E. Revenue Allocation

1. ORA

ORA recommends a different methodology than that used by Sierra and CSAA for determining the revenue allocation to the various customer classes. ORA recommends that marginal customer costs be based on the NCO methodology, which we adopt. ORA does not object to Sierra's calculation of marginal energy and demand marginal costs. The parties have reached a settlement on the overall California jurisdiction revenue requirement increase for test year 2003 of $3,020,000, representing a 6.2 percent increase to Sierra's California customers. Thus, the total California jurisdiction revenue requirement at proposed rates to be allocated to the various customer classes is $51,015,000. The proposed allocation absorbs the 2¢/kWh interim increase.

To minimize rate shock to California ratepayers, rather than strictly applying marginal costs revenue responsibility to the various customer classes, ORA recommends an increase over present rate revenues of 8.8% for all customer classes, except for rate schedules A-2 (Medium General Service) and A-3 (Large General Service). For the A-2 and A-3 customer classes, ORA recommends a zero rate increase. (See Table 1.) ORA agrees that because the A-2 and A-3 class marginal costs are significantly below their current revenue allocation it would be inequitable to raise their rates.

TABLE 1

ORA Recommended Revenue Allocation

Test Year 2003 ($000s)

Customer Class	Annual Revenue Present Rates	ORA Proposed Revenue Allocation	Percent Increase Over Present Revenues
Residential (DM-1, D-1)	$23,444	$25,506	8.8%
S/M Residential (DS-1)	381	414	8.8%
A-1	9,860	10,727	8.8%
A-2	5,348	5,348	0.0%
A-3	8,711	8,711	0.0%
Street Lights	92	100	8.8%
OLS	152	166	8.8%
PA	40	43	8.8%
Total Revenue	$48,028	$51,015	6.2%

2. Sierra

Sierra proposes a revenue allocation methodology that would apply an average system rate to all classes capping increases to each class at 5%. Two commercial classes, A-2 and A-3, would see their contribution to revenue requirement reduced slightly, but not nearly as much as if true cost-based rates were adopted. In Sierra's view, its revenue allocation methodology represents a middle ground between ORA's proposal to keep A-2 and A-3 rates at current levels while spreading the increase in revenue requirements to all remaining classes on an equal percentage basis and CSAA's proposal to immediately move to cost-based rates for all classes.

Under Sierra's proposed cost methodology, the A-2 (medium commercial) and A-3 (large commercial) customers have cost-based revenue requirements that are under their present rate revenues by 18.6% and 15.9%, respectively. Sierra calculates that this provides an annual subsidy of nearly $2.4 million to other classes by the A-2 and A-3 classes. Sierra has calculated that ORA's marginal cost proposal provides a comparable subsidy slightly above $2.0 million under present rates. This results, in Sierra's opinion, that 14.5% (using ORA's analysis) to 16.9% (using Sierra's analysis) of the A-2 and A-3 customers' collective revenue requirement presently covers costs that are the direct responsibility of other classes.

Sierra's comparison is shown in Table 2.

TABLE 2

RATE IMPACTS BY CLASS BASED UPON THE STIPULATED REVENUE REQUIREMENT OF $51,025 MILLION⁴

Increase/Decrease in Class Revenue Requirement Under Sierra's, ORA's & CSAA's Revenue Allocation Proposals⁵

Case 1: Using RECC Marginal Cost Study Results; Case 2: Using NCO Marginal Cost Study Results

Case 1: Revenue Allocation Results Using Marginal Customer Costs Based on the Real Economic Carrying Charge Method (RECC)

Class	(a) Equal Percent of Marginal Cost Under Both Sierra's ORA's Rate Design	(b) Sierra's Primary Proposal Using the 5% Cap Method	(c) Sierra's Alternate Proposal Using the 5% Cap & Floor Method	(d) ORA's Proposal	(e) CSAA's Primary Proposal
Res. (DM-1, D-1)	19.52%	11.24%	10.89%	8.82%	19.52%
Sub-meter Res. (DS-1)	82.76%	11.24%	10.89%	8.82%	82.76%
A-1	7.63%	11.24%	10.89%	8.82%	7.63%
A-2	-21.08%	-7.74%	-5.00%	0.00%	-21.08%
A-3	-18.44%	-4.67%	-4.97%	0.00%	-18.44%
Street Lights	16.34%	11.24%	10.89%	8.82%	16.34%
OLS	38.02%	11.24%	10.89%	8.82%	38.02%
PA	40.34%	13.19%	12.83%	8.82%	40.34%

Case 2: Revenue Allocation Results Using Marginal Customer Costs Based on the New Customer Only (NCO)

Class	(f) Equal Percent of Marginal Cost Under Both Sierra's and ORA's Rate Design	(g) Sierra's Primary Proposal Using the 5% Cap Method	(h) Sierra's Alternate Proposal Using the 5% Cap & Floor Method	(i) ORA's Proposal	(j) CSAA's Primary Proposal
Res. (DM-1, D-1)	16.51%	11.24%	10.54%	8.82%	16.51%
Sub-meter Res. (DS-1)	112.52%	11.24%	10.54%	8.82%	112.52%
A-1	4.38%	11.24%	10.54%	8.82%	4.39%
A-2	-17.26%	-10.44%	-5.00%	0.00%	-17.26%
A-3	-10.41%	-3.02%	-3.63%	0.00%	-10.41%
Street Lights	21.27%	11.24%	10.54%	8.82%	21.27%
OLS	39.69%	11.24%	10.54%	8.82%	39.69%
PA	41.08%	15.22%	14.52%	8.82%	41.08%

