6. Parties' Recommendations

The purpose of this phase of the GRC is twofold; to review PG&E's storm response and reliability performance and to identify any changes necessary in the methods used to measure and evaluate PG&E's performance. PG&E submits that its December 2002 storm response and reliability performance is reasonable, consistent with the "adequate service" standard described in D.00-02-046. Other parties suggest that PG&E should have performed better and recommend various measures designed to improve PG&E's reliability performance and storm response.

6.1 PG&E

PG&E has identified several specific storm and reliability issues that it believes should be addressed in order to improve performance. PG&E's testimony includes a list of "improvement initiatives" designed to address these issues and improve performance¹⁴, particularly during major events. The improvement initiatives include:

a. Modify restoration prioritization to balance the length of time small numbers of customers are out of power with the need to restore the largest number of customers as quickly as possible.

b. Simplify the routing of calls from emergency agencies to PG&E to improve the dispatching of PG&E resources to relieve police and fire agency personnel of the need to standby on site.

c. Develop additional software to enhance the ability within OIS to increase focus on single customer outages during major events to improve communication with customers and reduce outage duration;

d. PG&E will link its OIS with the mobile data terminals in the field to accelerate the input of outage cause and damage assessment information into the Operations Emergency Centers and ETOR data into the OIS to improve the speed of assessing damage and sharing outage information with customers;

e. Integrate the three existing outage databases (the Supervisory Control and Data Acquisitions, OIS and DOLIP) to reduce the number of manual entries an operator must make to improve efficiency and reduce outage duration;

f. Enhance mapping associations within the OIS so that smaller portions of PG&E's circuitry can be pinpointed for purposes of determining on a real time basis a more accurate number of customers affected by outages and more accurate outage information;

g. Add new toll-free number for customers who are without power for more than 48 hours;

h. Implement a campaign to urge customers to verify the accuracy of the phone number on their PG&E bill.

PG&E has already implemented some of the improvement initiatives because it believes the Commission desires improved performance during storm events, but the costs to implement some of these measures exceed the revenues requested by PG&E in its November 2002 application. PG&E maintains that the incremental costs associated with the initiatives must be added to PG&E's revenue requirement to ensure adequate funding of all necessary system work.

PG&E also identifies three additional suggestions for reliability improvements. First, PG&E suggests that the Commission could direct PG&E to accelerate its ongoing program to fuse overhead distribution tap lines. PG&E states that installing overhead distribution line tap fuses will help reduce SAIDI by reducing the number of customers affected by an outage and helping to pinpoint the location of the fault. PG&E included $5.4 million in its 2003 forecast for this work, but accelerating the annual amount of fuse work by 25 percent, would increase annual expenditures by approximately $1.35 million.

A second proposal is a tree-trimming pilot designed to evaluate the reliability benefits of selectively removing large branches that have the potential to fall into lines even though they are located outside the trim zone required by GO 95. PG&E estimates this pilot would cost $10 million per year for three years, but has not prepared a cost-benefit analysis or developed the details of the pilot program. Third, PG&E suggests that the Commission could consider a Performance Based Ratemaking-style performance incentive mechanism.

PG&E initially proposed that the Commission adopt a new memorandum account to record the incremental costs PG&E incurs to comply with any new standards or metrics adopted through the storm and reliability phase. PG&E also proposed that the Commission establish a future stage of this proceeding to adopt an incremental revenue requirement associated with the cost of compliance with new standards or metrics and to review the reasonableness of the costs recorded in the memorandum account.

PG&E also requested that the Commission approve an additional $7.98 million (in 2000 dollars) beyond its forecast expenses in Federal Energy Regulatory Commission (FERC) Account 588 - Miscellaneous Electric Distribution Expense and an additional $1.8 million in common utility plant for the upgrades to the OIS.

