PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

							Resolution G-3277
							Energy Division
							January 11, 2000

R E S O L U T I O N

RESOLUTION G-3277.  Corrects error in Resolution G-3274
(SoCalGas/Dynegy Settlement in Advice Letter 2848)

The Commission has been informed that an error exists in Resolution G-3274 which the Commission approved on January 6, 2000.

As a result of inadvertent clerical error, certain dicta concerning comments received was incorrectly included on pages 13-15 of the Resolution G-3274.  The Comments section of Resolution G-3274 is corrected below.  Corrected pages 13-19 of Resolution G-3274 to reflect the corrected Comments section is appended to this Resolution.

Under Resolution A-4661, IT IS ORDERED that Resolution G-3274 is corrected as set forth in the appendix attached to this resolution.

This resolution is effective today.

Dated January 11, 2000, at San Francisco, California

WESLEY M. FRANKLIN
Executive Director

Proceeding, 2) Resolution E-3165 (November 3, 1989), and 3) Resolution E-3236 (October 23, 1991).  

However, these instances did not establish Commission policy which is relevant to AL 2848-G.  Utility requests filed by advice letter are judged on the unique circumstances of each situation.  The relief prescribed by the Commission resolutions cited by SoCalGas is non-precedential and does not constitute policy, as each resolution addresses the unique nature of the request.  In neither of the advice letter instances did recovery of legal awards concern an alleged breach of negotiated contracts extended by SoCalGas to a customer, the situation we review by Advice Letter 2848-G.  Furthermore, the Commission’s unique consideration in D.97-09-049 by allowing the pre-authorized recovery of legal fees for the divestiture of electric plants was granted to allow for Electric Restructuring to occur. SoCalGas’ request to net legal expenses from the Dynegy case is not analogous to the situation for which the Commission authorized in advance recovery of litigation expenses in the electric divestiture proceeding.

SoCalGas extended long-term agreements with negotiated terms to Chalk Cliff and McKittrick fully aware of the risk inherent in long-term commitments, and was cautioned by the Commission in D.86-12-009 to put in place the adequate pricing premiums necessary to ensure the long-term nature of the agreement. The recovery of the minimum TOP obligation would serve as such a guarantee, and the utility’s commitment in mitigating the risk of uncertainty to both its ratepayers and shareholders requires that the utility pursue this obligation to its best ability.

SoCalGas should not net out any amount from this Settlement Agreement for outside litigation costs.  The $2.7 million dollars, adjusted for a 5% incentive received by shareholders, should be treated as remaining obligation to be recorded in the EORA, as reflected in Table 2.  The remaining obligation of $16.34 million plus interest accrued from the Settlement Consideration as of July 1, 1999 shall be recorded to the EORA, consistent with EOR ratemaking.  SoCalGas’ request is otherwise approved.

COMMENTS

The draft resolution of the Energy Division in this matter was mailed to the parties, SoCalGas and ORA, as well as Dynegy in accordance with PU Code §311(G).  SoCalGas and ORA waived the 30-day minimum comment period as provided by PU Code §311(G).  Both parties agreed to a comment due date of December 30, 1999.  Comments were filed on December 30, 1999 by SoCalGas.

SoCalGas makes four main arguments in its comments.  First, it disagrees with the denial of its request to recover legal expenses from the settlement proceeds. SoCalGas acknowledges that “it might be sound public policy not to permit an overall ‘true-up’ of base margin costs”.   However, SoCalGas continues to maintain that it should be able to recover an amount from the settlement to compensate its shareholders in recognition of its “extraordinary” legal efforts in this case and a settlement which is in the public interest. 

Second, SoCalGas states that the draft resolution does not attempt to explain why utility shareholders were allowed recovery of outside legal expenses in three previously cited  cases but SoCalGas should not be allowed recovery in this case. SoCalGas also states that it is irrelevant whether such authorization is granted in advance or after-the-fact, if there is a determination of public interest. 

Third, the utility states that the Commission should consider the small cost of the legal expenses in relation to the magnitude of the settlement benefit.

Finally, SoCalGas asserts that denial of its request would provide a disincentive to utilities to aggressively pursue litigation.

SoCalGas’ comments offer little new information or argument, and we have largely addressed their comments above.  The Commission’s support of prospective ratemaking has been applied consistently in Commission decisions.  As we discussed in D. 92-03-094:
    
It is a well established tenet of the Commission that ratemaking is done on a prospective basis.  The Commission’s practice is not to authorize increased utility rates to account for previously incurred expenses, unless, before the utility incurs those expenses, the Commission has authorized the utility to book those expenses into a memorandum or balancing account for possible future recovery in rates.  This practice is consistent with the rule against retroactive ratemaking.

