4. Starting Conditions for Indexing

SoCalGas and SDG&E, and the parties, assume that some form of post-test year adjustment to rates will be adopted. The Commission has a clear history of allowing for some form of attrition; i.e., adjusting rates in a simplified fashion between major reviews of rates in a GRC to allow for the detrimental effects of inflation that would reduce the utility's opportunity to earn a reasonable rate of return. We agree that this was a reasonable presumption and that attrition is a reasonable approach to ratemaking. We will authorize a mechanism to adjust SoCalGas and SDG&E's rates on an annual basis until their next major GRC.

The adopted revenue requirements in Phase 1 for the TY 2004 should be the beginning base for setting rates in 2005 and beyond. For SDG&E's electric operations the process starts with the Phase 1 settlement base margin and then excludes generation, transmission, San Onofre Nuclear Generation Station (SONGS), Catastrophic Event Memorandum Account (CEMA), California Alternative Rate for Energy (CARE), Demand-Side Management (DSM), Pension, Commission-imposed and Post Retirement Benefits Other than Pensions (PBOPs) costs.¹⁷

For gas operations, SoCalGas and SDG&E propose to start with the Phase 1 settlement base margin and exclude CEMA, Hazardous Substance Cost Recovery Memo Account (HSCRA), Self-Generation Program Memo Account (SGPMA), CARE, Direct Assistance Program (DAP), DSM, Public Goods and Other Research Design & Development (RD&D), Pension, Commission-imposed and PBOPs costs. ORA agrees with the applicants' proposal.¹⁸

As defined by SoCalGas and SDG&E and used in Phase 1, the revenue requirement includes miscellaneous revenues. Base Margin is total revenue requirement less miscellaneous revenues. This decision accepts all parties' use of the residual amount; Base Margin, as the appropriate starting point for indexed adjustments to post-test years.

We adopt as a starting point for post-test year indexing of Base Margin the revenue requirement as adopted in Phase 1.

We also adopt the otherwise uncontested adjustments or exclusions to the Base Margin as requested by SoCalGas and SDG&E. These are consistent with prior attrition mechanisms for SoCalGas and SDG&E.

¹⁷ Comparison Ex. 168, SDG&E p. 1, citing Ex. 152, p. JVL-6 and p. JVL-8.

¹⁸ Comparison Ex. 168, SDG&E p. 1, citing Ex. 334, pp. 1-9 and pp. 1-11.