Issue 1: How should the Commission modify Edison's PBR
to comply with § 739.10?

Positions of Parties

A central issue in this proceeding is how to insure that Commission regulation conforms to the statutory requirements of § 739.10.

Concerning the period between June 14, 2001 and the end of 2001, the parties have widely divergent positions. Edison urges the Commission to alter the PBR mechanism, effective June 14, and adopt a revenue requirement for 2001 whose recovery is subject to balancing account treatment. Edison argues that unless the Commission adopts a revenue requirement not linked to sales in 2001, Edison will lack a reasonable opportunity to earn its authorized return.

Edison's argument echoes the language of § 739.10. In particular, Edison states that a failure to adopt a revenue requirement will result in a material undercollection of revenues, in contravention of § 739.10. This material undercollection occurs, in Edison's view, because during the summer months of 2001, 33% of all Edison customers reduced their consumption by at least 20% compared to the summer of 2001. Edison notes that the California Energy Commission estimates that weather adjusted peak loads for June, July, and August 2001 have "declined approximately 12.2%, 9.1% and 7.7% compared to the same months in 2000."⁵ Edison further states that "billed revenues under the PBR rate-index mechanism are expected to be $67 million lower in 2001 (1.966 billion) rather than the recorded 2000 level of $2.033 billion."⁶ Thus, Edison concludes that a material undercollection occurs because sales have dropped substantially below those implicit in the forecasts used to develop PBR. Therefore, Edison believes that, pursuant to § 739.10, the Commission must act to ensure that the material undercollection that it has identified is mitigated by regulatory action.

ORA, in contrast, argues that § 739.10 does not mandate that the Commission establish a retroactive rate indexing formula for 2001. Further, ORA contends that such a change is inappropriate as a matter of policy. ORA argues that the record in this proceeding fails to demonstrate that an undercollection will occur in 2001 in the absence of an adjustment. Therefore, in ORA's view, granting Edison's request will result in a windfall. ORA believes that Edison's decline in revenues is more than offset by a drop in capital spending and operations and management spending.

TURN does not comment directly on the issue of whether to set a revenue requirement for 2001, but it indicates that it supports the analysis and recommendations of ORA.

For 2002, all parties agree that the Commission should adopt a revenue requirement for distribution expenses that is not linked to sales, and that this change should be implemented via a revenue requirement and balancing account. All parties agree that this approach would comply with § 739.10.

Discussion: Adopting a revenue requirement for 2001 and 2002 ensures compliance with § 739.10.

Regarding the year 2001, we find that adopting a revenue requirement and establishing a balancing account offers the most straightforward way of complying with § 739.10. We find ORA's argument, that the Commission need take no action concerning Edison's 2001 revenues, unpersuasive. It is clear that § 739.10 directs that the Commission - not Edison - take action to ensure against under- and overcollections by Edison in the period covered by the statute. Adopting a revenue requirement to cover the period commencing with the establishment of the memorandum account on June 14, 2001, therefore, is a reasonable method for complying with § 739.10. It is also reasonable to convert the memorandum account into a balancing account to be effective as of June 14, 2001. This approach is consistent with the timeframe established by the statute, which was effective on April 12.

It is clear from a reading of the statute and the briefs of all parties that establishing a revenue requirement and balancing account to cover year 2002 utility operations would comply with the provisions of § 739.10. Indeed, setting a revenue requirement that a utility receives no matter the level of electricity sales ensures against both under- and overcollections. We find that this is clearly the preferred regulatory approach for 2002.