SCE-01. Exhibit No.: Witness: 338-E) Edison. Before the. November 1, 2012

Transcription

1 Application No.: Exhibit No.: Witness: A SCE-01 Russelll Garwacki (U -E) Revised Rebuttal Testimony of Southern California Edison Company (U -E) Regarding Pacific Gas and Electric Compan y s Application for Approval off its Economic Development Rate for Before the Public Utilities Commission of the State of California Rosemead, California November 1, 01 LIMS-1-

2 Revised Rebuttal Testimony of Southern California Edison Company (U -E) Regarding Pacific Gas and Electric Company s Application for Approval of its Economic Development Rate for Table Of Contents Section Page Witness I. INTRODUCTION [Question ]...1 Russell Garwacki II. DISCUSSION... A. Shareholders Should Not Fund EDRs With A Positive CTM [Questions 0 and 1]... B. DWR Bond Charge Is Not A Marginal Cost [Questions and ]... C. The Floor Price Should Be Calculated Using Short- Run Marginal Costs [Question ]... D. The But-For Affidavit Is Unnecessary For Attraction And Expansion Customers [Questions 1 and 0]... III. CONCLUSION... Appendix A SCE Witness Qualifications... -i-

3 I. INTRODUCTION [Question 1 ] Like Pacific Gas and Electric Company (PG&E), Southern California Edison Company (SCE) administers Economic Development Rates (EDRs) that were approved in Decision (D.) -0-01, as modified by D Both companies EDR programs sunset on December 1, 01. SCE has a keen interest in the outcome of PG&E s Application for Approval of Economic Development Rate (EDR) for (Application), in part because SCE has not been successful in attracting a sufficient number of customers to its EDR program notwithstanding the sustained economic challenges faced by the state of California. SCE s challenge in recruiting eligible customers stems from the way in which the EDR Floor Bill is calculated pursuant to the settlement agreement adopted in D.-0-01, Section.f.ii. of which provides that the marginal generation components (energy and capacity) of the Floor Bill shall be based on the marginal generation costs adopted in D [the decision adopting the settlement agreement in Phase of SCE s 00 general rate case (GRC)], multiplied by the ratio of.0 divided by.00 to reflect an updated gas price. The marginal generation components adopted in D result in a Floor Bill that has proved to be too high to provide sufficient headroom for provision of the adopted rate discounts off their otherwise applicable tariffs (OATs) to customers who may be at risk of relocating their businesses out of state (or going out of business entirely). 1 Section. of the Scoping Memo And Ruling Of Assigned Commissioner (Scoping Memo), issued August, 00, requires parties to provide a reference to the applicable questions posed by the Scoping Memo in the parties testimony served in this proceeding. The reference to the Scoping Memo s questions is provided within brackets in each applicable heading of this testimony. The Floor Bill is an EDR contract term SCE uses to describe a customer s otherwise applicable tariff s transmission charges, Public Purpose Program charge, Nuclear Decommissioning charge, California Department of Water Resources bond charge, Competition Transition Charge, marginal cost of distribution, and, if a bundled service customer, marginal cost of generation. Pursuant to D.-0-01, the applicable EDR bill is subject to the Floor Bill. PG&E uses the analogous term Floor Price. -1-

4 SCE is a party to this proceeding. Given its interest in the outcome of PG&E s Application, it submits this rebuttal testimony to highlight four points. First, SCE seeks to maintain the status quo with respect to shareholder funding of the EDR program. Specifically, shareholders should not be required to pay the revenue difference between what a utility would have collected from a customer under its OAT, and what it collects from the same customer under an EDR schedule. Second, SCE offers clarification about why the Department of Water Resources (DWR) bond charge is not a marginal cost for purposes of determining an EDR customer s contribution to margin (CTM). Third, SCE proposes that, to the extent the California Public Utilities Commission (Commission) adopts a Floor Price as a means to calculate the applicable EDR discount, the marginal costs used to calculate the Floor Price should be based on short-run (not long-run) marginal costs. Fourth, SCE submits that for customers applying to receive an EDR for load they wish to expand in or attract to California, there is no need for an affidavit verifying that but-for the EDR, alone or in combination with other incentives, the customer s load would not be expanded in or attracted to California. Each of these four subjects are discussed in more detail below. II. DISCUSSION A. Shareholders Should Not Fund EDRs With A Positive CTM [Questions 0 and 1] SCE opposes the proposals set forth by the Division of Ratepayer Advocates (DRA) and other intervenors that EDR discounts should be funded by the utility s shareholders, as these proposals fundamentally misunderstand the premise of the EDR program and its relationship to basic utility ratemaking principles. A carefully designed EDR aims to prevent a customer from either going out of business or relocating out of California, so its aim is to retain, attract, or expand load that would otherwise not exist in the state. To the extent the EDR accomplishes this goal of keeping load in the state, customers not on an EDR ( non-participating customers ) are better off because the utility s fixed costs are spread over a larger number of kilowatt hours (kwh). Provided that EDR customers pay rate levels above the utility s short-run marginal cost of service (i.e., to the extent that EDR customers --

