VI. Non-Residential Rate Design

A. Tiering

The assigned commissioner issued a rate design proposal on March 27, 2001 that provided tiered rates for commercial users. Many parties argued that, in general, non-residential use should not be tiered at this time. TURN and the Farm Bureau proposed tiered commercial and industrial rates. TURN proposes an extremely low first tier, with the majority of usage to be captured in the second tier.

We decline to adopt tiered rates for commercial and industrial customers at this time. Designing new, tiered commercial schedules would present implementation hurdles for the utilities in the short term. We are also concerned that tiering would harm larger consumers to the benefit of smaller consumers within that class, without regard to their efficiency. Moreover, the utilities cannot provide adequate information to commercial customers by Summer 2001 regarding the potentially complex consequences of a tiered rate design. Because of practical implementation hurdles, the possible unintended consequences of tiered rate designs on certain industries, and the need for further analysis and education of customer segments, we believe the adopted rate surcharge of 3¢ /kWh as implemented in this decision for those customers without time of use meters provides the appropriate conservation incentive for commercial and industrial customers. These price signals will combine with the myriad conservation and incentive programs offered through legislation and Commission order to promote enhanced conservation measures for commercial and industrial customers.

One alternative to tiering discussed in our hearings involves specifying rates by standard industry code (SIC) classification. While this proposal deserves further analysis and examination of the practicality of its implementation, at this stage we have neither sufficient time nor sufficient information to create specialized rates by industry segment. Further, neither utility possesses all the SIC classifications of its consumers and both would require significant billing system changes before implementing such a change. For these reasons, we cannot adopt tiering on the basis of industry codes at this time.

We intend to investigate further the idea of industry-specific rates. We are open to considering whether more specialized classifications could help us develop a more equitable rate structure. We direct the utilities to collect data from their customers necessary to analyze the feasibility of rate design by SIC classification.

We reject tiering for time-of-use (TOU) customers for the same reasons that we reject tiering for non-residential, flat-rate customers. Time-of-use signals are more precise and encourage conservation at peak use and price periods. Moreover, we reject tiering for TOU customers due to practical obstacles to its implementation. Neither Edison nor PG&E can implement tiering for TOU customers on their billing systems by June 1, 2001.

B. Non-TOU Schedules

We adopt the rate design methodology proposed by ORA for commercial and industrial customers who do not use time-of-use schedules. For small and large commercial customers with seasonal designation, 70% of the incremental revenue requirement is allocated to the summer period and 30% to the winter period. This approach is reasonable and consistent with our goals because it balances the year-round need for conservation with a stronger conservation signal during the peak summer months.

We reject proposals to provide for increases during only the summer months because of the need for year-round conservation. Further, we are concerned about possible price spikes that could occur by limiting price increases to a single season . The methodology we adopt reconciles differing proposals received from the parties.

For larger customers with declining block schedules, such as GS-2 and PA-2 for Edison, existing declining block rates shall be modified to become increasing block rates. Eliminating the declining block rate structure will improve conservation incentives to this group of customers and adheres to our goal of rewarding customers for lower amounts of usage.

C. Time of Use

Parties proposed three primary proposals to change rates for existing time-of-use schedules. The first, promoted by Edison, ORA and the Street Light Association, would increase rates in all hours. The second, proposed by EPUC and CIPA, places the bulk of the increase on summer on-peak hours. The third, supported by TURN and CLECA, spreads the rate increase over all hours, with the largest increase during summer on-peak hours.

A rate increase spread over all hours has the virtue of simplicity, but it does not promote sufficient conservation during the hours of peak demand for the very customers with the best ability to respond to peak periods.

We reject proposals that increase rates most during summer peak demand periods. Existing time of use rates are already heavily weighted to the summer on-peak period. Conservation during peak periods is essential, but we balance this goal with that of avoiding extraordinarily high prices during any period. In doing so, we reject the methodology advanced in the rate design proposal published by the assigned commissioner ruling on March 27, 2001.

We adopt a surcharge allocation approach for TOU customers that spreads the rate increases over all hours, with a slight differential increase on summer on-peak usage. The differential between on- and off-peak usages is increased, but customers within this class will not be exposed to excessive on-peak prices. In addition, rate limiters will be in effect to ensure that those customers do not suffer extraordinary price shocks.

