22. Distribution Reliability
Incentive Mechanisms
Since 1997, SCE has been subject to a form of reliability incentive mechanism in which it could earn rewards or suffer penalties depending on its performance relative to benchmarks for the frequency of electric service interruptions and duration of those interruptions. The first such mechanism was adopted for SCE in D.96-09-092. More recently, the Commission authorized a modified version of a distribution reliability mechanism in SCE's test year 2003 GRC.
In this 2006 GRC, SCE, CUE, ORA, TURN and Aglet each presented testimony and filed briefs on what the Commission should authorize regarding distribution reliability incentive mechanisms in the 2006-2008 period. SCE's primary position, as reflected in testimony and briefs is that the type of incentive mechanism currently in place for SCE is no longer in the best interests of it or its customers. In summary, SCE contends that an incentive mechanism based on short-term measurement simply exposes customers and shareholders to rewards/penalties due to random events, and does not create incentives for achieving satisfactory levels of long-term reliability. Instead, SCE proposed to report annually to the Commission on its reliability performance relative to a peer group of utilities based on information supplied by those utilities to the Edison Electric Institute.
CUE's primary position, as reflected in its testimony and briefs is that the Commission should continue the kind of reliability incentive mechanism currently in place, but with certain changes. In summary, CUE contends that its mechanism will create necessary incentives for both short-term and long-term reliability, and will create a disincentive for SCE management to reduce its current reliability-related investments by diverting investments to other areas of company operations.
In its testimony and briefs, TURN supported SCE's recommendation to eliminate the incentive mechanism. TURN argued that if the Commission were to adopt a mechanism, it should include much more stringent targets to ensure that ratepayers pay incentives only for performance incremental to performance already funded through rates.
At this time, SCE, CUE and TURN have agreed on a reliability investment incentive mechanism which is explained and addressed below.
Aglet opposes corporate performance incentives that allow financial rewards and penalties for SCE. It is Aglet's position that these types of performance targets duplicate existing executive goals and are not necessary. However, Aglet supports monitoring of utility performance, in order to remind utility managers of the Commission's interest in specific areas of their operations.
ORA has proposed an alternative reliability accountability mechanism which is explained and addressed below.
Throughout this proceeding SCE, CUE, and TURN engaged in discussions aimed at resolving their differences on distribution reliability incentive mechanisms. Discussions between SCE and CUE did not culminate until October 19, 2005, when SCE and CUE agreed in principle on a fair resolution of these issues, which was documented in a Memorandum of Understanding. A duly noticed Settlement/Stipulation Conference was held on October 27, 2005, with participation by representatives of SCE, CUE, TURN, ORA, Aglet, and San Diego Gas & Electric Company. Following the Settlement/Stipulation Conference, SCE and CUE attempted to respond to some of the issues discussed during the Settlement/Stipulation conference and engaged in further negotiations with TURN. Those discussions with TURN culminated on November 1, 2005, when TURN agreed in principle to join in the stipulation provided SCE and CUE agreed to certain terms, which have been reflected in the stipulation.
On November 2, 2005, SCE, CUE and TURN (Settling Parties) submitted a joint motion for approval of a stipulation on the Reliability Investment Incentive Mechanism (RIIM). Aglet filed comments on the stipulation on November 16, 2005 and ORA filed comments on November 17, 2005. SCE and CUE jointly replied to the comments of Aglet and ORA on November 23, 2005.
The Settling Parties' stipulation regarding the RIIM is included in this decision as Appendix E. Briefly:
· The RIIM will be in effect upon the effective date of its adoption by the Commission and run through December 31, 2008.
· The Settling Parties have identified certain categories of SCE's capital expenditure request in this proceeding that are particularly related to preserving long-term electric service reliability for SCE's customers. Based on the record presented in this proceeding, the Parties have designated these certain capital expenditures and the associated cumulative capital additions forecast to be added to plant-in-service by December 31, 2008 (plus the associated cost of removal) as subject to the RIIM.
