2. Preliminary Matters
2.1 SCE's Showing
Pub. Util. Code § 451 provides, in part, that "all charges demanded or received by any public utility ... shall be just and reasonable." Section 454 provides, "Except as provided in § 455, no public utility shall change any rate or so alter any classification, contract, practice, or rule as to result in any new rate, except upon a showing before the commission and a finding by the commission that the new rate is justified." Where a utility fails to demonstrate that its proposed revenue requirements are just and reasonable, the Commission has the authority to protect ratepayers by disallowing expenditures that the Commission finds unreasonable.
As the applicant, SCE must meet the burden of proving by clear and convincing evidence that it is entitled to the relief it is seeking in this proceeding.6 SCE has the burden of affirmatively establishing the reasonableness of all aspects of its application. Intervenors do not have the burden of proving the unreasonableness of SCE's showing.
As in the last GRC, SCE has provided substantial testimony and workpapers to support its request. In D.04-07-022, we requested that in presenting their initial rate case showings, utilities work to provide the necessary justification with greater attention to the need for economy of words and data. We were not in any way retreating from our prior policy of requiring better initial utility showings. We were simply directing utilities to work at being more efficient in their presentations, which in turn should enable the Commission to administer its proceedings with greater efficiency. SCE appears to have considered this request in preparing its testimony and supporting workpapers. There appears to be less tangentially relevant and duplicative materials included in the company's showing.
As a general matter, with respect to individual uncontested issues in this proceeding, we find that SCE has made a prima facie just and reasonable showing, unless otherwise stated in this opinion.
2.2 SCE's Financial Health
SCE admits that its financial condition has improved considerably since the financial crisis of 2000-2001, but states that its credit ratings "are not yet back to pre-crisis levels" and that it could be downgraded if there is a reversal of the current trend of increasing regulatory consistency.7 Among other things, SCE requests approval of its proposed post-test year ratemaking mechanism for 2007 and 2008 in order to "continue SCE's return to financial health."8
From November 1992 through December 2000, SCE held an A+ rating from Standard & Poor's, a major credit rating agency. Ratings declined sharply during the financial crisis. In December 2003, Standard & Poor's, restored SCE's credit rating to BBB, which is an investment grade rating. In February 2005, Standard & Poor's upgraded SCE's credit rating to BBB+. Moody's Investors Service (Moody's), a second major rating agency, also restored SCE to an investment grade rating. Moody's later upgraded SCE's credit rating to A3, equivalent to a Standard & Poor's rating of A minus. According to Aglet, SCE has not shown that restoring its credit ratings to the A+ level is necessary for provision of safe, reliable service, or that additional revenues needed to achieve higher credit ratings are cost effective to ratepayers. Aglet also notes SCE's statement that financial recovery will be substantially complete if it achieves A minus ratings.9
In assessing SCE's finances, Moody's cites "[s]trong historical and projected financial credit metrics that reflect the collection of Procurement Related Obligations Account (PROACT) and the underlying financial strength of SCE's core utility business" and "continued evidence of a more constructive regulatory environment in California."10 Moody's states that over the next several years "SCE's funds from operations (FFO) coverage of interest expense is expected to exceed 5 times."11 Standard & Poor's FFO interest coverage guidelines for A rated utilities with SCE's business profile of 6 indicate a range of 5.2x to 4.2x. Wall Street expects that SCE's FFO interest coverage will be stable and sound. Barron's, a publication that focuses on investment issues, characterizes the stock of Edison International as having the prospect of market-level returns but with less risk than the broad market.
Aglet asserts that recent earnings by Edison International (EIX), SCE's holding company, are solid. The holding company was able to retire $571 million of maturing debt in September 2004, which improved key credit quality measures, even after the company increased cash dividends to shareholders. SCE provides the lion's share of earnings, cash flows and dividends for Edison International.
Based on the above discussion, we believe that SCE has substantially recovered from the financial effects of the 2000-2001 energy crisis, and it is not necessary to factor in further financial recovery in resolving specific issues in this proceeding.12
2.3 Forecasting Issues
As discussed in prior Commission decisions, there are a number of acceptable methodologies for forecasting test year costs.13 In this GRC, parties have used averages and trends of recorded costs, the most recent recorded costs, as well as forecasts based on budgets or incremental budgets over recorded amounts. Depending on circumstances, one method may be more appropriate than others. Under other circumstances, two or more methods may be equally appropriate. In general, the parties' testimony should explain (1) why its proposed methodology is appropriate, (2) why it is better than methodologies proposed by other parties and (3) why the results are reasonable. The Commission must weigh this information in deciding which methodology should be used and how it should be used.
