A Study of the Organization and Coordination of Electric Energy Planning and Electric Utility Regulation in California

This scrupulous aversion to imposing the public will on a regulated utility is illogical in a number of respects. First, it appears that, in some areas at least, the major California energy utilities would welcome guidelines and standards of the kind which the commission has been reluctant to provide. In testi- mony before this Commission on May 6, utility witnesses recommended "providing direction as to the types of resources that will be used!! to provide reliable service. In another cited example, PG&E suf- fered a "rather significant disallowance on fuel costs" because they "misread or misinterpreted, or at least didn't understand the guideline that the PUC felt it had spelled out". Throughout the testimony, there are requests for "clarity", adoption of data generated by the Common Forecasting Methodology, and other objec- tive "definables", such as guidelines for a least-cost fuel purchas- ing sequence. Second, the Commission seeks to protect the public interest by evaluating the management of utilities after the fact, but will not prescribe the standards for evaluation beforehand. That is, although they will not set standards for utility performance, there are pro- visions for penalizing the utilities for poor performance in conser- vation, and other areas, in subsequent rate cases. Unfortunately, this reactive approach to exercising regulatory jurisdiction can result in an uncertain environment for the utilities, and deferred benefits to the public. PUC Commissioners Have Insufficient Influence and Involvement in Policy Development Management theory states that organizations generally operate through a "top-down, bottom-up" process: That is, organizational policy and direction is set at the top and flows down. Staff with- -25- in the organization conduct the work which flows back up the organi~ zation to management for approval. On the basis of this classical model, one would presume that the guiding philosophy, the allocation of resources and the determina- tion of the pace and texture of Public Utilities Commission activities would be made by the five commissioners who sit atop the organiza- tional structure. This is not the case. The PUC commissioners are, in many ways, captives of the organization which they ought to con- trol. PUC commissioners were appointed to develop and implement Public Utility Commission policy by shaping and guiding the work of the commission's support staff. In practice, however, the commissioners react -- often quite late in the process and even then, selectively -- to the policy determinations made by the com- mission's staff. Much of the managerial strategy which the Commission applies to its energy responsibilities has been delegated to, or has been assumed by, the Energy Management Committee composed of the Com- mission's division chiefs and General Counsel. This committee meets weekly to review pending cases and issues, determine what information the commissioners need to properly resolve questions before them, and make staff assignments. This function of general management on energy matters ranges from broad strategy to specific cases before the Commission. Minutes of the meetings are circula- ted to Commissioners and their advisors so that, time permitting, commissioners might stay abreast of the priorities and staff alloca- tions that the Energy Management Committee has agreed upon. -26- Once a year, the committee brings before the Commission a list of energy issues that are emerging and will likely appear on their agendas during the succeeding months. The ensuing discus- sion forms the basis for guiding the many interim decisions the committee makes. Even this guidance permits an unusual degree of latitude to staff. "That's where policy is formed, without con- strain ts," said a current commissioner. "Sometimes I feel that the committee is the real Commission." To a large extent, the sheer volume of the workload at the Public Utilities Commission forces the kind of delegation that the PUC commissioners have made to senior staff people. In some in- stances, the assigned commissioner turns a pending matter over to his advisory staff and lets them process the case. Advisors have the time to filter the various information, and act as liaison with the technical staff. In the vast majority of cases, the commis- sioners don't see the matter under consideration until all the evidence is submitted, the ALJ has done the analysis, and the evi- dentiary hearing is closed. As discussed in the previous chapter, the Administrative Law Judges find fact, compile and evaluate testimony, and determine "just and reasonable" conclusions affecting literally billions of dollars of investment. The people who make these decisions are adjudicators by func- tion, but not necessarily by training. They are customarily not policy specialists; moreover, because of the mutiple regulatory responsibilities of the Public Utilities Commission and its Admini- strative Law Division, ALJ's presiding over energy cases are often not energy specialists. Because of the Commission's reliance on an -27- The PUC Does Not Use an Analytical Process for Reviewing Policy President Grimes, in his written testimony presented to the Little Hoover Commission's May 6 hearing, asserts that "PUC's staff members, in making their recommendations in formal (PUC) proceed- ings, often make substantial use of CEC work such as the Biennial Report 0 " However, there is no evidence that a formal process or structure exists at the PUC for reviewing the Biennial Report, the Electricity Report, and other critical policy documents 0 Neither is there a