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 megawatt² (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.

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) and in D.00-08-021 determined that the specific limited rate freeze proposal of UCAN required further study and hearings. We continue to believe that a rate freeze makes little sense.

Nevertheless, we remain 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 adopt a rate stabilization plan - not a rate freeze - to provide further bill protection and rate relief beyond that adopted in D.00-08-021.

As an alternative to a rate freeze, we propose a rate and bill stabilization plan that consists of the following elements:

1. SDG&E will cap residential rates so that a customer consuming 500 kWh of electricity in a month will receive an electric bill not to exceed $68. All residential customers consuming electricity at amounts in excess of 500 kWh per month will face market rates for all consumption above 500 kWh.

2. SDG&E will cap commercial rates so that a commercial customer consuming 1500 kWh per month will receive an electric bill not to exceed $220. All commercial customers consuming electricity at amounts in excess of 1500 kWh will face market rates for all consumption above 1500 kWh.

3. All revenue shortfalls should be booked to the Transition Cost Balancing Account. In this account, any additional revenues arising from the sale of power by SDG&E's current generation assets, such as SONGs and long-term contracts, during periods of high prices will automatically offset a portion of these revenue shortfalls.

4. San Diego should prepare an advice letter by September 15^th proposing a plan to implement a Levelized Payment Plan on a default basis. Such a plan may include a phase-in, if necessary. The plan should also propose procedures and communications strategies to reduce customer confusion. For example, the migration plan could include mail in ballots that would permit the customers to "opt-out" of the LPP, but failure to act would result in enrollment in the LPP. The plan should also identify the financial consequences of this change in billing practices and the costs associated with the modifications to the LPP. Such a plan may use forecasts to set bill levels to ensure that participants do not face sudden bill escalations. Finally, the filing should include projections on bills for residential customers consuming 500 kWh per month and commercial customers consuming less that 1200 kWh per month.

We note that in any electric utility system, the vast majority of customers consciously conserve power while a few use large amounts. Thus, approximately 70 percent of electricity users consume less than the average level of consumption.

This pattern holds true for San Diego Gas and Electric, as it does for every California electric utility. In SDG&E's service territory, approximately 70 percent of all residential customers consume less than 500 kWh per month.³ Similarly, approximately 70 percent of small commercial customers consume less that 1500 kWh per month.⁴ This pattern of consumption enables us to design a rate and bill stabilization plan that protects SDG&E's consumers from the gyrations of current energy markets, avoids instituting a rate freeze, and maintains incentives to encourage further energy conservation by those consuming large amounts of electricity.

We are particularly concerned that the adoption of a rate freeze at levels not to exceed 110% of frozen electric rates that were in effect as of June 30, 1998 for a two and a half year period, as others have proposed, would harm California. The adoption of such a proposal would lead to average bills in the $55 range and cause balancing account accumulations of approximately $1.5 billion, if current market conditions continue. Revenue shortfalls of this magnitude would likely jeopardize SDG&E's ability to purchase power or to build needed transmission infrastructure. These problems would have direct consequences for SDG&E's customers and the California economy.

Although we have adopted a rate stabilization plan that should reduce the shortfalls accumulated in the TCBA, we recognize that shortfalls may occur. 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 permitting SDG&E to book revenue shortfalls into the TCBA, 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.

We view the rate caps that we adopt here as facilitating an orderly transition to a LPP. The LPP we envision differs substantially from that available on current tariffs. In particular, it is modified to take into account the changing market conditions. First, it will become available through a procedure that allows customers to readily exercise choice, while those failing to exercise choice will default into the program. Second, it differs from the current program in that it will use projections of electric rates to avoid shortfalls that leave consumers facing large adjustments at the end of the year. Third, since this program differs in scale and scope from the current program, we recognize that the financial consequences of this program require resolution. Thus, we fully understand that the transition to such a plan will take time.

Previously, SDG&E identified several obstacles concerning rapid expansion of a LPP. We acknowledge that customer confusion may be an issue, but note that this Commission has had excellent experiences in education campaigns in the telecommunications industry concerning the issues of privacy and its relationship to caller id service. The issues involved in a LPP are much less complex. We have no doubt that SDG&E can develop a campaign that minimizes customer confusion. Second, although SDG&E's surveys indicate that many customers prefer the status quo, we envision that this program will give them the opportunity to opt out of the LPP. By "opt-out," we do not mean to force any customers onto the LPP. A different way of putting this is "changing the default," so that all customers should be given an opportunity to choose whether or not to be on an LPP. Those who do not make a choice would default to the LPP. Third, software and system programs, even if they prevent a flash cut to a LPP, are not intractable, and SDG&E can develop a plan to implement this ordered change. Finally, it is clear to us that such a plan will affect a utility's cash-flows, but these can also be addressed.

We therefore order SDG&E to file by September 15^th an Advice Letter proposing a plan to implement a LPP on default basis. Such a plan may include a phase-in. The plan should also propose procedures and communications strategies to reduce customer confusion. For example, the migration plan could include mail in ballots that would permit the customers to "opt-out" of the LPP, but failure to act would result in enrollment in the LPP. The plan should also identify the financial consequences of this change in billing practices and the costs associated with the modifications to the LPP. Further SDG&E should propose a method to mitigate potential "true-up" payments caused by forecasting error or price volatility. Finally, the advice letter should also propose to establish memorandum accounts to track expenses and permit recovery in rates of the costs of this program, including its financial costs.

We note that despite the rebates and discounts we have previously ordered, large businesses will not receive rate reduction bond rebates as they did not receive the associated 10 percent discount nor pay into the Transition Transfer Accounts. Other small business and residential customers will, for one reason or another, not receive rebates previously ordered. For these customers, the combination of the immediate rate stabilization measures and the LPP offer a good measure of relief. For this reason, we believe that this program offers the most practical way of providing relief from high bills.

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 not be examined and evaluated in the context of the OII order we vote upon today.

We will modify D.00.08-021 to add the following findings:

9. A rate stabilization plan can offer stable bills to residential and commercial customers during this period of price volatility.

10. We will hold evidentiary hearings in the context of the OII we order today on recovery of any revenue shortfall that may arise from a rate stabilization plan, 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 stabilization plan for SDG&E.

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, a rate stabilization plan 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 a rate stabilization plan on an interim basis for SDG&E.