XVIII. Rate Design

A. Residential Rate Issues

There are five disputed residential rate design issues. The issues arise from SoCalGas' proposals to: (1) increase the $5 customer charge to $7 for most customers; (2) narrow the differential between Tiers I and II; (3) reduce the baseline quantities; (4) redefine the master meter class to include all master meter customers with an annual usage of at least 100 Mth; and (5) complete the deaveraging of residential and commercial rates. ORA recommends that the Commission retain the current $5 customer charge; reject the narrowing of the tier differential; maintain the current winter baseline allowance while slightly reducing the summer allowance; and reject the proposed change in the definitions of the master meter class. Finally, ORA supports eliminating core averaging, to be achieved gradually over the course of the BCAP. Each of these issues is addressed below.

1. Customer Charge

SoCalGas proposes to increase the residential customer charge from $5 to $7. It claims that the current customer charge collects only 50% of the annual residential long run marginal costs which it estimates at approximately $120. ORA reminds us that this represents SoCalGas' third attempt to increase the customer charge above the $5 level. SoCalGas, in its last BCAP, proposed increasing the customer charge to $7.12 for single family dwellings and $5.26 for multi-family dwellings. In its PBR application it proposed increasing the charge to $13.57 for single family dwellings and to $10.35 for multi-family dwellings. In each instance, the proposal was rejected in favor of the status quo. ORA believes the same consistent policy should be maintained in this case.

ORA points to numerous problems with the SoCalGas proposal. First, the company overstates its case when it claims that the current customer charge recovers only 50% of marginal costs. SoCalGas' estimate of $120 is based on the rental method for estimating customer marginal costs. A $7 charge would recover 70% of this estimate. The NCO method results in a significantly lower marginal cost of $78 per year. The current $5 customer charge recovers almost 77% this cost. Since the current customer charge recovers a greater percent of marginal costs under the NCO method (77%) than the $7 charge under the rental method (70%), ORA says there is no need for an increase.

Second, the company's proposal results in significant bill impacts to residential customers. SoCalGas' overall showing would result in a 3.16% decrease to the residential class. At the same time, its rate design proposals will result in a bill increase for 66% of single family customers with some increases as high as $24 per year. Over 50% of regular residential and low income CARE customers would receive a bill increase rather than a decrease. Providing an overall decrease to the class while providing most customers with a bill increase is simply not justified.

Third, the claim that the current customer charge results in high usage customers subsidizing low usage customers can't be substantiated. SoCalGas made a similar claim about cross-subsidies in its last BCAP, which was rejected. (D.97-04-082, Slip Opinion, p. 116.) Because nothing new has been added, the alleged claim of cross-subsidization should again be rejected.

In any event, ORA argues, the claim of cross-subsidization is outweighed by equity considerations. What SoCalGas is proposing amounts to a 40% increase in the customer charge. A low usage customer facing an increase of that magnitude has very little ability to control or lower the bill other than to stop taking service. A high usage customer, on the other hand, has more options for controlling the bill impact by reducing usage.

We agree with ORA. A 40% increase in the customer charge which provides access to a commodity which is essential to basic human comfort and safety is not warranted, particularly considering that neither PG&E nor SDG&E have customer charges. The final reason for rejecting the proposed increase in the customer charge is that it would result in a rate structure that violates the provisions of § 739.7, which requires an inverted rate structure.

2. Tier Differential

Section 739(c) requires the Commission to establish "baseline rates" which apply to the lowest block of an increasing block rate structure. The statute is premised on the principle that "electricity and gas are necessities, for which a low affordable rate is desirable." (§ 739(c)(2).) Section 739.7 similarly requires an "appropriate inverted rate structure". These code sections have been consistently interpreted to include the customer charge in determining whether the rate structure is, in fact, inverted. Under this "composite tier differential" approach, customer charges are considered part of the Tier I, or baseline, rate for the purpose of calculating tier differentials. (D.87-12-039, 26 CPUC2d 213, 270; D.89-01-055; D.97-04-082, pp. 117-118.)

SoCalGas currently has a differential of 35% on a fully bundled basis (including the gas commodity cost and excluding the customer charge) and is proposing to reduce it to 20% on an unbundled basis (excluding both the commodity cost and customer charge).¹⁵ ORA argues the proposal must be rejected because when the customer charge is included, the rates are no longer inverted.

SoCalGas argues it is appropriate to decrease the differential between Tier 1 and Tier 2 volumetric rates. It proposes to reduce the differential from 35% to 20%. It says the present distorted residential rate design, consisting of a low customer charge and a high tier differential, is an ineffective and inappropriate tool for providing subsidized service to low income customers. What the existing rate design accomplishes is only to subsidize low volume users and not low income users. Consequently, the current residential rate design results in excessive subsidies going to low volume, high income users.

