Today, we respond to the emergency motion of Pacific Gas and Electric Company (PG&E) by directing parties to enter into an expedited collaboration to attempt to set an interim Competitive Transition Charge (CTC). Our discussion of PG&E's motion and the responses to it should provide guidance to the efforts of the collaborating parties.
On February 15, 1996, PG&E filed an emergency motion asking the Commission to adopt an interim CTC procedure applicable to departing customers.
The motion stems in part from the Commission's Decision (D.) 95- 12- 063, as modified by D.96-01-009 (the Policy Decision). In that important decision in our consideration of the restructuring of the electric utility industry, we determined to use the CTC to collect from all customers some of the reasonable costs that the regulated electric utilities have incurred in providing service to their customers, and specifically, those costs the utilities are not likely to recover through other means after implementation of the competitive framework adopted in the Policy Decision. The primary impetus for the motion, however, is PG&E's conviction that some customers may take advantage of gaps in the current law to evade the CTC and thus "disrupt the measured institution of the restructured electric services industry envisioned" in the Policy Decision. PG&E cites examples of municipal utilities, irrigation districts, and other publicly owned utilities who through various arrangements are seeking to serve customers who up to now have been retail customers of regulated investor-owned utilities (IOUs). PG&E asserts that as an inducement to those customers, these publicly owned utilities represent that customers who switch to their service will not be subject to the CTC. PG&E is concerned that evasion of the CTC will raise the costs borne by the remaining IOU customers, and these high costs in turn will lead more IOU customers to attempt to evade the CTC, with the eventual result that the Commission's plans for a measured transition to competition will be dashed.
To remedy this perceived problem, PG&E proposes an interim CTC procedure. The interim procedure would be in effect only until the Commission adopts a final CTC mechanism as part of its implementation of the Policy Decision. The interim procedure would apply to "departing load," defined as that portion of a customer's load for which the customer, on or after December 20, 1995 (the date of the Policy Decision), discontinues or reduces its purchase of electricity from PG&E, purchases or consumes power from another source to replace these PG&E purchases, and remains at the same location or within PG&E's service territory as it existed on December 20, 1995. The interim procedure would not apply to customers who go out of business, who relocate outside of PG&E's service territory, or who choose the direct access option described in the Policy Decision. The interim procedure would initially apply only to retail customers with monthly peak loads of more than 500 kilowatts.
Under the proposed interim procedure, a customer with departing load would be required to notify PG&E at least 90 days before it ended or reduced its purchases from PG&E. Within 20 days of the receipt of the notice, PG&E would present the customer with a projection of the CTC associated with the customer. The projection would be calculated according to a stated formula that develops a ratio of the net present value of expected unrecovered generation revenues to total annual revenues and applies that ratio to the customer's annual bill. The customer could contest PG&E's estimate by filing a motion with the Commission. The customer would also be required to sign an agreement accepting responsibility for its share of the CTC eventually determined by the Commission. The amount of the interim CTC projection would be due and payable in a lump sum five days before the termination or reduction in service, although the customer could elect to make monthly payments over seven years or to post a bond, provide a letter of credit, or pledge securities to cover the amount. Once the Commission issues its final CTC order, PG&E would either refund or collect, with interest, the difference between the customer's interim payment and final CTC responsibility.
PG&E's proposed interim procedure would be reflected in PG&E's tariffs. A customer's failure to sign an interim CTC agreement would be a breach of those tariffs with the consequence that the full amount of the interim CTC projection would be immediately due and payable. PG&E states that it would enforce this tariff in court, if necessary. PG&E further proposes that any breaching customer would not be permitted to take any utility service subject to the Commission's jurisdiction, including telecommunications and water services, until it had executed an interim CTC agreement and paid the interim CTC projection.
PG&E argues that the Commission has sufficient authority to establish the proposed interim CTC procedure and in fact has exercised that authority in the natural gas industry (citing D.87-03-044, D.86-12-009, and D.94- 05-069). PG&E further contends that the Commission's ability to fashion interim remedies was confirmed by the California Supreme Court in Toward Utility Rate Normalization v. Public Utilities Commission (1988) 44 Cal.3d 870, 878.
