Decision 96-12-025 December 9, 1996
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Order Instituting Rulemaking on the |
R.94-04-031 |
Order Instituting Investigation on |
I.94-04-032 |
In this order, we establish electric deferred refund accounts for Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE), and San Diego Gas & Electric Company (SDG&E). Such accounts were proposed for comment in Decision (D.) 96-10-035, issued on October 9, 1996.
In D.96-10-035, we stated:
"In addition, we propose to continue our policy of refunding utility cost disallowances directly to customers. In the past, this was generally accomplished by crediting any disallowances to utilities' balancing accounts where it would ultimately be refunded to ratepayers. Under the rate freeze contemplated in AB [Assembly Bill] 1890, balancing account credits may not reach customers but would offset transition costs. This would be unfair to customers and would negate the incentive for each utility to manage its expenditures prudently. In proposing this policy, we draw a distinction between (a) unanticipated refunds made to utilities and imprudently incurred expenditures, which should benefit customers directly and (b) previously forecasted other operating revenues and overcollections caused by forecast errors, which will offset transition costs. The proposal covers existing and future refunds that, in conformance with our usual ratemaking procedures, have already been or would have been made to Energy Cost Adjustment Clause [ECAC] and Electric Revenue Adjustment Mechanism [ERAM] balancing accounts. Given our policy direction of moving away from retrospective reasonableness reviews in favor of performance based ratemaking, the long term effect of direct refunds should be minimal. No new policy is needed for penalties ordered by the Commission, because penalties flow to the General Fund, not utility customers. (See, e.g., PU [Public Utilities] Code § 2104.) We will allow comments and replies on this proposal, followed by further order of the Commission. Because the proposal affects refunds now under consideration in other Commission proceedings, parties to those actions may also file comments.
"Under the proposal, the utilities would establish electric deferred refund accounts which consolidate various refunded amounts into customer refunds made during convenient billing cycles. Credits to these balancing accounts would be refund amounts ordered by the Commission plus accrued interest at conventional balancing account rates. Debits to the accounts would be refunds made directly to customers, as billing credits or refund checks." (D.96-10-035, mimeo. pp. 3-4.)
PG&E, SCE, SDG&E, the Office of Ratepayer Advocates (ORA), and Toward Utility Rate Normalization (TURN) filed timely comments on this proposal. PG&E, SCE, SDG&E, and TURN filed reply comments.
PG&E, SCE, and SDG&E are united in their recommendation that this refund proposal, if adopted, should only apply prospectively, and then only to amounts which are disallowed due to imprudent utility actions. In addition, the utilities recommend that potential refunds which are the result of settlements should not be affected by this proposal. The utilities state that because newly added PU Code § 368(a) (AB 1890, Ch. 854, Stats. 1996) provides that overcollections in the ECAC and ERAM balancing accounts are to be used to offset transition costs, this policy cannot be applied to potential refunds in the current ECAC and ERAM balancing accounts. PG&E states, "AB 1890 makes clear that the refunds addressed by the Interim Opinion were part of the revenue stream PG&E was to receive as part of the basic bargain. The [Commission] may not undercut that framework by deviating from its previously adopted policy for the treatment of refunds so as to circumvent AB 1890." PG&E further states that the refunds addressed by D.96-10-035 were part of the revenue stream which PG&E was to receive as part of a "basic bargain."
ORA agrees with our proposal because it would ensure that electric customers directly benefit from adopted utility disallowances. ORA believes that § 368(a) is unconstitutional, because the purpose of the balancing accounts has been redefined without proper notice and would produce unlawful confiscations of refunds otherwise due to ratepayers. Therefore, ORA recommends that any refunds (or changes in revenue requirements) stemming from unreasonably incurred expenses or unanticipated refunds and from overcollections related to forecast errors should be returned to ratepayers as direct refunds.
TURN believes that the distinction between refunds and overcollections is important and agrees with our proposal. TURN contends that the timing of circumstances from which the revenues at issue stem is important. For example, the $67 million (plus interest) disallowance adopted in D.96-08-033 results from excess gas costs incurred by PG&E between 1988 and mid-1994, and is the result of a stipulation signed in November 1994. TURN represents that the parties to the stipulation did not contemplate that the utility electric generation (UEG) portion of the $67 million would go toward transition cost recovery rather than directly to ratepayers, nor were any statements to that effect made on the record. TURN expresses similar concerns regarding the refund ordered in D.96-09-042, which relates to imprudent activities in 1988-1990.(1) The refund was originally ordered in D.94-03-045; core gas ratepayers have received their allotment of these funds, pursuant to D.95-12-053. The remaining $77 million is yet to be refunded to core-elect and UEG customers, pending an opinion in this matter in federal district court.
