5. Test Year 2008 Settlements (Appendices 1 and 2)
5.1. Summary
We adopt the proposed settlements for Test Year 2008 revenue requirements. There were timely comments in opposition to the SDG&E settlement by UCAN, and Federal Executive Agencies (FEA). We will discuss their objections in detail. No party filed comments objecting to the SoCalGas revenue requirement settlement, so we therefore will consider it to be unopposed. The Southern California Generation Coalition separately raises the issue of the revenue requirement associated with the purchase of the Cuyama-
Casitas pipeline which was not included in the settlement. We will discuss that issue separately.
We adopt the SDG&E Test Year 2008 settlement (Ex. SDG&E/SCG-303, Appendix 1) based on the considerable litigated evidentiary record and our findings that the outcome is reasonable on that record, within the likely range of outcomes were we to address every account and every test year activity in detail, herein. Notwithstanding this finding, there are several issues which we can resolve without overturning the settlement. In fact, the settling parties specifically identified unresolved policy issues. Several of these items were raised by parties that did not join in the settlements and thus these issues should be addressed in order to adopt settlements. We find that several of these are ripe for resolution, without otherwise modifying the settlements' test year revenue requirements, or adversely impacting or altering the separate post-test year ratemaking settlements, discussed separately in this decision.
We also adopt the settlement between SoCalGas and DRA and TURN and Aglet. (Ex. SDG&E/SCG-304, Appendix 2.) There were timely comments on the proposed settlement discussed below:
The Joint Parties, SDG&E and DRA, agreed to:
· a 2008 SDG&E base margin of $1,087,285,000 (revised to $1,097,897,000 as a result of D.07-12-049, which adjusted SDG&E's cost of capital from 8.23% to 8.4%10) for electric and $233,670,000 (similarly revised to $235,125,000) for gas, for a total of $1,320,955,000 which was revised to $1,333,022,000;
· a 2008 rate base for SDG&E of $3,347,587,000;
· a detailed allocation of expenses as described in the settlement and comparison exhibit (EX. SDG&E/SCG-301); and
· other various agreements which affect operations and capital additions.
Because we adopt the SDG&E settlement, we adopt the details as described in the agreement (Ex. SDG&E/SCG-303) and also the comparison exhibit (Ex. SDG&E/SCG-301). It is against this agreement that SDG&E will be evaluated in its efforts to fulfill the obligation to provide safe and reliable service. Although SDG&E has significant discretion in its detailed operations, the agreement reflects a commitment to a certain expected level of maintenance, repair, capital additions, and customer service, as described in the comparison exhibit.
SoCalGas and DRA, TURN agreed to:
· a 2008 SoCalGas base margin of $1,610,510,000;
· a 2008 rate base for SoCalGas of $2,800,852,000; and
· other various agreements which affect operations and capital additions.
Because we adopt the SoCalGas settlement, we adopt the details as described in the agreement (Ex. SDG&E/SCG-304, Appendix 2) and also the comparison exhibit (Ex. SDG&E/SCG-302). It is against this agreement that SoCalGas will be evaluated in its efforts to fulfill the obligation to provide safe and reliable service. Although SoCalGas has significant discretion in its detailed operations, the agreement reflects a commitment to a certain expected level of maintenance, repair, capital additions, and customer service, as described in the comparison exhibit.