On July 10, 2003 PG&E and ORA filed jointly-sponsored testimony intended to resolve all of the storm and reliability issues contained in ORA's testimony and PG&E's rebuttal to ORA's testimony, with the exception of the issues surrounding PG&E's Safety Net Program.¹⁵ PG&E and ORA agree that the December 2002 storms were severe, and that PG&E's storm performance should be improved. The PG&E/ORA joint testimony contains nine agreements that are intended to result in reliability performance improvements, particularly during major storm events. The nine agreements are spelled out in Appendix A. The PG&E/ORA joint testimony constitutes PG&E's current position regarding reporting and monitoring storm and reliability performance, and funding to improve outage communication performance.

PG&E opposed CUE's initial performance mechanism proposal, arguing that: (1) it relies on the unsupported assumption that customers are willing to pay more for additional reliability and (2) the performance targets require an unreasonably high level of reliability improvement, without a demonstrated need for the level of reliability improvement proposed. PG&E also argued that CUE's proposal would require the Commission to abandon its prior policy of adequate service without providing any evidence to support a different standard.

In response to CUE's proposal, PG&E recommended an alternative reliability performance mechanism in which the target reliability levels would remain fixed at the 1998-2002 average performance levels for the term of the mechanism. PG&E recommended that any consideration of improvement targets be postponed until PG&E can present the results of a customer value of service study prior to its next GRC proceeding.

PG&E now recommends that the Commission approve the joint recommendation between PG&E and CUE regarding a mechanism to improve reliability through incentives and additional funding.

The PG&E/CUE proposal contains the following elements:

· The term of the proposal is six years, 2004 through 2009.

· The performance metrics are the SAIDI and the SAIFI;

· The SAIDI target in terms of minutes per customer, by year, is: 171, 164, 158, 151,151,151;

· The SAIFI target in terms of interruptions per customer, by year is 1.42, 1.33, 1.24, 1.16, 1.16, 1.16;

· The maximum annual reward and penalty is $31.6 million for SAIDI and $10 million for SAIFI;

· The Deadband is 4.2 minutes per year for SAIDI and 0.05 outages per year for SAIFI on either side of the target;

· The Liveband is 15.8 minutes per year for SAIDI and 0.10 outages per year for SAIFI, for livebands on each side of the targets; and

· An Additional Revenue Requirement of $27 million annually for six years to be used for reliability improvement expenditures, subject to balancing account treatment;

· Any revenues not spent by PG&E in 2004, 2005, and 2006 would be carried over to the following years, up to 2007. Unspent revenues at the end of each year 2007, 2008, 2009 would be credited back to ratepayers at the end of each year.

PG&E states that it supports improving reliability through an appropriate incentive mechanism as long as additional revenues are authorized. PG&E believes the PG&E/CUE proposed incentive mechanism strikes the right balance between improved reliability targets and additional revenues.

PG&E does not support CUE's proposal for an Employee Safety Performance Mechanism. PG&E maintains that it already has a comprehensive and effective program to promote safety and health, including a new employee orientation, a Code of Safe Work Practices, safety and health procedures, internal safety, health and compliance audits, and a Public Safety Information program. PG&E claims that these programs have resulted in continued improvement in safety performance in recent years, and that the Employee Safety Performance Mechanism is not necessary. If the Commission adopts a Safety Performance Mechanism, however, PG&E recommends that the Commission adopt Lost Workdays as the basis for monitoring and evaluating its performance, instead of the OSHA recordables rate, because recent changes in OSHA regulations for reporting injury or illness make it impossible to develop an OSHA recordables metric that accurately compares recent statistics with historical records in any meaningful way nor does it measure the severity of injuries.

Finally, PG&E recommends that the Commission adopt a telephone service level (TSL) standard to replace the ASA requirement during normal conditions. PG&E states that it is the only major utility subject to an ASA standard and that adoption of its request would subject all Commission-jurisdictional utilities to the same type of call center performance standard.

