XIX. Working Cash - SoCalGas and SDG&E

Working cash is an allowance added to rate base that represents the funds provided by investors that are needed to pay for current operating expenses and provide a financial cushion. One major element in estimating the working cash need is the "lead/lag" that exists between when the company must pay its bills to suppliers for goods and services used to provide utility service and the time when the company receives payment for services from the consumers. This could be negative (in that the company needs cash to pay its suppliers ahead of receiving customer payment) or positive (customer payments arrive before payment to suppliers). Typically the former applies. There were several specific issues for working cash raised by ORA , TURN and FEA.

A. Federal & State Tax Payment Lag

ORA proposed to use data that it identified as 2002 tax payment information to determine the appropriate lag-days for SoCalGas and SDG&E.²¹⁴ Both companies disagreed.

SoCalGas argued that it had not yet filed its 2002 tax returns, but we observe tax payments do not necessarily follow the filing of corporate tax returns. SoCalGas claims ORA made other errors too, using the wrong tax payments and omitting a refund.²¹⁵ More persuasively, SoCalGas argue that ORA makes no clear justification for not using the base year 2001, as is the starting point for virtually all analyses for deriving Test Year 2004, or alternatively, using the 1999 to 2002 average because tax payments can vary from year to year. We agree that the use of an average is reasonable in this instance, and we will adopt the 36.1 lag-days for federal taxes and 26.99 lag days for state taxes for SoCalGas.²¹⁶

SDG&E used a different method, the "3-3-6-9" method, as approved by the Internal Revenue Service (IRS), and, as with SoCalGas, SDG&E believes that ORA misunderstood the company's proposal. SDG&E argues that the prior years' effects of electric industry restructuring make an average method invalid.²¹⁷ Further, SDG&E believes that ORA needs to use one consistent method for both state and federal taxes, suggesting that ORA was selecting the most advantageous method rather than the most appropriate method.

One continual message in this decision to all parties and the applicants would be: "be fair and consistent." We expect to impose an obligation to perform on the applicants and in exchange, the obligation to pay a reasonable rate is imposed on ratepayers. We therefore adopt SDG&E's estimates. ORA does not offer any convincing argument that the SDG&E method is wrong.

B. Municipal Taxes

TURN and UCAN argued that SoCalGas and SDG&E have understated the "lag-days" and they proposed to "synchronize" the taxes to the gas commodity prices.²¹⁸ SoCalGas and SDG&E responded that the lag days are not wrong and that the intervenors incorrectly use the (lower) commodity charge instead of (higher) total revenues - taxes are charged on total revenues.²¹⁹ For SoCalGas, a correct adjustment for revenue lag would be 42.61 days, based on a 13-month methodology. Included is a component for the collection lag that SoCalGas corrects to 25.40 days. By using both the correct base for taxes and the corrected lag days, SoCalGas reduces its rate base component for Municipal Taxes from $19.003 million to $15.277 million, a $3.727 million reduction.²²⁰

We accept the SoCalGas corrections as the most reasonable estimation method and adopt the corrected calculation, above.

C. Accrued Vacation and Withholdings

TURN and UCAN proposed to adjust the estimate for accrued vacation and withholding by using the adopted labor escalation rate. SoCalGas agreed (Ex. 27, p. 7) but disputed the second proposal that the change in accrual should reflect the same percentage change in O&M labor over the base-year. SoCalGas argued that "older workers" with 15-years or more of service earn more vacation (four to six weeks) compared to new replacement employees who earn only one to two weeks for the first five years. SoCalGas and SDG&E argued that as new employees are hired, they replace more experienced employees who are promoted. We do not find sufficient evidence to support the calculation and so we will not make the adjustment at this time.