formal review by the PUC of the specific recommendations made in the documents, nor are they acknowledged as foundations for PUC decisions. As one past PUC commissioner told us, "On occasion, the PUC considers the CEC position on energy matters, but, for the most part, establishes its own priorities and emphases. IV Our findings indicate that, while some of the data in the Biennial Report may indeed be useful to PUC staff, any concurrence between the recommendations made to the PUC by its staff and the policy positions of the Biennial Report are incidental rather than causal. Interviews with top staff at the PUC indicate that the Biennial Report is reviewed on an informal basis and "where it has good ideas, our people are stimulated to do that kind of thinking." Other staff persons have indicated that the Energy Commission docu- ments are "widely disseminated here" but there is no indication that the specific recommendations made to the PUC in the Biennial Report, accompanied by their significant body of supportive data, analysis, and rationale, are ever formally presented to, and con- sidered directly by, the Public Utilities Commissioners except through interventions by the Energy Commission in pending cases. Participation by the Energy Commission in PUC cases is useful, but -30- both the mechanics of intervention and the adversary nature of the PUC's hearings create impediments to effective policy making (see below) . In its first report to the Senate Committee, Cresap, McCormick and Paget asserted that new methods for arriving at policy would be needed in order to alleviate some of the costs inherent in using the PUC's adversary process for nearly every assessment of policy. Such new methods, the report concluded, should also draw the commis- sioners' attention more sharply to their policy-making responsibili- ties. Currently, the primary attempt to analyze internally or exter- nally generated policy at the PUC occurs in the Policy and Program Development Division. This division consists of seven professional staff and clerical support. The Division is being revitalized and encouraged to address key issues in the development of PUC policy. Under capable new leadership, the Division may soon organize itself better to "get ahead of the issues", help the Commission coordinate its policy research and analysis, and identify the ramifications of its policy options. As yet, there is no such strategy or program. This is not to say that research and analysis activities are not performed or that select policy issues are not reviewed, and analyzed by the staff; such work is Qeing conducted. However, the Commission's research and analysis of the effect of regulatory policies on the public and on the economy of the State are still limited and fragmented. Further, they tend to arise out of the cases rather than to provide a context for them. -31- Deficiencies in the PUC Intervention Process Although there is no system or process in place to provide a direct route to the Public Utilities commissioners for the Energy Com- mission's recommendations and policy rationale, an indirect route does exist: participation as interveners in the Puhlic Utilities Commis- sion's quasi-judicial and quasi-legislative processes. The earlier referenced Cresap, McCormick & Paget report states that this alterna- tive is an unsatisfactory, inefficient and piecemeal alternative, lacking the ability to inform Public Utilities Commissioners' think- ing on the broader conceptual approaches to energy utility regulation. We do not believe the "intervention process" provides adequate consideration of State energy policy, because it limits the scope of testimony, fails to accord any special consideration to laboriously developed state policy recommendations by the statutorily authorized planning agency, and places the logistical and budgetary burden of participating in the PUC's adversary process squarely on the inter- vening agency. The nature of the adversary process limits the scope of the interveners testimony to the issues presented in the case and to the individual applicant whose petition is being evaluated. The adversary process permits key policy issues presented by the intervener to be prpcedurally sidetracked, or deferred for later consideration, with- out evaluating the intervener's position on the merits.* * r\ prime examplp is thp cuntroversial Energy CnUlmi :-;,sio(1 i ntt.'rvent ion in the PG&E 19~1 rate case. In that intervention, the k,'y c<l"'ponent of the Ener"y Commission testimony was a proposed system of utility mana~ement incentives for developing "preferred resources~" The PUC re.sponse, in its decision on that rate case, was succinct. "Find- Ing 19. A system of management incentives to encoura"e investments into preferred alternative resources and cost-effective "onsprvation programs requires further study." A reasonable question ('xists re"arding whether t1wir linding satisfies the criteria established in PublIC UtilIties Code Section 1705, requiring PUC decisions to contain separately stated, finding,; or r""t and conclusion,; uf law by the Cummission on all Issues material to the urder or de"ision.", and in Supreme Court dicta, as below: "Findings (in PUC decisions) are essential to 'afford a rational basis for judiCIal review and assist the reviewing court to ascertain the prin"iples relied upon by the commiSSIon and to determine whether it acted arbitrarily, as well as assist parties to know why the case was lost and to prepare for rehearing or review, assist others planning activities involving similiar questions, and, serve to help the commission avoid careless or arbitrary action.' (cites omitted)." Calif. Manufacturers Ass'n v. PUb. Util. Comm'n, 24 