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PUC Approves Incentive Plan to Determine SDG&E Profit : Energy: In an experimental program to start in 1995, the utility's earnings will be tied to its ability to cut operating costs.

August 04, 1994|MICHAEL PARRISH | TIMES STAFF WRITER

In a significant step to change the way California's electric utilities are regulated, the state Public Utilities Commission on Wednesday approved a plan by San Diego Gas & Electric Co. that will determine the utility's profit by how efficiently it runs its business.

It will be the first such companywide incentive plan in the nation to be applied to an electric utility. It is "the beginning of the end of traditional rate making," SDG&E Chairman and Chief Executive Thomas A. Page said.

Until now, the state's investor-owned utilities have been granted a set return on their investments, which provided little financial incentive to keep costs low.

Beginning in 1995 under the five-year experimental plan, SDG&E's profit will be tied to the company's success in bringing operating costs down--in part, using the national average for electricity costs as a benchmark. SDG&E's power now costs about 30% more than the national average.

Such incentive schemes are also part of the commission's proposal to restructure the electric utility industry in California. In one part of that plan, customers would be allowed to shop for electricity among competing producers. But other areas of operations, including transmission and distribution, would probably remain regulated but use the efficiency incentives to determine profit.

"If the commission hopes eventually to succeed with its major restructuring proposal, this is a crucial first step," said Steven M. Fetter, director of regulatory and governmental affairs at Fitch Investors Service Inc. "It breaks away from the traditional mind-set with regard to rate making," he said.

Industry analysts applauded the move, but several California consumer groups say the plan as structured won't result in lower electric bills.

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Under a major component of the plan, utility shareholders will benefit when the utility can cut costs far enough to add as much as 1% to its return on equity allowed by the PUC. If greater efficiency gains push that to 1.5%, shareholders and ratepayers--in the form of lower power bills--share the increased profit.

"But once you've started sharing 50-50 with the ratepayers, you've lowered the incentive," said Michael Shames, executive director of San Diego-based Utility Consumers Action Network.

Fetter and other industry experts are far more optimistic about lower power rates.

"Most utilities when they're freed up (from traditional regulation) will do better," Fetter said. "They've never had the incentive to run a lean and mean operation."

Southern California Edison Co. and Pacific Gas & Electric Co.--the state's other two big investor-owned utilities--have proposals for similar plans pending before the commission.

"I would expect that within two years, all the utilities will have performance-based rate making in place," said Donald Felsinger, SDG&E executive vice president.

In anticipation, the utility has already begun shrinking the ranks of employees devoted to preparing for rate making under the traditional system. Felsinger estimated that SDG&E has had as many as 200 people at peak periods doing the paperwork necessary for the commission's rate-setting procedures, an effort that will end under the new rules, saving $1 million to $2 million every three years.

The utility also plans to tie part of workers' salaries--from 10% in the lower ranks to 50% for Page--to the company's business performance, rather than using conventional cost-of-living increases.

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