PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION                                                               RESOLUTION E-3656                							                                                          APRIL 6, 2000

R E S O L U T I O N

Resolution E-3656.  Southern California Edison Company (SCE) requests approval of its performance-based rate-making base rate mechanism final report for 1997, which details revenue sharing calculations and performance rewards and penalties for the subject year. 
By Advice Letter 1302-E filed March 31, 1998, advice letter 1302-E-A filed June 1, 1999, and advice letter 1302-E-B filed July 16, 1999.

______________________________________________________________________

SUMMARY

This resolution approves the PBR rewards reported in Southern California Edison Company (SCE) Advice Letter (AL) 1302-E-B filed on July 16, 1999 subject to the conditions and modifications as ordered in this resolution.  This AL provides SCE’s Performance-Based Ratemaking (PBR) Base Rate Mechanism Final Performance Report for 1997 (Base Rate Report) in compliance with Decision D.96-09-092.  The Base Rate Report provides SCE’s summary of 1997 performance under its base rate PBR mechanism, including SCE’s revenue sharing calculations and information about SCE’s rewards pursuant to the mechanism’s service reliability, customer satisfaction, and employee health and safety components. 

We order SCE to recalculate its 1997 PBR base rate revenues and revenue sharing amounts taking into account all of the findings in this resolution. SCE calculated a 1997 Return on Equity (ROE) subject to sharing of 13.46%.  This ROE is 186 basis points above the authorized ROE, and falls within the “middle band” of revenue sharing.  Ratepayers will be allocated some of the excess revenues.  For the first 50 basis points around the ROE benchmark, the shareholders receive all net revenue gains or losses.  From 50 to 300 basis points around the benchmark ROE, shareholder’s marginal share of gains or losses rises from 25 to 100 percent.  Using SCE’s calculation, ratepayers would be allocated $ 39.966 million.
 
In AL 1302-E-B, SCE reported that its performance in the Health and Safety area resulted in the maximum reward of $5 million.  No rewards or penalties were triggered for the area of Customer Satisfaction since performance in this area fell within the “deadband”
range.  No reward or penalty is assessed for Service Reliability for 1997, because performance is measured as a two year average.  SCE PBR began in 1997, so only one year of performance is available. 

The following performance rewards/(penalties) are approved:

ELECTRIC DEPARTMENT

	Performance Rewards/(Penalties)  
		Employee Safety				            $5,000,000		
		Customer Satisfaction			            $0			
		System Reliability           		            $0
			Total Electric Department	            $5,000,000
							
The revenue sharing amount and the reward will be recorded in the PBR Distribution
Rate Performance Memorandum Account and the net amount returned to customers through distribution rates.  

The Utility Reform Network (TURN) in its data requests to SCE objected to SCE’s allocation of its “fiber optic revenues” collected in 1997 between generation and non-generation.  According to SCE, the allocation was based on the methodology adopted in Edison’s 1995 GRC (D.96-01-011).  SCE further stated that due to its erroneous conclusions and misunderstanding it had included fiber optic lease revenues and expenses in PBR revenues and expenses and since fiber optic revenues are tracked in the Telecommunication Lease Revenue Memorandum Account, those revenues and expenses will be subject to the sharing mechanism adopted by the Commission in D.99-09-070.  TURN and SCE agree that the fiber-optic revenues should not be included in the PBR, they disagree as to the amount that needs to be removed from the PBR calculations.  We deny TURN’s protest, because we conclude that Edison has removed the correct amount.

BACKGROUND

The year 1997 was SCE’s first year of operation under the Non-generation PBR mechanism.  SCE’s base rate PBR was adopted by the Commission in D.96-09-092.
This PBR establishes the method by which the Company’s authorized distribution rates
are adjusted annually.  It also sets forth performance standards related to SCE’s quality of service (Customer Satisfaction, Outage Duration or Average Customer Minutes of Interruption (ACMI), Outage Frequency, Employee Health and Safety), with associated financial rewards and penalties in the event those standards are exceeded or not met by
the utility.
  
The Commission also adopted an automatic Cost of Capital Trigger Mechanism which would adjust the Utility’s authorized ROE to account for changes in interest rates, and to adjust Nongeneration Base Rates to account for changes in the Authorized ROE.  Pursuant to D. 96-09-092, the Commission later adopted a trigger value of 7.5% as a benchmark for the Utility Bond Rate. The Commission adopted an Authorized ROE of 11.60% for the year 1997 in D.96-11-060.  Every year SCE calculates the average value of the AA Utility Bond Rate for the October through September period.  
When the bond rate changes by 100 basis points or more from its base value, the Trigger Mechanism authorizes Edison to file for an adjustment to its authorized ROE, for half of the amount of the change in the bond rate from the base value.

