8. Which Proposed Activities Should be Funded?

The burden of proof rests on SCE to show that its proposal is reasonable and in the public interest. SCE provides information in support of its application in its associated testimony, specifically Exhibit 2 and Exhibit 5. SCE argues on the grounds described above that all of its proposed activities are appropriate for ratepayer funding at this time and should be approved.

TURN's primary position, that no further pre-deployment funding should be granted, does not assist us in defining the appropriate scope of pre-deployment activities, but TURN does address this question in response to specific guidance in the scoping memo. TURN suggests that pre-deployment activities may include "developing AMI technology and ensuring it actually works properly,"¹⁷ and identifies certain large categories of SCE's proposed activities as being more logically related to pre-deployment, and others as more related to early deployment. TURN suggests that "[s]ome... cost categories appear to be legitimately associated with pre-deployment activities-AMI Product Management, Information Technology, Field Deployment, and System Integrator. The remaining cost categories appear to be less associated with pre-deployment activities and more related to the full deployment of the AMI system."¹⁸ Within these broad categories, TURN neither endorses the cost categories as a whole nor specifically analyzes most of the activities and costs proposed by SCE. TURN's opening testimony "pointed out certain cost categories that it found to be unreasonable, but its final funding recommendation is actually based on Edison's original filing in A.05-12-026."¹⁹

TURN also requests that additional pre-deployment funding should be provided only if SCE commits to developing a final AMI proposal with a higher level of operational benefits than the current proposal, and suggests a minimum level of 85%.²⁰ TURN bases this request on SCE's preliminary business case included with this application, which estimates operational benefits covering approximately 57% of the cost of the project, with additional demand response accounting for the remaining benefits claimed. TURN suggests that the Commission should direct SCE to meet a pre-determined threshold of 85%, and require SCE to report on its progress and desist in development of its AMI plan if it fails to accomplish the 85% goal within eight months.²¹ TURN does not specify whether this additional research should be supported by shareholder funds, nor the activities or amount of ratepayer funding that might be reasonable to adopt for such a plan.

DRA provides a much more systematic examination of SCE's proposed activities and costs, and explains its categorizations of cost areas as pre-deployment and deployment. Consistent with its interpretation of the scoping memo guidance, DRA specifically excludes any activities that could result in information after SCE is expected to file its business case, and excludes most capital expenditures because they could result in stranded costs.²² Using these definitions, DRA argues that proposed activities in the following categories may be funded as pre-deployment: AMI product management; customer tariff, programs, and services; program management organization; and a small portion of the information technology costs. DRA considers additional costs to be early deployment.

8.1 Discussion

Based on the record developed, we agree with TURN and DRA that many of the activities SCE identified in its Phase 2 application provide limited or no value to ratepayers if the Commission ultimately decides AMI should not be pursued. Many of the activities that SCE describes are necessary only if SCE deploys a new metering and communication infrastructure. Activities undertaken for the purpose of preparing SCE systems for deployment cannot be expected to provide timely information to inform the evaluation of SCE's full business case. Approval of such costs would either be predicated on an assumption that the Commission will approve some form of AMI (leading to the appearance if not the actuality of prejudging SCE's forthcoming deployment case) or would raise the possibility of significant stranded costs. SCE's own preliminary analysis shows that 57% of its costs for AMI deployment would be covered by operational benefits. This is in contrast to the preliminary analysis in PG&E's pre-deployment application, A.05-03-016, which estimated operational benefits covering closer to 90% of its project costs. However, it is neither necessary nor appropriate to make a decision on implementation in the absence of a full and final cost-effectiveness analysis of SCE's project at this time.

Based on SCE testimony, some of the proposed expenditures on system integration, information technology, and organizational readiness are not necessary to develop or validate the business case, and are primarily useful if SCE ultimately deploys some full or partial AMI system in its territory. In addition, the need to provide the proposed advance ratepayer funding for contingencies is not sufficiently supported by SCE's testimony. On the other hand, expenditures for AMI product management, field testing, tariff development, program management and organization, and business process, as well as for some information technology and systems integration activities appear to further the development of the details of SCE's final proposal or provide information to develop or refine the associated cost-benefit analysis. Moreover, funding of the proposed MDMS in the information technology and systems integration categories appears to have value even if AMI is not ultimately deployed, and so incurs minimal risk of stranded costs.

8.2 Funding Approved

Exhibit 2 provides a table summarizing SCE's full request for ratepayer funding for this pre-deployment application.

