STATE OF CALIFORNIA GRAY DAVIS, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

June 17, 2003 Agenda ID 2354

Alternate Order to 2267

Ratesetting

TO: PARTIES OF RECORD IN RULEMAKING 02-01-011

Enclosed is the Alternate Draft Decision of Commissioner Loretta Lynch to the Draft Decision of Administrative Law Judge (ALJ) Thomas Pulsifer previously mailed to you.

When the Commission acts on this agenda item, it may adopt all or part of it as written, amend or modify it, or set aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

As set forth in Rule 77.6(d), parties to the proceeding may file comments on the enclosed alternate by June 27, 2003 and reply comments no later than July 3, 2003. An original and four copies of the comments with a certificate of service shall be filed with the Commission's Docket Office and copies shall be served on all parties on the same day of filing. The Commissioners and ALJ shall be served separately by overnight service.

 /s/ ANGELA MINKIN  

Angela Minkin

Chief, Administrative Law Judge

ANG:epg

/enclosure

COM/LYN/epg ALTERNATE DRAFT Agenda ID # 2354

Alternate to Agenda ID #2267

Ratesetting

Decision ALTERNATE DECISION OF COMMISSIONER LYNCH (Mailed 06/17/2003)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking Regarding the Implementation of the Suspension of Direct Access Pursuant to Assembly Bill 1X and Decision 01-09-060.

Rulemaking 02-01-011 (Filed January 9, 2002)

(See Decision (D.) 02-11-022 for a list of appearances.)

O P I N I O N

TABLE OF CONTENTS

O P I N I O N 2

I. Introduction 2

II. Procedural Summary 6

III. Framework for Evaluating the DA CRS Cap 8

IV. Relationship of this Proceeding to the DWR Revenue Requirement Redetermination 10

V. Results from Modeling and Forecasting of DA CRS Levels 12

VI. Determination of Cap Levels 15

A. Overview of Positions of Parties 15

B. Discussion 20

1. Cap Criteria for Assuring Bundled Customer Indifference 21

2. Evaluation of Forecast DA CRS Payback Period Scenarios 23

3. Determination of the 2001-2002 Undercollection 27

4. Disposition of DWR Operating Reserves 29

5. Analysis of Key Variables Underlying DA CRS Cap Evaluation 31

a) Natural Gas Prices 31

b) New Generation Capacity Additions 33

c) Levels of DA Load 35

d) Utility Retained Generation and CTC Costs 36

e) Off-System Sales (OSS) Prices 41

6. Interest Rate Assumed as a Source of Financing 44

a) Parties' Positions 45

b) Discussion 50

7. Effects of the Cap on DA Economic Viability 57

a) Parties' Positions 58

b) Discussion 63

8. Allocation of the DA CRS Undercollection
to Bundled Customer Groups 65

a) Parties' Positions 66

b) Discussion 72

VII. Order of Collection of DA CRS Elements 73

A. Parties' Positions 74

B. Discussion 75

VIII. Tracking Mechanism to Ensure Proper
Allocation of DA Default Between Core
and Noncore Classes 77

A. Parties' Positions 77

B. Discussion 79

IX. Frequency of Subsequent Reviews and
Readjustments of DA CRS Caps 79

X. Rehearing and Judicial Review 80

XI. Comments on the Alternate Decision of Commissioner Lynch 80

XII. Assignment of Proceeding 80

Findings of Fact 81

Conclusions of Law 84

ORDER 87

O P I N I O N

I. Introduction

In this decision, we determine the appropriate level of the Direct Access (DA) cost responsibility surcharge (CRS) cap effective for the period subsequent to July 1, 2003. In Decision (D.) 02-11-022, we adopted an interim DA CRS cap of 2.7 cents per kWh pending further proceedings that have led to the instant order. Based on further study as directed in that decision, we conclude that the DA CRS cap should be increased to 4.0 cents per kWh for PG&E, SCE and SDG&E. The analyses prepared by Navigant vary widely, even amongst the narrower scenarios that may represent more "realistic" assumptions. Under many likely scenarios bundled customers will be faced with bearing hundreds of millions in costs over the next few years, with the capital only being returned over a lengthy period of time. The only approach to meet the goal of maintaining bundled customer indifference is to adopt a DA CRS cap of 4 cents per kWh for PG&E, SCE and SDG&E, to minimize the size of the DA undercollection and limit the duration of the payback period. By adopting a 4 cent/kwh cap for all three utilities, we also reduce the future burden on DA customers, which will help ensure the long-term survivability of the DA market.