D. 96-09-092 requires SCE to file an annual report on March 31 of each year that provides SCE’s performance during the prior year under its non-generation PBR.  AL 1302-E was filed on March 31, 1998 to detail the results of SCE performance under the base rate PBR for 1997. 

On June 1, 1999, SCE filed advice letter 1302-E-A supplementing AL 1302-E and replaced its previously filed performance report in its entirety.  Noting that TURN had identified two issues in data requests to SCE, SCE revised its AL 1302-E.  First, SCE had included fiber optic lease revenues as Other Operating Revenue (OOR) in its PBR
sharing mechanism.  SCE was ordered by the Commission (D.96-10-071 and D.96-11-058) to establish the Telecommunication Lease Revenue (TLR) Memorandum Account to track all fiber optic lease revenues.  SCE should have waited for D.99-09-070 in SCE Application A.97-06-021 (OOR revenue sharing application) for appropriate ratepayer/shareholder sharing of fiber optic lease revenues.  Second, SCE misinterpreted the definition of a catastrophic event in its calculation of Average Customer Minutes of Interruption (ACMI), a measure used to calculate rewards or penalties for SCE performance in the reliability area of its PBR mechanism.

On July 16, 1999, SCE filed AL 1302-E-B and stated: “This advice letter supplements Southern California Edison Company’s (SCE) Advice Letter 1302-E and 1302-E-A.  It also replaces SCE’s 1997 Performance Report in its entirety.”  SCE stated that it incorrectly removed fiber optic revenues of $5.629 million and expenses of $0.531
million from its 1997 PBR report, instead of the correct amount of $8.644 million and $0.767 million respectively.  SCE states that the impact of this revision on customer’s share of PBR revenues is a decrease of $0.982 million relative to advice letter AL 1302-
E-A.

NOTICE

Public notice of this AL and its supplements was made by publication in the Commission calendar, and by SCE mailing copies of the filings to interested parties, including other utilities, governmental agencies, and the service list to Application 93-12-029.

PROTESTS

The Energy Division received a timely protest to Advice Letter 1302-E-B from The
Utility Reform Network (TURN).  TURN claimed that it continues to have questions about Edison’s proposed treatment of the fiber optic revenues and expenses. In its protest dated August 6, 1999, TURN stated that SCE had included all of the fiber optic revenue ($8.644 million) in its AL 1302-E-B for the 1997 PBR sharing mechanism.  However, TURN states that SCE proposes that only a portion of the 1997 fiber optic expense ($0.767 million of the total fiber optic expense of $1.130 million) is included in the PBR.  TURN urges the Commission to require SCE to remove the entire $1.130 million of the fiber optic expenses from the non-generation expense used to develop the 1997 PBR sharing mechanism.  SCE in its response dated August 13, 1999 to TURN’s protest agreed that since fiber optic lease revenue should be excluded from the PBR sharing mechanism that fiber optic lease expense should also be excluded.  SCE further stated
that it has removed all fiber optic lease expense from the PBR sharing mechanism with its filing of AL 1302-E-B.  While the parties agree that all fiber-optic expenses should be excluded from the PBR filing, SCE and TURN continue to disagree about the dollar amount that should be removed from the PBR.  While TURN’s protest asked Edison to provide “further and detailed explanation” why $1.13 million of fiber-optic expenses should not have been removed.  Edison’s response to the protest states that “only $0.767 million was reflected in SCE’s PBR sharing mechanism reported to the Commission in advice filing 1302-E-A.”

DISCUSSION

Revenue Sharing

The Base Rate PBR Mechanism includes a revenue sharing component, which allocates SCE’s recorded gains or losses, relative to the authorized ROE, between the utility’s shareholders and ratepayers.  The net revenue sharing mechanism is based on non-generation revenues and built around a benchmark authorized return on equity.  The authorized benchmark ROE for the PBR year 1997 was 11.60%.  The recorded ROE for the year 1997 was 13.46%.  This ROE is 186 basis points above the authorized ROE, which falls within the middle band of revenue sharing.  Ratepayers would be allocated some of the excess revenues.   For the first 50 basis points around the ROE benchmark, the shareholders receive all net revenue gains or losses.  From 50 to 300 basis points around the benchmark ROE, shareholder’s marginal share of gains or losses rises linearly from 25 to 100 percent.