5 provide a positive CTM), that will keep all non-participating customers rates lower by spreading fixed costs over a larger kwh base than would otherwise be the case without the EDRs. As such, the real beneficiaries of an EDR with a positive CTM are the utility s ratepayers, not its shareholders. Furthermore, because the Commission has authorized PG&E and SCE to use balancing accounts to recover their Commission-authorized base revenue requirements, no more or no less, the utilities shareholders are relatively indifferent to whether fixed costs are spread over a larger or smaller number of customers or kwh usage. In fact, if shareholders were required to fund EDRs, they would not be incentivized to promote them, as the utility s revenue requirement would be collected with or without the customers most in need of EDRs. In that respect, DRA overemphasizes the benefit to shareholders from EDRs. While DRA focuses on the fact that stock analysts consider a utility s sales and revenues in determining whether the company is strong, one cannot dismiss the positive impact on non-participating ratepayers when a utility s fixed costs are spread across a wider customer base. B. DWR Bond Charge Is Not A Marginal Cost [Questions and ] SCE notes that the testimony of DRA and Merced/Modesto improperly conflate what constitutes marginal costs for purposes of calculating an EDR customer s CTM, and what the components of the floor price are (which typically includes marginal costs plus non-bypassable charges). CTM is the difference between the average rate paid by a customer, on the one hand, and the marginal cost of serving that customer, on the other. The floor price includes more than just marginal costs. Without taking a position on whether DWR Bond Charge should ever be discounted under an EDR, SCE submits that DWR Bond Charge, like many other non-bypassable rate components, is not generally considered a marginal cost for the simple reason that the utility s DWR Bond costs do not increase with sales. When sales increases, the DWR Bond Charge is applied to the sales, and the accumulated revenues are DRA includes the DWR Bond Charge in its marginal costs at page - (lines -). Merced/Modesto include the DWR Bond charges in the price floor on page 1-1 of their testimony. See footnote 1 above, taken from the definition section of the settlement agreement adopted in D The limited exception is for D-CARE sales. --

6 subsequently transmitted to the DWR. To the extent that the utility has over-collected the forecast revenues at year s end, the future DWR Bond revenue requirement is reduced by the over-collection and the going-forward Bond Charge is reduced. Thus, the annual bond revenue required by the DWR is independent of sales, and is not a marginal cost. All other balancing accounts for non-bypassable charges work substantially the same way. Utilities do not incur additional costs with regard to those non-bypassable charges when sales increase. This distinction is important because a proper analysis of CTM should consider the difference between the average rate paid, and the marginal costs of serving a customer. If the analysis considered marginal costs in addition to non-bypassable and transmission charges, that approach would improperly understate the potential benefit to non-participating customers of the EDR program. C. The Floor Price Should Be Calculated Using Short-Run Marginal Costs [Question ] Should the Commission ultimately adopt a Floor Price in this proceeding, SCE recommends that it use short-run marginal costs not the long-run marginal costs normally adopted in connection with Phase of utility GRCs to set the floor price components for marginal generation capacity cost, marginal energy costs and distribution marginal costs. SCE s proposal is grounded in three principles. First, using short-run marginal costs is appropriate because the proposed EDR contracts are limited in duration i.e, five years. To properly assess the value of EDRs to non-participating customers, the CTM calculation should be based on short-run marginal costs because these represent the costs that are avoided absent the EDR customer s load. The time horizon that defines short-run can be debated, but SCE believes that a time period that is tied to the duration of the contract itself is reasonable. Second, with respect to marginal generation capacity cost in particular, the utilities longterm procurement plans show no need for additional capacity for at least the next five years. The Floor Price of the current EDRs include the entirety of the customer s OAT transmission charges. Theoretically speaking, it is more accurate to include only the marginal cost of transmission, not the entire rate. However, because transmission rates are FERC-jurisdictional, it is administratively easier to include the full rate in the floor price, as nondiscountable. --

