VI. Partial Settlements
On December 19, 2003, SoCalGas and SDG&E filed Motions for adoption of partial settlements (hereafter, partial settlements or Proposed Settlements) on Test Year 2004 revenue requirements.16 In addition to the motions, SoCalGas and SDG&E also filed the Settlement Agreements and Joint Settlement Comparison Exhibits. Notably, UCAN did not join in either settlement. The Federal Executive Agencies (FEA) filed a late comment17 in which it supported the SDG&E partial settlement. UCAN filed joint-testimony with TURN in both applications, but UCAN is a non-settling party to both SoCalGas and SDG&E and the two partial settlements. TURN is also a non-settling party with SDG&E by not settling in compromise with its joint UCAN testimony regarding SDG&E's application. (TURN did settle with SoCalGas.)
By a December 4, 2003 Ruling, all parties were directed to file and serve as appropriate on January 20, 2004: (1) responses or comments in opposition to the partial settlements or, (2) for the settling parties, opening briefs in support of their positions as litigated without regard to the partial settlements, and (3) non-settling parties were to file opening briefs in support of their positions as litigated on February 4, 2004. All parties were allowed to file replies to the comments in opposition to the partial settlements concurrently with replies to positions as litigated on February 19, 2004.
Some of the settling parties did file briefs on their litigation positions (opening litigation briefs). Applicants SoCalGas and SDG&E, UCAN and ORA filed extensive opening litigation briefs. Coral, Greenlining and Southern California Generation Coalition (SCGC) filed opening litigation briefs limited to the areas of their unique interests but did not address the total test year revenue requirements. TURN, as required for settling parties, filed an opening litigation brief for SoCalGas on its litigation positions but did not address SDG&E in the same brief where it is not a SDG&E settling party. All other settling parties waived filing opening litigation briefs.
Non-settling parties filed responses to the partial settlements. UCAN filed an extensive opposition to the SDG&E Settlement. TURN filed an opening brief as a non-settling party for SDG&E. Because TURN and UCAN jointly sponsored witnesses in both proceedings, and given the numerous similarities between the two applications, UCAN's opposition is broadly applicable to the SoCalGas partial settlement. No other party filed in opposition to the partial settlements. On April 13, 2004, SDG&E filed a motion seeking leave to file minor errata to the SDG&E partial settlement. On April 27, 2004, UCAN filed a response to this motion, and on April 29, 2004, SDG&E filed a reply. We accept the errata, and affirm the ALJ's May 12, 2004 ruling granting SDG&E's motion.
A. The Partial Settlements are not Reasonable
All of the active parties to the proceeding were put on notice that neither the Assigned Commissioner Carl Wood, nor that the assigned ALJ would consider a "black box" settlement.
"With respect to these cases in particular, and especially with respect to San Diego Gas & Electric's cost of service, I'm told that that utility has not had a fully-litigated GRC, or its equivalent, since I think 1984. There have been settlements that have been litigated up to a certain point, and I'm certainly not hostile to settlements. I think that is a fine way to conclude proceedings, but the one caveat to that is I, at least, as an Assigned Commissioner, I'm going to insist that any settlement be fully rooted in the record, and fully supported by a record.
"I'm very hostile towards black-box settlements that it is impossible to figure out what the basis for reaching a certain result or conclusion is. I think particularly in light of the fact that this isn't just a renewal of something we did three years ago, but we don't really have a good understanding or analysis of the cost of that company's doing business, then it is going to be particularly important to have a good record.
"So I am going to urge that the Judge ensure that there be a strong record on all the points, all the important points in the case." (Commissioner Wood, Transcript of February 7, 2003, at pp. 5 - 11.)
The parties were advised again about attempting to settle the cases without clearly resolving all of the issues.