Pursuant to D. 96-09-092, the Commission adopted a trigger value of 7.5% as a benchmark for the Utility Bond Rate.   If the AA Utility Bond Rate average for the 12 months from October through September is 100 basis points or more from the benchmark rate, SCE receives an up or down equity return adjustment equal to half the amount of
this change in bond rates.  The AA Bond rate for the 12 month period ending September 1997 was 7.61 percent.  Since it is less than 100 basis points above the benchmark of 7.5%, the Trigger mechanism was not activated.

The main reason SCE exceeded its benchmark ROE was an increase in sales.  There was  an increase of approximately $140.0 million in sales alone amounting to an increase of approximately 7% over the estimated sales in the last General Rate Case (GRC) of 1995.  It is difficult to assess whether this increase in sales was due to SCE aggressive marketing efforts or a natural load growth.  In the same period the total operating expenses for the non-generation PBR increased by approximately $60.0 million, an increase of approximately 4% over the GRC estimate.  The Energy Division found that the major increase occurred in administrative and general (A&G) expense accounts.  For the non-generation PBR, A&G expenses increased by approximately $48 million, a 19% increase over the estimated expense in the 1995 GRC.

The Energy Division analysis indicates that out of a total net increase of $48 million in A&G expenses for the non-generation PBR, SCE increased its Compensation Program by $30.5 million.  SCE reduced its labor costs through voluntary retirements and lower pension and benefits etc. by $22.7 million and additional reductions of $5.4 million were made in the maintenance costs of the General Plant and lease terminations etc.  SCE initiated a major reduction in the number of its full time equivalent employees (including Regular, Part Time, Supplemental, and Temporary) in 1995. SCE’s total workforce in 1997 was 16% lower than in 1995, and its transmission and distribution workforce combined was reduced by approximately 9% from year 1995 to 1997.

SCE stated the reasons for a reduction in its transmission and distribution expenses respectively as follows: “The major items which result in a 9% reduction in transmission O&M include a $7.4 million reduction in labor due to SCE’s voluntary retirement offer, reduction in forces, and other labor decreases.  The major item which results in a 4% reduction in distribution O&M includes an $18.8 million reduction in labor due to SCE’s voluntary retirement offer, reduction in forces, and other labor decreases…”.  The Energy Division found that SCE added approximately $268 million of net additional
transmission and distribution plant (excluding retired plant and depreciated plant) to its system in 1997.  SCE’s PBR gives it an incentive to reduce costs while maintaining
service reliability.  Nevertheless, we will need to monitor SCE’s performance under its PBR to ensure that the long term integrity and reliability of its system isn’t being
sacrificed due to a reduction in transmission and distribution expenses for its labor force over an extended period of time, while considerable additional plant may be being added to the SCE system.
 
The Energy Division has reviewed SCE’s revenue sharing calculations, and recommends that the revenues and revenue sharing should be recalculated, as discussed below.

SCE reduced its customer service expenses by one hundred percent from $3.246 million
to $0.  This could have a negative impact regarding the quality of services rendered to the customers.  In its response to an Energy Division data request, SCE stated that D.96-09-092 ordered SCE to assign all customer service and information costs to generation except for authorized economic development costs of $3.246 million.  SCE further stated that these economic development costs are subject to balancing account treatment in accordance with D.96-01-011 and since these costs receive balancing account treatment it is appropriate to exclude them in the calculation of the PBR Results of Operation Report.  However, SCE inappropriately included the economic development costs of $3.343 million in its PBR Result of Operation Report.  SCE must remove such costs in recalculating the Results of Operation Report as well as making all other adjustments noted in this resolution.      

Energy Division analysis indicates that in the total system administrative and general expenses, SCE has included $7.352 million in Corporate Identity Advertising expenses.  We believe that ratepayers should not have to pay for the corporate identity advertisement expenses for the services they receive from a non-competitive regulated utility. 

Energy Division agrees with the parties that all fiber optic revenues as well as the
expenses as described above should be removed from the PBR sharing mechanism and appropriately treated in accordance with D.99-09-070.

Employee Health and Safety

Rewards and penalties for employee health and safety are determined based on SCE’s performance related to a benchmark for the frequency of all industrial injuries and illnesses.  An index number (per 200,000 hours worked) is developed using the number
of incidents, actual work-hours, number of employees, and various other factors.  If this Index number falls within 12.7 and 13.3, there is no reward or penalty against the utility.  As the Index decreases from 12.7, the utility is progressively rewarded for its good performance to a maximum reward of $5.0 million when the Index reaches 11.8 or less.  On the other hand, if the Index increases above 13.3, the utility is progressively penalized for its bad performance to a maximum penalty of $5.0 million when the Index reaches
14.2 or above.  For the 1997 PBR period, SCE calculated its Index as 10.1 per 200,000 hours worked and earned a reward of $5.0 million.  Energy Division has reviewed this calculation and concurs with this reward.