7 Accordingly, it is appropriate to set the marginal generation capacity cost (MGCC) to zero or close to zero. DRA recognizes this reality when it appropriately sets the MGCC to zero for the standard EDR proposed by PG&E. Third, long-run marginal costs set in Phase of the GRC are principally used for revenue allocation. Litigating parties generally focus on the bill impacts for their constituents using various marginal cost assumptions. In principle, the revenue allocation is designed to send average-rate price signals to customers that are assumed to remain in the utility s service territory indefinitely. Part of the motivation for the EDR program stems from the fact that these average-rate prices are too high for customers who, without an electricity discount and other incentives, would either leave the state or not add additional load to California. Thus, it is appropriate to calculate the right discount to retain, attract and expand these customers load using short-run marginal costs, not the long-run marginal costs litigated in Phase of the GRC. Using short-run marginal costs is not without precedent. In D.--01, a decision evaluating earlier economic development programs, the Commission held that the programs must pass a rate impact measure (RIM) test to evaluate and quantify benefits to non-participating customers. The RIM test was part of the standard practice manual tests for cost-effectiveness of energy efficiency programs. The RIM included a forecast of time-of-use marginal energy costs, based on a forecast of heat rates and gas prices, and an ERI adjusted stream of marginal capacity costs. This approach, which used short-run marginal costs, was more appropriate than using long-run marginal costs because the goal was to attract load when short-run costs where low. Another instructive example is D.-0-0, in which the Commission adopted EDRs using a floor price based on the lesser of short-run avoided cost (SRAC) and the PX price. ERI refers to the electricity reliability index, which was a method used prior to deregulation for adjusting long-run marginal capacity costs for short-run excess capacity. The ERI usually was a stream of numbers between 0 and 1 which ramped up to 1 at a point where forecast loads matched forecast resources. SRAC refers to short-run avoided cost, and represented what SCE paid to QFs for short-run energy and capacity. The PX refers to the power exchange and represented market prices at that time. --

8 D. The But-For Affidavit Is Unnecessary For Attraction And Expansion Customers [Questions 1 and 0] DRA advocates for continuation of the requirement that customers sign an affidavit that but for the EDR discount, alone or in combination with other incentives, the load subject to the EDR would not be retained in, attracted to, or expanded in California. While SCE supports ratepayer safeguards against free-ridership in the EDR program, including obtaining CalBIS approval, it proposes that the Commission consider eliminating the onerous affidavit requirement for two of the three types of EDRs attraction and expansion. The main purpose of the affidavit is to ensure that the discount is properly applied to the load subject to the EDR. Because the discount will not apply to expansion or attraction customers until the load actually materializes, these rates are self-policing and do not require additional affidavit verifications. That is, non-participating customers are only impacted to the extent that the load actually grows in, or comes to, California. As described in Section B above, provided that the customer s contribution to margin is positive, non-participating ratepayers will benefit. Thus, there is no need for an affidavit except for retention customers, where the risks of free-ridership are more appropriately mitigated through an affidavit. Limiting the affidavit to retention contracts will simplify the administration of, and aid the marketability of, the EDR program III. CONCLUSION For the reasons stated above, SCE maintains that the Commission should reject the proposal to require shareholder funding for EDRs given to customers who provide a positive contribution to margin, urges the Commission to calculate contribution to margin using the appropriate components, proposes that short-run marginal costs should be applied to any floor price calculation, and recommends that the affidavit requirement be eliminated for all but retention customers. DRA, page -. --

9 Appendix A SCE Witness Qualifications

10 SOUTHERN CALIFORNIA EDISON COMPANY QUALIFICATIONS AND PREPARED TESTIMONY OF RUSSELL D. GARWACKI Q. Please state your name and business address for the record. A. My name is Russell D. Garwacki, and my business address is Walnut Grove Avenue, Rosemead, California. Q. Briefly describe your present responsibilities at the Southern California Edison Company (SCE). A. My current responsibilities include managing the Load Research and Rate Design functions within SCE s Regulatory Operations (RO) department. In that capacity, I have worked on the design of SCE s economic development rate programs. Q. Briefly describe your educational and professional background. A. I received a Bachelor of Arts degree in Economics from Whittier College in 0 and a Master of Arts degree in Economics from Claremont Graduate School in. I have been employed by SCE since. From to, I worked in the load research area of the department formerly known as Regulatory Policy & Affairs (RP&A), ultimately supervising the group. During that time, I gained an understanding of sample design, cost allocation, and other regulatory policies and procedures. In, I joined the Customer Service Business Unit (CSBU) as the Credit Analysis Manager, working to reduce both write-off and credit operational costs. From to, I managed the Measurement and Efficiency group, delivering process improvements for CSBU s Field Services, Credit, Payment, and Customer Communication Center functions. From to 00, I managed various CSBU activities including Job Skills Training, Internet Delivery, Benchmarking, and various technical support functions. In 00, I returned to RP&A (now RO) to assume my current responsibilities. Q. What is the purpose of your testimony in this proceeding? A. The purpose of my testimony in this proceeding is to sponsor the entirety of SCE s rebuttal testimony. A-1

11 Q. Was this material prepared by you or under your supervision? A. Yes, it was. Q. Insofar as this material is factual in nature, do you believe it to be correct? A. Yes, I do. Q. Insofar as this material is in the nature of opinion or judgment, does it represent your best judgment? A. Yes, it does. Q. Does this conclude your qualifications and prepared testimony? A. Yes, it does. A-