Cal. 3d 251,258-9, 155 Cal. Rptr. 664 (1979). -- -32- Further, the adversary process does not adapt well to the Energy Commission's responsibilities to make recommendations to the Public Utilities Commission for improving the very process by which rates are determined. It may be persuasively argued that there are types of testimony presented by the Energy Commission to the PUC in the hearing process which should be treated identically with the testimony of any other intervener; that is, subject to the same burden of proof and the same rules of evidence. For example, judgments or interpretations by Energy Commission staff on issues that have not been squarely addressed and adopted by the Energy Commission in the BR, and endorsed by the Governor, carry no special weight and deserve no special treatment. However, to subject oral or documentary testi- mony expressing policy positions and findings of a fundamental nature -- such as those which the Energy Commission is statutorily mandated to produce -- to the same degree of challenge, is to disregard the collective judgment of the many established profes- Sionals in both the public and private sector who participate in the lengthy, complex and extensive BR process. Further, it disa- vows the clear intent and mandate of many sections of the Public Resources Code. We received considerable testimony from the Public Utilities Commission affirming and reaffirming the PUC's interest in receiv- ing Energy Commission testimony, as an intervener, in any matter before the PUC. It is very clear, however, from the testimony and from information collected in our interviews that no special weight or value is given to this testimony, regardless of the means by which the position expressed was determined. As described by -33- President Grimes in his May 6 testimony before the Commission, "they (Energy Commission) come in like any other intervener ... they do not come in with an extraordinary. position, they come in on the same level that the other interveners come into the case. So their burden of proof, if you will, is on them." Unfortunately, the frequency of Energy Commission interven- tion in PUC proceedings -- acknowledged by both President Grimes and Chairman Imbrecht to be the predominant means of introducing Energy Commission recommendations into PUC deliberations -- has declined dramatically. In fiscal year 1982-83, the Energy Com- mission committed a total of 2.9 person years, (.18 percent of their total authorized budget) to efforts directed at implemen- ting CEC recommendations at the PUC, down from 6.3 person years (.4 percent of the total authorized budget) in 1980-81. Energy Commission officials say the number of interventions has fallen due to both budgetary constraints and a conclusion that their efforts were ineffective. Although both President Grimes and Chairman Imbrecht expressed hopes for increased communication in the future, the status quo results in a very constricted flow of input on fundamental energy policy to the PUC from the agency whose responsibility it is to recommend such policy. This, combined with the absence of a COherent, politically endorsed strategy for energy development and regulation generated from within the PUC leaves that organization -- with tools and resources suited to financial analysis, audits, and performance evaluations -- in the position of defining an energy strategy on a case-by-case basis. -34- California State Energy Policy, as Outlined in the Biennial Report and Other Documents Developed by the Energy Commission Lacks Potency Policy· making at the Energy Commission is, in effect, more advisory than conclusive. That Energy Commission policy recommenda- tions lack authority and potency is illustrated by the following testimony presented during our Commission's first hearing: Commissioner Bouskos: I'm curious, State energy to make your where is it? is there an official plan that you look to decisions? If so, President Grimes: Well, the nearest thing to it would be the Biennial Report ... Commissioner Bouskos: Do you use that as your guideline for energy planning in your decision making? President Grimes: It enters into our deliberations in the work that we do now. I think it would be a mischaracterization to say that it is "the" guideline. Despite what may have been the intention of many who sup- ported the creation of a central state agency to comprehensively plan for California's energy future, the Energy Commission's Biennial Report is not a compelling document. The Energy Commis- sion has attempted to develop "a comprehensive report designed to identify emerging trends related to energy supply, demand, and conservation ... and to specify the level of Statewide and service area electrical energy demand for each year in the coming 5, 12, and 20-year periods, and to provide the basis for State policy and actions in relation thereto, including, but not limited to approval of new sites for additional facilities ... " Nevertheless, absence of procedural linkages in the Warren-Alquist Act, the respective Commissions' lack of will to find a "common ground", and institu- -35- tional pride and prejudice on the part of both staffs, have impeded implementation 0 Among the reasons why the Biennial Report has not functioned as the basis for a systematic approach to electric utility regula- tion are some factors intrinsic to the Report itself. First, it suffers technically, and politically, from a lack of active parti- cipation by the PUC in its preparation and in its recommendations. Although the PUC does participate to some extent, their participa- tion is limited by budgetary and personnel constraints. The PUC's enthusiasm for participation is further dampened by a