Application No.: Exhibit No.: Witnesses: A.13-11-003 SCE-45 T. Godfrey (U 338-E) Excerpt of D.12-11-051 On Test Year 2012 General Rate Case For Southern California Edison Company (Pages 1-5, 13-14, 209-211, & 292-293) Before the Public Utilities Commission of the State of California
ALJ/MD2/lil/gd2/jt2 Date of Issuance 12/10/2012 Decision 12-11-051 November 29, 2012 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Southern California Edison Company (U338E) for Authority to, Among Other Things, Increase Its Authorized Revenues For Electric Service in 2012, And to Reflect That Increase In Rates. Application 10-11-015 (Filed November 23, 2010) (See Appendix A for Service List) DECISION ON TEST YEAR 2012 GENERAL RATE CASE FOR SOUTHERN CALIFORNIA EDISON COMPANY 37668274-1 -
DECISION ON TEST YEAR 2012 GENERAL RATE CASE FOR SOUTHERN CALIFORNIA EDISON COMPANY 1. Summary In this decision, we authorize Southern California Edison Company (SCE) to recover from ratepayers an increase of $271.9 million 5.04% over present rates, representing the reasonable costs of providing safe and reliable electrical service to its customers in 2012. The decision is the result of the Commission s detailed review of the future operations and service requirements claimed by one of the largest utilities in the country. The Commission holds safety, reliability, and just and reasonable rates for customers as the basis of our review. SCE, like other electric utilities, is in a period of transition with dual responsibilities to inspect, maintain and replace vast existing infrastructure, and also to respond to national, state, and Commission policies requiring additional renewable energy sources and new technologies for tomorrow s more efficient energy service. The technological changes are expected to result in efficiencies, better service, and lower costs to ratepayers over time. On the other hand, southern California has severely felt the effects of the recent economic recession, and most ratepayers have reduced resources to support rate increases. In order to keep rates just and reasonable, our decision imposes some belt tightening on SCE, including more efforts at cost effectiveness, slower implementation of some activities, and disallowance of non-essential costs and projects. The decision reduces SCE s Test Year 2012 company-wide request for Operations and Maintenance (O&M) expenses by approximately $258 million and reduces SCE s 2010-2012 capital spending request by approximately $756 million. - 2 -
SCE serves 4.9 million customers in a 50,000 square mile area of central, coastal, and southern California. SCE s service territory includes hundreds of cities and communities with a collective population of more than 13 million people. To provide electrical service, SCE employs over 19,000 people, and works with thousands of contractors to operate and maintain its infrastructure, including 88,207 miles of overhead and underground distribution lines, as well as its nuclear, hydroelectric, and gas- and diesel-fired plants. This decision authorizes $5.671 billion base revenue requirement for Test Year (TY) 2012 for SCE. We find that the authorized revenue requirement provides SCE with sufficient funding to provide safe and reliable service at just and reasonable rates. The adopted revenue requirement represents a 17.44% increase over the 2009 authorized revenue requirement of $4.829 billion, a 18.57% increase over SCE s 2009 recorded base revenue requirement of $4.783 billion, and 5.04% increase over the projected revenue requirement at present rate levels of $5.399 billion, and a 9.9% reduction from the updated 2012 revenue requirement requested by SCE of $6.294 billion. 1 The adopted methodology for calculating post-test year revenue requirement results in a revenue requirement for 2013 of $6.078 billion and for 2014 of $6.426 billion. This decision also authorizes a 20.73% increase in SCE s total company rate base between 2009 and 2012. In 2009, the authorized rate base 1 When SCE filed its request for a 2012 TY revenue requirement with the Commission on November 23, 2010, it requested a revenue requirement of $6.285 billion. In July 2011, SCE reduced parts of its request by approximately $71.4 million to reflect agreedupon changes with Division of Ratepayer Advocates and intervenors, corrections to the Results of Operations model, and updated numbers. Exhibit SCE-25, Vol. 01 at 1. Later, in SCE s update testimony filed on October 24, 2011 SCE presented an updated revenue requirement of $6.294 billion. - 3 -
