UCAN is urging the California Public Utilities Commission (CPUC), to reject SDG&E’s request for a record-breaking $1.2 billion rate hike, and to instead lower the utility’s rates, which are now the highest in California for any investor owned utility. The two briefs are summaries of the 16 months of discovery, expert analysis and evidentiary hearings on SDG&E's massive rate request.
UCAN's brief gives documented examples of “extreme gaming strategies by SDG&E” to manipulate the ratemaking process and trick regulators into giving larger rate increases than are warranted. According to UCAN’s Executive Director, Michael Shames, “SDG&E deserves the Rate Case Chutzpah Prize for seeking the largest revenue increase in its history during the worst recession in living memory. This rate request flaunts a “let them eat cake” attitude that would nauseate Marie Antionette.”
The report argues that SDG&E’s justifications for its rate increase are so unjust that they should be called “unjustifications,” and cites nine slippery budgeting gambits that SDG&E has deployed to make the proposal intentionally difficult to review by CPUC regulators. According to Shames, “SDG&E's filing represents a sophisticated strategy of exploiting the current rate case system."
UCAN's brief is calling for a complete reform of CPUC’s ratemaking process to prevent similar abuses in the future
Overview of SDG&E's budgeting gambits: (get the full report here)
GAMBIT #1: SDG&E has artificially inflated its costs by implementing a 5-year average to conceal true costs and profits. Even though the utility has successfully reduced costs and reaped enormous profits in 2010, it has deployed a five-year averaging scheme to conceal its real cost of doing business from CPUC regulators.
GAMBIT #2: No meaningful analysis of major initiatives. SDG&E has avoided scrutiny of budgets for major projects. The utility has resisted any kind of cost-effectiveness analyses for major initiatives.
GAMBIT #3: Across-the-board budget increases. SDG&E is asking for increases across-the-board rather than in selected accounts, making it difficult for regulators to focus on any one aspect of its operations.
GAMBIT #4: Cloaking massive rate hikes in a hard-to-audit format. SDG&E has intentionally concealed the full scope of its massive increases by offering cursory justifications. The lack of documentation has forced UCAN’s investigators to conduct time-consuming investigations for every account. (UCAN had to pose 72 sets of data requests containing over 5000 questions and, in many cases, never secured complete answers).
GAMBIT #5: Excessive compensation for substandard work. SDG&E has sought incentive ratemaking treatment for performance that is marginally competent. In addition, it has created employee incentive programs that disproportionately award suboptimal performance by utility executives, paying out $35 million more in compensation bonuses than it forecasted in the last rate increase.
GAMBIT #6: Numbers fiddling. SDG&E has manipulated forecast data developed by others in order to achieve outcomes that justify increased rates.
GAMBIT #7: Failure to meet regulatory obligations. SDG&E disregarded commitments made (and directives given) in the previous General Rate Case, by funding projects that it had reason to believe the Commission would not have approved
GAMBIT #8: Intentionally hobbling Smart Grid functionality. SDG&E minimized the capabilities of its new $571 million Smart Grid/Smart Meter system in order to justify another $218 million in additional Smart Grid investments;
GAMBIT #9: Fiscal “Fossilization.” SDG&E has based costs going forward on the premise that all past expenditures are perpetually engraved is stone and cannot be improved.
UCAN's experts found a number of problems in SDG&E's rate application that warrant not a rate increase, but an actual rate decrease. They include:
- inflated costs in almost every operating account, even after having reduced costs and reaped excessive profits in 2010, and relied upon the five-year averaging process to recoup the cost cuts;
- SDG&E resisted any cost-effectiveness analyses for major initiatives;
- It asked for increases across-the-board rather than in a select number of accounts, so as to guard against regulators’ focus on any one aspect of its operations;
- It offered cursory justifications for most of the larger increases, thus requiring an extensive and time-consuming discovery process for every account. (UCAN had to pose 72 sets of data requests containing over 5000 questions and, in many cases, never secured complete answers);
- SDG&E seeks extra profit incentives for performance that is marginally competent;
- SDG&E created employee incentive programs that disproportionately award suboptimal performance and utility executives;
- Its experts manipulated forecast data developed by others in order to achieve more favorable outcomes;
- The utility disregarded commitments made (and directives given) in the previous GRC and used its discretion to fund projects that it had reason to believe the Commission would not have approved;
The brief also identifies a number of important facts that came out in the analysis process that SDG&E did not or could not rebut:
- This case is the first fully litigated SDG&E general rate case since 1984. SDG&E’s operations have not been fully scrutinized by the appointed Commissioners for almost 30 years.
- In the last rate case (settled but contested by UCAN), SDG&E was granted what amounted to an initial 13% increase with very generous attrition increases.
- The result of that last rate case was devastating to San Diego. SDG&E's electric rates jumped well ahead of the other two major utilities in the state: SCE and PG&E. As of 2011, the state indicates SDG&E's residential average rates are 18.4 cents per kWhr with the bulk of the increase has occurring since 2007. During those five years, SDG&E's residential rates increased from 15.6 cents per kWhr to 18.4 cents per kWhr.
- During almost the identical time frame, SDG&E net income/earnings increased by 54%.
- Since 2006, SDG&E has consistently earned returns well above what the Commission has authorized, receiving an above-authorized return in every year, with 2009 reaping an 11.11% return.
- In 2006, SDG&E’s own customer survey data about customer perception of rate fairness indicated that over 50% of customers considered SDG&E’s rates unreasonable. SDG&E ceased collecting customer data about attitude towards rates, credibility or reliability since the beginning of 2008 when rates began their upward trajectory.
- As of SDG&E’s last rate case in 2008, the residential rates for all three utilities were just about the same (15.6 for SDG&E, 15.0 for both SCE and PG&E). The CPUC's own numbers show how SDG&E's system average rates were lower than SCE's in 2002 and 2006 and within one cent (7%) of SCE's system average rates for the period of 2003-2008. Similarly, SDG&E's rates were lower than those of PG&E in 2002, 2003 and 2006 and within one cent (7%) through 2008. Only after the 2008 SDG&E GRC decision did SDG&E's rates jump well above California's other two energy utilities while SDG&E reaped record profits and management bonuses.
- During this same time frame, SDG&E's customers were hit with the most serious economic recession since 1929, the effects of which will be plaguing SDG&E customers for the foreseeable future.
- The utility reorganized yet again (the third time in the last three rate cases), so as to impede analysts’ efforts to track costs effectively. SDG&E has not had a rate case in over 16 years in which its operational budgets were not affected by a reorganization of one kind or another, thus making the tracking of its expenditures exceedingly difficult.
- In 2008 the Peevey-led Commission approved a contested settlement that established the inflated base upon which SDG&E builds its current request. It is a base that has provided almost guaranteed sizeable bonuses for executives. In 2012, SDG&E's projected average bonus paid to its executives will be $140,952, while non-executive employees can expect an average payout of $12,155.
- In addition to this Rate Case revenue increase, SDG&E currently has another $551 million in capital and O&M increases in five other proceedings currently before the Commission. Their rate impacts will compound the increases sought in the current application.
The Commission is expected to issue a decision in the Fall of 2012. There will be opportunities for the public to comment before a final decision is reached. Stay tuned to the UCAN website to learn more about how and when to comment on the final decision