Twenty-four parties filed responses to PG&E's motions.[1] Most of the parties opposed the motion, and others expressed reservations short of actual opposition. Only San Diego Gas & Electric and Southern California Edison Company supported granting the motion. We will not summarize the numerous arguments presented by these parties here, but we will refer to some of their points in our discussion of the motion.
With the permission of the administrative law judge, PG&E filed a reply to the responses to the motion on March 7, 1996.
PG&E's motion stems from two sources: our discussion of a CTC in the Policy Decision and PG&E's perception that some large retail customers are making arrangements that they believe will allow them to evade the CTC.
The Policy Decision described certain costs that the electric utilities had incurred as part of their obligation to serve their customers but that the utilities would likely be unable to recover in the competitive market foreseen in that decision. These transition costs include the uneconomic portion of the net book value of generation facilities, the above-market costs associated with nuclear power plant settlements and power purchase contracts, and costs arising from regulatory obligations. Recognizing that these costs stem from the utilities' efforts to provide reliable service to their customers, we found it fair to allow the utilities an opportunity to recover appropriate transition costs. (Policy Decision, slip op. at pp. 119-120.) But since future market prices were unlikely to cover all of these costs, we decided to assess the CTC on all retail customers on or after December 20, 1995, the date of the Policy Decision. (Id. at p. 110.) Our goal was "to minimize the effects of the high-cost elements in the competitive market structure, while we close the books on past practices." (Id. at p. 119.)
PG&E's concern is that some sophisticated customers will take steps to attempt to evade payment of the CTC by putting themselves beyond the reach of the utilities and the Commission. To the extent that any customers evade the CTC, all other customers will suffer in the form of a higher charge. Although not stressed by PG&E, CTC evasion also makes it more difficult for the utility to recover all of its transition costs, increasing the possibility that shareholders will eventually bear some of these costs. PG&E's motion attempts in various ways to ensure that attempts to avoid the CTC are stymied.
PG&E's motion presents us with an intriguing dilemma. On the one hand, we are determined to collect each customer's fair share of transition costs in an equitable way and with as little disruption to the emerging competitive market as possible. On the other hand, as many responding parties point out, PG&E's proposed solutions could have the effect of thwarting emerging competition, increasing electricity costs, and providing the utilities with an unwarranted assurance of cost recovery (which in turn would undermine the utility incentives we have strived to create).
We share PG&E's fear that some customers may attempt to evade the CTC. We adopted the CTC out of a need, "during the transition to full competition, for a process to account for the lingering effects of today's market structure." (Id. at p. 119.) Having endorsed this method of collecting transition costs, we are determined to carry it out in a fair and equitable way. The first principle of fairness is that the CTC should fall on all customers in rough proportion to the benefits they have received from the utility's system. If some customers avoid those charges, others will consequently and unjustly bear more than their fair share. PG&E's motion raises the question of what steps are ecessary, in light of recent developments, to enforce this principle and carry out the intent of the Policy Decision.
PG&E proposes a multilayer line of defense against CTC evasion. First, the Policy Decision gave all customers notice of the Commission's intent to collect the CTC from all who are retail customers of IOUs on or after December 20, 1995. Second, a provision that the Policy Decision required to be added to the Preliminary Statement of the electric utilities' tariffs will place all PG&E retail customers on specific notice that they will be subject to the CTC. Third, any departing customer must (1) pay or provide security of payment of the estimated CTC, and (2) sign an agreement promising to pay the CTC and waiving any jurisdictional objection to imposition of the CTC. Fourth, enforcement of CTC payment will be through the courts or through denial of service provided by any utility under this Commission's jurisdiction. PG&E does not develop how these defenses would be fairly applied to its discounting efforts. We will address these elements individually.
The Policy Decision made a public declaration of our intent to collect appropriate transition costs from all customers who are retail customers of the regulated electric utilities on or after December 20, 1995. Moreover, the concept of a CTC has been raised since the order instituting this proceeding (the "Blue Book"). In adopting the CTC, the Policy Decision took the action that we had discussed widely in public for nearly two years. Thus, the Policy Decision gave IOU retail customers, and particularly the large customers targeted by PG&E's motion, notice that they would bear responsibility for the CTC.
