III. TURN's Accounting Proposal

A. Current Accounting Mechanisms for Tracking Transition Cost Recovery¹⁸

Until the utilities collect their uneconomic transition costs and the rate freeze ends, as it has for San Diego Gas & Electric Company (SDG&E), rates are fixed or frozen at the June 10, 1996 levels. As we explained in D.99-10-057, the utility draws down outstanding generation asset costs depending on the revenues remaining after paying off all other authorized costs, such as those associated with the electric distribution system, public purpose programs, transmission costs, and the costs of procuring electricity for its customers. The rate freeze shall end on the date relevant transition cost balances are zero. For PG&E and Edison, the end of the rate freeze shall not occur before the generation assets of each utility have been market-valued except as the law or the Commission determines otherwise. The Commission has established two major accounting mechanisms to track the costs and revenues associated with transition cost recovery: the TCBA and the TRA.¹⁹

In D.97-06-060, the Commission established the TCBA for each utility. In that decision, the Commission set forth particular guidelines for transition cost recovery. These guidelines were clarified in D.97-11-074, D.97-12-039, and D.00-02-048. In general terms, the TCBA tracks the accelerated cost recovery of generation assets and other authorized transition costs. Revenues are recorded on a monthly basis when headroom revenues are credited to the TCBA. In addition, revenues are recorded when generation assets are sold for greater than net book value. Costs are tracked on a monthly basis and are recorded in three general subaccounts: current costs, accelerated costs, and post-2001 costs. The Commission also established generation memorandum accounts that track the costs and revenues of operating in the marketplace. Prior to D.01-01-018, excess generation revenues (revenues over costs) from these accounts were credited to the TCBA on an annual basis. The Commission required the utilities to file monthly TCBA reports in D.97-06-060.

The Commission established the TRA in D.97-10-057. The TRA is a calculation mechanism designed to track the residual calculation of the CTC and to ensure that headroom is calculated correctly and credited to the TCBA on a monthly basis. As explained in Resolution E-3514, which addresses the advice letters filed by PG&E and Edison to implement the requirements of D.97-10-057, the purpose of the TRA is to match the amount of billed revenues against the amount of the separated revenue requirement and Commission-approved obligations. Separated revenue requirements consist of transmission, distribution, public purpose programs, and nuclear decommissioning. Commission-approved obligations consist of Independent System Operator (ISO) charges and Power Exchange (PX) charges. For PG&E, Commission-approved obligations also include Diablo Canyon-related ICIP exclusions. Another purpose of the TRA for PG&E is to ensure dollar-for-dollar recovery of distribution, nuclear decommissioning, and public purpose costs. For Edison, because it operates under a distribution performance-based ratemaking (PBR) mechanism, dollar-for-dollar recovery of its distribution revenues was not ensured. Therefore, for Edison, another purpose of the TRA is to ensure dollar-for-dollar recovery of nuclear decommissioning and public purpose costs.

Thus, the TRA and TCBA interact, because headroom is calculated through the TRA and credited as monthly revenue to the TCBA. The Commission has recognized that there may be months where operating costs exceed revenues, because the costs of energy are no longer fixed, but vary on an hourly basis.²⁰ In Resolution E-3527, the Commission allowed these unrecovered costs to be carried over in the TRA from month to month, and allowed revenues to be applied to these accumulated undercollections first before being transferred to the TCBA. To the extent that the rate freeze ends (i.e., transition costs are fully collected and final market valuation is established by the Commission), any remaining undercollection in the TRA cannot be recovered after the rate freeze. (See D.99-10-057 and D.00-03-058.)

B. A.00-10-028 (TURN's Petition to Modify Resolution E-3527)

In A.00-10-028, TURN recognizes the interaction of the TRA and the TCBA and focuses on Resolution E-3527, which stopped the transfer of any TRA undercollection to the TCBA on a monthly basis. TURN proposes that we modify the accounting rules adopted in Resolution E-3527 to require that the balance in the TRA for each utility, whether negative or positive, be transferred on a monthly basis to the TCBA. The effective date of the proposed accounting changes would be January 1, 1998, the effective date of Resolution E-3527. TURN and other parties maintain that this simple change will properly capture the concept of "headroom" over the entire frozen rate period, rather than applying the concept in low-cost months but rejecting it s application in high-cost months.