Customer Satisfaction 

In order to determine Customer Satisfaction with its service, SCE uses the results of its survey of a sample of customers with recent customer contacts and surveys in four areas: field service and meter reading operations; local office operations; telephone center operations; and service planning activities.  In each of the areas surveyed, Edison asks the respondent’s overall satisfaction with the specific service provided.  Respondents choose among six categories with the top two being “completely satisfied” and “delighted.”  The Customer Satisfaction Rating used to determine any rewards or penalty is the percentage of the customer responses in the top two of six response categories of four measured customer service functions noted above.

In December 1997, SCE closed all but twelve of its local offices and established
numerous Authorized Payment Agencies (APA’s) throughout its territory to process in-person payment transactions.  SCE thought it more appropriate to identify the In-Person Services as the measure of customer satisfaction in lieu of the Local Offices category.  SCE’s Customer Satisfaction Survey was administered by M/A/R/C, Inc., an independent market research company, headquartered in Irving, Texas.  In accordance with the guidelines of Council of American Survey Research Organizations (CASRO), surveys were verified by spot checks of no fewer than 15 percent of all surveys completed.
  
The reward or penalty is determined by comparison of the Customer Satisfaction Rating
to a benchmark percentage.  If the Customer Satisfaction Rating falls within a band of 61 to 67 percent, there is no reward or penalty awarded.  The reward increases to a
maximum of $10 million for a rating of 72% and above and the penalty increases to a maximum of $10 million if the rating decreases to 56% and below.  For the 1997 PBR period the Customer Satisfaction Rating according to SCE was 66% and hence no reward or penalty was assessed.
  
Since SCE had closed many of its local offices and instituted APA’s in its service
territory, the Energy Division asked SCE to recalculate its Customer Satisfaction Rating excluding the following: a) Voice Recording Unit measure, b) Turn on/off from APA’s,
c) credit extension from APA’s.    The overall customer satisfaction dropped from 66% to 64% and still there was no reward or penalty awarded because of 3% bandwidth around the benchmark of 64%.  Because of closure of its Local Offices, the Energy Division should continue to monitor customer satisfaction indices closely.  

Electric System Reliability

The utility reliability performance is measured using two elements, the Average
Customer Minutes of Interruption (ACMI) and the Outage Frequency.  The ACMI measures customer service interruptions in terms of the average minutes of service interruptions per customer excluding all interruptions that have a duration of more than five minutes.  The ACMI measure is calculated as the rolling average of the values of the ACMI for two successive years.  The Outage Frequency measures the number of circuit interruptions excluding all interruptions that have a duration of more than five minutes.  The Outage Frequency is measured using a two-year average.  Since the ACMI and Outage Frequency require a two-year average for measurement, 1998 will be the first year that a reward or penalty will be assessed and the current 1997 PBR filing will not be affected by elements of ACMI and Outage Frequency.  The ACMI has a performance standard of 59 minutes for 1997 and declines by two minutes per year thereafter through 2001.  The standard has a deadband of 6 percentage points on both sides in which there is no reward or penalty.  For the year 1997, the recorded ACMI was 56 minutes.  

The outage frequency reward or penalty will be assessed starting with year 1998.  If the performance rating falls below 9,800 a reward will be given to SCE.  If the performance rating rises above 12,000, SCE will be penalized for its performance.  For the year 1997, the recorded outage frequency performance rating was 8,987.

Fiber-Optic Expenses

We are satisfied that since SCE has removed in its supplemental Advice Letter the amounts for fiber-optic expenses that it included in its original Advice Letter, these amounts are no longer contained in SCE’s filing.  TURN’s protest is denied.

COMMENTS

The draft Resolution of the Energy Division in this matter was mailed to the parties in accordance with Public Utilities Code Section 311 (g).  No comments were filed.

FINDINGS

1. 	SCE filed AL 1302-E on March 31, 1998; AL 1302-E-A on June 1, 1999; and AL 1302-E-B on July 16, 1999, requesting approval of its PBR Base Rate Mechanism Final Performance Report for 1997.  AL 1302-E-B replaced AL 1302-E-A in its entirety.  This report transmits the Company’s revenue sharing calculations and PBR rewards under the mechanism for 1997. SCE’s base rate PBR was adopted by the Commission in D.96-09-092.

2. 	The Utility Reform Network (TURN) filed a protest to AL 1302-E-B.  TURN urged the Commission to require SCE to remove $1.130 million of the fiber optic expenses   from the non-generation expense used to develop the 1997 PBR sharing mechanism.  While SCE has agreed to remove all fiber-optic lease expenses from the PBR mechanism, it states that the correct amount be removed is $.767 million. 

