4. The Basis for Rate Increases: The DWR Revenue Requirement

4.1 Implementing The DWR Revenue Requirement

4.1.1 The DWR Request

By letter dated May 2, 2001, DWR informed this Commission that it had determined a total revenue requirement of $9.2 billion, pursuant to Water Code §§ 80110 and 80134, and that $914.9 million of this amount was attributable to electricity to be supplied to SDG&E's customers from July 1, 2001 through June 30, 2002. DWR requested that the Commission establish rates that would include charges payable to DWR for power sold by DWR to retail end use customers.

Based on the May 2nd DWR request, SDG&E proposed rate increases to collect an additional $503 million annually, or 2.77 cents per kWh for small customers and 2.86 cents per kWh for large customers. Other parties disputed an element of this proposal, i.e., SDG&E's proposed assignment of URG to small customers. ORA proposed a 3 cents per kWh surcharge as was done for PG&E and Edison. Except for ORA, the parties did not dispute the company's overall approach to calculating the average increase necessary for the collection of the total DWR revenue requirement.

On July 23, 2001, after the record of this phase of the proceeding was closed, DWR Director Thomas M. Hannigan sent a letter to Commissioner Geoffrey Brown setting forth, among other things, an updated revenue requirement totaling $13.07 billion for the period from January 2001 through December 2002. DWR stated that this revenue requirement calculation replaced and superseded the May 2 letter. On August 7, 2001, DWR further updated the revenue requirement to $12.6 billion for the same period. The ALJ directed SDG&E to update its calculations of the rate increases required to implement the updated DWR revenue requirement.⁷

4.1.2 A.00-11-038, et al.

The Commission is currently reviewing implementation of the DWR revenue requirement request in A.00-11-038, et al. That review includes the allocation of the total DWR revenue requirement among the customers of Edison and PG&E as well as SDG&E. In that proceeding we intend to establish the means of implementing the DWR revenue requirements applicable to Edison, PG&E, and SDG&E based on the adopted revenue requirement allocations. As explained in the following section, we determine that it is necessary to adopt an interim DWR charge applicable to SDG&E at this time. We further determine that this interim DWR charge should be determined by taking official notice of a draft decision in A.00-11-038, et al. that was mailed on September 4, 2001 (Draft Decision). In order to provide the necessary context and an understanding of our reasons for doing so, we have included an abstract from the Draft Decision as Appendix D to this decision.

4.1.3 Adopted Interim Approach to Implementation of The DWR Request

The record of the public participation hearings in SDG&E's service territory confirms that past electric rate increases and the prospect of more increases are deeply affecting the citizens, businesses, and economy of SDG&E's service territory. We understand that additional rate increases will undoubtedly inflict additional hardship upon the region. We also understand the anger at such increases that was repeatedly expressed at the public participation hearings, and we recognize the virtually unanimous opposition to any rate increase. Bearing this in mind, we intend to approve retail rate increases only to the extent that we find such increases are required for the provision of electric service, i.e., to keep the lights on, and are required as a matter of law.

The underlying problem remains the dysfunctional wholesale electric market and the volatile and extraordinarily high prices that have prevailed since last year. We will continue to pursue actions within our jurisdiction to mitigate the effects of the market breakdown, and to ensure that a reliable electric supply is available to utility customers at the most reasonable retail prices attainable under the circumstances. In the context of this proceeding, this approach requires that we recognize the current statutory role of DWR in procuring power on behalf of retail end use customers, and that we establish rates for SDG&E that will collect the share of the DWR revenue requirement allocable to SDG&E's customers.

It is undisputed that under Water Code §§ 80110 and 80134, DWR is authorized to procure power. Further, under Water Code Section § 80110, the review of power purchase costs for reasonableness, historically performed by the Public Utilities Commission, is transferred to DWR to conduct a review and determine the reasonableness review of their own procurement costs.⁸ Once this occurs, the Commission is required to allow DWR to recover its revenue requirement for power that it sells to retail end use customers served by electrical corporations. No one disputes the fact that DWR is providing power to SDG&E's retail end use customers pursuant to this authority.⁹ Clearly, the Legislature intends that we cooperate with DWR to ensure that rates are established by electrical corporations to provide for the collection of the DWR-determined revenue requirement from retail end use customers.

