PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION*					        RESOLUTION E-3654
								        March 2, 2000

R E S O L U T I O N

Resolution E-3654. Pacific Gas and Electric Company (PG&E) requests an extension of its Schedule ED until the end of the rate freeze or the date that a Decision in Application (A.) 99-03-014 become effective, whichever is later. Approved with conditions.
 
By Advice Letter 1846-E-A, Filed on November 22, 1999.

SUMMARY

PG&E ‘s Advice Letter 1846-E-A requests an extension of its Schedule ED, Experimental Economic Development Rate, and Standard Form 79-771, Supplemental Agreement for Economic Development Discount on Electric Service until the end of the rate freeze or a Decision in A.99-03-014, whichever comes later.

This Resolution approves PG&E’s extension of Schedule ED with the condition that shareholders assume 25% Schedule ED costs. In addition, pursuant to Public Utilities Code (P.U. Code) Section 740.7 (c), economic development discounts shall not be extended for federal military bases that have been closed or are scheduled to be closed.

BACKGROUND

Schedule ED is a customer attraction Flexible Pricing Option (FPO). It provides for a three year declining discount to certain customers that meet the conditions as defined in P.U. Code Section 740.4. Only customers locating load in California from another state are eligible for service under Schedule ED. The closing date for allowing new customers to take service under Schedule ED was December 31, 1998. Customers already taking service under Schedule ED are allowed to continue to do so until April 30, 2003. 

PG&E’s most recent extension of Schedule ED was approved on March 13, 1996 by Resolution E-3442. While extending the discounts until December 31, 1998, E-3442 puts PG&E on notice that once restructuring is implemented, it should be prepared to pay 100% of the discount costs. 

On January 28, 1999, PG&E filed Advice Letter 1846-E proposing to extend Schedule ED to new load until December 31, 2000, and that the discounts be extended until April 30, 2005.

On June 28, 1999, Commissioner Bilas issued an Assigned Commissioner Ruling (ACR) ordering Advice Letter 1846-E to be consolidated with Application (A.)99-03-014. On October 8, 1999, PG&E filed a Motion for Reconsideration of the June 28, 1999 ACR. On November 5, 1999, Commissioner Bilas responded to PG&E’s Motion by allowing PG&E to supplement its original Advice Letter to propose an extension of Schedule ED through the end of the rate freeze. Commissioner Bilas’ response states that while the extension should be treated in an expedited manner, an ultimate determination of whether economic development discounts should continue on a permanent basis remains an issue in A.99-03-014.

On November 22, 1999, PG&E filed supplemental Advice Letter 1846-E-A to extend Schedule ED through the end of the rate freeze or until a final determination is made in A.99-03-014, whichever is later.

PG&E argues that Assembly Bill 1890 (Stats. 1996, Ch. 854) requires that schedules in effect on June 10, 1996, remain open to new customers throughout the rate freeze. It states that this principal is contained in D.97-12-044:

We conclude that all customers should be able to choose service from schedules that contain the rate levels and that offer substantially the same quality and value of service that were available to similarly situated customers on June 10, 1996. As noted above, use of the word “optional” in Section 368 also suggests that schedules in effect on June 10, 1996 should remain open to all customers during the rate freeze. This conclusion does not mean that schedules may not be closed to additional customers under any circumstances. At a minimum, however, before a utility may close a schedule, it must have available a schedule that offers customers the same rates and substantially equivalent service to the schedules that were in effect on June 10, 1996 (D.97-09-065, mimeo, pp. 15, citing D.97-12-044, as modified by D.98-07-101, mimeo, pp. 19-20).

PG&E states that since Schedule ED was in effect on June 10, 1996 it must remain open and that PG&E has no other rate schedule with substantially equivalent service and rates. 
 
NOTICE

In accordance with Section III, Paragraph G, of General Order No. 96-A, PG&E mailed copies of this Advice Letter to other utilities and interested parties.  Public notice of this filing has been made by publication in the Commission's daily calendar.

PROTESTS

On December 13. 1999, protests to 1846-E-A were filed by Modesto Irrigation District (“MID”) and Merced Irrigation District (“Merced”). Aglet Consumer Alliance (“Aglet”) filed a protest on December 14, 1999.