presumption that the Energy Commissioners and Energy Commission staff are not particularly concerned, nor particularly knowledgeable, in the area of rate-making. As one former Public Utilities' commissioner told our consultant, "no one at the Energy Commission understands the utility business." Additionally, there is a sort of obverse concern for efficiency. As one top staff person at the PUC pointed out, there is little justification for the PUC to expend its staff resources on improv- ing Energy Commission planning and analysis, "when we know we're going to do the analysis again, ourselves, in the rate-making process anyway." Yet another rationale for infrequent adoption of Energy Com- mission recommendations is that the recommendations themselves are occasionally obscure. As former Energy Commissioner Gene Varanini told us in his May 6 testimony, the Energy Commission tends to be scrupulously specific when making recommendations to themselves in areas where they have clear regulatory authority. On the other hand, recommendations made to others -- specifically to the PUC, -36- because of the nature of the relationship between those two commis- sions tend to be "softer", so as not to irritate tender insti- tutional sensitivities. Quoting Varanini, "if you can literally figure out what each one of those recommendations (to the PUC) means, more power to you, because they've been massaged to a point that they, ... hopefully, offend no one." Indeed some of the recommendations made to the PUC in recent Biennial Reports are so pedestrian that they would almost certainly have been undertaken by the PUC in the ordinary course of its work, and hardly rise to the level of a recommendation that requires close evaluation and analysis. Among this type are the following: (1) a recommendation to implement the provisions of the Public utilities Regulatory Policy Act (federal legislation stimulating small power producers and requiring utilities to purchase electricity from private developers) to encourage development of alternative resources; and (2) a recommendation to continue to implement policies that facilitate electricity generation by small power producers. Not only are those recommendations so similar as to be reiterations of the same idea, but they are hardly on the cutting edge of policy develop- ment. The lack of specificity in the drafting of such recommendations does not facilitate the development of programs at the PUC to achieve them. Additionally, if the recommendations are vague, it is diffi- cult, if not impossible to measure the progress toward their accom- plishment. Another rationale for the lack of weight which the Biennial Report is given is its lack of political potency and inherent authority. As an independent Commission composed of individuals who represent the public at large, the Energy Commission often -37- suffers the fate of a political orphan outside the hierarchy of government and therefore outside the circle of those who share the authority of the Governor. It appears that even the Governor's approval, conveyed in his endorsement of the Biennial Report, as required by the Nestande amendment, has not effectively earned the Biennial Report and Electricity Report the imprimatur of "State policy." The "Nestande Amendment" to the Warren-Alquist Act (Public Resources Code Sec. 25309.2) requires the Governor to "report .. 0 to the legislature his agreement or disagreement with the policy recommendations contained therein... In the event the Governor disagrees with ... the Biennial Report, he shall indicate the reasons ... and specify the alternate policy he deemed to be his official statement of energy policy." This amendment was an attempt to make plain the Governor's adoption or rejection of the Energy Commission's Biennial Report, in whole or in part, with whatever conditions or comments he might choose to make. By refusing to sign the report, the Governor presumably would deny the recommendations of the Biennial Report the executive endorsement necessary for its adoption as "administration policy.1f Unfortunately, it appears that the converse is not necessarily true. That is, despite the wording of the amendment, the Governor's endorsement has not earned for the Biennial Report the status of official "state policy". The amendment has not forged the link between the Energy Commission and the Chief Executive that would give the Biennial Report the added leverage, weight, and implicit political support that policy statements of executive branch depart- -38 ments have. Rather, it may in fact have produced a double negative for the Energy Commission. First, to the extent that the Governor now has a kind of veto authority over Energy Commission analyses, conclusions, and recom- mendations, the credibility the Energy Commission can claim as an independent policy body is diminished. Secondly, the perfunctory attention which the Report receives in the Governor's office (indeed, the Governor's staff have no independent energy expertise with which to give it more than perfunctory review), and the lack of political advantage which the Governor's signature seems to give the Energy Commission's crown jewel, underscores the uncertain political status of both the Report and the Commission. The Energy Commission Lacks Sufficient Mechanisms to Implement St8.tc Electrical En~rgy Pblicy; The PUC Lacks Sufficient Cbmpulsion to Adopt and Set Timetables for Dnplementat ion of State Energy Policy As discussed above, State energy policy as outlined in the Biennial Report and Electricity Report lacks a statutory mandate for implementation at the PUC. Beyond this, the Energy Commission is unable to effectively implement its policies through its own regulatory