The Commission’s preference towards a prospective ratemaking system protects both ratepayers and utilities from the disadvantages of retroactive ratemaking.   Resolution E-3606 discusses the benefits to both utilities and ratepayers in avoiding the practice of retroactive ratemaking. While it is unfair to allow a utility to single out those instances when the utility spends more on a particular expense than it is authorized, the Commission’s position against retroactive ratemaking also prevents allocating to utilities the costs in those instances when utilities spend less than their authorized expense. 

The Commission’s advance authorization of expenses for the Dynegy litigation in D.97-07-054 is consistent with the Commission’s longstanding policy of prospective ratemaking.  We should refrain from retroactive ratemaking by denying SoCalGas’ request in AL 2848 to recover an amount equal to the difference of SoCalGas’ actual expenses and the forecasted amount authorized in D.97-07-054.   The amount of the litigation expense and its magnitude in relation to the settlement payment are irrelevant.   

We believe that the amounts we authorized in D.97-07-054 for these litigation expenses were an appropriate forecast, and we should not now provide additional compensation to shareholders for the actually incurred expense as an “incentive” for utilities to “aggressively” pursue litigation in the absence of a balancing account subject to reasonableness review.  Not only would this be inconsistent with our ratemaking policies, it would set a bad precedent for the recovery of any particular expense which the utility believed was in the pursuit of the public interest. There may be cases where the utility has not spent as much as forecast.  The utility is operating under a PBR which provides it the opportunity to flexibly and economically manage its costs.  Finally, in this particular case, the utility had its own incentive to aggressively pursue litigation.

In D.97-07-054 and E-3236, two of the examples SoCalGas cited where the Commission allowed the recovery of legal fees, the treatment of those expenses was pre-authorized.   Further, as we stated above, none of the examples SoCalGas has cited repeatedly in supporting its request to recover legal fees establish relevant policy to SoCalGas’ request in AL 2848, nor do they imply any precedence to a Commission convention in allowing the recovery of legal expenses without advance Commission approval. 

SoCalGas addresses a statement in the draft resolution that ratepayers did not receive adequate benefits from the CC and MK contracts because of a “revenue shortfall”, and states that there was no “revenue shortfall” in this case.   Although the contract rate is negotiated below the default tariff, the contract rate changes from the initial negotiated rate due to an annual escalation factor and the comparable default tariff rate also changes over time.  Although the contract rate may be below tariff for a number of years, there may not be an overall “revenue shortfall” over the life of the contract.  We remove discussion and findings in the resolution in this respect, but this has no impact on our decision to deny SoCalGas’ proposal for the treatment of litigation expenses. 

We also update Table 2 to reflect the shareholder incentive portion of the interest from the Settlement Consideration accrued from July 1, 1999, not included in the version of Table 2 of the Draft Resolution, to be consistent with the revenue treatment of the EORA, as stated on page 13 of the Draft Resolution.  With this modification, the ratemaking treatment as presented in Table 2 will provide ratepayers and shareholders with an appropriate allocation of benefit from the Settlement that is consistent with EOR ratemaking policy. 

FINDINGS

1.	SoCalGas filed AL 2848-G on September 20, 1999 to request that the Commission: 1) approve the Settlement Agreement between SoCalGas and Dynegy by February 2, 2000, and by doing so find the provisions of the Settlement Agreement reasonable, and 2) approve the ratemaking treatment of the recovered funds from the Settlement as proposed by SoCalGas in  “Attachment C” to its advice letter.

2.	The MK and CC contracts were negotiated under Schedule GLT for discounted EOR service governed by rules determined in D.85-12-102 and D.86-12-009, and D.87-05-046.  These decisions allowed the utilities great flexibility in negotiating pricing to serve EOR customers rather than have the EOR market bypass to proposed interstate pipeline proposals. 

3.	D.85-12-102 required Take-or-Pay Provisions for long-term transportation contracts to be no less than 50% of transport fees associated with the annual contract quantity.  This level of minimum obligation was meant to provide a degree of certainty that the customer was bound to the contract and would not abandon service or leave the system altogether.  

4.	The Commission cautioned the utilities in D.86-12-009 to establish adequate pricing premiums to mitigate risks to ratepayers and shareholders inherent in long-term contracts. The utility’s obligation to protect its ratepayers and shareholders requires the utility to pursue the recovery of the minimum TOP obligation to its best ability.

5.	In September 1992, less than two years after they had initiated service under their EOR transportation service agreements, McKittrick and Chalk Cliff interconnected to the newly built Kern/Mojave Interstate Pipeline. McKittrick and Chalk Cliff subsequently reduced deliveries from SoCalGas to the extent that they did not meet their minimum requirements after 1993 and 1994 respectively.  SoCalGas was engaged in four and a half years of litigation with legal actions with the defendants in federal, state, and bankruptcy courts before entering into a Settlement Agreement to resolve the litigation.

6.	Approval of the Settlement Agreement will terminate the contracts and conclude the legal dispute of over four and a half years over the CC and MK contracts, mitigating the uncertainty of a less beneficial outcome for ratepayers with continued litigation.