Table 1: SCE Cost Request (in thousands)²³

Parties' funding recommendations vary, and may be summarized as follows:

Table 2: Party Positions, by Cost Category (in thousands)²⁴

Given the reduced scope of activities we consider to be pre-deployment, as described above, the Commission should authorize ratepayer funding in each category as summarized below:

Table 3: Requested and Approved Funding, by Cost Category (in thousands)

The approved activities are estimated to cost $45.22 million, with the O&M costs treated as an expense and the remaining funding, related to the 5,000 meter field test and MDMS development, treated as capital. SCE should be authorized to record up to $25.52 million in pre-deployment expenses and $19.7 million in pre-deployment capital costs, with $5.6 million of that amount to be added to rate base in 2007 or 2008. The specific funding requests and amounts approved are discussed below. SCE may shift funds among approved activities as long as the total approved amount for O&M expenses, the total approved amount for capital costs, and the total approved revenue requirement adopted in this decision are not exceeded.

8.2.1 AMI Product Management

SCE includes several different engineering and design activities in its AMI Product Management category.²⁶ These include some evaluation and field testing of metering and telecommunications systems, evaluation of the results of requests for proposals (RFP), and procurement and quality assurance for equipment to be used in the 5,000 meter field test.²⁷ All of these activities, including the 5,000 meter field test, will provide information that helps to develop or validate SCE's final business case and deployment application, and therefore the $9.9 million requested in this category should be approved in full.

8.2.2 Information Technology

SCE describes the activities in its Information Technology (IT) category as preparation for the automation of its meter reading from the meter to back office systems that will read and record the meter data, for use in SCE's planned "Release 1," which SCE envisions as the beginning of its actual AMI deployment process.²⁸ IT activities in this category include the development and testing of SCE's proposed Meter Data Management System (MDMS) and Data Center Aggregator (DCA) with "[t]he largest single element ... the development and implementation of the MDMS."²⁹ The AMI IT systems will be used to process and access the data generated by the AMI meters and in-home devices supporting future AMI-enabled programs.³⁰ SCE does not make a compelling case that the DCA, and some of the other work in this category would provide information that can be used in SCE's final AMI proposal. In addition, it is not clear that work on systems other than the MDMS would have any use in the absence of AMI deployment. SCE witness DeMartini acknowledged that most work on the DCA (with the possible exception of some work on privacy and security of the AMI system) would have no real value unless the Commission ultimately approves, and SCE deploys an AMI system.³¹ For this reason, funding for activities other than the MDMS and RFP-related work should be considered as part of SCE's Phase 3 application for AMI deployment.

Unlike the other IT systems described in SCE testimony, funding MDMS activities can be useful to inform SCE's AMI proposal and it appears that even in the absence of any AMI deployment, SCE might be able to use the MDMS system. SCE witness DeMartini stated in hearings that the work in this area would inform the business case and cost-benefit analysis by allowing the company to understand the scope of development needed for the meter data management system over the entire project duration.³² SCE witness DeMartini also stated in hearings that the MDMS could be used to replace the company's existing Customer Data Acquisition System (CDAS). This makes MDMS activities valuable, independent of AMI deployment, and lowers the likelihood of stranded costs from associated work. Therefore, we find that it is reasonable to approve $9.6 million in MDMS-related IT costs. In addition, we accept DRA's position on this cost category and approve the $620,000 related to IT activities that support the evaluation of the RFP on telecommunications systems, an activity that is likely to affect the specifications and cost estimates of SCE's final AMI proposal.

We approve a total of $10.22 million of funding for activities in this category related to RFP work and development of the MDMS. The remaining $4.78 million in proposed IT activities, and specifically those associated with IT testing and system development work on the DCA, will not be approved at this time.

8.2.3 Business Process and Organizational Readiness

As described by SCE, the Business Process and Organizational Readiness category includes two different types of activities: those relating to business process mapping and those relating to communication activities intended to prepare SCE stakeholders for AMI deployment. Business process mapping includes the identification of current processes and the design of alternative processes that will be needed to support a new AMI system. These activities seem likely to inform SCE's business case by clarifying the process and possibly also the staffing changes that would be needed if AMI were implemented. For this reason, we approve the $600,000 in SCE's business process category.

In contrast, the Organizational Readiness programs SCE describes primarily focus on educating company employees, customers, and others in the utility industry about SCE's AMI proposal. SCE witness DeMartini describes internal and external elements of their organizational readiness program.³³ SCE makes a strong case that some of these costs would ease a transition from current metering through deployment of AMI by preparing customers and employees for changes in equipment and business processes, and would be especially helpful for current meter readers whose positions would be eliminated with AMI deployment. The activities in this sub-category, however, do not meet our criteria for pre-deployment activities because they do not provide information that will assist in the analysis of the business case. In addition, these activities do not have value if AMI deployment is not approved, and so we cannot justify ratepayer funding for these activities on the basis of independent value. SCE's requested $1.1 million for Organizational Readiness is denied.

