5. Ratemaking Considerations (Tessie - I don't know why the change above happened to 5. Please just format normally. Thanks.)

A. Distribution of PG&E's Gain on Sale and Lease Revenues

PG&E and ORA agree that PG&E's gain on sale from this transaction should generally be allocated according to Redding II.

In Redding II, we held that a utility's gain on the sale of all or part of a distribution system should be allocated to utility shareholders as non-utility income under the following four circumstances, provided that ratepayers did not contribute capital to the distribution system:

· The distribution system is sold to a public entity, such as a municipality or a special utility district;

· The distribution system consists of part or all of the utility's operating system located within a geographically defined area;

· Components of the system are or have been included in the utility's ratebase; and

· The sale of the distribution system is concurrent with the utility's being relieved of its obligation to serve customers in the area served by the distribution system, and the public entity that purchased the distribution system assuming this obligation.

However, Redding II also provides that if a transfer of a utility distribution system will adversely impact the cost or quality of service for remaining utility ratepayers, the gain on sale should be allocated to ratepayers to the extent necessary to mitigate the adverse impacts.

Although the Commission has deferred determination of the allocation of gain on sale between ratepayers and shareholders to a subsequent Commission ratemaking in numerous proceedings, we find it reasonable in this case to decide the ratemaking issues expeditiously, in order to facilitate business planning by the parties. We, therefore, will not defer this issue to a subsequent gain on sale rulemaking.²⁵ We note that no party has objected to our allocation of PG&E's gain on sale here.

We agree with the parties that this transaction is governed by Redding II, because (a) PG&E is selling its distribution facilities in the Westside Zone to TID, (b) the distribution consists of all or a major part of PG&E's operating system in the Westside Zone, (c) components of the system have previously been in PG&E's ratebase, and (d) PG&E's sale of the distribution system to TID is concurrent with PG&E's relief from its obligation to serve customers in the Westside Zone and TID's assumption of this obligation to serve.

ORA argues that under Redding II, the Commission should adopt certain mitigation measures to avoid adverse financial effects on remaining PG&E ratepayers. For example, under Section 4.3 of the asset sale agreement, PG&E has agreed to waive its right to collect non-bypassable chares (NBCs)²⁶ established before the closing date from departing customers in return for a promise by TID to pay PG&E for these charges monthly for the period of time that these charges are authorized.²⁷ ORA claims that if TID were to default on this obligation, PG&E would place an unfair financial burden on its remaining ratepayers by recovering the lost revenue from them. ORA therefore asks the Commission to require PG&E to place funds from its gain on sale in an amount equal to these NBCs in a holding account, to be utilized if TID defaults on its obligation to pay these NBCs. ORA also requests that PG&E shareholders be held jointly and severally liable with TID for the NBCs, as additional security.

PG&E and TID argue that ORA has not presented any evidence that TID is likely to default on this obligation, and that if a default occurs, PG&E may address the issue through the dispute resolution process specified in the closing agreement.

We agree that a default by TID on its obligations to pay NBCs established before the closing date on behalf of departing customers is unlikely. TID is an established public entity²⁸, and ORA has presented no evidence to show that TID is financially unstable or has defaulted on similar obligations in the past.²⁹ On the contrary, TID's annual report dated September 2001 indicates that in 2000, Standard & Poor's upgraded TID's bond rating from A to A+, citing TID's substantial reserves, competitive rates, and progressive management policies.³⁰ Under the closing agreement, if TID were to default, PG&E could pursue the issue through mediation and ultimately, binding arbitration. Further, if TID had not agreed to pay these NBCs for departing customers, PG&E would collect these NBCs directly from departing customers, which would be far more difficult and would involve a greater risk of non-payment. Therefore, we find it unnecessary to order PG&E to place a portion of its gain on sale equal to the amount that TID has agreed to pay for NBCs otherwise owed by departing customers in a holding account or to require PG&E shareholders to be jointly and severally liable with TID for these NBCs.