mechanisms. (Except for citing utility-proposed power plants, an increasingly infrequent event, the Energy Commission has few opportunities for implementation of its energy plan and policy vis-a-vis the utilities). Consequently, there is no effec- tive means of implementing a comprehensive electrical energy strategy through the regulatory process. -39- This circumstance of having highly regarded analytical work performed, and recommendations prepared, with no statutory or administrative structure in place for implementation, is one of the central issues of this studyo Producing a product for which there is no market, either natural or artifically created, is bad business whether you're in the profit sector or the public sector. Clearly, there is a market for many of the work-products the Energy Commission pro- duces. For example, private industry makes extensive use of the Energy Commission's projections ot fuel prices and assess- ments of electricity demand and supply. Utilities in the North- west and Southwest have used the Electricity Report and key support- ing documents to help them understand the California energy market. Developers of alternative technologies use the ER to assess the market potential of their products. But the assertion that the BR and ER are used by utilities and government agencies as an over- view of State electricity policy is questionable, considering the testimony of the utilities before our Commission. That testimony, in brief, indicated that the State energy policy as outlined in the BR has relatively little impact on them. The only exceptions are those policy statements which are reflected in PUC rate decisions. However, it was the intent of the Warren-Alquist Act to promote the development of a State energy policy, not simply a series of useful data analyses,for which an independent Commission would not be necessary. If the policy positions taken by the Commission are to be adopted and implemented, they must be given greater weight. -40- Because the Warren-Alquist Act did not include integral pro- visions for implementing the recommendations of the Energy Com- mission, the Act created a political and logistical quandry for the Legislature and the Governor. Although there are provisions in the Act that mandate some of the Energy Commission's recommenda- tions on the PUC (load management and energy conservation, for example), the preponderance of the recommendations called for in the Warren-Alquist Act are to be made to the Governor and the Legislature. Presumably, it was believed that the executive and the legislative branches would take up the voluminous and manifest analyses and recommendations taht the Commission produces, and on a regular basis and in a systematic way continually prescribe appropriate governmental activities in response. This has not occurred. However, in addition to the Energy Commission's "recom- mendations to the Governor and the Legislature for administrative and legislative actions based on results of commission's studies and evaluations ... ", the Warren-Alquist Act refers to the Biennial Report as "a comprehensive report designed to identify ... energy supply, demand, and conservation and public health and safety factors, to specify the level of Statewide and service area electrical energy demand ... and to provide the basis for State policy and actions in relations thereto ... " Further, the Act provides that the Report "shall serve as the basis for recommenda- tions by the (Energy) Commission tQ the Governor, the Legislature, and the other appropriate public and private agencies ... " (Empha- sis added). -41- Therefore, although the Legislature did not give away any of its appropriate responsibilities for considering various means of adopting and implementing Energy Commission policy recommendations, it fully acknowledged a direct recommendatory role for the Energy Commission in terms of the actions of other State agencies with energy regulatory responsibilities most notably the Public Utilities Commission. The legislative intent with respect to the findings and recommendations of the Energy Commission must be made explicit. Deficiencies in Electrical Energy Planning and Implementation May Have Resulted in Uncertain and Inconsistent Regulatory Decisions, Higher Long-Term Electricity Costs, and Operating Inefficiencies Existing deficiencies in the electrical energy planning and regulatory system have resulted in inconsistent and uncertain near- term energy planning objectives for utilities which rely upon these objectives as cornerstones of their resource planning activities. Regulatory decisions (as an expression of policy) are unnecessarily unpredictable; many issues are debated and finally decided in the adversarial process that might be resolved more efficiently and more objectively by reference to adaptable standards contained in State policy. Moreover, consumer costs for electricty over the long term may be higher than necessary because the lack of commit- ment to a long-term strategy encourages "penny wise and pound foolish" decisions. Finally, misallocation of PUC personnel resources and confusion of operational priorities increase the overall cost of electricity. Given that the PUC has finite resources to apply to each issue brought before it, the absence of cogent, flexible standards requires time and effort to be spent in each -42- successive case, assessing the policy ramifications of each material issue; time and effort which could otherwise be re-directed to the auditing and accountancy components of rate-application review. Such reassignment of personnel could substantially mitigate the circumstances leading to approval by the PUC of unsupportable addi- tions to a utility's