VI. Discussion

A. Statutory Principles

In theory, the statutory methodology for determining the CPA is - for the most part - straightforward. The generation-related component of retail rates minus specific utility generation-related costs equals the CPA. In practice, details such as subtracting a "cost" from a "rate" pose challenges. In addition, it is important to keep in mind the entire mechanism adopted in AB 1X. TURN's and Aglet's point that the statute must be read as a whole is well taken. The utilities' proposals, for example, inject certain views concerning the "intent" of statutory provisions that cannot be supported when the statute is read as a whole.

Prior to addressing the determination of the CPA, we must address the utilities' misconception that the fixed DWR Set-Aside portion of the CPA is the only source of revenue that may flow to DWR. ⁸ Section 360.5 contains no such limitation; rather, it sets forth a formula for determining a rate element known as the CPA. Nothing in the plain language of Section 360.5 says that the Fixed DWR Set-Aside portion of CPA is the only revenue stream that flows to DWR.⁹ On the contrary, as discussed below, DWR is entitled by law to an amount equal to the number of kWhs sold to end-use customers multiplied by the relevant generation rate.

We must implement Section 360.5 in view of other changes imposed by AB 1X. We note that DWR's procurement of power improves the financial stability of SDG&E, PG&E and Edison.¹⁰ Without DWR's actions, the utilities' financial situations would have continued to deteriorate. Instead, AB 1X has stabilized their financial condition, and transferred a large amount of their financial risk to DWR. In determining the amount of revenues that DWR should collect, we are also guided by the following relevant statutes adopted by the legislature in AB 1X at the same time it adopted Section 360.5.

Water Code Section 80002.5 states that "[i]t is the intent of the Legislature that power acquired under this division shall be sold to all retail end use customers served by electrical corporations, ...." Water Code Section 80104 explains that "[u]pon the delivery of power to them, the retail end use customers shall be deemed to have purchased that power from the department. Payment for any sale shall be a direct obligation of the retail end use customer to the department." (Emphasis added.) Water Code Section 80106(a) provides a mechanism for DWR to collect payment by providing DWR discretion to contract with utilities to "provide billing, collection, and other related services, as agent of the department, ...." (Emphasis added.) Water Code Section 80110 makes clear that DWR "shall retain title to all power sold by it to retail end use customers." Finally, Water Code Section 80112 explicitly summarizes DWR's interest by stating:

"... all money paid directly or indirectly to or for the account of [DWR] with respect to any sale ... of power acquired [by DWR] shall constitute property of [DWR] and shall be deposited in the [DWR Electric Power] fund ... To the extent any moneys are received by an electrical corporation pursuant to Section 80106 in the process of collection, and pending their transfer to [DWR], they shall be segregated by the electrical corporation on the terms and conditions established by [DWR] and shall be held in trust for the benefit of [DWR]." (Emphasis added.)

Although Water Code Section 80112 is wholly self-executing, given the positions taken by the utilities in this proceeding, we shall order them to immediately comply with Water Code Section 80112.¹¹ Specifically, SDG&E, Edison and PG&E, must immediately segregate, and hold in trust¹² for the benefit of DWR all moneys they receive pursuant to Section 80106. Section VI. E of this order will explain this process in detail.

B. Generation-Related Component of the Retail Rate

We are cognizant that each utility's tariffs contain many different rate schedules. This results in different generation-related rate components for different schedules. In this decision, we do not attempt to calculate the generation-related rate component for each tariff schedule of each utility. Instead, for each utility we will adopt a company-wide average generation-related rate component (except that SDG&E will have separate numbers for capped and uncapped customers).

The generation-related rate component of retail sales is derived from the rates in effect as of January 5, 2001. The 1-cent/kWh surcharge for PG&E and Edison, adopted by the Commission in January, was in place on that date and must be included in the calculation of the generation-related component of the retail rates.

For Edison and PG&E (whose rates are still frozen), the generation-related component of retail rates is calculated as follows:

Total bundled electric rate (which includes one cent per/kWh surcharge and reflects the legislated 10% rate reduction for those customers to whom it is applicable);

Less non-generation-related rates or charges:

Transmission;¹³

Distribution;

Public Purpose Programs;

Nuclear Decommissioning;

Fixed Transition Amount.¹⁴

The remainder is the generation-related rate component of retail rates.

SDG&E's rate freeze under AB 1890 has ended and it has no 1 cent/kWh surcharge. SDG&E has an "energy" rate ceiling of 6.5 cents/kWh for residential, small commercial, and street lighting customers, pursuant to AB 265. For these "capped" customers, the generation-related rate component is this 6.5 cent/kWh ceiling. The amount that "uncapped" customers pay for generation varies depending on wholesale market prices. Thus, for SDG&E's uncapped customers the generation-related rate component is necessarily based on an estimate of wholesale prices.