3. CSAA

CSAA is an alliance of the major ski resorts in the Lake Tahoe area which purchase power from Sierra. Its members, Alpine Meadows Ski Resort, Heavenly Ski Resort, Trimont and Land Company dba Northern at Tahoe, and Squaw Valley Ski Corporation, all purchase power under Sierra Pacific's A-3 rate schedule. The A-3 class also includes school districts, utility districts, hotels, and grocery stores. CSAA submits that the Commission should not approve the cost allocation or rate design proposed by either Sierra or ORA and should require Sierra to establish rates on marginal cost. CSAA argues that neither Sierra nor ORA have produced any tangible evidence of the existence or extent of customer economic hardship that might result from the implementation of marginal cost based rates; neither Sierra nor ORA have considered whether existing or potential non-rate making mitigation solutions will sufficiently alleviate customer economic hardship that might result from the implementation of marginal cost based rates; and that the cost allocation and rate design proposals by both Sierra and ORA represent a movement away from marginal cost based rates.

CSAA agrees with Sierra's initial method of developing the true revenue responsibility of each class through the equal percentage marginal cost (EPMC) method, which aligns revenue responsibility closely with each customer class' cost causing behavior. However, CSAA points out, Sierra then applies a 5% capping mechanism that shifts revenue responsibility to the A-1, A-2, and A-3 customer classes such that the resulting rates for these classes are artificially high, while the rates for others are too low. While Sierra's marginal cost allocation shows that the true A-3 customer class share of revenue requirement is 13.89%, the proposed revenue requirement for A-3 is 16.35%, a 17.7% increase over its true allocated revenue requirement. CSAA describes this result as a "penalty" above the true costs allocated to A-1, A-2, and A-3 customers. The A-class customer absorbs the other customer class' deficiency in the amounts of $345,000 (A-1), $771,000 (A-2), and $1,297,000 (A-3) annually. For the 36 A-3 customers, including financially strapped school and utility districts, this penalty is $36,000 per customer per year.

CSAA says that ORA completely ignores the marginal cost study and the EPMC based allocation of customer class revenue responsibility except to identify those customer classes for whom the study calculates a revenue responsibility below that which results from current rates. Once identified, ORA arbitrarily fixes customer classes A-2 and A-3 at current rates (which include the interim increase authorized by Decision (D.) 02-07-031) then allocates the remaining revenue requirement across the other customer classes so that those classes receive the same increase over current rates. This results in a penalty to the A-2 and A-3 class to absorb other class' deficiency of $993,000 (A-2) and $1,042,000 (A-3) annually. For the 36 A-3 customers this penalty is $28,944 per customer per year.

CSAA asserts that ORA, and to a lesser degree Sierra, mistakenly measures the impact of marginal cost based customer class revenue responsibility by comparing it with customer class revenue based on the rates after the interim increase granted in Phase 1 of this case rather than based on the last rates found to be just and reasonable prior to the interim increase. CSAA says this is an inappropriate means of comparison which gives an inaccurate impression about the combined phase 1 and phase 2 rate impacts upon these classes. CSAA believes that the interim across the board increase of 2¢/kWh was not intended to distort or prejudge the proper revenue allocation among classes.

4. Discussion

We will adopt ORA's rate allocation. Table 2, Case 2, Column (f) (supra) sets forth the rate increase to each customer class if marginal cost pricing were implemented. Column (f) represents Sierra's estimate of the revenue requirement percentage increase to each customer class if all customer classes were allocated their share of the total revenue requirement using marginal cost principles. The revenue requirement basis for column (f) is $51,025,000, which includes the 2¢/kWh surcharge authorized in D.02-07-031. Residential rates would increase over 16.5% while A-2 rates would decrease 17.3% and A-3 rates would decrease 10.4%. Because A-2 and A-3 customer rates are currently substantially above marginal costs ORA recommends neither an increase nor a decrease. We agree.

CSAA proposes a 10.4% decrease of A-3 and 17.3% from A-2, based on strict marginal cost principles, while ignoring the mitigating circumstances which this Commission has always considered when allocating rate increases. In this instance Sierra's residential customers have seen a 27.7% rate increase in July 2002, and, to be responsible for their share of the $3.02 million rate increase under ORA's proposal, will pay an additional 8.8%. An almost 40% increase in little more than a year is substantial and a hardship. The A-2 and A-3 customers pay no part of the $3.02 million rate increase. Under the circumstances of this proceeding, when allocating an overall system increase, it would be imprudent to increase rates substantially for one class of customers while substantially decreasing rates for others.

CSAA argues that ORA distorts the impact of ORA's proposal by using the Phase 1 interim rates (2¢/kWh across the board) as a base to characterize the impact on schedules A-2 and A-3 customer classes as rate decreases, rather than using the pre-interim increase as a base. We believe it is inappropriate to compare the present rate revenues excluding the interim increase to determine whether the 2003 test year proposed revenue requirement would result in an increase or decrease to the various customer classes. The measure of the rate impacts of the revenue requirement on the various customer classes should be based on present rate revenues which include the interim rate increase.