STATE OF CALIFORNIA GRAY DAVIS, Governor
PUBLIC UTILITIES COMMISSION
505 VAN NESS AVENUE
SAN FRANCISCO, CA 94102-3298
March 26, 2001
TO: PARTIES OF RECORD IN APPLICATION 00-11-038 ET AL.
This is the proposed decision of Administrative Law Judge (ALJ) Walwyn. It will be on the Commission's agenda at the next regular meeting. The Commission may act then, or it may postpone action until later.
When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.
Active parties have waived the 30-day review and comment period on the proposed decision, as explained in the attached decision. Final oral argument is being held in lieu of written comments.
/s/ LYNN T. CAREW
Lynn T. Carew, Chief
Administrative Law Judge
LTC:eap
Attachments
ALJ/CMW/t93/eap DRAFT Item 5
3/27/2001
Decision PROPOSED DECISION OF ALJ WALWYN (Mailed 3/26/2001)
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Application of Southern California Edison Company (E 3338-E) for Authority to Institute a Rate Stabilization Plan with a Rate Increase and End of Rate Freeze Tariffs. |
Application 00-11-038 (Filed November 16, 2000) |
|
Emergency Application of Pacific Gas and Electric Company to Adopt a Rate Stabilization Plan. (U 39 E) |
Application 00-11-056 (Filed November 22, 2000) |
|
Petition of THE UTILITY REFORM NETWORK for Modification of Resolution E-3527. |
Application 00-10-028 (Filed October 17, 2000) AB1X |
(See Appendix A for List of Appearances.)
TABLE OF CONTENTS
Title Page
INTERIM OPINION 2
Summary 2
I. Introduction 4
II. Further Utility Financial Relief 9
A. The Utilities' Rate Proposal 9
B. Independent Report Findings 11
C. Discussion 16
1. Framework and Criteria for Evaluating Need for Further Relief 16
2. The Rate Freeze Compact 18
3. Effects of Rate Proposal on Bankruptcy 19
4. AB1X 21
5. Financial Assistance from Parent Companies 23
6. Proceeds from Income Tax Refunds 26
7. Restructuring of QF Contracts 26
8. Setting prices for Diablo Canyon and SONGS at Cost-Based Levels 27
9. Management Decisions Affecting Cash Flow 27
10. Overfunded Pension Assets 32
11. Remedial Actions by Governor's Office and State Legislature 32
12. Conclusion 33
III. TURN's Accounting Proposal 34
A. Current Accounting Mechanisms for Tracking Transition
Cost Recovery 34
B. A.00-10-028 (TURN's Petition to Modify Resolution E-3527) 37
C. Responses to A.00-10-028 (TURN's Petition to Modify
Resolution E-3527) 39
D. Legal, Factual, and Policy Analysis of Proposal 39
1. Resolution E-3527 Fosters an Accounting Anomaly That
Must be Corrected 39
2. TURN's Proposal is Lawful 42
a) TURN's Proposal Is Consistent With AB 1890 42
3. TURN's Proposal Does Not Violate the Filed Rate Doctrine 47
4. TURN's Proposal Does Not Constitute Unconstitutional Takings 48
5. TURN's Proposal Does Not Constitute Retroactive Ratemaking 50
6. Adopting TURN's Proposal Will Not Impede Edison's Right
To Due Process 53
7. TURNS Proposal Will Once Again Achieve "Neutrality" of
the Rate Reduction Bonds (RRB) Transactions 53
8. Crediting the Balances in the Generation Memorandum
Accounts into the TCBA Monthly Will Provide a More
Accurate View of Transition Cost Recovery 55
E. Impact of Proposal on Rate Freeze 56
IV. Status of Rate Freeze 57
A. Valuation of Remaining Utility Generation 58
1. Is valuation required before the Rate Freeze may end? 58
2. May interim valuation be used in determining whether
the rate freeze has ended? 60
3. Valuation Date for Purpose of Determining if the Rate
Freeze Has Ended. 63
B. Has the Rate Freeze Ended on a Prospective Basis? 64
IV. Care Discount 67
VI. Residential Tiering and Rate Design Proposals 70
VII. Issuance of the Proposed Decision 72
Findings of Fact 74
Conclusions of Law 83
INTERIM ORDER 88
APPENDIX A - List of Appearances
In this decision, we look at one piece of the need to raise electric prices, the need to increase prices in order for Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (Edison) to continue to purchase power to serve their customers on a going-forward basis. We will address in other decisions (1) the money needed by the California Department of Water Resources (CDWR) for its power purchases on behalf of the customers of PG&E and Edison and (2) whether customers should bear any portion of financial responsibility beyond that already in existing rates for past purchase power obligations.
