II. Procedural Background and The Stipulation

A. Procedural Background

SoCalGas filed this application on March 19, 1999 to recover incremental El Niño storm-related expense and capital costs in rates through the CEMA, authorized in Resolution E-3238 and later codified in Pub. Util. Code § 454.9.¹ SoCalGas sought approval to recover in rates $6,445,800 in incremental costs (net of capital costs, tax benefits, and expenses presently covered in rates). It proposed to recover a revenue requirement of $3,134,239 through 1999, a total revenue requirement of $5,171,478 through 2002,² and the remainder capitalized in the next rate case.³ SoCalGas also requested the authority to file advice letters to recover any future costs attributable to the El Niño storms. SoCalGas proposed that the revenue requirement be allocated among customer classes on the basis of equal percent of marginal cost (EPMC).

ORA filed a timely protest on April 26, 1999. A prehearing conference (PHC) was held on June 11, 1999, at which time SoCalGas and ORA entered appearances and Southern California Edison Company (Edison) and TURN appeared and requested information only status. Assigned Commissioner Henry M. Duque issued a scoping memo on June 18, 1999, confirming the ratesetting designation and finding a hearing necessary. Subsequently, TURN filed a motion to change its status from information only to active party, which the ALJ granted on July 23, 1999. ORA submitted testimony on August 19, 1999, recommending that a revenue requirement of $1,264,130 be adopted and that SoCalGas' ratepayers and shareholders be equally responsible for CEMA expenditures. TURN submitted testimony on September 2, 1999 addressing only the allocation of the revenue requirement among SoCalGas' customer classes.

On September 29, 1999, the parties advised the Commission that SoCalGas and ORA had reached an agreement regarding SoCalGas' recovery of costs through the CEMA but that SoCalGas and TURN were not able to reach an agreement with respect to the allocation of costs among customer classes. On September 30, 1999, SoCalGas and ORA filed a Notice of Stipulation Conference and Stipulation. A stipulation conference was held on October 7, 1999.

SoCalGas and ORA filed a Joint Motion for Approval of Stipulation (Joint Motion), with an attached stipulation, on October 14, 1999. The stipulation purports to resolve all issues in this application, with the exception of the issue raised by TURN regarding the appropriate manner in which to allocate the revenue requirement among customer classes. TURN does not oppose the stipulation but does not join in it. The evidentiary hearing was postponed pending review of the stipulation.

By rulings on September 22, 1999, October 5, 1999, and November 12, 1999, the ALJ ordered the parties to submit additional testimony regarding issues identified in the Scoping Memo and necessary to determine whether the costs sought for recovery were reasonable under § 454.9. SoCalGas provided some additional testimony on November 15, 1999.⁴ SoCalGas also provided substantial information to the Commission's Energy Division in response to data requests. On November 12, 1999, the ALJ set tentative hearing dates on the settlement for January 6 and 7, 2000.

After reviewing the additional information presented, the ALJ determined that an evidentiary hearing remained necessary to establish a complete record and to effectively evaluate the stipulation to determine whether it is in the public interest. By ruling dated December 17, 1999, the ALJ directed (a) SoCalGas and ORA to produce witnesses and supporting documentation to explain and support the stipulation, and (b) SoCalGas to produce witnesses and supporting documentation to support its application. SoCalGas was asked to put into the record responses and documents submitted to the Energy Division in response to data requests. We affirm the ALJ's rulings.

The Commission held evidentiary hearings on January 6 and January 7, 2000. The parties submitted opening briefs on February 4, 2000 and reply briefs on February 18, 2000. The record was reopened on May 15, 2000 to receive additional late-filed exhibits and the case was submitted on May 30, 2000. As such, we have a record upon which to evaluate the stipulation and SoCalGas' application.

B. The Declared Disaster

Pub. Util. Code § 454.9 provides:

a. The commission shall authorize public utilities to establish catastrophic event memorandum accounts and to record in those accounts the costs of the following:

(1) Restoring utility services to customers.

(2) Repairing, replacing, or restoring damaged utility facilities.

(3) Complying with governmental agency orders in connection with events declared disasters by competent state or federal authorities.

b. The costs, including capital costs, recorded in the accounts set forth in subdivision (a) shall be recoverable in rates following a request by the affected utility, a commission finding of their reasonableness, and approval by the commission. The commission shall hold expedited proceedings in response to utility applications to recover costs associated with catastrophic events.

