7. Post-Test Year Ratemaking Settlements
(Appendices 3 and 4)
7.1. Summary
This Decision adopts the January 18, 2008 proposed settlements for post-test year ratemaking for both SDG&E and SoCalGas with a modified earnings sharing mechanism. As discussed below, these proposals reasonably address the litigated issues. Thus, it also provides that SDG&E and SoCalGas should next file a GRC for Test Year 2012. SDG&E and SoCalGas point out in reply to comments opposing the proposed post-test year settlements that "the settlement revenue requirements are fixed dollar amounts, and are not like traditional attrition mechanisms at all. There is no adjustment for inflation and no adjustment to true up for recorded capital additions during the GRC term, both of which are features of a traditional attrition mechanism." (Reply, p. 4.) We agree and, thus, adopt the settlements, as modified and discussed herein, knowing that we are departing from traditional attrition ratemaking.
7.2. Unique Features
As SDG&E and SoCalGas note, the post-test year's settlement revenue requirements are fixed dollar amounts, and are not traditional attrition mechanisms: there is no adjustment for inflation and no adjustment to true up for recorded capital additions. In order to adopt these departures we must ensure ratepayers will still see adequate expenditures by SDG&E and SoCalGas for maintenance, repair, capital replacement, and expansion commensurate with the needs of the system regardless of inflation, customer growth or any other factors which may influence the operating needs of the companies.
When we adopt rates they must be just and reasonable so that the regulated utility has a reasonable opportunity to provide safe and reliable service and earn a fair return. In that process we set expectations for performance - e.g., a specific rate allowance to maintain pipeline plant comes with an obligation to actually maintain the pipelines. Traditional attrition adjusts the detailed test-year revenue requirement for known factors, forecasts of growth, and a mechanism to recognize inflation, such as a specific price index.
Here, the settling parties propose a fixed monetary amount in lieu of the traditional detailed derivation. DRA, TURN and Aglet, are the principal ratepayer representatives that joined with SDG&E and SoCalGas in the proposed settlements. We can find, based on the depth and breadth of the evidentiary record that these parties performed sufficient competent analysis to make an informed choice to settle with SDG&E and SoCalGas. When a traditional attrition mechanism is used we make the assumption that the underlying expenditures for capital additions and expenses will continue on a particular trajectory and we can adjust for an inflation forecast and a rate of growth. We do not delve into the same level of detail that occurs in the test year. Adopting a fixed amount for attrition provides more latitude or discretion to the companies on how to reasonably use the revenue to provide safe and reliable service.
We can adopt the proposed settlements provided the parties clearly accept that SDG&E and SoCalGas are in no way relieved of any obligation to spend sufficient funds for maintenance, repair, capital replacement, and expansion commensurate with the needs of the system. With that clarification, we adopt the proposed post-test-year settlements.
7.3. FEA's Objections - SDG&E Post-Test Year Settlement
FEA raised three objections to the settlement (1) procedural, (2) the settlement was not reasonable in light of the whole record (Rule 12.1(d)), and (3) the proposed settlement is not in the public interest.
FEA argues the settling parties failed to comply with the requirements of Rule 12.1(a) and ignored Rule 11.6, in that the settling parties failed to notice every party to seek informal agreement to an extension (Rule 11.6) before filing the motion for permission to late file a proposed settlement, and that the motion was itself untimely (Rule 12.1(a)). FEA did not make the same objection to the proposed Test-Year 2008 Settlement which was also filed after the Rule 12.1 deadline.
Although we are sympathetic to FEA, we note that parties were on notice from the initial prehearing conference, and it was affirmed in the assigned Commissioner's scoping memorandum, that the parties were encouraged to settle the proceeding (after thorough discovery and analysis, and service of intervenor testimony) and thus there was a strong preference for settlement. Guidance included a requirement that the parties could not settle test year, post-test year, and incentive-related issues, where the compromise in one area was dependent on another outcome.26 Although SDG&E and SoCalGas did not comply with Rule 12.1(b) separately for the post-test year settlement proposals, Rule 1.2 permits deviations from the rules. In light of the preference for settlements, the ALJ was within his discretion to allow the proposed settlements to be filed. Parties were allowed to comment and the Commission considered all objections.
