3. Petitions to Modify D.04-02-062

A. Background

In D.04-11-014, as modified and affirmed by D.04-12-059 and D.05-01-040, the Commission excepted⁶ certain new MDL and transferred load from one of the five elements that comprise the Cost Responsibility Surcharge (CRS). The five elements are as follows:

1. The Competitive Transition Charge (CTC) and Tail CTC.

2. The DWR Bond Charge.

3. The DWR Power Charge.

4. The RAC.

5. The Energy Recovery Bond Charges.⁷

New MDL and transferred load are exempt from the DWR Power Charge element of the CRS. The exemption is subject to certain restrictions, including a cap on the exemption for transferred load and a portion of new MDL.

Most elements of the CRS stem from the electricity crisis that gripped California in 2000 and 2001.⁸ At the time, huge increases in the price of wholesale electricity left the investor-owned utilities (IOUs) financially crippled and unable to buy power for their customers. In response to the crisis, the Governor declared a state of emergency and ordered DWR to purchase power on behalf of the IOUs' retail customers.⁹ The Legislature also enacted laws in an emergency session to provide DWR with the requisite authority to buy power.

In order to buy power, DWR had to borrow more than $ 10 billion from the State's General Fund and Wall Street firms. DWR eventually refinanced the debt by selling long-term bonds to investors. The DWR Bond Charge element of the CRS recovers the principal and interest payments on DWR's bonds. In addition, DWR signed numerous long-term contracts to ensure a stable power supply. The DWR Power Charge recovers the ongoing cost of power purchased under DWR's long-term power contracts.

The huge increase in the price of wholesale electricity caused PG&E to incur large debts to buy power. On April 6, 2001, PG&E filed for protection under Chapter 11 of the United States Bankruptcy Code. In D.03-12-035, the Commission adopted a modified settlement agreement (MSA) to establish a plan of reorganization (POR) to enable PG&E to emerge from bankruptcy. PG&E's POR under Chapter 11 became effective on April 12, 2004, and incorporated the terms of the MSA.

To restore PG&E's financial health, D.03-12-035, as modified and affirmed in D.04-03-009, authorized PG&E to record a bankruptcy Regulatory Asset in the amount of $ 2.21 billion and to recover the Regulatory Asset from electric customers over a nine-year period.¹⁰ The total costs to PG&E's customers for the Regulatory Asset, including rate of return, income taxes, etc., was expected to exceed $ 4.6 billion.¹¹ Decision 04-02-062 adopted the Regulatory Asset Charge (RAC) to enable PG&E to recover the cost of the Regulatory Asset. In addition, D.04-02-062 required all of PG&E's customers to pay the RAC, except for certain Customer Generation Departing Load (CGDL).

Importantly, D.04-02-062 determined that new MDL should not be exempt from the RAC. However, D.04-02-062 also recognized that the Commission was considering in R.02-01-011 whether to exempt new MDL from the DWR-related costs of the CRS. Decision 04-02-062 stated that after the Commission had decided the CRS exemption issue in R.02-01-011, municipal utilities could file petitions to modify D.04-02-062 to exempt new MDL from the RAC to the same extent new MDL had been exempted from the CRS.¹² As noted above, D.04-11-014 and D.04-12-059, which were issued in R.02-01-011, exempted new MDL and transferred load from the DWR Power Charge element of the CRS, subject to certain restrictions and caps.

B. Summary of the Petitions

In their petitions to modify D.04-02-062, CMUA, Merced, and Modesto seek to exempt new MDL from the RAC. They believe the following provision in D.04-02-062 demonstrates that the Commission intended to exempt new MDL from the RAC if the Commission in R.02-01-011 exempted new MDL from the DWR Power Charge:

To ensure that [D.04-02-062] is consistent with Commission decisions...Municipal utilities may file a petition for modification of [D.04-02-062] concerning certain new municipal load's cost responsibility for the Regulatory Asset, once the Commission decides the pending rehearing [in R.02-01-011] on the exceptions of certain new municipal load's payment of the CRS. (D.04-02-062, mimeo., p. 40 [COL 8].)

CMUA, Merced, and Modesto observe that D.04-11-015 and D.04-12-059, issued in R.02-01-011, exempted new MDL from the DWR Power Charge element of the CRS. They maintain that in order to fulfill the Commission's intent in D.04-02-062 to make new MDL's exemption from the RAC consistent with new MDL's exemption from CRS, it is necessary to modify D.04-02-062 to exempt new MDL from the RAC.

CMUA also requests that D.04-02-062 be modified to exempt transferred load from the RAC. CMUA states that both new MDL and transferred load were exempted from the DWR Power Charge by D.04-11-014 and D.04-12-059. CMUA believes this precedent shows that new MDL and transferred load must be treated the same. Thus, if today's Decision exempts new MDL from the RAC, the Decision must also exempt transferred load from the RAC. CMUA further claims that transferred load should be exempted from the RAC because D.04-02-062 exempted CGDL from the RAC. CMUA argues that it would be unlawfully discriminatory to exempt CGDL from the RAC but not transferred load.

C. Responses to the Petitions

i. Merced and Modesto

Merced and Modesto support CMUA's petition, including CMUA's request to exempt transferred load from the RAC (which Merced and Modesto did not request in their own petitions to modify D.04-02-062).

ii. NCPA

NCPA supports CMUA's petition.¹³ CMUA states that the Commission intended in D.04-02-062 that new MDL's exemption from the RAC and CRS should be treated consistently. NCPA also agrees with CMUA that exempting transferred load from the RAC would be consistent with the Commission's determination in D.04-02-062 to exempt CGDL from the RAC.

iii. PG&E

PG&E does not object to modifying D.04-02-062 to exempt new MDL from the RAC to the extent that new MDL is exempted from the DWR Power Charge. On the other hand, PG&E opposes modifying D.04-02-062 to exempt transferred load from the RAC. PG&E argues that unlike new MDL, the Commission did not intend to re-visit D.04-02-062 with respect to transferred load.