D. Customer Deposits

SoCalGas and SDG&E tariffs require that an applicant for new service establish credit. A customer who has not qualified for the establishment of credit with the utility must submit a deposit pursuant to the utilities' Commission-approved tariff rules. SoCalGas and SDG&E are required to refund customer deposits with interest within 12 months as long as the customer pays his or her bills timely. Between 1997 and 2001, SoCalGas had average deposit balances of $35.088 million²²¹ and SDG&E had balances between $22 million and $24 million.²²²

TURN and UCAN contended that customer deposits represent a permanent source of working capital not provided by investors. However, customer deposits are not counted as an offset to the operational cash requirement under current practice. This is because SoCalGas and SDG&E pay interest on the deposits (at the three-month commercial paper rate, which is currently less than 2%), and the Commission's Standard Practice U-16 (U-16) indicates that while interest-free customer deposits should be counted as working cash, those on which the utility does pay interest should not be counted as working cash.²²³

TURN and UCAN therefore recommended that the Commission, as a matter of policy, amend the "interest-free" restriction of U-16 as it specifically relates to customer deposits held by SoCalGas. TURN's specific recommendation in this proceeding was to reduce the test year rate base by $43.6 million based on escalating the 2001 data for TURN's forecast of customer growth to mid-2004. UCAN calculated $26.070 million for SDG&E. TURN and UCAN further recommended that if the Commission treats deposits as a rate base offset, it should also increase SoCalGas and SDG&E's operating expenses to reflect interest payable on customer deposits at a projected interest rate of 2%.

This recommendation is identical to TURN's recommendation in Edison's A.02-05-004 and adopted in D.04-07-022.²²⁴

SoCalGas and SDG&E vigorously opposed the adjustment,²²⁵ as Edison did in its proceeding. Applicants argued the recommendation conflicted with the standard practice, but for Edison the Commission found it reasonable to deviate from U-16. Edison lost its argument in A.02-050-004 that was based on comparing customer deposits to its historical investment in fuel oil inventories that was limited, for ratemaking purposes, to short-term interest. The Commission found:

"in rejecting SCE's proposal (in 1996) to rate base a portion of fuel inventory, the Commission held that "the risk Edison is offering to assume [of a change in value of the inventory] is not significant enough to justify a change in financing of the carrying costs." (64 CPUC 2d 241, 382, Finding of Fact 110-111.) SCE has not demonstrated to our satisfaction that the circumstances that led the Commission to reject SCE's proposal to rate base fuel inventory are equivalent to the circumstances attendant to TURN's proposal for customer deposits."²²⁶

SoCalGas and SDG&E made essentially the same arguments as Edison. SoCalGas and SDG&E argued that they have large comparable amounts of shareholder capital committed to serving customers that does not earn a full cost of capital return, and the proposed treatment of customer deposits is inconsistent. SoCalGas and SDG&E argued that if the Commission treated customer deposits as an offset to rate base that would otherwise earn the authorized rate of return on rate base, to be fair we would have to change the treatment of other similar items that have previously been authorized to only earn interest at the short-term commercial paper rate. SoCalGas further stated that it currently has an average of $53.8 million of working gas inventory, where it is only authorized to earn the short-term commercial paper rate, not the authorized rate of return.²²⁷ Applicants argued there is no reason to provide a lower return on this investment in inventory, provided by shareholders, than would be paid on the customer deposits provided by new customers. There is a comparable argument for SDG&E that has a $21.2 million investment in working gas inventory.

The question before us now is whether the current ratemaking treatment for SoCalGas and SDG&E is distinguishable from Edison.

The Commission has previously decided that the working gas inventories should accrue a short-term interest allowance.²²⁸ These inventories are similar to Edison's fuel oil inventories in that they are both necessary for the operation of the system and they were found to lack the same element of risk associated with assets that earn the full rate of return when included in rate base, as was described in D.04-07-022. These are not the proceedings where SoCalGas and SDG&E may pursue a change in the ratemaking treatment for working gas inventories based on the equity argument or other arguments addressing the current risk compared to allowed return.

