8. Earnings Sharing

8.1. Summary

The proposed post-test year ratemaking settlement has no earnings sharing mechanism. This would end the mechanism adopted in D.05-03-023, and exclude a mechanism as modified by the applicant's proposal. We find it reasonable to adopt the settlement.

8.2. Background

SDG&E and SoCalGas propose nearly identical, symmetrical, earnings sharing mechanisms with dead-bands of plus or minus 50 basis points of overall rate of return (ROR) and ratepayer rewards or payments that are capped when achieved RORs exceed or fall below authorized levels by 300 basis points or more. (Exhibit SDG&E-34, p. MMS-14; Exhibit SCG-31, p. MMS-10.)

In the prior proceeding, SDG&E and SoCalGas also requested symmetric earnings sharing mechanisms, i.e., ratepayers would share in earnings above or losses below authorized returns. The only significant difference is that in the prior proceeding, after 300 basis points the mechanism would be suspended (D.05-03-023, mimeo., pp. 23-24), and here, SDG&E and SoCalGas propose (Ex. SCG-31, p. MMS-14) to keep the mechanism in place and receive 100% of the over or under-earnings, as shown below:

Proposed Earnings Sharing Mechanism
Bands	Sharing Band (Basis Points) Above or Below Authorized Rate of Return	Company	Customer
Inner	0-50	100%	0%
1	51-100	25%	75%
2	101-125	35%	65%
3	126-150	45%	55%
4	151-175	55%	45%
5	176-200	65%	35%
6	201-300	75%	25%
Outer	More than 300	100%	0%

DRA, UCAN and TURN proposed a different mechanism and Aglet opposed any earnings sharing. Ratepayers currently share earnings that exceed authorized rates of return by more than 50 basis points. (D.05-03-023, Appendix C, pp. 11-12.)

Aglet argues here that there is "no sound policy justification for symmetrical earnings sharing" mechanisms and the Commission should instead ensure "the overall ratemaking package for each utility is fair and reasonable." (Aglet Opening Brief, p. 24.) Aglet links this recommendation to its concerns with the Utility of the Future and with the extended six-year rate case cycle proposed by SDG&E and SoCalGas.

8.3. Discussion

Earnings sharing mechanisms have been adopted by the Commission in some cases. Here we have utilities that have favored them and proposed them for this case. However, the settlement does not include an earnings sharing mechanism. It is not a necessary item, and since we will adopt the settlement, we will not force an earnings sharing mechanism on the applicants.

Regardless of any ratesetting mechanism, the utilities are obliged to prudently manage the operations for the shareholders' long-term financial best interests and provide safe and reliable service to customers. This is the classic utility obligation to exercise expert judgment and management where the Commission does not "micromanage" every action and decision on a daily basis.

Aglet proposes that the Commission should make a finding that the rates adopted ensure that SDG&E and SoCalGas are financially healthy. In fact, when we adopt rates, which must be just and reasonable, those rates are sufficient to allow the companies a reasonable opportunity to earn a fair return after providing safe and reliable service. We recently addressed this issue in the PG&E general rate case:

We agree with Aglet that PG&E is financially healthy. PG&E does not need all of the test-year and attrition year revenues it requested in A.05-12-002 to maintain the financial health that PG&E requires to provide good, safe, and reliable service. This is demonstrated by the fact that the Settlement Agreement provides less revenue to PG&E than it requested in A.05-12-002. Obviously, PG&E would not have settled for less revenue if it believed that doing so would harm its financial health. (D.07-03-044, mimeo., p. 243.)

In these proceedings, where SDG&E and SoCalGas proposed settlements for Test Year 2008 and post-test year ratemaking, we believe the companies would not have settled if the expert opinions of SDG&E and SoCalGas management thought that doing so would harm the financial health of either company.