PG&E disputes CMUA's contention that D.04-02-062 should be modified to exempt transferred load from the RAC because D.04-02-062 exempted CGDL from the RAC. PG&E argues that the Commission in D.04-02-062 knowingly exempted CGDL but not transferred load. Thus, the Commission's determination in D.04-02-062 to exempt CGDL from the RAC provides no support for granting transferred load a similar exemption.

D. Discussion

The petitions to modify D.04-02-062 raise the issue of whether new MDL and transferred load should be exempted from the RAC. We first consider if new MDL should be exempted from the RAC, followed by transferred load.

i. New MDL

All the parties agree that the Commission intended in D.04-02-062 that new MDL should be exempted from the RAC to the same extent new MDL is exempted from the DWR Power Charge. The parties also agree that D.04-11-014 and D.04-12-059 exempted certain new MDL from the DWR Power Charge.

We concur with the parties' assessment. Therefore, as contemplated by D.04-02-062, we will modify D.04-02-062 to exempt new MDL from the RAC to the same extent that new MDL is exempted from the DWR Power Charge element of the CRS by D.04-11-014 and D.04-12-059. We note that new MDL's exemption from the DWR Power Charge is subject to various restrictions, and that the exemption for a portion of new MDL is capped. The same restrictions and cap and shall apply to new MDL's exemption from the RAC.

PG&E shall file revised tariffs to reflect new MDL's exemption from the RAC adopted by today's Decision.¹⁴ For as long as the RAC remains in effect, PG&E shall promptly revise its RAC tariffs to conform to any future revisions to new MDL's exemption from the DWR Power Charge.

ii. Transferred Load

The parties dispute whether transferred load should be exempted from the RAC. We conclude for the following two reasons that transferred load should not be exempted. First, unlike the situation with new MDL, D.04-02-062 did not contemplate an exemption for transferred load.

Second, the RAC and its successor, the Energy Recovery Bond Charges, should be treated similarly because both charges recover the same PG&E bankruptcy costs. As discussed in more detail, infra, exemptions from the Energy Recovery Bond Charges are limited to those authorized by Pub. Util. Code §§ 848.1(b) - (d).¹⁵ These statutes do not exempt transferred load from the Energy Recovery Bond Charges. Therefore, because exemptions from the RAC and Energy Recovery Bond Charges should be treated similarly, and transferred load is not exempt from the Energy Recovery Bond Charges, we conclude that transferred load should not be exempted from the RAC.¹⁶

We disagree with CMUA that it is unlawfully discriminatory to exempt CGDL from the RAC but not transferred load. In D.04-02-062, the Commission held that MDL (with the possible exception of new MDL) should not be exempted from the RAC, even though D.04-02-062 exempted certain CGDL from RAC.¹⁷ CMUA has not provided adequate justification to reverse our previous holding on this issue.

⁶ Commission decisions issued in R.02-01-011, including D.04-11-014, D.04-12-059, and D.05-01-040, use the verb "excepted" and its conjugated forms. Today's Decision uses the verbs "except" and "exempt" synonymously.

⁷ Pursuant to D.04-11-015, the Energy Recovery Bond Charges will replace the RAC.

⁸ Some CTC costs are not attributable to the energy crisis, but were caused by the transition to a competitive electricity market.

⁹ Governor's Emergency Proclamation dated January 17, 2001. (D.02-02-051, Appendix B.)

¹⁰ The bankruptcy Regulatory Asset was sized to provide PG&E with the necessary revenue, cash flow, and capital structure to pay creditors in full and to enable PG&E to emerge from bankruptcy as an investment grade company.

¹¹ As described more fully in D.03-12-035, PG&E's customers had to contribute several billion dollars over and above the cost of the Regulatory Asset to enable PG&E to emerge from bankruptcy and pay its creditors in full.

¹² D.04-02-062, mimeo., pp. 4 - 7, 22 - 23, 34 -35, and 40 [Conclusion of Law (COL) 8].

¹³ NCPA did not respond to Merced's and Modesto's petitions.

¹⁴ PG&E filed Advice Letter (AL) 2624-E on February 7, 2005, to eliminate the Regulatory Asset Revenue Adjustment Mechanism (RARAM) and transfer any remaining balance in the RARAM to the Energy Recovery Bond Balancing Account. The RARAM and RAC will terminate if and when AL 2624-E goes into effect.

¹⁵ All statutory references are to the Public Utilities Code unless otherwise indicated.

¹⁶ The transferred load that is exempted from the DWR Power Charge by D.04-11-014, as modified and affirmed in D.04-12-059, is load that was forecast by PG&E to be transferred to POUs during 2001-2003. (D.04-11-014, mimeo., p. 18.) This transferred load does not encompass the load served by PG&E during 2000, when PG&E incurred the preponderance of the costs that ultimately resulted in its filing for bankruptcy. The Commission subsequently authorized PG&E to recover these bankruptcy-related costs through the RAC and Energy Recovery Bond Charges.

¹⁷ D.04-02-062, mimeo., pp. 22 -23, 34 - 35, and 40 [COL 8].