We have relied on the utilities' workpapers (see attachments) ¹⁵ to determine each utility's company-wide average generation-related rate component. Based on our review of these workpapers we adopt the following company-wide average generation-related rate components:

7.277 cents/kWh for Edison;

6.471 cents/kWh for PG&E;

6.5 cents/kWh for SDG&E capped customers;

12.539 cents/kWh for SDG&E uncapped customers.

C. Proposal to Make CPA a Set Rate Component

We propose that the CPA be a set rate component, calculated using utility rate components, as opposed to a periodically changing revenue amount as advocated by the utilities.

Our interpretation that CPA is a "rate" is consistent with language in Section 360.5 which states:

"The commission shall determine that portion of each existing electrical corporation's retail rate effective on January 5, 2001, that is equal to the difference between the generation related component of the retail rate and the sum of the costs of the utility's own generation, qualifying facility contracts, existing bilateral contracts, and ancillary services. That portion of the retail rate shall be known as the California Procurement Adjustment. ...." (Emphasis added.)

Our interpretation that CPA is "set" and a "rate" is also consistent with Water Code Section 80130 which determines the amount of indebtedness that DWR may incur.

"... In no event shall [DWR] authorize the issuance of bonds ... in an aggregate amount greater than the amount calculated by multiplying by a factor of four the annual revenues generated by the California Procurement Adjustment ..." (Emphasis added.)

The issuance of bonds is dependent on the CPA. If CPA fluctuated monthly, little certainty would exist concerning the amount of bonds that DWR could issue.¹⁶ An interpretation of Section 360.5 that concludes that the CPA is a set rate is more consistent with Water Code Section 80130. Thus, we reject the utilities' proposals that CPA is an amount that fluctuates monthly. Those proposals focus more on the role of the CPA as a factor in determining the fixed DWR Set-Aside.

The use of the verb "generated" in Water Code Section 80130 also supports our interpretation that CPA is a rate. Amounts do not "generate" revenues, whereas a "rate" would generate revenues.

D. Proposed Method to Calculate the CPA

Under AB 1X, the CPA serves two purposes. It is used as a step in calculating Fixed DWR Set-Aside. In addition, CPA-generated revenues are used to calculate the maximum amount of bonds that DWR may issue. We are not calculating the Fixed DWR Set-Aside at this time.¹⁷

The following discussion is not adopted by the Commission today. Rather, it incorporates a proposal for the calculation of the CPA, on which we will obtain a further comment from the parties, before being adopted in a subsequent order. The primary purpose for which our proposal to calculate the CPA is made is to enable DWR to proceed with the process of issuing bonds in a timely fashion.

Each of the utilities proposes to calculate the CPA using essentially the following model:

1. The generation-related component of retail rates is multiplied by the company's total annual kWh sales to produce total generation-related revenues.

2. The four statutorily authorized costs are then subtracted from the revenues calculated above.

As explained elsewhere, we propose to calculate the CPA as a set rate. However, because the statute requires costs to be deducted from rates, this proposal agrees with the utilities that it is appropriate to multiply the generation-related rate-component by total kWh sales¹⁸ to arrive at generation-related revenues. It is then possible to deduct generation-related costs from these revenues. The result of this calculation, however, is not the CPA (which is a rate), but rather it is the revenue produced by the CPA over a given time period (namely the time period over which the kWhs were delivered to customers). We then propose to take these CPA-generated revenues and then divide them by the company's total kWh sales in the same time period to calculate the CPA rate.

After calculating the revenues produced by the generation-related rate component, therefore, this proposal next determines the sum of the costs of the utility's own generation, qualifying facility contracts, existing bilateral contracts, and ancillary services. Section 360.5 expressly refers to those identifiable costs, and no others. Thus, we propose that the only costs to be utilized in calculating the CPA are those specifically enumerated in Section 360.5.

At the workshops, the utilities presented estimates of generation-related costs and of kWh sales, which they used to develop CPA revenues under several different scenarios. Their workpapers and proposals show a number of adjustments to the total generation-related revenues, as well as a number of categories of costs they believe fall within the four statutorily authorized categories.¹⁹ This proposal does not agree with the utilities that all of these adjustments and costs are appropriate. Section 360.5 clearly refers to those specific identifiable costs. Thus, we propose to exclude from the utilities' submission those costs not specifically provided for in Section 360.5.