was $14.77 billion. Today, we increase the authorized rate base to $17.814 billion. However, when SCE s sale of the Four Corners Generating Station is completed, all associated assets will be removed from rate base. As a result of this decision, SCE total projected company revenue requirement for 2012 is approximately $6.126 billion. It is an enormous challenge for the Commission and the public to review SCE s proposal within the time available, particularly when few issues were resolved by settlement. Several parties asked the Commission to improve the transparency of SCE s testimony and data responses. The decision includes initiatives and orders to SCE to improve the consistency and clarity of crucial information SCE will provide in future general rate cases. Safe operations continue to be a top priority, and we recognize the importance of SCE knowing the condition of its assets, particularly poles and wires which can cause great damage if downed. In this decision, we authorize enhanced equipment inspections and new technology to better track the condition and service record of SCE s assets. We also order an independent assessment of SCE s system utility poles to determine whether current loads meet legal standards. SCE has faced two significant challenges to operations in the preceding 12 months: the December 2011 windstorms and extended shut down of the two nuclear power plants at San Onofre (SONGS). In this decision, we find it is in the best interest of ratepayers for Test Year O&M and post-2011 capital expenditures related to SONGS to be tracked in a memorandum account for separate review and be subject to refund. Regarding SCE s much-criticized response to the windstorm, in 2013, SCE is required to provide the Commission with a progress - 4 -
report on various initiatives SCE stated it would take to improve its emergency communications and responses to service communities and customers. We remain committed to authorizing recovery only for those expenses necessary to provide safe and reliable electric service. Going forward, SCE proposes to invest billions of dollars in Information Technology (IT) solutions. These capitalized costs are substantial, the assets are short-lived, project costs are difficult to estimate and benefits can be tough to quantify. Therefore, to assist the Commission with reviewing these expenses in SCE s next GRC, the decision requires SCE to provide specific testimony in its next GRC about SCE s capitalized software cost estimation methodology, approach to cost-effectiveness, and whether reasonable metrics exist to measure benefits. Another significant change in this rate cycle, is the full deployment of Edison SmartConnect, or smart meters, scheduled for the end of 2012. The decision integrates SmartConnect into regular operations in 2013 with separate forecasts, and shifts funding into general rates from a dedicated balancing account. We have also reduced rate recovery for the replaced electromechanical meters. In addition, SCE has reached three settlements on specified issues with intervening parties: Disability Rights Advocates, Vote Solar Initiative, and California Coalition of Utility Employees (CCUE). This decision finds that the proposed settlements are a reasonable resolution of the specified issues in light of the record that are consistent with the law and in the public interest. Consequently, the decision approves these settlements. However, in relation to the settlement with CCUE, we order SCE to obtain an independent audit of SCE s Reliability Investment Incentive Mechanism. - 5 -
Finally, we adopt 2010 unadjusted, recorded capital expenditures for all business units where these recorded costs were made available during the course of the proceeding. According to the Rate Case Plan, SCE is required to prepare its application based on 2009, not 2010, recorded expenses. However, there is nothing in the Rate Case Plan which limits discovery of 2010 actual recorded expenditures and the Commission finds them informative. Therefore, the Commission examined each requested capital expenditure for necessity, duplication, and cost, and further adopts the unadjusted, recorded expenditures for 2010 capital spending unless otherwise stated in this decision. 2.2. Forecasting Methodologies Forecasting costs is central to the art of determining the revenue requirement. The Commission has said that selecting the most appropriate method to forecast test year expenses is ultimately a matter of informed judgment. 10 Forecasting methods were the basis of a large number of disagreements in this GRC. Several different methods can be used to calculate test year estimates of expenses, e.g., linear trending, averaging (e.g., five year average (5YA) recorded expenses), last recorded year (LRY), and budget based estimates. We recognize that the forecasting principles discussed in prior decisions are generally appropriate and applicable here. 11 SCE primarily relied on budget-based forecasting where it used a variety of methods to establish a base year forecast and then made incremental 10 D.04-07-022 at 19. 11 See, D.00-02-046, D.89-12-057, and D.89-04-060. - 13 -