Section 454.9 codifies the practice we established in Resolution No. E-3238, where we authorized the utilities to establish blanket CEMAs to prospectively record these costs to "ensure that all potentially affected utilities are given the maximum incentive to restore service immediately and completely after declared disasters" and to "ensure that the utilities are not precluded by the retroactive ratemaking prohibition from recovery of the extraordinary additional costs they may incur immediately after a disaster but before the Commission can act to authorize such accounts."

Substantial amounts of rain fell throughout California during the winter of 1998, which was attributed to El Niño, a natural, recurring phenomenon that results in the warming of the Pacific Ocean and affects weather conditions throughout the world, often bringing heavy rains to Southern California. The heaviest rain occurred in February, causing flooding, landslides, and other property damage, and prompting the Governor, on February 27, 1998,⁵ (Exh. 9) and the President, on February 9, 1998, to issue press releases declaring many California counties disaster areas, effective February 2, 1998.⁶

During February and March of 1998, SoCalGas sustained damage to pipelines and facilities in Ventura, Orange, Los Angeles, San Bernardino, Riverside, Kern, San Luis Obispo, and Santa Barbara Counties, with the most serious damage to the pipelines occurring near the coastlines of Ventura and Orange Counties. There were no deaths or injuries and only minor service disruptions to one hundred end-use customers, who were provided temporary service. SoCalGas states that potentially over 40,000 customers could have been affected if the utility had not taken action quickly to prevent rupture from landslides and debris masses stressing major creek spans. Accordingly, on March 6, 1998, SoCalGas advised the Commission's Executive Director of its intention to record costs in its CEMA resulting from the El Niño-driven storms. Such notice is required by SoCalGas' tariff and Resolution E-3238.

C. SoCalGas' and ORA's Stipulation

The written stipulation recommends that SoCalGas be permitted to recover a revenue requirement of $2,710,869 for 1998-2000 and a total revenue requirement of $4,713,616 through 2002. (Exh. 400, Attachment A.) SoCalGas and ORA argue that the agreement represents a 13.5% reduction from the revenue requirement SoCalGas seeks in its application, apparently based on a reduction in the revenue requirement allowed for 1998-2000 (from $3,134,239 to $2,710,869).⁷ The stipulation also allows recovery of an additional $425,000 in costs SoCalGas claims to have incurred after the application was filed but provides that there will be no future cost recovery for other damage attributed to the El Niño-driven storms.

At the hearing, SoCalGas and ORA clarified the stipulation with respect to the treatment of interest and future costs. SoCalGas agreed to forego interest on the unamortized balance in the CEMA (at the time of hearing calculated to be $361,026) that otherwise would have been recoverable pursuant to its CEMA tariff.

At the hearing, SoCalGas also attempted to bolster the stipulation by submitting testimony regarding costs it attributes to the El Niño storm but that it agreed to forego under the stipulation. SoCalGas maintains that it is foregoing a minimum of $1.2 million in known costs and most likely costs for additional undiscovered damage, including: (1) $445,158 in repair costs attributed to the El Niño-caused storms since the stipulation was filed, (over and above the $425,000 cap); (2) $40,000 to $50,000 in anticipated spending to repair damage to facilities at its Aliso Canyon Storage Field; and (3) approximately $90,000 to $130,000 spent for remediation to Line 2000 in the Chino Hills area to protect against heavy rains expected during the 1998 El Niño storms.

The stipulation makes no recommendation regarding cost allocation among customer classes.

D. Standard of Review

Rule 51.1(e) of the Commission's Rules of Practice and Procedure⁸ provides the standard for reviewing stipulations and settlements:

The Commission will not approve stipulations or settlements, whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law, and in the public interest.

We refined our settlement policy and established sponsorship and content criteria for review of all-party settlements in Re San Diego Gas & Electric Co. (1992) D.92-12-019; 46 CPUC2d 538. Rule 51(f) delineates all-party settlements as "uncontested" and defines them as those "filed concurrently by all parties to a proceeding in which such stipulation or settlement is proposed for adoption."⁹

Because TURN is an active party and does not join in the stipulation, we do not evaluate it under the "all party settlement" criteria, but rather under the criteria set forth in Rule 51.1(e).

As we have stated on numerous occasions,

[T]he standard of review [under Rule 51.1(e)] is somewhat more stringent. Here, we consider whether the settlement taken as a whole is in the public interest. In so doing, we consider individual elements of the settlement in order to determine whether the settlement generally balances the various interests at stake as well as to assure that each element is consistent with our policy objectives and the law." (D.96-01-011, 64 CPUC2d, 241, 267, citing D.94-04-088.)