8.2.4 Field Deployment

Most activities included in SCE's Field Deployment category relate to the company's proposed 5,000 meter field test. This project will "[i]nstall and deploy AMI Field Test meters..., oversee the telecommunications network installation and select the Phase III deployment vendor."³⁴ DRA's main objection to this cost category is that information from this field test will not be available until after SCE is expected to file its application on AMI deployment. As discussed in Section 8.2.1 above, we believe that the 5,000 meter test will provide information that could refine aspects of SCE's proposal and assist the Commission in analyzing associated costs and benefits. The purpose of field deployment is to establish the vendor and SCE's processes and technology to reliably scale for the AMI deployment.³⁵ We approve the full $1.3 million requested in this category.

8.2.5 Customer Tariffs and Programs

Under the Customer Tariffs and Programs category SCE proposes $1.2 million for activities related to developing tariffs and customer programs that would take advantage of the capabilities of their proposed advanced metering infrastructure. SCE argues that AMI allows dynamic pricing and other tariff options for customers, and that many of the benefits it anticipates from the deployment of its AMI system may come from demand response and innovative programs.

The Commission set out a template for cost-effectiveness analysis of IOUs AMI applications in a July 21, 2004 ruling in R.02-06-001, the Commission's original rulemaking proceeding on demand response. This template specifies five basic tariff structures that the utilities must include in the final cost-benefit analysis within their AMI deployment applications.³⁶ In addition, this ruling provides that "[u]tilities may also develop other tariff structure scenarios that they believe make the most sense for economic or other reasons."³⁷ In its testimony, SCE describes some possible future tariff structures that would utilize its proposed AMI system,³⁸ and in testimony and hearings, SCE witness DeMartini acknowledged that the company expects to propose yet another tariff structure in its final application.³⁹

As discussed above, the cost-benefit analysis that SCE prepared and included in Exhibit 3 of this proceeding shows that approximately 57% of costs are offset with operational benefits. The remaining benefits, almost half of the total benefits in this early analysis, are expected to come from demand response and programs enabled through AMI deployment. The detailed development of tariffs and programs will provide information that will assist the Commission and parties in assessing the possible benefits of AMI. Therefore, we approve the requested $1.2 million of proposed costs related to the development of tariffs and programs. We also order SCE to consult with Energy Division staff in determining the scope of research and types of work products that should result from its expenditures on customer tariffs and programs, in order to ensure that the work conducted in this area informs future analyses of AMI.

8.2.6 Systems Integrator

SCE proposes a budget of over $18 million for systems integration work, which is technical consulting work performed by a systems integration consultant in support of its other proposed activities.⁴⁰ The majority of costs in this category would support SCE's AMI deployment, including integration of the DCA, development of the MDMS, and SCE's core back office systems. SCE divides its proposed Systems Integration work into the following categories: MDMS development, Network Operating Center, system architecture, testing, business process, organizational readiness, field deployment, and Program Management and Organization.⁴¹ These categories to a large degree mirror the major categories SCE proposes, and the rationales for their approval or disapproval are generally consistent with these related larger categories.

As SCE describes them, costs related to the Network Operating Center and testing subcategories appear related to preparation for Release 1. These costs must be excluded for the reasons that other Release 1 costs are denied, as explained in the Information Technology Section (8.2.2) above. Also, Organizational Readiness costs should be denied, for the reasons described in Section 8.2.4, above.

Consistent with Section 8.2.2 above, we approve funding here for activities in the MDMS subcategory ($2.4 million) because we expect the MDMS to have value even if AMI deployment is not ultimately approved. Costs related to development of system architecture ($5.0 million) are approved, because they could provide information that assists in estimating the costs of the final AMI project. Field Deployment ($600,000), Business Process ($3.0 million), and Program Management Organization ($3.0 million) costs within the system integrator category should be approved for the reasons described in Sections 8.2.4, 8.2.4 and 8.2.7, respectively. In total, we approve $14.0 million in the system integrator category; the remaining $4.6 million is not approved at this time and should be reviewed as part of SCE's future deployment application.

8.2.7 Program Management and Organization

The Program Management and Organization costs of $8.0 million are primarily related to the overall management of the AMI pre-deployment process, including staffing and related support costs. It is reasonable to approve these costs as proposed, to support the activities approved above. Though some of the costs in this category may be related to activities excluded from ratepayer funding by this decision, we believe it is in the ratepayers' interests to approve this category in full to ensure that SCE can develop its final proposal and to help provide some continuity in case the final deployment is approved.