At hearings, PG&E and Edison stated they needed a 20% increase, in addition to the 10% interim increase we adopted in January 2001. In considering the need for additional financial relief for PG&E and Edison, we first make findings on the status of the utilities' financial condition with respect to cash liquidity, credit capacity, and solvency. We assess the need for rate relief in relation to the potential for the utilities to continue to meet their obligations to serve by utilizing all cash and credit resources available from all other feasible sources and measures before raising customer's retail rates. As we stated in Decision (D.) 01-01-018, we remain troubled by the utilities' assumption that customers must bear the burden of significant rate increases without the shareholders sharing the pain.
In view of their existing cash resources, the possibility that all procurement costs, including a portion of the spot market purchases being made by the Independent System Operator (ISO) are covered within the existing generation rate, and the range of strategies and potential remedies available to the utilities to deal with their cash flow crisis, we find PG&E and Edison have not justified their need for rate increases to purchase needed power on a going-forward basis. Therefore, we deny their applications for rate relief at this time.
We recognize that all the costs of providing customers electricity may not be covered in today's retail rates, but it is only after we fully implement new legislation effective February 1, 2001, AB1X, that we will know the amount, if any, of a necessary rate increase, and the proportion of revenues that would be due the utilities rather than CDWR.
We adopt two proposals that benefit low-income households eligible for the California Alternative Rates for Energy (CARE) program for the electric customers of PG&E and Edison. These changes are to increase the CARE discount from 15 to 25% and to increase the eligibility criteria from 150% to 175% of Federal poverty guidelines. Families eligible for CARE are also severely effected by today's high gas bills and, therefore, we will move quickly to address the applicability of the changes we make here to all jurisdictional utilities.
We also adopt an accounting proposal by The Utility Reform Network (TURN) that allows us to properly reflect PG&E and Edison's operating costs and recovery of stranded transition costs over the rate freeze period provided by the Legislature in 1996 under Assembly Bill (AB) 1890. In adopting this proposal, we modify a 1998 resolution, Resolution E-3527, that improperly changed our accounting methodology.
We find the rate freeze has not ended for PG&E and Edison because these utilities have not recovered all the transition costs specified under Public Utilities Code Section 368(a), and the full transition period for the utilities to have the opportunity to recover these stranded costs has not expired. To end the rate freeze with transition costs unrecovered would leave PG&E and Edison with stranded cost balances of $6.3 Billion and $3.7 Billion, respectively. As we stated in D.99-10-057, these balances cannot be collected from customers after the rate freeze ends.
I. Introduction
A. Events Leading to Today's Decision
In this decision, we address the utilities' request for an immediate rate increase in the context of extraordinary circumstances. Before 1996, under traditional cost-of-service regulation, we periodically reviewed and revised electric utility rate levels under a prescribed schedule. Rates were set at a level to cover prudent operating expenses and to provide for a reasonable opportunity for utility investors to earn a return on capital commensurate with the return earned by firms of comparable risk.
In 1996, however, the California legislature enacted AB 1890 to institute generation competition as the basic structure of California's electric utility industry. The legislation provided for retail prices to remain frozen during a transition period in order for each utility to have the opportunity to recover uneconomic generation costs within a specified period. The premise of AB 1890 is that the competitive market price of electricity would remain lower than the regulated price of electricity in effect on June 10, 1996 and, therefore, by freezing regulated prices at this level, the utilities would be provided "headroom" above their authorized costs, such as those associated with distribution, nuclear decommissioning, public purpose programs, and energy costs, that would be available to be applied to transition costs.
As we stated in Decision (D.) 00-03-058, slip at 3: AB 1890 determined that utilities should be "at risk" for recovery of some transition costs. (Pub. Util. Code, § 368, subd. (a). AB 1890 only allows each utility to recover those transition costs that could be paid for with revenue generated by frozen rates during that utility's transition period. Utilities were thus responsible for "costs not recovered during that time period." (Pub. Util. Code, § 368, subd. (a).)
AB 1890 required that electric utility rates would remain fixed at June 10, 1996 levels through the transition period, except that rates for residential and small commercial customers were reduced by 10% from those levels during the transition period. As stated in Section 330, the legislature intended that a cumulative rate reduction of at least 20% would be achieved not later than April 1, 2002, for residential and small commercial customers.
It is an understatement to note that the original expectations of competitive market-driven generation prices have not played out as anticipated. Instead of electricity wholesale prices dropping in response to competitive market forces, they have progressively risen by staggering proportions, particularly since the summer of 2000. These increases occurred partly in response to orders of the Federal Energy Regulatory Commission (FERC) when it removed the previously imposed price cap of $250/megawatt for wholesale power. The FERC action subsequently caused prices for electricity obtained through the Power Exchange (PX) and ISO's real-time energy markets to hit unprecedented levels which has severely strained the resources of California's investor-owned utilities.
While wholesale prices soared, PG&E and Edison were still required to charge retail rates frozen at 1996 levels, as mandated by Section 368(a). The utilities' financial problems thereby grew progressively worse during the second half of 2000 because retail rates remained frozen and the increasing price of wholesale power could not be passed along to retail customers. As we acknowledged in D.00-12-067, the utilities are now facing an "extraordinary and unforeseen crisis in wholesale and retail electric power markets in California." The continued financial viability of California's utilities has been called into question by the dramatic escalation in the wholesale prices for purchased power.