The payment of transition costs using overcollections in utility ECAC and ERAM balancing accounts as of December 31, 1996 is now a matter of law. Administrative agencies, including this Commission, cannot determine the constitutional validity of any statute. (Constitution of the State of California, Article III, § 3.5.) We will therefore not address constitutional issues at this time.
Despite PG&E's reference to a "basic bargain," there is no language in § 368 or elsewhere in the legislation that can be construed to address refunds and disallowances. Absent the provisions of AB 1890, in the normal course of our ratemaking procedures, the current overcollections in the ECAC and ERAM balancing accounts consist of both overcollections due to inevitable forecasting errors and refunds and disallowances from which all classes of current ratepayers would benefit. For convenience, refunds and disallowances have traditionally been disposed of in ECAC and ERAM balancing account proceedings. The intended purpose of these disallowances was to benefit customers through reduced rates. Using such disallowances to help the utility collect transition costs would contravene the purpose of the disallowances. Disallowances are intended both to be equitable to ratepayers and to discourage imprudent activities. This incentive disappears if the utility is able to retain this money, albeit to offset a different type of cost.
We are obligated to ensure that rates are just and reasonable. (PU Code § 451.) Furthermore, PU Code § 453.5 orders that "[w]henever the commission orders rate refunds to be distributed, the commission shall require public utilities to pay refunds to all current utility customers, and when, practical, to prior customers, on an equitable pro rata basis...." The electric deferred refund accounts will appropriately remedy the inequity of using specific refunds and disallowances to which current customers would otherwise have been entitled to offset transition costs. Settlement amounts which have not yet been refunded, but which were otherwise intended to be refunded to ratepayers, should be included in the electric deferred revenue accounts. AB 1890 was not signed into law when such settlements occurred, nor was the potential impact of the draft legislation discussed on the record in those proceedings. Any other treatment of these funds would result in ratepayers not being made whole and would violate the spirit of the settlements, as discussed above.
Balancing accounts were instituted to balance risks between shareholders and ratepayers. For example, prior to 1972, fuel costs were forecasted and incorporated into rates as part of general rate cases. In the early 1970s, the utilities experienced rising fuel costs due to high levels of inflation and changes in fuel mix. The uncertainty in fuel expenses led to rate instability and reduced financial security for the utilities. The original Fuel Cost Adjustment (FCA) proceedings were designed to reduce the risk of fluctuating fuel prices through annual adjustments to the fuel expense portion of the rate. The FCA did not include a balancing account. (73 CPUC 180.) The ECAC was introduced in D.85731, because under the FCA the utilities had been overcollecting on their expenses. (79 CPUC 758.) This balancing account was established to keep track of over- or undercollections, which were subsequently refunded or recovered through rate adjustments in the next forecast period. In D.92496, the Commission stated that the goal of the ECAC procedure is to "maintain future clause revenue-expense differentials at a minimum." (4 CPUC2d 693, 699.)
Similarly, the ERAM was established in late 1981, with the intent to protect utilities from the risk of inaccurate sales forecasts, as well as to eliminate the disincentive for active conservation programs. (7 CPUC2d 349, 394.) ERAM's purpose is to ensure that all authorized base rate costs are recovered regardless of differences between estimated and actual sales levels. In return for this shift in risk, however, customers have been guaranteed rate adjustments in the next ratemaking period, to accommodate either overcollections or undercollections.
Section 368(a) now changes this basic ratemaking approach. If we were to allow utility and customer refunds to offset the transition costs of each utility, this would shift the risk yet again. Authorizing these offsets would reduce utilities' risks of recovery of such costs without concomitant ratepayer benefits. Section 368(a) states in relevant part:
"These rate levels for each customer class, rate schedule, contract, or tariff option shall remain in effect until the earlier of March 31, 2002, or the date on which the commission-authorized costs for utility generation-related assets and obligations have been fully recovered. The electrical corporation shall be at risk for those costs not recovered during that time period."