5.2. Unresolved Test Year Issues
By separate filing,11 the settling parties, in a joint response, identified several issues which the settlements specifically did not resolve even though the settlements otherwise agree to Test Year 2008 revenue requirements and the comparison exhibits for these settlements fully allocate the settled amounts by expense and capital categories for both companies. UCAN reminds us in its comments that SDG&E has settled every GRC since 1984. Therefore, it behooves us to resolve these litigated disputes to provide both a critical review of the current unpersuasive arguments and guidance for the next proceeding. We also note that TURN did not settle with SoCalGas, nor did UCAN or FEA settle with SDG&E. FEA and UCAN argue that the decision should adopt a litigated outcome rather than adopt the settlement; therefore as a part of our review of the settlement we must critically review these disputes. These unresolved issues, as described in the joint response, include:
a. Whether or not, as a matter of policy, the CPUC should consider the closure of SoCalGas or SDG&E branch offices in the future;
b. Whether or not, as a matter of policy, the CPUC should allow SoCalGas or SDG&E to use "payday lenders" as authorized by the utility as non-utility payment locations;
c. Whether or not, as a matter of policy, the CPUC should assign Sempra Energy shareholders with responsibility for funding SoCalGas or SDG&E incentive compensation plans;
d. Whether or not, as a matter of policy, the CPUC should consider the proposals raised by TURN (with respect to SoCalGas only) or DRA related to the calculation of SoCalGas or SDG&E depreciation expense;
e. Whether or not, as a matter of policy, the CPUC should consider the proposals raised by TURN (with respect to SoCalGas only) or DRA related to the calculation of SoCalGas or SDG&E working cash expense, including whether Customer Deposits should be considered as a source of working cash; and
f. Whether or not, as a matter of policy, the CPUC should consider the proposals raised by TURN related to the SoCalGas Employee Stock Ownership Plan and its relationship to the calculation of SoCalGas' income tax expense.
5.2.1. Authorized Non-Utility Payment Locations and Branch Offices
The bilateral settlement with Disability Rights Advocates, discussed elsewhere in this decision, provides for studies and certain limitations on branch office closures and new authorized payment locations. As discussed below, we still have concerns which we find compelling after considering, for example, cross examination by Greenlining and TURN which showed there had not been a careful study on the impacts to low-income customers. Thus, we adopt the settlement with the further guidance here on branch offices generally and authorized non-utility payment locations. We go further than the settlement and place a moratorium on branch office closures and new pay-day lender payment locations.
We find that the proposal to close branch offices is problematic for low-income customers. We, therefore, find that all existing branch offices should remain open but that applicants may separately apply to close individual offices in the future or revisit the issue in the next GRC. The reality is that some customers are more expensive to service than others: we cannot presume all to have internet bill-paying capacity or even checking accounts. Therefore, we must find a way to serve these customers' needs for bill payment, customer service, and information. The traditional branch offices serve these functions.
We find that "payday lenders" or check-cashing outlets are problematic locations for customers to pay their bills. We, therefore, impose a moratorium on further pay-day lender non-utility authorized payment locations. Applicants argue that these businesses are regulated by the state and they are willing, unlike many other businesses, to undertake payment functions. As noted above, some customers are harder to serve and branch offices meet their needs. We accept applicants' testimony on the very limited number of customers who use branch offices or payment locations. Nevertheless, we agree that these payday lender businesses are problematic because of the potential for customers to enter into legal but costly loans in the process of paying their utility bills. We, therefore, will place a moratorium on any further contracts with payday lenders.12 We invite applicants to work with parties and develop other options to serve these customers' needs. SDG&E and SoCalGas may bring an application at any time to propose a comprehensive solution to the problems of business office closures and payment locations, or defer any further action to the next GRC.
We find, based on the testimony of applicants and DRA, that the total compensation study, performed by an independent consultant under the joint direction of the applicants and DRA, demonstrates that total compensation for SDG&E and SoCalGas is statistically "at market" and thus reasonable.13 The use of the joint applicant-DRA total compensation study is a long-standing component of general rates, including the last proceedings for SDG&E and SoCalGas, A.02-12-028 and A.02-12-027, respectively. Total compensation includes, for many employees, a combination of base pay and incentives. The study results were used to develop applicants' test year forecasts and included incentives "at target" - this means that SDG&E or SoCalGas would absorb the difference if employees actually earn above or below target incentives.