additions by tying each forecast to identified drivers of future work. SCE asserts that, for many items, use of recorded data is inappropriate because of changed circumstances. The Commission has previously observed that because utility spending plans may not always be implemented as intended, budget-based forecasts generally are given less weight than forecasts based on recorded spending absent a showing supporting the contrary approach. 12 DRA disputes the accuracy of SCE s varied approach and instead contends that SCE tended to use whatever method yielded the highest result. In contrast, DRA relied heavily on historical costs and the concept of embedded costs which it explained were costs previously approved and already in existing rates. For example, embedded costs include: (1) historical costs for routine activities that are similar to those forecast; (2) costs for closed or completed projects but for which SCE is still collecting rate recovery; (3) previously authorized funds spent elsewhere; and (4) expenses forecast by SCE to be reduced due to efficiency gains. Forecasting is educated estimation, is imprecise by nature, and more than one method may be reasonable. We generally accept that use of the best information available is preferred, and total reliance on historical costs will be flawed in at least some areas. For example, reliance on historical costs alone does not capture growth in the number of pieces of equipment to be purchased or maintained, expanded programs of inspection, maintenance, repair or replacement, new programs and technologies, or new failure information. 12 D.09-03-025 at 17. - 14 -
5.10.1.3. Transmission and Distribution Storm Expenses: 573.170 & 598.170 The costs associated with restoration of service during storm conditions are recorded in subaccount 573.170 and 598.170. Subaccount 573.170 includes costs associated with work during storm conditions on transmission facilities, including repair of transmission assets. Subaccount 598.170 records costs associated with repairing storm damage to distribution assets. SCE s combined request for TY2012 O&M costs related to T&D storm damage is $22.463 million ($2009). This is a 121% increase over 2009 recorded costs, however, 2009 costs were less than half of the five-year historical combined average, which is also equal to $22.463 million. 399 DRA recommends a reduction of $12.146 million ($2009), a 54% decrease, based on different forecast methodologies for each subaccount. By subaccount, SCE s forecasts are $3.731 million ($1.036 million Labor, $2.695 million Non-labor) for Transmission and $18.372 million ($7.029 million Labor, $11.703 million Non-labor) for Distribution storm expenses. Both forecasts are based on a five-year average of historical costs. 400 SCE claims its methodology is consistent with Commission precedent and the nature of the costs in the category, which depends on the weather from year to year. 401 DRA s forecast for Transmission storm damage 2012 O&M is $1.312 million, $2.419 million less than SCE s forecast, utilizing a three-year 399 SCE-18, Vol. 04, Pts. 3 & 5 at 13 (2009 combined $10.186 million). 400 Id. at 19. 401 D.09-03-025 at 23 ( Costs that fluctuate based on weather are better forecasted on a historical average basis, rather than last recorded year. Accordingly, it is reasonable to forecast these subaccount costs by estimating them separately. ). - 209 -
average (2007-2009) of recorded costs. DRA chose 2007-2009 because these years appear to be more normal and routine years compared to the recorded costs for the years 2005 and 2006. 402 SCE may recover certain costs incurred for major emergencies and catastrophic events through the Catastrophic Event Memorandum Account (CEMA). DRA also claims it is concerned that SCE did not remove all its CEMA related costs from its recorded expenses and that such costs were mistakenly included in SCE s test year forecast. 403 DRA s forecast for Distribution storm damage 2012 O&M is $9.005 million, $9.727 million less than SCE forecast. DRA utilized 2009 recorded costs because that year appears to be a more normal and routine year compared to recorded costs for 2005-2008. DRA notes that SCE s expenses declined each year between 2006 and 2009 making LRY a reasonable method to forecast SCE s test year expenses. 404 CCUE disagrees with DRA s recommended reductions because it views the storm-related expenses to be critical components of reliability. 405 CCUE s argument links various overhead and underground maintenance and storm-related subaccount disallowances proposed by DRA, which CCUE sharply criticizes as significantly below historical levels of expenditures. 406 The basis for DRA s use of different methodologies is not well supported. The primary driver of the storm-related O&M costs is the weather. Given the 402 DRA-5 at 103. 403 Id. at 102. 404 Id. at 149. 405 CCUE OB at 14. 406 Id. at 15. - 210 -
