California Adopts Restricted Definition of Fixed Cost

In a proceeding in which it more comprehensively addressed the types of expenses that electric utilities may recover through their fixed customer charges in future rate cases, the California Public Utilities Commission ruled that, with certain exceptions, the fixed charge component of utility rates should include only meter-related capital costs, minimum service drop costs, and final line transformer expenses, as well as so-called "revenue cycle" service costs, which the commission identified as those costs related to account set-up, metering functions, and bill issuance and payment processing. Additionally, the commission told utilities that such calculations should be based on the minimum observed cost for the residential class. 

Besides listing what elements the fixed charge can encompass, the commission also provided specific guidance on what cannot be recognized in the fixed charge. To that end, it ruled that fixed charges may not cover any costs that vary with demand. As a result, the commission held that fixed charges must exclude generation charges, transmission charges, and all nonbypassable charges, such as public purpose program charges. 

The commission also determined that fixed charges should not include an amount representing the equal percentage "scalar" adjustment used to reconcile revenues that would be recovered under marginal cost rate designs with full embedded costs. However, the commission said it may revisit the excluded items in the future for good cause shown. The utilities had advocated for fixed charges that include all marginal customer and capacity costs, plus all other nonmarginal costs incurred in serving customers. But the commission took a contrary view, concluding that fixed costs are defined as ongoing marginal customer costs that do not vary with customer usage. 

The commission explained that including the marginal cost "scalar" adjustment in a fixed charge would distort the rate structure by allocating all nonmarginal distribution costs to the customer function. It elaborated further that there is no separate scaling process that includes customerrelated costs only, because customerrelated distribution costs are not separated from demand-related distribution costs in utility systems of accounts. 

Nevertheless, the commission acknowledged that there was some merit in the utilities' argument in favor of including an expanded definition of distribution fixed costs. As an example, the commission cited to utility poles in residential neighborhoods, which obviously are necessary for the provision of basic service and whose costs do not vary with a customer's demand or usage. 

The commission also noted that as the electricity market continues to evolve to accommodate new opportunities for how customers procure and/or conserve electricity to meet their needs, there will be a need for a mechanism for collecting associated fixed distribution costs. At the same time, though, the commission observed that poles and other "upstream" distribution costs do not fall within a proper definition of fixed costs because they are not customer-specific. 

That is, the commission clarified, it is not enough for fixed costs to be customer-related; they also must be customer-specific (i.e., facilities that serve only one customer or a small group of adjacent customers). The commission added that limiting fixed charges to the recovery of fixed costs (as now defined) will help minimize the regressive impacts that the fixed charge method of collection could have. Re Pacific Gas & Electric Co., Decision 17-09-035, Application 16- 06-013, Sept. 28, 2017 (Cal.P.U.C.).