SoCalGas believes subsidies that exist as a result of a high tier differential cannot be justified on the basis of compassion for low income customers. It says the Commission has indicated its misgivings about the current baseline tier differential structure because it perceives inherent conflicts between the types of innovative service offerings that could be provided in a competitive market and using a regulatory-mandated rate design approach. (D.95-12-063 (1995) 64 CPUC2d 1 at 75.) SoCalGas asserts that a move to a 20% simple tier differential is consistent with the Commission's objective of moving towards cost-based rate design as well as with the language in § 739(c) which calls for a gradual differential between the baseline and Tier 2 rate. It admits the 20% tier differential is based upon maintaining the customer charge as a separate increment of customer rates, not included in Tier 1 rate.

We reject SoCalGas' proposal. As we said in the last SoCalGas BCAP,

Therefore, we should retain the existing tier differential calculated on a composite basis. The composite tier differential is more meaningful than the simple differential because it gives the price for access and purchase of a quantity of gas that covers basic needs. (D.97-04-082, p. 118.)

No evidence has been presented that requires a different result. SoCalGas' statement that "a high differential cannot be justified on the basis of compassion for low income customers" flies in the face of § 739 which is specifically directed toward the low income ratepayer and which requires an inverted rate structure. We will adopt a 5% composite tier differential (excluding gas costs) as proposed by TURN.

3. Baseline Allowances

SoCalGas recommends reducing the summer baseline allowance from 15 therms per month to 14 therms per month, and the winter baseline allowance from 50 therms per month to 49 therms per month. ORA supports reducing the monthly summer baseline allowance to 14 therms since it would bring the allowance closer to compliance with § 739(d)(1), which requires that the summer baseline quantity be between 50% and 60% of average residential consumption. ORA opposes the reduction in the winter allowance since the current allowance is already in compliance with the statute. The statute requires that the winter baseline quantity be set between 60% and 70% of average residential consumption. The current winter allowance represents 69.3% of average residential consumption. Since it is already in compliance with the statute, there is no need for a change.

SoCalGas says ORA ignores that under the existing winter allowance of 50 therms, the proportion of throughput billed at the Tier 1 rate is 69.3% in the winter, on the verge of exceeding the statutory limit. SoCalGas' proposed adjustment to 49 therms as the winter allowance is extremely modest and will serve to better ensure compliance with Pub. Util. Code § 739(d)(1). Even at SoCalGas' proposed winter allowance of 49 therms, the proportion of overall residential throughput billed at the Tier 1 rate is expected to be 68.5% in the winter, only 1½% away from the upper limit specified in the statute. We will adopt SoCalGas' proposal.

4. Core Deaveraging

Over the past two BCAPs the Commission has pursued a policy of deaveraging commercial and residential rates. In the 1993 BCAP, the Commission deaveraged core and commercial rates by 50% over the two year BCAP cycle. In the 1996 BCAP it again deaveraged rates by 50%. As a result of these two decisions, 75% of the effects of averaging have been removed from commercial rates. SoCalGas proposes to eliminate the remaining $28.4 million in averaging costs from commercial rates in the first year of the BCAP. TURN opposes further deaveraging in this BCAP. This issue was resolved by the JR, by maintaining the status quo.

5. Master Meter Issues

e. Requirement for Service

SoCalGas proposes to lower the requirement for taking service at the residential master meter rate from 250Mth of annual usage to 100Mth of annual usage. This would increase the number of master meter customers (who pay lower rates) and thus would increase other residential rates. SoCalGas states that these customers are paying more than their fair share of marginal customer costs. In making its argument, SoCalGas calculates marginal customer costs using the rental method.

ORA opposes this recommendation as it would raise the rates for other residential customers and because the change is unnecessary at this time. The master meter sub-class was recently created in SoCalGas' last BCAP, D.97-04-082, and there is no need to change the class definition for master meter customers so soon. Also, ORA uses the NCO method to calculate marginal customer costs. When this method is used to calculate marginal costs, SoCalGas' argument that large customers are paying far more than their share of marginal customer costs is weakened.

Master meter customers are a diverse group. The number of living units per master meter varies widely. Some accounts have over 1,000 units per master meter. However, more than 45% of the master meter accounts have three or less living units and 57% have 4 or less units. Given the substantial number of master meter accounts with such a small number of living units, SoCalGas proposes to include the smaller customers within the single family customer class for establishing the monthly customer charge. Under SoCalGas' proposals, small master meter customers with annual usage of less than 100 Mth would pay a monthly customer charge of $7. Under current rates, a master meter customer using 100,000 therms will pay over $11,000 per year in customer-related costs through its volumetric rates while having marginal customer costs of approximately $4,400 per year. This is a significant discrepancy and segmenting the master meters at 100 Mth instead of the current level of 250 Mth will help remedy this. Consistent with the policy established in D.97-04-082, the customer charge for this segment will be cost based, calculated to recover the marginal customer related costs. The impact of implementing this proposal on other residential customers is less than $1 per year.