The burden of proving the stipulation or settlement is fair is on the proponents. (See, e.g., Pacific Gas & Electric Co. (1988) D.88-12-083; 30 CPUC2d 189.) It is the Commission's responsibility to independently assess and protect the public interest. As we stated in Re San Diego Gas and Electric Co. (1990) D.90-08-068; 37 CPUC2d 346:

Parties to the settlement may chafe at what they perceive as intrusion on bargained-for deals and may believe that this Commission should simply take their word that the settlements serve the interest of the public in addition to the interests of the settling parties. However, settlements brought to this Commission for review are not simply the resolution of private disputes, such as those that may be taken to a civil court. The public interest and interests of ratepayers must also be taken into account, and the Commission's duty is to protect those interests. (Id., at p. 360.)

Thus, Rule 51.7 provides that the Commission may reject a stipulation or settlement if it is not in the public interest and hold hearings on the underlying issues, allow the parties to renegotiate the settlement, or propose alternative terms.

E. Positions of the Parties

ORA and SoCalGas contend that the stipulation is reasonable in light of the whole record, consistent with the law, and in the public interest, and urge that the stipulation be adopted in its entirety.¹⁰ ORA and SoCalGas point out that they represent all affected interests, including consumers of natural gas in SoCalGas' service territory, and that the agreement is a good faith compromise of strongly held positions by the two active parties who participated on these issues, through experienced counsel, after completion of discovery and ORA's on-site audit of the costs SoCalGas recorded into the CEMA. SoCalGas and ORA also point out that the amount to be recovered under the stipulation lies between that which SoCalGas requested initially and that which ORA recommended in its direct testimony.

SoCalGas and ORA contend that the settlement is consistent with Resolution E-3238 and § 454.9 and that it is in the public interest to provide utilities with an incentive to repair damages related to catastrophic events promptly and completely and to preserve public safety. They also argue that approval of the stipulation avoids further proceedings, including the time and expense of litigating via advice letter potential recovery of additional costs asserted by SoCalGas to result from the El Niño storms, including the "potentially complex evaluation of whether and to what extent the El Niño storms of 1998 have caused geologic forces to be placed in motion that could potentially affect SoCalGas' pipelines for years to come."

F. Review In Light of the Whole Record

We are confident that ORA's audit of SoCalGas' records was professionally completed and competently supports the stipulation insofar as it determined, from its spot check of work orders and invoices, that the funds were expended on the stated repairs. However, ORA conducted its review only from an accounting perspective; ORA did not review the reasonableness of the expenditures from a cost causation perspective or from a cost reduction or avoidance perspective as required by § 454.9 and Resolution E-3238.

To determine whether this settlement is in the public interest and whether it complies with the law, we must conduct a broader review of SoCalGas' expenditures to determine their reasonableness. We discussed the appropriate scope of our review in Resolution E-3238. First, we must determine whether the asserted catastrophe is of the type covered by the CEMA. Thus, in Resolution E-3238, we stated that to be recoverable, the costs must be associated with "truly unusual catastrophic events such as the Loma Prieta earthquake." Further, while we decided to permit the utilities to record costs prospectively and without review, we made it clear that this fact "should not be construed as a prejudgment of the appropriateness of recovery of any amounts so accumulated." Thus, we stated that we will "examine closely all costs recorded in a utility's catastrophic event memorandum account before allowing their recovery in customers' rates." Finally, we determined that we must look at the costs sought to be recovered in the context of the company's overall rate structure and specific circumstances surrounding the case:

While costs incurred for repairs may well be significant, they may not necessarily all be properly recoverable from ratepayers. Recovery may be limited by consideration of the extent to which losses are covered by insurance, the level of loss already built into existing rates, and possibly other factors relevant to the particular utility and event. Before authorizing recovery from customers of any costs, the Commission will examine how they relate to the overall costs currently authorized for these types of repairs. . . . As with any rate increase request, the Commission staff will review the basis for the increase request and make a recommendation to the commission as to the amount in the account to be recovered in rates.

In this case, in addition to confirming that the funds for which SoCalGas seeks recovery were spent on the stated repairs, a proper review requires us to determine whether, at a minimum: (1) the "El Niño storms" qualify as a disaster for CEMA purposes, and, if so, the scope of the disaster; (2) the damage for which cost recovery is sought was related to that disaster; (3) the costs could have been avoided or reduced, including whether some of the pipelines should have been relocated prior to February of 1998; and (4) the costs for which recovery is sought are reasonable and incremental to normal pipeline and facility repair activity, including whether the costs were or should have been included among the risks contemplated to be borne by the utility in current rates. It is only after making these determinations that we can properly evaluate the reasonableness of the stipulation.