B. Procedural Background
In D.00-12-067, the Commission determined that expedited action was necessary to fulfill our statutory obligations to ensure that the utilities can provide adequate service at just and reasonable rates. We consolidated the Rate Stabilization Plan Applications of PG&E and Edison and TURN's Petition to Modify Resolution E-3527 and ordered emergency hearings to begin on December 27, 2000. These hearings narrowly focused on PG&E's and Edison's prima facie showing that the current rates did not yield revenues sufficient to meet current obligations, including power purchases, and that cash resources were being rapidly depleted.
Following the emergency hearings, the Commission issued D.01-01-018 on January 4, 2001. In this decision we authorized PG&E and Edison each an interim Emergency Procurement Surcharge (EPS), subject to refund, of one cent per kilowatt-hour (kWh), exempting low-income customers eligible for the CARE program. We authorized this surcharge, to be in effect and applied to recovery of the future electricity procurement costs for 90 days, during which time the independent consultants engaged by the Commission would perform a comprehensive review of the utilities' financial position, as well as that of their holding companies and affiliates, and the Commission would conduct further hearings.
A prehearing conference (PHC) was held on January 10, 2001, and the assigned Commissioner issued a procedural schedule for this phase of the proceeding, designated Phase 1, on January 26, 2001. The assigned Commissioner designated the following issues to be heard:
(1) Reviewing the independent report results of PG&E and Edison, ordered in D.00-12-067, and, as part of that analysis, determining whether or not there is a financial necessity for other or additional relief for the utilities;
(2) TURN's accounting proposal for the proper reconciliation of the Transition Revenue Account (TRA) and Transition Cost Balancing Account (TCBA) accounts and the Generation Memorandum Accounts (GMA);
(3) Consideration of whether the rate freeze has ended on a prospective basis only, including parties' testimony on interim valuation of retained utility generating assets for the purpose of addressing whether the rate freeze has ended on a prospective basis;
(4) Greenlining/Latino Forum's CARE proposal;
(5) Parties' proposals for tiered residential rates.
The schedule for this phase was set prior to the enactment of Assembly Bill (AB) X1 1 (Ch. 4 First Extraordinary Session 2001), signed February 1, 2001. We discuss specific portions of this legislation in the next section. Briefly, AB1X authorizes, among other provisions, the California Department of Water Resources (CDWR) to enter into contracts to purchase power and to sell to retail end-users of PG&E, Edison, and SDG&E, as well as municipal utilities, and for the Commission to designate a portion of the existing generation rates of PG&E, Edison, and San Diego Gas and Electric Company (SDG&E) as the California Procurement Adjustment (CPA), and to establish a payment mechanism to collect from retail end-users the amount of the CPA allocable to the power sold by CDWR and transfer it to CDWR. 12
CDWR is entitled to establish revenue requirements sufficient to recover its costs and the Commission may authorize an increase in customers' rate to recover this revenue requirement, with the provision that rates cannot be increased for residential users for existing baseline quantities and usage up to 130% of baseline quantities.
AB1X refers to rates that are in effect as of January 5, 2001. Therefore, the interim surcharge the Commission authorized in D.01-01-018 is made permanent.
At a February 2, 2001 PHC to discuss implementation of AB1X, the assigned Administrative Law Judge (ALJ) in this proceeding asked the parties to discuss their recommendations for addressing Phase 1 issues in light of AB1X. While parties agreed that AB1X impacted issues under consideration in Phase 1, all parties requested the Commission proceed with the Phase 1 hearings and pursue AB1X implementation through a workshop process. The Commission adopted this procedure in ALJ rulings on February 2 and February 5, 2001.
Hearings in this phase were held from February 20th to March 2, 2001 and briefs were submitted on March 5, 2001. On March 15, 2001, the assigned Commissioner issued a ruling that reopened the record, provided parties updated financial information and an opportunity for additional comments. Parties participating in the hearings and/or filing briefs are: Edison, PG&E, Aglet Consumer Alliance (Aglet), California Farm Bureau Federation (Farm Bureau), California Industrial Users (CIU), California Large Energy Consumers Association (CLECA), California Manufacturers & Technology Association (CMTA), Enron Energy Services, Inc. (Enron), Federal Executive Agencies (FEA), Golden State Power Cooperative (GSPC), Greenlining Institute and Latino Issues Forum (Greenlining/LIF), Los Angeles County (Los Angeles) Office of Ratepayer Advocates (ORA), City and County of San Francisco (San Francisco), Sacramento Municipal Utility District (SMUD), and TURN. Parties who participated only in filing written comments on the March 15th ACR are: Calpine Corporation (Calpine), Independent Energy Producers Association (IEP), and Watson Cogeneration Company (Watson).
1 Section 360.5 2 The methodology for setting the CPA is developed in a separate decision.