FEA argues any rate-cycle longer than three years is unreasonable based on the record of the proceeding. As discussed below, we pragmatically adopt a four-year cycle with other safeguards. As a matter of basic policy, our rate case plan would envision a three-year cycle, but when we delay proceedings or depart from the plan for other utilities, there are cumulative impacts on other proceedings that must be addressed.
We find FEA is not persuasive that the proposed settlement is not in the public interest. FEA suggests SDG&E will shift significant savings to the company through a longer four-year or five-year cycle. FEA (and the Farm Bureau) argue the proposed settlement's late-filing violates the public interest. We have already addressed that point. And finally, FEA objects that the proposed settlement has the unresolved four or five-year attrition conflict between the settling parties. We can resolve this difference which is otherwise the only residual dispute between the settling parties. We adopt the four-year rate cycle option below.
7.4. Duration of the Post Test Year Cycle
In the settlements DRA agreed to a five-year cycle and Aglet argued for a four-year cycle (thus settling parties ask the Commission to resolve this residual difference). Both of these options are a reduction from the proposed six-year cycle in the applications. We adopt a four-year rate cycle (test year plus three years of attrition).
SDG&E and SoCalGas originally proposed the next rate case should be for Test Year 2014, following a six-year cycle of Test Year 2008 plus five subsequent years of attrition adjustment. We find as a matter of public policy this is too long a period without a thorough review of utility operations. For example, about six years ago, in late 2001, the restructured electric industry was in free-fall. We cannot adequately provide appropriate safeguards for ratepayers and an opportunity for shareholders to earn a fair return with any proposed post-test year rate adjustment mechanism for five years beyond the test year. Too many unforeseeable events will likely transpire, and the Commission should not handicap its regulatory oversight by foregoing timely GRC reviews of SDG&E and SoCalGas' operations. We note that PG&E will file for Test Year 201127 and SCE has filed for Test Year 2009.28 Because of the burden of these GRCs on all parties, we prefer to avoid overlapping proceedings and 2010 is too close upon us. Therefore, the earliest we can reasonably consider another SDG&E and SoCalGas GRC is for Test Year 2012.
DRA argues in its comments in support of the five-year option, with a Test-Year 2013, and pleads its case that the staffing requirements of a GRC dictate the five-year cycle. Aglet argues a four-year option is better, closer to the standard of three years, and that five or six years are too long. We believe that 2012 is the earliest year that may not "double-up" major rate cases (depending on the outcome of the pending Edison rate case A.07-11-011), we can try to accommodate DRA's staffing limitations and the concerns of other parties that more than three-year cycles are unreasonable. Nevertheless, we have recently address this issue where we were prepared for a potential overlap of the next PG&E general rate case with a rate case for SDG&E and SoCalGas on a three-year cycle:
The Commission and DRA have sufficient resources to
process simultaneous test-year 2011 GRCs for PG&E,
SDG&E, and [SoCalGas]. (Decision (D.) 07-03-044,
Finding of Fact 28, mimeo., p. 275.)
Thus, if necessary, if we could expect to successfully pursue rate cases for test year 2011 for PG&E as well as SDG&E and SoCalGas, then we can also expect to successfully conduct rate cases for Edison as well as SDG&E and SoCalGas for test year 2012.
26 We believe that there are three independent categories of issues that are potential areas of settlement. Thus, any settlement in one category should be separate from any settlement, or failure to settle, in the other categories. Specifically, we consider test year revenue requirements, post-test year ratemaking mechanisms, and incentive mechanisms to be unique and independent categories; therefore, parties should not condition a settlement in any one category on specific outcomes in either of the other categories. We will consider individual settlements in one or more of these three categories without regard to the other settled or litigated outcomes. (Scoping Memo, p. 7.)
27 D.07-03-044, mimeo., p. 2.
28 D.06-05-016, mimeo., p. 1, which reflects the adoption of Test Year 2006, post-test years 2007 and 2008.
