3. Discussion

3.1 SDG&E's Proposed Program

The voluntary program directed by § 332.1(f) is a form of bill stabilization plan for large commercial, agricultural, and industrial customers. Because the statute provides for a true-up after a year, participating customers are ultimately responsible for paying the procurement costs reasonably and prudently incurred by SDG&E, as those costs are reflected in the company's retail tariffs. As CFBF notes, the program does not offer true rate relief. It does, however, offer eligible customers a tool to manage exceptionally high rates and to budget for the coming year.

SDG&E believes that a substantial number of its large commercial, agricultural, and industrial customers may be interested in the program, and that it could face significant financial risk exposure if there is large-scale participation. SDG&E asserts that if high wholesale energy prices continue, and if 100% of eligible customers enroll in the program, it could be at risk for up to $150 million in annual undercollections. SDG&E also states that it might need to provide financing for up to $150 million or more during a 12-month period.

The assumption of 100% participation strikes us as unrealistic. As CFBF notes, SDG&E reports that only five agricultural customers and 40 customers with peak loads in excess of 100 kW participate in SDG&E's Level Pay Plan.² This level of participation in an alternative bill stabilization program suggests that participation in the voluntary § 332.1(f) program is highly unlikely to approach 100% of large commercial, agricultural, and industrial customers. We also think that CFBF is closer to the mark when it states that many agricultural customers may prefer to pay actual costs on an ongoing basis. Of course, any assumption that all participating customers will fail to pay any true-up settlement amounts is entirely unrealistic.

Still, to the extent that (1) SDG&E's reasonably and prudently incurred energy procurement costs continue to exceed $.065 per kWh; (2) participation in the voluntary program is more than de minimis; and (3) a significant proportion of participating customers fail to fully pay their true-up settlement obligations, SDG&E faces a risk of under-recovery of its energy procurement costs. SDG&E will also incur financing costs due to the deferred collection of procurement costs. Accordingly, controls on the availability of the voluntary program and other protections are warranted so that the program does not impose an undue burden on SDG&E due to under-recovery of procurement and financing costs. At the same time, the program should not be so burdened with conditions and restrictions that it denies any real benefits to large commercial, agricultural, and industrial customers.

SDG&E's proposed program includes a requirement for standardized contracts, eligibility criteria that require customers to establish creditworthiness and to furnish security, provision for a single true-up settlement payment with interest, and includes commitments to provide customer education and other communications regarding the status of future balances due. SDG&E also proposes that it be allowed to establish a memorandum account for regulatory accounting. On the whole, we believe that SDG&E has proposed a program that appropriately balances ratepayer and shareholder interests, and that it can be adopted as the means of implementing § 332.1(f). In the remainder of this decision, we evaluate certain components of SDG&E's proposed program and the corresponding comments of the other parties, including proposals for regulatory accounting. It is our intention to approve the program proposed by SDG&E except as modified in the following discussion. We direct SDG&E to file an advice letter to implement its proposed program and accounting mechanism, as modified herein.

3.2 Rate Ceiling v. Fixed Rate

Unlike the statutory rate stabilization program for residential, small commercial, and street lighting customers, which sets a ceiling rate of $.065 per kWh, the energy rate under the voluntary program for participating large commercial, agricultural and industrial customers is statutorily fixed at $.065 per kWh. In addition, while the statute gives the Commission discretion to adjust the ceiling for residential, small commercial, and street lighting customers if certain conditions are met, it makes no equivalent provision for adjusting the $.065 per kWh fixed energy rate for large commercial, agricultural and industrial customers. Accordingly, the CFBF recommendation to set a price ceiling of $.065 per kWh for the voluntary program is denied.