6.2 CUE

CUE suggests that the increase in PG&E's restoration time is explained primarily by a decrease in electric field service personnel per customer. CUE compares PG&E's electric field service personnel staffing levels since 1990 with PG&E's Customer Average Interruption Duration Index (CAIDI) levels since 1990 and argues that there is a strong correlation between the two. CUE admits that both outage frequency and outage duration are affected to an extent by weather, system design and maintenance, as well as staffing levels, but argues that outage duration on PG&E's system is more closely related to staffing levels. CUE explains that its argument is based primarily on a review of PG&E's field staffing statistics. CUE believes that with incentives and resources, PG&E could, and would, provide better reliability to its customers. CUE also believes that the public response to the December 2002 storms shows that customers want better service.

CUE initially recommended a reward and penalty incentive mechanism that set performance targets equal to PG&E's 2002 performance levels for SAIDI, SAIFI, and MAIFI and became progressively more stringent, to give PG&E economic incentives to improve reliability. CUE's initial proposal also included an additional $72.5 million annual revenue requirement and a maximum award or penalty of $145.2 million per year. CUE asserted that if PG&E does not improve reliability with the incremental revenue, ratepayers would be reimbursed through penalties. On the other hand, if PG&E succeeds in improving reliability and earns rewards, CUE argues that the cost of the incremental annual revenue requirements along with the additional reward payments would be consistent with existing value of service studies and incentive rates previously adopted for SCE and SDG&E.

After the hearings on the storm and reliability issues, PG&E and CUE served joint testimony recommending that the Commission approve a joint proposal for a reliability incentive mechanism. CUE argues that although the PG&E/CUE mechanism would not improve reliability as much as the original CUE proposal, it preserves the critical features of its original proposal, and it provides for some improvement at a lower cost.

CUE also argues that the Commission should adopt the CUE Employee Safety Incentive Mechanism. CUE believes that an employee safety mechanism is particularly important in the context of reliability performance incentives, where there is a direct economic incentive to restore service as quickly as possible. CUE states that its proposed safety incentive is based on mechanisms previously adopted for SCE and SDG&E, and uses the standard OSHA reporting category, "OSHA Recordable Injuries and Illnesses Frequency Rate" (the OSHA recordables rate), with a benchmark set at 5.42, PG&E's most recently attained safety level.¹⁶ CUE recommends no deadband, and an incentive rate of $342,000 per 0.1 change in the annual OSHA recordables rate, with the liveband set at plus or minus 2.5, comparable to the mechanism CUE has proposed for SCE in its GRC. The maximum annual reward or penalty under the employee safety incentive mechanism would be $8.55 million.

6.3 ORA

The majority of ORA's testimony and recommendations centered around the adequacy of the Commission's existing standards and measures for evaluating PG&E's reliability and outage response. ORA explains that despite the severity of the December 2002 storms, the Commission's existing reliability and emergency response standards could not be used as a benchmark to evaluate PG&E's response to the storms because the storms did not meet the definition of "Major Outage" within GO 166. In order to ensure that the Commission is able to effectively assess PG&E's storm response and reliability performance in the future, ORA initially recommended that the definitions used for "Excludable Major Event," "Major Outage" and "Measured Event" be made consistent.

ORA is concerned that conflicts between the definitions and requirements contained within GO 166 and D.96-09-045 create a lack of uniformity in how PG&E measures its reliability performance and how these measures are then compared with the restoration benchmark used by the Commission to measure PG&E's performance. In particular, ORA notes that while the GO 166 standards only apply during a "Major Outage," defined as a situation where 10% of PG&E's customers simultaneously experience an outage, D.96-09-045 defines an Excludable Major Event as an event that "affects" 10% of its customers or 15 % of its facilities, whichever is less for each event, with no mention of simultaneous or cumulative, and allows PG&E to exclude such events from its reliability indices. ORA suggests that by allowing excludable major events to be determined using a 10% cumulative basis, while the restoration benchmark is applied only during outage events that affect 10% of customers simultaneously, PG&E is getting the best of both worlds.

ORA also notes that while GO 166 clearly defines how start and end times for a Measured Event are to be determined, D.96-09-045 does not define start and end points for an excludable major event. As a result, the utilities have developed different methods of calculating the start and end points of such events.