3. 	The selected utilities AA Bond rate for the 12-month period ending September 1997 was 7.61 percent.  Since it is less than 100 basis points above the benchmark value of 7.5%, the Trigger Mechanism was not activated.

4. 	In AL 1302-E/E-A, SCE incorrectly removed fiber optic revenues of $5.629 million and expenses of $0.531 million from its 1997 PBR report, instead of, $8.644 million and $0.767 million respectively. 

5. 	SCE should recalculate its revenues, revenue sharing amounts, the recorded ROR and recorded ROE taking into account all of the adjustments discussed in this resolution.

6. 	The main reason SCE exceeded its benchmark ROE was an increase in sales.  There was an increase of approximately $140.0 million in sales alone amounting to an increase  of approximately 7% over the forecast.  It is difficult to assess whether the increase was due to SCE aggressive marketing efforts or a natural growth.

7. 	SCE administrative and general expenses for the non-generation PBR increased by approximately $48 million, a 19% increase above the amount estimated in its last GRC .  In A&G accounts, SCE increased its Compensation Program by $30.5 million and  reduced its labor costs through voluntary retirements and lower pension and benefits etc. by $22.7 million.

8. 	SCE initiated a reduction in the number of its full time equivalent employees  (including Regular, Part Time, Supplemental, and Temporary) starting in 1995 and continued this reduction through 1997.  SCE’s total workforce in 1997 was 16% lower than in 1995.

9. 	The major items that  resulted in a 9% reduction in transmission O&M include a $7.4 million reduction in labor due to SCE’s voluntary retirement offer, reduction in forces,  and other labor decreases.

10. 	The major item which resulted in a 4% reduction in distribution O&M was an $18.8 million reduction in labor expense due to SCE’s voluntary retirement offer, reduction in forces, and other labor decreases.

11. 	SCE added approximately $268 million of net additional transmission and    distribution plant to its system in the year 1997.

12. 	We will monitor SCE’s performance under its PBR to determine if long term system reliability and integrity is being sacrificed due to reductions in transmission and  distribution expenses in labor force over an extended period of time while considerable transmission and distribution plant may be being added to SCE rate base. 

13. 	SCE inappropriately included the economic development costs of $3.343 million in  the operating PBR expenses used in the Results of Operation Report.  SCE must remove these costs and recalculate its results of operation report to reflect this change as well as all other adjustments noted in this resolution.

14. 	SCE included $7.352 million expenses related to its Corporate Identity Advertising in its total system A&G expenses.  SCE must remove this expense from PBR operating expenses. We believe that ratepayers should not have to pay for the corporate identity advertisement expenses for the services they receive from a non-competitive regulated utility.

15. 	SCE achieved its Health and Safety index of 10.1 per 200,000 hours worked and will earn a maximum reward of $5 million for its shareholders.

16. 	SCE has closed many of its local offices and instituted APA’s.  SCE achieved a Customer Satisfaction rating of 66% which is within the 3% band around the benchmark of 64% set in the PBR mechanism and will not receive any reward or penalty.  With most of the local offices closed, the Energy Division recommends that this index be monitored closely in the future.

17. 	The year 1997 was the first year of this PBR mechanism.  Since the Reliability index elements of ACMI and Outage Frequency require a two-year average of data, there was no reward or penalty for the 1997 PBR period.

18. 	SCE’s reward and revenue sharing amount should be recorded in the PBR  Distribution Rate Performance Memorandum Account, and allocated to customers through distribution rates.

19.  TURN’s protest of excluding an additional $.363 million of fiber-optic expense  should be denied.

THEREFORE, IT IS ORDERED THAT:

1. 	SCE’s Base Rate Report for 1997, is partially approved, subject to a recalculation of the revenue sharing amounts.

2. 	SCE shall recalculate its PBR revenues and the revenue sharing amounts for 1997 taking into account adjustments 13 and 14 as listed in “FINDINGS” of this resolution.

3. 	A $5.0 million reward for SCE’s performance in the area of Employee Health and Safety is approved. 

4. 	The revenue sharing amount and reward shall be booked to the PBR Distribution Rate Performance Memorandum Account and the net amount returned to customers through distribution rates.

5. 	TURN’s protest is denied.

6. 	SCE shall file a supplemental advice letter within 30 days after the effective date of this resolution to reflect the above ordered revenue sharing recalculation.

7. 	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 April 6, 2000; the following Commissioners voting favorably thereon:

     
														                                                      									        						WESLEY M. FRANKLIN
							            						      Executive Director

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