ECACs were originally used for fuel and purchased power costs only. They have in recent years included many other types of costs. Those costs were allocated in D.97-08-056 to generation, transmission, or distribution to functions. Because only generation costs would be left in the ECAC and because those costs are now included in the TCBA of each utility or are recoverable through PX or ISO payaments, the ECAC is redundant and serves no regulatory purpose. Following the rate freeze period, utility generation costs will be deregulated to the extent that those costs have received regulatory protections that would not be available to competitors. The Commission has recognized that changes in the industry affect the need for and operation of balancing accounts such as ECACs. In D.96-12-077, we found that ECAC mechanisms may no longer be useful ratemaking tools, observing that "the PX price will set the standard for electric generation and power purchases, the primary components of ECAC costs..." At the same time, D.96-12-088 recognized that associated reasonableness reviews may be required after the introduction of competition in generation markets "to verify the accuracy and fairness of the utilities' recovery of PX costs."
Energy Division's report does not make any recommendations with regard to the ECAC balancing accounts except for elimination of a few subaccounts. The Energy Division does comment that the purpose of the forecast phase of the ECAC proceeding will be substantially changed with the introduction of the PX. It also suggests that the reasonableness of utility fuel costs and purchases will continue to require Commission oversight until the PX is functioning properly. The utilities unanimously propose eliminating ECACs.
We will direct the utilities to eliminate ECAC mechanisms. Balances in the accounts as of December 31, 1997, should be entered into the interim transition cost balancing accounts pending reasonableness reviews of these costs in final ECAC proceedings. Reasonableness reviews will be conducted in more appropriate proceedings for costs incurred following December 31, 1997. We also find no further need for ECAC forecasts. We will therefore no longer conduct ECAC proceedings for generation costs incurred beginning January 1, 1998. With the elimination of the ECAC proceeding, we will need to develop a forum to determine the energy reliability index. We will seek comments on this matter in this proceeding.
D.96-12-077 finds that the "introduction of competition for generation will render ineffective our past approach of supporting DSM by using ERAM to counter the utility's economic incentive to increase sales." The ERAM was conceived during a period when the utility was the sole provider of power and a primary provider of conservation technologies and information. The ERAM was designed to reduce the conflict between the Commission's policy objective to promote conservation and the utilities' objective to increase revenues and profits through higher sales. When generation markets are competitive, a distribution utility would not be able to affect the level of power sales. To the extent distribution rates are designed to be insensitive to usage, that is, "flat," the utility would be indifferent to the amount of electricity a customer uses. Where distribution rates are sensitive to the amount of electricity a customer uses, the main purpose the ERAM would serve would be to protect utility shareholders from variations in revenues. Competing electricity providers will promote electricity sales without regard to the distribution utility's ratemaking mechanisms. During the transition period, the utilities may also have an incentive to promote electricity sales notwithstanding the presence of an ERAM because increased sales will reduce the risk that the utilities will be unable to recover their uneconomic generation costs in the time allotted by AB 1890.
Several parties propose the elimination of the ERAM accounts for the reasons we have addressed here. Energy Division's workshop report also recommends elimination, but proposes to explore alternatives in utilities' distribution PBR application. We appreciate the parties' concern for continued conservation efforts and other types of demand-side management. Their comments in this proceeding, however, do not suggest ways to overcome the inevitable conflict between policy objectives to dampen demand and the compulsion of competitive electric providers to promote more sales. In subsequent proceedings, we will invite the parties to address this matter and possible alternatives to ERAM for the period following the transition period. We will direct PG&E to eliminate its ERAM effective January 1, 1998 and consistent with our subsequent findings regarding PG&E's TRA proposal. SDG&E should eliminate its ERAM since the account no longer serves its original purpose and is used only to track PBR rewards and penalties, and revenues subject to sharing. As we discussed earlier, Edison no longer has an ERAM.