ORA also notes that while GO 166 requires the Commission to investigate major outages, the Commission is not required to investigate excludable major events. ORA recommends that the various definitions related to SAIDI, SAIFI, CAIDI, MAIFI (including specific requirements detailing how these are measured and calculated), Major Outage, Measured Events, and benchmarks for measuring reliability performance should be incorporated into one single regulation. ORA further recommends that the terms Major Outage, Measured Event, and Excludable Major Event, be consolidated into one term, "Major Outage," and all major outages should be investigated before the utilities are allowed to exclude them from the reliability indices.

ORA suggests that the definition of major outages, benchmarks used to measure performance during major outages, and determinations used to exclude events from reliability indices during major outages should be based on a clearly defined percentage of customers out of service on a cumulative basis. ORA also suggests that the Commission establish a process to examine if the level of the CAIDI benchmark in GO 166 is realistic.

ORA initially recommended that reliability measurements be reported at the operating divisions and operating area level as well as at the system level. ORA is concerned that system level reliability indices may reflect high reliability, while masking lower reliability experienced by customers at the division level, especially for an area as large and diverse as that served by PG&E. ORA's consultants report that while system-wide SAIDI values show an overall decrease over the five-year period from 1998-2001, five divisions exhibited an upward trend, three remained unchanged, two showed a slight downward trend, and seven exhibited a modest downward trend. ORA's consultants also noted that a number of comparable divisions (in terms of area, number of customers, etc.) exhibited relatively large differences in reliability.

ORA recommends using a five-year rolling average of current performance measurement as a benchmark for reliability performance. ORA suggests that PG&E should be required to investigate deviations, on a division or area basis, when performance varies by over 10% from the benchmark to determine the cause and report findings to the Commission.

ORA also suggests that the Commission direct PG&E to implement the existing measures in its action plans as well as explore additional technical measures to improve the accuracy of its VRU systems. Similarly, ORA suggests that PG&E review its OIS, CIS, Field Automation System (FAS), VRU and all customer interface and response systems, to identify any needed adjustments that would aid PG&E's decision makers in making appropriate resource deployments to address outages. ORA also agreed with PG&E's initiative to develop a policy to insure that no customers are left without service for an inordinate amount of time. Although ORA supported PG&E's improvement initiatives, it expressed concerns regarding the limited data presented in support of the initiatives. ORA supported PG&E's proposal to accelerate the installation of overhead line fuses, but argued that no additional funding is necessary to accelerate the program because sufficient funds already exist in PG&E's base 2003 revenue requirement request. ORA also initially recommended that PG&E be directed to base value of service on empirical analysis and present the results to the Commission no later than its next GRC.

As described in Section 6.1 above, ORA and PG&E reached agreement on all of the contested issues raised by ORA with the exception of the issues surrounding PG&E's Safety Net Program. ORA asks the Commission to approve the recommendations and agreements in the jointly-sponsored testimony of PG&E and ORA in the Storm and Reliability phase of PG&E's TY 2003 GRC. With respect to PG&E's Safety Net Program, ORA recommends that the Commission make PG&E's Safety Net Program mandatory, increase the outage payments to $50, remove the $100 cap, and require PG&E to report on the payments.

Finally, ORA recommends that the Commission reject the jointly sponsored testimony of PG&E and CUE proposing a reliability performance incentive mechanism as well as the alternative reliability incentive proposal of PG&E. ORA argues that the incentive proposals are too expensive and do not result in increased reliability beyond that already anticipated.

6.4 TURN

TURN recommends that the Commission reject the PG&E/CUE proposal for a separate reliability funding mechanism. TURN suggests that it would be appropriate for the Commission to establish reliability performance measures based on recent historical averages of reliability performance, but argues that any reliability performance standard should account for the impact of system improvements that are already in progress and those forecast for completion during the term of the mechanism. TURN argues that the reliability performance targets in the PG&E/CUE mechanism fail to reflect a reasonable forecast of future performance.