D. "Super Peak" Rate

The California League of Food Processors proposes a three hour super on-peak period for the food processing industry. The on-peak price proposed would be twice as high as the on-peak price for other members of their class during the traditional six-hour peak. The proposal offers off-peak rates during the remainder of the peak period.

At this time we have insufficient facts and analysis to adopt this proposal. We are concerned that adopting the proposal would not be revenue neutral, as food processors would simply avoid the super-on-peak prices.¹⁶ Moreover, we believe that further facts are needed as to specific customer load profiles to be able to implement these concepts. However, we recognize the creativity of this proposal and will continue this proceeding on an expedited basis to obtain further evidence as to its operation and effects.

E. County of Los Angeles' Proposal to Cap Rates for Essential Customers

The County of Los Angeles proposes a cap on rates applied to facilities that have a limited ability to reduce consumption The impact of a rate increase is a concern shared by every customer group in this proceeding. At this time we are not convinced that we should treat local governments differently from any other customer. While we share the County's concern, we cannot justify providing it a special electricity rate. Thus we reject the County of Los Angeles' proposal to mitigate the impact the rate of increase on essential government facilities.

F. Federal Generation Based Tariffs

ORA proposed a rate for federal agencies that would reflect market prices for their electricity consumption. This proposal for a federal generation-based tariff (FGBT) is consistent with a number of policies historically used by the Commission to set rates and allocate costs, and with specific proposals made in this proceeding. For example, Bradford has stated that one significant factor to consider in rate design is the ability of the customer to pay. Clearly, the Federal government has the ability to pay the increased rates that would occur under ORA's proposal.

The federal government is also in a unique position to take actions itself to mitigate such costs. Unlike other consumers who can only act to offset the necessary rate increases through reductions in their usage, the federal government can also act to reduce its financial burden by implementing appropriate policies aimed at reducing market prices, which would benefit all consumers.

As stated elsewhere in this decision, another consideration for the Commission is to mitigate negative impacts on the state economy and on California ratepayers in general. Requiring federal customers to pay the full market cost for the energy it consumes will reduce the need to increase rates to other customers. In particular, if the increase in revenues from federal customers is used to offset the revenues collected from other ratepayers within the same customer class, commercial and industrial rates could see a significant decline once a federal rate is established. This would blunt the impact on the state's economy of the high wholesale electricity costs currently being inflicted upon California.

Another concern the Commission must weigh is the appropriateness of using state funds, from DWR to subsidize the electric use of the federal government. In addition, the federal government itself has stated its belief that the high market prices that would form the basis of an FGBT are reasonable in magnitude and reasonable to charge directly to customers. The federal government has also repeatedly stated a position that charging market-based rates is useful to send customers appropriate price signals in order to modify their consumption patterns and behavior and to achieve a balance of supply and demand:




Market prices send the right signals to both sellers and buyers (at least those not subject to a rate freeze). Market prices will increase supply and reduce demand, thus correcting the current imbalance. Capping prices below market levels through regulation or legislation will have exactly the opposite effect. (FERC testimony before the Committee on Government Reform, April 10-12, 2001)

Establishing a pricing mechanism that enables federal facilities to gain experience with real-time wholesale electricity prices is consistent with the federal government's public position advocating just such application of market prices. A pilot program for such mechanism can provide useful insights into the impact of real time prices on conservation efforts. We recognize that federal agencies currently take service under a variety of schedules. Creating new tariffs for federal customers will require many modifications to the existing rate schedules. The record in this proceeding is insufficient to permit us to adopt any particular rate schedules for federal customers at this time.

However, in recognition of the federal government's stated preference for adoption of electric retail rates based on concurrent wholesale costs and the other policy reasons stated above, we will direct the utilities to design and file such tariffs on an expedited basis for implementation in July after review and approval by the Commission. Setting retail rates that reflect wholesale market prices would be most meaningful if the facilities possessed and used real-time meters. We direct the utilities to propose ways to charge federal agencies so that: 1) federal facilities with real time meters will be charged real-time prices; 2) federal facilities with interval meters will be charged the average price over the interval; and 3) federal facilities without interval meters will be charged the monthly average wholesale rate for electricity usage. The utility proposals for FGBTs shall be filed with the Commission's Energy Division within 30 days of the date of this decision, with comments to be filed thereafter pursuant to a procedural schedule to be set by the assigned Commissioner.

