I. Introduction

This testimony is presented on behalf of Utility Consumers Action Network (UCAN) by William B. Marcus, Principal Economist of JBS Energy, Inc. Mr. Marcus has appeared before this Commission on many occasions, and has filed testimony or formal comments before about 35 federal, state, provincial, and local courts and regulatory bodies in the U.S. and Canada. Mr. Mr. Marcus' qualifications are included as Attachment A.

Other UCAN testimony in this case is presented by Ms. Gayatri Schilberg. She is UCAN's witness on Critical Peak Pricing rate design policy for SDG&E.

UCAN's testimony in this case presents a critical evaluation of SDG&E's marginal distribution costs and finds that the residential class allocation proposed by SDG&E is $71 million too high. At last count, we found eleven mathematical errors that increased the residential allocation by a net of about $15 million. In addition, SDG&E

• made several conceptual errors that understated marginal distribution demand costs;
• calculated distribution demand and customer O&M using inconsistent annual data to the detriment of the residential class allocation;
• did not properly allocate customer-related O&M costs to classes;
• failed to update its allocation of customer accounting and service costs from 1996 despite burgeoning new programs aimed at industrial meters and customer service (after losing all previous underlying support for its allocation);
• failed to follow a Commission precedent on crediting miscellaneous tariffed service charges against marginal costs (after following this precedent as late as 1999);
• used an outdated calculation of distribution demand costing determinants that overstates the contribution of non-coincident peak, and
• allocated $100 million of public purpose, solar, energy efficiency, demand response, and generation procurement costs by EPMC distribution instead of broader allocation factors.

UCAN's analysis of marginal generation costs exposes an inconsistency in SDG&E's position in two different cases. Like SDG&E's comments in the demand response OIR, UCAN subtracts the excess of market prices above combustion turbine running costs from the capacity value. This change results in a marginal capacity cost of $53.72/kW instead of SDG&E's $76.40. This change actually increases the residential allocation of commodity costs by $2 million but provides more accurate pricing signals for rate design.

UCAN strenuously opposes SDG&E's proposal to increase tier 1 and tier 2 residential rates. UCAN believes that SDG&E's proposal is not only prohibited by AB 1-X but is poor public policy that is likely to increase overall energy consumption, and will either increase the cost of energy efficiency rebates or decrease the effectiveness of energy efficiency programs. In addition, UCAN still finds that, within the residential class (Rates DR and DR-LI) SDG&E's largest users use disproportionately more expensive peak period energy and more coincident peak capacity than smaller customers.

UCAN also opposes SDG&E's reinstitution of a generation commodity demand charge and proposes to otherwise de-emphasize demand charges for commercial/industrialcustomers. Demand charges inhibit the development of distributed generation, and are not cost-based given that the typical commercial/industrial customer's non-coincident demand during on-peak hours has only a weak relationship to coincident peak demand after controlling for on-peak energy use.