SoCalGas and SDG&E situation cannot be distinguished from Edison's and so we may consider applying the same treatment accorded to Edison's customer deposits to those of SoCalGas and SDG&E. Customer deposits are risk-free to SoCalGas and SDG&E, and the cost for the use of these funds is limited to the interest accrued and paid to customers when deposits are refunded.

If SoCalGas and SDG&E had no customer deposits, would they have to either borrow more money for working cash or to finance long-term plant included in rate base? Applicants argue the deposits do not finance long-term rate base because the funds are temporary.²²⁹ Because the balance turns over continually as old deposits are refunded and new ones are made, we agree with SoCalGas and SDG&E that customer deposits do not finance long-term investments. But customer deposits can replace short-term borrowing. SoCalGas and SDG&E did not argue the customer deposits did not replace short-term borrowing. U-16 only calculates a needed amount of working cash²³⁰ but the applicants have not shown they will borrow that amount as short-term debt in the test year. Applicants' ratemaking models do not show customer deposits as available funds not provided by investors. We can conclude that in practice, SoCalGas and SDG&E use the deposits in lieu of borrowing the amount projected by U-16.

Therefore, we will adopt the recommendations of TURN and UCAN and reduce the working cash rate base component by the average of $35 million and $23 million for SoCalGas and SDG&E, respectively. We will authorize SoCalGas and SDG&E to recover interest at the forecast commercial paper rate of 2%, or $0.700 million and $0.460 million, respectively, in the 2004 base margin.

E. Hub and Swap Revenues

In its opening litigation brief,²³¹ TURN proposed to reduce by 25% the Accounts Receivables attributable to hub and swap transactions, or $2.6 million, that would reduce the working cash calculation for SoCalGas. TURN argued that hub and swap transactions utilize core capacity and commodity assets and therefore working cash requirements should be reduced because revenues generated by hub transactions offset the purchased cost of gas and contribute to savings that may result in increased shareholder rewards under the Gas Cost Incentive Mechanism (GCIM).

SoCalGas responded²³² to this proposal by pointing out that the revenues are recorded in full in the Purchased Gas Account (PGA), which has the effect of reducing gas costs recovered from core customers. Subsequently, under the GCIM there is sharing incentive mechanism that allocates any gains outside of a deadband between customers and shareholders. SoCalGas argued that this proposal is a piecemeal change to the GCIM.

It is clear that TURN's discussion in the brief does not fully explain and resolve the ratemaking effects of the hub and swap revenues in both the base margin cost of service (this proceeding) and in the GCIM (a separate proceeding). We agree with SoCalGas that this issue is misplaced in this case and we reject the proposal for consideration here.

²¹⁴ Ex. 301, p. 26-5 and Ex. 302, p. 26-5.

²¹⁵ Sempra opening litigation brief, p. 285.

²¹⁶ Ex. 81, p. 6 and Sempra opening litigation brief, p. 285.

²¹⁷ Sempra opening litigation brief, pp. 285 - 286.

²¹⁸ Ex. 501, p. 49.

²¹⁹ Sempra opening litigation brief, p. 286.

²²⁰ Ex. 127, pp SWK-3 through SWK-7, and SWK-13.

²²¹ Ex. 501, p. 52, excluding 2002, which is beyond the base year.

²²² Interpreting a chart without a data table, see Ex. 602, p. 75.

²²³ Ex. 501, pp. 51-53.

²²⁴ See D.04-07-022, mimeo., pp. 251-257.

²²⁵ Sempra opening litigation brief, pp. 292-294.

²²⁶ D.04-07-022, mimeo., pp. 256-257.

²²⁷ Ex. 127, p. SWK-9.

²²⁸ Sempra opening litigation brief, p. 293.

²²⁹ Sempra opening litigation brief, p. 293.

²³⁰ It is possible that working cash would exceed needs, but the applicants' calculations show a need for additional working cash that becomes the rate base component in dispute.

²³¹ Pages 147-148.

²³² Sempra opening litigation brief, p. 295.