PG&E filed a response to Aglet’s and Merced’s protests on December 20, 1999. On December 23, 1999, PG&E responded to MID’s protest.

Merced maintains that Schedule ED expired on its own terms in December of 1998. It believes that when AB 1890 froze tariffs in place on June 10, 1996, it also froze the sunset date contained in Schedule ED. Aglet also argues that Schedule ED should come to an end because the discounts are experimental, discriminatory, and PG&E has not demonstrated ratepayer benefit.  In addition, both parties object to PG&E’s proposal that should the rate freeze end before a decision in A.99-03-014, the discounts should extend beyond the rate freeze. Parties argue that if the Commission determines that Section 368 (a) prohibits the closure of Schedule ED, its obligation to maintain rate schedules no longer exists beyond the rate freeze period.

PG&E responds that neither Aglet nor Merced address the determination made in D.99-09-065 and D.97-12-044 as modified by D.98-07-101 that schedules in place on June 10, 1996 must remain open throughout the rate freeze. PG&E also argues that D.99-09-014 granted Southern California Edison (SCE) an extension of its discounts pending a determination in its post rate freeze application. PG&E believes it should be afforded the same treatment by having the ability to offer Schedule ED while its post rate freeze application, A.99-03-014, is pending. 

PG&E believes that it has demonstrated ratepayer benefits because ratepayers benefit from a contribution to margin by all current and previous customers taking service on Schedule ED.

Merced states that even if the Commission determines that Schedule ED should continue, it may not be extended for military bases that have closed or are scheduled to close pursuant to Section 740.7 (c). Section 740.7 (c) mandated economic development rates for retired military facilities to expire on January 1, 1999. PG&E states that while Section 740.7 repealed economic development incentives, the statute does not preclude an extension of the incentives. It maintains that the Commission has the discretion to extend the incentives for retired military bases.

Merced also argues that if the Commission determines that Schedule ED should be extended, it should do so only under the terms applied to PG&E’s E-TD and E-TDI rates approved in D.97-09-047. Merced argues that D.97-09-047 prohibits the utility from “chasing CTCs” by discounting rates to compete with irrigation districts utilizing Competition Transition Charge (CTC) exemptions provided for in Section 374. Merced argues that any flat discount which is applied to the entire rate, such as that provided in Schedule ED, allows PG&E to chase CTCs making PG&E no longer indifferent to a customer’s energy supplier. Merced also states that if Schedule ED is extended, PG&E should only be allowed to discount the distribution portion of the customer’s bill.

PG&E responded that once customer bills were unbundled, the incentive offered under Schedule ED was limited to the distribution portion of the customer’s bill. PG&E also states that barring PG&E from offering Schedule ED to customers that have a competing offer from an irrigation district with a CTC exemption, effectively deprives communities of a benefit intended by the legislature. In addition, it would create a irrigation district or nothing situation, serving to shield the irrigation district from distribution competition.     
 
Aglet notes the that two new customers have taken service under Schedule ED in 1999. It questions where authority to offer the discounts originates since the discounts expired in December of 1998. In response to Aglet’s protest, PG&E states that the two new customers signed their Schedule ED contracts before Schedule ED expired, but did not actually consume electricity until 1999. Under the terms of Schedule ED, Paragraph 4 “Start Date”, customers can sign contracts but wait up to 24 months to take service in order to allow time for the construction of facilities. 

MID does not object to PG&E’s economic development rate as MID itself has a similar rate available to customers. However, MID objects to the long-term nature of the Schedule ED contract since PG&E has advertised in Modesto newspapers that it does not require long-term contracts. MID requests that the Commission deny PG&E the ability to impose a long-term contract in relation to Schedule ED or require PG&E to be less deceptive in its advertising.

In response to MID’s protest, PG&E states that the newspaper advertisement is geared toward customers that would not be eligible for Schedule ED since the Schedule is only available to customers from outside California. In addition, it states that consistent with its advertisement Schedule ED is optional and customers can terminate the contract with 30 days notice. 

DISCUSSION

Closure of Schedule ED
We believe PG&E’s proposed extension of Schedule ED through the end of the rate freeze or until a decision in A.99-03-014, whichever it later, is reasonable and should be adopted with the conditions described below. We believe an extension is consistent with  the determination made in D.99-09-065 and D.97-12-044 as modified by D.98-07-101, that schedules in place on June 10, 1996 must remain open throughout the rate freeze.

