Issue 3: Should the Commission alter the "trigger mechanism" and/or earnings benchmark contained in the PBR?

Positions of Parties

As mentioned above, the "trigger mechanism" leads to changes in ROE and changes in rates depending on the movement of a "trigger" set at interest rates based on Moody's Aa utility bonds.

Edison states that the current "trigger mechanism" for modifying the ROE earnings benchmark contained in the PBR should continue unchanged during the limited period of the PBR extension.¹⁸ In its testimony, Edison demonstrates that the trigger mechanism accurately tracks Edison's authorized return on common equity over the 20-year period from 1978 to 1997, a period prior to the adoption of the PBR. Edison further notes that:

"If the trigger mechanism had been in place during this period, it would have reset the return on common equity six times over the 20-year period. On average, the return generated by the Trigger Mechanism would have been 13 basis points below the returns actually authorized by the Commission."¹⁹

Edison therefore concludes that this mechanism has rewarded shareholders and ratepayers with a predictable, stable, and reasonable return. Finally, Edison notes its current financial crisis, and argues that an examination of its ROE should take place in May 2002, when it expects to make a cost-of-capital filing.²⁰

ORA recommends that the Commission adjust Edison's trigger mechanism by resetting the current benchmark value form 7.5% to 7.69%. ORA justifies this adjustment by stating that 7.69% is the 12-month trailing Moody's Aa utility bond rate calculated as of the end of September, 2001.²¹

TURN supports ORA's proposal, stating that adjusting the trigger index as proposed "increases the possibility of a lower rate of return under current market conditions and is an eminently fair response to the lowered utility risk."²²

Discussion: No basis for change.

The PBR trigger mechanism should not be changed. Historically, the trigger was developed in a way that tied a specific Commission adopted ROE to a specific value of a 12-month trailing average of Moody's Aa utility bonds. In addition, the trigger mechanism and ROE were developed and modeled using utility financial data and Commission regulatory actions for the twenty years from 1978 to 1997. Any proposal for change should address why we should now break this link.

From its adoption in September of 1996 through June 2001, the trigger has moved within the deadband. Nevertheless, even if there were no deadband, and ROE was recalculated annually, Edison's ROE would have average 11.59%, only one basis point below the authorized level of 11.6%. Thus, we are confident that this trigger mechanism is operating fairly and need not be changed.

ORA's proposal does not explain why the Commission should change the current benchmark for the trigger mechanism at this time, nor does ORA explain what justifies breaking the established link between the trigger and ROE. In particular, ORA's arguments make no reference to historic data of any sort in their discussion of the trigger mechanism. Thus, ORA's recommendation to alter the trigger mechanism is unsupported.

TURN argues that establishing a revenue requirement and balancing account reduces a utility's financial risks and therefore change is justified. Nevertheless, there is no testimony from either TURN or ORA that explains why adjusting the mechanism in exactly this way is reasonable. Moreover, TURN's argument ignores the complex financial situation of Edison, which clearly calls for a comprehensive review before adopting a new ROE or financial structure.

In summary, the request for a change in the trigger mechanism has no empirical justification and we cannot find this change reasonable.