Discussion

On June 29, 2000, the Independent System Operator (ISO) Board of Governors reduced price caps in the ISO real-time ancillary services, and inter-zonal congestion markets from $750 per megawatt¹ (MW) to $500/MW, effective July 1, 2000 through October 15, 2000. On August 1, the price caps were reduced to $250/MW. The ISO has identified several Stage 1 and Stage 2 emergencies thus far this summer. Under California's Electrical Emergency Plan, a Stage 2 emergency is defined as a period when the electric reserve margin (i.e., backup generating capacity) drops below five percent but is above 1.5% of customer

demand. A Stage 1 emergency exists when power reserves fall below 7%. High temperatures in the West have limited the amount of electricity that California can import and have caused periodic drops in the state's electric reserves. Electricity demand has surpassed 44,000 MW on certain days.

Increased demand both in California and across the western United States, particularly when high temperatures exist in multiple regions, combined with relatively flat supply over the past decade, and the concentration of in-state generation in a small number of companies, has provided substantial market power to in-state generation owners, and resulted in soaring wholesale prices both in California and across the western United States. Given the high costs of energy thus far this summer, we remain troubled about the impacts of high-energy costs on the ratepayers in SDG&E's service territory.

On August 9, 2000, Governor Davis requested that this Commission "reduce average residential bills from the current level of approximately $120 per month to the mid-60s range."² The Governor in his radio remarks stated that this would be essentially the average payment over the next two years, depending on how long the PUC decides to extend this bill stabilization plan. We fully intend to move ahead quickly with the investigation ordered in I.00-08-021; however, nothing can be resolved in that investigation in time to grant San Diegans the relief on their electric bills that is requested now by the Governor. To ensure the relief we grant is meaningful, we will do what we can today and fill in details retroactive to June 1 as the investigation progresses.

In D.99-05-051, the Commission adopted a settlement regarding the end of SDG&E's rate freeze. The settlement allowed SDG&E to cap its residential, small commercial and lighting customer rates at levels not to exceed 112.5% of frozen electric rate levels "on a monthly average basis" for the months of July, August, and September 1999. The settlement also provided that SDG&E would not propose a "similar" rate cap for the year 2000 in this proceeding.

We recognize that the Commission only recently rejected price or rate caps after the rate freeze (other than the interim rate caps adopted for SDG&E last summer) and in D.00-08-021 determined that the specific limited rate freeze proposal of UCAN required further study and hearings. We continue to believe that a rate freeze makes little sense and could result in delayed and increased costs to consumers. We deem today's action an interim bill ceiling to stabilize San Diego bills while we proceed with our investigation, including hearings.

Nevertheless, we remain very concerned regarding the impact of high-energy costs on SDG&E's ratepayers. Therefore, in light of the Governor's request, we will modify D.99-09-051, D.00-06-034, and D.00-08-021 to adopt a bill stabilization plan - not a rate freeze - to provide further bill protection beyond that adopted in D.00-08-021. This plan should remain in effect until December 31, 2001 but will be reevaluated and possibly extended before that time.

As an alternative to a rate freeze, we propose a bill stabilization plan that consists of the following elements:

SDG&E will cap residential bills so that a customer consuming 500 kWh of electricity in a month will receive an electric bill not to exceed $68 until the end of January 2001. The cap in residential bills will then step up to $75 until the end of December 2001. All residential customers consuming electricity at amounts in excess of 500 kWh per month will face market rates for all consumption above 500 kWh.

In implementing this cap via tariffs, SDG&E shall propose a proration mechanism on prices in reaching the 500 kWh cap so that those consumers using lesser amounts of energy also get the benefit of the capped prices. In instituting this bill cap it is our intent for example, that a customer using 200 kWh to pay the same per kWh charge as a customer who uses 500 kWh. We wish to avoid the perverse result that such a consumer have a $50 bill while the larger consumer gets capped at $68.

We are also committed to ensure that inland customers of SDG&E, whose dependence on air conditioning is greater, have a kWh cap which is not punitive. What we adopt today is based on average demographic data (including coastal regions where there is no air conditioning load) that does not differentiate between this distinct regional load profile. Therefore, we direct SDG&E to promptly file a petition to modify today's decision to adjust the residential cap to reflect demographic data by region in order to arrive at a fair & equitable cap for SDG&E's inland customers. We direct SDG&E to file with its petition information based on zip code locations and other temperature zone information with usage profiles so that we may adjust the 500 kWh cap as necessary, retroactive to June 1, 2000.

SDG&E will cap commercial bills so that a commercial customer consuming 1500 kWh per month will receive an electric bill not to exceed $220. All commercial customers consuming electricity at amounts in excess of 1500 kWh will face market rates for all consumption above 1500 kWh.