Therefore, Merced’s and Aglet’s protests recommending that Schedule ED be closed are denied.
 
Economic Development Incentives for Retired Military Bases 
We agree with Merced’s argument that pursuant to Section 740.7(c) economic development incentives should not be extended for military bases that are closed or scheduled to close. Economic development incentives for military bases closed or scheduled to close were in place on June 10, 1996. However, Section 740.7 (c) required that the economic development incentives for military bases not be extended beyond January 1, 1999.  We believe that the legislature was specific in its mandate on this matter and that pursuant to the statute the incentive should not be extended to these entities. 

Merced’s protest on this issue is granted.

Schedule E-TD and E-TDI
D. 97-09-047 determines that PG&E cannot use load retention discounts, such as E-TD and E-TDI, to compete with irrigation districts that have a valid CTC exemption. This determination was made since allowing the utility to offer discounts to prevent customers from departing to take service from an irrigation district would undermine the legislative intent in providing irrigation districts with CTC exemptions. 

As noted by MID, irrigation districts are able to offer their own economic development incentive rates. These can be offered in addition to any CTC exemptions that may be applicable. We do not believe that authorizing PG&E’s Schedule ED discounts will interfere with the competitive advantage of irrigation districts with CTC exemptions because the irrigation districts have the ability to compete for a customer using their own economic development incentives. In addition, the irrigation district still maintains its CTC exemptions while the utility must charge its customers the CTC. In sum, while the utility and the irrigation may compete on an even footing using economic development incentives, the irrigation district will have an advantage due to the CTC exemption.

Therefore, Merced’s protest on this issue is denied.   

Allocation of the Discount
Since PG&E responded to Merced’s protest that it can only discount the distribution portion of the customer’s bill, this issue is moot.

New Schedule ED Customers in 1999
We determine that PG&E was operating within the terms and conditions of Schedule ED since the two new customers in 1999 signed contracts before the tariff expiration date.

Therefore, Aglet’s protest on this issue is denied.

PG&E’s Advertisement
PG&E’s advertisement states that long-term contracts are not required.  We agree that since Schedule ED is an optional rate schedule that can be terminated with 30 days notice, PG&E’s advertisement is not in conflict with the terms of the rate schedule. 

MID’s protest is denied.

Ratemaking Treatment for Schedule ED
We are concerned that ratepayers continue to fund the entire cost of the economic development discount despite the clear benefits that accrue to shareholders in a competitive market. P.U. Code Section  740.4 (h) states:

…the Public Utilities Commission, in implementing this chapter, shall allow rate recovery of expenses and rate discounts supporting economic development programs within the geographic area served by any public utility to the extent the utility incurring or proposing to incur those expenses and rate discounts demonstrates that the ratepayers of the public utility will derive a benefit from this program.

The Commission has repeatedly stated its policy that utilities should share in the costs of Flexible Pricing Options during restructuring implementation after which utilities are responsible for the entire cost associated with rate discounts [D.95-10-033, D. 95-12-063, D. 97-09-047]. The Commission’s policy in this regard stems from the increased benefits that accrue to shareholders in a competitive market. 

Section 740.4 authorizes the utility to recover the costs associated with economic development programs to the extent that ratepayers benefit. The Commission has consistently stated that benefits that accrue to shareholders from Flexible Pricing Options increase substantially in competitive markets. Indeed, this has been the basis of our policy concerning shareholder funding of discounts as annunciated, for example, in the Preferred Policy Decision. 

In a competitive environment, PG&E’s monopoly distribution customers finance the cost of attracting new load for PG&E’s competitive generation services. Under the current 100% ratepayer funded program, PG&E gains strategic competitive advantages by attracting new customers and locking in sales over the long term due to the nature of the Schedule ED contract. Once PG&E begins serving the new customer it gains the additional advantage of having been the first competitor to establish a relationship with the customer, arguably making it easier to sell additional services and placing the burden on competitors to lure the customer away from their existing provider. 