"... my concern would be that in order to recommend adoption of the settlement even if it is an all-party settlement, I would need to be able to find the settlement to be reasonable in total and in the public interest. And I would certainly advise that more detail is better than less, particularly in terms of resolving where in fact there is an agreement on the level of effort to be put into certain programs ... There are a lot of finite issues here as to whether the company should or should not undertake certain tasks or how much of an effort those tasks should entail. And a settlement that doesn't address in detail the expectations of the company's performance in the test year would be possibly problematic." (ALJ Long, Transcript of November 13, 2003, at pp. 2,174 - 2,175.)
"I probably expressed most of my fundamental concerns, which is (sic) having sufficient detail either to propose a decision based on the litigated position of the parties ...(or) to be able to address a proposed settlement in sufficient detail that it's reasonable to find it in the public interest and also that it would provide sufficient guidance to the utilities of the Commission's expectations for the test year, the level of service, the types of programs that are in fact acceptable to the Commission. So my concern about high level summarization is that it leads directly to a lot of black box outcome that makes it difficult in a subsequent proceeding to determine how well the applicants actually performed compared to expectation, as to the scope and scale of their new programs or maintenance of the system and being a reasonable system operator." (ALJ Long, Transcript of November 13, 2003, at pp. 2,183 - 2,184.)
"I see our obligation to adopt a revenue requirement for the company that is prescriptive not only to how much money we think they should collect in rates for the test year, but for what purpose. And so that, then, leads to accountability and measurement of corporate stewardship for the next time we have a rate proceeding, because otherwise, we could end up in a process where we never have a good basis for saying: what have they actually accomplished compared to expectations in order to ... set new expectations in subsequent proceedings?" (ALJ Long, Transcript of November 14, 2003, at p. 2,203.)
Based on these concerns and following a careful review, we reject the Proposed Settlements because they do not resolve all of the issues, and more importantly the parties failed to provide sufficient detail in stipulating to specific expectations. The proposed Settlements would provide ratepayers no assurance that the money they would pay in rates is the right amount necessary to receive safe and reliable service and no comfort that the applicants would in turn be obligated to perform all reasonable tasks necessary to provide safe and reliable service and to make necessary capital expenditures. As discussed in detail elsewhere in this decision, the disputes concerning the size of the workforce, the compensation of the workforce and the form of compensation are not adequately resolved. Too many settlement provisions are unsubstantiated compromises where the only item settled is a dollar allowance without explaining how, and justifying why, the settlement differs in scope and scale of the work or task to be performed from the applicants' end-of-litigation positions. ORA proposed in its opening litigation brief that the rates adopted here should remain in effect until the next general rate proceeding, which ORA suggests should be in 2008 or 2009.18 These two partial settlements are simply inadequate foundations for the next five or six years.
UCAN aggressively opposed the partial settlement for SDG&E in its filing.
"ORA and SDG&E have entered into a Settlement that awards SDG&E excessive increase that is not justified by the evidentiary record and cannot be afforded by a community hit hard by rate increases since the 2000-2001 Energy Crisis. Moreover, the failure of the Settlement to incorporate the many efficiencies that should have been brought by a merger, a reorganization and technology-driven productivity is a fatal flaw that undermines the very foundation of the Settlement.
"One of the primary obstacles presented by the Settlement Agreement is its lack of specificity. Judging from the Settlement and its accompanying exhibits, UCAN is unable to establish the basis for the proposed revenue requirement agreed to by the two primary parties." (UCAN Comments,19 p. 2.)
UCAN also objected that the partial settlement increases SDG&E's distribution revenues by 27.3% over its 2001-recorded costs that, according to UCAN, equates to an annual increase in electric operations costs of almost 7%. We would not reject the settlement solely because the rate of increase is perceived to be too high; the rate is only an indicator of concern. We are concerned that any increase (or decrease) needs to be thoroughly supported in the record of the proceeding and that we can set reasonable performance goals for SDG&E, and by logical extension, SoCalGas too.