For example, we agree with Aglet that franchise fees attach to all retail revenues, not generation costs, and that, uncollectibles are not costs at all, but instead are revenue requirement allowances related to nonpayment of customer bills. Aglet correctly contends that these items are not included in the four categories in Section 360.5. Aglet also correctly argues that while other items such as direct access credits, restructuring implementation costs, employee-related transition costs, losses on sale and QF shareholder incentives conceptually are generation-related costs, they are not encompassed by any of the four categories in Section 360.5. Indeed, since direct access customers are sold electricity by neither the utility nor DWR, direct access revenues and credits both should be excluded from these calculations.²⁰ We also agree with Aglet that rate reduction bond revenues are not included in any of the four items in Section 360.5. Nuclear incentive amounts--for example, Diablo Canyon ICIP payments--in excess of actual costs are not strictly generation costs but are settled revenue requirement amounts, however, they have not been excluded in our current calculations because we lack the data to do so. Customer Service and Informational expenses and administrative and general (A&G) costs are not generation costs and do not fall within the scope of the four items in Section 360.5.

In order to calculate the CPA we propose to look to the scenarios the utilities provided at the workshops. For Edison and PG&E we propose to use their scenarios which reflect QFs priced at $80/MWh. This figure reflects ongoing efforts to restructure QF pricing. SDG&E provided only one scenario in which it forecasted QF payments in 2001 according to actual contract terms. We propose to correct the selected scenarios to eliminate the adjustments and costs we have found inappropriate (as discussed above). Using these corrected spreadsheets, we propose to calculate the annual revenues generated by the CPA. As shown in Table 1, the annual revenues generated by CPA would be: for PG&E $1,619,592,000, for Edison $801,870,000, for SDG&E capped $293, 596, 000, and for SDG&E uncapped, $ 398, 744, 000. The CPA rate itself would then be calculated by dividing the annual CPA revenues by the company's total annual kWh sales for both utility and DWR supplied energy, excluding Direct Access. The figures produce the following proposed company-wide average CPA rates. For PG&E, 2.180 cents per kWh, for Edison, 1.049 cents per kWh, for SDG&E capped, 2.630 per kWh, for SDG&E uncapped, 8.658 cents per kWh. These calculations would enable DWR to determine the maximum amount of bonds it can issue under Water Code Section 80130.

In using these selected scenarios to calculate the CPA, we would not accepting the utilities' cost figures as a basis for calculating future rates or revenue requirements for the utilities. These cost figures have not been subject to the kind of analysis and scrutiny by the Commission and the parties that would be necessary before we could accept them for such purposes. We would accept them here solely for purposes of calculating the CPA, which we propose to do primarily in order to permit DWR to determine the maximum amount of bonds it may issue.

E. Segregation of DWR Revenues

Pursuant to Water Code Section 80112:

"... all money paid directly or indirectly to or for the account of [DWR] with respect to any sale ... of power acquired [by DWR] shall constitute property of [DWR] and shall be deposited in the [DWR Electric Power] fund ... To the extent any moneys are received by an electrical corporation pursuant to Section 80106 in the process of collection, and pending their transfer to [DWR], they shall be segregated by the electrical corporation on the terms and conditions established by [DWR] and shall be held in trust for the benefit of [DWR]." (Emphasis added.)

We have previously ordered the utilities to take these steps with regard to the monies they collect pursuant to Water Code Section 200. The utilities have apparently not done so. According to the utilities, they are uncertain about how to do the necessary calculations. No matter what the stated reason, utilities are holding money that properly belongs to DWR. Elsewhere in this order, we give PG&E and Edison specific directions on how to comply with our prior order. We put them on notice that we will impose penalties if they do not comply promptly.

This leaves us with the issue of how the utilities shall segregate and transfer to DWR the revenues identified in today's order. DWR is purchasing electricity and selling it to retail end-use customers, and it is unreasonable to allow utilities to retain the revenue generated by those transactions - transactions to which they are not a party - even though they are in financial distress. We will shortly outline a methodology which the utilities will be able to use after filing the appropriate tariffs and making any necessary adjustments to their billing systems. However, we will not allow the utilities to retain DWR's revenues while these details are worked out. Accordingly, this order specifies a method for segregating and transferring revenues to DWR to be used beginning today, until those details are worked out.

DWR reports to each utility on a daily basis the number of kilowatt-hours procured for that utility's end use customers on a given day. Under today's order, DWR is entitled to receive the company-wide average generation-related rate component for each kilowatt-hour that DWR supplies to the utility's retail end-use customers.²¹ On average, the utility should receive revenues for the energy supplied by DWR within 45 days after the energy is delivered to retail end use customers.²² Accordingly, under our immediate methodology, we order the utilities to segregate and hold in trust for DWR, no later than 45 days after DWR supplies power to their retail end-use customers, an amount equal to the product of (i) the number of kilowatt-hours that DWR provided 45-days earlier; and (ii) the company-wide average generation-related rate. Utilities shall segregate these funds according to the method described below. For all electricity supplied by DWR more than 45 days prior to the effective date of today's order, SDG&E, Edison and PG&E shall immediately segregate and hold in trust the funds owing to DWR, except as may otherwise be provided in Section VII of this decision (dealing with funds to be transferred to DWR pursuant to Water Code section 200 and D.01-01-061).