Although Section 740.4 authorizes the utility to recover the costs of the economic development program to the extent of ratepayer benefit, we believe that due to reduced ratepayer benefit, the statue does not mandate 100% ratepayer funding. This is due to the altered degree of benefit derived from Schedule ED that accrue to shareholders and  ratepayers in a competitive market. Therefore, in keeping with our policy of shareholders sharing in the discount cost, PG&E shall assume 25% of the costs of Schedule ED. This sharing mechanism is consistent with our most recent ruling on PG&E’s rate discounts in D.97-09-047. 

For the post rate freeze period, a complete quantitative assessment of shareholder benefits shall be addressed in PG&E’s on-going GRC phase II proceeding. In accordance with Section 740.4, PG&E has the burden to demonstrate the ratepayer benefits derived from Schedule ED. Furthermore, the increased sales revenues resulting from Schedule ED must be considered in the post rate freeze context. During the rate freeze any revenues derived from the Schedule ED contribute to PG&E’s stranded cost recovery. However, once the rate freeze ends it remains undetermined whether a mechanism  should exist for ratepayers and shareholders to share the revenues. PG&E should propose treatment of such revenues in the Phase II GRC. 

COMMENTS

The Energy Division mailed the draft resolution in this matter to parties in accordance with PU Code Section 311(g). Comments were filed by MID on  February 22, 2000, Merced on February 18, 2000, and PG&E on February 22, 2000.

Merced supports the Draft Resolution believing that its determination that PG&E shareholders assume 100% of Schedule ED costs is consistent with Commission policy. Merced simply comments that several recent decisions support this outcome, D.99-05-031 and D.99-09-064. 

Modesto comments that Finding of Fact No. 7 should be changed to note that an irrigation district with a valid 374 CTC exemption only has a competitive advantage for the limited duration that the CTC exemption is effect. We agree with Modesto and will make the corresponding change to Finding of Fact No. 7.

Modesto requests clarification regarding the rate component to which the Schedule ED discount is applied. As stated in the discussion and protest sections of this Resolution, the discounts available under Schedule ED are limited to the distribution component of the customer bill. 

PG&E opposes 100% shareholder funding of Schedule ED. PG&E’s primary argument rests on its belief that Section 740.4 mandates that economic development programs be 100% ratepayer financed. In addition, it argues that the ratemaking treatment cannot be changed during the rate freeze citing Resolution E-3479. PG&E also states that the Resolution’s reliance on PG&E’s settlement adopted in D.95-10-033 and its agreement to pay 100% once unbundling and direct access were established, is misplaced. This is because D.95-10-033 established 100% shareholder funding for Business Attraction Discounts, but was not applicable to Schedule ED. PG&E also argues that shareholder contribution for economic development discounts is inappropriate since it claims that shareholders receive no benefit from offering the discounts.

We do not agree with PG&E that altering the ratemaking treatment for Schedule ED is counter to AB 1890. PG&E cites Resolution E-3479 to support its position. In that Resolution PG&E had proposed to shift the costs of E-20 from shareholders to ratepayers. It was a new proposal, counter to policy precedent concerning rate discounts. We do not believe that case is applicable here due to the stated policies of the Commission, both prior and subsequent to AB 1890, concerning rate discounts. That is, D.95-10-033, D. 95-12-063, and D. 97-09-047 state our policy of increasing shareholder contribution to the discount costs, with shareholders eventually assuming 100% of the costs by the time restructuring is implemented. The ratemaking treatment prescribed in this Resolution is not a new ratemaking treatment proposal, but rather the implementation of a long established policy. 

We agree that a technical error was made in relying on the Joint Recommendation adopted in D.95-10-033. While Schedule ED is indeed a business attraction discount, it is not the business attraction discount referred to in that Decision. Therefore, we will remove the proposed ratemaking treatment that was based on our previous interpretation of that decision. We will establish ratemaking treatment of 25% shareholder contribution as specified in the Discussion portion of this Resolution.

FINDINGS

1.	Schedule ED should be extended through the end of the rate freeze or until a decision in A.99-03-014, whichever it later. PG&E’s proposal is reasonable and should be adopted with conditions. 

2.	An extension of Schedule ED is consistent with the determination made in D.99-09-065 and D.97-12-044 as modified by D.98-07-101, that schedules in place on June 10, 1996 must remain open throughout the rate freeze.