rate base, as cited by the Auditor General in his June 1983 report entitled "The California Public Utilities Commission Needs to Improve Its Rate Review Systems". -43- CHAPTER IV OPPORTUNITIES FOR IMPROVING EFFICIENCIES FINDINGS: Overlap and Duplication Between Energy Commission and PUC Activities Despite the stated intent of the Warren-Alquist Act to Con- solidate the state's authority over energy policy in general and electricity policy in particular, important pieces of the state's policy making for electricity were left fragmented between the two commissions. The utility participants in our study have indicated that there are areas of program duplication between the Energy Commission and the PUC which require redundant and costly responses to data requests, and create the potentiality (indeed likelihood) of conflicting find- ings and requirements. These program overlaps have been the subject of proposed remedial legislation. The most notable bill was SB 1380 (Montoya), which failed passage in the closing hours of the 1982 legislative session. Load management and research and development are program areas "shared" by the two commissions which have been mutually recognized as problem areas. Progress toward an agreement on approaches to research and development priorities has begun. A joint research and development committee has been convened. Although the committee is lacking official sanction, a dialogue has been established to build upon recent PUC decisions which acknowledge the importance of utility resource plans in the development of research and development priorities. Efforts to develop a more efficient approach to utility load management programs dis cussed below, have been initiated in recent months. -44- Although the San Diego Gas and Electric Company was unable to quantify the exact cost to them resulting from dual jurisdic- tion, Pacific Gas and Electric was helpful in that area. PG&E estimates total staff hours expended for required participation in Energy Commission planning and policy-making activities to be about 16,550, at a total cost of about $897,000 for staff, computer time, and consultant expenses. With respect to the PUC's policy- making activities (specifically excluding the general rate cases), PG&E officials testified that 15,000 staff hours are expended annually, at an additional cost of $216,000. San Diego Gas and Electric discussed the nature of duplica- tion. "It is SDG&E's experience that the CPUC energy planning and policy direction is performed independently of the (Energy Commission's) energy planning and policy set forth in the Biennial Report. The CPUC reviews utility plans and sets policy primarily in accordance with determinations from the General Order 131B filings, ratemaking proceedings and certificate proceedings. On occasion, the CPUC considers the (Energy Commission's) position on energy matters, but, for the most part, establishes its own priorities and emphasis." "In addition, the CPUC staff prepares its own energy fore- cast for consideration, despite the availability of the CEC's Biennial Report containing the common forecasting methodology demand forecast which contains a very detailed short and long- term end-use forecast. In other words, despite the fact that the utities and CEC staff have collaborated and expended significant effort in the preparation of a demand forecast, the CPUC prepares its own ·energy forecast for consideration in ratemaking proceedings." -45- Ideally, the information contained in the Biennial Report should yield conclusions regarding utility resource plans and electricity demand. Clearly, the Warren-Alquist Act delegates to the Energy Commission the responsibility for preparing the State's demand forecast. Nonetheless, the CPUC does not appear to rely upon the forecast developed by the Energy Commission. Forecasting As has been mentioned above, the Energy Commission's 5, 12 and 20 year forecasts are central not only to the Biennial Report and its component analyses of what California's energy future looks like, but also for the Energy Commission's power plant siting responsibilities, its responsibility to develop and promote alternative energy resources, and its responsibility to establish conservation standards for buildings and efficiency standards for appliances. Indeed, the entire process of fore- casting, nominally the responsibility of the Assessments Division of the Energy Commission, is so fundamental to the function and purpose of the Energy Commission that it calls upon each of the Energy Commission's divisions for input and, conversely, should be considered critical to the direction, pace, and priority of the work of each of the Energy Commission's divisions. The Public Utilities Commission also maintains an energy forecast function although it is much more limited in its scope and application. As part of every general rate case, the PUC conducts a short-term forecast of sales for the period of the pending rate application. This forecast takes a near-term look at the effects of inflation and weather on sales during the -46- period under consideration to help ensure that the rate of return granted the applicant utility is equitable. If the forecast of sales by the applicant utility is too high, the rate of return established will, when applied to the actual sales, produce insufficient revenues for the utility during the period for which rates are being established. This will require a subsequent off- set proceeding. If the forecast of sales for the period are too low, the rate of return determined to provide equitable return on an investment will generate windfall profits to the utility_ This issue of apparent duplication has been considered by both