Because total compensation is reasonable, (defined as prevailing market rates for comparable skills) the ratepayers should reasonably fund a revenue requirement that includes the full market-based employee compensation for the adopted levels of staff. Thus, there is no basis to exclude the incentive component and force shareholders to assume a portion of the reasonable cost of employee compensation. We find no merit in DRA's argument that shareholders should fund any portion of the incentive portion of market-based employee compensation. We do not agree that incentives solely benefit the company: if employees work harder or smarter to earn incentives (even just to achieve the target incentives) then ratepayers should benefit too.
Although there is a settlement of revenue requirement, under the settlement rules, the outcome is not a precedent for the future. (Rule 12.5.) Nevertheless, we can review several issues that were extensively litigated prior to the settlement and make certain findings. We find, as discussed below, intervening parties were not persuasive here, and have also failed to persuade the Commission in other recent proceedings, that the current depreciation practices are unreasonable or incorrect. In particular, TURN and UCAN argue applicants incorrectly calculate and recover the negative net salvage values. We reject these arguments, as we discuss further below.
The alternative methodology proposed by TURN was not adopted in the most recent Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (SCE) GRCs.14 We would therefore have denied with prejudice the recommendations of DRA, TURN, and UCAN on depreciation and net salvage in a litigated decision. The purpose of this discussion of our likely denial is to avoid an unnecessary repetition in subsequent proceedings. Any party that raises these issues again should have new analysis and new arguments which may persuade us, unlike the arguments raised here or in other recent rate proceedings. We adopt, as a part of the Test Year 2008 settlements, the further studies identified in the settlements and described below, that are to be included in the subsequent GRCs for SDG&E and SoCalGas.
Net salvage is the difference between the gross salvage amounts that will be realized when an asset is retired, less the cost of removing the assets. Regulatory accounting includes an allowance for net salvage in depreciation rates accrued over the life of the asset.15 As discussed below, we find that we disagree with the changes proposed by DRA and TURN/UCAN. Also, we did not adopt the TURN/UCAN proposals in both of the recent GRCs for PG&E and SCE and we do not adopt them here.
The Applicants' testimony asserts there is a prevailing trend in recent studies toward more negative net salvage rates, generally related to the change in service lives (which are lengthening), and has an offsetting impact on depreciation rates and expense.16 Based on its analysis, DRA opposes 11 of the 30 changes proposed changes by SDG&E, and eight of the 23 changes proposed changes by SoCalGas.17 DRA concedes, however, that the methodology used by DRA and both utilities is the same and is consistent with the Commission's Standard Practice (SP) U-4.18 DRA argues that it considered additional factors: (a) the utilities' over-reliance on historical data; (b) a comparison of proposed net salvage to those of other California utilities; and (c) whether SDG&E and SoCalGas already collect sufficient funds under current rates to pre-fund future cost of removal.19
The Applicants' rebuttal testimony criticizes DRA's additional factors, arguing that DRA "has demonstrated a clear bias in its approach."20 DRA argues that SDG&E and SoCalGas rely on a flawed methodology which calculates net salvage rates based solely on the weighted average rates of 15-year historical data. DRA cites to PG&E's Test Year 1999 GRC, (which is not the recently settled proceeding) arguing the Commission warned against over-reliance on historical data:
"PG&E relies on a mechanistic transformation of historical recorded accounting data into proposed depreciation parameters, a transformation which was not effectively tempered by judgment."21
DRA states it does believe it is appropriate to consider a 15-year historical band and it is consistent with its past recommendations on this issue. DRA further states that it does not oppose the majority of the Utilities' proposed changes to its net salvage rates which are based on this 15-year band. DRA argues it is the Commission's policy that other factors and considerations, in addition to the 15-year historical average, can influence the final result.
We agree with DRA that in certain instances additional information may justify a departure from the standard methodology. We reject, however, the analysis that DRA performed of actual removals compared to the accrual of salvage costs. DRA states that it compared the accruals of net salvage dollars authorized in rates to the actual net salvage dollars spent by both utilities during a five-year period from 2001-2005. SDG&E collected approximately $279 million in rates from customers for net salvage and actually spent approximately $106 million for cost of removal during a five-year period. DRA further cites that SoCalGas collected approximately $309 million in rates during the same five-year period, but actually spent approximately $64 million for cost of removal during that time.