Western Mobilehome Parkowners Association (WMA) supports SoCalGas. Under current tariffs a customer using 100 Mth will pay an extra $2,600 in customer-related costs more than its cost of service. Changing the definition of large master meter customers to an annual usage level greater than 100 Mth provides relief for a large group of customers, and shifts costs of only an additional $.90 per year for an average residential customer, with only a $.40 per year impact for a small multifamily customer. This cost shift reverses in part the cross-subsidy that these large customers now provide to all other residential customers.

We agree with SoCalGas and WMA. Lowering the threshold to 100 Mth therms per year is a reasonable change, well justified with limited cost impacts on other customers, and will be adopted.

f. Submeter Credit

SoCalGas makes several proposals related to the submeter credit. Under current rate design, a submeter credit is given to customers with master meters who provide metered service to residential sub-units, for example at multifamily dwelling units and mobile home parks. The purpose of the submeter credit is to compensate the master meter customer for costs of providing submeter services. The compensation to the master meter customer is based on the costs avoided by SoCalGas in serving one master meter customer rather than the individual units served through the master meter.

SoCalGas proposes to retain the master meter avoided costs that were adopted in D.97-04-082, but to revise the methodology used to calculate the submeter credit in two ways. First, SoCalGas proposes that the submetered units be treated as single family dwellings. Almost 90% of submetered units are in mobile home parks, and those facilities and physical configurations closely align with single family premises. Under SoCalGas' proposal, submetered units would be charged the $7 per month customer charge applicable to single family dwellings. Second, to be consistent with Commission policy on unbundling, SoCalGas proposes to eliminate the scaling component of the submetered calculation. This is because costs included in the scaler are non-marginal costs and therefore not avoided by SoCalGas as result of master-metering. SoCalGas proposes to eliminate this and have the avoided costs used in the calculation of the submeter credit be consistent with the avoided cost policy adopted by the Commission for unbundling. The new avoided cost figure would be $9.86 per month, and the new submeter credit would be $2.86 per month.

WMA agrees with SoCalGas' master meter proposals except the proposal to eliminate the scaler. WMA argues that there are strong policy arguments for applying the EPMC scaler to determine the SoCalGas master meter discount. First, the express language of § 739.5 requires that the differential be set at a level that reflects the utility's average cost of supplying the service. The rates charged by the utility at the master meter are scaled to reflect the full SoCalGas revenue requirement. That revenue requirement is SoCalGas' cost of providing the service. WMA contends that setting the master meter differential at a lower level through omission of the scaler puts the master meter customer in a price squeeze: it pays a rate at the master meter which is based on full cost recovery by the utility, but it is permitted less than full cost recovery for the service it provides to the submetered residents and which the utility is permitted to avoid. The utility would be in a position of recovering costs as if it had incurred them, while paying the actual provider of those services a smaller amount. This violates the principle of utility indifference embedded in § 739.5. It converts master metered delivery service into an inappropriate profit center. WMA estimates the avoided cost credit is $.3804 per day or $11.58 per unit per month. Scaled, the credit is about $.47 per day.

SoCalGas responds that the scaling performed in SoCalGas' cost allocation process reconciles marginal cost revenues for the SoCalGas system to the authorized level of costs. The scaler adjusts the system marginal cost to the system average cost, not the costs of any one particular functional activity. The marginal costs used to develop the avoided costs include loaders that are placed on the O&M costs that reflect overhead cost. The marginal capital costs reflect all of the capital related costs: return, depreciation, and taxes. An avoided cost calculation, as the Commission has determined in the unbundling proceedings, should not include the scaler. SoCalGas recommends adopting the WMA credit of $.3804/d, without the scaler.

Section 739.5(a) provides, in part:

The commission shall require the corporation furnishing service to the master meter customer to establish uniform rates for master meter service at a level which will provide a sufficient differential to cover the reasonable average costs to master meter customers of providing submeter service, except that these costs shall not exceed the average cost that the corporation would have incurred in providing comparable services directly to the users of the service.

We agree with WMA. The scaler should be included in costs; the credit should be approximately $.47 per day per unit. In SoCalGas' last BCAP the scaler was included in costs and SoCalGas has not persuaded us that we should now drop it. If SoCalGas provided the service it would have priced it including a scaler. There is an unreasonable imbalance when SoCalGas collects revenue based on costs that include a scaler, but argues that those costs are different (and less) when SoCalGas must pay.