Although in A.00-11-038 et al. we are still considering actions to implement the updated DWR revenue requirement, we believe that we should not wait until that proceeding is completed before we take action to increase SDG&E's rates to provide for the collection of the DWR revenue requirement through an interim DWR charge. The parties' proposals in this proceeding and the various scenarios displayed in Exhibit 38 all assume adoption of the "postage stamp" allocation of the DWR revenue requirement that was proposed by DWR in its original and updated requests to the Commission.

While we expect that a decision in A.00-11-038 et al. will make a DWR revenue requirement allocation to SDG&E's customers, that allocation cannot be determined at this time. Nevertheless, we believe that there is a significant likelihood that regardless of the eventual disposition of the DWR revenue requirement issues in that proceeding, it will be necessary to raise SDG&E's rates, possibly by a significant amount, in order to provide for the collection of the allocated portion of the DWR revenue requirement. We are concerned that any additional delay in raising SDG&E's rates to provide for the DWR revenue requirement could result in a deferred rate increase of a much greater magnitude, which in turn could have a greater likelihood of causing disruptive rate shock. Since it is likely that significant rate increases will ultimately be found to be necessary regardless of the allocation method and other revenue requirement determinations made in A.00-11-038 et al., we prefer to mitigate if not eliminate rate shock by adopting a rate increase now. Simply put, we do not necessarily protect ratepayers by deferring rate increases that may grow significantly in magnitude if deferred. We also note that by raising SDG&E's rates at this time, we take advantage of an opportunity to restructure SDG&E's rate design employing conservation-based price signals.

The various system average rate increase scenarios portrayed in Exhibit 38 (based on our decision, discussed below, to continue the traditional assignment of SDG&E's URG to all customer classes) range from 2.22 cents per kWh to 3.80 cents per kWh. As noted earlier, these scenarios are based on DWR's allocation proposal. As discussed below, the system average rate increase that results from the revenue allocation to SDG&E's customers that is proposed in

the Draft Decision in A.00-11-038, et al. is 1.46 cents per kWh. Until we determine in A.00-11-038 et al. the DWR revenue requirement amount that should be allocated to SDG&E's customers, the alternative scenarios set forth in Exhibit 38 in this proceeding and the 1.46 cents calculation derived from the Draft Decision represent a range of rate increases that might be adopted for SDG&E. To give effect to our intention to raise SDG&E's rates now in order to prevent or mitigate more disruptive rate increases that might otherwise have to be adopted later, and to further our conservation rate design policies, we believe it is reasonable to adopt an interim system average rate increase at this time that is within this range. We further believe that in view of the uncertainty associated with this issue and our continuing intent to protect ratepayers from any unnecessary rate increases, it is reasonable to adopt the lowest system average increase within this range.

We hereby take official notice of the DWR revenue requirement allocation to SDG&E's customers and the SDG&E-specific DWR charge of 9.02 cents per kWh that were proposed in the Draft Decision. To fulfill our responsibilities under AB1X, it is reasonable to reflect a charge per-kWh that is attributable to sales by DWR. While we establish a separate per-kWh charge for DWR, we do not require SDG&E to show this charge as a separate line item on customers' bills.

We shall use this DWR charge for the sole purpose of calculating an interim system average increase that we shall adopt for SDG&E at this time. We emphasize that both the DWR charge and the system average increase are adopted on an interim basis and will be subject to adjustment when we reach a decision on the DWR revenue requirement and allocation thereof in A.00-11-038, et al. We also emphasize that our interim use of the SDG&E-specific DWR charge proposed in the Draft Decision is without prejudice to our subsequent decision in A.00-11-038, et al.

We are committed to meeting our statutory responsibility to ensure the receipt of the allocated DWR revenue requirement. Therefore, in order to give further effect to the DWR revenue requirement as it applies to SDG&E's customers, we determine that an interim DWR charge of 9.02 cents per kWh should be adopted and that an interim system average retail rate increase of 1.46 cents per kWh is required. We have computed this retail rate increase by taking into account the current rate of SDG&E's disbursements to DWR and the estimated percentage of total bundled retail sales that will be supplied by DWR. As reflected in Exhibits 14, 18, and 38, an estimated 58% of SDG&E's bundled retail sales will be supplied by DWR and the remaining 42% will be supplied by SDG&E's URG. We use this model for calculating the required rate increase, rather than the model used in Exhibits 14, 18, and 38. We do so in order to implement a DWR charge whose calculation is independent from the utility's URG and related costs. However, we accept SDG&E's assumption that DWR will supply 58% of its system needs. The following table shows the calculation of the adopted increase using these assumptions.