UCAN identified five basic deficiencies with the SDG&E partial settlement:
1. Annual revenue requirement is not supported by the record;
2. Failed to incorporate productivity gains that were ordered by the Commission and/or could be reasonably imputed;
3. Failed to address controversy over corporate center costs allocated to the SDG&E by Sempra Energy;
4. Did not adequately address the specific adjustments proposed by UCAN and FEA and;
5. Imposing costs on ratepayers contrary to Commission policy.
We considered UCAN's five points, and the responses of the settling parties, and other relevant factors as we reviewed both the litigated positions of the parties and the limited justifications that are included in the partial settlements.
ORA and SoCalGas and SDG&E argue that the partial settlements "reflect hundreds of hours of negotiation"20 and the Commission should not "cherry-pick." The settling parties miss the point; the Commission decides issues of fact and policy, not the parties. ORA argued against UCAN's opposition by stating "The Commission can, and should, note that ORA is a signatory to this settlement, and thus from ORA's perspective ratepayers will be better off if this settlement is adopted."21 ORA proceeded to argue that it considered whether the
Commission would adopt various recommendations or not22 and so argued that settling was in the ratepayers' interest.
"Would ORA have liked it if the settlement negotiations had ended up at a lower revenue requirement as UCAN suggests they should have? Yes, of course. However, given the record compiled in this proceeding, and the limited willingness of SDG&E to reduce its revenue requirement, we find the revenue requirement reflected in the settlement to be reasonable, fair, and acceptable." (ORA's February 19, 2004 Response to non-settling parties, p. 22.) (Emphasis added.)
We will not adopt a revenue requirement based upon an assessment of litigation risk and the "willingness" of the utilities to compromise; we will only adopt the most appropriate revenue requirement justified as reasonable in light of the entire record, with adequate revenues for the provision of safe and reliable service. Both ORA and UCAN have shown an inappropriate focus on lower rates and not on just and reasonable rates. Their arguments do not support a Commission finding that the partial settlements are in the public interest.
1. Credibility and Weight of Settling Parties
Few of the signatory parties to the partial settlements actively litigated and filed detailed briefs in the proceeding. For SoCalGas, only TURN and ORA actively litigated the majority of the issues and the major portion of the costs underlying the requested 2004 test year revenue requirement. For SDG&E, this active party list includes only FEA and ORA. FEA did file an opening litigation brief but offered no substantive reason for its late decision to support the settlement. UCAN is very concerned that SDG&E and the Commission's in-house advocacy staff have settled major cases:
(this is) "the fourth consecutive time in which ORA has chosen to settle, rather than fully litigate, an SDG&E cost of service proceeding.23 The last fully litigated General Rate Case for SDG&E occurred in A.84-12-015; it was based upon 1984 operational costs. As a result, during the past two decades, SDG&E's operational costs have not been fully scrutinized by the Commissioners."24
UCAN also raised the concern that for SDG&E most of the settlement parties did not have "substantive testimony that relates to revenue requirements."25 UCAN argued, and we agree, that these partial settlements are more of a "joint recommendation" than they are a settlement of all active parties. UCAN urges the application of the stringent review standards of D.96-01-011.26 We determine that we should apply only limited weight and credibility to the settlement by the other parties to the partial settlements.
UWUA and Local 483 both presented very narrowly focused testimony on those areas where their memberships are employed in SoCalGas' operations.27 Neither filed a brief to support their litigation positions and a review of the partial settlements raises significant policy concerns that there may be inducements for these two parties to settle by the inclusion of results neither party has previously been able to achieve through the collective bargaining process. As discussed further in the appropriate operating and maintenance expense portions of this decision, and in detail below, the settlements offer full-time union employee positions that were beyond SoCalGas' request. The recommendations in the testimony of UWUA and Local 483 do not support the portion of the partial settlement directly beneficial to the two unions. There is no brief by either party with a sustainable argument based on other aspects of the record to support the provisions included in the settlement. The SoCalGas partial settlement also failed to justify the allowances based upon the record in the proceeding. As already discussed, parties were on notice that all settlement components required a detailed justification if they were not to be viewed as "black-box."
