Pulsifer Comment Dec. Order Implementing Cost Recovery Allocation of Department of Water Resources Revenue Requirement

X. Implementation of DWR Revenue Remittance Procedures

A. Establishment of a Separate Charge for DWR Electric Power

The Commission's responsibility is to set the overall rate that electric customers see on their bills. However, parties generally agree that breaking this charge down to reflect a separate amount per kWh sold by DWR will make the rate structure more efficient. SCE and PG&E maintain that breaking out a DWR charge will eliminate the need for them to maintain their own balancing accounts for DWR payments and revenues. Instead, the actual amount of revenue that is generated by reference to the DWR charge and the amount of kWh sold by DWR would be remitted directly to DWR.

By letter to the Commission dated May 2, 2001, DWR has also stated that the charges set for recovery of its revenue requirements "should be independent of rates payable by retail end use customers for power purchased by such customers from the utilities, and by law, must be sufficient in order for the Department to recover the revenue requirements attached hereto." DWR stated that revenues resulting from such rates should be measured as a function of the amount of power sold by DWR, and not as a function of the amount of power sold by each respective utility. DWR specified the revenue requirement on a separately allocated and combined basis for the service territories for each of the three utilities.

We agree that it is reasonable to implement DWR cost recovery as an amount per-kWh that is attributable to sales by DWR.⁴⁵ Although the effect may be muted by the use of external financing proceeds to pay for procurement costs, establishing a per kWh charge for DWR will cause its revenues to vary in some proportion to the amount of energy it is procuring. This approach facilitates the independent calculation of charges that will be segregated and remitted directly to DWR. The forecasted net short position in GWh and the revenue requirement to be allocated to each utility provide the basis for the calculation of a system-wide amount per-kWh sold for electricity sold by DWR to the customers of each utility.

Accordingly, we shall direct each of the utilities to begin disbursing payment to DWR for its revenue requirement based on the relevant DWR charge, as adopted above, for each kWh sold by DWR to the utility's customers. Utilities shall begin calculating and distributing payments on this basis as applied to kWhs billed on and after March 1, 2002.

B. Procedures for the Remittance of Funds to DWR

We have previously adopted servicing agreements between DWR and each of SDG&E and SCE, and a servicing order relating to PG&E. These decisions provide for the utility services required by DWR to perform functions authorized by the Water Code.⁴⁶ The servicing agreements for SDG&E and SCE set forth the terms under which each utility will provide transmission and distribution of DWR power to electric customers, and provide billing, collection, and related services for AB1X-authorized power purchased by DWR.

The servicing agreement for PG&E also addresses details concerning the manner and timing of remittance of funds to DWR. In D. 01-09-015, as stated in Finding of Fact 25, however, the servicing agreement (in Section 2 of Attachment E) allows PG&E to seek Bankruptcy Court approval of the servicing agreement. The Bankruptcy Court has not yet approved PG&E's servicing agreement.

On December 6, 2001, an ALJ ruling provided notice that the Commission was considering implementing DWR remittance procedures for PG&E utilizing language from excerpts of the servicing agreement that PG&E negotiated with DWR, which was approved by the Commission in Decision No. 01-09-015. The pertinent excerpts were appended as an attachment to the ruling, specifying procedures for PG&E's remittance methodology.

PG&E filed a response expressing objections to the use of the language from the servicing agreement as a basis for remittance of proceeds that PG&E owes to DWR. PG&E claims that interim remittance arrangements that have been used up until now are adequate, and that it is inappropriate to extract sections of the servicing agreement out of context from the whole agreement.

In its comments, DWR seeks to remove a parenthetical clause, "(exclusive of Imbalance Energy)," from Section 4 of the Attachment B remittance methodology.⁴⁷ DWR argues that FERC recently confirmed that DWR, as the creditworthy party, is responsible for such charges.⁴⁸ For this reason, DWR argues PG&E should be remitting revenues to DWR for Imbalance Energy.

