III. Jurisdictional Authority for Imposing Cost Responsibility Surcharges

A. Parties' Position

Parties disagree concerning whether this Commission has the jurisdiction to impose surcharges on MDL customers for DWR costs and historic utility undercollections. The municipal parties argue that imposition of such charges on MDL customers would constitute regulation of the rates and service of municipal utilities. Thus, they argue that it is beyond our jurisdiction to impose such charges because the Commission lacks the constitutional or legislative authority to regulate municipal utility customers. The municipal parties also claim that Federal Energy Regulatory Commission ("FERC") has the authority to establish stranded costs in the first instance in matters relating to cost responsibility associated with municipal customer load,²³ and that state courts have the exclusive jurisdiction over the condemnation process.

CMUA argues that applying cost responsibility surcharges on municipal customer load threatens to infringe upon the boundaries of the authority of publicly owned utilities to regulate their own operations.²⁴ CMUA claims that, absent an election by a public agency to utilize the Commission to determine valuation or cost determination issues,²⁵ the courts have exclusive jurisdiction to determine valuation and cost determination issues related to the acquisition of IOU property by a publicly owned utility.

Corona and CMUA rely on County of Inyo v. Public Utilities Commission²⁶ to support the argument that the Commission does not have the authority to impose DWR surcharges on customers of municipal utilities.²⁷ This case addressed a request by Inyo County to have the Commission regulate the rates of customers within the county, which the Los Angeles Department of Water and Power (LADWP) had recently incorporated into its service territory. The State Legislature had not conferred upon the Commission the ability to regulate LADWP's rates in that instance and, therefore, the Commission had no such authority.

Corona argues that the powers conferred upon the Commission by the State Legislature, as discussed in County of Inyo, are expressed, not implied, and there is no expressed authority for the Commission to regulate the municipal utility rates in this instance. CMUA argues that in order to regulate or exercise jurisdiction over publicly owned utilities, including provisions for billing customers on behalf of the IOU, the Commission must be given an express grant of such authority by the Legislature consistent with the California Constitution.²⁸

Merced argues that the Irrigation District Act (which authorizes irrigation districts to provide electric service to customers within the irrigation district) delegates no authority over irrigation district electric rates, charges, or services to the Commission. Under Section 369 certain load served by publicly owned utilities, including irrigation districts, was made subject to the competition transition charge. Merced states, however, that "[i]n recognition of statutory authority and past investments," Section 374 provided exemptions for certain load served by irrigation districts.

The IOUs argue that the State Legislature has conferred upon the Commission sufficient authority to establish rates to recover stranded costs at issue here. The IOUs characterize the argument that the Commission lacks the legal authority to regulate rates of publicly owned utilities as being irrelevant. They agree that if a customer departs the IOU system for a municipal utility's system, the Commission will not regulate the rates charged for the municipal utility's services. However, they argue that the Commission can find that the customer retains its existing responsibility for unpaid costs it would leave behind and require that those costs be paid either in one-lump sum or over a period of time.

The IOUs frame the relevant issue as one of cost responsibility of MDL customers and the charges that the IOUs - not the publicly owned utilities - may ask those consumers to pay. PG&E does not consider it to be municipal regulation for the Commission to require departing load to be held responsible for payment of the DWR and other costs at issue in this proceeding.²⁹ PG&E argues that the Commission has the authority under Sections 451, 453, and 701 to impose responsibility for such costs on the departing load customers of the regulated IOUs.³⁰

SCE similarly characterizes the relevant issues as ensuring that all customers, including customers that depart from IOU to a municipal utility, bear their fair share of the costs incurred on their behalf and that will be incurred as a result of DWR planning to provide electricity in the future.

PG&E notes that the witnesses for publicly owned utilities participating in this proceeding admitted that any costs imposed on DL customers would be charged by the regulated IOU, not the publicly owned utility.³¹ On this basis, PG&E argues that any surcharges that the Commission might impose on MDL would be part of the IOUs' regulated charges, and not an effort to regulate the charges that the publicly owned utility require its own customers to pay.

The IOUs and ORA argue that with the enactment of AB 117, codified as Section 366.2(d) of the Public Utilities Code, the Legislature provides express authority to impose cost responsibility on retail customers that depart to municipal utilities and thereby to avoid cost-shifting. The Legislature added Section 366.2(d) to clarify its intent concerning the cost responsibility of each retail end-use customers who was a customer on or after February 1, 2001. This subsection states:

"It is the intent of the Legislature that each retail end-use customer that has purchased power from an electrical corporation on or after February 1, 2001, should bear a fair share of the [DWR's] electricity purchase costs, as well as electricity purchase contract obligations incurred... that are recoverable from electrical corporation customers in commission-approved rates. It is further the intent of the Legislature to prevent any shifting of recoverable costs between customers."³²

The Municipal Parties argue that because of the "historic risk" posed by publicly owned utilities and the "unique rights and responsibilities" of irrigation districts, municipal departing load should be relieved of responsibility to pay the CRS. PG&E dismisses the relevance of such claims in relation to the fundamental cost responsibility issues in this proceeding. PG&E views the relevant question to be one of cost causation. Based on its belief that DWR did not reduce its power purchases to reflect load loss to municipal load, PG&E contends there is no basis to grant municipal departing load a special exemption from the CRS regardless of any historic risk or unique rights and responsibilities associated with these entities.