SCGC addressed only two issues of very narrow self-interest. The first is certain software development costs related to the Gas Industry Restructuring which SCGC opposed addressing in this case and which the partial settlement would defer to another proceeding. We decline to allow parties to dictate by settlement when and where we will address an issue that has been litigated in this proceeding. This issue is ripe for decision and we will not defer it. Second, SCGC would prefer deferring consideration of issues within the SoCalGas resource plan, identified over SoCalGas' objections in the Scoping memo and Clarifying Memo as within the scope of this proceeding. Again, we will not allow parties to settle scope and timing issues. This issue, too, is ripe for decision and there is no reason to defer it.
CUE is a settling party for SDG&E, along with the City of Chula Vista. Neither participated in the evidentiary hearing by offering either testimony or conducting cross-examination and neither filed opening litigation briefs identifying any areas of concern in the proceeding. They state that they believe the settlement is a reasonable outcome.
Greenlining raised issues in this case concerning employee diversity and corporate philanthropy. The scope of these issues was specifically addressed in several rulings.28 Greenlining identified no retail rate issues that had to be decided as a part of adopting Test Year 2004 revenue requirements. We will address Greenlining's issues on their merits in this decision without regard to its participation in the partial settlement. It is not appropriate for us to rely on Greenlining's endorsement of the partial settlements when it made no detailed study of the vast majority of the economic issues before us.
2. The Greenlining Institute and SoCalGas and SDG&E Side-Settlement Agreement
SoCalGas and SDG&E included in the partial settlements an additional agreement with Greenlining addressing Workforce Diversity, Supplier Diversity, and Philanthropy.29 Greenlining and the applicants are the only parties to the agreements. The agreements between the utilities and Greenlining30 make four commitments on work force diversity, supplier diversity, philanthropy and annual meetings.
3. Workforce Diversity
Under the terms of the proposed settlement, SoCalGas and SDG&E would provide to Greenlining workforce diversity data in the same format as provided to Fortune Magazine for its annual diversity survey, unless the Commission mandates a similar format for reporting to the Commission. SoCalGas and SDG&E would make "their very best good faith efforts to be in the top ten `Best Companies for Minorities'" as measured by Fortune Magazine and to be a leader among California Utilities.31 While commendable, these commitments are not relevant to adopting a test year revenue requirement.32 The Commission is not the appropriate government agency to adopt, approve or oversee issues of workforce diversity and will not direct SoCalGas and SDG&E to do anything other than to comply with the spirit and the letter of the law - state or federal - that impose any legal obligations to ensure workforce diversity, a discrimination-free work environment and a safe work environment. This conclusion is consistent with the recent D.04-07-022, in Edison's GRC, A.02-05-004, that set no specific goals or requirements on diversity, except to require Edison to provide an update on its diversity program in its next rate case filing.33
4. Supplier Diversity
Greenlining wanted 25% of SoCalGas and SDG&E's suppliers to be minority businesses. SoCalGas and SDG&E made no specific commitment in the proposed settlements to Greenlining other than to "continue to discuss the viability of this objective" and to comply with the existing obligations of General Order (GO) 156.34 We will impose no obligation on SoCalGas and SDG&E beyond the expected compliance with the existing requirements of GO 156. We note too that Rulemaking (R.) 03-02-035, dated February 23, 2003, was issued in response to a petition filed by Greenlining to amend GO 156. We will not intrude on the scope of the rulemaking in these two rate proceedings.
5. Philanthropy
Greenlining proposed in testimony35 that SoCalGas and SDG&E should be ordered by the Commission to make philanthropic contributions equal to either the compensation of the "top ten executives" or 2% of pre-tax earnings, and further, 80% of the contributions should be "allocated to the needy." The moral arguments of Greenlining are compelling; philanthropy ought to assist those in greatest need. We decline to pursue the issue because philanthropic giving by SoCalGas and SDG&E is not a component of the test year 2004 revenue requirements.36 This approach is also consistent with D.04-07-022 for Edison where we rejected a similar proposal to link compensation to philanthropy, and found philanthropy generally to be beyond the scope of the Commission's ratemaking authority.37
Any contributions for any social, political or corporate image-enhancement purposes are made with "shareholder money," that is the earnings that are discretionarily available to the companies to pay dividends or use for other non-utility investments. The only commitment of shareholder earnings enforced by the Commission is the overarching requirement that the shareholders maintain sufficient invested capital to sustain the authorized capital structure of the company to finance its used and useful plant and equipment necessary to serve the ratepayers. Greenlining offered no legal basis to suggest the Commission has any authority to control or direct philanthropic giving of shareholder money. We have no authority to enforce ratepayer funding of philanthropy and must reject the use of ratepayer funds for philanthropic purposes to eliminate ratepayer funding of donations for any purpose no matter how socially worthwhile.
