8. Sharing Mechanism

SoCalGas and SDG&E propose a symmetrical sharing mechanism whereby the companies and the customers would share either the excess earnings or losses on an annual basis. This is a change to the mechanism last adopted for SoCalGas in D.97-07-05437 and SDG&E also requested the identical mechanism.38

In the companies' proposal, they get significant relief at the first recoverable levels of losses; 75% of anything between 25 and 50 points below authorized is reimbursed by ratepayers, but ratepayers also receive 75% of the first band of higher earnings. Based on the proposed approach to be reimbursed by ratepayers, the applicants appear to be highly adverse to losses. As we have demonstrated, it is difficult to determine that the deferral of expenses that would avert the losses otherwise absorbed by shareholders is imprudent.

SoCalGas and SDG&E argue that sharing was a product of the adoption of PBR packages. They argue if the ratemaking mechanisms proposed by Aglet, ORA and TURN are adopted, there would be no sharing. SoCalGas and SDG&E consider the intervenors' proposals to be similar to the proposals made for PG&E and Edison in the recent GRCs.39

No party challenges the concept of a sharing mechanism; ORA and TURN propose different mechanisms. ORA proposed that earnings sharing should apply only to earnings in excess of authorized rate of return (ROR). It proposed to apply to SoCalGas and SDG&E the sharing bands currently effective for SDG&E, except that shareholder shares would be capped at 75% for all bands above 175 basis points above authorized ROR.40

TURN recommended an earnings sharing mechanism of 50/50 ratepayer/shareholder for earned ROR in excess of 100 basis points above authorized ROR. If an indexing formula like that proposed by SoCalGas and SDG&E were adopted, TURN recommended application to SoCalGas and SDG&E of the earnings sharing mechanism currently applicable to SDG&E.41

The Base Margin Settlement proposal would adopt sharing above the authorized rate of return for up to 300 basis points (3%). There would be no sharing in the event of earned ROR falling below authorized ROR for either of the two utilities individually. After a 300 point spread, SoCalGas and SDG&E would trigger an automatic suspension and "a formal review by the Commission of that utility's PBR mechanism." At 175 points, the utility has the "option" to suspend the mechanism and file an application.42

However, the utility can always file an application (without regard to the outcome) and we believe this approach is one-sided; for example, ORA could not - within the limits of the settlement - obtain an automatic review if, after 2 years, both companies earned 175 points above the authorized return. With the sole modification of clarifying that ORA (or any other party) may also petition the Commission for an automatic formal review, we will adopt the sharing mechanism as otherwise proposed in the partial settlements.

One of the Phase 2 issues is whether the incentives and sharing apply to 2004. The proposed Base Margin Settlement said no.43 The parties in their litigation positions focused on the nature of the mechanism and did not address 2004 explicitly. Although the adopted revenue requirement is lawful,44 the legality of a 2004 sharing mechanism has not been addressed.

We find that sharing is not reasonable for 2004. SoCalGas and SDG&E asked for 2004 Sharing in their applications and argued at the time it was a continuation of the existing PBRs. In the opening brief, they expressed a concern that adopting only upside sharing would be retroactive ratemaking and that it would be unlawful to require them to share 2004 earnings based on a decision adopted after the start of the test year.45 We need not resolve the first issue because we adopt both upside and downside sharing. We also need not find whether it would be retroactive to adopt 2004 sharing after the start of the test year. We earlier found the Phase 1 adoption of the final test year revenue requirement was not retroactive ratemaking when it was made subject to refund in the interim Phase 1 decision, D.03-12-057. Here, we determine that applying sharing to 2004 would not be reasonable because of the uncertainty that was inherent in adopting a final revenue requirement significantly after the start of the test year. We are not comfortable with the reverse incentives that could result from this delay. If actual expenses in 2004 are higher than adopted, SoCalGas or SDG&E could incur a loss. But if the companies were exceptionally cautious, perhaps avoiding necessary expenditures because of the uncertainty, there could be a windfall gain. Sharing up to 300 basis points may not exactly offset the actual differences between 2004 expenditures and the adopted revenue requirement, nor would it be reasonable to share a chance gain or loss by SoCalGas and SDG&E when they were not in a position to exercise management discretion that would affect whether 2004 earnings were above or below the authorized rate of return. In this case the final decision on 2004 revenue requirements was adopted extremely late in the year. The practical fact is that SoCalGas and SDG&E could not react and manage to a final revenue requirement. We will not authorize a sharing mechanism for 2004.

37 Ex. 151, pp. JVL-34 ff.

38 Ex. 152, pp. JVL-34 ff. (Ex. 151 and 152 are sequential exhibits sponsored by the same witness that differ only to the particular history or circumstances of the two companies.)

39 Sempra Opening Litigation Brief, p. 57.

40 Ex. 333, pp 2-2 to 2-7 as cited in the Comparison Exhibit.

41 Ex. 561, pp. 14 and 15 as cited in the Comparison Exhibit.

42 Base Margin Settlement p. 12. We note that this approach assumes the presumption that the adopted rate setting mechanisms would be the SoCalGas and SDG&E "PBR" bundle of mechanisms, as settled.

43 Base Margin Settlement, p. 12.

44 D.03-12-057 granted interim rate relief to SoCalGas and SDG&E by establishing memorandum accounts to track any eventual difference in current rates and any increase or decrease adopted for Test Year 2004.

45 "SoCalGas and SDG&E have not agreed to be subject to upside earnings sharing for 2004, which would be required under the holding of the Pacific Telephone decision cited above. Given that the Commission did not create a balancing account for costs or otherwise provide notice of the application of an earnings sharing mechanism applicable to 2004 before the start of that year, it would clearly constitute unlawful retroactive ratemaking for a decision in Phase 2 to require SoCalGas and SDG&E to refund any above-authorized returns they might earn in 2004." Sempra Opening Litigation Brief, pp. 57-58.

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