8.2.8 Contingency

SCE describes this category as a sort of safety net of funds, in case certain of their Phase 2 activities cost more than expected.⁴² SCE does not provide a detailed justification for the amount requested ($7.7 million), and to the extent that the company has shown that its cost estimates in the other seven categories are reasonable, it does not seem necessary to provide additional funding for the same activities at this time. Because we are leaving SCE's existing memorandum account in place, if SCE finds that the costs approved for the above activities are insufficient, the company can record additional costs related to its approved Phase 2 activities, and may be able to recover them, subject to a future reasonableness review. All costs in this category are excluded from the approved amount.

8.3 Associated Revenue Requirement

SCE asks that its capital expenditures approved in this proceeding should be included in rate base in 2007 or 2008 as Electric Plant-in-Service. TURN objects to this request, contending that the capital expenditures would be more properly classified as Construction Work in Progress (CWIP) and added to rate base only when the associated equipment comes into service.⁴³ In support of its position, TURN requests that the Commission take judicial notice of PG&E's response to similar concerns in its own pre-deployment proceeding, A.05-03-016. Because the Commission did not specifically address this point in A.05-03-016, the record of that case is not relevant here, and TURN's request for official notice is denied.

The $5.6 million of the capital costs approved in this decision are associated with the purchase and installation of meters and telecommunications equipment. SCE's proposal to include such costs in rate base is consistent with industry practice. The additional $14.1 million in approved capital costs are associated with the development of the system architecture for the MDMS and DCA, which may assist SCE in developing its final proposal and accurately estimating its costs, and the development of the MDMS, which we expect to be used at some point in the future, whether or not AMI is eventually deployed. SCE asserts that FERC USOA Electric Plant instructions support its position that all capital costs should be added to rate base by providing that capital costs for work that is completed but part of an unfinished larger project should be immediately included in rate base. We do not believe that this principle is relevant to the proposed development of systems architecture because the systems architecture expenditures are approved here as a planning tool and not as a part of a larger capital project such as the development of the full DCA. The capital associated with development of the MDMS should be reviewed in an appropriate proceeding to determine whether any or all of the expenditures should be included in rate base, and if so, when. We approve the addition of only the $5.6 million in capital costs associated with the AMI Product Management and Field Deployment categories to SCE's rate base at this time, and not the remaining $14.1 million approved for systems architecture work or MDMS development. Depending on the outcome of SCE's Phase 3 application, the Commission may consider adding some or all of the remaining $14.1 million in capital costs to rate base in the future. According to SCE's calculations, the costs approved in this decision translate into a revenue requirement of $26,054,000 in 2007 and $713,000 in 2008.⁴⁴ No party offered an alternative methodology of translating expenses and capital additions to a revenue requirement.

¹⁷ Exhibit 200, p. 10.

¹⁸ Exhibit 200, p. 6.

¹⁹ Exhibit 201, p. 2.

²⁰ TURN Opening Brief, p. 3.

²¹ TURN Opening Brief, p. 4.

²² Exhibit 100, p. 1-4.

²³ Information from Exhibit 2, p. 7.

²⁴ Exhibit 6.

²⁵ This represents TURN's secondary recommendation. TURN's primary position is that no further pre-deployment funding should be granted. In their secondary recommendation (if the Commission rejects their primary position), TURN provides some discussion of which categories may be logically associated with pre-deployment, but does not break down its total funding recommendation by category. TURN instead recommends adopting the amount SCE requested for Phase 2 in its initial AMI pre-deployment application, A.05-03-026, plus 20%.

²⁶ Exhibit 2, p. 17.

²⁷ Exhibit 2, p. 18.

²⁸ Exhibit 2, p. 17.

²⁹ Exhibit 2, p. 18.

³⁰ Exhibit 2, p. 20.

³¹ April 17, 2007 RT 99: 1-10.

³² April 17, 2007 RT 82: 23-28.

³³ April 17, 2007 RT 86: 4-25.

³⁴ Exhibit 2, p. 17.

³⁵ Exhibit 2, p. 25.

³⁶ July 21, 2004, ACR in R.02-06-001, Appendix A, p. 11.

³⁷ July 21, 2004, ACR in R.02-06-001, Appendix A, p. 11.

³⁸ Exhibit 3, pp. 17-18.

³⁹ Exhibit 3, pp. 16 and 34; April 17, 2007 RT 59: 4-15.

⁴⁰ Exhibit 2, p. 17.

⁴¹ Exhibit 2, p. 32.

⁴² Exhibit 2, p. 3.

⁴³ TURN Opening Brief, p. 11.

⁴⁴ Comments of Southern California Edison Company on Proposed Decision of Administrative Law Judge Hecht and Alternate Proposed Decision of Assigned Commissioner Grueneich on SCE's Application for Approval of Advanced Metering Infrastructure Pre-Deployment Activities and Cost Recover, July 16, 2007, Appendix A.