IV. Discussion

A. Rule Changes Regarding Accounting for Applicant-Installed Projects

1. Does the Commission's decision requiring the utilities to book the "lower of" the utility's estimated costs or the applicant's actual costs apply to the refundable portion of the project costs or to the total project costs?

Ordering Paragraph 4 of the decision states "[t]he proposal to change the utilities' accounting procedures to require the utilities to book to rate base the lower of the utilities' bid amount or the applicants' costs for applicant-installed projects, is adopted." The decision does not specify, however, whether the Commission intends this accounting treatment to apply to the refundable portion of the project costs or to the total project costs. PG&E says that under the rationale of the decision, the accounting change should apply only to the refundable portion of project costs, not all of the applicant's costs, but the decision does not make this clear.

TURN says that PG&E correctly points out that there can be dramatically different outcomes in the application of this requirement, depending on whether one is applying it to "refundable" amounts or "non-refundable" amounts. According to TURN, PG&E is right - if the "lesser of estimate or actuals" approach were applied to the non-refundable amounts, it could serve to reduce the ratepayer benefits from implementation of this change, as the non-refundable amounts do not impact rate base.

CBIA disagrees. CBIA says the accounting change should apply to the total project costs, including non-refundable amounts. CBIA argues that while non-refundable project contributions are not included in the calculation of rate base upon which the utility earns a return, "such contributions are included in rate base accounts" which, in turn, are used to develop/determine recoverable utility operating expenses such as O&M and property taxes. CBIA contends that consequently, reductions in these non-capital investment rate base accounts means lower costs for ratepayers.

We reject CBIA's argument. The issue in the decision on which PG&E seeks clarification relates to the TURN/UCAN proposal "to limit the addition to the utility's ratebase on applicant-installed projects." (D.03-03-032, mimeo., p. 15.) CBIA's characterization of non-refundable costs as being "included in rate base accounts" does not change the fact that non-refundable costs have no impact on ratebase and thus are irrelevant to the issue on which PG&E seeks clarification. According to the decision, the stated purpose of the proposed accounting change is to potentially reduce amounts booked to rate base from applicant-performed work. Further, the decision notes that the only amounts booked to rate base for applicant performed work are allowances plus refunds. (D.03-03-032, mimeo., p. 17.) These amounts are typically referred to as "refundable(s)." In fact, non-refundable project costs do not show up in rate base at all because they are covered by the applicant, either by a cash payment or by an in-kind contribution of the non-refundable items of work. Accordingly, we agree with PG&E and TURN that the accounting change adopted in the decision applies only to the refundable portion of project costs, not to the applicant's total project costs.

2. Are the utilities required to use "actual cost" data from an applicant after the project is complete and all costs are determined, or are the utilities permitted to use an applicant's anticipated costs as set forth in a contract with the installer at the start of a project?

Ordering Paragraph 4 of the decision requires the utilities to book the "applicants' costs" if they are lower than the utilities' bid amount. The discussion section of the decision refers to the applicants' "actual costs," but the decision does not specify whether the figures used can be amounts that the applicants have contracted for with a third-party contractor or whether these figures must reflect the final determination of all costs after project completion.

PG&E notes that the discussion section of the decision cites the TURN/UCAN position that "utilities can receive a simple and accurate accounting of the third-party billed cost by requiring the customer to submit an invoice and verified statement prior to receiving any refunds." (D.03-03-032, mimeo., p. 18, emphasis added.) According to PG&E, the citation to this comment suggests that using the contract price, or "billed" price, for the third-party installation may have been contemplated as opposed to a final accounting of all expenses. Further, PG&E points out that allowing the utilities to use the applicant's costs as set forth in applicant's third-party contract at the commencement of the project will simplify several of the administrative problems created by this accounting change.¹

CBIA agrees that the utilities should be authorized to use the applicant's third-party contract estimate as a proxy for actual cost.

TURN supports PG&E's proposal to allow the utilities to use the applicant's costs as set forth in the applicant's third-party contract at the commencement of the project.

We note that the decision states: "We are not persuaded that the utilities should need to undertake expensive verification efforts." (D.03-03-032, mimeo., p. 17.) By using applicant's costs as set forth in its third-party contract at the commencement of the project, the utilities would obviate the need to change the terms of the contract after job completion, and obviate the need to withhold refunds and reimbursements pending determination of actual costs. Applicants should provide the utility with copies of their third-party contract to enable the utility to verify applicant's claims, and to ensure no gaming of refundable and non-refundable costs. Accordingly, we adopt PG&E's proposal as being consistent with the stated intent of the decision.

B. Rule Changes for Inspection Fees

1. Because the decision converts inspection fees from a non-refundable cost to a refundable cost, should the reconciliation of inspection costs be omitted?

Ordering Paragraph 5 of the decision states that applicants "shall be permitted to apply any otherwise-available line extension allowances to some or all of the cost of utility inspections, to the extent that the overall cost of the installation does not exceed the utility's cost estimate for performing the same work." Currently, inspection fees for applicant-performed work are a non-refundable cost for which the applicant makes a payment up front, with reconciliation of actual inspection fees upon project completion. The decision, however, converts inspection fees to a refundable cost, potentially impacting allowances and refunds.

PG&E says that because refundable costs impact contract terms and payments to applicants, it is important that they not become a "moving target." Since inspection fees under the decision will become a refundable cost, they should logically be fixed at the outset of the project and not be subject to reconciliation, according to PG&E.

CBIA agrees with PG&E that the estimated one-time inspection costs should be used without reconciliation. According to CBIA, the inspection fees should be estimated and collected in advance and be identified in the contract as part of the amount subject to refund.

TURN opposes PG&E's request that for purposes of calculating refunds, inspection costs be set at the outset of the project and not be subject to reconciliation. TURN says it does not understand PG&E's stated concern about avoiding having refundable costs becoming a "moving target." TURN argues that under current practices, the reconciliation of actual inspection fees upon project completion serves to place the risk squarely with the applicant. According to TURN, reconciliation of inspection cost at the end of the project would keep the risk on the applicants, as it was prior to D.03-03-032.

We reject TURN's argument that reconciliation of inspection costs at the end of a project is required to keep the risk on the applicants. First, we believe TURN's rationale for requiring a reconciliation of inspection costs at the end of a project is not consistent with its position supporting PG&E's request that the utilities be allowed to use applicant's third-party contract costs at the commencement of a project rather than the final costs determined after project completion.

Second, as PG&E pointed out in its petition, if the utilities are required at the completion of the project and receipt of final cost data to revise the figures used for refundable costs, the other contract terms derived from this amount also have to be modified, and payments to and from the applicants are potentially affected. Also, according to PG&E, the problems of waiting until the job is complete are magnified where Rule 16 services are involved, because "build-out" or completion of all services in a development is often a matter of years. Apparently, that is the moving target which PG&E refers to in its petition.

Third, our decision provides: "we will allow inspection fees to become part of the job costs subject to line extension allowances. As long as the total ratepayer exposure cannot exceed the utility's estimated cost for doing the same work, ..." (D.03-03-032, mimeo., p. 8.) Thus, there is no basis for TURN's concern that inspection costs must be reconciled at the end of a project to keep the risk on the applicants. Accordingly, we adopt PG&E's proposal that inspection costs should be fixed at the outset of the project and not be subject to reconciliation for purposes of refunds.