TURN proposes that we revise our accounting mechanisms to allow such a transfer. TURN submits that this treatment would be consistent with that originally established in Resolution E-3514 and would be more consistent with the intent of AB 1890. Furthermore, TURN contends that correcting the ratemaking treatment in this manner will recognize the billions of dollars recovered as transition costs for both Edison and PG&E and will properly recognize the revenues achieved from operating their own generation plants.

TURN believes that the rate freeze concept was intended to serve as a meaningful limitation on the utilities' ability to recover transition costs. TURN explains that this concept can only be valid if the rate freeze applies to all costs incurred as well as to transition costs recovered over the entire rate freeze period. By allowing any TRA balance (whether an overcollection or an undercollection) to be transferred to the TCBA on a monthly basis, TURN maintains that the level of market electricity prices is appropriately reflected in the amount of recorded transition costs recovery. TURN also contends that this action removes the false distinction between excluding PX purchase costs from the rate freeze for purposes of calculating transition cost recovery during periods of high PX prices and including PX purchases costs in the calculation of transition cost recovery during periods of low PX prices. TURN believes this approach is lawful because it maintains the prohibition against carrying over costs incurred during the rate freeze for post-recovery and achieves consistency between the treatment of undercollections accrued in each utility's respective Energy Cost Adjustment Clause (ECAC) accounts that the Commission authorized for transfer and recovery though the TCBA.

TURN also asserts that its proposed accounting change will correct the erroneous treatment of revenues associated with the Rate Reduction Bonds (RRBs) authorized in AB 1890. TURN observes that the Commission's current accounting treatment does not achieve the "indifference" outcome reflected in the Commissions decisions on rate reduction bonds when TRA undercollections are accumulating. TURN also rebuffs the utilities' claim that allowing the transfer of the undercollections in the TRA to the TCBA would result to a transformation of the procurement costs currently recorded in the TRA, into transition costs, in violation of the limitations AB 1890 imposed for what qualifies for transition cost recovery. TURN contends that allowing the transfer of TRA undercollections merely reduces prior revenues recorded in the TCBA, thereby affecting only the amount of transition cost recovery achieved to date, not the amount of transition costs recorded in the TCBA. TURN also dismisses the utilities' suggestion that the accounting proposal would violate prohibition against retroactive ratemaking.

C. Responses to A.00-10-028 (TURN's Petition to Modify Resolution E-3527)

TURN filed its petition to modify on October 17, 2000. On November 9, 2000, the following parties filed written responses to the petition: CIU, CMTA, Energy Producers and Users Coalition (Coalition), Enron, Farm Bureau, Greenlining/LIF, ORA, and Western Power Trading Forum (WPTF). Parties addressing TURN's proposal through testimony and briefs in this proceeding are: Aglet, CIU, CLECA, CMTA, Edison, Enron, Farm Bureau, FEA, GSPC, Los Angeles, ORA, PG&E, San Francisco, and SMUD.

Only PG&E and Edison object to adopting of TURN's petition, termed the "TURN proposal"; all other interested parties addressing TURN's proposal urge its adoption.

D. Legal, Factual, and Policy Analysis of Proposal

1. Resolution E-3527 Fosters an Accounting Anomaly That Must be Corrected

Adopting the accounting change TURN seeks in A.00-10-028 corrects an anomaly that was inadvertently adopted in Resolution E-3527. Specifically, by requiring that either the debit or credit balance determined through the TRA calculation be recorded in the TCBA, we give full effect to the rate freeze principle, properly apply the matching principle, and adhere to the requirements of § 368(a). It is inconsistent and counterintuitive to continue to allow the utilities to appear to incur substantial undercollections in their operating costs on the one hand, even while they continue to record substantial amounts of transition cost recovery. As CMTA correctly points out, since the utilities were both sellers to and buyers from the PX market, the utilities simply paid the PX the difference between revenues to which they are entitled for sales into the PX and cost of power purchased from PX.²¹ As PG&E witness McManus' Prepared Rebuttal Testimony indicates, PG&E is not actually out of pocket by the amount of purchase power cost reflected in the TRA. Instead, it is only out of pocket the difference between the TRA costs and revenues generated from its own generation assets.²² A simple adjustment that TURN proposes eliminates an unintended consequence of our current flawed accounting mechanism. It eradicates the anomaly of allowing the utilities to claim recovery of billions of dollars in transition costs, but also claim that they cannot recover the huge sums of operating costs. This approach also properly offsets generation revenues and costs of procurement, as we discuss more fully below.