· The Settling Parties also agree that adequate recruitment and retention of apprentice Linemen/Groundmen, and their training represents an important indicator of SCE's ability to preserve long-term electric system reliability.
· SCE agrees to add a cumulative total of 600 apprentice Linemen/Groundmen to its workforce during 2006-2008.
· At the end of 2008, SCE will compare the adopted RIIM capital additions (plus associated cost-of-removal) with the adjusted recorded RIIM capital additions from the effective date of the GRC final decision through December 31, 2008. This difference, if any, is the "Cumulative Shortfall."
· The capital-related revenue requirement associated with any Cumulative Shortfall, plus associated interest will be returned to SCE's customers as a balancing account credit.
· If SCE's cumulative increase in apprentice Linemen/Groundmen is less than 600 employees, but is greater than 500 employees, SCE will return to customers an amount calculated as follows: $15 thousand multiplied by (600 - the increase in apprentice Linemen/Groundmen).
· If the cumulative increase falls below 500 such apprentice Linemen/Groundmen, the amount returned to customers would include the calculation from Section 3.6.5 (i.e., $15 thousand multiplied by 100 apprentice Linemen/Groundmen, or $1.5 million), plus an additional concurrent amount calculated as follows: $70.5 thousand2 multiplied by (500 - # increased).
· For six months during 2006, SCE will record its outage information and tabulate "SAIDI," "SAIFI" and "MAIFI" values using both its existing "DTOM" system and its new "ODRM" system. The results of this dual recording will be made publicly available so that parties can compare the outage metrics produced by the old and new systems.
We approve the Settling Parties' stipulation regarding the RIIM, although we are somewhat concerned about the actual incentive. The incentive is not to maintain or improve distribution reliability, but rather to spend money on projects or activities that will likely maintain or improve distribution reliability. Whether spending the money actually accomplishes anything is not tied to the RIIM.
However, we approve the use of the RIIM, because we feel the related expenditures that are adopted in this decision are necessary. The adoption of the expenditures, much of which was in excess of what historic data would indicate was reasonable, was influenced, to a great extent, by the importance placed on them by SCE. While we expect SCE to spend its authorized amounts for these categories, the RIIM provides an incentive for them to do so and a means to credit money back to ratepayers if they do not do so.
In approving the use of the RIIM, we are at the same time rejecting the continued use of an incentive mechanism with rewards and penalties. SCE argues that:
· The existing distribution reliability mechanism has not improved SCE's reliability.
· The distribution reliability mechanisms have attracted a great deal of management time and attention that could be better used to address more significant issues such as the efficient replacement of SCE's aging infrastructure.
· The primary contributors to unreliability are either causes over which SCE has little or no control (e.g., unavoidable operational activities, third party, and weather) or equipment failures. While SCE clearly has control over the number of equipment failures over the long term, i.e., through a program of infrastructure replacement, the effects of infrastructure replacement cannot be immediately seen.
· The costs to ratepayers of the reliability mechanisms proposed in this proceeding have not been assessed. It is possible that the amount of money required to meet the proposed targets would far exceed what ratepayers would be willing to fund.
SCE's recommendation to discontinue its current reward/penalty reliability incentive mechanism was supported by TURN and Aglet. We are persuaded that such incentive mechanisms are not appropriate at this time. Also as discussed later, we do not adopt ORA's proposed reliability mechanism.
There are two elements of the stipulation, which are opposed by other parties. The first is the proposal to require SCE to make capital additions in the amounts found to be reasonable by the Commission. While ORA does not object to this element, Aglet sees the proposal as a shift toward recorded cost ratemaking. Aglet states that the balancing account feature would result in authorizing recorded cost ratemaking for revenue requirements that would normally be set on a forecast basis. Aglet explains that if SCE in 2006 spends more than authorized amounts on the functions that are subject to the RIIM, it will be allowed to offset those costs against underspending in the two subsequent years. This would undermine SCE's incentive to control its test year costs, and would give SCE a perverse incentive to shift costs from other company functions into accounts protected by the RIIM. Consequently, price and spending risks will be transferred from the utility to ratepayers, without adequate compensation or offsetting benefits.