In D.02-11-022, we adopted policies and procedures to implement cost responsibility surcharges for DA load pursuant to the directives in D.02-03-055, as modified and affirmed in D.02-04-067, which maintained the effective date of September 21, 2001 for the suspension of DA that was adopted in D.01-09-060, as affirmed in D.01-10-036. We suspended DA pursuant to legislative directive, as set forth in Assembly Bill No. 1 from the First Extraordinary Session (AB 1X ). (See Stats. 2002, 1^st Extraordinary Session, ch 4.) This emergency legislation was enacted and made effective on February 1, 2001 to respond to the serious situation in California when Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (SCE) became financially unable to continue purchasing power due to extraordinary and unforeseen increases in wholesale energy prices.

The Governor's Proclamation of January 17, 2001,¹ and AB 1X required that DWR procure electricity on behalf of the customers of the California utilities. As part of its provisions to deal with California's energy crisis, AB 1X also called for the suspension of the right to acquire DA, as set forth in Section 80110 to the Water Code:

"After the passage or such period of time after the effective date of this section as shall be determined by the commission, the right of retail end use customers pursuant to Article 6 ... to acquire service from other providers shall be suspended until [DWR] no longer supplies power hereunder."

In compliance with the mandate to suspend DA, we considered the related implementation issues in A.98-07-003. The Commission issued D.01-09-060, suspending the right to acquire DA after September 20, 2001. In D.01-09-060, we placed parties on notice, however, "that we may modify this order to include the suspension of all direct access contracts executed or agreements entered into on or after July 1, 2001." (D.01-09-060, pp. 8-9.)

On January 14, 2002, the instant rulemaking (R.) 02-01-011 was initiated to consider among other things, whether a suspension date earlier than September 20, 2001 should be applied to direct access.² On March 27, 2002, we issued D.02-03-055, determining that the DA suspension date should remain as "after September 20, 2001." DA contracts executed on or prior to September 20, 2001, were not suspended, but were made subject to the restrictions imposed by D.02-03-055. We emphasized in D.02-03-055 that bundled service customers should not be burdened with any additional costs due to the migration of customers from bundled service to direct access between July 1, 2001 and September 21, 2001.

We stated that, in lieu of an earlier suspension date of July 1,2001, DA surcharges must be adopted as a means of preventing cost shifting to bundled customers. We later clarified that prevention of cost shifting meant that "bundled service customers are indifferent."³ In order to maintain bundled customer indifference, DA customers must thus bear cost responsibility for stranded costs due to the migration of customers from bundled to DA service on and between July 1 and September 20, 2001.

In D.02-11-022, we adopted a methodology for achieving bundled customer indifference through a Direct Access Cost Responsibility Surcharge (DA CRS). In adopting the DA CRS mechanism, we noted our concern that had been previously expressed in D.02-07-032 that the "pancaking" of cumulative surcharges on DA customers may lead to DA contracts becoming uneconomic. To address this concern, we stated in D. 02-07-032 that "there should be a cap on the total surcharge levels imposed on DA customers (including the impact of any changes to PX credits)."

Consistent with these concerns expressed in D.02-07-032, we did not immediately pass through the full DA CRS obligation, including cumulative undercollections, to DA customers. To avoid undermining the economic viability of DA, we adopted an interim cap of 2.7 cents per kWh on the current DA CRS amounts billable to DA customers to remain in effect through July 1, 2003 pending further study.

The DA CRS includes the DWR Bond and Ongoing Power Charge applicable to DA load that took bundled service on February 1, 2001, and a charge on all DA load for above-market Utility Retained Generation (URG) costs.⁴ For SCE, the amount collected under the DA CRS cap also includes the Historical Procurement Charge (HPC) to recover a part of the Procurement Related Obligation Account (PROACT) balance from DA customers pursuant to D.02-07-032.⁵

The DA CRS cap is intended to preserve bundled customer indifference while enabling DA to remain economically viable. By imposing a cap on the initial payment obligation, the burden of the DA customer is mitigated. DA customers remain responsible for the deferred DA CRS obligation in excess of the cap, but the collection is spread over future periods. Bundled service customer charges fund CRS undercollections due to the cap on an interim basis pending reimbursement from DA customers.

The DA CRS undercollection shall be paid off in subsequent years as revenues collected under the capped DA CRS begin to exceed then-current DA revenue requirements. The resulting surplus in DA CRS recovery in later years will be credited to bundled customers, with interest, to pay down the undercollections that they funded in the initial years. In D.02-11-022, we ordered further proceedings to assess whether or to what extent the interim 2.7 cents cap was sufficient, or should be revised as of July 1, 2003, in order to assure proper balancing of the goals of bundled customer indifference and DA economic viability. This phase of the proceeding is addressing whether the 2.7 cents cap should be revised subsequent to July 1, 2003.

² The administrative record relating to these specific issues in A.98-07-003 et al. was incorporated into this rulemaking. Judicial notice was also taken of specific information in the DWR Revenue Allocation Proceeding A.00-11-038 et al. (See Letter of January 25, 2002, to the parties that accompanied the Draft Decision of ALJ Barnett).

³ D.02-04-067, pp. 4-5 (slip op.).