unpredictability of the weather, recently illustrated by the December 2010 windstorm in SCE s territory, use of a five-year average seems more reasonable to develop a test year forecast for these subaccounts. The Commission utilized a five-year average for these categories in SCE s 2009 GRC. 407 DRA s designation of some years costs being more normal resulted in the lowest forecasts, but lacked any supporting evidence. Furthermore, DRA s concern that SCE did not remove all its CEMA related costs from its recorded expenses is not supported by any facts. We are persuaded by SCE s evidence that it has properly excluded CEMA costs. 408 The Commission adopts SCE s five-year average methodology to establish TY2012 Transmission Related Storm Costs (subaccount 573.170) and Distribution Related Storm Costs (subaccount 598.170) of $3.731 million and $18.732 million, respectively. 5.10.1.4. Overhead Line Operations: 583.170 The Overhead Distribution Line Operations activities recorded in this subaccount are associated with the inspection, testing, and switching of distribution equipment to identify, isolate, or prevent problems. This work is primarily driven by outages or abnormal conditions, and is dependent on the size and age of the system. The work has both reliability and safety implications. SCE requests $4.722 million ($2009--$3.744 labor, $0.978 non-labor) for its O&M expenses in TY2012, an increase of $0.593 million or 14.36%, over 407 D.09-03-025 at 23. 408 SCE-18, Vol. 04, Pts. 3 & 5 at 20. - 211 -
A.10-11-015 ALJ/ /MD2/lil/gd2/jt2 5.17.2. Distribution Work-Order Write-Offs and Underground Utility Locating Services: 588.281 5.17.2.1. Individual Work-Order Write-Offs The parties follow the positionss taken forr Transmission work-order write-offs. SCE s revised forecast for TY2012 Distribution Work-Order Write-Offs costs is $10.001 million, after re-classifying certain expenses identified by TUR RN. 549 SCE s forecast is derived from the average historical percentage of write-offs to distribution capital expenditures, multiplied by average 2012-2014 forecast distribution capital expenditures. SCE justifies its forecast method by reference to the Commissio n s decision in the 2009 GRC. 5 DRA used a five-year adjusted historical average for this line item to forecast $ $8.214 million, after removing $3.4 million associated with the Catalina fire as unusual and non-recurring. Similarly, TURN made adjustments to recorded historical expenses before developing its five-year averagee for a TY2012 forecast of $7.971 million. DRA and TURN reiterated the arguments each put forth regarding Transmission work-order write-offs above. Historical recorded expenses for this line item have fluctuated between 2005 and 2009, ranging from a low in 2008 of $5.081 million to a high of $18.444 million in 2009, a 263% increase in one year due primarily to an increase in cancelled capital projects, uncollectible costs for billable work orders, and delayedd write-offs from 2008. 551 This is an inadequate explanation. 550 549 JCE at 314; SCE-18, Vol. 05, Pts. 3 & 4 at 20-23. 550 D.09-03-025 at 75. 551 SCE-03, Vol. 05, Pts. 3 & 4 at 31. - 292 -
Based on the same reasoning as set forth above, we find it reasonable to adopt a five-year average of adjusted recorded costs. SCE claims it wrote-off $44.554 million between 2005 and 2009. 552 From its original list of excluded write-offs, TURN now accepts two items and SCE accepts exclusion of three, leaving the following write-offs in dispute as to whether they should be removed from the forecast: $648,646 written off before but paid after 2009; $101,780 associated with the USAT write-off; $600,000 associated with defects in a software project ($437,000 per SCE); and $1.276 million for Catalina undersea cable. We agree with TURN that the write-offs associated with the Catalina undersea cable should be excluded from calculations of average historical costs. Although we approved the write-off in Section 4.6.2 as reasonable, that does not mean that it is a type of recurring expense. Catalina has a uniquely isolated service population and the undersea cable project was abandoned in favor of a more cost effective delivery system. It is unlikely that similar costs would be incurred by SCE in the next rate cycle. We also exclude 50% of the extraordinary USAT expenses, but decline to exclude the other expenses which appear to be the ordinary types of write-offs to be expected in this subaccount. The five-year average of adjusted recorded costs for Distribution Work-Order Write-Offs is $8.230 million and the Commission adopts this amount for TY2012. Furthermore we apply SCE s Labor to Non-labor ration of 6% ($0.494 million Labor, $7.736 million Non-labor). 552 SCE-18, Vol. 05, Pts. 3 & 4 at 18, Table II-10. - 293 -