We do not view the RIIM as a step toward recorded cost ratemaking. Rates related to the expenditures at issue are set on a forecasted basis. Certainly, SCE can overspend in one year and underspend in other years. This is the case even under forecasted cost ratemaking. However, under the RIIM as well as under forecasted cost ratemaking, SCE does not receive additional funding if it spends more than authorized. Rates will not be adjusted to reflect recorded amounts. Therefore there is no incentive to shift costs to RIIM accounts, and there is no additional risk to ratepayers. However, if SCE spends less than authorized over the GRC cycle, under the RIIM, it will credit ratepayers for the difference between recorded and authorized spending. Only in that sense does the RIIM reflect recorded cost ratemaking. However, the risk to ratepayers is less under the RIIM, because SCE must credit ratepayers if it spends less than authorized. Under forecasted cost of service ratemaking, the company could use that that amount for other purposes, including payment to shareholders. For these reasons, we do not view the RIIM as a shift toward recorded cost ratemaking, but merely a commitment to spend money for reliability purposes, to the extent that it is authorized.
Aglet also criticizes this element of the stipulation as being unnecessarily complex in that the Settling Parties do not specify how the stipulation will calculate 2007 and 2008 revenue requirements subject to the RIIM, based on 2006 capital expenditures. For example, test year 2006 expenditures for pole replacement and load growth will decline in the following two years. According to Aglet, while the stipulation asks the Commission to identify any reductions to SCE's requested 2006 through 2008 amounts that would be subject to the proposed RIIM, it is incomplete because it offers no method or basis for making such reductions. Aglet asserts that this omission will lead to uncertain ratemaking and unnecessary technical disputes.
The RIIM does add a level of complexity to the process. However, it does not affect the rates that are set for 2006, 2007 or 2008. The complexity relates to determining what levels of expenditures for certain particular cost categories will be subject to SCE's commitment to either spend the authorized levels or credit any underspent amount back to ratepayers. Since the settling parties have agreed what those levels should be based on SCE's request, they should be able to determine what the levels should be based on the results of this decision. Therefore, based on the results of this decision, the Settling Parties should jointly determine the levels of expenditures that will be subject to SCE's commitment to either spend the authorized amounts or credit ratepayers for the underspent amounts. When SCE files its compliance advice letter to submit the preliminary statement to establish the operation of the RIIM, it should include that jointly determined information, with supporting workpapers.
The second element of the stipulation that is opposed relates to the addition of 600 apprentice linemen/groundmen to SCE's workforce over the three-year GRC cycle.
ORA asserts that the Settling Parties have failed to meet the burden of proof for adoption of an incentive mechanism and have not shown that the stipulation as to the 600 additional employees is reasonable in light of the record, consistent with law, or in public interest. We are not persuaded by ORA's arguments.
ORA's assertions seem to revolve around the assumption that 600 additional positions are being added by the stipulation to specifically address reliability problems. From its comments, Aglet also seems to be under the impression that the RIIM will cause the addition of 600 additional employees. However, SCE has made it clear that it is not requesting additional funding for the 600 additional linemen and groundmen because of the RIIM. This additional workforce was assumed in SCE's original application showing. SCE originally projected a need to hire 180 apprentice and journeymen linemen per year. For the RIIM target of 600, it was decided to include 60 groundmen over the GRC cycle. The reasonableness of the additional linemen/groundmen was addressed in SCE's direct showing and rebuttal.
In general we do not micromanage the utility's operations. Whether SCE adds 600 linemen/groundmen is secondary in importance to the total net workforce that is reflected in our determination of reasonable O&M and capital expenditures. However, in considering the RIIM we should address the addition of 600 linemen and groundmen, to determine if is reasonable for RIIM purposes. What this number should be, given the results of our decision today, is unknown. In general, additional linemen/groundmen will either replace exiting jobs that are vacated due to retirement or other reason, be used to reduce overtime for ongoing activities, be used to replace contract workers, or be used to perform new or expanded work activities. Considering what is reflected in SCE's test year estimates and given all the different ways in which the additional linemen/groundmen can be used, it is reasonable to assume that 600 additional linemen/groundmen can be accommodated within the revenue requirement authorized by this decision.121
ORA also criticizes the stipulation for not demonstrating how, and to what extent, the 600 additional linemen/groundmen will contribute to maintaining or improving reliability. We take the view that the additional linemen and groundmen are embedded in the workforce that is necessary to accomplish the activities authorized in rates by this decision. Maintaining reliability is a primary focus of many of those activities. Without a sufficient workforce, reliability can only suffer.
