PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION					RESOLUTION E-3649
                                					            JANUARY 6, 2000 	 

RESOLUTION

Resolution E-3649.  Southern California Edison Company (Edison) seeks to record 1) fuel oil inventory carrying costs in its Power Exchange Revenue Memorandum Account (PXRMA) and 2) gains and losses on the sale of fuel oil inventory in its Transition Cost Balancing Account (TCBA) commencing February 1, 2000.   Approved in part, denied in part. Edison shall not record fuel oil inventory carrying costs in the PXRMA, as it is an inappropriate account for this purpose.  Edison shall not record any of its fuel oil inventory costs into the TCBA since D.97-11-074 precludes booking any of these costs to this account after January 1, 1998.  To avoid creation of a “regulatory gap” Edison may continue to book fuel oil related costs to its existing Fuel Oil Inventory Memorandum Account (FOIMA).  The termination date of the FOIMA is extended from January 31, 2000 to January 31, 2001.

By Advice Letter 1412-E filed on October 25, 1999. 
______________________________________________________________________________

Summary

Southern California Edison Company (Edison) currently records 1) its fuel oil inventory carrying costs and 2) gains and losses on the sale of Edison’s fuel oil inventory as entries to Edison’s Fuel Oil Inventory Memorandum Account (FOIMA).

Edison’s FOIMA account is scheduled to expire as of January 31, 2000.  Edison states that this deadline does not give it sufficient time to undertake the actions needed to dispose of its fuel oil inventories as required by the Commission.

Rather than seek an extension of the expiration date of the FOIMA, Edison proposes in Advice Letter (AL)1412-E that starting as of February 1, 2000 Edison would record:
•	The carrying-costs for its fuel oil inventory in Edison’s Power Exchange Revenue Memorandum Account (PXRMA);
•	The gain or loss on the sale of its fuel oil inventories to Edison’s Transition Cost Balancing Account (TCBA).

This portion of Edison’s request is denied.  Edison’s request seeks to record its fuel oil expenses into accounts that are inappropriate for that purpose.  Neither the PXRMA nor TCBA were established to record these costs.  

Furthermore, Edison’s request to record the gains or losses on the sale of its fuel oil inventory to the TCBA is contrary to Decision (D).97-11-074 which precludes the recording of any fuel oil costs to the TCBA after December 31, 1998. Granting Edison’s request would also prejudge the issue of the transition cost recovery of Edison’s fuel oil inventories.  In D.99-06-078, the Commission has already decided that Edison shall file an application by no later than January 31, 2000 to address this issue. 

Rather than record fuel oil costs into inappropriate accounts, it is reasonable to allow Edison to continue to record the gain or losses on the sale of its fuel oil inventory to its existing FOIMA. The expiration date of the FOIMA is therefore extended to January 31, 2001.  This avoids the creation of a “regulatory gap” between the expiration date of the FOIMA and the time needed by Edison to dispose of its fuel oil inventories.  This was the stated purpose behind Edison’s Advice Letter filing. Extending the operation of the FOIMA more concisely achieves this outcome.

Background

In D.97-11-074 the Commission deferred the issue of transition cost recovery for Edison’s fuel oil inventories associated with its recently divested power plants.  Instead, D.97-11-074 allowed Edison “to apply the 3-month commercial paper rate to the unamortized balance of the level of (Edison’s) fuel oil inventories.”  This authority was allowed “for 1998 only.”   In D.99-06-078, a follow-up decision to D.97-11-074, the Commission once again deferred consideration of the issue of transition cost recovery for Edison’s fuel oil inventories.  D.99-06-078 directed Edison to file an application by “no later than January 31, 2000” to address the market valuation principles and ratemaking treatment to apply to Edison’s fuel oil inventories and associated fuel oil storage and delivery system.

In Resolution E-3606, adopted by the Commission on August 5th, 1999, Edison was allowed to create the Fuel Oil Inventory Memorandum Account (FOIMA). The purpose of the FOIMA is 1) to record fuel oil inventory carrying costs; and 2) gains and losses on the sale of Edison’s fuel oil inventory.  This account will expire as of January 31, 2000. 

Creation of the FOIMA was warranted in order to give the Independent System Operator (ISO) additional time to determine whether Edison’s fuel oil inventories were needed for system reliability. The FOIMA also provides an account for Edison to record its fuel oil related costs until the Commission reaches a final decision on the market valuation of these assets.  As a memorandum account Edison may only record these costs for potential future recovery in rates.