commissions. Careful comparisons of each commission's respective processes indicate that the Energy Commission's common forecasting methodology, the scope and time horizons employed by the Energy Commission in their "umbrella" forecast, are not well suited to the purpose served by the PUC's narrow and discrete one-year sales forecasts. This however does not exhaust the issues of integration, cost savings, and consistency which relate to the forecasting activities conducted by the two commissions. For example, the PUC has recently completed an extended settlement conference process intended to produce standard offers for long-term contracts for the sale of energy by independent energy producers to California utilities. Government analysts, utility managers and energy economists all agree that independently produced energy will largely supplant new utility-built generating capacity for the foreseeable future. The PUC must ensure California ratepayers that the contracts between independent energy producers and the utilities make electricity available at rates that will -47- be "just and reasonable." The price of energy provided for by these contracts depends in large measure upon forecasted fuel prices, forecasted load growth, forecasted availability of energy purchased by the utilities from sources, and other factors. These issues have been an integral part of the CFM process conducted by the Energy Commission, in which process the viewpoints of most of the parties to the PUC settlement conference were represented. Yet, the production-cost values which were finally adopted for inclusion in the standard offers were not those generated by the Energy Commission's process, but were taken, in some cases, directly from the utilities. Therefore, in a circumstance which seems tailor-made to utilize the comprehensive and analytically based projections of the Energy Commission, the Public Utilities Commission has chosen to adopt energy-rate values submitted by the utilities. There can be scant public policy rationale for such action. To reject, or fail to consider, the Energy Commission's forecasts is demeaning to the process conducted by the Energy Commission (con tribu ted to by the utilities), wasteful of public funds spent in both the Energy Commission and the Public Utilities Commission process, and directly counter-productive to the effort to develop a consistent approach to the evaluation and comparison of various resource mixes in the rate-making process, in the facility siting process, in forecasting energy requirements, and in establishing conservation goals. -48- Load Management Another area of overlap between the two commissions' activities is load management, a term used to describe various means of reducing peak demand for electricity. Because the energy demanded by consumers during this "peaking period" far exceeds the average maximum demand during the rest of the day, expensive generating facilities must be built to satisfy this limited demand~ unless the various activities are undertaken to lower the demand by reducing the total demand throughout the day or by spreading the consumer's use of energy more evenly through the day. There are various incentives and mechanical devices that are used to reduce consumer demand during peak periods and shift that demand for service to off-peak hours. Among these methods are time-of-use rates, which provide incentives to customers to shift their usage patterns by charging lower rates for off-peak use and higher rates for on-peak use, and mechanical devices such as air conditioning cyclers and electric water heater cyclers. Other quasi-contractual approaches are also in place, in which the energy customer agrees to accept curtailment during periods of peak demand in exchange for a reduced energy rate. The Energy Commission is responsible for the development of load management (and other conservation) programs. The general authority to establish cost-effective load management standard is provided in Public Resources Code, Section 25403.5, which states that, "The commission silall... adopt standards by regula- tion for a program of electrical load management for each utility service area ... " -49- Under this broad mandate, the Energy Commission could adopt standards requiring and cefining a wide range of demand reduction programs to be carried out by electric utilities. How- ever, a number of such utility programs already existed, and the Energy Commission chose to adopt standards only for cycling of residential air conditioners and water heaters, swimming pool pumps, and commercial building audits. Each investor-owned utility may thus have a large number of load management programs, some of which are required and regulated according to standards adopted by the Energy Commission, and others which were undertaken by the utility with the initial approval of the Public Utilities Commission. This difference in the origin and source of regulatory approval for various programs has led to conflicting methods and criteria by the two commissions in their reviews of utility load management programs under their respective authorities. Such conflicts have occurred in rate cases where utilities sought PUC approval of funding for load management programs required by the CEC. Section 25403.5 of the Public Resources Code further requires that " ... the standards shall be cost-effective when compared with the costs for new electrical capacity, and that the Energy Commission shall find them to be technologically feasible. Any expense or any capital investment required of a utility by the standards shall be an allowable expense or an allowable item in the utility rate base and shall be treated by the Public Utilities Commission