8. Allocation of Generation Related
Administrative & General Costs

The requirement for SCE to have separate rate components for distribution and generation requires SCE to separate or functionalize its requested Commission jurisdictional base related revenue requirements accordingly. For test year 2006, SCE used the methodology that was included in developing the authorized revenue requirements distribution and generation in its last GRC. SCE first assigns O&M costs and capital costs directly between generation and distribution functions. It then uses a labor cost allocator to functionalize those O&M costs and capital costs that cannot be directly assigned (i.e., A&G and general plant costs). Next, SCE functionalizes the other components if its 2006 revenue requirement, including income, payroll and property taxes, by using either a labor or rate base allocator. Finally, for ratesetting purposes, SCE assigns to distribution the A&G and general plant costs initially assigned to generation using the labor cost allocator (except those costs associated with pensions and benefits, computer costs, and furniture and equipment costs). SCE's methodology shifts approximately $276,300,000 in generation related costs to distribution rates in the test year.²⁴

AReM, DAAC and WPTF oppose the reassignment of generation related A&G expenses and general plant costs from the generation function to the distribution function, principally because the methodology runs counter to cost causation principles. They argue there is no point to functionalizing costs if they are simply going to be reassigned arbitrarily to another function and conclude that all generation-related costs should be assigned to the generation component of the revenue requirement.

Both AReM and DACC note that PG&E also functionalizes its A&G expenses and general plant costs between generation and distribution, but does not reassign the generation related overhead to the distribution function.

In addition, AReM and DACC contend that A&G costs related to the Energy Supply and Management (ES&M), Qualifying facilities (QF), and Resource Planning departments should be directly assigned to the generation functions, because these are substantially generation related activities.

SCE argues that it is not the case that Direct Access (DA) customers are only responsible for distribution-related costs. The Commission has previously recognized that certain generation-related costs are properly borne by all customers. In D.01-01-019, for example, the Commission recognized that utilities - which are required by law to act as the default provider to all retail customers within their respective service territories - must maintain the necessary infrastructure to take back direct access customers that choose to return to bundled service. That decision found that the default service obligation is not cost-free and all electricity customers should pay for it. SCE acknowledges that D.01-01-019 addressed what adders to include with the Power Exchange (PX) Credit received by DA customers. However SCE argues that the Commission's findings regarding what costs are properly borne by DA customers is also relevant in this proceeding.

SCE also disagrees with the DACC and WPTF claim that DA customers already pay their fair share of generation costs through the Direct Access Cost Recovery Surcharge (DACRS). SCE states that because the Commission approved SCE's functionalization approach in D.04-07-022, SCE has included A&G and general plant costs for rate recovery in its base-related distribution revenue requirement since 2004. This has reduced the amount of the competition transition charge (CTC) (a component of DACRS) that SCE's DA customers pay, because in determining the CTC component of the DACRS, SCE's A&G and general plant costs are excluded. SCE states that it is for this reason that AReM's and DACC's comparison of PG&E to SCE falls short. According to SCE, what AReM and DACC overlook is the fact that PG&E includes A&G and general plant costs when determining the CTC component of the DACRS. Therefore, PG&E's DA customers pay these identical costs; they just pay it as a portion of CTC.

SCE also opposes the proposal to allocate the costs of the ES&M, QF, and Resource Planning departments directly to generation. SCE maintains that these departments also perform distribution-related tasks as well as generation-related functions. Also, the proposal is one-sided in that it does not consider any other A&G organizations that may be weighted more heavily to the distribution function.

8.1 Discussion

In one sense, the issue of whether A&G expense and general plant overheads related to generation should be recovered from DA customers appears settled. According to SCE it can recover A&G expense and general plant overheads related to generation, from direct access customers, by either charging those overhead costs to all distribution customers (its proposal in this GRC) or by including those overhead costs in the CTC calculation used in determining the DACRS (SCE's characterization of what PG&E does). For issues which affect more than one utility, without good reason to do otherwise, our preference is to provide consistent treatment for the utilities. SCE implies there is consistency by PG&E recovering the overhead costs through the DACRS and SCE recovering the overhead costs through distribution rates, because in both cases DA customers are being charged for the overhead costs. This may be true, but the record in this proceeding is not conclusive. While no party has disputed SCE's claim regarding PG&E, which was brought up in SCE's rebuttal testimony, it is not clear that the effect of using both procedures is exactly the same. Certainly, with the current DACRS cap, the timing of cost recovery would be different. Also, AReM states in its reply brief that "Setting aside the issue of whether such costs should be included in CTC calculations at all, AReM submits that the issue of what costs should or should not be included in CTC is an issue for the utilities' Energy Resource Recovery Account (ERRA) proceedings, where the Commission has determined CTC issues should be addressed, or, alternatively, the DA proceeding (R.02-01-011)." There is at least an implication that whether A&G expense and general plant overheads should be included in the CTC calculation may become an issue in future ERRA proceedings. If that does occur, there is no telling whether what we might determine in this decision today would be consistent with what is determined in a future PG&E ERRA. That would largely depend on what recommendations are made and what evidence is produced in any future proceeding.

To facilitate regulatory consistency between SCE and PG&E, we will change the treatment for SCE to match that of PG&E. That is cost recovery of the overheads in question, if appropriate, should be recovered through the DACRS. It is more reasonable to address this issue, as well as any concerns SCE has with the DACRS cap, in a proceeding where the principles and calculations regarding DA cost responsibility principally reside. That would, as AReM suggests, be in either the utilities' ERRA proceedings and/or R.02-01-011. We will leave it up to SCE to decide the best way for it to proceed.

Regarding the proposal to directly assign the three generation related A&G departments to generation, we agree with SCE's arguments and will not do so.

²⁴ The amount shown has been reduced by approximately $108,000,000 due to SCE's agreement with WPTF's recommendation that not all pension and benefit and computer, furniture and equipment costs should be assigned to the distribution function.