12. Assignment of Proceeding

Susan P. Kennedy is the Assigned Commissioner and Douglas M. Long is the assigned Administrative Law Judge and principal hearing officer in this proceeding.

Findings of Fact

1. As a result of massive wildfires, on October 26, 2003, then-Governor Davis declared a state of emergency for San Diego County. The following day, October 27, 2003, President Bush also declared a state of emergency for San Diego County.

2. Approximately 3,200 power poles, 400 miles of wire, 400 transformers and more than 100 other pieces of related equipment were damaged by the fire and needed to be replaced by SDG&E. In total, SDG&E spent $71.1 million to replace lost equipment and restore service.

3. SDG&E's actions were reasonable when it activated its Emergency Operations Center. As a result of the damage, SDG&E decided it was necessary to call on other utilities for assistance to restore service. The use of mutual assistance crews and additional contractor personnel was necessary to restore service in a timely fashion. Senior management was involved in the oversight of the project and SDG&E systematically tried to reestablish service as quickly as possible.

4. Based on the high cost of premiums and limits on coverage, SDG&E had no reasonable insurance option to offset the costs of the Wildfires.

5. Resolution E-3238 established the Commission's requirements for invoking and applying the CEMA tariff provisions. SDG&E complied with these requirements by informing the Commission in a timely manner and establishing separate accounting and other controls for the Wildfires' costs. The company reasonably assumed that direct labor at straight -time (i.e., excluding overtime) was not includable in the Wildfire Account, but overtime labor and other costs incurred solely to restore service are incremental to existing costs already included in rates.

6. ORA's examination of SDG&E's actions was focused on ensuring that only incremental costs were included in the Wildfire Account. ORA found that SDG&E included in the Wildfire Account $9,416 for newspaper advertisements to thank the utilities that provided mutual assistance crews. This cost was not necessary to restore service and is not reasonably included in the Wildfire Account.

7. ORA did not review the reasonableness of expenditures for a cost causation perspective or from a cost reduction or avoidance perspective.

8. UCAN applied an additional reasonableness test to SDG&E's request. UCAN proposed that costs incurred by SDG&E should be compared to a fair market price for the commodity.

9. SDG&E provided meals, beverages and snacks in large number to all workers, including, incidentally, some police, fire and other workers involved in fighting the Wildfires or SDG&E's efforts to restore services. SDG&E utilized established catering firms that it believed could provide adequate service in numerous locations throughout the affected service territory.

10. SDG&E's vendors charged for food service on the basis of the number of meals served, but the measurement was a standard assumption of the size of food portions that would constitute a meal. Many workers often ate the caterer's equivalent of multiple meals as a result of long hours and hard work. No accurate head-count was maintained. SDG&E did negotiate a generic 10% reduction to the bills from one major vendor after the Wildfires.

11. SDG&E exercised reasonable control over all vendor costs, including the costs of meals, snacks and drinks.

12. The CEMA process as authorized in Resolution E-3238 allows SDG&E the opportunity to recover its reasonable costs incurred as a result of a catastrophic event. Without this ratemaking exception, SDG&E would have no option but absorb all of its Wildfires expenses and would only recover capital expense changes to rate base in a subsequent rate setting proceeding such as the next general rate case.

13. In order to allow for a full cost recovery, Commission ratemaking conventions allow SDG&E to increase its revenue requirement to collect from all customers the amount of revenue otherwise uncollectible from a few, plus the franchise fees it pays on the total revenue requirement. SDG&E correctly calculated the gross-up factor as: 1 / 1 - (3.67% + 0.266%) = 1.041.

14. The tree inventory maintained for vegetation management has increased since the Wildfires because damaged trees adjacent to the right-of-way are now monitored by SDG&E. Many damaged trees in the right-of-way were not physically removed and remain in the inventory.

15. The total cost of replacing long-lived assets destroyed by the Wildfires is higher because SDG&E expedited construction; this management decision resulted in incurring both higher costs, including overtime and mutual assistance, and additional costs, including meals and snacks, compared to slower methods of restoring service. All of the costs are allocated between maintenance, which is a current expense, and capital expenditures, which reflect installing long-lived assets in rate base.

16. SDG&E expensed most of its support costs that are accounted for as overheads based on its interpretation of the applicable accounting standards that these costs were immediately "consumed" and should not be capitalized as a part of the costs of installing new long-lived assets in rate base as they have no future economic value or alternative use.

17. UCAN recommended an allocation factor for support costs based on the allocation of labor costs to reflect the correct split of costs between expense and capital. This method allocates 15.8% to current expense and 84.2% to capital expenditures.

18. SDG&E correctly allocates its crew support costs to expense.

19. SDG&E employees are eligible for incentive compensation under a performance evaluation plan where the actual incentive is based upon their performance in relationship to specific goals and objectives. SDG&E accrued $726,000 for incentive compensation, and allocated $470,000 as incremental costs to be recovered in the Wildfire Account. SDG&E demonstrated that these costs are appropriately recovered in the Wildfire Account.

Conclusions of Law

1. The disaster declarations issued by the Governor and the President for the 2003 Wildfires constitute an event declared to be a disaster by competent state or federal authorities for purposes of § 454.9.

2. Use of the Wildfire Account for recording and recovering the costs incurred by SDG&E to restore utility service to customers, repair, replace or restore damaged facilities, as caused by the 2003 Wildfires, is appropriate under the statute as written.

3. SDG&E alone bears the burden of proof to show that its costs were reasonable and are eligible for recovery under the CEMA tariff.

4. The Commission's Standard for Prudent Managerial Action is the appropriate standard to apply to the costs recorded in the Wildfire Account.

5. The Commission is not dependent on an intervenor performing any specific analysis before the Commission may determine the reasonableness of a pending matter.

ORDER

IT IS ORDERED that:

1. The reasonable total recoverable costs resulting from this Catastrophic Event Memorandum Account (Wildfire Account) application is $40.8 million to be collected in retail rates charged by San Diego (SDG&E).

2. For electric CEMA costs, the non-capital expenditure portion and the 2003-2005 capital-related revenue requirement portion shall be amortized in rates beginning October 1, 2005 and ending December 31, 2006. The 2006-2007 capital-related revenue requirement shall be recovered as an annual adjustment to base margin rates effective January 1 of 2006 and 2007. For gas CEMA costs, the recovery of the approved costs should be handled through a transfer to the Gas Fixed Cost Account as proposed by SDG&E.

3. SDG&E shall file a compliance advice letter with the Commission's Energy Division for its electric department Wildfire costs prior to the effective date of the rate change described in Ordering Paragraph No. 2. It shall be served on the service list for this proceeding. The advice letter shall include the calculations of the rate amortization to recover the current portion of the Wildfire Account and include a description of the recovery in the Preliminary Statement.

4. SDG&E's gas department Wildfire costs shall be recovered by transferring the gas department Wildfire Account balance to the Core and to the Noncore Fixed Cost Accounts.  SDG&E shall file an advice letter to allocate the gas department's Wildfire costs between Core and Noncore.  The Wildfire costs allocated to the Core and Noncore Fixed Costs Accounts shall be recovered in rates as a part of the ongoing operation of these accounts. The advice letter will be effective on the date filed subject to Energy Division determining that the filings are in compliance with this order.

5. Application 04-06-035 is closed.

This order is effective today.

Dated August 25, 2005, at San Francisco, California.

Appendix A Appearance List D.0508037

Previous PageTop Of PageGo To First Page