January 21, 2003 Testimony of Michael Peevey

Responses of California Public Utilities Commission

President Michael R. Peevey to
Questions from Senate Energy, Utilities and Communications Committee
for January 21, 2003 Hearing

1. How much annual revenue will be collected from direct access customers at a rate of 2.7 cents (by utility)?
   
   Response
   
   The table below indicates the annual revenue that will be collected in 2003 from direct access customers at a rate of 2.7 cents, by utility.
   
   

   PG&E	$202 million
   Edison	$281 million
   SDG&E	$37 million
   Total	$520 million

2. What is the Commission’s estimate of the total cost recovery obligation for direct access customers? How long will it take to pay at a rate of 2.7 cents and 4 percent interest? What is your estimate of the maximum under-collection during the repayment period (by utility)?
   
   Response
   
   The table below provides the Commission’s estimate of the total cost recovery obligation for direct access customers, by utility. This includes (1) the DWR bond charge, (2) DWR costs for 2001 and 2002, (3) ongoing DWR costs, and (4) the ongoing above-market portion of utility-related generation costs.
   
   The length of repayment excludes the duration of the bond charge, which is expected to remain in place for 20 years for all customers, whether they take bundled service or direct access service.
   
   

   	Total Obligation of Direct Access Customers	Years to Repay	Maximum Under-collection
   PG&E	$2.7 billion	10	$489 million
   Edison	$3.4 billion	10	$548 million
   SDG&E	$1.1 billion	More than 20	$905 million
   Total	$7.2 billion

3. In your opinion, what level of under-collection is acceptable and consistent with maintaining the Commission’s principle of bundled customer indifference?
   
   Response
   
   The Commission’s principle of bundled customer indifference can be maintained as long as the under-collection earns an interest rate that will reasonably compensate bundled customers for the delay in repaying them for the amounts that Direct Access customers did not pay in 2001 and 2002. The present cap and interest rate earned on uncollected balances will be revisited and finalized in the Commission proceeding to be completed by July, 2003.
    
4. How much do direct access customers currently owe for power delivered in 2001 and 2002 (by utility)? How will these costs be credited to bundled service customers? Is the 2.7 cent surcharge sufficient to fund this credit in 2003? If not, how will it be funded?
   
   Response
   
   See the table below for amounts owed for power delivered in 2001 and 2002.
   
   These costs will be indirectly credited back to bundled customers by using CRS revenues received from Direct Access customers to reduce the amount that the IOUs remit to DWR on behalf of bundled customers in 2003 and later years.
   
   The 2.7 cent surcharge will not be sufficient to fund this credit in 2003. Instead, the balance owed by direct access customers for 2001 and 2002 will be paid down gradually over time, and will accrue interest in order to compensate bundled customers.
   
   

   	Direct Access Customer share of DWR bond debt	Amount Owed for Deliveries in Q4, 2001 and 2002
   PG&E	$527 million	$272 million
   Edison	$470 million	$236 million
   SDG&E	$ 96 million	$101 million
   Total	$1.09 billion	$609 million

5. On what basis was 2.7 cents chosen as the cap? Does the Commission have an analysis to indicate the degree to which existing direct access contracts remain "economic" at this rate?
   
   Response
   
   SCE’s Historical Procurement Charge (HPC) for Direct Access customers, for the period prior to January 1, 2003, had been set at 2.7 cents/KWh. Therefore, the Commission chose to adopt a 2.7 cent cap. This differed from my alternate decision, which would have set the cap at 2.9 cents for SCE and PG&E, and 3.2 cents for SDG&E. My alternate lost on a 3-2 vote.
   
   The Commission does not have an analysis to indicate the degree to which existing direct access contracts remain "economic" at the 2.7 cent cap.
    
6. Would it be feasible or appropriate to impose a cap on the rate of collection of DWR and utility historic procurement costs from bundled customers in light of the economic consequences of existing bundled rates? Why or why not?
   
