2. Procedural History

SoCalGas and SDG&E filed individual applications to revise their base rate revenue requirements effective January 1, 2004, and for authority to establish a method to adjust the revenue requirement for 2005 through 2008.¹ The applications did not propose joint rates or a single common revenue requirement. Pursuant to Rules 45 and 55 of the Commission's Rules of Practice and Procedure,² a joint motion for consolidation of the separate applications was filed concurrently with SoCalGas' A.02-12-027 and SDG&E's A.02-12-028 on December 20, 2002 respectively, for authority to update their gas and electric revenue requirements and base rates. In addition, both companies sought authority for margin-per-customer (MPC) indexing mechanisms and certain other incentive reward and penalty mechanisms.

By Ruling the applications were consolidated on January 22, 2003. On March 13, 2003 the Commission issued Order Instituting Investigation (I.) 03-03-016 to allow the Commission to hear proposals other than the applicants', and to enable the Commission to be able to enter orders on matters for which the utilities may not be the proponent.

In D.97-07-054 (73 CPUC 2d, 469), the Commission first adopted an incentive ratemaking mechanism for SoCalGas and suspended the requirement to file a general rate case for the life of the mechanism.
(73 CPUC 2d, at 535). D.01-10-030 extended for a year the five-year rate period that was to expire on December 31, 2002. For SDG&E the requirement to file a general rate case for test year 1999 was suspended by D.97-12-041 (77 CPUC 2d, 139) and the company was ordered to file a "cost-of-service showing" as a part of the performance-based ratemaking (PBR) form of incentive ratemaking mechanism in a proceeding ordered by D.94-08-023. This latter decision adopted an "experimental" mechanism as an alternative to the traditional proceeding. SDG&E's last-adopted incentive ratemaking mechanism was to remain in effect through 2002 and was also extended through 2003 by D.01-10-030.

In Decision 97-04-085, the Commission found that the typical requirements to process a general rate case were a burden on the limited resources of staff and parties because of the workload imposed by the
in-progress implementation of electric restructuring.³ In Phase 1 of this proceeding we addressed just and reasonable rates⁴ for SoCalGas and SDG&E for Test Year 2004.⁵

Our legal 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 here, adequate⁶ 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, a utility that provides adequate service must be in compliance with laws, regulations, and public policies that govern public utility facilities and operations. In carrying out this statutory obligation, we assess whether SoCalGas and SDG&E have justified the ratemaking proposals in their applications for post-test year 2004 and for earnings sharing and other incentive mechanisms. These questions were deferred by the May 22, 2003 Ruling Clarifying the Scoping Memo and Modifying the Schedule. D.03-12-057 granted interim rate relief to SoCalGas and SDG&E⁷ by establishing memorandum accounts to track any eventual difference in current rates and any increase or decrease adopted for Test Year 2004.

Active parties in Phase 2 were: the Office of Ratepayer Advocates (ORA), The Utility Reform Network (TURN), Aglet Consumer Alliance (Aglet) and the California Coalition of Utility Employees (CCUE) all of whom sponsored testimony and witnesses of their own and actively cross-examined the SoCalGas and SDG&E witnesses. In addition, the Natural Resources Defense Council (NRDC), and the Southern California Generation Coalition (SCGC) each sponsored testimony and a witness. Evidentiary hearings were held on June 1 through June 10, 2004.

A Comparison Exhibit, Ex. 168, was served on June 18, 2004. This exhibit provided a jointly prepared summary of the parties' litigation positions in Phase 2. Opening Briefs were filed on July 16, 2004⁸ and Phase 2 was submitted following the Replies that were filed on August 6, 2004.⁹

a. Late-Filed Partial Settlement

On July 21, 2004 SoCalGas and SDG&E filed a motion to adopt (Motion to Adopt) a proposed partial settlement¹⁰ jointly with Aglet, NRDC, ORA, SCGC, TURN that would settle certain issues in Phase 2. The motion was filed more than the thirty days after the end of evidentiary hearings allowed by Rule 51.2. The parties to the proposed settlement also filed a motion¹¹ for leave to late-file the motion (Late-File Motion) to adopt the settlement. Finally, they also filed a Settlement Agreement Regarding Phase 2 Base Margin Issues (Base Margin Settlement). We grant the Motion for Leave to File and we will, as discussed, adopt the Base Margin Settlement in this decision. The City of Chula Vista (Chula Vista) filed comments on August 20, 2004. Chula Vista argued in its comments that the Commission should not adopt the Phase 2 settlement because it was premised on, and required the adoption of, the Phase 1 revenue requirements settlement proposed for SDG&E's cost of service, and that the Phase 2 settlement was not in the public interest.¹²