We remain concerned that this cap on commercial bills may not provide relief to the medium-sized commercial customers. It is our intent that it do so. Therefore, we instruct SDG&E in a petition to modify to include load profile data on commercial customer classes and to prepare programs to ensure we may tailor the bill stabilization plan to embrace such medium sized commercial customers, retroactive to June 1, 2000. SDG&E should also include the same regional load profile data for inland versus coastal commercial customers as we required to assess adjustments to the residential kWh cap. If the data shows a need for adjustments to the commercial cap, we shall make such adjustments retroactive to June 1, 2000.

All revenue shortfalls resulting from these bill caps should be booked to the Transition Cost Balancing Account. In this account, any additional revenues arising from the sale of power by SDG&E's current generation assets, such as SONGs and long-term contracts, during periods of high prices will automatically offset a portion of these revenue shortfalls.

The residential and commercial bill caps shall apply to billing for energy consumed commencing on and after June 1, 2000. In order to implement the bill caps for the period prior to issuance of this Decision, SDG&E shall provide a credit on a future bill issued no later than September 30, 2000. The credit for each customer shall consist of the amount previously billed excess of the bill caps imposed by today's order. The credit shall be provided whether or not the customer has paid the prior bill. Concurrently with providing the bill credit, SDG&E shall credit its TCBA in an equivalent amount. Future adjustments to the bill caps should be handled in this manner.

San Diego should file comments by September 30 proposing a plan to implement a Levelized Payment Plan on a default basis. Such a plan may include a phase-in, if necessary. The plan should also propose procedures and communications strategies to reduce customer confusion. For example, the migration plan could include mail in ballots that would permit the customers to "opt-out" of the LPP, but failure to act would result in enrollment in the LPP. The plan should also identify the financial consequences of this change in billing practices and the costs associated with the modifications to the LPP. Such a plan may use forecasts to set bill levels to ensure that participants do not face sudden bill escalations. Finally, the filing should include projections on bills for residential customers consuming 500 kWh per month and commercial customers consuming 1500 kWh per month.

We note that in any electric utility system, the vast majority of customers consciously conserve power while a few use large amounts. Thus, approximately 70 percent of electricity users consume less than the average level of consumption.³ This pattern holds true for SDG&E, as it does for every California electric utility. In SDG&E's service territory, approximately 70 percent of all residential customers consume less than 500 kWh per month.⁴ Similarly, approximately 70 percent of small commercial customers consume less that 1500 kWh per month.⁵ This pattern of consumption enables us to design a bill stabilization plan that protects SDG&E's consumers from the gyrations of current energy markets, avoids instituting a rate freeze, and maintains incentives to encourage further energy conservation by those consuming large amounts of electricity. It is a bill stabilization plan accomplished through a tiering mechanism. We also direct SDG&E to work diligently to identify and make special arrangements for consumers with medical needs for increased energy. We will also explore methods to accommodate businesses (e.g. grocery stores) that must maintain power in our investigation.

In addition, we are concerned about the impact of an SDG&E specific bill stabilization plan on retail competition. Therefore, we will consider in our ongoing investigation the appropriateness of extending the bill stabilization plan retroactively to direct access customers.

We take official notice of the recent lowering of the ISO price cap from $750 to $250, the U.S. Navy's attempts to bring in generators to add supply for its

bases, the grocers' association pact to lower usage and increase access to federal power savings as mitigators of the price spikes we saw in June and July. Therefore, we will continue to investigate before taking radical steps to stabilize bills.

We are particularly concerned that the adoption of a rate freeze at levels not to exceed 110% of frozen electric rates that were in effect as of June 30, 1998 for a two and a half year period, as others have proposed, would harm California. The adoption of such a proposal would lead to average bills in the $55 range and cause balancing account accumulations of approximately $1.5 billion, if current market conditions continue. Revenue shortfalls of this magnitude would likely jeopardize SDG&E's ability to purchase power or to build needed transmission infrastructure. These problems would have direct consequences for SDG&E's customers and the California economy.

Although we have adopted a rate stabilization plan that should reduce the shortfalls accumulated in the TCBA, we recognize that shortfalls may occur. In its response to UCAN's emergency petition (filed in this docket on July 6, 2000), SDG&E stated that this Commission is obligated to allow SDG&E to recover the market-based wholesale rates approved by the Federal Energy Regulatory Commission (FERC). We acknowledge the federal filed rate doctrine. In permitting SDG&E to book revenue shortfalls into the TCBA, we will allow these costs to be recovered in a manner that makes SDG&E whole, including carrying costs, subject to Commission review of the prudence of SDG&E's procurement decisions.⁶ Furthermore, we will conduct evidentiary hearings on the cost recovery issue in I.00-08-002. In those hearings, we will also explore the impacts on large industrial customers.