Calculation of Adopted System Average Rate Increase

Line No.	Item	Cents/kWh
1	Amount to be disbursed to DWR for each kWh sold by DWR to SDG&E customers (A.00-11-038)	9.02
2	Current amount disbursed to DWR for each kWh sold by DWR (D.01-03-081)	6.50
3	Increase required for each kWh sold by DWR (Line 1 less Line 2)	2.52
4	Increase required for each kWh, total SDG&E retail sales (58% of Line 3)	1.46

Pursuant to Water Code §§ 80016, 80110, and 80134; and our general obligation under the Public Utilities Act¹⁰ to ensure the provision of safe and reliable service by the utilities we regulate, we adopt an interim system average rate increase of 1.46 cents per kWh. We intend that this increase will produce an increase of 2.52 cents for each kWh sold by DWR to SDG&E's bundled retail customers in addition to the 6.5 cents per kWh now being disbursed to DWR, so that a total interim DWR charge of 9.02 cents per will be reflected in SDG&E's rates, and collected by SDG&E and remitted to DWR on a pass-through basis. We intend that this will fulfill DWR's request that we establish charges that are measured as a function of the amount of power sold by DWR and not as a function of the amount of power sold by the utility.

DWR will receive from SDG&E the revenues that the utility collects on behalf of DWR, based on the adopted fixed DWR charge of 9.02 cents per kWh. This per-kWh charge payable to DWR shall remain fixed, even though the actual percentage of SDG&E's system sales supplied by DWR may vary from the forecast of 58% in any month. However, the retail rate applied on each utility customer's bill should not fluctuate from month-to-month merely due to changes in the percentage of sales supplied by DWR each month. This would cause customers undue confusion.

With fixed retail tariff rates, and a fixed per-kWh charge payable to DWR, there is in effect an amount that the utility is entitled to receive for its own account for the kWhs that it supplies to its retail customers. We will call this amount the "imputed utility rate." To the extent that the actual percentage of DWR sales to SDG&E's retail end use customers is either less than or exceeds the 58% forecast percentage of DWR sales to those customers for any month, the customer's bill for that month will not exactly provide the imputed utility rate for the kWhs the utility provides. However, it is not our intent that the utility ultimately recover either more or less than the imputed utility rate for the kWhs it provides. Therefore, in order to ensure that the utility recovers neither more nor less than its imputed utility rate, we shall authorize and direct SDG&E to establish a balancing account mechanism. The mechanism shall take effect concurrently with the effective date of the DWR charge and the system average retail rate increase adopted herein.

As noted above, although the end user's retail rates will not fluctuate to reflect monthly differences in DWR sales, the rate per kWh that is included in the bill for the power that the utility provides (i.e., the "effective utility rate") will vary from month to month. Authorization of the balancing account will ensure that the utility will recover its imputed utility rate per kWh consistent with today's decision. The utility shall book into this balancing account the difference between the imputed utility rate based on today's decision and the effective utility rate it has billed, multiplied by the number of kWhs billed at that effective utility rate. By truing up this balancing account at a later date, we will ensure that the utility bills, and its customers pay, over time, the imputed utility rate for utility-supplied power consistent with the revenue requirements implemented in today's decision.

We adopt a rate increase based on the DWR revenue requirement today without specifically approving the individual components underlying SDG&E's calculations and assumptions for any other purpose, including those with respect to URG, ISO charges, and sales forecasts.¹¹ Also, we find no basis for preferring ORA's proposal for a 3 cents per kWh surcharge. In March of this year, the Commission adopted a 3 cents per kWh average rate increase for PG&E and Edison customers. In this order, we adopt an average 1.46 cents per kWh increase for SDG&E customers for similar purposes. The rate increase for SDG&E customers is significantly lower than the rate increases adopted for PG&E and Edison customers because a 3 cent rate increase has not been shown to be necessary at this time to implement the DWR revenue requirement to be allocated to SDG&E's customers in A.00-11-038, et al. ORA's proposal would result in a higher than necessary rate increase for SDG&E customers. Therefore, we deny ORA's proposal.