We remind the utilities that recovery of transition costs is not guaranteed. Both AB 1890 and D.95-12-063, as modified by D.96-01-009, provide for the opportunity to recover these costs and obligations. There is no reason to further insulate the utilities from risk of recovery of transition costs by allowing them to use refunds otherwise due to current ratepayers.
The utilities seek clarification of the term "unanticipated refunds" to avoid future litigation over its meaning. Based on TURN's suggestions, we find that the direct refund policy should apply to all utility cost disallowances, whether based on our findings of imprudence or upon settlements of imprudence allegations, such as in reasonableness reviews, and to all refunds made to the utilities on the basis of a decision by a regulatory agency, again regardless of whether that agency was acting on a settlement or a litigated matter.
SDG&E has raised implementation issues related to refunds versus billing credits. SDG&E suggests that using billing credits to lower overall energy credits may have the perverse effect of shielding the utility from competition. This might be true if billing credits are used to offset a competitive rate component, e.g., energy rates. However, if billing credits are used to offset monopoly rate components (e.g., distribution rates), the same effect on competitors would not necessarily occur. We are not convinced that direct refunds will materially affect competition.
SDG&E has proposed a refund cycle which might balance high transaction costs and customer expectations. In this proposal, "The timing criteria for a refund would be the greater of 0.1% of the annualized amount of billed electric distribution revenue or at a minimum once very three years." This approach is needlessly complicated. We have previously recognized that once electric competition begins, we must ensure that commodity prices reflect current market levels, so that suppliers in competition with the utility are not disadvantaged and so that customers are given accurate price signals. (D.96-02-071, mimeo. at 21.) Given increased competition for gas service, we have found that the one-time credit best achieves a market-oriented result. (D.95-09-075, mimeo. at 11.) Using the methodology adopted in D.96-02-071, we find that PG&E, SCE, and SDG&E should return refunds and disallowances, including appropriate interest, to ratepayers through an annual refund based on each customer's average monthly energy usage for each calendar-year period, and which should be reflected as a billing credit or refund in the spring of each year.
In sum, we will establish electric deferred refund accounts which accumulate credits for electric disallowances ordered by this Commission, UEG shares of gas disallowances ordered by this Commission or FERC, and electric and UEG gas settled amounts resulting from reasonableness disputes at this Commission or FERC, plus interest charges at conventional balancing account interest rates. The accounts will not cover ordinary ECAC and ERAM forecasting errors, other operating revenues forecast in base rate proceedings, or revenues specifically assigned to shareholders in Commission-approved performance-based ratemaking mechanisms.
The utilities will refund account balances recorded at the end of each calendar year, following Commission approval of refund plans submitted by advice letter. Such plans may include billing credits or direct refund checks to customers, as reasonable for each utility's circumstances. Entries made to the refund accounts before the end of 1996 shall cover: (1) all pending refunds and disallowance amounts which are not yet recorded in utility ECAC and ERAM balancing accounts, and (2) all refunds and disallowance amounts which have been credited to the balancing accounts but have not been amortized in rates. The latter amounts should include all refund and disallowance credits booked since the last utility rate decision in which account balances were amortized.
In compliance with this decision, by December 20, 1996, PG&E, SCE, and SDG&E shall file advice letters to establish the electric deferred refund accounts and to list each refund and disallowance affected by this decision. Advice letters that are in compliance with this decision shall be effective on the date filed. On or before January 31, 1997 and in each of succeeding year, PG&E, SCE, and SDG&E shall file advice letters which set forth a refund plan for each utility.
IT IS ORDERED that:
This order is effective today.
Dated December 9, 1996, at San Francisco, California.
P. GREGORY CONLON
President
DANIEL Wm. FESSLER
HENRY M. DUQUE
Commissioners
I dissent.
/s/ JESSIE J. KNIGHT, JR.
Commissioner
I dissent.
/s/ JOSIAH L. NEEPER
Commissioner
(1) A similar set of circumstance arises in D.96-10-069 that addresses a proposed settlement agreement between SCE and ORA (previously the Division of Ratepayer Advocates) regarding the power purchase contract between SCE and Mojave Cogeneration Company. In that decision we stated that we will approve the proposed settlement agreement if SCE and ORA agree to modify the settlement such that the $14 million plus interest beginning January 1, 1996 will be credited to an electric deferred refund account rather than to the ECAC balancing account.