However, we find that the accrual of salvage costs in the past five years is not intended to fund the current removal in that same five-year period. The accrual in any one year is the fractional accrual for the eventual retirement of all outstanding plant as their service lives expire. We therefore find no meaningful conclusions from this analysis. We note for future proceedings that parties should analyze actual removal and net salvage for specific asset groups, and the accrual in rates over the assets' service lives, to determine whether there are over or under-accrual allowances.22
The settlement agreements provide that parties have compromised on an allowance for depreciation expense in the test year revenue requirements. They also agree to perform a detailed study for the next proceeding as described below for SDG&E (and with similar language in SoCalGas' settlement):
SDG&E shall also provide in its next GRC application the following:
1. The then-current balance of pre-funded removal costs;
2. A year-by-year projection of: (1) when the then-existing balance of prefunded removal costs will be consumed, and (2) the implicit inflation rate for future asset removal costs;
3. A five-year projection of the year-end balance of pre-funded removal costs showing for each year the gross additions to the balance, gross expenditures for removal costs, and the net change in the balance of pre-funded removal costs;
4. A study for presentation in the next GRC that will separate the accrual for cost of removal from accruals for depreciation expense; and
5. If SDG&E determines the necessary information is available, SDG&E shall include a net salvage study for each of the Palomar and Miramar generation facilities in the next GRC. (SDG&E Settlement Agreement, p. 11.)
We agree that this is a worthwhile study. We expect that parties may either agree on a methodology or at least not replicate the same arguments presented here without further and more persuasive analysis.
DRA proposes an adjustment to the working cash allowance because it argues the amounts included by SDG&E "are not a `required bank deposit' as clearly set forth in Standard Practice U-16 (SP U-16)." (Ex. DRA-22, p. 22-7.) DRA quotes the practice: "In determining the cash requirement, the only amounts which should be considered are the required minimum bank deposits that must be maintained and reasonable amounts of working funds." (Ibid, p. 22-6.) DRA quotes SDG&E's explanation that the amount the company includes in the working cash calculation "represent its estimated average required minimum bank deposit. It is not a minimum balance specified by the bank, but rather it is the minimum average bank balance required to operate SDG&E effectively." (Ibid.)
The current standard practice, U-16 was first published on February 28, 1956, and last revised September 13, 1968, about 40 years ago. It is less than current: certainly many aspects of how a regulated utility operates, and how it can manage its cash flow, pay bills, receive payments, etc., have changed. DRA does not literally apply the language of U-16; its witness provided an interpretation, with a slight wording variation, which allowed for a downward adjustment to the calculation. We are not persuaded that the intention of U-16 is to consider only the deposits "required by the bank" and not the amount of cash on deposit "required to operate SDG&E effectively." Had the standard practice meant only the narrow specific "required by the bank" it could have said so.
We believe SDG&E's description of "the minimum average bank balance required to operate SDG&E effectively" is more reasonable: we should only include in rates what the company reasonably needs. The 1968 standard practice also states: "[i]n the final analysis the amount of working cash to be included in the rate base must rest upon the engineer's judgment. The amount of working cash allowance in the end result is essentially a judgment amount based upon what the staff engineer believes to be fair and reasonable for the operations of the utility but within limitations dictated by the size of the utility and staff policy." (SP U-16, mimeo., pp. 1-3 and 1-4. Emphasis in the published original.) We see no exercise of judgment "to be fair and reasonable for the operations of the utility" in the DRA recommendation.
We believe, however, the parties are better served by looking to the purpose of any standard practice when setting reasonable rates rather than any narrow parsing of the language. The standard practice does not make any effort to narrowly construe the language and DRA offers no Commission decisions which make the narrow interpretation it proposed here. The standard practice is a tool of convenience, with inherent compromises, not a razor-sharp scalpel.