We note that in using budget based methodologies, the forecasts are often based on incremental budgets over a base amount, usually the last recorded year. While this may be appropriate and reasonable in many instances, it is not a complete bottoms up budget and may be questioned, particularly as to what is already embedded in the historic data. While incremental budgets may capture anticipated increases over historic levels it is not always clear that (1) additional productivity from past or current projects are also being properly cast on a forward basis, (2) that certain historic costs will be necessary in future years and can, instead, be used to offset new costs, and (3) that the proposed budgeted costs are not included in another form in the embedded recorded data. When these types of issues are raised, the utility has the responsibility to demonstrate the reasonableness of its estimates, even if it means identifying and justifying all costs embedded in the base year amount.
2.3.2. Increased Costs of Providing Service
SCE has asked the Commission to authorize a revenue requirement commensurate with the company's cost to serve its customers. In many instances, SCE asserts that use of recorded data is inappropriate because of changed circumstances. The company highlights three points to support its position.
· First, SCE's electric system was built largely in the decades after the Second World War, and many of its components are wearing out at the same time. SCE provided consultant testimony that assessed SCE's system and the capital investment required to slow its deterioration. SCE states this testimony was unchallenged by any party.
· Second, SCE asserts that its plan of stepped-up capital investment is the lowest cost option for its customers and that embracing deferred maintenance or a run-to-failure philosophy advocated by the ORA and seconded by other parties, will be more costly over time.
· Third, according to SCE, its workforce is rapidly aging, with the over-50 population having doubled since 1998, and ORA's proposals would guarantee widespread vacancies in the years to come. SCE also indicates that its request for salaries and benefits is validated by the Total Compensation Study developed by an independent third party in accordance with the Commission's guidelines, and jointly directed by ORA and SCE.
As a preliminary matter, we agree with many of the points raised by SCE. We supported the concept of the distribution capital replacement program in SCE's last GRC and do so again in today's decision. In deciding this case, we will consider the increased costs to customers if system components are allowed to run to failure. Also, we agree that there may be incremental costs related to adjusting to an aging workforce. Therefore, we do not necessarily rely on lower, recorded data to forecast expenses or capital expenditures. However, we do not feel compelled to accept SCE's estimates either. SCE has the burden to show that, under these circumstances of an aging distribution system and an aging workforce, its forecasts of costs are fully justified and supported. If at any time we feel that burden had not been met, we will not hesitate to reduce SCE's request.
2.4. Joint Comparison Exhibit
Between SCE and the other participating parties, there are numerous conflicting estimates and recommendations. This is complicated by errata and stipulations that have occurred at different times during this proceeding.
The Joint Comparison Exhibit reconciles SCE's corrections, revisions and agreements since the filing of its application. Similarly, it reconciles changes to the estimates and recommendations of the interested parties since their initial submittal of testimony. The parties' final positions, prior to update testimony, are reflected in the Joint Comparison Exhibit, and the numerous resultant issues that are identified and summarized form the basis for determining what must be addressed and resolved in this decision. Revisions to SCE's request due to its agreement with the positions of other interested parties, as reflected in the Joint Comparison Exhibit, are reasonable. Those revisions, as well the adopted numbers related to the resolution of issues in this decision, are reflected in the results of operations model used to calculate the adopted summary of earnings table and related tables for this proceeding. Workpapers for the RO model were previously identified as late filed Exhibit 900 and are, at this time, received in evidence. Identified issues related to SCE's agreement with other parties' proposals are explained in the Joint Comparison Exhibit and will not be addressed further in this decision.
6 "[T]he long-standing and proper rule [is that a] utility seeking an increase in rates has the burden of showing by clear and convincing evidence that it is entitled to such increase." (D.00-02-046, p. 38, citing D.90462, 2 CPUC 2d 89, 98-99.) See also D.00-02-046, Conclusion of Law 6. (Id., p. 535, as modified by D.01-10-031, p. 45.)
7 Exhibit 1, pp. 4-5.
8 Exhibit 77, p. 138
9 SCE, Hunt, 22 RT 2172-2173
10 Exhibit 409, pp. 50 and 57, November 25, 2003, and December 22, 2004.
11 Exhibit 409, p. 57, December 22, 2004.
12 In SCE's last GRC decision, D.04-07-022 at pages 11-12, the Commission addressed restoration of investor confidence: "[W]e find no evidence convincing us that granting SCE the full amount of its requested test year base revenue is a necessary precondition for the company to achieve the financial health it requires to provide adequate utility service. To the contrary, evidence introduced by Aglet shows that the company's financial condition has already improved greatly since the height of the state's energy crisis and SCE's financial crisis." Since that time SCE's financial health has only improved.
13 For instance, see D.04-07-022, mimeo. at pp 15-17.
