Juice: Reasonable Doubt

By Published On: July 1, 2011

I was a total brat. Mom used to give me the parental equivalent of the California Public Utilities Commission’s “reasonableness review.” If I did something particularly wrongheaded, my allowance was disallowed and punishment wasn’t far behind my behind. After the 2000-01 energy crisis, California regulators allowed utilities new economic leeway that would make Mom “tsk.” The traditional practice of reviewing utilities’ investments as to whether they were “reasonable” became softer and gentler. Like kids these days, utilities are often allowed to make their own rules. Suppose: “If I promise to be in bed by midnight, can I watch HBO I promise I’ll be quiet so you can read.” “Yes dear, but one minute after 12, I’m going to review your TV time.” The CPUC’s reasonableness review was a Baby Boomer tradition. Basically, if regulators believe ratepayer money is spent unwisely, the CPUC calls a utility on the carpet; insisting on hearings. After going over testimony and testi-money, regulators may fine utilities retroactively if they find a problem. That’s known as a disallowance. For instance, three decades ago, Pacific Gas & Electric spent $5.5 billion on the Diablo Canyon nuclear plant. The original estimate of the cost of the facility was about $300 million. Public scrutiny over the spending was intense. Months of reasonableness hearings ensued. Finally, the utility was disallowed $60 million of the $5.5 billion. The next time big spending came around on nuclear power plants--a few years ago--utilities tried a new tack. Utilities basically said, we know the commission doesn’t have the resources to conduct long, technical reasonableness reviews, so tell you what--we’ll give you a set price, if we come in below that price then you can’t review us. If we’re above it, then we’ll be there for the hearings. It’s like offering to go to the store for Mom for $10, when you know what she wants only costs $9. You may not get to keep the change, but she won’t ask embarrassing questions. This happened first with PG&E’s plan to replace Diablo Canyon’s steam generators, followed shortly by Southern California Edison with the same steam generator change-out for San Onofre Nuclear Generating Station. In 2005, the commission allowed PG&E to go ahead without a reasonableness review--if it kept spending under $706 million. For Edison’s San Onofre steam generator replacement, regulators allowed the utility to spend up to $680 million without review. PG&E requested the same treatment for its work to decommission the Humboldt Bay nuclear plant. This time, in 2009, the commission did not approve the deal. Because decommissioning is an ongoing process with the state’s shut down plants (Humboldt and San Onofre unit 1), there was a question that if the cost is set as reasonable the first time around, it would be presumed reasonable in future expenditures. Those expenditures are set every three years. In each case, the commission’s small print noted that it could still insist on a reasonableness review. Just in case. In May 2011, Edison characterized a CPUC proposed decision that plans to transfer the money that it did not use for steam generator replacement to another account, “an improper collateral attack [on the ruling] which approved the reasonableness” of the steam generator spending as approved in the utility’s 2009 general rate case. Edison wants to use the money it did not spend under the $680 million threshold for another project at San Onofre. Edison claims the funds were pre-approved as “reasonable.” With this fuss, the proposed decision’s been held up for months. Nukes aren’t the only regulatory issue treading on reasonableness. With energy efficiency, a different sort of reasonableness from the commission is applied. It’s more like giving a kid a formula. If Janey gets an “A” in energy efficiency, Mom gets a third of the rewards--and on down the report card. If Janey gets an “F” Mommy gets nothing. In this case, Janey is the utility. Mom represents utility shareholders. Energy efficiency reasonableness is subject to a methodologist’s dream of charts, graphs, equations, and assumptions: net-to-gross ratios, effective useful life, energy savings, load-shaping. That methodology is called “evaluation, measurement & verification.” Here, regulators’ theory is if utilities get a carrot for their shareholders, they’ll do a good job in implementing efficiency measures so the ratepayers save money in the long run and the environment is less stressed because less energy is consumed. Utilities’ performance is subject to an objective methodological report card--the evaluation, measurement & verification phase. Sounds simple. It’s not. Stakeholders have taken up scads of commission time, and that of their own experts and lawyers, over almost a decade arguing over the “objective” methodology. They’re still tweaking at it with a decision pending on the commission’s calendar as well as a July 7 workshop on evaluations. What regulators have is supposedly objective and difficult--the methodological approach that’s being tweaked every few months and with which no one is happy. Regulators have subjective and time consuming reasonableness hearings. And in the rare third case, regulators simply have an outside index to judge shareholder bonuses. Natural gas, too, has its incentives. Gas is far more straightforward. If utilities, like SoCal Gas, are able to supply customers for a price under a benchmark, then shareholders reap a reward. The price benchmark is set on an index. If SoCal Gas exceeds savings on procurement by 5 percent or more, shareholders receive a 10 percent reward. The problem here is what index to bless as the arbiter--the subject of current filings at the commission. Does the commission take the subjective reasonableness review path--the rare wrath of sitting in the equivalent of the principal’s office with months of excruciating hearings, or the objective years of figuring out a quasi-scientific method of reasonable utility behavior? There’s a third option: “command and control.” Utilities and many stakeholders rejected that path--too Tiger Mom. The subjective is the way. It can change with the winds of politics, with new commissioners, with new economic and environmental realities. It can be applied or not applied as necessary. It can be completely capricious. Just like Mom.

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