On August 26, 1999, the ISO determined that Edison’s back-up fuel oil inventory was no longer needed to ensure system reliability.  As a result of the ISO’s decision, Edison states that it “plans on disposing of [its] fuel oil inventory as expeditiously as possible” but does not believe it will be able to do so prior to the scheduled expiration date of the FOIMA of January 31, 2000.  Edison states that it must first file an application with the Commission, as required by D.99-06-078, in order to determine the market valuation principles that will apply.  Additionally, Edison states that due to physical limitations on its ability to withdraw fuel oil from storage and the market demand for fuel oil, Edison will be unable to complete the disposition of its fuel oil inventories prior to January 31, 2000.

Rather than seek an extension of the expiration date of the FOIMA, Edison proposes in 
AL1412-E that starting as of February 1, 2000 Edison would record:
•	The carrying-costs for its fuel oil inventory in Edison’s Power Exchange Revenue Memorandum Account (PXRMA); and,
•	The gain or loss on the sale of its fuel oil inventories to Edison’s Transition Cost Balancing Account (TCBA).

The stated purpose of Edison’s filing is to avoid creation of a “regulatory gap” between the scheduled expiration of the FOIMA and the final disposition of the transition cost recovery of Edison’s fuel oil inventories. 

Notice 

Notice of AL 1412-E was made by publication in the Commission’s Daily Calendar.  Edison states that it was distributed to interested parties in accordance with Section III-G of General Order 96-A and to all parties of record in Edison’s Competitive Transition Charge (CTC) application service list  (A.96-08-007/A.96-08-071).       
Protests

Advice Letter 1412-E was protested by Enron.   

Enron states that “it is premature for the Commission to grant [Edison’s] requested changes as the Commission has not yet decided whether or not to provide transition cost recovery” for fuel oil inventories and that Edison’s “advice filing must be rejected.”

While Enron does not object to Edison’s expeditious disposal of its fuel oil inventories, Enron opposes booking any gain or loss associated with the sale to Edison’s TCBA.  Enron believes it is premature to book these costs to the TCBA because the Commission has not yet decided either that fuel oil costs are eligible for transition cost recovery or how they should be treated in rates.  Enron notes that D.99-06-078 directed Edison to file an application by no later than January 31, 2000 to address the market valuation principles and ratemaking treatment associated with the disposition of Edison’s fuel oil inventories.  

Edison responded to Enron’s protests.  The major focus of Edison’s response was on the need to avoid the creation of a “regulatory gap” due to the scheduled expiration of the FOIMA.

Discussion

Summary

Edison’s request to record fuel oil costs into its PXRMA and TCBA accounts should be denied.  Edison’s request seeks to record its fuel oil expenses into accounts that are inappropriate for that purpose.  Both the PXRMA and TCBA were not established to record these costs and, in the case of the TCBA, any further entries to this account of fuel oil related costs are prohibited by D.97-11-074.
  
The stated purpose behind Edison’s Advice Letter filing was to avoid the creation of a “regulatory gap” between the expiration date of the FOIMA and the time needed by Edison to dispose of its fuel oil inventories. Extending the operation of the FOIMA more concisely achieves this outcome. The expiration date of the FOIMA should be extended to January 31, 2001.

Recording Fuel Oil Inventory Costs to the PXRMA Account is Inappropriate

In its Advice Letter, Edison proposes that after the expiration of the FOIMA, Edison would record its fuel oil carrying costs to the PXRMA.   Booking of fuel oil expenses to this account is inappropriate, as the PXRMA was not designed for this purpose.  The purpose of the PXRMA is to track the “going forward” revenues and expenses associated with power plants retained by Edison that are selling their energy into the Power Exchange.  The purpose of the PXRMA, according to Edison’s own tariffs, is to record expenses associated with “the Utility’s fossil generating facilities, which are not deemed to be “must run” by the ISO.” Entries to this account are to cease once the “fossil generating facility is market valued.” 

Edison’s fuel oil inventories meet none of the above criteria.  They are not “generating facilities” and are associated with power plants that have already undergone market valuation.

Recording the Gains and Losses on Fuel Oil Inventories in the TCBA

Edison’s second request in its Advice Letter, that it be allowed to record the gains and losses on the sale of fuel oil inventories in the TCBA, should also be denied.

