CONTACT: Dianne Dienstein June 11, 1997 CPUC - 58
415-703-2423 (R.94-04-031/I.94-04-032)

CPUC SETS ELECTRIC INDUSTRY TRANSITION COST RECOVERY PARAMETERS

Under the competitive electric services market set to begin January 1, 1998 in California, some assets of investor-owned utilities may become uneconomic. These are called ‘transition costs’, and the utilities are given the opportunity to recover their reasonable costs of purchasing power or building generation facilities through a ‘competition transition charge’ (CTC) which their customers will pay whether they purchase electricity from the utility or a different supplier. In general, these costs are currently being recovered in rates. The expectation was that they would be recovered gradually over many years. That cost recovery now is to be accomplished over the four-year transition (1998 - 2002) to a fully competitive electric industry. Utilities are at risk for generation-related transition costs not recovered by December 31, 2001.

Among the transition costs to be recovered are those associated with generation plants, nuclear settlements and QF contracts. In addition, utilities can recover costs associated with the Biennial Resource Proceeding Update settlement, capital additions to utility generation facilities existing as of December 1995 which the Commission finds reasonable to maintain until 2002, Southern California Edison’s fixed fuel contracts, and employee-related transition costs.

Costs associated with power purchase contracts, including QF contracts in place December 20, 1995, may be collected for the duration of the contract. Recovery of employee-related transition costs can extend through December 31, 2006. Employees are protected because severance, retraining, early retirement and outplacement costs approved as reasonable by the CPUC will be recovered through the competition transition charge.

If costs to implement direct access, the Power Exchange, and the Independent System Operator reduce the ability of utilities to collect generation-related transition costs, those costs may be collected after December 31, 2001; no time limit is set. In addition, to the extent that funding renewable program costs impacts utilities’ ability to recover generation-related transition costs by December 31, 2001, these generation-related transition costs may be deferred and recovered during an extension to the transition period from January 1, 2002 - March 31, 2002.

Assembly Bill 1890, enacted in 1996, ordered electric rates to be frozen at June 1996

levels through December 31, 2001. In a previous decision, the Commission ordered the rate freeze to begin January 1, 1997. The difference between the frozen rate level and costs of service allows utilities the opportunity to recover the costs of most generation-related assets

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CPUC SETS ELECTRIC INDUSTRY TRANSITION COST RECOVERY PARAMETERS 2

and obligations. With rates frozen since January 1, 1997, utilities are able to accrue revenue prior to the beginning of the transition period. Utilities are to accelerate collection of those transition costs which earn a high rate of return and to maximize tax benefits, which means that at minimum, they should accelerate deprecation of those assets on a straight-line basis -

over a 48 month amortization period, including associated taxes and the reduced rate of return.

If generation-related transition costs are recovered prior to December 31, 2001, the rate freeze will end and ratepayers should then see lower rates. Shareholders and utilities also benefit from utilities’ full recovery of costs, because then the utility does not need to absorb any undercollection.

To determine the amount of uneconomic assets eligible for transition cost recovery for utilities’ generation-related assets, valuation of those assets must be completed by the end of 2001. Transition costs ultimately will be determined by netting the negative (above market costs) and positive (below market costs) costs of all utility-owned generation assets. Utilities must amortize their uneconomic costs so that their recorded rate of return does not exceed the authorized rate of return on ratebase.

A market rate forecast of 2.4 cents/kWh will be used to estimate transition costs for 1998. This is not precedent for any other purposes, except that it may be useful to utilities in developing Rate Reduction Bond proposals. The billed CTC will be based on metered consumption. The CTC will be collected from all existing and future customers including those who remain with the utility (utility service customers), those who purchase electricity from a different supplier but receive delivery from the utility (direct access customers), and those who leave the utility system (departing load customers).

Investor-owned utilities are directed to present tariffs which enable consumers to easily understand the cost implications of choosing an option by giving them general information on transition costs, calculation of the competition transition charge, and requirements, terms and conditions for full service, direct access, and departing load customers. PG&E, Edison, and SDG&E are to file preliminary tariffs with the CPUC by June 16, 1997. Workshops to address tariff issues will be held in July.

In the coming months, the Commission will issue another decision addressing transition cost recovery issues; transition cost recovery will also depend on Power Exchange prices during the rate freeze, and market valuation. In addition, the Commission will address issues associated with rate reduction bonds. o

Throughout the remainder of this year, the Commission will make more decisions specifying how California’s competitive electric services market will work. The best way to follow these developments is to access the CPUC Internet website at http://www.cpuc.ca.gov and check these categories: Electric Restructuring, News Releases, Commission Meeting Agenda, Daily Calendar, and Energy Division.