6. Need for the Incentives
6.1. Positions of Parties
PG&E states that it has been unable to attract new developments that have the option of being served by a POU. PG&E alleges that POUs originally cherry-picked PG&E's larger and more profitable existing customers (usually commercial and industrial) but have more recently gone after new residential subdivisions and commercial developments. PG&E states that POUs have succeeded in attracting virtually all new development in those portions of PG&E's service territories where they are extending service. PG&E claims that, in the last few years, over 11,000 customers (approximately $18 million in annual revenues) have chosen to take service from POUs rather than PG&E.
PG&E argues that the POUs have the ability to offer more financially attractive line extension costs and terms to developers because they have significant financial advantages. PG&E states that the rules applicable to PG&E and POUs are different. In particular, it represents that because POUs do not pay federal or state income taxes, they are not required to impose ITCC or an equivalent on developers. Thus, PG&E must pass through costs to the developer that the POU does not incur. PG&E states that its inability to offer more financially attractive line extension costs and terms to developers is a primary cause of the uneconomic bypass at issue here.
PG&E also states that POUs have the advantage that they are not regulated by a third party (the Commission). PG&E represents that, when it comes to deviations from standard tariff line extension offerings, the POU can respond more quickly to developers than PG&E because PG&E must seek the Commission's advance approval whereas the POUs do not have third-party regulators whose approval they must seek. PG&E states that in seeking Commission approval, it must file an application that would cause PG&E to incur additional costs, consume many months of regulatory litigation and allow the POUs to oppose the application. PG&E represents that developers are not willing to wait for such approval or assume the risk that approval will not be granted.
PG&E states that service to developers is one of a number of important factors that developers consider in choosing an electric distribution provider. PG&E represents that it has taken and continues to take steps to improve the quality and timeliness of its service to developers, but that cost is a critical factor for developers. PG&E argues that if service was the central subject matter at issue in this proceeding, the POUs would be confident that their service is superior to PG&E's service and would not be participating in this proceeding.
PG&E argues that, due to its inability to attract these new developments, uneconomic bypass has occurred with the result that existing customers' rates will be higher than would have been the case had PG&E gained the new developments. PG&E also represents that its inability to attract new developments means that the POUs control the gateways to subsequent expansion of the new developments making it more costly and, therefore, less attractive to developers to choose PG&E to serve such subsequent expansions.
PG&E states that its proposed incentives will avoid the resulting uneconomic bypass and provide a positive CTM that will result in existing ratepayers' rates being less than they would otherwise be.
The Division of Ratepayer Advocates (DRA) states that PG&E's proposal is not necessary because line extension allowances have been around for decades and this is the first request of this type.
The Utility Reform Network (TURN) states that PG&E failed to address the availability of the 50% nonrefundable discount option and third party installation as ways of competing with POUs.
CCSF states that PG&E has failed to measure or quantify any advantages the POUs have over PG&E. CCSF also states that uneconomic bypass occurs when a customer leaves the utility system, not when new in-state load can be served by PG&E or a POU. Additionally, CCSF states that the Commission's criteria for approval of proposals related to the threat of uneconomic bypass are: (1) the threat of bypass must be imminent, (2) the bypass must be uneconomic, and (3) the proposed contract must have reasonable terms and conditions.
Hercules Municipal Utility (Hercules) states that PG&E has not shown that it has lost new customers to POUs because it could not match the POU's line extension offer.
The Merced Irrigation District and the Modesto Irrigation District (collectively MID) state that PG&E has not shown that the load it lost to POUs was due to financial reasons as opposed to service reasons. MID argues that PG&E has failed to measure or quantify any advantages the POUs have over PG&E, and that competition by POUs is not new and has been going on for almost a century. MID also represents that PG&E's poor service to developers is one of the reasons that developers choose POUs.
MID states that the Commission's determinations regarding uneconomic bypass have been in situations where the ultimate customer is the one making the choice rather than a developer as is the case in this application.
The Northern California Power Agency (NCPA) states that uneconomic bypass occurs when a customer leaves the utility system.10 NCPA argues that PG&E's proposal is not intended to retain customers or entice them to locate in California, but is intended to discriminate between customers to further its business growth. Additionally, NCPA states that the Commission's criteria for approval of proposals related to uneconomic bypass are: (1) the threat of bypass must be imminent, (2) the bypass must be uneconomic, and (3) the proposed contract must have reasonable terms and conditions.