In the proposed side-settlement with Greenlining, SoCalGas and SDG&E "agree to continue to strive to be leaders in philanthropy to low-income and minority non-profits." Any such moral or ethical choice belongs to the shareholders and we will not intervene in shareholder philanthropic practices. The companies and their shareholders are free to decide how any shareholder money is used for philanthropic purposes. If we were to include an allowance for philanthropic giving in retail rates we would be forcing the ratepayers to make a contribution when we have no way to judge their willingness to contribute nor their choices of where to contribute. We lack that authority and that insight.
We decline to link executive compensation to philanthropy. As discussed elsewhere, compensation is based upon the necessity of paying market rates for competent employees.
6. Annual Meetings
SoCalGas and SDG&E committed in the proposed settlement with Greenlining that the chief executive officer of both companies "and/or" the president, and Sempra's senior vice president of human resources will attend an annual meeting with Greenlining to discuss workforce diversity, supplier diversity and philanthropy. While we see only a benefit from such communication, we decline to direct the applicants meet with any interested party outside of their service obligations to customers and litigation of regulatory proceedings before the Commission.
7. New Positions Created to Elicit Additional Settling Parties
It is disconcerting to see that SoCalGas proposed in its settlement to conditionally "create" 19 new positions that were not requested in its application. As a specific requirement of the settlement, nine of these positions would be filled within 90 days of a decision adopting the settlement and these positions would be union-represented.38 The Settlement states that these are in response to "concerns related to staffing levels raised by Local 483." In Exhibit 850, Local 483 proposed the addition of 15 new positions; 14 new positions because "(d)ue to terror threats on oil and gas producers the Company should have a minimum of two employees working at Compressor Stations and Storage Fields at all times."39 The 15th position proposed by Local 483 would be in the Storage Department to perform maintenance and inspection of Cathodic Protection Equipment.
The nine positions created in the Settlement do not match the 15 positions proposed by Local 483. The Settlement Agreement states that four new positions would be for the Pipeline Integrity Program and another two have no delineated duties other than to be "represented positions" in the Transmission Department. One settlement-created position would be a union-represented position in the Storage Department for a Cathodic Protection Specialist and a further two represented positions will also be in the Storage Department.
SoCalGas proposed to also hire the first 10 graduates trained by a new Western States Utility Workers Industry Apprenticeship and Training Trust. SoCalGas would provide $500,000 "within the total revenue requirement provided for by this settlement."40 No duties or work location are specified for these 10 positions. Without attributing the funding to any account, we can only assume the company would fund this expenditure using some excess still built into the SoCalGas Settlement generally.
We are concerned that this aspect of the settlement is not based on an outcome that could be supported by the record and thus is not even a reflection of avoiding the litigation risk inherent in either party's positions. We must reject the apprenticeship program, which is not justified - or even proposed - in the evidence on the record for this proceeding. We will only adopt in the appropriate accounts adequate funding, and the appropriate full-time employee equivalent positions, for Test Year 2004 as discussed in those sections of this decision.