As stated in Resolution E-3527, Edison proposed this approach early on:

Edison finds the ED's proposed approach inequitable because `at the same time that the payments to the ISO and PX are increasing, potentially making the TRA balance negative, additional funds from the sales of Edison's generation output to the PX are being directly credited to the TCBA which will result in a direct benefit to the customers by immediately reducing transition costs recorded in the TCBA.' Edison argues that with an increase in the PX price, the ED's proposal results in the utilities bearing the risk of debit balances in the TRA while the benefits of the increased in the market price related to sale of their generation output to the PX are entirely reflected in the TCBA. (Resolution E-3527, mimeo at p. 5.)

In this resolution, the Commission explained that because of the structure of the TRA, the payments to the PX and ISO are the major components that could force the monthly TRA balance to be a debit amount. Furthermore, the Commission went on to explain additional concerns raised by Edison:

At the end of the rate freeze, there may be a debit balance left in the TRA. Edison is concerned that a utility can be `unjustly harmed if a debit balance is recorded in the TRA during the latter part of the rate freeze period. For example, if the monthly TRA calculation results in a debit amount during the first month of operation, it is very likely to be offset by future credit amounts. However, if in the last month of operation, the TRA monthly calculation results in a debit amount, Edison will not have the opportunity to recover this amount in future periods.' Edison believes this condition results solely because of the timing of the debit. To remedy this condition, Edison proposes that `the amount transferred to the TCBA should be determined in aggregate based on the accumulated balance over the entire rate freeze and not in monthly increments.' (Id. at p. 6.)

Resolution E-3527 rejected Edison's arguments by stating that such treatment would be equivalent to treating the TRA debits as transition costs, which would be unlawful pursuant to § 367(a). The Resolution also declined to address the disposition of debits remaining in the TRA at the end of the transition period, as being beyond the scope of the Resolution.

In retrospect, Edison was correct in noting how E-3527 negated the matching principle. We believe the Resolution incorrectly characterized the nature of TRA debit transfers. Applying the principles set forth in D.99-10-057 and upheld in D.00-03-058 requires that we take a closer look at the accounting anomalies caused by the treatment provided for in Resolution E-3527, as TURN requests. We do not intend to further foster such inconsistencies. As we have previously stated, the Commission has devised the TCBA and TRA accounting mechanisms and it is within our purview to change these mechanisms.

2. TURN's Proposal is Lawful

a) TURN's Proposal Is Consistent With AB 1890

PG&E and Edison claim that allowing the transfer of the undercollections in the TRA to the TCBA would result in transforming the procurement costs currently recorded in the TRA into transition costs. According to the utilities, this modification would violate AB1890's limitations on what qualifies for transition cost recovery.²³

We do not agree that this modification will treat TRA undercollections as an additional category of transition costs. Instead, it merely reduces prior revenues recorded in the TCBA, thereby affecting only the amount of transition cost recovery achieved to date, not the amount of transition costs recorded in the TCBA.²⁴ The TCBA has monthly entries in its "costs" section that record the amount of transition costs eligible for recovery. Monthly entries in the "revenues" section are applied to the costs to determine to amount of monthly transition cost recovery.

Adoption of TURN's accounting proposal would result in a revenue debit amount on the TRA balance line of the TCBA revenue section. Changes to the amounts in the revenues section, while affecting the amount of transition cost recovered, does not change, or as PG&E and Edison insist, transform these amounts to transition costs.²⁵

TURN observes that the proposed treatment of the TRA undercollections would be consistent with prior treatment afforded other revenue-tacking accounts applied to the TCBA such as the ISO/PX Implementation Delay Memorandum Account (IPIDMA).