In comments submitted in this proceeding and in Exhibit 38, SDG&E detailed the constraints of its billing system. In comments on the ALJ's proposed decision, SDG&E requested that it be allowed 10 working days in which to make its compliance advice letter filing. While this decision differs in several respects from the ALJ's proposed decision, it adopts a system average increase of 1.46 cents per kWh as in the proposed decision and it does not make material changes to the rate design relative to those in the proposed decision. The proposed decision was mailed on August 27, 2001, and SDG&E has had since that date to begin preparations for its advice letter filing. We authorize and direct SDG&E to increase its rates pursuant to this decision not later than September 30, 2001, and to make its compliance advice letter filing within seven days from the effective date of this decision.

The rate interim increases ordered by this decision will remain in effect until further Commission order. As stated earlier we intend to issue a decision in A.00-11-038 et al. that addresses the DWR revenue requirement and the allocation of the revenue requirement among the utilities. We will consider adjustments to SDG&E's rates that may be necessary at that time.

4.2 Rate Increases Implementing DWR's Revenue
Requirement and Rate Stabilization
Legislation

Because of legislation aimed at stabilizing the electric bills paid by SDG&E's customers, it is necessary to determine whether there are any conflicts between the requirement to increase rates on behalf of DWR and legislative intent that the energy component of small customer rates be capped at 6.5 cents per kWh and that the energy component of large customer rates be frozen at 6.5 cents per kWh.

We conclude there is no statutory conflict that impinges on our decision to recognize and implement the DWR request. While the § 332.1(b) ceiling for SDG&E's small customers may not be adjusted at this time,¹² the ceiling does not prohibit assigning rate increases resulting from DWR's revenue requirement to small customers. Section  332.1(b) specifically provides that the ceiling applies to electricity supplied to small customers by SDG&E. Section 332.1(f) similarly provides that the frozen rate applies to electricity supplied to large customers by SDG&E. By the terms of these statutes, neither the ceiling nor the frozen rate is applicable to charges for electricity supplied by DWR.

We believe the foregoing interpretation is consistent with the purpose of the statute. The limitation on adjustments in § 332.1(d) is related to this Commission's review of the prudence and reasonableness of SDG&E's procurement. There is no purpose served in applying such a limitation to the DWR-supplied electricity, which the Legislature has already removed from the purview of this Commission's reasonableness review processes.

While we find no statutory impediment to the DWR increases in the rate stabilization legislation, we note that ABX1 43 provides an additional basis for adjusting SDG&E's large customer rates. Section 332.1(f) provides that after having established an initial frozen rate of 6.5 cents per kWh for the energy component of electric bills for electricity supplied to SDG&E's large customers, the Commission shall:

"[c]onsider the comparable energy components of rates for comparable customer classes served by the Pacific Gas and Electric Company and the Southern California Edison Company and, if it determines it to be in the public interest, the commission may adjust this frozen rate, and may do so, retroactive to the date that rate increases took effect for customers of Pacific Gas and Electric Company and Southern California Edison Company pursuant to the commission's March 27, 2001, decision."

This language requires that we consider the level and the structure of large customer rates in effect for Edison and PG&E and the relationship of those rates to comparable rates for SDG&E. It also authorizes us to adjust SDG&E's frozen energy rate component for large customer rates, provided it is in the public interest to do so.¹³

The rates of Edison and PG&E were increased by an average of 3 cents per kWh by D.01-03-082, and individual rates were established on the basis of allocation and rate design principles adopted in D.01-05-064. To the extent that SDG&E's large customer rates (including the initial frozen energy rate component of 6.5 cents per kWh) were comparable to large customer rates of Edison and PG&E prior to the implementation of the 3 cents per kWh increase for those utilities, rate adjustments that would maintain inter-utility relationships are permissible under § 332.1(f). Thus, rate increases that might be required to maintain such relationships may be adopted if such increases are in the public interest. However, we emphasize that it is the DWR revenue requirement that provides the basis for the specific rate increases adopted by this decision. Elsewhere in this decision we further analyze the statutory requirement to consider inter-utility comparability in establishing rates and rate structures for SDG&E's large customers.