How Much Risk is Enough? The Answer Will Shape Billions in Utility Spending (R.26-04-016)

On June 8, parties submitted opening comments in the CPUC's Risk-Based Decision-Making Framework proceeding.

The Risk-Based Decision-Making Framework governs how utilities quantify and propose safety spending in General Rate Cases. R.26-04-016 is the successor docket to R.20-07-013, and picks up a handful of unfinished tasks from that proceeding's final decision (D.25-08-032), including:

• Adopting a formal risk tolerance standard;
• Formalizing additional RAMP review time for the CPUC's Safety Policy Division; and
• Standardizing Benefit-Cost Ratio methodology, including optional Present Value Revenue Requirement treatment.

RISK TOLERANCE

A key dispute is whether the definition of risk tolerance should incorporate affordability. SoCalGas/SDG&E say no and repeatedly answer that affordability is "outside the scope of this proceeding," arguing tolerance must be defined first to protect safety, with cost addressed separately afterward.

On the other side stands a combined advocate-and-industrial bloc: Cal Advocates, TURN, Mussey Grade Road Alliance (MGRA), and EPUC/Indicated Shippers all support incorporating affordability or ratepayer cost tolerance into the framework.

PG&E supports adopting a risk tolerance standard but wants it built through evidentiary hearings, not workshops, citing serious-injury-and-fatality exposure, public safety impacts, and litigation risk. SCE wants the Benefit-Cost Ratio methodology stabilized before risk tolerance is finalized, using two coordinated workshop tracks.

TURN is the most skeptical that an abstract standard can be built at all, warning utilities will drive stated tolerance toward zero because capital grows rate base and profit. TURN invokes Arrow's Impossibility Theorem against any representative-consensus working group and instead favors building on D.25-08-032's budget-constrained portfolios anchored in ESJ affordability.

MGRA supports Commission-led development, wants the Safety Policy Division directed to produce an improved proposal while allowing parties to submit alternatives, and proposes two scope additions:

• The relationship between risk tolerance and risk-aversion scaling functions (which Office of Energy Infrastructure Safety Wildfire Mitigation Plan decisions are already pushing utilities to address collaboratively); and
• Senate Bill 254 integration of the OEIS WMP process into the Risk-Based Decision-Making Framework, including the loss of Commission ratification of WMPs, evidentiary use of OEIS-approved WMPs in General Rate Case proceedings, RAMP/WMP duplication, and intervenor compensation.

MGRA frames at least some of these as potential future-phase items rather than immediate scope.

EPUC/Indicated Shippers support incorporating affordability in the definition but reject a rigid standard, favoring a flexible framework keyed to each utility’s execution history. They demand unscaled, risk-neutral Benefit-Cost Ratios at the Risk Reporting Unit, project and program levels, backed by Risk Spending Accountability Report over/under-spending records and Risk Mitigation Accountability Reports. They also reject the lifestyle-risk benchmark (motor vehicles, drownings, housefires) and instead propose an unscaled Benefit-Cost Ratio of 1.0 or higher as the cost-effectiveness threshold, with a higher baseline for utilities with documented poor execution records.

RISK-SCALING

Cal Advocates targets PG&E's proportional method of distributing risk evenly across a circuit segment, arguing it cannot capture within-segment heterogeneity. Cal Advocates also cites the Safety Policy Division Sempra RAMP finding that SDG&E's scaling did not meaningfully correlate with unscaled risk or unscaled Consequence of Risk Event values and appeared to increase Benefit-Cost Ratio values rather than guide risk-informed prioritization. EPUC/Indicated Shippers independently demand unscaled, risk-neutral Benefit-Cost Ratios.

BENEFIT-COST RATIO & O&M

Most parties support a standard O&M treatment. PG&E and SCE want net O&M in the denominator so all resource costs are measured against risk-reduction benefits, and PG&E expressly rejects SPD's Method 3, which moves O&M savings into the numerator, on grounds it would reward low-risk-reduction, high-savings projects. Cal Advocates argues that avoided O&M belongs in the numerator as a benefit. TURN supports denominator placement with a Present Value Revenue Requirement base and a discount rate consistent with the numerator.

PRESENT VALUE REVENUE REQUIREMENT

SoCalGas/SDG&E argue a PVRR derived from estimates lacks precision because reliable revenue-requirement figures exist only after the General Rate Case Results of Operations model runs, and answer "outside scope" to the PVRR questions.

SCE opposes mandatory PVRR in Benefit-Cost Ratios as a ratemaking question belonging in the General Rate Case. PG&E is more nuanced: it has provided estimated PVRR in its 2027 General Rate Case and supports resolving Benefit-Cost Ratio methodology in this proceeding, but urges caution and framework stability before any further changes.

Cal Advocates wants a standard method developed through an SPD workshop and white paper, with PG&E presenting its CHARGE tool. EPUC/Indicated Shippers call for a 20-year recovery period, Year Zero at in-service date, and discounting at current Weighted Average Cost of Capital on an after-tax basis, applied at the Risk Reporting Unit level for controls and tail risks such as wildfire and dam safety, with program-level application acceptable for other enterprise risks.

INSTANT ANALYSIS

A risk tolerance standard will mean little unless the Commission also decides how much utility discretion remains inside the Benefit-Cost Ratio calculation. SoCalGas/SDG&E would define risk tolerance first and address affordability afterward; Cal Advocates, TURN, MGRA and EPUC/Indicated Shippers say the cost of eliminating risk is part of deciding what residual risk is tolerable. The key test is unscaled, risk-neutral Benefit-Cost Ratio reporting: a mitigation that clears 1.0 only after risk-aversion adjustments is not the same as one that clears 1.0 before utility scaling is applied.

SCE wants Benefit-Cost Ratio methodology stabilized before risk tolerance is finalized. PG&E would put tolerance on a hearing track while moving BCR issues through workshops. The scoping memo will show how much of the parties' competing BCR agenda survives: PG&E and SCE want material BCR issues resolved in this proceeding rather than the SPD-37 undergrounding case; EPUC/Indicated Shippers want unscaled, risk-neutral BCRs at the RRU/project/program level; and Cal Advocates wants PVRR standardized as a fuller measure of ratepayer cost.