As TURN, Enron and the Los Angeles County noted, Edison does not characterize its transfer of about $238 million in IPIDMA balances, which made their way to the TCBA as revenue debits, as a "transformation" to transition costs.²⁶ Likewise, PGE& does not claim that its recovery of $316 million in this similar manner somehow "transformed" these going forward costs into transition costs.²⁷ Aglet also correctly points out that debits in the TCBA include many non- transition costs.²⁸ Prior transfers of balances, which were reflected as revenue debits in the TCBA, did not result in any "transformation" to transition costs, neither would transfers of the TRA undercollections. TURN's witness Florio for TURN testified that the only way one can argue that the accounting proposal would "create" new transition costs is if the negatives ever exceeded the positives, which is an assumption contrary to the facts.²⁹

In D.97-11-074, the Commission determined the costs and categories of costs for generation-related costs and obligations that had the potential of becoming uneconomic as a result of transitioning to a competitive generation market. These Commission-authorized costs and obligations will not increase, except as they may have been modified by other Commission decisions. Instead, transferring the TRA balance to the TCBA on a monthly basis, whether that balance is an under- or overcollection, simply serves to match costs and revenues appropriately. The effect of this change is fully consistent with AB 1890 and several prior Commission decisions, including D.97-10-057, D.99-10-057, and D.00-03-058.

We find that the elements against which we must measure the proposals before us are whether they afford the utilities a reasonable opportunity to recover their uneconomic generation costs, as is required by §§ 330(s) and 368(a), while ensuring that ratepayers do not assume unintended and unlawful risks. PG&E and Edison contend that the rate freeze is over, that their respective TCBAs were overcollected as of August, and that at a minimum, ratepayers are responsible for undercollections that have accrued in the TRA since that time. In other words, the utilities insist that shareholders have achieved full recovery of transition costs and are therefore not at any risk. At the same time, the utilities demand that ratepayers now be required to reimburse the utilities for energy procurement costs, even while recognizing that rates were frozen at an artificially high level to ensure that transition cost recovery. The utilities' positions indicate that they are unwilling to assume the risks contained in AB 1890.

In other proceedings at this Commission and before FERC, PG&E and Edison have long recognized the risk that the variable energy costs may create. For example, in early 1997, PG&E and Edison asserted to FERC that market-based rates were appropriate because they had no incentive to exercise market power. The utilities recognized that any increase in revenues obtained as a seller of energy in the PX would be offset by a greater loss in headroom revenues.³⁰ In its order conditionally approving the ISO and PX, FERC adopted market-based wholesale rates and confirmed that the existence of the rate freeze, the fixed transition cost recovery period, and the mandatory sale of energy by the utilities into the PX helped to mitigate market power concerns.

This finding is based, in part, on the existence of the retail rate freeze under the Restructuring Legislation during the transition period and the then mandatory sale of energy by the companies into the PX. During the transition period while the retail rate freeze is in effect, the retail rate freeze in conjunction with the CTC will reduce the incentive to raise prices when the companies are net buyers.³¹

In D.99-06-057, the Commission discussed the risk of the utilities in this regard:

"Edison believes that the UDC bears a significant energy procurement risk. During the transition period, utility rates are frozen at the June 10, 1996 level. Within the frozen rate level, the utility must recover its operating costs, the costs of procuring sufficient energy and capacity to meet its load, pay for mandated public purpose programs, and recover its transition costs. If its operating or energy procurement costs rise, the UDC's shareholders may not be able to fully recover transition costs. The energy procurement cost is the most highly variable component of the utility's frozen rate and is completely outside the control of the utility. Customers are shielded from the risk of price increase during the transition period; utility shareholders bear the entire risk." (D.99-06-057, mimeo. at Sec. IIIC.)

Adopting the accounting treatment proposed in A.00-10-028 will properly recognize these risks and will be consistent with AB 1890. To be sure, adopting TURN's proposal will reduce the amounts available for transition cost recovery, while eliminating the undercollections in the TRA.

However, as the Parties explain: " . . . the impact of the proposed change is that, consistent with AB 1890, the level of recorded transition cost recovery at any given time will reflect the total revenues collected to date during the rate freeze, as well as the total costs incurred to date in providing service during the rate freeze."³² This is essentially the same treatment that the utilities have applied themselves in recovery of prior reporting period adjustments and recovery of prior period undercollections. By collecting these undercollections before headroom is applied to transition cost recovery, the total transition cost recovery achieved is necessarily lower.

