IV. Revenue Allocation Between Customers

Having determined the revenue requirement amount each utility is authorized to collect, we next design rate structures that will permit the utilities to collect the authorized amounts for themselves and as agents for DWR. We must decide generally how to allocate the revenue increase among customer classes. We must also allocate the shortfall that results from exempting residential usage up to 130% of baseline consumption from any increase. The allocation and rate design adopted today concern only those revenues to be collected by way of the three cent per kWh surcharge adopted on March 27th. The underlying rate structure of the utilities will not change. Consequently, this decision affects only part of each customer's electricity bills. By operation of the statutory safe harbor about half of residential customer sales will be exempt from rate increases.

A. Methodology for Revenue Allocation Among Customers

For the last several years, the Commission is policy is that rates to various types of customers reflect the costs customers impose on the utilities' systems. We abandon this principle in part because we cannot match costs with rates. California's wholesale energy market is dysfunctional and the prices set in that market are unconscionable and unlawful. These prices bear little if any relationship to actual production costs. While circumstances in California markets have changed, the basic costs of production, other than fuel, have not. Simply put, the outrageously priced wholesale energy that causes us to take the extraordinary step of imposing this rate surcharge is being produced at the same plants upon which we based our traditional cost allocation procedures. In that respect, the fundamental facts of energy production have not changed. What has changed is that California is beset by wholesale sellers intent upon maximizing revenue and federal regulators refusing to impose any limitations. The price of wholesale energy is no longer a function of cost of production but rather a function of what price can be extracted from a market through manipulation.

Absent this data, we must find another methodology to allocate the revenue to be collected from customer. The parties to this proceeding presented several options:

Historic Generation Cost Allocation - this methodology allocates the incremental revenue requirement based on the percent of generation revenues contributed by each customer group prior to adoption of the 3¢/kWh surcharge.

On Peak Energy Use/Top 100 hours - these two methods allocate costs based on the customer group's share of either summer on peak energy use or 100 hours of highest system demand.

1999 Power Exchange (PX) Generation Charges - this method allocates the revenue requirement by each customer group's contribution to 1999 PX costs.

Equal cents per kWh - this method divides the revenue among the customer classes based on the total units of energy each class is forecast to consume during calendar year 2001.

Allocating the revenue requirement to customer classes based on the proportion of 2001 forecast total kWh sales to the class appears equitable. Moreover, such allocation would provide funds for CDWR to purchase electricity in the wholesale market at a time when those costs are expected to be higher in all hours of the year than they were during the same portions of previous years. ⁹ The dysfunctional wholesale market has created a unique crisis of unknown duration for California electric customers.

Applying the surcharge as broadly as possible is the fairest way to apportion the noncost-based price premium now extracted by sellers in the California wholesale electricity market should gain the widest public acceptance.

To apply the surcharge most broadly we begin by allocating the surcharge revenues to all usage across all customer groups. Some wage is exempted from rate increases by statute (residential usage up to 130% of Baseline) or by our prior decisions (low-income CARE-eligible customers); we address the steps in allocating these revenue shortfalls in a later section..

B. Revenue Requirement Shortfalls

1. Allocating Shortfall from 130% of Baseline Exemption

Having completed the allocation of revenue across the customer classes, we must allocate the revenue shortfalls resulting from exemptions to the surcharge. In AB1X, the Legislature added section 80110 to the Water Code, effective February 1, 2001:

In no case shall the commission increase the electricity charges in effect on the date that the act that adds this section becomes effective for residential customers for existing baseline quantities or usage by those customers of up to 130 percent of existing baseline quantities, until such time as the department has recovered the costs of power it has procured for the electrical corporation's retail end use customers as provided in this division.

This section exempts 130% of "baseline" usage. Baseline usage is defined in § 739(a). That section requires the Commission to establish a quantity of gas and electricity that is necessary to supply a "significant portion of the reasonable energy needs of the average residential customer." This "baseline quantity" is defined to be between 50 and 60 percent of average residential consumption, with allowances for seasonal and climatic variations, in § 739(d)(1). The Commission is further directed to require the utilities to file residential rate schedules that provide for the baseline quantity to be the first or lowest block in a increasing block rate structure. In addition, the Commission is directed to "establish an appropriate gradual difference between the rates for the respective blocks of usage." § 739(c)(1). In 1976, the Commission determined the initial lifeline quantities in D.86087, 80 CPUC 182. Subsequent revisions and updates to the baseline quantities and applicable rates have been made in the utilities' general rate cases. Taken together, new Water Code § 80110 and Pub. Utils. Code § 739, exempt approximately 50% of each utility's residential sales from rate increases. The resulting shortfall is significant: 64% of SCE residential sales are exempt, and 62% of PG&E residential sales are exempt.

We have before us three proposals for allocating this shortfall. The first option is to recover the shortfall within residential rates. The second it to reallocate to all eligible sales, and the third is to allocate the increase to all non-residential sales.