3.	Merced’s and Aglet’s protest recommending that Schedule ED be closed is denied.

4.	Pursuant to Section 740.7(c) economic development incentives should not be extended for military bases that are closed or scheduled to close.

5.	Merced’s protest concerning termination of economic development discounts for military bases is granted. 

6.	Irrigation districts can offer economic development discounts.

7.	hile the utility and the irrigation may compete on an even footing using economic development incentives, the irrigation district will have an advantage due to the CTC exemption.  In those cases where the irrigation district is using a CTC exemption, the irrigation district has a competitive advantage for the limited duration that the CTC exemption is effective.

8.	Merced’s protest requesting that the terms of PG&E’s E-TD and E-TDI rates be applied to Schedule ED, is denied.

9.	PG&E can only discount the distribution portion of the customer’s bill. Therefore, Merced’s protest concerning the component to which the discount is applied, is moot.

10.	Schedule ED allows customers to wait as long as 24 months after signing a Schedule ED contract before actually consuming electricity.

11.	PG&E was operating within the terms and conditions of  Schedule ED when the additional customers started taking service under Schedule ED in 1999 because the new customers signed contracts before the tariff expired. 

12.	Aglet’s protest regarding the authorization to offer Schedule ED in 1999, is denied.

13.	Since Schedule ED is an optional rate schedule that can be terminated with 30 days notice, PG&E’s advertisement is not in conflict with the terms of the rate schedule. 
MID’s protest is denied.

14.	The Commission has repeatedly stated its policy that utilities should share the costs of Flexible Pricing Options during restructuring implementation because special rate options in a competitive market confer strategic benefits to utility shareholders.

15.	The Commission’s policy is that once restructuring is in place, utilities will not be able to pass the costs of discounts to ratepayers; instead, shareholders should fund any discount offered to customers.

16.	The Commission’s policy regarding ratemaking for Flexible Pricing Options has been applied both to SCE and SDG&E. 

17.	Under the current ratemaking treatment, PG&E’s monopoly distribution customers finance the cost of attracting new load for PG&E’s competitive generation services. 

18.	Currently, PG&E does not contribute to the costs of Schedule ED despite the strategic competitive advantages in receives from attracting new customers.

19.	Under the current 100% ratepayer funded economic development program, PG&E gains strategic competitive advantages by attracting new customers and locking in sales over the long term. Once PG&E begins serving the new customer it gains the additional advantage of having been the first competitor to establish a relationship with the customer, arguably making it easier to sell additional services and placing the burden on competitors to lure the customer away from their existing provider.

20.	Section 740.4 authorizes the utility to recover the costs of the economic development program to the extent of ratepayer benefit. Since ratepayer benefits have decreased under competition, the statue does not mandate 100% ratepayer funding. 

21.	In keeping with our policy of shareholders sharing in the discount cost, PG&E shall assume 25% of the costs of Schedule ED. This sharing mechanism is consistent with our most recent ruling on PG&E’s rate discounts in D.97-09-047. 

22.	For the post rate freeze period, a complete quantitative assessment of shareholder benefits shall be assessed in PG&E’s on-going GRC phase II proceeding. 

23.	The increased sales revenues resulting from Schedule ED must be considered in the post rate freeze context. Once the rate freeze ends it remains undetermined whether there should be a mechanism for ratepayers and shareholders to share the revenues. PG&E should propose treatment of such revenues in the Phase II GRC.  

THEREFORE, IT IS ORDERED THAT:

1.	PG&E Advice Letter 1846-E-A is approved with the conditions described herein. PG&E shall supplement its Advice Letter within 10 days of the effective date of this Resolution to modify its proposed tariff language as follows:
 
i)	PG&E’s Schedule ED is extended through the end of the rate freeze or until a decision in A.99-03-014, whichever it later.  

ii)	Economic development incentives are no longer available for military bases that are closed or scheduled to close.

iii)	PG&E shareholders shall assume 25% of the costs associated with Schedule ED.

This supplemental Advice Letter shall be effective after Energy Division determining that it is compliant with this Resolution.

2.	The protests to Advice Letter 1846-E-A are resolved as described in the findings of this Resolution.

3.	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 March 2, 2000.  The following Commissioners voted favorably thereon:

_________________________
   WESLEY M. FRANKLIN     
       Executive Director

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