This approach is also consistent with the Commission's prior actions in D.96-12-077 and D.97-11-074. For example, the Commission authorized the rate freeze to commence on January 1, 1997, a year prior to the statutorily-mandated beginning of the transition period (§ 330(n)). (70 CPUC 2d, 207, 220.) The Commission specifically discussed the impact of Energy Cost Adjustment Clause (ECAC) undercollections and overcollections during that initial year when ECAC costs were part of the authorized revenue requirement:

"If ECAC costs are higher than forecasted, then authorized revenues will be insufficient to cover these costs, and the resulting `undercollection' will eventually result in a higher authorized revenue requirement. ¼ Since rates may not rise to amortize the undercollection, however, the effect is to reduce the headroom revenues available for crediting to the interim TCBA. Similarly, if ECAC costs are lower than forecasted, a larger headroom and greater credit to the interim TCBA will result." (Id. at 224-225.)

3. TURN's Proposal Does Not Violate the Filed Rate Doctrine

PG&E contends that while AB 1890 exposed them to the risk of recovery of its transition costs, it did not subject them to the risk of recovery of FERC-approved costs. PG&E argues that adopting TURN's proposal would do exactly that, and it is therefore unlawful. Similarly, Edison contends that federal law requires states to pass through to retail customers federally tariffed charges and, to the extent that TURN's proposal denies Edison of its ability to recover procurement costs, it would go against the filed rate doctrine.

As stated above, we reject the utilities' contention that allowing the transfer of the TRA undercollections will somehow transform energy procurement costs to transition costs. In adopting TURN's accounting proposal we merely reduce prior revenues recorded in the TCBA, thereby affecting only the amount of stranded cost recovery achieved to date. Under TURN's proposed accounting mechanism, the utilities would achieve full recovery of their PX costs and any other FERC-approved costs incurred during the rate freeze. To be clear, TURN's accounting proposal, in it of itself, does not disallow the recovery of the utilities' cost of procuring and transmitting electricity in retail rates.

As TURN's witness Florio explained in his testimony, "[u]nder the TURN accounting proposal there is NO (zero) unrecovered power purchase costs; only unrecovered transition costs, for which the utilities were clearly and explicitly at risk under the terms of AB 1890³³"(emphasis in original).

Since TURN's accounting proposal alone does not disallow FERC approved cost, there can be no violation of the filed rate doctrine in our adoption of TURN's accounting proposal at this time.

4. TURN's Proposal Does Not Constitute Unconstitutional Takings

PG&E and Edison are also aligned in asserting that the failure to authorize them to recover the TRA undercollections would result in a takings under the California and United States Constitutions. Edison asserts nothing in AB1890 changes the principle that a regulated company is entitled to a fair opportunity to recover its just and reasonable cost of operation. Both utilities claim the constitutional right to retail rates that are not confiscatory.

PG&E maintains that any change of Commission's rules that would result in an indirect disallowance of PG&E's reasonable utility costs of service, whether the costs are operating costs or transition costs, is unlawful. According to Edison, TURN proposes that the TRA undercollection be transferred to the TCBA, where generation revenues are too minimal to offset them. Edison argues, because TURN's proposal would have the effect of denying Edison's ability to recover its procurement costs, it is confiscatory.

We find these assertions unpersuasive as they relate to the adoption of TURN's proposal. With regard to PG&E's assertion, we note that under AB1890 the utilities are at risk for the recovery of transition costs. Accordingly, we do not believe that the fact that some portion of this risk has now come to pass necessarily means that there has been an unconstitutional taking. In short, the utilities' argument alleging an unconstitutional taking of property, is premature. In this decision, we do not find the rate freeze over. Therefore, while adopting TURN's proposal reduces prior transition cost recovery, we do not have a definite landscape in which to ascertain the exist3nce or extent of unrecovered costs.

Edison's argument about procurement costs essentially adds nothing to PG&E's argument. Furthermore, we note that in prior decisions we have consistently stressed that if we were to allow the utilities to recover procurement costs incurred during the rate freeze following the end of rate freeze, the utility's rates during the rate freeze period would have effectively exceeded those in effect on June 10, 1996. This action would therefore be unlawful and would result in recovery of excess transition costs, an outcome inconsistent with AB 1890.

We find these assertions unpersuasive as they relate to our adoption of TURN's proposal. The Commission has steadfastly maintained TURN's Proposal Does Not Constitute Unconstitutional Takings

With regard to PG&E's assertion, we note that under AB 1890 the utilities are at risk for the recovery of transition costs. Accordingly, we do not believe that the fact that some portion of this risk has now come to pass necessarily means that there has been an unconstitutional taking. In short, the utilities' argument alleging an unconstitutional taking of property, is premature. In this decision, we do not find the rate freeze over. Therefore, while adopting TURN's proposal reduces prior transition cost recovery, we do not have a definite landscape in which to ascertain the existence or extent of unrecovered costs.

