IV. Legal Standards
A. The Public Utilities Act
Under the Public Utilities Act, our primary purpose "is to insure the public adequate service at reasonable rates without discrimination..." Pacific Telephone and Telegraph Company v. Public Utilities Commission (1950) 34 Cal.2d 822, 826 (PacTel 1); Pacific Telephone and Telegraph Company v. Public Utilities Commission (1965) 62 Cal.2d 634, 647 (PacTel 2); City and County of San Francisco v. Public Utilities Commission (1971) 6 Cal.3d 119, 126 Pub. Util. Code sections 451 and 453 set out this basic obligation. Under § 451, public utilities may demand and receive only just and reasonable charges, and they must provide "adequate, efficient, just, and reasonable service" in a way that promotes the "safety, health, comfort, and convenience of [their] patrons, employees, and the public." Pub. Util. Code section 453 prohibits undue discrimination in either rates or service.
Under Pub. Util. Code section 454, public utilities must make a showing to the Commission that any proposed rate change is justified, and receive a finding by the Commission to that effect, before making such change. Under §§ 701 and 728, the Commission has the authority to determine what is just and reasonable, and to refuse to permit recovery of costs not found to be just and reasonable. In particular, the Commission "... has the power to prevent a utility from passing on to the ratepayers unreasonable costs for materials and services by disallowing expenditures that the Commission finds unreasonable." Pactel 2 at 647.
Our obligation to the residents of California is to ensure that SoCalGas and SDG&E provide adequate service at just and reasonable rates. As we use the term, adequate service encompasses all aspects of the utilities' service offering, including but not limited to safety, reliability, emergency response, public information services, new customer connections, and customer service. In addition, we assume that a utility that provides adequate service is in compliance with laws, regulations, and public policies that govern public utility facilities and operations. In re Pacific Gas and Electric Company, D.00-02-046, at Section 4.2 (hereafter "PG&E")
In carrying out our obligation, we assess and determine the reasonable costs of providing the adequate service that utility customers are legally entitled to receive and provide an opportunity for recovery of those costs in rates. The activities of establishing cost transparency and articulating criteria for reasonableness are central to the regulatory enterprise for franchised utilities. These activities give the ratepaying public confidence that they are getting what they are paying for, and that what they are paying is reasonable in amount and reflects prudent management by the entities entrusted with providing essential services. As we noted in PG&E, the decision resolving PG&E's 1999 Test Year General Rate Case:
... In this case, as in all others brought under the Public Utilities Act, we seek to promote the public interest. This involves balancing the interests of numerous stakeholders -- residential, business and agricultural end-use customers; utility investors and employees; utility managers; providers of energy services; exponents of environmental and social concerns. In this case, which deals with the pricing and quality of electric and gas distribution service, we are dealing with essential services, infrastructure that is critical to the well-being of our entire state. Through local franchises and the orders of this Commission, California has entrusted management of this infrastructure to the stewardship of Pacific Gas and Electric Company, subject to our ongoing regulatory oversight. PG&E is a pervasive presence in our communities, and a vital force in the economy of Northern California. We intend to hold PG&E to a high standard of service quality, and we expect prudent and effective management of the financial and human resources we have placed under its control. Under these conditions we intend to provide sufficient revenues to meet the costs of providing quality distribution service. We seek to strengthen the partnership between the public and PG&E. PG&E at Section 4.1.
We make the same commitments in this case to the customers of SDG&E and SoCal Gas.
The activities of precisely estimating cost and linking cost with service quality are particularly important for SoCal Gas and SDG&E, because for the many long years of de facto deregulation, the Commission did not undertake any meaningful independent scrutiny of these utilities' costs and did not make the formal "just and reasonable" and "adequacy" determinations for them. Now, as we said in PG&E:
...[w]e intend to pursue a policy which balances maintaining reliability and quality of the integrated distribution system with cost discipline and accountability.
PG&E, at Section 4.9
B. Scoping Memo
Making explicit the required nexus between reasonable costs and adequate service was a particular concern of the Assigned Commissioner in this case, and was expressly made a part of the proceeding by the Assigned Commissioner's Ruling Establishing Scope, Schedule and Procedures for Proceeding (hereafter "Scoping Memo") issued on April 2, 2003. The Scoping Memo specifically directed the parties to address a number of questions that elaborated on the nexus between cost and service quality in the context of a renewed commitment to cost of service regulation. Scoping Ruling in A.02-12-027 and A. 02-12-028 dated April 2, 2003. In particular there were five areas that called for elaborate supplemental testimony by SDG&E and SoCal Gas:
3.1. Investment Planning
My objective is to determine how SDG&E is, and how it should be, positioning itself to resume provision of fully integrated electric utility service. Testimony should make recommendations for overall Commission policy on the utility's role in providing retail service over the next ten years. I invite testimony that examines SDG&E's organizational structure, internal resources, and decision-making processes for planning and investment activities. Parties should also submit proposals on how the Commission should structure and oversee SoCalGas and SDG&E's investment planning process.