We obviously also agree that notice of CTC collections should be incorporated in each electric utility's tariffs, as we ordered in the Policy Decision (Ordering Paragraph 28, p. 226). This requirement was imposed to provide even more evident notice to customers that they would be subject to this obligation. The Preliminary Statement, when revised as we ordered, provides another basis for enforcement of customers' CTC obligations.
We also endorse PG&E's proposal to broaden the coverage of our requirement that each direct access customer must sign an agreement to pay its share of transition costs and thereby waive any jurisdictional objection the customer might otherwise raise in any forum. (Id.) Without regard to the validity of PG&E's factual allegations, the motion makes the point that customers may attempt to make arrangements to evade CTC collection even before we commence the initial stages of direct access on or before January 1, 1998.[2] If we are to uphold our principle that transition costs should be fairly allocated among all who are retail customers on or after December 20, 1995, we must ensure that customers departing the system after that date and before the effective date of our final decision on CTC bear responsibility for their fair share of those costs. Departing customers should be given an opportunity to sign an agreement to pay their fair share of transition costs and thereby to waive any jurisdictional objections. Whether the customer signs the agreement or not, the customer will be deemed to have agreed to these terms by taking retail service on or after December 20, 1995.
We have much more difficulty with PG&E's proposal to require a lump-sum payment of all projected CTC amounts (or security for such a payment) before a customer leaves the system.
We agree with the many parties who pointed out the anticompetitive effect of this proposal. The collection of transition costs is an unfortunate but unavoidable barrier that must be overcome as we move from today's regulated world to full competition in generation. The CTC will inevitably influence customers' economic decisions to stay on the system or to take electric service in some other fashion, but we hope the interim CTC sends as accurate a signal as possible to customers making those decisions. Requiring a lump-sum payment of all estimated CTC before permitting a customer to leave the system would impose an economic burden that would discourage customers from leaving the system.
We have no objection to customers exercising their rights to leave the system before or after January 1, 1998, provided that they remain responsible for their fair share of transition costs. Any exit requirements should be narrowly limited to accomplish this goal. PG&E's proposal goes considerably beyond these narrow purposes.
By requiring payment of or security for the entire estimated CTC amount, PG&E would dramatically accelerate the collection of the customer's CTC obligation. In effect, PG&E presumes that it will be unable to collect CTC from the customer over time after service from PG&E has ended. We disagree with this presumption. CTC is nonbypassable. If choosing another competitive option and ending service with an IOU were all that was necessary to avoid payment of the CTC, every customer would seek to do so. "Nonbypassable" means that CTC will be collected whether or not the customer maintains a service relationship with the IOU, since competition contemplates that there will be new providers of service.
PG&E's proposal also seems inconsistent with the interim nature of its proposal. It is not necessary to collect the customer's entire projected CTC at this time. All that is necessary now is to secure an appropriate contribution from departing customers until we have completed our proceeding to develop the mechanisms for CTC collection, a proceeding that necessarily will be finished some time before January 1, 1998. Under the terms of the Policy Decision, all who are retail customers on or after December 20, 1995 will be subject to the CTC as eventually developed in our proceeding. All that is needed now is an interim measure to apply to customers who leave the utility system or replace a portion of their load before the final CTC mechanism takes effect.
The nature of this interim obligation requires some clarification. In the Policy Decision, we were focused on the implementation of our adopted competitive framework, and consistent with that focus, we defined CTC in terms of that competitive framework. This approach leads some parties to urge that there can be no interim CTC collection because there are no transition costs until we have begun direct access and the operation of the Power Exchange. These parties criticize PG&E for attempting to collect CTC before January 1, 1998. But the Policy Decision also recognized that transition costs are included in current rates (id. at p. 113), and collecting interim CTC from customers who depart before January 1, 1998 is consistent with our goal of retaining the widest possible base for collection of those costs. If those costs are not collected from departing customers, they will increase the burden on remaining customers through the operation of the Electric Revenue Adjustment Mechanism and will unfairly affect the locational decisions of new customers, results we wish to avoid. For these reasons, we believe that interim CTC should be collected from any customers who leave the system after December 20, 1995 and before January 1, 1998.