3.3 Eligibility for the Program

SDG&E proposes that the following categories of customers be declared ineligible to participate in the voluntary program: customers in Chapter 11 or other forms of bankruptcy or receivership; customers who do not meet creditworthiness requirements; customers who refuse to sign the contract; Direct Access customers with loads equal to or greater than 100 kW (who already can negotiate terms and rates with electric service providers); customers who are unwilling to establish a pay agreement for any past due balance prior to or at the signing of the program contract; customers who are covered under the mandatory AB 265 program (i.e., residential, small commercial, and street lighting customers); and customers who are under a Level Pay Plan.

Except for SDG&E's proposed creditworthiness and financial security requirements, discussed in the following section, commenting parties either support or do not oppose SDG&E's proposed eligibility criteria. We find SDG&E's proposed exclusions to be reasonable and consistent with § 332.1(f), and hereby approve them. SDG&E should not be required to offer this plan to customers who refuse or are unable to sign a contract in which they agree to pay the full costs of their electricity usage through the true-up settlement process, customers who are in bankruptcy, customers who refuse to agree to a plan to pay off past due amounts, or customers who are statutorily ineligible to participate. We also see no reason to require combining the voluntary and Level Pay Plan, and note that doing so could be administratively burdensome.

3.4 Creditworthiness and Security

SDG&E reserves the right to review creditworthiness and to exclude from the voluntary program those customers who are not able to establish credit to SDG&E's satisfaction. SDG&E also proposes that customers electing to participate in the voluntary program be required to secure their contractual obligations by providing an acceptable security such as a guarantee, surety bond, or irrevocable letter of credit equal to twice the average monthly bill in the previous 12 months.³ SDG&E claims that providing such security is necessary as a sound business practice because a customer's outstanding debt over the course of a year could be substantial.

CFBF finds SDG&E's reservation of the right to review creditworthiness "disconcerting" because no details or guidelines are suggested. CFBF believes that SDG&E's proposed standards could result in arbitrary implementation, and could deny any customer the possibility of qualifying for the program. If SDG&E is allowed to reject participants for lack of creditworthiness, CFBF asks that screening guidelines be established. CFBF also objects to the requirement for a surety bond, letter of credit, or guarantee, at least with respect to agricultural customers with less than 100 kW in demand. CFBF contends that smaller customers are simply unable to provide a surety bond or letter of credit.

We believe that it is reasonable for SDG&E to review the creditworthiness of customers applying to participate in the voluntary program, because the program potentially creates significant future payment liability on the part of the customer. As both SDG&E and ARM point out, the program essentially provides a loan to participating customers (assuming wholesale prices remain high). Screening for the creditworthiness of program applicants and requiring reasonable security arrangements where credit is not otherwise satisfactory are appropriate means for SDG&E to mitigate the risk of underrecovery of costs. In the context of the voluntary program, we do not fully agree with CFBF's argument that SDG&E is adequately protected by its ability to terminate service for nonpayment of bills. This is because unlike normal monthly bills, the true-up settlement amount does not become due and payable until after a year.

We agree with CFBF that creditworthiness reviews and security requirements must be fair and reasonable, but we do not share CFBF's apparent pessimism that SDG&E will arbitrarily deny creditworthy applicants an opportunity to participate in the voluntary program. SDG&E already considers the creditworthiness of its customers pursuant to its Tariff Rule 6 (Establishment and Re-Establishment of Credit). We assume that SDG&E is both willing and able to extend its current credit review program to the voluntary bill stabilization program on a fair and equitable basis. Nevertheless, in order to provide further guidance to SDG&E, and in recognition of the concerns raised by CFBF, we specify an alternative that SDG&E should include as part of its credit screening and security requirements.

SDG&E's Tariff Rule 6A provides four alternative ways in which credit is deemed established by an applicant for metered service: (1) if credit information satisfactory to the utility is provided; (2) if the applicant makes a cash deposit as provided in Rule 7; (3) if the applicant furnishes a guarantor or bond; or (4) if the applicant has previously been a customer of the utility and has paid all bills for service within the period as set forth in Rule 9 for a period of 12 consecutive months immediately prior to the date when the applicant for service previously ceased to take service from the utility, provided such service occurred within two years from date of the new application for service.

