2. Background

2.1. Rate Controls and Energy Crisis

In 1996, the California Legislature enacted AB 1890. AB 1890 sought an orderly transition of the electricity generation market from cost-of-service-based rate regulation to competition for the purposes of encouraging innovation, efficiency and better service; reducing regulatory oversight; and ultimately lowering electricity rates. (Public Utilities Code Sections 330(a), (e) and (t).¹)

As one important element of a complex scheme to accomplish these goals, AB 1890 set retail electric rates beginning in 1998 at rate levels that were in place on June 10, 1996. AB 1890 also established an additional 10 percent rate discount for residential and small commercial customers. The fixed rate levels were to end the earlier of March 31, 2002, or the date on which certain Commission-authorized transition costs were determined by the Commission to have been fully recovered. (§§ 367 and 368.) The rate levels fixed by AB 1890 were higher than the utilities' then current costs to provide utilities an opportunity to recover some or all transition costs during the transition to a competitive market. In exchange, utilities took the risk that all transition costs would not be recovered by March 31, 2002.

The wholesale generation market, however, became exceedingly dysfunctional, and wholesale costs paid by utilities escalated to extraordinarily high levels. The AB 1890 balancing of competing interests in pursuit of its public policy goals neither contemplated sellers manipulating the market to increase wholesale electricity prices, nor the Federal Energy Regulatory Commission (FERC) failing to establish and enforce just and reasonable wholesale rates. The dramatic market manipulation by sellers in 2000 and 2001 destroyed the fundamental balance of these competing interests, and the premise upon which AB 1890 rested. The extremely high costs (due to the dysfunctional market) but limited revenues (due to the AB 1890 rate controls) contributed to Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (SCE) facing serious financial distress in 2000 and 2001.² This distress jeopardized system reliability, the State's economy, and the welfare of the State's citizens.

On January 17, 2001, the Governor responded to the crisis by proclaiming a State of Emergency. The Governor ordered immediate remedies, including the procurement and sale of electricity by the California Department of Water Resources (DWR).

The Legislature responded to the crisis by, among other things, adopting AB 6X³ in its First Extraordinary Session. AB 6X became effective on January 18, 2001. This legislation cancelled the AB 1890 transition of utility generation from regulated to unregulated status, terminated the requirement for market valuation of generation assets as part of the transition, and continued Commission regulation of utility owned assets. Further, it prohibited disposal of any utility owned generation before January 1, 2006, and required that the Commission ensure continued dedication to public service of public utility retained generation assets.

The Legislature also adopted AB 1X,⁴ which became effective on February 1, 2001. This law required that DWR procure electricity for resale to the customers of California utilities. It also required that the Commission assess charges on electric utility customers enabling DWR to recover its costs.

The Commission addressed the crisis by, among other things, adopting a $0.01 per kilowatt-hour (kWh) surcharge effective January 4, 2001, and an additional $0.03/kWh surcharge effective March 28, 2001, for a cumulative increase of about 40%. (D.01-01-018 and D.01-03-082, respectively.) We corrected transition cost accounting by adopting an "accounting true-up" to properly assess the recovery of transition costs over the entire rate control period, as intended by AB 1890. ⁵ (D.01-03-082, Ordering Paragraph 7.) We also found that the AB 1890 rate controls had not ended for either PG&E or SCE. (D.01-03-082, Ordering Paragraph 9.)⁶

D.02-01-001 granted limited rehearing of D.01-03-082 "on the issue of whether rate controls under AB 1890 should be ended." (D.02-01-001, Ordering Paragraph 2.) We stated that the rehearing should address the impact of AB 6X on the AB 1890 rate control paradigm, and the actual date of the end of the rate control period. We also indicated our expectation that issues involved in this determination are legal as opposed to factual, and could be resolved after briefing. We directed the Administrative Law Judge (ALJ) Division to enumerate the issues and set a schedule. Finally, we noted that we must also determine the extent and disposition of what formerly were termed "transition" or "stranded" costs left unrecovered, and that we would address this issue in proceedings subsequent to our determination regarding the end of the rate control period. (D.02-01-001, mimeo., page 25.)

2.2. Rehearing on End of Rate Controls and Positions of Parties

By Ruling dated May 7, 2002, the issues were enumerated and a schedule set for the filing and service of opening and reply briefs. Timely opening briefs were filed and served by PG&E, SCE, California Industrial Users (CIU), California Manufacturers & Technology Association (CMTA), California Large Energy Consumers Association (CLECA), Modesto Irrigation District (MID), and The Utility Reform Network (TURN). Timely reply briefs were filed by PG&E, SCE, CIU, CMTA and TURN.