3.2. Safety and Reliability
We also need an examination of SoCalGas and SDG&E's safety, reliability, and maintenance standards and performance. ORA, TURN, and unions can be expected to address similar issues. I anticipate parties will offer comparisons of the companies' reliability standards with those of other utilities. Parties should propose an appropriate level of maintenance expenditures, including recommendations for parts of the two natural gas systems, and SDG&E's electric system, where maintenance concerns should be targeted.
3.3. Customer Service
I invite proposals that evaluate and suggest improvements to SoCalGas and SDG&E's customer service programs. Testimony should evaluate current PBR customer satisfaction standards, compare SoCalGas and SDG&E's standards to those of other utilities, and make recommendations on new standards and performance measures. Parties should assess the effectiveness of SoCalGas and SDG&E's billing system, website, and call center to meet customer needs, including web-based contacts and responses, 800 telephone numbers, call management systems, and voice mail.
I am particularly interested in proposals regarding the need for localized customer service, such as neighborhood customer service centers and outreach efforts to local communities. Proposals should include recommendations regarding the maintenance and improvement of current outreach programs.
3.4. Utility Operations
In these COS proceedings, I would like to develop a consistent overall policy for how SoCalGas and SDG&E undertake their operations. In considering this policy, I ask the parties to examine the decision-making processes the utilities use to determine how to provide safe and reliable service to customers at a reasonable cost. Parties should provide testimony on how these 2004 test year applications fit in within the utilities' established decision-making process.
3.5. Diversity, Outreach, Contributions, and Minority Contracting
Consistent with the February 13, 2003, Scoping Memo for A. 02-11-017, SoCalGas and SDG&E should serve supplemental testimony regarding its workforce diversity over the last 10 years, as well as present and future plans regarding workforce diversity.
Scoping Memo at Section 3.
The scoping memo, as a procedural device for shaping the issues in a Commission proceeding, was made a part of the Commission's practice in rate proceedings by Chapter 856 of Stats. 1996 (SB 960 (Leonard)) which added Pub. Util. Code sections 1701.1 and 1701.5. Section 1701.1 provides in pertinent part:
(b) The commission upon initiating a hearing shall assign one or more commissioners to oversee the case and an administrative law judge where appropriate. The assigned commissioner shall schedule a prehearing conference. The assigned commissioner shall prepare and issue by order or ruling a scoping memo that describes the issues to be considered and the applicable timetable for resolution.
This provision enables the parties and the assigned commissioner to shape the issues proactively, and not be passive recipients of an agenda shaped solely by a utility-initiated application submitted months in advance pursuant to the Rate Case Plan.
Section 1701.5 provides in pertinent part:
1701.5. (a) Except as specified in subdivision (b), in a
ratesetting or quasi-legislative case, the commission shall resolve
the issues raised in the scoping memo within 18 months of the date
the scoping memo is issued, unless the commission makes a written
determination that the deadline cannot be met, including findings as
to the reason, and issues an order extending the deadline. No single
order may extend the deadline for more than 60 days.
This provision of the statute is clear that the issues identified in the scoping memo must be addressed and resolved. They are not optional or peripheral. The failure of parties and applicants in this case to engage and create a record on which the Scoping Memo issues can be addressed substantively by the Commission requires that a Supplemental Phase of this proceeding be established.
C. Burden of Proof
Sempra Energy, through its subsidiaries SoCal Gas and SDG&E enjoys an effective monopoly in the provision of gas distribution service in Southern California. Pub. Util. Code sections 328 and 328.2 , added by Statutes 1999, Ch. 909, effective January 1, 2000 (AB 1421, Rod Wright). SDG&E enjoys a similar monopoly for electric distribution service. C.f., Pub. Util. Code Sections 330(f), AB 1890 (Brulte). This means not only that it is the sole provider of the service, but also that it has exclusive control over the costs and conditions of such service and, importantly, control over the information about costs and conditions. In order to prevent abuse of this monopoly and its incidents, the Legislature has given the Commission broad powers of investigation intended to make the real costs and conditions of monopoly service transparent. We exercise those powers to assure the public that the prices they pay for monopoly service are in fact just and reasonable, that they are in fact reasonably related to costs prudently incurred by efficient, conscientious managers to provide the quality of service we expect. This is at the core of our responsibilities.