The purpose and operation of PG&E's proposed TRA appears to be mostly one of tracking revenues. It does not change PG&E's regulatory regime: to the extent PG&E recovers authorized revenue requirement dollar-for-dollar today using an ERAM, it will continue to do so under the TRA. We do not believe this particular type of ratemaking is useful in a competitive environment for the purpose of protecting conservation goals, as we discussed earlier. It may also provide protections to the utility which are no longer realistic. However, that is a matter for more studied review in PG&E's upcoming PBR proceeding or those future proceedings in which we address specific proposals for regulatory change. In the meantime, the TRA will track revenues by function consistent with existing regulatory mechanisms to calculate the level of credits available for paying off uneconomic generation costs. In this way, PG&E's TRA appears no different from the methods Edison and SDG&E will use to calculate these credits, except in name.
We do not herein adopt PG&E's proposal to include in this ERAM-type mechanism any determinations which would affect the regulation of transmission costs. That is a matter for the Federal Energy Regulatory Commission (FERC). The FERC is currently considering transmission rate proposals by the California electric utilities. After the FERC has issued an order addressing these issues, PG&E should modify its tariffs accordingly. Such an order is expected before the end of 1997. Consistent with D.97-08-056, PG&E may not calculate the transmission revenue requirement residually.
With this exception for transmission revenues, we adopt PG&E's proposal for a TRA account. We will revisit this ratemaking treatment for distribution costs in PG&E's distribution PBR application, which it will file on or after December 15, 1997, pursuant to D.97-04-067.
The utilities propose retaining certain balancing accounts in order to permit rate changes after the rate freeze for costs incurred during the rate freeze period. Except for collection of certain costs set forth explicitly in AB 1890, we find such a scheme to be unlawful. We believe the legislature intended the utilities' revenues during the rate freeze period to be limited to the amounts collected from the rates that were in effect on June 10, 1996. AB 1890 does not state that utilities may accumulate balances associated with various costs or ratemaking mechanisms through the rate freeze period and then collect them at a later date. Nothing in the bill would lead us to conclude that the rate freeze merely represents a period during which ratepayers and shareholders will lend funds to each other.
Moreover, rate change deferrals would violate the provisions of AB 1890 that set forth the method by which the utilities may collect uneconomic generation costs. Section 368(a) specifies that "the electric corporation shall be at risk for those (generation-related) costs not recovered during (the transition) period." By deferring rate changes to reflect costs (or cost savings) beyond the rate freeze period, the utilities would change the headroom available for the recovery of uneconomic generation investments. AB 1890 specifies the methods by which uneconomic investments may be recoverable and the exceptions to the rule that those costs must be recovered by the end of the transition period. In so doing, AB 1890 does not anticipate or authorize deferring cost recovery of nongeneration costs until after the rate freeze in ways which would affect headroom.
Some of the costs the utilities propose to include in regulatory accounts for purposes of deferring rate increases are costs for which we have in recent years granted dollar-for-dollar recovery without risk to utility shareholders. Such costs include those incurred to repair utility systems following storms or earthquakes and costs associated with clean-up of hazardous materials. We have not changed our view that these costs are legitimate (although we have stated our concern that balancing account treatment of them may create incentives for the utilities to defer maintenance). Notwithstanding our views, however, AB 1890 does not permit the utilities to recover such costs by way of rate increases--either during the rate freeze period or after it-to reflect costs incurred during the rate freeze period. We cannot fashion an exception to the law on the basis that the law conflicts with our policy preferences. The Legislature has narrowly circumscribed our ratemaking authority during the transition period. Exceptions that AB 1890 does not specify to the rate freeze provisions are unlawful. We therefore reject proposals that would authorize the utilities to accumulate costs or revenues in balancing accounts during the rate freeze in order to incorporate them into rate changes after the end of the rate freeze period, except as expressly identified in AB 1890 for certain transition costs.