Several parties contend that the rate freeze ended, became ineffective, or was mooted, sometime in the period from no later than March 31, 2000 to early 2001. Other parties argue that the rate freeze ended on March 31, 2002, pursuant to AB 1890.

PG&E, for example, argues that the rate freeze ended no later than March 31, 2000. PG&E bases this on estimates of final market valuations for utility-owned generation-related assets, and "zeroing out" of transition cost balances.

SCE contends that the rate freeze became ineffective in early 2001 upon the enactment of AB 6X (on January 18, 2001) and AB 1X (on February 1, 2001). TURN states that the rate freeze ended with AB 1X, not AB 6X. That is, the rate freeze ended, according to TURN, when AB 1X became effective on February 1, 2001.

CIU says that the rate freeze apparently did not end early, and thus ended on March 31, 2002, pursuant to AB 1890. According to CIU, the accounting true-up (adopted in D.01-03-082) prevented an artificial early termination of the rate freeze as desired by utilities, and resulted in the end date set by AB 1890.

CMTA asserts that both PG&E and SCE seemingly believe they fully recovered their transition costs in 2000, but that Commission adoption of the accounting true-up in March 2001 may have delayed the end of the rate freeze relative to the dates advocated by utilities. Nonetheless, CMTA contends that nothing can affect the statutory requirement that the rate freeze ended by March 31, 2002. Further, according to CMTA, "the end of the rate freeze is made moot...by the enactment of AB 6X...in the sense that it [the end of the rate freeze] cannot trigger the deregulation of utility generation." (Opening Brief, May 28, 2002, page 7.)

CLECA says the end of the rate freeze may have been made moot by the passage of AB 6X but if not, then the rate freeze ended on the statutory date of March 31, 2002, based on Commission adoption of the accounting true-up. MID asserts that regardless of whether utilities have fully recovered Commission-authorized transition costs, the rate freeze ended no later than March 31, 2002.

The importance of the date depends upon what then happens with costs and rates after the rate freeze. That is, parties dispute whether and how the end of the rate freeze affects the permissible recovery of transition and other costs, and the resulting level of rates.

For example, PG&E asserts that it had recovered all of its transition costs by March 2000, and that post-freeze rates must now permit recovery of all remaining costs. In contrast, TURN and others argue that utilities assumed the risk of less than full transition cost recovery under AB 1890. Having failed to recover all transition costs by the end of the rate freeze, these parties contend that remaining costs may not be recovered, rates must be reduced to cost of service, and excess revenues (including surcharge revenues collected after the date the rate freeze ended) must be refunded to ratepayers.

2.3. Valuation of Generation Assets and Positions of Parties

Valuation of utility generation assets is related to the determination of the end of the rate freeze. On October 25, 2001, the Commission rejected PG&E's proposal to market value PG&E's hydroelectric generation assets prior to establishing PG&E's utility retained generation (URG) revenue requirement. (D.01-10-067.) We found that market valuation was not necessary for determining prospective ratemaking practices or rates for URG assets, but did not address market valuation for determining uneconomic cost recovery.

On December 21, 2001, the Assigned Commissioner directed parties to address whether or not AB 6X supersedes the requirement of § 367(b) that valuation of certain assets subject to valuation be completed by December 31, 2001.⁷ (December 21, 2001 Assigned Commissioner's Ruling.) On January 15, 2002, timely comments were filed by PG&E, the California Hydropower Reform Coalition (CHRC), PacifiCorp, and the Office of Ratepayer Advocates (ORA). On January 25, 2002, timely reply comments were filed by PG&E, ORA and the California Resources Agency (Resources Agency).

PG&E asserts that AB 6X did not supersede or repeal the requirement to set the market value of utility generation assets by December 31, 2001. Consistent with PG&E's position, CHRC says that AB 6X did not implicitly repeal the market valuation requirement of § 367(b).

PacifiCorp contends that AB 6X supersedes the valuation required under AB 1890, and no valuation is necessary. ORA agrees that no valuation is necessary, but maintains we need not reach the issue of whether or not AB 6X supersedes AB 1890. ORA asserts that the return to cost-of-service ratemaking removes URG assets from those assets subject to valuation. The Resources Agency takes no position on whether or not AB 6X explicitly or implicitly repeals the market valuation requirement of § 367(b) or, if there is no repeal, whether utility retained generation assets remain subject to market valuation now that the Commission has restored cost-of-service regulation as a result of D.01-10-067.