DWR also argues that any remittance order should require PG&E to provide an accounting for, and to remit to DWR, all DWR revenues received in respect of imbalance energy prior to the effective date of the order. Finally, DWR believes the remittance order should contain an express requirement for PG&E to deliver all power made available by DWR. If DWR is responsible for procuring all imbalance energy and other ancillary services, DWR expects assurances that such energy and other services is delivered to retail end use customers.

SCE also filed comments in response to the ruling. SCE does not address the appropriateness of the Commission adopting this remittance methodology for PG&E, as this issue is currently before the U.S. Bankruptcy Court. However, SCE questions whether DWR is asking the Commission in its comments to make the same change to SCE's servicing agreement with DWR. For example, DWR requests that the Commission incorporate "Section 2.2(d), Section 4.1, Section 4.2, and Section 6 of Attachment E" of the PG&E servicing agreement into any remittance order for PG&E. With respect to Sections 4.1 and 4.2, DWR states these "are the general provisions concerning remittances which should be applicable to all three investor-owned utilities."⁴⁹ Section 4.2 of the PG&E servicing agreement, which DWR would make applicable to all three investor owned utilities, states that the "Utility shall determine the Daily Remittance Amount in the manner set forth in Attachment B hereto." DWR proposes to change Attachment B to include remittance for Imbalance Energy. SCE argues that the Commission should not entertain any "back-door" attempt by DWR to unilaterally change the mutually agreed-upon and Commission-approved servicing agreement between SCE and DWR.

Issues associated with DWR's responsibility for Imbalance Energy charges, among other things, and the remittance of revenues to cover those costs, were not resolved in the negotiations that formed the basis for the servicing agreement for SCE. It was agreed that those issues would be considered at a later point in time. For the past six months, SCE has been negotiating with DWR regarding DWR's responsibility for ISO charges incurred to serve SCE's customers, along with other issues. SCE currently has a proposal before DWR to resolve these issues.⁵⁰ The Commission should not, based on the incomplete record before it, short-circuit that process and unilaterally change SCE's servicing agreement with DWR.

In its December 6 letter, DWR reports that it is paying the ISO, under protest, certain disputed amounts and that those disputed amounts were not included in its revenue requirement request. The dispute is as to whether DWR or the utilities are responsible to pay these amounts to the ISO. We have not considered or decided in this proceeding who should pay the ISO. However, we will not allow circumstances to develop such that ratepayers pay both DWR and utilities for same ISO costs

For PG&E, we shall direct that PG&E follow the remittance procedures based on the relevant language extracted from its servicing agreement, as set forth in the December 6, 2001 ALJ ruling. We shall also require PG&E to account for and to remit to DWR, all DWR revenues received with respect to Imbalance Energy prior to the effective date of the November 7, 2001 FERC order. Although PG&E's servicing agreement, itself, has not been approved by the Bankruptcy Court, we conclude that the relevant language extracted from the servicing agreement, as identified in the December 6, 2001 ALJ ruling, provides an appropriate basis for the collection and remittance of funds to DWR. We also conclude the requirement to include Imbalance Energy is reasonable in that DWR is responsible for procuring all Imbalance Energy and other ancillary services for customers in PG&E's territory.

For SCE and SDG&E, we shall simply direct that they make payments in accordance with their approved servicing agreements. Unlike PG&E, those servicing agreements are already in effect and prescribe how funds are to be remitted. We hesitate to interfere with the ongoing negotiations that are in progress between SCE and DWR regarding responsibility for ISO charges without further record development as to all of the ramifications involved.

C. Payment for Shortfalls in Prior Period DWR Remittances

For each utility, a separate one-time payment from each utility shall be required to reimburse DWR for its shortfall in costs that have already been incurred from the period when DWR began procuring power on behalf of the customers of that utility's service territory up through the date when the prospective monthly payment of charges prescribed in this order takes effect. These payments shall be made out of amounts previously collected by the utility from customers pending allocation between DWR and the utility. In prior orders, we have established interim amounts that each utility was to pay to DWR pending the final determinations made in the instant order.