In addition to the accounts they propose for certain operational costs, both Edison and SDG&E propose to use regulatory accounts for the purpose of affecting rate changes to reflect a variety of PBR costs incurred during the rate freeze period. Edison's memorandum account for PBR rewards and penalties and SDG&E's RSPRBA would permit the utilities to accumulate entries for recovery at the end of the rate freeze period. SDG&E's proposal goes further by ignoring the rate freeze altogether if revenue-sharing balances exceed $10 million during the rate freeze period. As we have stated, AB 1890 does not permit such ratemaking mechanisms. We add that we cannot circumvent the intent of AB 1890 to impose a rate freeze by calling rate changes any other name. We interpret AB 1890 to require that the tariffed rates in effect on June 10, 1996 are those which must be in place during the rate freeze period. We clarify that Resolution E-3478 did not authorize Edison to use a memorandum account for such a purpose and an advice letter would not be the proper forum for reviewing the lawfulness or wisdom of such a matter. We reject the proposals of Edison and SDG&E to create new balancing accounts to track PBR rewards, penalties, and revenue sharing for the purpose of affecting rates during or after the rate freeze period. Any such rewards or penalties would be reflected in the portion of total rates allocated to distribution and thereby affect the calculation of headroom. However, balancing accounts should be created for the sole purpose of crediting the TCBA.
Some electric utility accounts are designed to track program costs for the purpose of assuring that either authorized funding is spent on the program or is returned to ratepayers. Such accounts include those relating to the CARE program, DSM programs, and RD&D. In some cases, they are "one-way" balancing accounts because ratepayers may receive refunds for unspent funds but would not be required to pay for cost overruns. These types of accounts may be useful, even necessary, for program administration notwithstanding the rate freeze. In fact, Section 381 and Section 382 require the utilities to fund a variety of public policy programs at specified levels.
This proceeding does not rule on the wisdom of funding levels for public purpose programs. Those are matters which are appropriately subjects of proceedings relating to program design and administration. We will, however, direct the utilities to retain these accounts for the purpose of tracking related costs and revenues with that understanding and as a method of assuring that the funds dedicated to related programs are actually used for their intended purposes.
We also adopt the proposals of the electric utilities to create balancing accounts for authorized nuclear decommissioning costs and authorized public benefits programs costs. We agree that their proposals are consistent with AB 1890 which authorizes recovery of associated costs. Consistent with our earlier discussion, the balances in these accounts would affect only headroom during the transition period except to the extent we have determined otherwise in the transition cost proceedings.
Several other accounts have been created pursuant to AB 1890 and Commission decisions which are designed to accomplish certain objectives through the transition period. These accounts have been established in transition cost proceedings and will not be changed in any way by this decision.
The utilities and other parties propose to eliminate various accounts as being unnecessary due to industry changes. With the exceptions of those accounts required to track DSM, RD&D, and CARE programs, discussed above, and those required for transition matters which have been addressed in relevant transition cost decisions, we encourage the utilities to eliminate regulatory accounts beginning January 1, 1998. We will require each utility in its first RAP to identify those regulatory accounts that have been eliminated and those that have been retained.
SDG&E's proposal to modify the allocation of costs in certain accounts is denied because cost allocations are outside the scope of this proceeding. We adopted cost allocation methods for SDG&E in D.97-08-058.
In its comments on the proposed decision, Edison proposes for the first time a "modified TRA." It argues that it should be permitted the same opportunity as PG&E to recover its costs and payments to the ISO and PX. Like PG&E, it observes that a TRA will perform the function of a number of balancing accounts and simplify accounting.
We understand Edison's concern and, in light of the complexity of our ratemaking programs and the overlays which are required to implement AB 1890, the difficulty in interpreting the intent of the proposed decision. Edison observes correctly that "The PD finds no difference, except in name, between the TRA mechanism adopted for PG&E and Edison's method of determining the revenues available for paying off transition costs." In fact, the intent of the proposed decision and our order today is that Edison would subtract various revenue requirements, or actual revenues depending on the mechanism already adopted for a category of costs, from billed revenues. For Edison, the calculation would operate just as it would for PG&E, applying the TRA, with the exception that the deduction for Edison's distribution operations would be based on actual revenues rather than an adopted revenue requirement, consistent with Edison's PBR mechanism.
We do not herein specifically adopt a TRA mechanism for Edison because, prior to the filing of its comments on the proposed decision, Edison did not propose a TRA. Nevertheless, our intent is that the calculation of Edison's "headroom" would be made as if Edison had a TRA. If Edison believes it requires a specific account to effect this calculation, it may propose one in the tariff modifications it submits in compliance with this order.