Another recommendation for working cash proposed an adjustment for customer deposits. We will not review it in detail because we adopt a settlement. We will note that PG&E's Opening Brief23 (pp. 3-8) correctly summarized the history and practice of excluding interest bearing customer deposits from working cash where the Standard practice is extremely brief and unambiguous: "[o]nly non-interest-bearing customer deposits are to be considered." (SP U-16, p. 3-7.) We could wish for more explanation, but there is no ambiguity. As with the bank deposit question, we expect parties to exercise good judgment and thoughtful analysis to the operating needs of the utility and not try to overly narrowly construe standard practices.
TURN and UCAN argue that the utility tax allowance calculation should include the benefit of the tax deduction for dividend payments attributable to the Sempra shares held by utility employees in the employee stock ownership plan. PG&E intervened supporting applicants' view that the deduction was irrelevant to utility operations because the dividends are not a part of test year revenue requirement.
In PG&E's recent GRC, TURN raised the same issue of stock option dividends. However, the Commission adopted a settlement which did not resolve this dispute.24
We agree with applicants and PG&E: dividends are the disbursement of earnings that would be distributed even if the shares were not held in the stock option plan. Those earnings are shareholder property. (See, PG&E Opening Brief, October, 11, 2007.) We find that the tax benefits derived from the payment of dividends on stock held by employees in the Employee Stock Ownership Plan do not require ratepayer funding beyond the allowance for a return on equity which is included in rates regardless of who owns the shares. Therefore, the tax benefits accrue to the corporation, and not ratepayers.
10 The settlement (p. 12) provided for this adjustment based on the final adoption of the cost of capital decision.
11 Joint Response to ALJ Long's Questions Regarding 2008 Test Year Settlements, filed and served January 22, 2008. (Joint response.)
12 Disability Rights Advocates commented on the proposed and alternate decision that a restriction on new pay-day lenders would not require any modification to the settlement which is silent on the particular types new payment locations. (Comments, p. 3.)
13 Once we find a total compensation package to be reasonable, it would typically be used to forecast the labor costs of the test year forecast for the adopted staffing levels.
14 For example, in D.07-03-044 the Commission did not adopt TURN's proposals but did require further study for the next general rate. (Mimeo., pp. 210 - 222.)
15 Ex. DRA-20, p. 20-7, lines 14-17.
16 Ex. SDG&E-18-E, p. REL-4, lines 21-24; Exhibit SoCalGas-16-E, p. REL-3, lines 25-28.
17 Table 20-3 of Exhibit DRA-20 (p. 20-13) shows the comparison of the proposed net salvage rates of SDG&E and DRA for Test Year 2008. Table 20-4 of the same exhibit (p. 20-23) shows the comparison of the proposed net salvage rates between DRA and SoCalGas.
18 California Public Utilities Commission, Standard Practice for Determination of Straight-Line Remaining Life Depreciation Accruals. (January 3, 1961.)
19 Ex. DRA-20, pp. 20-8 - 20-12.
20 Ex. SDG&E/SoCalGas-242, p. 1, lines 7-8.
21 D.00-02-046, p. 360.
22 We note, as a clarification, that the depreciation issues in this proceeding relate entirely to the method of cost recovery for ratemaking, often called a "straight-line" depreciation method. None of this discussion involves the differences between ratemaking depreciation and accelerated depreciation as used for income tax purposes.
23 PG&E intervened, sponsored testimony, cross examined witnesses, and filed briefs, on a limited number of issues.
24 "... we find ... it is unnecessary to delve deeper into the merits of TURN's proposed disallowance for ESOP tax benefits. We conclude that the Settlement Agreement, by reducing PG&E's requested revenue requirement by $181 million, represents a reasonable approximation of the likely litigation outcome of all issues raised by TURN and the other parties, including [employee stock option plans]." D.07-03-044, mimeo., p. 231.
