The utilities propose that the Commission establish the distribution revenue requirements after subtracting the FERC-approved transmission revenue requirements from the combined non-generation revenue requirements. They observe that if the Commission does not account for the FERC revenue requirements, the utilities will either be denied an opportunity to recover reasonable costs or will have an opportunity to receive windfall profits from the difference.
Edison refers to its proposal as a "rate credit" approach. It argues that any other method would effectively require the Commission to relitigate its general rate case. SDG&E argues that deriving the revenue requirements using methods other than the one it proposes will create new risks for the utilities because the utility will not have an opportunity to recover its costs.
Farm Bureau argues that the utilities’ method would permit the utilities to charge distribution customers for services not being performed. Edison responds that all of its distribution customers are also its transmission customers. It observes that a higher revenue requirement for one function implies a lower revenue requirement for the other, making the customer indifferent.
Several parties, including CAC/EPUC, CLECA/CMA, CIU, ORA, and TURN/UCAN, argue that the utilities’ approach would require the Commission to abrogate its authority to the FERC by effectively allowing the FERC to determine the utilities’ distribution revenue requirements. Edison responds to this concern by observing that the Commission found the total nongeneration revenue requirement to be reasonable and that it may be assured that the FERC transmission revenue requirement will be reasonable. The difference between the two, therefore, must also be reasonable, according to Edison.
CAC/EPUC also argue that under Edison’s rate credit approach, Edison will have an incentive to stipulate to any level of transmission revenue requirement, and its allocation between the wholesale and retail jurisdictions. Edison responds that because it has to update its Transmission Revenue Requirements at FERC annually, it will have every incentive to "get it right" from the outset.
CIU recommends that the Commission assume for ratemaking purposes that the FERC has adopted the revenue requirements the utilities proposed, rather than the one the FERC ultimately adopts. The utilities reply that this approach would almost certainly result in revenue losses for them.
CLECA/CMA observe that FERC may adopt a revenue requirement that differs from previous Commission revenue requirements for transmission because it may, for example, employ a different rate of return or different depreciation rates. The resulting lower revenue requirement, according to CLECA/CMA, should not be made up by distribution customers whose rates are subject to Commission jurisdiction. Edison responds that such differences may be monitored by the Commission and accounted for.
One of the consequences of electric industry restructuring is the transfer of transmission ratemaking activity from the Commission to FERC. Although FERC always retained authority over regulation of transmission, it deferred to the states to set a total revenue requirement for the transmitting utility, a revenue requirement which included the reasonable cost of transmission. Henceforth, FERC will have sole responsibility to set transmission revenue requirements.
We defer to FERC’s authority and its decisions. Nevertheless, we will not abandon our own authority or responsibility to FERC by allowing it to determine the revenue requirements for distribution, a determination over which we have sole responsibility and authority, which no party disputes. To be sure, we may not lawfully delegate our authority to another agency. Section 454 requires the Commission to issue findings with regard to the reasonableness of utility rates, a process which assumes cost allocations between customer classes and utility functions. AB 1890 requires a rate freeze and a "fire wall" which retains certain cost allocations between customer classes. It nevertheless provides in Section 367(e)(3) that "The Commission shall retain existing cost allocation authority, provided the fire wall and rate freeze principles are not violated." Establishing a distribution cost allocation which is premised entirely on the findings of FERC would be an abrogation of our authority under Section 454 and Section 367(e)(3).
If, as the utilities argue, the potentially disparate ratemaking decisions of FERC and this Commission creates risk, it is a risk already anticipated by AB 1890 and previous Commission decisions. Accordingly, regulation and legislation have already accounted for this risk in offsetting concessions to the utilities. In any event, the risk that the FERC and Commission decisions may create a shortfall is at least partially offset by the opportunity for additional profit, as PG&E observes.
We also reject the utilities’ proposals to set distribution rates residually because it could put us in the position of second-guessing FERC decisions. To the extent that FERC reduces the utilities’ proposed revenue requirements, it finds that for whatever reason the costs of utility transmission are not reasonable. The utilities propose that we effectively overlook the FERC’s findings and to determine that those same costs are reasonable by including them in distribution rates. We would only grant such a request with a showing that the specific costs are both reasonable and associated with distribution activities. None of the utilities have made such a showing here if for no other reason than they have no FERC decision upon which to form their proposals.
Just as we have declined to reduce the distribution revenue requirements in this proceeding to account for costs associated with activities the utilities may no longer conduct, we decline to increase the distribution revenue requirements to account for FERC decisions. In each instance, the utilities will have an opportunity to make their case with regard to specific revenue requirements changes in their PBR proceedings or, for PG&E, general rate case. In the interim, we will adopt the revenue requirement for distribution that each utility proposes here with the adjustments we make in subsequent sections, consistent with law and policy. To the extent necessary, we will revisit these revenue requirements at a later date, as discussed below.
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