6.2. Discussion
PG&E has provided no estimate of the amount of revenues it will fail to obtain in future years due to developers choosing a POU over PG&E or the revenues it will gain if this application is approved. Therefore, we look to the record to examine a range of possible results if the incentives are authorized.
The amount of revenues from customers PG&E claims to have failed to obtain over the last few years amounts to 0.17% of its total annual revenues as pointed out by TURN. The record does not indicate the exact number of years over which the 0.17% loss of revenues occurred but it appears to be between 2001 and 2005, or about 0.034% per year. If we assume that the potential for developers to choose a POU over PG&E will remain at roughly this level, and that the incentive proposal would allow PG&E to attract all new developments that could choose a POU, it would take approximately 29 years for the incentives to have a 1% effect on PG&E's annual revenues. If the amount of revenues is increased to 0.05% per year (a 47% increase), it will take approximately 20 years to have a 1% effect on PG&E's revenues. However, PG&E does not claim that the incentives would capture all new developments. If PG&E were able to attract half of such new developments, it would take approximately 40-58 years to have a 1% effect on PG&E's revenues using the above assumptions.
PG&E has provided no estimate of the CTM it will fail to obtain in future years due to developers choosing a POU over PG&E or the CTM it will gain if this application is approved. If we assume that the CTM per customer from the customers the incentive is intended to attract is the same as from existing customers, the above analysis would indicate that with a 50% success rate, it would take approximately 40-58 years to have a 1% effect on PG&E's CTM.11
The above analysis, though rough, is sufficient for us to find the CTM PG&E will fail to obtain in future years due to developers choosing a POU over PG&E or gain if this application is approved will not be significant. As a result, the record does not indicate that the lack of the incentives would have a significant adverse effect on revenues or CTM, or that the incentives would have a significant positive effect. Since a significant positive effect on CTM is necessary to have a significant positive effect on rates, we have no reason to believe the incentives would have a significant positive effect on rates.
PG&E alleges that its failure to attract new developments is primarily due to the POU's ability to offer more attractive line extension terms. While the record demonstrates that this is an important factor, there are other things PG&E can do to compete with the POUs.
As pointed out by the parties, PG&E has tools available to attract developments in addition to its line extension allowances. One tool is the 50% non-refundable discount option. Normally refundable costs of the line extension are paid by the developer to the utility. Under the 50% nonrefundable discount option, the developer has the option of paying only half of the refundable costs of the line extension, but the developer would not be eligible for a refund. This option allows the developer to have lower up-front costs. PG&E represents that this tool has not been successful in persuading developers to take service from PG&E rather than a POU. However, PG&E has not addressed what improvements to this tool or the promotion of this tool could help it compete with the POUs. Thus, the record does not indicate the degree to which the 50% nonrefundable discount option could reduce or eliminate the alleged need for the incentive proposal.
Another tool is third-party installation, which allows the developer to have the line extension installed by a third party rather than the utility. Depending on the availability of third-party installers, this may allow the developer faster or lower cost installation than PG&E can provide. PG&E represents that this tool has not been successful in persuading developers to take service from PG&E rather than a POU. However, PG&E has not addressed what improvements to this tool or the promotion of this tool could help it compete with the POUs. Thus the record does not indicate the degree to which third-party installation could reduce or eliminate the alleged need for the incentive proposal.
The record demonstrates that service to developers is an important factor in competing with the POUs. The record contains some anecdotal evidence indicating that at least some developers have been dissatisfied with PG&E's service and that PG&E intends to improve such service. Improving service to developers is a tool PG&E could use to compete with POUs. However, PG&E has not addressed the degree to which service to developers can be improved, and to what degree such improvement would attract developers who would otherwise elect to take service from a POU. Thus the record does not indicate the degree to which improved customer service could reduce or eliminate the alleged need for the incentive proposal.