In considering all of the above, we are convinced that the stipulation regarding the RIIM is reasonable in light of the record, is consistent with law, is in the public interest, and should be approved.
22.2 Reliable Distribution
Accountability Mechanism
It is ORA's position that some form of financial accountability is necessary, if SCE's ratepayers are to receive a level of service reliability commensurate with the rates they are paying. ORA proposes the Reliable Distribution Accountability Mechanism (RDAM) to meet that objective.
ORA's single index starts with the average of SCE's results from 1999 - 2003 for SAIDI, SAIFI and MAIFI to arrive at an expected level for each. ORA then adds a margin to establish a penalty threshold value. SAIDI and SAIFI values have equal weights of 45%. MAIFI is weighted at 10%. Using ORA's reliability index, acceptable performance on one measure can offset poor performance on another. ORA's mechanism also includes a storm adjustment, and allows exclusions for specified "major events" so that SCE is not held responsible for outages that SCE could not reasonably have anticipated. The single index will measure whether SCE has provided a total level of service that is acceptable. The index value measures performance relative to a score of 100, with scores below 100 representing improvement in total reliability performance. The RDAM would impose a penalty of $2,250,000 per percentage point above 100.
ORA asserts that its RDAM is reasonable because (1) it provides ratepayers some protection if SCE's system reliability declines below even minimally acceptable standards; (2) it is not a punitive measure although it provides for specified consequences; (3) the minimum level of reliability is condition-based -- there is one minimum level for a broad range of normal conditions, and a higher acceptable level of outages to account for adverse weather conditions; and (4) SCE may seek penalty mitigation or waiver upon showing that new and unanticipated circumstances caused SCE to exceed the penalty threshold.
SCE states that the proponents of distribution reliability mechanisms have failed to support the investment needed to maintain reliability, specifically, noting that "ORA proposes SCE be penalized for failing to meet ORA's proposed reliability benchmark, while at the same time proposing draconian cuts to SCE's proposed investments to replace aging, and increasingly failure-prone distribution infrastructure." SCE also asserts that ORA's proposal is not cost effective, because holding reliability at a constant level going forward would require extraordinary amounts of infrastructure replacement, far beyond what is requested in the GRC.
22.3 Discussion
The intent of the RDAM to hold SCE accountable for what it receives in rates is a worthy goal. ORA disputes SCE's contention that its system is aging and points to projects such as distribution automation that should improve reliability. However, although ORA proposes that reliability levels only be maintained and not improved, it has not provided any guidance as to what level of spending is necessary to do so. Whether it can be accomplished under ORA's proposed revenue requirement or even under SCE's proposed revenue requirements has not been substantiated. In this decision, we have acknowledged that SCE's distribution infrastructure is aging and that there are attendant problems associated with such aging. We are reluctant to impose an incentive mechanism such as that proposed by ORA without more information that can substantiate the level of expenditures necessary to maintain distribution reliability levels.
We believe that the RIIM accomplishes the same goal as the RDAM in that it holds SCE accountable for distribution reliability related funds that it receives in rates. However, the RIIM directly relates to what we are authorizing in rates. If SCE does not spend the authorized amounts of money on those particular reliability related items, that money will be returned to ratepayers. At this time, we believe the RIIM is a fairer and more appropriate mechanism to address this aspect of distribution reliability. Therefore, we will not adopt ORA's proposed RDAM.
121 It is our understanding that SCE has committed to add the 600 new linemen/groundmen no matter what level is set by this decision for T&D O&M or capital expenditures.