First, Edison’s request is precluded by D.97-11-074.  Edison’s only stated rationale for its request is a citation to a portion of D.97-11-074 that states that:

Conceptually, we agree that gain or loss resulting from sale of assets, including land, should now flow through the transition cost balancing account…

Edison analogizes that this ratemaking treatment should now apply to Edison’s fuel oil assets.  While D.97-11-074 may have “conceptually” agreed on this ratemaking treatment, this decision also specifically rejected this treatment for Edison’s fuel oil inventories.  Instead, D.97-11-074 specifically stated that the only fuel oil related costs that could be booked to the TCBA would be limited to Edison’s fuel oil carrying costs and further limited these entries to 1998 only.    Even Edison had previously conceded that fuel oil related entries to the TCBA were prohibited after December 31, 1998.   Therefore, it is unclear why Edison would now propose to once again begin recording fuel oil costs into the TCBA.

Second, Edison’s request, as Enron noted in its protest, prejudges the eligibility of fuel oil inventory expenses as transition costs.  Both D.97-11-074, and its follow-up decision D.99-06-078 deferred consideration of the eligibility of fuel oil costs for transition cost recovery.  In D.99-06-078, the Commission specifically directed Edison to address the appropriate ratemaking treatment for its fuel oil inventories in an application to be filed no later than January 31, 2000. 

Third, recording Edison’s fuel oil costs into a balancing account, such as the TCBA, rather than in a memorandum account, is inappropriate.  The purpose of the TCBA, according to Edison’s tariffs, is to record “The cost and cost categories referred to in [Assembly Bill] AB1890 and authorized for rate recovery by the Commission.”   Since all of Edison’s existing fuel oil expenses are being recorded in memorandum accounts, all of these costs are only being tracked for potential future recovery in rates, and none of these costs have yet to be authorized for rate recovery. 

Avoiding Creation of a "Regulatory Gap”

The stated purpose behind Edison’s Advice Letter filing was to avoid the creation of a “regulatory gap” between the expiration date of the FOIMA and the time needed by Edison to dispose of its fuel oil inventories.  As noted in Edison’s filing, the combination of regulatory requirements, physical limitations, and market demand make it appear unlikely that Edison could complete the disposition of its fuel oil inventories prior to the expiration of the FOIMA.  During this “regulatory gap” after the expiration of the FOIMA, Edison would not be able to record costs associated with its fuel oil inventories.  While the Commission is not mandated to address this problem, in the present situation a reasonable solution to this problem is to extend the expiration date of the FOIMA.  As previously mentioned, it is unclear why Edison did not choose this approach to address this problem rather than seeking to record fuel oil costs into accounts that are inappropriate for that purpose.  Extending the operation of the FOIMA more concisely achieves Edison’s stated outcome.

Rather than record fuel oil costs into inappropriate accounts, it is reasonable to allow Edison to continue to record the gain or losses on the sale of its fuel oil inventory to its existing FOIMA. The expiration date of the FOIMA should be extended to January 31, 2001.   

Comments

The draft Resolution of the Energy Division in this matter was mailed to parties in accordance with Public Utilities Code Section 311(g).  Comments were filed by Edison on December 21, 1999.   Edison supports the draft Resolution’s extension of the FOIMA’s expiration date to January 31, 2001. Edison also proposes two minor changes to the text of the Resolution, neither of which we choose to make.

First, Edison infers that the Resolution states that had Edison filed its application to market value its fuel oil inventories earlier than the January 31, 2000 date mandated in D.99-06-078, there would not be a need to extend the FOIMA’s expiration date.  Edison states that even if it had filed earlier, the Commission could not have acted upon Edison’s application prior to the FOIMA’s original expiration date.  Edison misunderstands that the purpose of the text contained in the Resolution is solely to reiterate the Commission’s oft-stated goal that the market valuation process be completed as “expeditiously as possible.”  The earlier that Edison could have filed its application, the earlier the Commission could have reached a decision, regardless of whether or not the decision occurred prior to January 31, 2000. Edison could have filed its application any time after the ISO reached its decision in August 1999.

Second, Edison states that the reason it chose in its Advice Letter filing not to seek an extension of the expiration date of the FOIMA was because the Commission had previously rejected Edison’s request to do so in Resolution E-3606.  This is correct.   However, Edison’s proposed solution to overcome this issue, modifying the TCBA and PXRMA accounts, suffers from the same problem.  As the Resolution notes, the Commission had also precluded Edison from booking fuel oil costs to either the TCBA or PXRMA accounts. The Draft Resolution concludes that based upon the updated information provided by Edison in this Advice Letter filing it is reasonable for the Commission to grant Edison an extension and the most concise way to do so is to extend the expiration date of the FOIMA.   