TURN proposes that the revenue requirement be re-allocated to all non-exempt sales, observing that § 80110 is silent on the issue. All other parties¹⁰ addressing this issue propose to re-allocate the revenue requirement to all residential sales that are not included within the exemption. Under the re-allocation method supported by most of the parties, the residential customer group would be allocated significantly more of the revenue requirement, and see a significantly greater rate increase. The rate increase for SCE customers for the two methods is as follows:

Non-exempt All Non-

Residential only Exempt

Residential 22% 9%

Large Power 36% 43%

The residential customers would also see significantly greater changes in prices for higher tier usage. For example, PG&E's E-1 General Residential rate schedule would show the following increases under the two alternatives:

Allocated to Non- Allocated to

Exempt All Non-

Residential only Exempt

Tier 1 (0 - 100%)¹¹ 11.4¹² 12.5¹³

Tier 2 (100 - 130%) 13.0 14.32

Tier 3 (130 - 200%) 19.5 16.66

Tier 4 (Over 200%) 28.9 20.30

Allocating the entire shortfall to residential customers only creates dramatic price increases from Tier 2 to Tier 3 usage. The "only non-exempt residential" methodology creates more gradual (although still significant) rate increases as usage falls into the higher tiers.

Re-allocating the revenue requirement shortfall to remaining residential sales only creates rate spikes that are too severe. The cost of this exemption should be allocated equally to all customer groups. We find that the revenue requirement shortfall caused by applying the 3¢/kWh surcharge approved in D.01-03-082 to sales to residential customers below 130% of baseline shall be re-allocated to all three customer classes equally. This method spreads the shortfall one-third to the residential class, one-third to commercial customers and one-third to industrial customers, an outcome that takes a middle path between allocating the shortfall equally to all wage, and proposals by parties to allocate the entire shortfall within the residential class. We believe that this method is the most consistent with the legislative intent of AB1X-1.

2. CARE and Medical Baseline Exemption

The revenue requirement shortfall caused by exempting CARE-eligible customers from the 3¢/kWh surcharge approved in D.01-03-082 shall be re-allocated to all sales other than sales subject to the CARE program and residential customers with usage of or less than 130% of baseline.

The general surcharge we adopt today to pay for extraordinary power costs should be allocated as broadly as possible. However, because of the extraordinary size of the rate increase, it is reasonable to mitigate the impact to the most vulnerable customer classes. This mitigation is consistent with legislative direction in AB1X as well. We therefore direct the utilities to exempt medical baseline customers from the rate increases adopted in this order. The shortfall will be allocated equally to each of the customer classes, consistent with the allocation of the shortfall from the exemption for 130% of baseline usage.

3. Direct Access Customers

We next consider whether direct access customers should be required to pay any of the rate increase. We find that they should not because they are not relying on the utilities or DWR to purchase power on their behalf. The surcharge adopted in D.01-03-082 is intended to provide payment for power CDWR purchases and delivery to utility customers. It would be inequitable for direct access customers to pay for both their own cost of procurement and the procurement costs of bundled customers.

4. Amortization of Rate Increase as of March 27, 2001

In D.01-03-082 we adopted the 3 cent rate increase effective March 27, 2001. That decision also obligates SCE and PG&E to pay a generation-related rate including the 3¢/kWh surcharge to CDWR beginning on that date. Today's decision determines the specific rate allocation and design of the surcharge and implements it as of the effective date of this order. During the intervening time, March 27th to the date that SCE and PG&E begin applying the surcharge or customer bills, SCE and PG&E have been obligated by Commission order to pay the funds to CDWR but have not been able to collect the amounts from their respective customers. PG&E and SCE therefore seek to recover the revenue shortfall from this time period over some period in the future. SCE proposes to recover this shortfall by amortizing it over three months. This three-month amortization would effectively increase the three-cent surcharge to five cents. PG&E proposes a twelve-month amortization method, increasing the surcharge to 3.6 cents per kWh over the period.

Aglet and TURN contend that the rule against retroactive ratemaking prohibits collection of these amounts, because no balancing or memorandum account has yet been established to authorize such collection.¹⁴ Section 728 requires the Commission to determine the rate "to be thereafter observed and in force" the right to recover revenues equivalent to the three cent surcharge was established by D.01-03-082 and affected only electricity delivered from the effective date of that decision forward. Similarly, the precise charges to be collected from customers to recover those revenues will be effective prospectively after the date of today's decision. We see nothing retroactive in these decision that could possibly violate § 728. TURN's argument assumes, without citation, that creation of a balancing or memorandum account is the only method whereby the commission can allow a utility to collect sums at a later date. This is simply not so. At most, § 728 requires a prospective authorization to recover the revenues. While the Commission often accomplishes this result through balancing or memorandum accounts, that method is not required by § 728. Accordingly, we see no possible violation of any prohibition against retroactive ratemaking here.

The revenue associated with applying the 3¢/kWh surcharge to all non-exempt energy sales from March 27, 2001 to the day utilities begin collecting the surcharge should be added to the overall revenue requirement allocated among customer classes through this decision. From an equity standpoint, a 3-month summer amortization would undoubtedly cause undue stress on summer rates, which will already be very high. The three-month surcharge may place a severe hardship upon industries that have heavy summer usage, such as the agricultural industry. We therefore authorize the utilities to amortize the unrecovered amount over twelve months, as PG&E proposes. The shortfall will be allocated consistent with the allocation of the shortfall for baseline and CARE exemptions.