The Base Margin Settlement is a not a complete settlement under Rule 51(c), because it fails to reach a "mutually acceptable outcome to the proceedings" which implies, and we take to mean, all litigated issues. It is however a partial settlement.¹³ We are not bound to accept the settlement, but as discussed in the decision, we do find the settlement "reasonable in light of the whole record, consistent with the law, and in the public interest"¹⁴ when compared to the careful consideration of the litigated positions of the parties.

The Base Margin Settlement also contained an automatic reopening of negotiations¹⁵ if the proposed settlements for SoCalGas and SDG&E in Phase 1 were not adopted. The Phase 1 decision was adopted by the Commission and therefore this provision is moot.

¹ In Resolution ALJ-176-XXXX, the Commission categorized the matters as Ratesetting and preliminarily determined that hearings were required. This was affirmed in the Scoping Memo.

² Unless otherwise noted all subsequent references to Commission Rules are to the Commission's Rules of Practice and Procedure.

³ Reference to D.97-04-085 within D.97-12-041, (77 CPUC 2d 138, 142.)

⁴ The Commission generally adopts as an annual amount, a revenue requirement, which is necessary to provide safe and reliable service. This amount is then converted to an authorized unit price, or a rate based on a sales forecast. Therefore the term "rates" can be used interchangeably to refer to either the total revenue requirement or to the unit price.

⁵ Cite decision as adopted.

⁶ Webster's Third International Dictionary, (1976) defines adequate as equal in size or scope, or fully sufficient for a specified or implied requirement.

⁷ April 18, 2003, SoCalGas and SDG&E filed a Motion seeking reconsideration of the April 2, 2003 Scoping Memo. The May 22, 2003 Ruling clarified the Scoping memo as appropriate and D.03-12-057 was necessary to grant the interim relief request.

⁸ Opening Briefs were filed by SoCalGas and SDG&E, ORA, TURN, Aglet, SCGC, CCUE, and City of Chula Vista.

⁹ Reply Briefs were filed by SoCalGas and SDG&E, ORA, TURN and Aglet.

¹⁰ Motion of Joint Parties Southern California Gas Company, San Diego Gas & Electric Company, Office of Ratepayer Advocates, The Utility Reform Network, Aglet Consumer Alliance, Natural Resources Defense Council, and Southern California Generation Coalition for Adoption of Settlement Agreement Regarding Specified Issues in Phase 2 for Southern California Gas Company and San Diego Gas & Electric Company.

¹¹ Motion of Joint Parties Southern California Gas Company (U 904-G), San Diego Gas & Electric Company (U 902-M), Office of Ratepayer Advocates, The Utility Reform Network, Aglet Consumer Alliance, Natural Resources Defense Council, and Southern California Generation Coalition for Leave to File Motion for Adoption of Settlement Agreement More Than 30 Days After Close of Hearings.

¹² Comments, pp. 2 ff.

¹³ Certain Phase II matters are not resolved by this Settlement Agreement, and are left to be resolved by the Commission on a litigated basis unless resolved by subsequent settlement agreement. The unresolved matters are in the area of performance indicators and performance incentives, which for SDG&E currently include electric reliability, customer service, and employee safety and for SoCalGas currently include customer service and employee safety.

¹⁴ Rule 51.1.(e).

¹⁵ P. 8: "If the Commission does not approve both of the Phase 1 settlements or if the Commission orders substantive modifications to either or both of them, then the Joint Parties agree to continue good faith efforts to negotiate mutually acceptable outcomes for all issues covered by this Settlement Agreement."