Edison's argument about procurement costs essentially adds nothing to PG&E's argument. Furthermore, we note that in prior decisions we have consistently stressed that if we were to allow the utilities to recover procurement costs incurred during the rate freeze following the end of rate freeze, the utility's rates during the rate freeze period would have effectively exceeded those in effect on June 10, 1996. This action would therefore be unlawful and would result in recovery of excess transition costs, an outcome inconsistent with AB 1890.

5. TURN's Proposal Does Not Constitute Retroactive Ratemaking

PG&E calls TURN's proposal illegal retroactive ratemaking because it changes the "rules of the game" after the fact. PG&E argues that Resolution E-3527 set the rule: TRA undercollections are not to be transferred into the TCBA. PG&E asserts that TURN's proposal adjusts the ratemaking as though the earlier rule were not adopted. PG&E contrasts this approach with making a later entry to a balancing account whose entries are subject to reasonableness review, in order to partially or wholly reverse a previous entry as a result of a reasonableness review. In such a case, PG&E contends, the rules of the game from the beginning contemplated the review and possible later "adjusting" entry.

We disagree with PG&E's position that adopting TURN's accounting proposal violates the prohibition against retroactive ratemaking, as PG&E construes this prohibition too broadly. Even if this accounting change were a change in the rules of the game, it would not constitute prohibited retroactive ratemaking. As the California Supreme Court explained in Southern California Edison Company v. Public Utilities Commission (1978) 20 Cal.3d 813 (Edison), not every order involving rates that has a retroactive effect is prohibited retroactive ratemaking.

In Edison, the Commission had established a fuel cost adjustment clause for the utility. The fuel clause permitted Edison to increase its rates to compensate for the predicted higher cost of fossil fuels. Under the fuel clause, Edison recovered these increased costs for the quantity of fossil fuel that would be consumed in a year of average weather. Due to favorable weather conditions, Edison in fact collected considerably more money under the fuel clause than it needed to pay its increased fuel costs (because it was consuming less fuel than it would have in years of average weather). The Commission then terminated the fuel clause, and replaced it with an energy cost adjustment clause (ECAC). The ECAC, unlike the fuel clause, took account of the actual amount of fuel consumed. The Commission also ordered Edison to refund to its customers the amount collected under its fuel clause that it in fact did not need to pay for fuel costs. Edison challenged this refund on retroactive ratemaking grounds, and lost. The California Supreme Court concluded that an adjustment of rates, which does not involve general ratemaking, may be retroactive in effect without violating the rule against retroactive ratemaking. Here, as in Edison the accounting change at issue does not involve general ratemaking.

In Edison, while the accounting rules changed in a way that Edison argued was detrimental, the new rules, together with the required refund, simply carried out the Commission's original intent, to allow Edison to recover its increased fuel costs on a dollar-for-dollar basis. Similarly, here, although TURN has proposed an accounting change, the effect of this change is to carry out the original intent of AB 1890, that the utilities are at risk for recovery of transition costs during the transition period.

There are a number of additional and related reasons why TURN's proposal does not constitute prohibited retroactive ratemaking. First, no rates are being changed here. Unlike the situation in Edison where refunds were ordered, here the utilities' rates remain frozen at the same level both before and after implementation of TURN's proposal. Second, the prohibition on retroactive ratemaking is a general statutory prohibition, imposed by section 728 of the Public Utilities Code. (See Edison, 20 Cal.3d at 816.) The accounting changes we are adopting here are required to carry out a more specific and more recently enacted statute, AB 1890. Thus, even if there were a conflict between the retroactive ratemaking prohibition imposed by Section 728 and the requirement of AB 1890 that the utilities be at risk for recovery of transition costs during the transition period, the more recently enacted and more specific requirements of AB 1890 would control.

The Commission established the TRA and TCBA based on our authority as an administrative agency to implement the provisions of AB 1890. In retrospect, the accounting treatment we adopted in Resolution E-3527 contravenes the principles promulgated in AB 1890. Given the change in circumstances, we find it necessary to modify our accounting approach, as proposed by TURN. The Commission has the authority to do so and is not preempted by any law, contrary to the claims proffered by the utilities.