In particular, TURN notes that PG&E's tap line fuse installation program, designed to limit the number of customers affected by outages, is expected to benefit both SAIDI and SAIFI, and is described by PG&E as providing "relatively significant reliability benefits at a low cost."¹⁷ According to TURN, PG&E stated that "the intent of this project is to achieve an estimated 10 percent reduction in SAIDI upon completion of the work." TURN maintains that the Commission should assume that the completion of this program will result in almost 17 minutes of SAIDI improvement based on testimony offered by PG&E witness Camara. In addition, TURN notes that PG&E witness Blastic estimated that the tap line fuse installation program would result in a reduction of 0.1 outages in the SAIFI by 2007 and that the reliability benefits of the fuse program are expected to continue for the 30-year useful life of these devices.¹⁸

TURN cites PG&E witness Bhattacharya's testimony stating that PG&E's fuse replacement, pole replacement, and substation asset replacement programs are likely to contribute to improved reliability performance in the coming years as support for its position.¹⁹ TURN also points out that PG&E witness Battacharya testified that PG&E's expenditures in Major Work Category (MWC) 49 were expected to triple over the next five years. TURN argues that the Commission should assume that a tripling of expenditures in this MWC would have a positive impact on reliability that would produce a reduction in both SAIDI and SAIFI and that any such reductions must be factored into the calculation of reliability performance targets.

TURN also recommends that if any reliability measures are adopted in this proceeding, they should recognize the extreme rate sensitivity of current customers and ensure that any desired reliability benefits are achieved at the lowest possible cost.

TURN also recommends that the Commission reject Agreement 6 and Agreement 7 of the PG&E/ORA proposal. TURN opposes Agreement 6 because it would direct PG&E to review and assess data from previous value of service studies rather than conducting a new value of service study. TURN argues that there is no useful purpose in revisiting data that is over ten years old and has become increasingly irrelevant in light of the significant events that have occurred in the intervening years. TURN recommends that before decisions are made based on value of service data, a new value of service study by major class of PG&E's customers should be undertaken. TURN also recommends that any such study research the value of service from both the point of view of willingness to pay and willingness to accept values.

TURN opposes Agreement 7 of the PG&E/ORA proposal because it would allow PG&E to collect $15.9 million in funding for four projects associated with OIS and emergency response system upgrades, despite the fact that certain of the proposed changes should have been incorporated into the original OIS system.

Specifically, TURN is opposed to PG&E's request for $0.8 million in hardware and $3.25 million in expense to integrate three separate computer systems on the grounds that this integration should have been designed into the new OIS that was capitalized in 1999. TURN opposes PG&E's request for $1 million in capital and $2.45 million in expense to remedy the treatment of single customer outages that are dropped off the system after 30 minutes for the same reason. If TURN's recommendations on these two projects are not approved, TURN recommends that the expense should be averaged over 3 years.

TURN also argues that the $3.05 million expense associated with the software upgrade for the mobile data terminals should be averaged over 3 years instead of one because it is a one-time expense. TURN also argues that the mapping expense of $7.38 million should be averaged over 5 years consistent with the expected length of the project and the amount of projected expenditures per year. TURN does not oppose the rest of the PG&E/ORA proposal.

TURN also does not oppose PG&E's request to replace the ASA standard with a TSL standard as long as the adopted standard reflects the same performance level. TURN suggests that the TSL standard be set so that 80 percent of total calls during the month must be answered within 20 seconds. TURN also requests that PG&E provide it with the monthly reports on call center performance that are provided to ORA and the Commission.

6.5 Aglet

Aglet agrees with TURN and ORA that the Commission should reject the PG&E/CUE proposal. Aglet argues that the incentive mechanism proposed by CUE and PG&E is too expensive and is crippled by reliance on stale, uncertain value of service numbers.