For similar reasons, we will also reexamine shareholders' obligations under discounts negotiated to retain customers who would otherwise depart from the system. Because we recognize that the interim CTC will affect competitive decisions that may be made before the market is restructured, we are concerned that the burdens of transition costs are also fairly associated with options for service other than those reflected by tariffed rates. One option discussed in PG&E's Reply to responses to emergency motion is the possibility of negotiating a special contract. Special contracts with a utility are subject to Commission review. As noted by PG&E, in D.95-10-033 we approved some special contracts for particular purposes, and approved a settlement assigning a portion of the revenue shortfall associated with the contract to PG&E's shareholders. In the Policy Decision, we set forth that shareholders would bear 100% responsibility for these revenue shortfalls after the restructured market is in place on or before January 1, 1998. Today's approval of an interim CTC requires that we accelerate this date in order to safeguard fair competition. The fact that an interim CTC is placed on departing customers does not limit the developing marketplace because customers can negotiate the transfer of those burdens to competing suppliers, including PG&E in situations in which it competes to retain a customer through discounted contracts.[3] We require that the revenue shortfall associated with any discount contracts entered into after today, including those approved in the rate design window, be entirely the responsibility of PG&E's shareholders.
In its reply, PG&E acknowledges that it is more concerned with having a CTC mechanism in place, and less concerned about the specific assumptions that feed into the formula it proposed in its motion. It suggests that the specific market assumptions could be developed through an "expedited, collaborative process" of no more than three days' duration, convened by the Commission Advisory and Compliance Division (CACD). The collaboration would also consider situations that might merit special treatment, such as self-generation projects in which customers had made a substantial investment before December 20, 1995. If no consensus is reached during the three days of collaboration, a report highlighting the issues would be presented to an administrative law judge for quick resolution.
PG&E's proposal recognizes the importance of the market assumptions that are employed in its formula. These assumptions are necessary to PG&E's approach because our definition of certain elements of transition costs were keyed to a market standard, and that market does not exist today. As many responding parties argue, these market assumptions become critical because PG&E proposes to project transition costs out to 2025. However, if the focus shifts to developing an interim charge as we suggest above, rather than projecting a customer's total CTC, these long-term market assumptions may not be so crucial.
The Policy Decision makes some observations that suggest some other approaches to the interim charge. We noted that "future potential transition costs . . . are already embedded in utility rates today; transition costs would simply be identified in a different way than they are today " (id. at p. 113). Thus, an interim CTC could be derived by identifying appropriate components from today's rates. Although some market assumptions would still be necessary (for example, to determine the uneconomic portion of generation costs), the assumptions would be about current markets and the extent of any projections would be for only the next 20 months or so.
With these considerations in mind, we will direct the parties to attempt to set an interim CTC using the expedited collaboration PG&E proposes. To guide the parties, we offer the following observations:
If the collaboration succeeds in setting an interim CTC, the terms should be incorporated in a report and filed in this docket as soon as possible. If the parties are unable to reach consensus on an interim CTC within the three days, CACD or representatives selected by collaborating parties shall prepare a report outlining the issues that divided the parties and the various positions on those issues at the close of the collaboration. The report should also note any points of unanimous or substantial agreement. The report will be served on all parties and filed in this docket, and unresolved issues will be referred to an administrative law judge to prepare a recommended decision for our consideration. Parties are urged to keep in mind that any charge we adopt will be in effect for a short period, and all payments will be subject to adjustment when we adopt our final CTC; PG&E will refund any overcollection and the customer will pay any shortfall between the interim payments made and its final CTC responsibility. The interim CTC will necessarily be somewhat rough; excessive precision is not required for these purposes.
PG&E's final proposal, to enforce collection of the interim CTC by denying the services of other utilities under our jurisdiction to any customer who breaches its agreement or fails to pay the CTC, drew strong opposition. We agree with these opponents that PG&E goes too far with the recommendation. We will not require other utilities under our jurisdiction to become collection agents for PG&E or other electric utilities.