The separate lump sum payment for DWR procurement costs prior to March 1, 2002 shall be calculated as follows. The per kWhr charges for each utility's customers adopted in this order multiplied by the applicable DWR sales to those customers for the applicable period beginning on or after January 17, 2001 through March 1, 2002 shall determine the amount to be remitted for that utility. From this amount, the utility shall subtract the amounts that have already been remitted to DWR on an interim basis. Each utility shall then remit additional funds to DWR as a lump sum payment, for any shortfall in the amounts already remitted for DWR power delivered.

PG&E and SCE should already be collecting and remitting to DWR an amount determined by multiplying the sum of their utility-specific generation rate and the energy surcharge rates as authorized by the Commission in D.01-05-064 by the volume of power delivered to their customers on behalf of DWR since June 1, 2001.⁵¹ The utility-specific DWR charges we have calculated in this order indicate that PG&E and SCE need to remit to DWR an amount above the funds they have already remitted since the energy surcharges took effect on June 1, 2001. For SDG&E we established an initial generation rate component of 6.5 cents/kWh in D.01-05-060. In D.01-09-059, we adopted an interim rate increase for SDG&E that provided for remittance of DWR charges at the rate of 9.02 cents/kWh for sales on and after September 30, 2001. SDG&E's lump sum remittance to DWR for power sales prior to March 1, 2002 shall be net of any funds that have already been remitted for DWR sales on that interim basis.

DWR will receive from each utility the revenues that the utility collects on behalf of DWR, based on the fixed DWR charge per kWh as noted above. The per-kWh charge payable to DWR shall remain fixed, even though the actual percentages of system sales supplied by DWR will vary each month. However, the retail rate applied on each utility customer's bill will not fluctuate from month-to-month merely due to changes in the percentage of sales supplied by DWR each month. Such monthly fluctuations on customer bills would cause undue customer confusion.

Instead, the respective share of sales attributable to DWR versus utility URG sales shall be tracked through the balancing accounts that we have directed to be established elsewhere in this order.

With fixed retail tariffed 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 each utility's retail customers is either less than or exceeds the forecast percentage of DWR sales to those customers for any month, the customers' bills for that month will not reflect exactly the imputed utility rate for the kWhs the utility provides. The balancing account mechanisms that we have authorized elsewhere in this order are intended to ensure that over time, the utility recovers its imputed utility rate by segregating the effects of DWR sales and providing for a true up of estimated to actual DWR sales and allocated costs.

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 itself provides through URG sources (i.e., the "effective utility rate") will vary from month to month. By truing up the utility balancing account at a later date, we will ensure that the utility bills, and its customers pay, (over time) the imputed rate for utility-supplied power.

⁴⁵ While we establish a separate per-kWh charge for DWR, we do not require the utilities to show this charge as a separate line item on customers' bills. We have discussed this in our orders adopting Servicing Agreements between DWR and SCE, SDG&E, and PG&E, respectively. ⁴⁶ See A.01-06-044, filed June 25, 2001 for Edison's Servicing Agreement, and A.01-06-039, filed June 22, 2001, for SDG&E's Servicing agreement. PG&E's Servicing Agreement was considered in this docket (A.00-11-038 et al.) as a result of DWR's letter of June 27, 2001 requesting that the Commission order PG&E to provide certain services to DWR. ⁴⁷ DWR Comments, p. 2. ⁴⁸ FERC, Order Granting Motion Concerning Creditworthiness Requirement And Rejecting Amendment No. 40, ER01-3013-000 and ER01-889-008, issued November 7, 2001. ⁴⁹ DWR Comments, pp. 2-3. (Emphasis added.) ⁵⁰ Among the issues to be addressed is determining the amount of Imbalance Energy DWR actually provided to SCE's customers. For example, the following issues must be addressed to determine the amount of Imbalance Energy DWR provided: (a) establishing distribution losses; (b) determining treatment of energy dispatched by the ISO from IOU generation to serve other ISO-area load; and (c) accounting for ISO sales of pre-scheduled DWR energy for which SCE has previously paid DWR. SCE is attempting to resolve these issues with DWR. ⁵¹ In D.01-03-082, the Commission granted an energy surcharge three cents per kWh for PG&E and SCE, prescribing that a portion of the surcharge would be allocated to DWR.