In its comments, SDG&E argues that there are material issues of disputed facts that must be resolved before the alternate can be adopted. The issues SDG&E claims to be material relate to the amortization of the undercollection and the amount that would be undercollected at the end of 2003. This Decision makes no order concerning how the undercollection shall be amortized. Rather, to ensure that SDG&E has an opportunity to be heard on any issues of fact that may be material, we only impose an interim bill cap through the end of December 2001. Based on SDG&E's figures, the amount of the undercollection would be considerably less at the end of December 2001 than at the end of 2003. See SDG&E Comments, Attachment 2.

We will hold hearings to permit SDG&E to raise any issues of material fact relating to the increased undercollection as well as other issues. While we utilize the December 2001 end date, we defer the ultimate decision of the duration of the bill cap pending the outcome of hearings.

We also view the bill caps that we adopt here as facilitating the implementation of a modified LPP. The LPP we envision differs substantially from that available on current tariffs. In particular, modifications may be necessary to take into account the changing market conditions. First, it may need to become available through a procedure that allows customers to readily exercise choice, while those failing to exercise choice will default into the program. Second, it may differ from the current program in that it will use projections of electric rates to avoid shortfalls that leave consumers facing large adjustments at the end of the year. Third, since this program differs in scale and scope from the current program, we recognize that the financial consequences of this program require resolution. Thus, we fully understand that the transition to such a plan will take time.

Previously, SDG&E identified several obstacles concerning rapid expansion of a LPP. We acknowledge that customer confusion may be an issue, but note that this Commission has had excellent experiences in education campaigns in the telecommunications industry concerning the issues of privacy and its relationship to caller id service. The issues involved in a LPP are much less complex. We have no doubt that SDG&E can develop a campaign that minimizes customer confusion. Second, although SDG&E's surveys indicate that many customers prefer the status quo, we envision that this program will give them the opportunity to opt out of the LPP. By "opt-out," we do not mean to force any customers onto the LPP. A different way of putting this is "changing the default," so that all customers should be given an opportunity to choose whether or not to be on an LPP. Those who do not make a choice would default to the LPP. Third, software and system programs, even if they prevent a flash cut to a LPP, are not intractable, and SDG&E can develop a plan to implement this ordered change. Finally, it is clear to us that such a plan will affect a utility's cash flows, but these can also be addressed.

We therefore order SDG&E to file comments by September 30 proposing a plan to revise LPP, including its true-up mechanism. Such a plan may include a phase-in. The plan should also propose procedures and communications strategies to reduce customer confusion. For example, the migration plan could include mail in ballots that would permit the customers to "opt-out" of the LPP, but failure to act would result in enrollment in the LPP. The plan should also identify the financial consequences of this change in billing practices and the costs associated with the modifications to the LPP. Further SDG&E should propose a method to mitigate potential "true-up" payments caused by forecasting error or price volatility. Finally, the comments should also propose to establish memorandum accounts to track expenses and permit recovery in rates of the costs of this program, including its financial costs.

We note that despite the rebates and discounts we have previously ordered, large businesses will not receive rate reduction bond rebates as they did not receive the associated 10 percent discount nor pay into the Transition Transfer Accounts. Other small business and residential customers will, for one reason or another, not receive rebates previously ordered. For these customers, the combination of the immediate bill stabilization measures and the LPP offer a good measure of relief. For this reason, we believe that this program offers the most practical way of providing relief from high bills.

We will modify the following findings of fact in D.00-08-021, as follows:

1. UCAN's motion to re-institute the rate freeze for SDG&E for the months of August, September, and October could lead to unintended consequences and higher winter bills; however, we recognize that immediate rate relief is requested now by the Governor.

2. UCAN's proposal should not be examined and evaluated in the context of the OII order we vote upon today.

We will modify D.00.08-021 to add the following findings:

9. A bill stabilization plan can offer stable bills to residential and commercial customers during this period of price volatility.

10. We will hold evidentiary hearings in the context of the OII we order today on recovery of any revenue shortfall that may arise from a bill stabilization plan, but will ensure that SDG&E is made whole, subject to Commission review of the prudence of SDG&E's procurement decisions.

The following findings of fact will be modified in D.00-06-034:

21. We reject PG&E's proposal that it is necessary to cap rates in order to protect residential and small commercial customers from potential price volatility and corresponding rate increases; however, it is reasonable to adopt an interim bill stabilization plan for SDG&E.

22. We did not initiate electric restructuring in order to shield consumers from the market. We agree with Weil and TURN that customers need accurate price signals in order to react and protect themselves against periodic price spikes; however, an interim bill stabilization plan is required to provide immediate rate relief for ratepayers in SDG&E's service territory.

23. In a workably competitive market, masking prices results in incomplete and inefficient market structure and system demand, and compromises system reliability. Only through accurate price signals can customers understand how their usage impacts the system and make economically efficient choices; however, it is reasonable to implement a bill stabilization plan on an interim basis for SDG&E.