16 Pursuant to Rule 51.1(c) of the Commission's Rules of Practice and Procedure, the first motion was filed by SoCalGas, ORA, TURN, Utility Workers Union of America (UWUA), Local 483 UWUA (Local 483), Southern California Generation Coalition (SCGC) and Greenlining Institute (Greenlining) (collectively the "SoCalGas settling parties") addressing Phase One of the above-captioned SoCalGas Cost of Service (COS) proceeding and the second motion was filed by SDG&E, ORA, Greenlining, Coral Energy Resources, LP (Coral), and the Coalition of California Utility Employees (CUE) (collectively, the "SDG&E settling parties") addressing Phase One of the above-captioned SDG&E COS proceeding. When referring generally to both settlements, the two groups are collectively the settling parties.
17 On January 30, 2004, FEA filed a Motion to file late-filed comments on the SDG&E partial settlement. Its comments were limited to indicating its decision to join the settlement.
18 ORA litigation brief, at p. 13.
19 Comments of UCAN in Opposition to the Partial Settlement of the SDG&E Cost of Service Application dated January 20, 2004.
20 Amongst several cites, see p. 2 of ORA's February 19, 2004 Reply.
21 ORA's February 19, 2004 Response to Non-Settling Parties, p. 11.
22 For example, "ORA reviewed Mr. Woychik's recommendations and concluded that the probability that the Commission would adopt UCAN's position on these issues was nearly zero..." (ORA's February 19, 2004 Response, p. 13.) UCAN's recommendation is discussed in the appropriate section of this decision.
23 If one counts the Commission's decision to in D.94-08-023 to defer the 1996 GRC until 1998, then one could conclude that five GRCs have passed since a contested GRC was presented to the Commission. (Footnote as included in UCAN Protest.)
24 UCAN Protest, p. 4.
25 Id.
26 Edison (63 CPUC 2d 241).
27 On February 10, 2004, Edison filed a rehearing request for D.04-01-007, a decision that found Local 483 eligible for intervenor compensation. The rehearing is pending and is not prejudged by any determinations made in this decision.
28 Beginning with the Scoping Memo, any issues already in other active proceedings were excluded. On May 19, 2003, Greenlining filed a Motion to Compel Discovery, which was denied by an ALJ Ruling on June 18, 2003.
29 Attachment C to both proposed Settlement Agreements.
30 The Greenlining Institute and Latino Issues Forum did not intervene jointly. While they did jointly file a motion on March 17, 2003, only the Greenlining Institute has an appearance in these proceedings and only Greenlining signed the settlement.
31 SoCalGas proposed Settlement Agreement, p. 27 and SDG&E, p. 23. Apparently, the ordinary "good faith efforts" of SoCalGas and SDG&E would not be sufficient.
32 This policy was established in the scoping memo at p. 7 where it was ruled that a party would have to show a data request to be "relevant to the 2004 test year revenue requirement" (underlining in the original). (See Assigned Commissioner's Ruling Establishing Scope, Schedule, and Procedures for Proceeding, dated April 2, 2003.) This restriction was applicable to diversity, outreach, contributions (philanthropy) and minority contracting. (See pp. 6-8.)
33 "Review of the utility's employment practices is clearly within the purview of a general rate case. A utility that fails to achieve workforce diversity denies itself and ultimately its customers significant advantages. These include making the utility an attractive employer with a more capable and motivated workforce, as well as compliance with applicable state and federal laws." (Mimeo., p. 315.)
34 GO 156: Rules Governing the Development of Programs to Increase Participation of Women, Minority and Disabled Veteran Business Enterprises in Procurement of Contracts from Utilities as Required by Pub. Util. Code §§ 8282 - 8286.
35 Exhibit (Ex.) 900, Updated Testimony of John C. Gamboa, pp. 11-12.
36 See the assigned ALJ's Ruling Denying the Motion of The Greenlining Institute and Latino Issues Forum to Compel Responses to Outstanding Data Requests, dated July 18, 2003. Ruling: "3. Shareholder financed philanthropy is not within the scope of these proceedings." We affirm the ALJ's ruling on this issue.
37 Mimeo., p. 212.
38 SoCalGas Settlement, p. 9.
39 Exhibit 850, Prepared Direct Testimony and Recommendations for A.02-12-027 and A.02-12-028, p. 3.
40 SoCalGas Settlement, p. 17.