Findings

1.	Southern California Edison Company (Edison) currently records 1) its fuel oil inventory carrying costs and 2) gains and losses on the sale of Edison’s fuel oil inventory as entries to Edison’s Fuel Oil Inventory Memorandum Account (FOIMA).  Edison’s FOIMA account is scheduled to expire as of January 31, 2000. 

2.	Edison states that it plans on disposing of its fuel oil inventory as expeditiously as possible but does not believe it will be able to do so prior to the scheduled expiration date of the FOIMA of January 31, 2000 due to regulatory requirements, physical limitations on its ability to withdraw fuel oil from storage and the market demand for fuel oil.

3.	Edison proposes in Advice Letter 1412-E that starting as of February 1, 2000 Edison would record the carrying-costs for its fuel oil inventory in Edison’s Power Exchange Revenue Memorandum Account (PXRMA); and the gain or loss on the sale of its fuel oil inventories to Edison’s Transition Cost Balancing Account (TCBA).

4.	Edison’s request to record the carrying costs for its fuel oil inventories in the PXRMA should be denied.  These costs meet none of the criteria that are needed for these expenses to be included in the PXRMA.  They are not “generating facilities” and are associated with power plants that have already undergone market valuation.

5.	D.97-11-074 prohibits the recording of any fuel oil costs to the TCBA after December 31, 1998.

6.	Even Edison had previously conceded that fuel oil related entries to the TCBA were prohibited after December 31, 1998.

7.	In D.97-11-074, and once again in D.99-06-078, the Commission deferred the issue of transition cost recovery for Edison’s fuel oil inventories associated with its recently divested power plants.  D.99-06-078 directs Edison to file an application by no later than January 31, 2000 to address the transition cost eligibility and ratemaking treatment of its fuel oil inventories. 

8.	Granting Edison’s request to include fuel oil costs in the TCBA would prejudge the issue of the transition cost recovery of Edison’s fuel oil inventories.  

9.	Recording Edison’s fuel oil costs into a balancing account, such as the TCBA, rather than in a memorandum account, is inappropriate since all of Edison’s existing fuel oil expenses have yet to be authorized for rate recovery.

10.	Edison’s request to record the gains or losses on the sale of its fuel oil inventory to the TCBA should be denied.

11.	The stated purpose behind Edison’s Advice Letter filing was to avoid the creation of a “regulatory gap” between the expiration date of the FOIMA and the time needed by Edison to dispose of its fuel oil inventories.

12.	The Commission is not mandated to address the problem of “regulatory gap”, although in the present situation a reasonable solution to this problem is to extend the expiration date of the FOIMA.

13.	The expiration date of the FOIMA should be extended to January 31, 2001. 

14.	Enron’s protest of Advice Letter1412-E is accepted for consideration by the Commission.  Enron’s protest is granted in part, in accordance with the discussion and findings contained in this Resolution.

Therefore it is ordered that:

1.	The request of Southern California Edison Company (Edison) in Advice Letter 1412-E to record the carrying-costs for its fuel oil inventory in Edison’s Power Exchange Revenue Memorandum Account (PXRMA) and the gain or loss on the sale of its fuel oil inventories to Edison’s Transition Cost Balancing Account (TCBA) is denied.

2.	Edison is authorized to revise its Fuel Oil Inventory Memorandum Account (FOIMA) by changing the expiration date of the account from January 31, 2000 to January 31, 2001.  If Edison accepts the modifications, it shall supplement its Advice Letter within 20 days of the effective date of this Resolution to make the change to its tariffs, otherwise this authorization is vacated. 

3.	The protest of Enron to Edison’s Advice Letter 1412-E is granted in part, in accordance with the discussion and findings contained in this Resolution.

4.	This Resolution is effective today.  

I certify that the foregoing resolution was duly introduced, passed and adopted at a conference of the Public Utilities Commission of the State of California held on January 6, 2000; the following Commissioners voting favorably thereon:

				      
									  _____________________
  WESLEY M. FRANKLIN
									       Executive Director

									  RICHARD A. BILAS
									           President
									  HENRY M. DUQUE
									  JOSIAH L. NEEPER
									  CARL W. WOOD
									  LORETTA LYNCH
									        Commissioners