7.	The Settlement Consideration of $29.1 million plus interest, at 94% of the TOP charges, provides a substantial portion of the minimum obligations owed to SoCalGas.

8.	The terms of the Settlement Agreement between SoCalGas and Dynegy are reasonable in light of the whole record and in the public interest.  The Settlement Agreement (“Attachment B” of AL 2848-G) should therefore be approved.

9.	SoCalGas’ proposal for the ratemaking treatment of the settlement payment  (“Attachment C” of AL 2848-G) includes a request by SoCalGas to “net out” $2.7 million dollars against the Settlement Consideration, and instead, to credit the amount an unspecified “utility account”.  SoCalGas requests to net out the $2.7 million for outside litigation costs it incurred in the case and to provide utilities with incentives to pursue recovery of funds associated with litigation.

10.	ORA filed a protest on October 12, 1999 to SoCalGas’ proposal in “Attachment C” of AL 2848-G to “net out” the $2.7 million from the Settlement Consideration, which SoCalGas requests for outside legal costs associated with the Dynegy case.  ORA argues that litigation expenses connected with the CC and MK contracts are already being recovered from ratepayers in current rates.  ORA recommends that the settlement not be offset by any of the $2.7 million that SoCalGas requests.

11.	 SoCalGas partly agreed with ORA’s protest in its response on October 19, 1999, agreeing that SoCalGas should not recover the same expenses twice.  SoCalGas adjusted its proposal by requesting $1.08 million of the Settlement Consideration to be excluded from EORA ratemaking treatment, rather than $2.7 million in its original request.

12.	SoCalGas’ request to “net out” $2.7 million (or $1.08 million as revised in its response to ORA’s protest) in its proposed ratemaking treatment of the settlement payment in “Attachment C” of AL 2848-G is unreasonable and should be denied.

13.	SoCalGas provided three instances where the Commission allowed recovery of outside litigation costs in rates.  However, these instances did not establish Commission policy which is relevant to this advice letter. Utility requests filed by advice letter are judged on the unique circumstances of each situation.  The relief prescribed by the Commission resolutions cited by SoCalGas, therefore, is non-precedential and does not constitute policy, as it is addressed to the unique nature of each request.

14.	The Commission’s unique consideration in D.97-09-049 by allowing the pre-authorized recovery of legal fees for the divestiture of electric plants was granted to allow for Electric Restructuring to occur. SoCalGas’ request to net legal expenses from this case is not analogous to the situation for which the Commission authorized in advance the recovery of litigation expenses in the electric divestiture proceeding.

15.	SoCalGas has already been authorized expenses for the litigation of the Dynegy dispute in its current authorized rates.  Absent prior authorization for balancing account treatment, the Commission does not allow a “true-up” for the recovery of actually incurred expenses.  

16.	The PBR mechanism allows SoCalGas to flexibly manage its costs and expenses, and provides an incentive for SoCalGas to economically manage its costs and expenses.  In this instance, it would now be inappropriate to adjust SoCalGas’ actual expenses with a portion of the Settlement payment, when ratepayers would not be assured of any benefit from the amount of the adjustment.

17.	SoCalGas’ shareholders will collect a 5% incentive of the EOR revenues recovered for future obligations, which shareholders would not otherwise receive without pursuing the Dynegy legal settlement.

18.	SoCalGas has the incentive to act on its own to obtain the best possible legal outcome in the Dynegy case to provide a compelling example to deter any other parties seeking to avoid similar contractual obligations with SoCalGas.

19.	 SoCalGas should not be authorized to net out any outside litigation costs from this Settlement Agreement. The most appropriate allocation of the $2.7 million (or $1.08 million as agreed by SoCalGas) settlement payment portion is to the EORA balancing account in compliance with the ratemaking established for the EOR market.

20.	The $2.7 million dollars, adjusted for a 5% incentive received by shareholders, should be treated as remaining obligation to be recorded in the EORA, as reflected in Table 2.  The interest accrued from the Settlement Consideration as of July 1, 1999 shall be recorded to the EORA, consistent with EOR ratemaking.

THEREFORE, IT IS ORDERED THAT:

1.	The Settlement Agreement between SoCalGas and Dynegy, et al. (“Attachment B” to Advice Letter 2848-G) is reasonable and is approved.

2.	SoCalGas’ proposal for ratemaking treatment of $2.7 million of the Settlement Consideration in “Attachment C” to AL 2848-G for outside litigation expenses is denied.

3.	ORA’s protest to SoCalGas’ proposal for ratemaking treatment of $2.7 million of the Settlement Consideration in “Attachment C” to AL 2848-G for outside litigation expenses is granted.

4.	The ratemaking treatment of the $29.1 million Settlement Consideration is approved as modified in Table 2 of this Resolution.

5.	This resolution is effective today.

I hereby 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 voted favorably thereon:

___________________ __           
WESLEY M. FRANKLIN
       Executive Director

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