California PUC Adopts DWR Regulations, Re-Regulates Utility Generation 
•	DWR power to go only to SCE and PG&E customers, for now 
•	Obligates SCE and PG&E to make DWR whole for its unrecovered costs
•	Re-regulates all generation retained by the 3 IOUs, Each to file cost-based rates 
•	Rate base to be net depreciated book value, less recovered stranded costs
The California PUC adopted emergency regulations for the delivery and payment mechanisms the state’s Department of Water Resources (DWR) will use in fulfilling its electric purchase and sale obligations under emergency bill AB 1X.  Under the provisions of AB 1X, which the PUC apparently had confidence would be enacted without significant change, the PUC requires the DWR to sell the power it purchases directly to the retail end use customers of Southern California Edison (SCE) and Pacific Gas & Electric (PG&E).  Since the law requires the PUC to ensure that DWR recovers all of the costs of its power purchase program and yet also limits the recovery to only an allocable portion of the utilities’ currently frozen energy charges, the PUC recognizes the possibility that DWR’s costs may not be fully recovered at certain times.  The PUC makes SCE and PG&E liable to pay any shortfalls to ensure DWR recovers its costs on as current a basis as possible, but suggests it is open to further consideration of this policy.  

URG Assets Re-Regulated 

The PUC orders the three utilities to each make “Advice Letter” filings to establish cost-based rates for their URG.  The rate set will be made retroactive to whenever the utility stopped bidding its retained generation into to the PX, which SCE and PG&E said they stopped doing on 12/28/00.  The two utilities said they stopped participating in the PX day-of and day-ahead markets on 01/19/01.  

The PUC directs the utilities to calculate their cost of capital-related revenue requirements using the amounts in their respective Transition Cost Balancing Accounts (TCBA) as the rate base.  The TCBA reflects the net book value of utility generation assets less the recovery of those assets’ stranded costs.  The PUC will allow utilities to record in a memorandum account the difference between this reduced rate of return component of revenue requirements and their last PUC authorized rate of return for the same assets, for possible future use in adjusting the TCBA-based rates.  The amounts in these memorandum accounts will represent the difference between their current allowed returns and what they “may have earned had these generation costs been recovered under traditional cost of service ratemaking in place prior to restructuring.”  The cost-based rates so determined, the PUC says, would comply with the principle that ratepayers pay just and reasonable rates, and as costs change would be subject to adjustment.  

The PUC decides that SCE, PG&E, and San Diego Gas & Electric (SDG&E) should use their “utility retained generation” (URG) in the following order, to: 1) serve their existing customers at cost-of-service based rates; 2) sell power at cost-based rates to other California investor-owned utilities; and 3) sell or barter excess power from URG to minimize future costs.  The PUC directs that if any surplus generation exists, it should first be offered to other California IOUs at cost-based rates, with any net proceeds to benefit in-state ratepayers.  URG consists of utility-owned generation and long-term purchased power contracts.  

Since the December 15, 2000 order from the Federal Energy Regulatory Commission (FERC) ending the investor-owned utilities’ obligation to sell all of their energy produced through the Power Exchange (PX) and buy all of their energy requirements from the PX (the so-called “buy/sell requirement”), utilities had no regulatory direction for using and pricing their retained generation.  In lieu of an evidentiary hearing, because of the need to protect the public interest during this time of nearly continuous Stage 3 supply emergencies, the PUC now provides this direction.  The PUC makes SDG&E a party to the URG aspects of its order, while the PUC does not apply the DWR delivery and pricing rules to SDG&E, at this time.  The AB 1X law does not exclude SDG&E’s retail customers from receiving DWR power, but the PUC opts not to require DWR power to go them at this time.       

In this interim order adopted on 01/31/01, the PUC says it does not end the rate freeze, set an interim valuation, or otherwise provide a basis for ending the rate freeze.  As far as it addresses the pricing and use of utilities’ retained generation, the order only sets an interim basis for pricing the power utilities continue to produce and provide to their customers since the effectively defunct PX no longer fulfills this function.    

Residual Pricing of DWR Power

Because of the provisions of AB 1X, which was enacted the day after the PUC adopted its order, the PUC must price DWR power residually, or as a percentage of what each SCE and PG&E retail end use customer currently pays them for energy.  The utilities’ energy charges are currently frozen at different levels for each utility and each customer class.  The percentage is calculated by dividing (1) the amount of power provided by DWR and delivered by the utility, by (2) the total amount of power generated or purchased by the utility and the amount of power in item (1).  The amount of power purchased by the utility includes purchases from QFs and others for resale, as well as any energy they purchase in the ISO’s real time market.  This percentage or ratio will be calculated daily.   

The PUC provides the following example, if a utility generates and purchases 750 MWh of power and delivers along with it 250 MWh of DWR power for a total of 1,000 MWh, each customer owes DWR 25% of the energy charge in their rates for the power they used that day.  
Utilities will collect these amounts from customers on behalf of DWR and hold the amounts in trust for DWR.  

As the law requires the calculation of the amounts to be collected on the basis of the megawatt hours DWR actually purchases and delivers, while calculating the amounts it is entitled to recover from utilities’ retail customers in dollars of costs, there is a built in potential for DWR’s costs to be under recovered, depending on how the actual price DWR pays for each MWh matches up with the utilities’ existing, frozen energy charges.     

The PUC says that making the utilities liable for any shortfall in the recovery of DWR’s costs “satisfies the legislative concern that the State recover the funds expended.”  If the two cash-strapped, nearly bankrupt utilities are liable for substantial amounts to make DWR whole, these amounts would likely only add to the approximately $12 billion in unpaid, overdue purchased power costs they have already accumulated.  
 
Following the provisions of AB 1X, the PUC sets the DWR price of power upon resale as equal to DWR’s purchased power costs, plus administrative costs, transmission and scheduling costs, and other related costs, less any overpayments DWR may subsequently recover from suppliers.  

Again following AB 1X, the PUC directs DWR to retain title to its power until sold to the utilities’ retail end use customers, and reminds that under the new statute “neither the full faith and credit nor the taxing power of the State of California may be pledged for the payment for any obligation.”  The PUC orders the two cash-strapped utilities to deliver DWR power to retail customers and directs the utilities to take no ownership or other interest in DWR power, acting only in an administrative capacity as billing agents for DWR.    

The PUC’s interim order is posted on its web site at: 
http://www.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/4867.htm

Citation: The PUC approved its interim order, Decision 01-01-061, adopting emergency regulations on the delivery and payment mechanism for DWR power and directing utilities on the use and pricing of utility retained generation on January 31, 2001, in SCE and PG&E’s consolidated rate stabilization cases, Application numbers 00-11-038 and 00-11-056, of which SDG&E is a party.