   Response
   
   Because the Commission is likely to take action in 2003 to reduce rates for Edison and PG&E (see responses to questions 10 and 11, below), it does not appear necessary to impose a cap on the rate of collection of DWR and utility historic procurement costs from bundled customers. In addition, the Commission is bound by AB 1X to establish power charges sufficient to meet DWR’s revenue requirement, and may not cap these charges at a level below that required by DWR.
    
7. In Decision 02-11-022, the Commission adopted a recommendation from TURN that "any financing of the cap shall be retained with the same customer classes that benefit from the cap." What does this provision mean and how does the Commission intend to implement it?
   
   Response
   
   The purpose of this provision is to ensure that customer classes with low rates of participation in Direct Access (primarily residential and small commercial) do not subsidize those classes with higher rates of participation.
   
   The Commission will ensure that the utilities will implement accounting provisions so that bundled customer revenues are only used to finance the direct access customer undercollections of the same class.
    
8. What is the Commission’s process and schedule for finalizing the level of the cap and interest rate? What factors might cause the Commission to change either the cap or the interest rate?
   
   Response
   
   As of January 1, 2003, an interim cap of 2.7 cents/KWh is being collected by the utilities.
   
   As noted in its November decision, the Commission will hold an expedited proceeding in order to develop a further record on the level of cap that would be appropriate, given the need to achieve payback of the undercollection resulting from the any cap, with interest, over a reasonable period. The Commission intends to adopt a decision reflecting the outcome of this proceeding by July 1, 2003. A ruling by the assigned Administrative Law Judge to begin this proceeding is expected shortly.
   
   The Commission could change either the cap or the interest rate if a party makes a showing that the current cap and/or interest rate will produce an outcome that does not result in bundled customer indifference.
    
9. You co-authored Decision 02-07-032, which established direct access customers’ obligation for SCE’s historical procurement costs at $391 million (as compared to $540 million in the ALJ’s proposed decision). In testimony before the Senate Rules Committee on July 10, you indicated that the calculation was imperfect and committed to amend the decision to allow for adjustment of this figure based on a better calculation. SCE has now completed a more precise calculation indicating a direct access customer share of $496.8 million. Given this new evidence, will you adjust the allocation of SCE costs to direct access customers?
   
   Response
   
   On October 16, 2002, SCE filed a Petition to Modify Decision 02-07-032, seeking recovery of the $496.8 million from Direct Access customers, as I invited them to do. The Commission will now develop a record testing Edison’s request, and an Administrative Law Judge will write a proposed decision. My decision on whether to maintain or alter the historical procurement costs to be collected will be based on the evidence produced. I will urge that this question be given a speedy look.
    
10. When will SCE’s historical procurement costs (as measured by the balance in its PROACT account) be recovered? Once these costs are recovered, what does the Commission intend to do with the revenues which are currently dedicated to PROACT? When will the Commission reduce SCE’s rates?
    
    Response
    
    On January 17, 2003, SCE filed an application with the Commission to lower its rates upon full recovery of its PROACT balance, which SCE currently projects will occur by July 2003. My intention is to support a rate decrease, supported by the record, to take effect this coming summer.
     
11. The Commission’s proposed plan of reorganization for PG&E calls for the use of PG&E’s cash on hand as of January 31, 2003 to help retire PG&E’s debts. Will the Commission continue to permit PG&E to collect rates in excess of its costs after January 31? If so, what does the Commission intend to do with these revenues? When will the Commission reduce PG&E’s rates?
    
    Response
    
    The current surcharge revenues remain subject to refund.
    
    PG&E’s rates are closely connected to the results of the PG&E bankruptcy case, in which a decision is expected later in 2003. PG&E’s rates are also connected to pending proceedings before the Commission (for example, the General Rate Case, end of the rate-freeze rehearing, and the Bankruptcy OII) and at the FERC (for example, PG&E has just filed its 6th Transmission Owner rate case, which requests a 45% rate increase). Until the outcome of these proceedings is known, we cannot definitively state the level of PG&E’s rates. The Commission will only approve rates that are just and reasonable.