This creates a natural "litigation advantage" enjoyed by utilities,7 and the fact that we must rely in significant part on their experts, reinforces the importance of placing the burden of proof in ratemaking applications on them. ORA reminds us of this in its opening litigation brief8 and while we are mindful of this, it is important to note that the intervenors, including ORA must assist us by raising credible questions of fact or reasonable policy objections.
TURN argues in its opening litigation brief9 that:
"the Commission's own evidentiary obligation. Pub. Util. Code § 1757(a)(4) provides that the Commission's findings in a decision must be supported by substantial evidence in light of the whole record. The Commission has interpreted this substantial evidence standard as follows:
"We have a regulatory responsibility to ensure [SoCalGas] provides adequate service at just and reasonable rates, and we must view the facts accordingly. Our legislative mandate encompasses promoting the "safety, health, comfort, and convenience of [SoCalGas'] patrons, employees, and the public." (See § 451.) "In construing substantial evidence, we must consider all factors that may have a bearing on this goal." (D.01-10-031, p. 5.)
Similarly, the Commission must have "adequately considered all relevant factors, and [have] demonstrated a rational connection between those factors, the choice made, and the purposes of the enabling statute to survive judicial review." (See D.01-10-031, p. 5 (citing Calif. Hotel & Motel Assoc. v. Industrial Welfare Comm'n (1979) 25 Cal.3d 200, 212.) It is through the critical analysis of the utilities' showings, the presentation of witnesses and exhibits by the intervenors and ORA, and through their cross-examination of the utilities, that the Commission gains another perspective on the evidence and can weigh the facts and the policy options to reach the necessary findings of fact to support its decision.
SoCalGas and SDG&E have the sole obligation to provide a convincing and sufficient showing to meet their burden of proof, and any active participation of other parties can never change that obligation. This was clearly described in D.87-12-06710 as follows:
"The inescapable fact is that the ultimate burden of proof of reasonableness, whether it be in the context of test year estimates, prudence reviews outside a particular test year, or the like, never shifts from the utility seeking to pass it costs of operations onto ratepayers on the basis of the reasonableness of those costs." And further:
"The longstanding and proper rule is set forth in D.90642 at 2 CPUC 89, 98-99 and requires that the utility meet its burden by clear and convincing evidence. To meet this burden we have specified that "... the applicant must produce evidence having the greatest probative force.""
As we stated in PG&E, we do not approach or apply the burden of proof in a formulaic manner. The litigation game disserves the Commission and the public if it fails to provide the Commissioners with a sound, substantive basis for determining the costs of service and making them transparent and assessing the quality of service that consumers are provided when they pay those costs. The relative disparity in access to information and analytical capabilities between utilities and representatives of the public -- whether they be our staff at ORA or intervenors -- requires that we place the "risk of non-persuasion" on the utility. In this proceeding, in many instances, SoCal and SDG&E have presented us with evidence that is adequately supported and intellectually rigorous. The existence of objections or alternative point of view put forward by other parties does not in and of itself effectively controvert the utility applicants' showing. But the absence of challenge does somewhat undermine our confidence that the information we have is in fact sufficient to support the decision.
In some basic respects, a ratecase is the public's opportunity to do "due diligence" on the business operations and practices of the entities to whom we have entrusted the task of providing us with essential services. We have too many examples, including some very close to home in San Diego, where a failure to do effective, critical due diligence over a number of years has led to catastrophic consequences. Our detailed description and determinations about costs as reflected in the utility's accounts should be considered in this light. We commit to do our best, but we have not been placed in the best position to accomplish it, in the very fundamental areas cited above from the Scoping Memo, based on the record before us.
For that reason, we will provide an additional opportunity to address these issues in the current docket. We will establish a third phase, to further address the significant issues. We expect the utilities to enhance the showings that they offered in their supplemental testimony, and we will rely on ORA and other intervenors to fully engage in the issues, and help us to develop the record we need to provide due diligence.
7 This advantage is discussed at length in D.00-02-046, a recent rate case for PG&E.
8 ORA opening litigation brief, at pp. 10-11.
9 TURN opening litigation brief, pp. 6 and 7.
10 D.87-12-067, 27 CPUC 2d, 1, 21, and footnote 1 at p. 169.
