiary hearings, is rendered moot with the adoption of this decision. The methodology adopted in this decision is a different methodology, and is fully supported by the record in this proceeding.

Based on the strength of SDG&E's first two arguments, we will modify
D.04-12-014 as set forth in this decision. The methodology outlined in this decision replaces the methodology of D.04-12-014 in its entirety. The rehearing of D.04-12-014 ordered in D.05-01-036 is no longer needed. This decision reiterates the various proposals made by parties in this proceeding, and articulates reasoning for taking a different approach to a permanent allocation methodology than the one originally adopted in D.04-12-014.