G. Agricultural Rates

Agriculture depends heavily on summer on-peak usage and many agricultural customers have a limited ability to shift demand to other periods. Moreover, the agricultural industry maintains a unique position in the California, and in the nation's, economy. Especially in this year, when California agriculture is faced with low water availability and, thus, increased water pumping needs which depend upon electricity, agriculture may be uniquely unable to shoulder the burden of the increased costs associated with the exorbitant electricity prices in California's wholesale markets.

The Governor's proposal, advocated by the Farm Bureau, limits agricultural increases to 5% for time of use rates and 15% for non-TOU rates. We agree with the direction provided by the Governor's proposal because of the needs of this class of customers. We will cap agricultural rate increases at 20% for time of use agricultural customer rates and at 15% for non-time-of-use agricultural customers. The shortfall from the agricultural customer rate caps is to be spread over all eligible customer classes in the same manner as other shortfalls are spread over non-exempt customer classes. The caps established for agricultural tariffs today create no precedent for the capping of agricultural rates as an element of subsequent rate changes that may be required to recover CDWR or other future revenue requirements.

We provide additional protection to agriculture customers by adopting a bill limiter of 250%. Both the cap and the bill limiters will protect agricultural customers who are disproportionately affected by the rate increases, which will present particular burdens because of this year's drought.

H. Master Meter Customers

Master meter customers are required to revise their billing systems to address the rate increase. While they are engaged in that process, these customers must also comply with AB1X, which exempts customers using less than 130% of baseline from the surcharge, and Section 739.5, which requires master meter customers to charge their park residents approximately the same rate they would have been charged if they took service directly from the utility.

We reject WMA's proposals to exempt master meter customers from any surcharge in the near future and to phase in a surcharge over a year. All eligible customer classes must share the burden of a rate increase. If WMA receives an exemption or an extension, park owners who quickly fix their billing systems could receive a windfall, since they would be exempt from the surcharge but could charge it to customers. We order a surcharge to appear on the master meter customer's bill, effective June 1. This approach ensures these customers are not exempted from bearing some portion of the energy procurement costs covered by the three-cent surcharge. We also give master meter customers a strong incentive to take immediate steps to implement the necessary billing system changes. Over the longer term, we will continue to encourage movement away from the master meter system.

We recognize that some master meter customers may have difficulties complying with the required rate changes by June 1, 2001. However, we are concerned that a strong price signal for conservation be implemented prior to this summer. Therefore, we encourage master meter customers to modify their billing systems and implement the new rates as expeditiously as possible. However, as suggested by WMA in its May 10, 2001 comments, we will extend the amount of time that master meter customers have to comply with the adopted rate changes to no later than July 17, 2001.

I. Streetlight and Traffic Light Schedules

We allocate a rate increase to the streetlight, outdoor lighting and traffic light schedules on the equal cents per kilowatt-hour basis. TURN proposes an alternative rate tiering method for streetlights, based on the type of lamp rather than the size of lamp or customer size. The goal of TURN's rate design is to encourage the replacement of more inefficient lighting technologies. We support the replacement of inefficient lighting technologies, but we believe the rate increase, in combination with energy efficiency programs, will encourage cities and counties to invest in more efficient street lighting. The summer initiative energy efficiency program provides communities with significant funding for investment in Light Emitting Display (LED) technology. In addition, these technologies were cost-effective, before any rate increase, and providing a price break through a tiered rate design to encourage their deployment should not be necessary. We therefore adopt an equal cents per kilowatt hour rate increase for streetlighting.

J. CIPA's Credit for Interruptible Customers

The California Independent Petroleum Association (CIPA) proposes that interruptible customers be exempted from a substantial portion of any surcharge. Interruptible customers receive lower rates for energy in return for curtailing usage when called upon to do so to reduce the demands on the state's power grid. The three-cent surcharge will not change their interruptible status, or their obligation to comply with the tariff.

Interruptible customers already receive a substantial pricing incentive. Moreover, this Commission has substantially redesigned the interruptible programs to increase flexibility, customer choice and the prices paid to interruptible customers in exchange for their voluntary agreement to drop specified loads when called upon by the utilities or by the Independent System Operator. The costs of these new programs are expected to be more than those of the old programs, and these costs are spread over every other non-interruptible customer class. We decline to provide any additional rate advantage.