The record demonstrates that PG&E and the POUs have different advantages and disadvantages over each other. For example, PG&E pays income taxes whereas the POUs do not. PG&E charges developers ITCC whereas POUs do not. PG&E must get Commission authorization to offer exceptional case contracts while POUs must get the authorization of their boards of directors to deviate from their tariffs. Since POUs are much smaller than PG&E, they do not have the economies of scale that PG&E has. POUs provide revenues to cities and counties that PG&E is not required to provide. Overall, PG&E has provided evidence that there are differences between it and POUs, but it has not provided evidence that quantifies or otherwise demonstrates that POUs have a significant overall net advantage over PG&E. Thus, the record does not support PG&E's claim that the incentives are necessary to overcome any significant advantage held by the POUs.
PG&E correctly asserts that it must seek Commission approval to deviate from its line extension rules. PG&E states that the resulting delay causes developers to choose the POU rather than PG&E. The record also shows that approval of the POU's governing board is necessary for the POU to vary from its tariffs. It seems possible, especially if the application is opposed, that it could take some time for PG&E to obtain the Commission's approval of a deviation. However, it is reasonable to assume that there would be some delay inherent in the POU getting its board to approve a deviation from its tariffs. PG&E has not provided evidence that demonstrates that the delay it may encounter is significantly greater than the delay the POU may encounter. Additionally, PG&E has not demonstrated that any such difference has been a significant factor in developers choosing the POU rather than PG&E. 12
In Decision (D.) 92-11-052, the Commission stated "Bypass is uneconomic when a customer leaves the utility system even though its cost to bypass is more than the marginal cost of utility service." Thus, the term uneconomic bypass applies to the loss of an existing customer.
D.92-11-052 pertained to rate discounts for the transportation of natural gas. In the decision, the Commission stated "Discounts to prevent uneconomic bypass can attract or retain incremental load which would otherwise be lost, and thus help to keep other rates down." This means that discounts intended to deter uneconomic bypass could also have the effect of attracting incremental load. Thus we do not interpret D.92-11-052 to define uneconomic bypass as necessarily including new customers taking service from a POU rather than PG&E.
Uneconomic bypass has been used in connection with rate discounts offered to certain large customers as an incentive to continue taking service from the utility. In those cases the customer is the direct recipient of the discount. An important element in determining whether to offer a discount is finding whether the customer's cost to bypass is greater than the utility's marginal cost to provide service. An additional requirement has been that the incentive must result in a specified amount of positive CTM. In this case, the developer makes the decision about whether to take service from PG&E, but the developer is not ultimately the customer. PG&E's application, even though it bases its CTM analysis on revenues from the customers in a development over a 30-year period, does not address the costs to the new customer to bypass. Therefore, even if we were to accept PG&E's assertion that its proposal is aimed to prevent uneconomic bypass, PG&E has not done the necessary analysis to demonstrate that new customers being served by a POU rather than PG&E constitute uneconomic bypass.
In D.92-11-052, the Commission stated that "Bypass should only be prevented if it is uneconomic." Thus, rate discounts should not be offered in the case of economic bypass, which occurs when the customer's cost to bypass is less than the utility's marginal cost to provide service. The record shows that POU rates are in some cases significantly lower than PG&E's rates. Thus, if we were to accept PG&E's claim that developers choosing a POU over PG&E could fit within the definition of uneconomic bypass, there could also be economic bypass in some circumstances. Here again, PG&E has not done the necessary analysis, and we find that PG&E has not demonstrated that this application addresses uneconomic bypass.
Overall, PG&E has not demonstrated that its proposal will have a significant positive effect on CTM or rates, that it is effectively using other tools available to it to compete with POUs, that POUs have significant advantages over PG&E, or that its proposal will reduce uneconomic bypass. Thus, PG&E has not demonstrated a need for its proposed incentives.
10 NCPA is a Joint Powers Agency whose members include the Cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Palo Alto, Redding, Roseville, Santa Clara and Ukiah, as well as the Bay Area Rapid Transit District, the Port of Oakland, the Truckee Donner Public Utility District, and the Turlock Irrigation District. NCPA's associate members are the Plumas-Sierra Rural Electric Cooperative and the Placer County Water Agency.
11 This assumes that a change in revenues results in the same percentage change in CTM.
12 PG&E described one instance where it claims the delay in getting Commission approval for a deviation contributed in large part to the developer's decision to take service from the POU.