SoCalGas did not include information to resolve these issues in the application and the stipulating parties did not submit such information in support of the stipulation. For example, SoCalGas neither identified the scope and parameters of the alleged catastrophic event nor provided basic data, such as the dates that damage occurred or was discovered and dates that repairs were made, to enable us to determine whether the damage was caused by a catastrophic event and thus properly recovered through the CEMA.

As we stated in Re San Diego Gas & Electric Company:

Where a rate case is litigated or a settlement is contested, the utility must provide a more detailed showing for all of its requested revenue requirement, in order to sustain its burden of proof. Where a settlement is adopted by all parties and is consistent with relevant law and Commission policy, the utility must provide a more detailed showing to enable the Commission to be confident both the settlement can be well understood in the context of the company's initial request and that the Commission and its staff will have sufficient information with which to monitor the utility's activities and costs." (supra, at p. 27.)¹¹

These principles are equally applicable to CEMA cases, where the utility seeks a revenue requirement to support increased rates and we are charged with performing a reasonableness review, and are even more important in cases like this one where the settlement is not all-party but the issues have not been litigated by any party.

Although SoCalGas provided some information through additional testimony and documents at an evidentiary hearing, the record in this case is still incomplete, as we discuss in more detail below. We apply the information we do have to evaluate below the applicability of the CEMA and the reasonableness of the costs sought for recovery, and the reasonableness of the settlement.

¹ All references are to the Pub. Util. Code unless otherwise stated. ² SoCalGas states that $1,903,104 reflects incremental operating and maintenance (O&M) costs, which it proposes to recover over a one year period, and that $4,542,695 reflects capital costs, which it proposes to amortize. ³ In a late-filed exhibit, SoCalGas shows the proposed recovery of total carrying costs associated with capital investments of $14,657,751 exclusive of franchise fees and uncollectibles. (Exh. 24.) However, SoCalGas points out that the cost recovery schedule will most likely vary greatly because it expects its rates to change in its next base margin proceeding. ⁴ SoCalGas was allowed to incorporate in its testimony the factual matters set forth in the October 14, 1999 Joint Motion. ⁵ The Governor declared a state of emergency for various counties on February 9, 24, and 26, 1998. ⁶ In its application, SoCalGas represents that the Governor declared the counties of Santa Barbara, San Luis Obispo, and Ventura to be in a state of emergency on February 9, 1998, the county of Fresno on February 11, 1998, the city and county of Los Angeles on February 18, 1998, the county of Orange on February 24, 1998, and the counties of Kern, Riverside, San Bernardino, Tulare, and Ventura (stet) on February 26, 1998. SoCalGas did not, however, offer into the record evidence to support this statement. In its responses to data requests, SoCalGas also states that the Governor declared 43 counties to be in a state of emergency starting February 2, 1998 and that the President declared 27 counties disaster areas from storms starting February 2, 1998. (Exh. 10, DR 2; DR 3.) These are undisputed and readily verifiable facts. We take official notice pursuant to Rule 73 of the Commission's Rules of Practice and Procedure that the President declared 27 counties, including Ventura, San Luis Obispo, and Santa Barbara counties, where SoCalGas incurred damage, disaster areas, effective February 2, 1998, and that the Governor declared 43 counties to be in a state of emergency, including Ventura, San Luis Obispo, Santa Barbara, Los Angeles, Orange, San Bernardino, and Riverside counties, where SoCalGas incurred damage, effective February 2, 1998. ⁷ However, we note that the reduction in the revenue requirement SoCalGas proposes through 2002 is 8.9%. (From $5,171,478 to $4,713,616.) ⁸ Title 20, California Code of Regulations, Section 6.2. All references to Rules unless otherwise specified refer to the Commission's Rules of Practice and Procedure. ⁹ We stated that we would approve an all-party settlement if it: (1) commands the unanimous sponsorship of all active parties to the instant proceeding; (2) the sponsoring parties are fairly reflective of the affected interests; (3) no term of the settlement contravenes statutory provisions or prior Commission decisions; and (4) the settlement conveys to the Commission sufficient information to permit us to discharge our future regulatory obligations with respect to the parties and their interests. (Id. at p. 9.) Satisfying these criteria, in effect, creates a rebuttable presumption of the reasonableness of the settlement although we still need to determine that the settlement is consistent with the law and in the public interest. ¹⁰ ORA adopts the positions set forth in SoCalGas' brief with one minor exception discussed infra. ¹¹ Further, concluding that a company's traditional method of offering the most minimal support for rate requests is "not acceptable," the Commission specifically warned parties that it would reject rate case settlements "no matter how reasonable they might otherwise appear, where they are not supported by a comprehensive initial showing. (Id.)