II. Background

A. The March 27, 2001 Order

Our March 27, 2001 decision, D.01-03-082, adopted a rate increase but did not adopt a rate design - specific rates to be applied to specific classes of customers. Conceptually, we decided to adopt inverted or "tiered" rates for those non-residential customer classes that do not have "time-of-use" rates. Pub. Util. Code § 739.7⁵ requires the Commission to maintain "an appropriate inverted rate structure" for residential rates, an approach we believe appropriately encourages customers to conserve because rates increase as customers use more energy that bears a higher cost. This approach, we believe, will encourage customers to pursue energy efficiency measures as directed by § 747.5.

B. Record Development.

No utility may change the rates it charges "...except upon a showing before the commission and a finding by the commission that the new rate is justified...." PU Code section 454. The Commission may determine the procedures by which the showing is made, and has broad discretion in so doing. Wood v. PUC, 4 C. 3d 288, 292(1970). The Commission's effort to implement tiered rates began with the assigned Commissioner proposing a specific tiered rate design, inviting comment, and setting forth a schedule. Hearings and workshops were conducted; the utilities filed reports recording billing systems and comments and briefs on the proposed were filed, all to obtain evidence regarding rate design and implementation.

The Commission held evidentiary hearings and Public Participation Hearings (PPHs) throughout Edison and PG&E's service territories to allow customers to provide their concerns to the Commission directly. The PPHs were held in Santa Monica, Rosemead, Fresno, Visalia, Fullerton, San Bernardino, Sacramento, Oakland and San Jose. Edison and PG&E informed all customers of the locations and times by a special mailing.

After the conclusion of hearings on April 26, 2001, the parties filed briefs. The Administrative Law Judge issued a proposed decision and the assigned commissioner issued an alternate decision for comment on May 9, 2001. The parties filed and served comments on the proposed decision on May 10, 2001. The Commission heard the parties' final arguments on May 11, 2001.

C. Rate Design Principles and Goals

The assigned commissioner's March 27^th ruling proposed certain rate design principles:

- Base-rate differences among customer classes should be adjusted to reduce the disparity in prices paid for energy (on a per kilowatt hour basis) to ensure fairness in the prices paid for all energy purchased for California;

- For all customers, electric bills should be tiered to the amount of electricity used in order to promote conservation - the more you use, the more you pay for that extra electricity above a certain threshold of use; and

- For commercial customers with time-of-use (TOU) or other advanced meters, rates should be set so as to promote the greatest amount of conservation possible during summer peak hours.

After considering parties' views⁶ on the proposed rate design goals, President Lynch issued an ACR on April 11 that provided parties flexibility in constructing their own rate design proposals and established a hearing process to examine the proposals. As we discuss more fully below, we have extensively modified the original framework in response to the submissions of the parties.

We today adopt a rate design and intra-customer revenue allocation designed to achieve the following objectives: (1) reduce energy consumption and thereby reduce California's liability for exorbitant wholesale power purchases; (2) allocate the unreasonable costs of this generation fairly, consistent with costs statuary mandates; (3) protect the most vulnerable customers; (4) ensure that no individual customers experience extreme hardship; and (5) provide customers, with ways to manage their energy usage and reduce their energy bills.

1. Equity

The outcome of traditional ratemaking is to reflect the reasonable cost of the service supplied. PU Code section 451; Pacific Telephone and Telegraph v. PUC, 62 C. 2d 634 (1965); Pacific Telephone and Telegraph v. PUC, 34 C. 2d 822 (1950). In practice this means that the Commission, through ratemaking, establishes rates that will collect the utility's revenue requirement needed to supply electric service. California Manufacturers' Association v. PUC, 24 C.3d 251, 257 (1979). However, cost recovery as a general goal of ratemaking is accompanied by other policy goals, including the equitable pursuit of the public good. Pacific Telephone and Telegraph v. PUC, 7 C.3d 331, 357 (1974).

The goal of equity is essentially one of fairness, viewed in a broad policy context. TURN v. PUC, 22 C. 3d 529, 538 (1978).We cannot precisely address the responsibility of various customers for costs associated with energy supply because we do not have sufficiently accurate information concerning the specific nature and extent of the costs relating to power purchases to date on behalf of the utilities and their customers by the CDWR. (Although CDWR informed us on May 2, 2001 that its revenue requirement is $9.2 billion through June 2002, we have not had an opportunity to incorporate this forecast into our analysis here.) Equity as we use it here transcends the application of simple mathematical formulas. In that context, we evaluate rate design proposals considering customers' ability to pay and whether to limit the hardship rate increases impose on particularly vulnerable customers and specific classes of customers. We consider also the relative hardship imposed on various customer groups. This view of fairness is shared by Peter Bradford, one of three outside experts testifying in this proceeding. Bradford cites to Professor James Bonbright's rate design principles, the sixth of which is: fairness of the specific rates and the apportionment of total costs of service a month the existing customers.⁷

2. Conservation

A fundamental goal of this proceeding is to promote energy conservation and to give customers the means to conserve when they are able. Wholesale power purchases in the past several months have been prohibitively expensive for all hours. This rate design will mitigate that expense by promoting conservation in all hours. We also hope to promote conservation during summer peak hours when prices are highest and the grid is most vulnerable to failure caused by shortages. By promoting energy conservation during summer peak hours, we attempt to limit blackouts and service interruptions in order to preserve public health and safety.⁸

During summer peak periods, PG&E, Edison and others project inadequate power supplies. They and others project a need for purchases by CDWR and the ISO to meet anticipated customer needs. Although this Commission does not posses sufficient information to determine the value of conserving energy in specific peak periods, we do know that 2001 electricity futures contracts are currently priced at $200-800/MW. Spot market prices during the summer peak could be much higher. As Dr. Borenstein testified, all energy purchased this summer will be expensive and power purchased in peak periods will be even more expensive.

The Governor's 20/20 program will reward customers who reduce their overall electric consumption by 20% this summer. This incentive, combined with customer education, energy efficiency programs, and the price signal that higher rates will send customers, are ways to promote conservation. A reduction in total energy consumption will help protect Californians from blackouts and reduce the total financing or revenues needed for the state and the utilities to purchase electricity.

We are currently evaluating how conservation promotes system reliability and interruptible programs in Rulemaking (R.) 00-10-002. Certain types of customers place an extremely high value on reliability and may be particularly receptive to peak reduction programs. Moreover, the CEC pursuant to SB5X will spend $35 million this year to install interval meters on commercial customers' facilities that use 200 kilowatts or more. These meters will encourage further conservation.