The Rule 6A alternative of making a cash deposit as provided in Rule 7, which provides for a deposit equal to twice the maximum monthly bill as estimated by the utility, is similar to SDG&E's proposed requirement for a guarantee, surety bond, or irrevocable letter of credit equal to twice the customer's average monthly bill in the previous 12 months. Rule 6A and Rule 7 thus provide a model for the voluntary program. By allowing customers the option of making a cash deposit equal to twice the customer's average monthly bill in the previous 12 months as an alternative means of establishing credit, we address the CFBF concern that smaller customers will not be able to secure guarantees, bonds, or letters of credit. In its reply comments, SDG&E stated it would accept a cash deposit as an alternative to a bond or a letter of credit. We direct SDG&E to include the cash deposit alternative as part of the voluntary program.

3.5 Enrollment Period

Edison proposes a minimum enrollment period of one year for ease of program administration. Edison believes that it would be difficult to prorate future obligations of customers who elect to participate for just a few months of the year. SDG&E does not propose a minimum time period for enrollment in the voluntary program. ARM disagrees with a one-year requirement.

Since SDG&E would be responsible for administering the program, and it has not proposed a one-year minimum requirement for ease of administration or for any other reason, we see little basis for requiring such a minimum enrollment period. In fact, such a requirement might be contrary to the public interest if both SDG&E and a customer agreed to that customer's removal from the program before a year has passed. As ARM notes, restrictive time limits could act as a barrier to customers exploring and acting upon their competitive options.

3.6 Program Duration

CFBF proposes that the voluntary program be offered through December 2002, as is the mandatory program for residential, small commercial, and street lighting customers. SDG&E does not propose any deadline for terminating the voluntary program.

Under the terms of § 332.1(b), the mandatory program is terminated on December 31, 2002 unless the Commission finds that it is in the public interest to extend the program for an additional year. The voluntary program mandated by § 332.1(f) provides no equivalent sunset feature. CFBF's sunset proposal is denied.

3.7 True-Up Mechanism

SDG&E proposes basing the true-up/settlement for energy procurement on the difference between the amount paid at $.065 per kWh and the actual amount due based on the applicable tariff schedule, plus interest. Interest would be charged at the three-month commercial paper rate, which is identical to that charged on the Transition Cost Balancing Account.

SDG&E further proposes that the full amount of the settlement payment would be due and payable (1) when the customer receives a final bill; (2) on the following bill after a customer's removal from the voluntary program (whether by customer request or due to the customer's failure to continue to meet eligibility requirements); or (3) on the following bill after 12 consecutive months on the program (with or without payment arrangements). Consistent with its normal billing practice, SDG&E proposes that bills must be paid within 15 days of the date the amount is due and payable. SDG&E states that it may also grant payment arrangements for customers that are unable to pay the entire settlement amount within 15 days. Such arrangements would be on terms to be negotiated with the customer and subject to additional security, and would not exceed 60 days. In its reply comments, SDG&E proposed that participating customers be allowed to make payments toward their settlement balance during the course of the year.

CFBF proposes that the settlement payment due be amortized and collected over a 12-month period. CFBF contends that requiring a balloon payment would make the program prohibitive for some customers, particularly nursery growers in the San Diego territory. CFBF agrees to limit the availability of the 12-month amortization period to agricultural customers whose demand is less than 100 kW.

Most elements of SDG&E's proposed true-up/settlement mechanism are both uncontested and reasonable. In particular, we concur with the interpretation of the § 332.1(f) true-up provision that holds that participating customers ultimately must pay the applicable tariff rates for energy procurement. Allowing SDG&E to assess interest charges on accumulated balances gives the company an opportunity to recover financing costs created by the program, and is both fair and consistent with regulatory practices. (Of course, if energy procurement costs decline to less than $.065 per kWh and overcollections occur, SDG&E would pay interest on any overcollected balance.) Allowing the flexibility of making partial payments will be beneficial for some customers, and will serve to reduce SDG&E's risk exposure.