B. Discussion

We acknowledge that this Commission does not have authority to regulate the rates, charges or service of municipal utilities. Subject to limitations set forth in the California Constitution, the Legislature has plenary power to delegate authority to the Commission and to impose regulations on publicly owned utilities.³³ The publicly owned utilities are given exclusive power to establish the rates and charges paid by their customers for services provided by these utilities.³⁴

We reject Municipal parties' arguments, however, that imposition of cost responsibility on departed IOU customers now served by publicly owned utilities constitutes regulation of the publicly owned utility. The surcharges that we authorize herein shall be part of the IOU tariffs, and as such, entail regulation of the IOUs. Although the surcharges will apply to customers that are presently being served by municipalities, the surcharges will be calculated, billed, and collected as a function of IOU tariffs. We defer to a separate order the specific means by which the billing and collection process will be implemented. Consequently, none of the actions we adopt in today's order constitutes regulation of rates that municipalities charge for their own service.

As a general matter and consistent with the law, the Commission may fix rates and establish rules for the IOUs.³⁵ We thus authorize IOU tariff charges necessary to hold MDL customers responsible for costs necessary to prevent cost shifting in accordance with AB 117, thereby ensuring that bundled customers' charges are just and reasonable consistent with Section 451. Section 453 gives the Commission the authority and responsibility to ensure that IOUs do not discriminate or grant any preference or advantage to particular persons, and do not maintain any unreasonable difference as to rates between localities or classes of service. Section 701 grants the Commission discretionary authority to do all things, whether specifically designated in the Code or not, "which are necessary and convenient" in the exercise of its power and jurisdiction.³⁶

Pursuant to these statutes, we have authority to establish charges to recover costs incurred by DWR. Moreover, the State Legislature specifically stated its intent in AB 117 "to prevent any shifting of recoverable costs between customers," when it enacted Section 366(d). The potential for cost shifting is not limited just to DA customers, but also implicates other load that departs from IOU service, including customers that depart bundled service after February 1, 2001 to be served by a municipality. Such departing customers leave behind costs they helped cause to be incurred to provide them with benefits. MDL customers that left the IOU after February 1, 2001, thus come under the provisions of AB 117. In accordance with these statutory requirements, bundled customers may not be unfairly charged for obligations that are the responsibility of MDL customers.

Accordingly, we find that the County of Inyo case is distinguishable from the issues before us here. County of Inyo pertained to Commission regulation of a municipal utility's rates. We do not seek to regulate the rates or charges of a municipal utility in this order. Instead, by authorizing tariff charges applicable to the IOU, we are regulating the IOU, and allocating costs. The fact that the IOU must bill and collect the CRS from customers that have departed IOU bundled service after February 1, 2001, does not preclude us from authorizing the IOU to recover these amounts. Thus, nothing in this order conflicts with County of Inyo.

The DWR costs for which MDL customers bear responsibility include both past undercollections as well as an ongoing cost component. Water Code Section 80002.5 states that "[i]t is the intent of the Legislature that power acquired under this division shall be sold to all retail end use customers served by electrical corporations, ...." AB 1X provides for funds to DWR through charges for the electricity that it purchased on behalf of retail end-users. AB 1X requires that DWR include in its revenue requirement ". . . amounts necessary to pay for power purchased by it . . . ." (Water Code, § 80134, subd. (a)(2).) Thus, consistent with the Water Code and AB 117, MDL customers bear responsibility for those costs.

CMUA argues that AB 117 relates to "direct access" (known as "community choice aggregation"), an arrangement that contemplates a continuing service relationship between the customer and the investor-owned utility. CMUA claims that AB 117 contains no express grant of authority relating to municipal customer load, and that there is no specific reference therein to service provided by publicly owned utilities.

While most of the code sections in AB 117 involve aggregation programs, § 366.2(d) is expressly about customers that took bundled service on or after February 1, 2001. The grant of authority is thus framed in the general context of bundled IOU customers as of February 1, 2001, not merely in the context of a DA or community aggregation customer. AB 117 does not carve out exceptions from cost responsibility for customers departing to a municipal utility. Moreover, since authorizing IOU tariffs does not constitute regulation of a municipality, we find the argument inapplicable that AB 117 provides no express authorization to regulate municipal rates. The fact that customers depart IOU service subsequent to that date does not foreclose our authority to recognize the preexisting obligation of the customer and to require them to pay a fair share of DWR costs, as required by law. Pursuant to Section 366.2(d), therefore, MDL customers come within the jurisdictional reach of cost responsibility for DWR charges.

Merced argues that Section 366.2(d) must be read in conjunction with Water Code Section 80104. While Section 80104 may authorize recovery of DWR Power Charges from utility customers, Merced interprets the code Section as precluding recovery of future costs, such as a DWR Power Charge, from departing customers. Merced contends that because customers who leave an IOU for an irrigation district stop taking delivery of DWR power, they incur no liability for the costs of prospective DWR power that they never receive. Because Section 80104 imposes DWR cost responsibility "upon delivery" of power to a customer, Merced argues that cost responsibility cannot attach without delivery. Merced thus claims that irrigation district customers cannot be required to pay DWR Power Charges after they depart an IOU and cease taking delivery of power purchased under DWR contract.

We reject such arguments. Cost responsibility does not cease to apply to MDL customers simply because they do not currently consume DWR power. Such a conclusion contradicts the principles of cost responsibility and bundled customer indifference adopted in D. 02-03-055. Section 366.2(d) imposes cost responsibility not just for delivered DWR "purchase costs" but also "purchase contract obligations incurred." Thus, cost responsibility includes ongoing costs resulting from "contract obligations" made during 2001 when DWR was entering into purchase commitments covering several years. Those obligations require that power under the contract continues to be purchased even though priced above-market.

To the extent off-system sales of such power yield a net loss, we have determined that DA customers share in such loss even though they do not currently consume power under DWR contracts. This is because DWR entered into these contracts for power on behalf of these customers while they took bundled service. In similar fashion, MDL customers must bear responsibility for a share of ongoing above-market costs resulting from prior DWR contract obligations even though they do not currently consume DWR power.