Discussion of Issues Raised by Parties

Parties raise several concerns about the servicing agreement. Aglet states that the servicing agreement could result in double recovery of utility costs, and recommends that the Commission provide explicit protections against such double recovery. Aglet proposes that this be accomplished by ordering DWR to reimburse SCE for embedded costs incurred by SCE for metering, meter reading, billing, and customer service, rather than the incremental costs incurred in providing these services. Aglet also states that the determination of incremental costs is often disputed, is subject to manipulation by the utility, and its calculation is not specified in the servicing agreement. Aglet recommends that in SCE's next rate case, the Commission should allocate to the DWR charges² a share of SCE's distribution costs and common costs. Finally, Aglet recommends that until the Commission decides SCE's next rate case, the authorized electric distribution revenue requirement should be reduced to reflect the unbundling of embedded costs to the DWR charges.

SCE contends that the use of incremental costs is consistent with Commission past practice and therefore Aglet's recommendation to use embedded costs should be rejected. SCE also asserts that even if these recommendation were adopted, there would be no impact to bundled customer's rates. SCE dismisses Aglet's concerns that incremental costs are manipulated by the utility, and references Attachment G of the servicing agreement as setting forth SCE's estimated incremental costs, their derivations in general, and a process of how those estimates will be revised, if necessary. Finally, SCE disagrees with Aglet's recommendations to allocate to the DWR charges a share of SCE's distribution and common costs and to subsequently reduce SCE's PBR revenue requirement to reflect the unbundling of embedded costs to the DWR charges. SCE argues that its PBR is designed to reward SCE and its customers for cost efficiencies, and thus its performance of the servicing agreement for DWR or itself should still benefit its customers. SCE does not see the rationale for two distribution rates, one subject to PBR and the other, or services provided to DWR, not subject to PBR.

We do not agree with Aglet that DWR should reimburse SCE for embedded costs, nor do we agree with Aglet's recommendations to allocate to DWR's charges a share of SCE's distribution costs and common costs. Separating embedded costs between DWR and SCE would be time-consuming and laborious, yet result in cost accounting benefits that are negligible at best. The embedded costs of certain services remain the same whether SCE provides that service to DWR or not. For example, SCE states that its metering and meter reading costs do not change at all whether SCE bills for DWR power or not. Furthermore, the transmission and distribution services, which SCE will provide DWR under the servicing agreement, are already included in SCE's rates. There is little to be gained by creating separate categories of costs, one subject to SCE's PBR and the other not, when the PBR mechanism is intended to provide mutual benefits to customers and utility shareholders regardless of which entity is purchasing or generating the electricity. We note that Aglet acknowledges that the assignment of embedded costs to either DWR charges or SCE rates might not change the overall rates for bundled service. Thus, we will not reduce SCE's authorized electric distribution revenue requirement to reflect the unbundling of embedded costs to the DWR charges as Aglet suggests.

Even if implemented, Aglet's recommendations address a limited-term situation. DWR's authority was an emergency measure designed to stabilize a crisis. (Water Code §§ 80000, 80003.) Under the transaction currently being undertaken by the State Treasurer and the Administration, DWR must continue to sell electricity for the life of the bonds. However, AB1X appears to contemplate that the utilities will resume the responsibility of purchasing electricity for their customers (see Water Code §80260). Given that DWR's role as a power purchaser may change in the long term, so long as the bonds are not affected, the benefits of Aglet's recommendations would be of limited value.

However, Aglet raises an important issue regarding the potential to over-estimate incremental costs. We will order subsequent proceedings to review the costs SCE will charge DWR, and to determine if those costs are reasonable. In doing so, we are not reviewing the reasonableness of DWR's requests for service from the utility, but the reasonableness of the utility's behavior in responding to that request. If we find that the expenses are unreasonable in any part, we will require the utility to reduce its bill to DWR to eliminate any unreasonable expense.

We acknowledge that there is the potential that the costs SCE will recover from DWR will be greater than incremental costs that are already included in SCE's rates. Indeed the servicing agreement provides that the Commission may adjust SCE's rates to avoid double-recovery.³ Accordingly, any concerns about double-recovery can be addressed in SCE's upcoming General Rate Case.

TURN states that the $1.8 million in capital `start up' costs claimed by SCE in Attachment G of the servicing agreement should be treated as contributions in aid of construction (CIAC) or afforded similar ratemaking treatment since these costs, as well as ongoing expenses, are intended to be recovered through fees paid by DWR to SCE. Failure to properly account for these expenses places SCE's ratepayers at risk for paying depreciation expense and return on capital investment, costs which were recovered from DWR. SCE agrees that capital costs paid for by DWR should not be added to rate base and that no change to the servicing agreement is required for this to occur.