Aglet agrees with TURN that PG&E's reliability will improve without an incentive mechanism for several reasons. First, PG&E's recorded costs and future budgets for reliability projects show a steady increase in funding. Second, there is general agreement that PG&E's program to fuse overhead distribution tap lines will improve reliability. Third, improved information technology and communication systems should improve worker response times and thereby improve measured reliability performance. Fourth, PG&E asserts that improved inspection and patrol practices will improve system reliability.²⁰

Aglet disagrees with CUE's assertion that the rate impact of $27 million of additional revenue requirement is minimal. Aglet explains that over the six-year period of the joint proposal, ratepayers would pay $162 million (6 x $27 million) in additional revenues and would be exposed to $249.6 million (6 x $41.6 million) of incentive payments. In addition, after the six-year period, ratepayers could also face rate recovery of unknown millions of dollars in undepreciated capital costs because the agreement provides that at the end of the program any undepreciated capital costs will be eligible for inclusion in rate base. Aglet suggests that it is possible that ratepayers could pay $400 million to $500 million in total revenues over the duration of the proposed incentive program.

Aglet also points out that although PG&E and CUE argue that the incentive mechanism benefits ratepayers, all three ratepayer groups strongly oppose it. According to Aglet, this opposition, in itself, is a very strong reason why the proposal should not be approved. Aglet recommends that if the Commission decides to approve an incentive mechanism, it should set any associated revenue requirements and ensuing rates subject to refund until completion of a new value of service study and cost allocation deliberations in the rate design phase of the GRC in order to prevent residential customers with lower values of service from being forced to subsidize larger customers with higher values of service.

For the same reason, Aglet argues that the Commission should order PG&E to produce a new value of service study. Agreement 6 of the ORA/PG&E joint testimony would allow PG&E to survey prior VOS studies and then determine - without participation by Aglet or other intervenors - whether a new VOS study is necessary. Aglet argues that there is no evidence to support the finding that a new VOS study is "not warranted," and that in fact there are three reasons for a new VOS study.

First, as stated above, the available VOS studies are stale. The two studies referred to by CUE and PG&E are over ten years old and the agreement with ORA does not indicate what other studies might be surveyed by PG&E. Second, there is general agreement that public perceptions of the electric power industry have changed since the initiation of industry restructuring. Third, accurate VOS information is needed to optimize utility resources and apply them to reliability improvements. Reliable VOS information will also be needed when the Commission addresses cost allocation issues. Therefore, if the Commission does approve the PG&E/CUE incentive proposal, Aglet argues that the Commission should also set the associated revenue requirement and ensuing rates subject to refund until completion of a new VOS study and cost allocation in the rate design phase of the proceeding.

Aglet believes the Commission should discourage system-wide averaging and averaging over several years of operations because both tend to dampen or reduce the variability of the performance metrics. Aglet recommends that the Commission review reliability at the district or division level for single-year periods first, with system-level measurements used as a secondary indicator. Aglet argues that there is no good reason to begin the measurement process by system-wide averaging or averaging over time, thereby losing information and reducing the performance risks that face the utility. Aglet believes this is especially true because the reliability measures already exclude major events.

Aglet also believes that the Commission should reject Agreement 7 of the PG&E/ORA proposal because it would result in retroactive ratemaking. Aglet argues that if the Commission adopts Agreement 7, it will not approve the proposed memorandum account until it reaches a decision in the instant reliability phase of the GRC, after PG&E has already spent "several million dollars" for the specific upgrades that are part of the joint recommendation. Aglet argues that this would constitute retroactive ratemaking because the Commission has not authorized rate recovery of 2003 costs beyond adoption of current revenue requirements. Aglet asserts that PG&E and ORA have not shown that 2003 recorded costs are now booked to any account that would allow recovery. Aglet believes PG&E's current ratemaking accounts only allow debiting of authorized revenue requirements, not recorded costs, for the instant reliability upgrades. Aglet argues that as a matter of law, the Commission must deny rate recovery of 2003 costs that PG&E and ORA propose be recorded in the memorandum account prior to the effective date of a decision in this phase of the proceeding.