B. Core Commercial/Industrial Rate Issues

SoCalGas currently has two commercial and industrial classes. The G-10 class is comprised of customers using less than 250 Mth per year while the G-20 class includes all customers using more than 250 Mth per year. In its direct testimony, SoCalGas recommended combining these two classes into a single class with a 3-tiered rate design structure. Under this proposal, the commercial class as a whole would experience a rate decrease. However, smaller customers using less than 2,500 therms per year would experience a bill increase. In its direct showing, ORA indicated it could support the SoCalGas proposal provided that the customer charge for smaller commercial customers (those using less than 1000 therms per year) was reduced from $15 to $10 per month. Adoption of this modification to the SoCalGas proposal would result in a commercial rate design similar to the one currently in effect for PG&E. Both TURN and SoCalGas support this modification. SoCalGas, ORA, and TURN have proposed a new consolidated core commercial and industrial customer class, tariff, which we adopt.

We will adopt the proposal to combine the G-10 and G-20 customer classes. SoCalGas will be authorized to file an advice letter as it proposes.

C. Noncore Commercial and Industrial Rate Design

1. Rate Design

SoCalGas' current noncore commercial and industrial rate design distinguishes between medium-pressure and high-pressure distribution customers. The company proposes to simplify its rate design by eliminating this distinction. This would result in two subclasses of G-30 customers, those served at the distribution level and those served at the transmission level. SoCalGas additionally proposes a single customer charge and a declining block rate structure, which will avoid some of the rate discrepancies currently experienced by customers with similar usage. ORA recommends that the changes proposed by the company be adopted. We agree.

2. Special Treatment for Red Team and Rule 38 Contracts

SoCalGas proposes to exclude the additional throughput resulting from two categories of discounted contracts from cost allocation proceedings for a five-year period. The two categories involve shareholder funded incentives to attract new load under the state authorized "Red Team" economic development effort and the Commission approved "Rule 38" program. The latter program is aimed at stimulating interest in new gas fired technology.

Under current practice, the additional throughput resulting from discounted contracts entered into over the course of a BCAP period would be included in the forecast adopted in the next BCAP. If the Commission were to adopt a three-year BCAP, as recommended by ORA and others, shareholders would benefit from the additional revenues associated with Red Team and Rule 38 contracts for a three-year period. Ratepayers would benefit from the additional load in subsequent BCAPs since the company's costs would be spread over a larger volume of throughput. SoCalGas is essentially proposing to extend the period during which shareholders benefit from three years to five years.

ORA objects to this proposal. Any changes in the incentives for shareholder participation in Red Team and Rule 38 programs should similarly be addressed in the context of the PBR since that is the proceeding which examines the overall incentive structure. The JR resolves this issue by accepting SoCalGas' proposal.

D. Rate Design Window

Rate design issues are typically examined during the course of each BCAP. SoCalGas proposes to change this practice by making a "rate design window" filing in April 2000 for rate design changes which would take effect on January 1, 2001. SoCalGas claims that the transition to a new regulatory structure requires a mid-course rate design proceeding.

ORA says this proposal is inefficient, unnecessary, and should be rejected. Based on the current schedule, it is unlikely that new BCAP rates and rate design changes will be implemented much before February 2000. SoCalGas is proposing to file a new application two months later to litigate rate design issues yet again. This is simply an inefficient and wasteful use of the Commission's and other parties' limited resources, in ORA's opinion. Any rate design changes which SoCalGas thought were necessary during the upcoming BCAP period, should have been addressed in its testimony. Neither ORA nor other parties have the resources to address whatever rate design changes the company can propose on an annual basis. We agree with ORA.

E. Impact of the Joint Recommendation

The JR impacts core deaveraging and the incentives associated with Red Team and Rule 38 contracts. The JR would adopt the TURN position that no further deaveraging take place during this BCAP cycle. It would also adopt the SoCalGas position that the additional throughput from Red Team and Rule 38 contracts be excluded from the cost allocation process for a five-year period. ORA believes that these compromises are reasonable in the overall context of the JR. ORA argues that while the Commission is clearly committed to eliminating the subsidies inherent in the core averaging process, it is also true that SoCalGas is much farther along in the process than PG&E, having already eliminated 75% of the subsidy. Given this, delaying the full elimination of averaging to the next BCAP is reasonable. Delaying the benefits to ratepayers from additional throughput from Red Team and Rule 38 contracts is also reasonable given other provisions of the JR which benefit ratepayers including the higher throughput forecast.