We concur. Capital `start up' costs should not be added to rate base, but shall be treated as CIAC or afforded similar ratemaking treatment. Our determination of this issue does not require a change to the servicing agreement.

TURN also questions the MOU between DWR and SCE, described generally in Section 1 of Attachment E of the servicing agreement. If the Commission approves the servicing agreement, TURN recommends that the Commission avoid any possible inference that its approval of the servicing agreement constitutes an approval of all, or even a part, of the MOU. SCE clarifies that it is not seeking Commission approval of the MOU, and notes that Attachment E references separate agreements between SCE and DWR which would not be superceded or otherwise affected by the servicing agreement.

We clarify that our actions today are not predicated on the MOU. Our approval of the servicing agreement does not constitute approval of any part of the MOU. In the event the MOU referenced in Attachment E is not approved as required by the MOU's own terms, our approval here should not be read as an independent endorsement of the MOU such that the MOU's provisions may be enforced through the servicing agreement. Language shall be added to Attachment E, Section 1 to make clear that the Commission's approval of the servicing agreement does not prejudge, endorse, or approve any component of the referenced MOU.

Another party, NewPower, states that the servicing agreements for all three utilities are ambiguous as to whether a utility default is required for DWR to switch to non-utility revenue cycle service providers. NewPower suggests that DWR may want to procure billing and metering services from non-utility suppliers in order to obtain potential gains in functionality or efficiency but would forego these benefits if the Commission permits the utilities to provide DWR these services at only a nominal fee. NewPower recommends that the Commission direct the utilities to provide revenue cycle services to DWR under the servicing agreement at exactly the same Commission-approved rates that the utilities charge non-utility electric service providers (ESPs) for such services.

The servicing agreements are not ambiguous. DWR can switch to non-utility revenue cycle service providers only if SCE defaults on the servicing agreement. (See Section 3.2 and Section 5.3(a)(ii).) In any event, we will modify the agreement so that DWR may not adopt a dual billing service. Moreover, it is not reasonable to charge DWR the same rates that the utilities charge ESPs for revenue cycle services. DWR is providing electricity to all retail end-use customers in SCE's service territory, while ESPs provide electricity to only a limited number of customers. The fees paid by DWR to SCE are based on lump sum costs provided in Attachment G of the servicing agreement, while the rates paid by ESPs to SCE are based on a methodology adopted in D.98-09-070.

Water Code § 80106 states:

"(a) The department may contract with the related electrical corporation or its successor in the performance of related service, for the electrical corporation or its successor in the performance of related service, to transmit or provide for the transmission of, and distribute the power and provide billing, collection, and other related services, as agent of the department, on terms and conditions that reasonably compensate the electrical corporation for its services.

(b) At the request of the department, the commission shall order the related electrical corporation or its successor in the performance of related service, to transmit or provide for the transmission of, and distribute the power and provide billing, collection, and other related services, as agent of the department, on terms and conditions that reasonably compensate the electrical corporation for its services."

The law speaks only of electrical corporations or their successors as the providers of billing, collection and other revenue cycle services to DWR. The legislation is specific in mentioning reasonable compensation to electrical corporations for the services provided, and the legislation contains no reference to other entities such as ESPs providing such services. It is clear that the intent of the legislation is to ensure that SCE is reasonably compensated for the services it provides, rather than to ensure that other providers of revenue cycle services have an opportunity to compete with SCE. DWR's current role in providing electricity should cause the least possible increase in the total cost that electric end-use customers pay for billing and related services. Accordingly, we do not agree with NewPower's recommendation to direct the utilities to provide revenue cycle services to DWR at a higher level than the incremental cost provided in the servicing agreement.

In addition to addressing the concerns raised by the commenters, we also address one other point in the servicing agreement that we mentioned earlier. Section 2.2 of Service Attachment 1 deals with the presentation of DWR charges on utility bills. Subdivision (a) of that section provides for a separate line item for DWR charges on all utility bills.⁴ We believe this is undesirable. Electricity bills are already complex and adding a separate line item for DWR will only increase this complexity. Increasingly complex bills are likely to cause customer confusion, and may well dilute the energy conservation message we are trying to convey by the way in which tiered rates are shown on customers' bills. Accordingly, subdivision (a) of Section 2.2. of Service Attachment 1 should be revised to read as follows: "DWR charges shall appear on all Consolidated Utility Bills in the manner and at the time required by Applicable Law and Applicable Tariffs." While DWR charges will not be separately stated on customers' bills, the utility's internal accounting will account separately for DWR charges, so that the utility properly segregates the money it receives on behalf of DWR as DWR's agent from all other monies it received.⁵ This revision is limited solely to subdivision (a) of Section 2.2 of Service Attachment 1 and is in no way intended to alter or amend any other provision thereof or of the servicing agreement or the parties' respective duties or obligations thereunder.