as such in a rate proceeding". The PUC's role, then, is to approve in its general rate cases those investments by the utilities required to conform to the standards established by the Energy Commission. -50- The statutory requirement cited above is customarily ignored. Citing from Gary Cotton's testimony on behalf of SDG&E at our May 6 hearing, "In compliance with California Energy Commission mandated load management standards, SDG&E has expended $4.86 million over the past three years. Expending this money found the development of specific plans to meet the standards and approval of the California Energy Commission. In order to recover through rates the expense of the load management program, SDG&E sought rate relief from the PUC. Despite the fact that the resulting load management programs require CPUC funding approval, the CPUC and the California Energy Commission used different criteria to evaluate the program's effect. As a result, SDG&E encountered resistance and difficulty in receiving adequate and timely rate relief to cover the load management expenditures." Similar testimony was provided by PG&E. "In their response to the California Energy Commission's load management program, the company requested $5 million in 1980 for implementation of the California Energy Commission load management standards. Because of differences of opinion regarding which program should be included within the company's conservation expenditures, the PUC granted only about $4 million. Again in our 1982 general rate case a similar conflict occurred. Under Public Resources Code, Section 25403.5, the company is subject to the CEC load management standards and can receive an exemption from them only on very narrow grounds. However, the company was faced with a situation in which the PUC's staff recommended disallowing the needed funds to carryout the Energy Commission's approved plan." -51- Information taken from consultant's interviews with the Public Utilities Commission's top staff persons indicates that the rationale for the PUC's subsequent independent review of load management programs is their interpretation of the requirement to adopt and approve only those expenditures which are least cost options for the ratepayer. In the view of PUC's staff persons, the cost benefit analyses performed at the Energy Commission to support the load management programs were inadequate, in that they did not account for the benefits to the proper classes of rate- payers. There are indications that the PUC's reevaluation of the Energy Commission's load management work is not simply redundant, but is multiply redundant. In testimony offered by PUC staff to the Energy Commission in the matter of residential load management programs by Pacific Gas & Electric, the PUC staff witness testi- fied not only that the Energy Conservation Branch of the Utilities Division would be making load management recommendations to the Public Utilities Commission which were different than those being made by the Energy Commission, but, in addition, other units in the PUC might be recommending yet other standards to the commis- sioners. It appears, therefore, that despite the wording of 25403.5, load management standards adopted by the Energy Commission continue to be the object of various potentially conflicting recommendations coming from various divisions within the PUC. Such anomalies are costly and confusing, and should be remedied in ways that acknowledge the legislative intent of Public Resources Code Section 25403.5. Subsequent re-analyses -52- of the Energy Commission's standards generate costs that are borne by ratepaye~s, invalidate forecasts of "realistic" conser- vation potential, and further irritate relations between the Commissions. Although there has been no formal action by either of the Commissions and that might point toward a resolution of this problem, there has been some effort in the last year to coordi- nate staff analyses in future rate proceedings. In" February of this year the staffs of the two commissions jointly produced a "Standard Practice for Cost Benefit Analysis of Conservation and Load Management Programs." This standard practice report establishes consistent procedures to be used in calculating cost effectiveness, but leaves open the substantial problem of determining the value to be used in the equations. For example, the report does not address the values that will be inserted for energy or demand, or the discount rate used to determine the present value of cost and savings. (It is worth noting that the Energy Commission proposed using the energy cost forecasts adopted in the CFM process for the energy cost assumptions in the calcula- tions. For reasons discussed in the above section on forecasts, the Energy Commission felt that these estimates, subject to intensive analysis and public inspection, had been validated. The PUC declined.) In September 1983, selected members of the two commissions and their staffs met to establish a joint task force for the pur- pose of coordinating CEC and PUC staff analyses of utility conservation programs. Initially, the task force intends to develop -53- procedures that will result in an integrated analyses for the 1984 general rate case for Southern California Edison Company. In addition, the task force also hopes to establish procedures for developing integrated analyses of utility R&D programs. Nevertheless, despite these efforts, the most recent PUC decision in the SDG&E rate case disapproved all further funding for the utility's swimming pool load management program, a program required by the Energy Commission's standards. As of this writing, the legal dilemma created for the utility by this action had not been resolved. -54-