Creation Of The Servicing Agreement

California has experienced an electricity crisis of immense magnitude. When AB1X was enacted, SCE and other investor-owned utilities were unable to convince sellers that they were financially able to purchase electricity on the wholesale market for their customers, resulting in serious concerns about reliability. AB1X authorized DWR to provide electricity to customers of investor-owned utilities to meet those concerns. An integral part of the statute's scheme are provisions allowing DWR to contract with electrical corporations to transmit and distribute that power to retail end-use electric customers, and to provide billing, collection, and other related services as an agent of DWR on terms and conditions that reasonably compensate the utility for its services. The servicing agreement embodies those terms and conditions that DWR and SCE have agreed to.

The servicing agreement, among other things, provides a detailed methodology for the remittance of revenues to DWR. This methodology revises and expands upon the methods for the utilities to transfer revenues to DWR, as set forth in D.01-03-081 and D.01-05-064.

The servicing agreement contains a variety of provisions. It provides for the transmission and delivery by SCE of power procured by DWR (Section 2.1),¹ as well as the furnishing of metering services, meter reading services, and billing services by SCE to DWR (Section 3.1). The servicing agreement addresses how DWR charges shall appear on customer's billings, and how customers shall be notified in the event of changes to the DWR charges (Service Attachment 1, Sections 2.2 and 2.6).

The servicing agreement establishes various fees and charges that DWR will pay to SCE to cover the utility's costs of establishing procedures, systems, and mechanisms necessary to perform billing and related services and providing those services on an ongoing basis (Section 7, Section 2.3 of Service Attachment 1 and Attachment G). The servicing agreement provides that SCE will be paid its incremental costs. The servicing agreement enables the Commission to adjust SCE's rate to avoid double recovery of any costs paid by DWR which have already been included in SCE's rate (Section 7.1). Furthermore, the Commission has jurisdiction to resolve disputes between SCE and DWR concerning the reasonableness of costs charged to DWR (Service Attachment 1, Section 2.3).

The servicing agreement also establishes data and communication procedures between DWR and SCE concerning customer usage, utility-retained generation, and energy trade schedules so that DWR can make accurate electricity purchases (Section 2.2). The servicing agreement includes a methodology for SCE to segregate, hold in trust, and remit to DWR revenues from the sale of DWR power to customers (Section 4.2). The remittance methodology specifies how payments are to be processed, addressing such details as uncollectible balances, reconciliation with the Interim Remittance Methodologies this Commission adopted in previous decisions, and management of partial payments by customers (Attachment B). The servicing agreement also addresses any adjustments associated with the "20/20 program" established by Governor Davis' Executive Order, D-30-01, dated March 13, 2001 (Section 4.3).

Finally, the servicing agreement includes other provisions addressing the consequences of default by either SCE or DWR (Section 5), confidentiality of information belonging to SCE's customers, SCE or DWR (Section 6), retention of and access to SCE records, and audit rights for DWR and the State of California Bureau of State Audits (Section 8). SCE will provide annual reports to DWR and the Commission (Section 8). The servicing agreement also addresses various other matters.

We conclude that the provisions contained in the servicing agreement properly enable the issuance of bonds developed and structured by the State Treasurer and the Administration. DWR is now selling electricity to customers in SCE's service territory because SCE is unable to supply 100% of the load requirements in its territory. As long as DWR performs this purchasing function, mechanisms must be in place to ensure that DWR's electricity is transmitted and distributed to these customers. In addition, a detailed description of how SCE will fulfill its role as a collection agent is appropriate. We also believe it is appropriate for SCE to provide us with the same information it provides DWR, and we will order it to do so.

The provisions of the servicing agreement relating to transmission and distribution are reasonable because they provide for SCE to transmit and distribute DWR's electricity at no additional charge to the utility or to end-use customers, as SCE already records in rates amounts for transmission and distribution and there is no change in costs for handling DWR's power. Meter reading and other necessary revenue cycle services in SCE's service territory are also provided appropriately. We endorse the remittance methodology contained in the servicing agreement because it clearly establishes that SCE is acting as a collection agent for DWR. Provisions allowing SCE to reduce remittances to DWR for the already-tariffed costs of the 20/20 program adopt a reasonable approach to meeting DWR's requirement to pay these costs. As we discussed above, we believe that the incremental method of determining SCE's costs is appropriate, especially as we may prevent double-recovery by adjusting SCE's rates.

However, we will revise certain details of the servicing agreement. We eliminate the requirement for a separate line item for DWR charges on customers' bills, as we believe this will cause undue customer confusion. In addition, we will change the provisions concerning dual billing service. Water Code §80106 authorizes DWR to contract "with the related electrical corporation or its successor" for billing services. We respect the Legislature's judgement and do not believe it is cost effective to provide for separate billing by DWR, especially when this Commission maintains the authority to ensure that utilities comply with the servicing agreement provisions. The Commission is able to ensure compliance with its orders because of monetary and criminal penalties if the utility or its officers refuse to comply with a Commission decision.

The proposed rate agreement also requires us to ensure that SCE complies with this order and we intend to meet those obligations. Furthermore, we retain the ability to reconsider these modifications at a future date if needed. For example, while we see no need for dual billing now, we retain discretion to adopt a different result in a different fact situation. We also modify Section 1 of Attachment E to clarify that our approval of the servicing agreement is not an endorsement of the Memorandum of Understanding (MOU) referenced in the servicing agreement.