Decision ____________	DRAFT	Item 1
		8/21/00

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Investigation into the Functioning of the Wholesale Electric Market and Associated Impact on Retail Rates.

Investigation 00-08-002 (Filed August 3, 2000)

OPINION MODIFYING DECISION (D.) 99-05-051, D.00-06-034,

AND D.00-08-021 REGARDING INTERIM RATE CAPS FOR

SAN DIEGO GAS & ELECTRIC COMPANY

Summary

On August 3, 2000, we issued Decision (D.) 00-08-021. After reconsidering the exigencies of the soaring electric rates in San Diego, we adopt an interim rate freeze and establish a balancing account for future collection of these costs. In doing so, we recognize the directive of Governor Davis and the urgency of the situation in San Diego. We therefore modify D.00-08-021, D.00-06-034, and D.99-05-051 and establish interim rate caps for San Diego Gas & Electric Company (SDG&E) through December 2003. We will explore other options, as appropriate.

Background

In D.00-08-021, we considered and rejected a rate freeze proposed by the Utility Consumers' Action Network (UCAN). We recognized that wholesale electric markets are not workably competitive and issued Order Instituting Investigation (I.) 00-08-002 to begin an investigation to consider the impact of the wholesale electric market on retail rates in SDG&E's service territory. As we explained in that decision, ratepayers in the service territories of Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (Edison) are shielded from increases in energy prices (both commodity and ancillary services) because these utilities' electric rates remain frozen. SDG&E, however, ended its rate freeze on July 1, 1999 (D.99-05-051).

In D.00-06-034, we determined that consumers must be aware of the price signals provided by the market and rejected PG&E's rate capping proposals. The Commission agreed with TURN that balanced payment plans, which each utility already has in place, offer a bill smoothing effect for residential customers and still allow these customers to be exposed to price signals.

Discussion

On June 29, 2000, the Independent System Operator (ISO) Board of Governors reduced price caps in the ISO real-time ancillary services, and intra-zonal congestion markets from $750 per megawatt¹ (MW) to $500/MW, effective July 1, 2000 through October 15, 2000. On August 1, the price caps were reduced to $250/MW. The ISO has identified several Stage 1 and Stage 2 emergencies thus far this summer. Under California's Electrical Emergency Plan, a Stage 2 emergency is defined as a period when the electric reserve margin (i.e. backup generating capacity) drops below five percent but is above 1.5% of customer demand. A Stage 1 emergency exists when power reserves fall below 7%. High temperatures in the West have limited the amount of electricity that California can import and have caused periodic drops in the state's electric reserves. Electricity demand has surpassed 44,000 MW on certain days. The combination of heat waves across the western United States and the corresponding drops in reserves along with increased demand in California have resulted in significantly increased prices to consumers. Given the high costs of energy thus far this summer, we remain troubled about the impacts of high rates on the ratepayers in SDG&E's service territory. We fully intend to move ahead quickly with the investigation ordered in I.00-08-021; however, nothing can be resolved in that investigation in time to grant San Diegans the rate relief that is required now.

In D.99-05-051, the Commission adopted a settlement regarding the end of SDG&E's rate freeze. The settlement allowed SDG&E to cap its residential, small commercial and lighting customer rates at levels not to exceed 112.5% of frozen electric rate levels "on a monthly average basis" for the months of July, August, and September 1999. The settlement also provided that SDG&E would not propose a "similar" rate cap for the year 2000 in this proceeding.

While we recognize that the Commission only recently rejected price or rate caps after the rate freeze (other than the interim rate caps adopted for SDG&E last summer), we are very concerned regarding the impact of high energy costs on SDG&E's ratepayers. Therefore, we will modify D.99-09-051, D.00-06-034, and D.00-08-021 to require SDG&E to impose interim rate caps on residential, small commercial, and lighting customers. The interim rate caps should be in place from the effective date of this decision through the end of 2000. SDG&E shall cap its residential, small commercial and lighting customer rates at levels not to exceed 110% of frozen electric rate levels that were in effect as of June 30, 1998 from the effective date of this decision through December 2003.

We also order SDG&E to establish a balancing account to record the undercollections resulting from our actions today. In its response to UCAN's emergency petition (filed in this docket on July 6, 2000), SDG&E stated that this Commission is obligated to allow SDG&E to recover the market-based wholesale rates approved by the Federal Energy Regulatory Commission (FERC). We agree. In establishing this balancing account, we will allow these costs to be recovered in a manner that makes SDG&E whole. Furthermore, we will conduct evidentiary hearings on this issue in I.00-08-002. In those hearings, we will also explore the impacts on large industrial customers. Within five days of the effective date of this decision, SDG&E shall file an advice letter to establish this balancing account.

We will modify the following findings of fact in D.00-08-021, as follows:

1. UCAN's motion to re-institute the rate freeze for SDG&E for the months of August, September, and October could lead to unintended consequences and higher winter bills; however, we recognize that immediate rate relief is required now.

2. UCAN's proposal should be examined and evaluated in the context of the OII order we vote upon today in order to determine the jurisdictional and practical implementation of a solution. We will hold evidentiary hearings on recovery of the shortfall, but will ensure that SDG&E is made whole.

The following findings of fact will be modified in D.00-06-034:

21. We reject PG&E's proposal that it is necessary to cap rates in order to protect residential and small commercial customers from potential price volatility and corresponding rate increases; however, it is reasonable to adopt an interim rate freeze for SDG&E through December 2003.

22. We did not initiate electric restructuring in order to shield consumers from the market. We agree with Weil and TURN that customers need accurate price signals in order to react and protect themselves against periodic price spikes; however, affirmative action is required to provide immediate rate relief for ratepayers in SDG&E's service territory.

23. In a workably competitive market, masking prices results in incomplete and inefficient market structure and system demand, and compromises system reliability. Only through accurate price signals can customers understand how their usage impacts the system and make economically efficient choices; however, it is reasonable to implement rate caps on an interim basis for SDG&E.