Because SDG&E has two separate average generation-related rates (one for capped customers and one for uncapped customers), this immediate methodology must be modified for SDG&E. Because SDG&E has two separate average generation-related rates, SDG&E must divide the "kilowatt hours that DWR provided 45-days earlier" between capped and uncapped customers. Pursuant to Water Code section 80002.5 "[p]ower sold by the department to retail end use customers shall be allocated pro rata among all classes of customers to the extent practicable." Accordingly, the total kilowatt hours supplied by DWR should be attributed to capped and uncapped customers based on the ratio of total kilowatt hours delivered by SDG&E to capped and uncapped customers. This information will have to come from SDG&E's billings; however, SDG&E's bills cover a period of approximately 30-days, not a single day. The billing information SDG&E uses to implement this immediate methodology should cover a period as close in time as possible to the date on which the DWR power was sold to SDG&E's end use customers. This information may cover billings rendered on a single day, or over a period of a month. However, SDG&E must use a consistent method for calculating the percentage of power attributed to capped and uncapped customers throughout the period covered by this immediate methodology. Using a methodology substantially along the foregoing lines, SDG&E should divide the kilowatt-hours supplied by DWR 45 days earlier between capped and uncapped customers. Then the kilowatt-hours for each type of customers should be multiplied by the corresponding company-wide average generation related rate, to produce a dollar amount. SDG&E should then segregate, for the benefit of DWR, the sum of the dollar amounts for capped and uncapped customers.

A more precise method for remitting funds to DWR should be arrived at as soon as practicable. Under this more precise methodology, each customer's bill will specifically identify the generation-related rate for DWR. In order to do this, tariff schedule-specific generation-related rates will need to be calculated. In addition, it will be necessary to determine the number of DWR supplied kilowatt-hours on each customer's bill to which this customer specific generation-related rate will be applied. The number of DWR-supplied kilowatt-hours will be calculated using the following method.

First, each utility will calculate the percentage of DWR power supplied to its customers for each day, by dividing (1) the amount of power supplied by DWR and distributed by the utility by (2) the sum of (a) the amount of power generated or purchased by the utility, including any real time energy from the Independent System Operator, and (b) the amount of power included in (1) above.23

Because each customer's billing cycle includes more than one day, the utility will calculate the percentage of DWR power over a billing cycle by averaging the percentage of DWR power supplied for each day in the customer's billing cycle (the DWR billing-cycle percentage). Finally, the utilities will calculate the amounts they must collect on behalf of DWR as required by today's order by multiplying the total kilowatt-hours on a customer's bill by the DWR billing-cycle percentage and then multiplying that product by the schedule specific generation-related rate. This will show the amount on each customer's bill that is required to be collected by the utility on behalf of DWR, and once collected immediately segregated and held in trust for the benefit of DWR until it is transmitted to DWR, all as more specifically described below.

Within 15 days of today's order, each utility shall file the tariff changes necessary to implement this more precise methodology, and shall implement billing under this more precise methodology within 30 days of the approval, by the Commission or its staff, of these tariff changes.

At various places in this order, we have referred to the segregation of funds that are to be paid to DWR. Such funds are to be collected by the utility as agent for DWR, and segregated and held in trust for DWR in a separate bank account (denominated, "[utility name] in trust for the Department of Water Resources") for the benefit of DWR until such time as those funds shall be paid over to DWR in accordance with this order. Unless doing so would contravene an existing agreement or require the use of a bank outside California, such accounts shall be opened with a bank that has not extended credit or made credit available to the utility. The utility shall not have any right in and to such revenues and such revenues shall not be used by the utility as its own or commingled with its own monies. At all times such revenue shall constitute property of DWR only, as provided by statute.

We are concerned that our past orders with regard to the segregation of funds have not been carried out, and direct the utilities to provide, by letter to the Commission's Executive Director, and to the Director of the Department of Water Resources, the numbers of these accounts, the names of the banks where the accounts are located, the amount of credit that has been extended or made available to the utility by that bank, and the amounts deposited therein. Such letter shall be delivered by fax no later than 4:00 p.m. on March 28, 2001.

Moreover, utilities should transfer all funds held in trust accounts for DWR, including all interest paid thereon, each business day, before 10:00 a.m., Pacific Time. Each minute of delay in complying with this order shall constitute a separate violation of this order. We find that the above payment mechanisms are essential and necessary to accomplish the directives of Water Code Section 80112.