Many parties objected strenuously to PG&E's definition of departing load. Because this issue will be addressed thoroughly during our CTC proceeding, we are willing to accept without approving PG&E's definition on an interim basis, recognizing that it is not an exclusive listing of all customers who received retail service on or after December 20, 1995 and are subject to CTC. If a customer or load is later found not to be subject to the interim CTC, any payments will be refunded with interest. The approach seems far preferable to either attempting a precise definition on the basis of this record or developing too narrow a definition now and trying to recover back payments of interim CTC at a later date. We also accept PG&E's proposed exceptions for customers who go out of business or move to a new location outside of P&E's service territory (assuming that no sham or corporate structural legerdemain is involved). We also concur with PG&E's proposal to apply the interim CTC to large customers with monthly peak loads of more than 500 kilowatts, although we recognize that broader application may be appropriate if market circumstances change.
We are aware that the Legislature is currently considering many of the issues that are raised by PG&E's motion. We are acting on some of these issues at this time because PG&E's motion placed them before us and because we are persuaded that quick action by us is necessary. But our action today should not be interpreted as prejudging the issues before the Legislature or as an attempt to preempt legislative options. We are committed to work cooperatively with the Legislature on all aspects of electric industry restructuring, and we will continue to do so.
Some of the issues raised by PG&E's motion are also the subject of various parties' applications for rehearing of the Policy Decision. We will be addressing the applications for rehearing in a future decision, and nothing in today's decision should be viewed as deciding or prejudging the issues raised in the applications for rehearing.
1. PG&E filed an emergency motion for an interim CTC procedure on February 15, 1996.
2. To the extent that any customers evade the CTC, all other customers will suffer in the form of a higher charge.
3. Customers may attempt to make arrangements to evade CTC collection even before we commence the initial stages of direct access on or before January 1, 1998.
4. Transition costs are included in current rates.
1. Each customer's fair share of transition costs should be collected in a fair and equitable way.
2. The first principle of fairness is that the CTC should fall on all customers in rough proportion to the benefits they have received from the utility's system.
3. The interim CTC should send as accurate a signal as possible to customers making economic decisions to stay on the system or to take electric service in some other fashion.
4. The Policy Decision gave the IOUs' retail customers, and particularly the large customers targeted by PG&E's motion, notice that they would bear responsibility for the CTC.
5. The IOUs' Preliminary Statements, when revised as we ordered, provide another basis for enforcement of customers' CTC obligations.
6. A customer departing the system of an IOU after December 20, 1995and before the effective date of our final decision on the CTC should be given an opportunity to sign an agreement to pay its share of transition costs and thereby to waive any jurisdictional objection the customer might raise in any forum, and will otherwise be deemed to have so agreed by taking retail electric service from an IOU on or after December 20, 1995.
7. Interim CTC should be collected from any customers who leave the system after December 20, 1995 and before January 1, 1998.
8. PG&E's shareholders should bear 100% responsibility for revenue shortfalls associated with discounted special contracts entered into after the date of this decision.
1. The Commission Advisory and Compliance Division (CACD) shall notice and within 14 days convene an expedited collaboration open to all parties to this proceeding to attempt to set an interim competitive transition charge (CTC) consistent with the principles discussed in this decision. The collaboration shall be convened for no more than three days. If the collaboration succeeds in setting an interim CTC, the terms shall be incorporated in a report, and the report shall be served on all parties and filed in this docket as soon as possible. If the parties are unable to reach consensus on an interim CTC within three days, CACD or representatives selected by the collaborating parties shall prepare a report outlining the issues that divided the parties and the various positions on those issues at the close of the collaboration. The report shall also note any points of unanimous or substantial agreement. The report shall be filed in this docket within 10 days of the completion of the collaboration, and the unresolved issues shall be referred to an administrative law judge to prepare a recommended decision for our consideration.
2. To the extent consistent with this decision, the "Emergency Motion of Pacific Gas and Electric Company for Adoption of an Interim CTC Procedure Applicable to Departing Customers" is granted. Except as granted herein, the motion is denied.
3. The shareholders of Pacific Gas and Electric Company shall bear 100% responsibility for any revenue shortfalls resulting from discounted special contracts entered into after today.
This order is effective today.
Dated April 10, 1996, at Sacramento, California.
DANIEL Wm. FESSLER
President
P. GREGORY CONLON
HENRY M. DUQUE
JOSIAH L. NEEPER
Commissioners
I will file a dissent
/s/ JESSIE J. KNIGHT, JR.
Commissioner