6. Adopting TURN's Proposal Will Not Impede Edison's Right To Due Process

As stated above, Edison contends that the Commission's adoption of TURN's accounting proposal at this time will frustrate due process and call to question whether a "neutral and detached" Commission is presiding over this proceeding. Edison explains that when the recovery of the TRA undercollection is presently before a federal court, the Commission can not, consistent with due process, take any action which would have the intent of disguising the costs at issue in Federal Court.

Parties, in their responses, disagree. Edison filed its case with the Federal Court after TURN filed its accounting proposal with the Commission. The Commission's consideration of TURN's proposal is a timely exercise of our ratemaking authority.

7. TURNS Proposal Will Once Again Achieve "Neutrality" of the Rate Reduction Bonds (RRB) Transactions

We accept TURN's contention that current accounting treatment negates the neutrality of the RRB transactions since the utilities' TRAs are undercollected. The Financing Order,³⁴ which governed the 10% rate reduction and the issuance of the RRBs, adopted a ratemaking approach designed to render the RRB transactions neutral as to when rate freeze ends and that prevents cost-shifting between residential and small commercial customers and large customers.³⁵

Since the TRA undercollections began to accrue, there has been no transition recovery from rate revenues.³⁶ Absent the financed 10% rate reduction, the total amount of revenues collected from residential and small commercial customers would have been applied to offset the undercollections in the TRA.³⁷ But because of the adopted RRB transactions and the Commission's current accounting mechanism, the utilities continue to impute into the TCBA revenues related to the RRBs. Consequently, residential and small commercial customers' continue to contribute to transition cost recovery by the amount of the imputed revenues, despite the lack of headroom.

TURN concludes, as a result, that the utilities have recorded a greater amount of transition cost recovery than they would have had absent the RRB transaction and that residential and small commercial customers are paying a disproportionate share of the utilities' transition cost recovery.³⁸ According to TURN, this outcome contradicts the objectives of the Financing Order. We agree with TURN that by applying the monthly TRA balance to the TCBA, whether positive or negative, ratepayers are made indifferent as to how the revenues associated with the RRBs are treated and the neutrality contemplated in the Financing Order will hence be once again achieved.

8. Crediting the Balances in the Generation Memorandum Accounts into the TCBA Monthly Will Provide a More Accurate View of Transition Cost Recovery

While this is not a part of TURN's proposal but instead was raised in comments, we should modify our approach to generation revenues tracked and recorded in the generation memorandum accounts.³⁹ D.97-11-074 allowed the utilities to credit these accounts to the TCBA on an annual basis, in part to address Edison's concerns regarding the seasonal nature of its costs and revenues.

TURN and other parties who support this modification propose in their responses that the balance (whether overcollected or undercollected) in generation-related memorandum accounts be transferred to the TCBA monthly, rather than annually.

PG&E on the other hand proposes that a portion of the retained generation revenues accruing in the TCBA accounts and generation memorandum accounts should be credited to the TRA undercollection. Enron agrees that, to the extent we reject the treatment proposed in A.00-10-028, all generation revenue should first flow into the TRA to offset the utilities' operating costs on a monthly basis.

Because we are now transferring the balance in the TRA to the TCBA on a monthly basis, we will also require the utilities to transfer the excess revenues that accrue in the generation memorandum accounts to the TCBA on a monthly basis. This is appropriate because it will match the costs of procuring power on a monthly basis with the net revenues resulting from generating that power.

Consistent with D.97-11-074 and § 367(c), overcollections should be transferred to the TCBA on a monthly basis. Undercollections will then be carried over from month to month in the generation memorandum accounts and offset by market revenues. We may adjust this accounting as we move forward and consider the impact of § 367(c) on recording the balance, whether positive or negative, in the TCBA.

E. Impact of Proposal on Rate Freeze

In adopting TURN's petition to modify Resolution E-3527, we agree with TURN that the effective date of this accounting change is January 1, 1998, the effective date of Resolution E-3527. We will make our accounting change regarding the GMA effective on the same date and direct that PG&E and Edison make these accounting changes for each month and file by advice letter each month's accounting adjustment and balance. We estimate that, as a result of transferring the TRA undercollections to the TCBA along with applying the net revenues in generation memorandum accounts as of January 31, 2001 to the TCBA, the restated TCBA for Edison and PG&E will shoe undercollections of approximately $3.7 billion and 6.3 billion, respectively.⁴⁰