ORA also argues that under Redding II, the Commission should condition its approval of PG&E's request to waive collection of the amounts owed by departing customers under PG&E's Energy Efficiency Program³¹ by requiring PG&E to place an amount of $427,946 in a holding account. ORA claims that unless the Commission requires this measure, PG&E's remaining ratepayers will be required to make up the difference through increased rates.³²

PG&E states that it wishes to waive the amounts owed by departing customers under its energy efficiency program contracts because these customers have no responsibility for the transfer of their service to TID. PG&E also points out that if the Commission does not permit this waiver, the asset sale agreement requires TID to pay amounts owed by departing customers under energy efficiency program contracts in an amount up to $500,000.³³

We decline to authorize PG&E to waive the amounts owed by departing customers under energy efficiency program contracts, in order to avoid shifting these costs to remaining PG&E ratepayers. However, TID's obligation to pay PG&E up to $500,000 for these charges will most likely reimburse PG&E for amounts owed by departing customers under energy efficiency program contracts.³⁴ Again, ORA has presented no evidence that TID will default or renege on this obligation, and the closing agreement contains an adequate dispute resolution process to address any non-payment by TID.

However, as additional protection for remaining PG&E ratepayers, we direct PG&E to pursue any default by TID on its obligations to pay NBCs established before the closing date and amounts owed under energy efficiency program contracts on behalf of departing customers through the dispute resolution process stated in the closing agreement.^{35 36}

Based on the preceding discussion, we reject ORA's proposed mitigation measures and allocate PG&E's gain resulting from the sale of distribution facilities to TID to PG&E's shareholders pursuant to Redding II. PG&E shall allocate its gain resulting from the sale of transmission facilities to TID based on the applicable FERC authority.^{37 38}

In addition, since lease revenues fall within an existing category of non-tariffed products and services under PG&E Advice Letter 2603-G/1741-E, Category T.C. 4, PG&E shall treat revenues from the Patterson and Salado substation leases as Other Operating Revenue (OOR).

B Payment of NBCs or Cost Responsibility Surcharges Established After the Closing Date

PG&E requests a Commission finding that TID's agreement to pay NBCs established before the closing date on behalf of departing customers fully satisfies any responsibility of PG&E or its customers for the payment of NBCs.³⁹ However, the asset sale agreement does not provide for the payment of new charges established after the closing date by PG&E, TID, or departing customers.⁴⁰ Although we will not require TID, as an irrigation district, to assume financial obligations not agreed to in the transaction documents or otherwise required by law, we cannot properly exempt departing customers from a legal obligation to pay any applicable NBCs or cost responsibility surcharges (CRS) established after the closing date. ⁴¹ If departing customers do not pay their fair share of these charges, these costs may be shifted to remaining ratepayers and create a disproportionate financial burden for them. We therefore require departing customers in this case to be responsible for any applicable NBCs or CRS established after the closing date, to the extent required by state law or Commission decision, as a condition of approval of this transaction.⁴²

C. PG&E's Methodology for Calculating Amounts Owed for NBCs

PG&E also asks the Commission to approve its proposed methodology for the calculation of NBCs to be paid by TID on behalf of departing customers.⁴³ ORA has not challenged PG&E's proposed methodology or calculations, and there is no evidence in the record to contradict PG&E's testimony on this issue. PG&E's proposed methodology is based on its tariffs and advice letters, Commission decisions, and applicable statutes cited in its testimony, and appears to be generally sound, so long as calculations are made consistently with this authority. However, we note that the figures contained in Table 2-2 of PG&E's testimony⁴⁴ are illustrative examples only. Further, the discussion of PG&E's accounting treatment in the testimony is based on these illustrative examples, rather than actual calculations.⁴⁵ We therefore do not approve these calculations as representative of the total NBCs that TID is required to pay on behalf of departing customers under the asset sale agreement. We also deny PG&E's request to find that the calculations and methodology contained in its testimony represent the total liability of PG&E and its customers for NBCs, because departing customers may be subject to new NBCs or CRS established after the closing date, as discussed above.

In order to clarify this issue, we direct PG&E to file a revised statement of its methodology, including specific calculations of the applicable NBCs, by advice letter no later than 90 days after the effective date of this decision.