Edison proposes that participating customers be provided a pro rata share of revenues associated with sales of SDG&E-owned or managed generation assets to offset any undercollection, noting that this would be consistent with treatment prescribed for the AB 265 mandatory stabilization plan applicable to smaller customers. SDG&E does not oppose this proposal. This proposal is reasonable and should be reflected in SDG&E's advice letter.

We approve the CFBF proposal for a 12-month amortization period for agricultural customers whose demand is less than 100 kW. We are persuaded that failure to build such payback flexibility into the program would render the program unusable for some of these smaller customers. We are not persuaded that SDG&E's willingness to establish payment arrangements for up to 60 days adequately addresses the needs of smaller agricultural customers. SDG&E's ability to require creditworthiness and security mitigates any incremental risk that this extended payback creates for SDG&E. We also note that interest would continue to accrue on unpaid balances, so that SDG&E would not incur unrecovered financing costs.

3.8 Customer Notification and Education

SDG&E will make available to participating customers a formula that can be used to estimate the true-up settlement amount at the end of the year. SDG&E will also include a new line item on the bills of participating customers showing the current settlement balance and the date and/or the month in which the settlement amount will be due. We view these provisions as vital to customers for budgeting purposes, and agree that they should be required.

SDG&E commits to using various methods to publicize the voluntary program to ensure that customers are aware of it prior to the scheduled implementation date. SDG&E account executives will communicate details of the program to their assigned accounts, and the company will make information available through a posting on its website and through bill messages or bill inserts. We direct SDG&E to pursue these and any other reasonably available means (such as print or broadcast media) of informing all potential participants of the program's availability. We further direct SDG&E to include in its advice letter filing a showing of how it intends to do so. SDG&E shall provide a copy of the advice letter showing to the Commission's Public Advisor. We also note that CFBF intends to work with the local county Farm Bureau to explain the program to ratepayers.

3.9 Accounting Mechanism

SDG&E requests that it be authorized to establish a memorandum account to track the costs of the voluntary program, the revenues received, and any undercollections resulting from, for example, customers not paying their entire true-up settlement amounts. The memorandum account balance would be allocated as directed by the Commission.

We will authorize a memorandum account as proposed. We place SDG&E on notice that while we allow it to record undercollections due to uncollectible bills, we do not intend to allow double recovery of such amounts. A final accounting for ratemaking purposes will include an appropriate adjustment that takes into account the extent to which SDG&E's rates already include an allowance for uncollectibles.

Edison proposes that any shortfall resulting from the voluntary program be recovered on a non-bypassable basis from all customers who opt for the program. SDG&E states that it is particularly supportive of this proposal. Because the voluntary program provides a benefit to participating customers, and that benefit does not extend to the general body of ratepayers, this proposal is fair and should be reflected in SDG&E's plan.

The entries to the memorandum account will be reviewed in SDG&E's 2001 annual transition cost proceeding (ATCP), and subsequent ATCP proceedings as necessary depending on how long the program lasts. At the same time we will review the share of revenues associated with sales of SDG&E-owned or managed generation assets to offset any undercollections from the voluntary program.

3.10 Program Implementation Date

SDG&E proposes to make contracts available on December 1, 2000 or upon Commission approval of the voluntary program if such approval occurs later. Contracts processed during the month of December would be placed on the voluntary program beginning with January 1, 2001 bills, provided that the appropriate security and contract has been received from the customer and approved by SDG&E. Customers could enroll after December 31, 2000, in which case the effective date of enrollment would begin with the next billing period after the contract has been fully executed. CFBF asks that the program be in place so that eligible customers can receive notification of the program by the end of the year 2000.

SDG&E's proposed implementation plan addresses the CFBF request and will be approved. We are mindful of the need to implement the voluntary program as soon as practicable so that eligible customers can begin receiving the benefits intended by the Legislature in enacting AB 265 as an urgency statute. We address the procedural implications of this implementation schedule in the following section.