D0105064

II. Background

A. The March 27, 2001 Order

Our March 27, 2001 decision, D.01-03-082, adopted an average three cent per kWh rate surcharge but did not adopt a rate design, i.e., specific rates to be applied to specific classes of customers. Conceptually, we expressed our intention to adopt inverted or "tiered" rates for those non-residential customer classes that do not have "time-of-use"(TOU) rates. Section 739.7 requires the Commission to maintain "an appropriate inverted rate structure" for residential rates, an approach we believe appropriately encourages customers to conserve because rates increase as customers use more energy. In a working wholesale market, the last increment of electricity purchased, especially in the summer, will be the most expensive increment. Reducing demand at peak energy use periods should thus result in greater cost savings in overall energy purchases as well as system reliability benefits. This approach, we believe, will encourage customers to conserve energy as directed by Section 747.5.

B. Record Development

No utility may change the rates it charges "...except upon a showing before the commission and a finding by the commission that the new rate is justified...." Section 454. The Commission may determine the procedures by which the showing is made, and has broad discretion in so doing. Wood v. PUC, 4 C. 3d 288, 292 (1970).

The Commission's development of a tiered rate structure began with the assigned commissioner proposing a specific tiered rate design, inviting comment, and setting a schedule for proceedings. To obtain evidence for rate design and implementation hearings and workshops were conducted. The utilities filed reports proposing billing systems' changes and detailing practical implementation issues.

The Commission held evidentiary hearings and Public Participation Hearings (PPHs) throughout Edison's and PG&E's service territories so customers could state their concerns to the Commission directly. The PPHs were held in Santa Monica, Rosemead, Fresno, Visalia, Fullerton, San Bernardino, Sacramento, Oakland and San Jose. Edison and PG&E informed all customers of the locations and times by a special mailing. At the PPHs, the Commission heard statements from numerous concerned citizens. In Appendix D, we include a summary of the major issues addressed at the PPHs. This Appendix was prepared by the Administrative Law Judges (ALJs) presiding at these PPHs.

After the evidentiary hearings concluded on April 26, 2001, the parties filed briefs. The ALJ issued a proposed decision and the assigned commissioner issued an alternate decision for comment on May 9, 2001. The parties filed and served comments on the proposed decision on May 10, 2001. The Commission heard the parties' final arguments on May 11, 2001.

C. Rate Design Principles and Goals

The assigned commissioner's March 27^th ruling proposed the following rate design principles:

· Rate differences among customer classes should be adjusted to reduce the disparity in prices paid for energy (on a per kilowatt hour basis) to ensure fairness in the prices paid for all energy purchased for California;

· For all customers, electric bills should be tiered to the amount of electricity used in order to promote conservation - the more you use, the more you pay for that extra electricity above a certain threshold of use; and

· For commercial customers with time-of-use (TOU) or other advanced meters, rates should be set so as to promote the greatest amount of conservation possible during summer peak hours.

After considering parties' views⁶ on the proposed rate design goals, President Lynch issued an ACR on April 11th that provided parties flexibility in constructing their own rate design proposals and established a hearing process to

examine the proposals. As we discuss more fully below, we have extensively modified the original rate design framework in response to the submissions of the parties.

Today we adopt a rate design to achieve the following objectives: (1) reduce energy consumption and thereby reduce California's liability for exorbitant wholesale power purchases; (2) allocate these wholesale electricity purchase costs fairly among customers, consistent with statutory mandates; (3) protect the most vulnerable customers; (4) minimize the extent to which individual customers experience extreme hardship; and (5) provide customers with ways to manage their energy usage and reduce their energy bills.

1. Equity

Traditional ratemaking outcomes reflect the reasonable cost of the service supplied. Section 451; Pacific Telephone and Telegraph v. PUC, 62 C. 2d 634 (1965); Pacific Telephone and Telegraph v. PUC, 34 C. 2d 822 (1950). In practice this means that the Commission, through ratemaking, establishes rates that will generate the revenue requirement needed to supply electric service. California Manufacturers' Association v. PUC, 24 C.3d 251, 257 (1979). However, cost recovery as a general ratemaking goal is accompanied by other policy goals, including the equitable pursuit of the public good. Pacific Telephone and Telegraph v. PUC, 7 C.3d 331, 357 (1974).

The goal of equity is essentially one of fairness, viewed in a broad policy context. TURN v. PUC, 22 C. 3d 529, 538 (1978). We cannot precisely address the responsibility for the specific energy supply costs California bears today because CDWR has not provided us with sufficient information concerning the nature and extent of its power purchase costs to date.⁷ In any event, equity transcends the application of simple mathematical formulas. We therefore evaluate rate design proposals considering customers' ability to pay and the hardship that rate increases impose on particularly vulnerable customers. We also consider the relative hardship imposed on various customer groups.⁸

2. Conservation

A fundamental goal of this proceeding is to promote energy conservation and to enable customers to conserve where possible. Wholesale power purchases in the past several months have been prohibitively expensive for all hours. This rate design will mitigate these expenses by promoting conservation at all hours. It is also important to promote conservation during summer peak hours, when prices can be the highest and the grid is most vulnerable to failure caused by shortages. By promoting energy conservation during summer peak hours, we attempt to reduce blackouts and service interruptions in order to preserve public health and safety.⁹

PG&E, Edison and others project there will be inadequate power supplies during summer peak periods. They and others project a need for purchases by CDWR and the ISO to meet anticipated customer needs. Although we do not have sufficient information to determine the specific dollar value of conserving energy in specific peak periods, we do know that 2001 electricity futures contracts are currently priced at $200-800/MW. Spot market prices during the summer peak could be much higher. As Dr. Borenstein testified, all energy purchased this summer will be expensive, and power purchased during peak periods will be even more expensive.

The Governor's 20/20 program will reward customers who reduce their overall electric consumption by 20% for each month during this summer. This incentive, combined with customer education, energy efficiency programs, and the price signal that higher rates will send customers, can help to promote energy conservation. A reduction in total energy consumption will help protect Californians from blackouts and will reduce the total financing or revenues needed for the state and the utilities to purchase electricity.

We are currently evaluating conservation and demand response programs to promote system reliability and interruptible programs in Rulemaking (R.) 00-10-002. Certain types of customers place an extremely high value on reliability and may be particularly receptive to peak period demand reduction programs. Moreover, the CEC pursuant to SB5X will spend $35 million this year to install interval meters on commercial customers' facilities with maximum demand of 200 kilowatts or more. These meters will encourage further conservation.

⁶ The parties commented on rate design goals at the April 2, 2001 PHC and in comments filed on April 6, 2001. ⁷ Although CDWR informed us by letter dated May 2, 2001 that its overall revenue requirement totals $9.2 billion through June 2002, we have not had an opportunity to incorporate this forecast into our allocation analysis here. ⁸ See Bradford, Energy Division, 23 RT 3001-2. Bradford, one of three outside experts testifying in this proceeding, states that the eight rate design principles laid down by James Bonbright, the preeminent utility economist of the mid-20^th century, have held up well over time and should be considered by the Commission here. The sixth such principle is: fairness of the specific rates and the apportionment of total costs of service among the existing customers. ⁹ The exposure to blackouts and service interruptions cannot be prevented merely through increasing prices as reliability is dependent on many facts, including temperature, conservation effects and the ability of sellers to withhold capacity from California's market.