Power and Energy Updates

Milbank Energy Update

November 7 , 2002

The Cost Responsibility Surcharge

The Commissioners of the California Public Utilities Commission ("CPUC") today approved, on a 3-2 vote (Commissioners Lynch and Wood dissenting), orders implementing a Cost Responsibility Surcharge (CRS) with an interim overall cap of 2.7 cents/kWh for Direct Access customers within the service territories of Pacific Gas and Electric Company (PG&E), Southern California Edison Company (Edison), and San Diego Gas & Electric Company (SDG&E). The level of the interim cap will be subject to adjustment after an initial six-month review period to provide assurance that capped surcharges are sufficient to cover Direct Access (DA) customers' obligations over time.

The CRS will be determined on a total portfolio basis, taking into account both DWR and utility-procured resources, and will reflect DA customers' respective share of costs associated with those resources. DA customers will pay their fair share of DWR's historic and future costs, as well as utility net uneconomic (stranded) costs. The payment of charges by DA customers will be subject to an overall cap of 2.7 cents/kWh. The cap will also include the DA customers' obligations for the "Historic Procurement Charge" that was previously approved for Edison in August of this year. The 2.7-cent cap should permit total repayment within 15 years.

Both Commissioners Lynch and Wood opposed the adoption of a 2.7 cents/kWh surcharge. Both estimate that DA customers would shift over a billion dollars to bundled service customers. This is based on the estimation that CRS will result in nearly $500 million in payments per year from DA customers. However, Commissioner Wood estimated that DA customer's responsibility for costs approximated $1 billion since the suspension of DA and will approximate $1.3 billion by January 1, 2003, the date the CRS is expected to take effect. For this "loan," DA customers are paying 4 percent interest.

The CRS will be composed of the following elements:

• DWR's Bond Charge, the actual amount of which will be computed and implemented through a separate decision in the Bond Charge proceeding.
   

• DWR's Power Charge covering DA customers' share of procurement costs between September 21, 2001 and December 31, 2002, representing DA customers' share of the above-market portion of DWR costs incurred after DA was suspended. The actual final amount of the DWR Power Charges will be based on the specific forecast variables underlying the 2003 DWR revenue requirement that will be implemented in A.00-11-038.
   

• DWR's Power Charge applicable to prospective costs for calendar year 2003 and ongoing subject to a subsequent annual update proceeding for future years, representing DA customers' share of the above-market portion of prospective DWR power costs.
   

• A separate charge to cover the ongoing net above-market portion of utility-related generation costs. 

The above-market portion of utility-related generation costs will be applicable to all DA customers. The DWR Bond Charge and the DWR ongoing Power Charge will be applicable to all DA customers except for those who never took utility electric service after February 1, 2001.


Use of Surcharge Revenues

The CPUC also issued an order which revised the restriction on the use of surcharge revenues collected as a result of two rate increases, so that they might be used, if necessary as authorized by the Commission, to return the utilities to reasonable financial health. Previous CPUC decisions made permanent a $0.01 per kilowatt-hour (kWh) surcharge, and a $0.03/kWh surcharge (for a total surcharge of $0.04/kWh), but restricted use of those surcharge revenues to ongoing procurement costs and future power purchases.

Upcoming Commission proceedings will determine, as necessary, what needs require use of surcharge revenues, if any; whether there is any cost or other basis to support specific surcharge levels; and whether the resulting rates are just and reasonable. The CPUC indicated that restoring the financial health of PG&E and Edison may require use of some or all of the surcharge revenues.


Utility Return on Equity

The CPUC also issued a decision establishing the 2003 ratemaking return on common equity (ROE) for PG&E, Edison, Sierra Pacific Power Company (Sierra), and SDG&E. The proceeding will remain open for PG&E to true up its test year capital structure and ROE upon its implementation of a financing plan approved by the Bankruptcy Court that enables it to emerge from Chapter 11 of the Bankruptcy Code. The overall ROE, return on rate base, and estimated change in revenue requirement is as follows:

PG&E had sought to increase its electric operations ROE to 12.50% from 11.22% and its gas distribution operations ROE to 12.25% from 11.22%, which would result in a $133.5 million increase in its electric revenues and a $22.3 million increase in its gas revenues.

Ed Feo (efeo@milbank.com)
Doug Dunn (mdunn@milbank.com)
Steve Kramer (skramer@milbank.com)
Kevin McSpadden (kmcspadden@milbank.com)
Carla Urquhart (curquhart@milbank.com)
Orlan Johnson (ojohnson@milbank.com)
Jim Liles (jliles@milbank.com)