4. Revenues and Expenses
4.1. Revenues
Southwest and ORA forecast sales in therms8 per month for each customer, by class, through regression analysis. Total sales forecasts9 were developed by multiplying the consumption per customer by the number of customers10. Revenues at present rates were developed by multiplying the sales forecast by the current rates for each customer class.
The primary impact of the sales forecast is on the development of new rates. The higher the forecast of revenues at present rates, the lower the rates will have to be to recover the revenue requirement in the test year. Because of this direct relationship between forecasts and rates, revenue forecasts can be controversial.
In this case, ORA's sales forecast is slightly higher than the forecast by Southwest. ORA's sales forecasts exceed Southwest's forecasts by about 271,000 therms, or 1.4% for Northern California, and 2,858,000 therms, or 2.41% for Southern California. ORA and Southwest agree these variances are a result of different heating degree-day11 data. ORA used 25 years of data, while Southwest used 10 years of data. Southwest argues that using 10 years of data is consistent with its forecast methodology for all GRCs during the past 20 years, whereas, ORA argues that the use of 25 years of data is more appropriate because it reflects a greater number of weather cycles, and is therefore a more accurate picture of weather-related customer usage. ORA contends that the historic use of 10-years of data is immaterial, and that other utilities including PG&E and Southern California Gas Company (SoCalGas) use at least 20 years of data in their respective GRC proceedings.
However, in this proceeding, the potential effect of revenue differences is minimized since Southwest and ORA agree that base revenues should be accumulated in a balancing account. If the revenue forecast is too high and revenues are under-collected the balancing account protects shareholders. If the revenue forecast is too low and revenues are over-collected, then the balancing account protects ratepayers.
Although Southwest and ORA agree on establishing a balancing account, revenue forecasts could have an effect on operating revenues if the implementation date for the balancing account differs from the date of this decision. Revenues occurring between the date of this decision and the date for implementing a balancing account could result in over or under-collections of revenue. Southwest advocates establishing the balancing account effective on the effective date of this decision, whereas, ORA recommends that the balancing account not become effective until January 1, 2004. ORA argues that delaying the implementation date will mean the balancing account will begin on an appropriate annual cycle, and will allow time for Southwest to file appropriate tariffs, and the Energy Division to review the filings. ORA agrees with annual adjustments to the balancing account; however, such adjustments depend on the attrition mechanism discussed elsewhere in this decision.
Southwest contends ORA has not provided sufficient justification for delaying implementation of the balancing account, and any delay will place shareholders at risk for under-collections between the effective date of today's decision and January 1, 2004.12 As an alternative, Southwest is willing to calculate monthly test year revenues and offset the balancing account for those months prior to the effective date of this decision.
4.1.1. Discounted Special Contracts13
ORA opposes including the revenue shortfall from discounted special contracts in the balancing account as this removes an incentive for Southwest to minimize discounts. Southwest agrees that the revenue shortfall resulting from discounted special contracts should not be given balancing account protection. We will not include the revenue shortfall from discounted special contract revenues in the revenue balancing account.
4.1.2. Interstate Pipeline Demand Charges
Finally, although not a balancing account issue, ORA recommends removing interstate pipeline demand charges that are currently tracked in the Core Fixed Cost Adjustment Mechanism (CFCAM), and recording these costs in the Purchased Gas Account (PGA). ORA contends interstate demand charges are more properly connected to the procurement of gas. Southwest disagrees with ORA's proposal, and contends including interstate demand charges in the PGA would distort the monthly cost of gas by subjecting customers to monthly
fluctuations in the average cost of interstate capacity. Furthermore, Southwest notes neither SoCalGas nor PG&E includes interstate demand charges in their respective PGA balancing accounts.
4.2. Discussion
The disparity in forecast models is primarily the result of the number of years of data (10 by Southwest, and 25 by ORA), used in the forecast models. Statistical measures that compare the two forecasts, such as R-squared values, were not provided by parties; therefore, we address the comparative forecasting information provided.
As a starting point, we reject Southwest's argument that because a particular time period has been used in the past, it necessarily justifies using the same period in this or any other proceeding. This position does not necessarily mean that ORA's 25-year forecast is preferable because it has more information and is similar to periods used in other states. Each forecasting technique should be judged on whether it applies to the current circumstances in which it is employed and whether the results produce more accurate forecasts. In making this determination, a review of ORA's exhibits 126 and 127 indicates that Southwest's forecasts are almost the same as ORA's, and in the later periods, Southwest's forecasts appear to more accurately predict actual gas sales volumes. Furthermore, as explained in Southwest's Exhibit 5 (Tab B), simulations based on 10-year and 25-year modeling showed that the 10-year model better predicted actual results for Southwest during the nine-year study period. On the basis of these indicators, we will adopt a 10-year period for forecasting sales.
4.2.1. Balancing Account
The issue of different sales projections will have a minimal effect on revenues, since we adopt a balancing account that will track differences in revenues due to forecasted sales and actual sales. Our adoption of the balancing account will be effective 30-days after the effective date of this decision, with offsets to the adopted revenue for those months already past as proposed by Southwest. We take this action in order to reduce the potential for over-collection, or under-collection of revenues during the rest of the test year. The additional 30-days provides time for Energy Division review of the balancing account and for the filing of tariffs. Consistent with our treatment of SoCalGas and PG&E we will not direct Southwest to include interstate pipeline demand charges, fixed storage charges and core margin revenue in the PGA balancing account, but will provide that these charges can continue to be included in the CFCAM. However, like SoCalGas and PG&E, we direct Southwest to develop discrete rate components for its interstate pipeline demand charges.
4.2.2. Gas Costs and Other Revenues
ORA estimated gas costs and other revenues using updated information. Although Southwest did not dispute ORA's estimates, recently filed gas costs14 indicate Southwest's estimates are reasonable and should be adopted.
8 A therm is equivalent to 100,000 British Thermal Units or BTUs. 9 Measured in therms. 10 ORA reviewed and accepted Southwest's forecasted number of customers in both Northern and Southern California. 11 A degree-day is unit of measure used to express the extent to which temperatures vary from a specific reference temperature during a given time period (month, season, year). 12 We note, however, that if actual sales exceed adopted sales for any period between the effective date of this decision and the implementation date of a balancing account, then the opposite effect would occur and there would be a revenue over-collection by Southwest. 13 Discounted Special Contracts are listed in Southwest's CPUC Tariff, Sheet No. 5422-G. 14 See Advice Letter 693, August 1, 2003.
