2. Background

2.1. Pacific Gas and Electric Company's Application

In its February 20, 2009 application, Pacific Gas and Electric Company (PG&E) seeks approval of its proposed Fuel Cell Project, which consists of the installation and operation of three utility-owned fuel cell generating facilities with a total capacity of 3.0 megawatts (MW) at two California State University (CSU) campuses - CSU East Bay and San Francisco State University (SF State). Two of the facilities would be located at SF State, namely a 1.4 MW molten carbonate fuel cell and a 200 kW solid oxide fuel cell. CSU East Bay would host a 1.4 MW molten carbonate fuel cell. The molten carbonate fuel cells would be designed to output waste heat to the universities to serve campus thermal load, such as heating the Olympic-sized swimming pool at CSU East Bay, as well as water for landscape irrigation. The plants have an estimated useful life of 10 years.

PG&E claims the project will advance acceptance of fuel cell technologies in California, provide electricity to the grid, and provide fuel cell by-products to the host campuses, namely waste heat to serve campus thermal load and discharged water for landscape irrigation. After selecting sites for the fuel cells, PG&E issued an Request for Proposal to select an engineering, procurement and construction contractor for each site. PG&E plans to coordinate with the two universities to implement educational outreach programs to maximize the educational benefits of the fuel cell facilities. For example, PG&E would install an educational kiosk at each campus, coordinate signage and educational material, help develop class curriculum, host tours of the facilities, and facilitate educational and community outreach. The application describes how CSU East Bay plans to develop multi-disciplinary curriculum and research-based learning opportunities utilizing the fuel cell system, while SF State intends to use the fuel cell project on its campus to enhance its graduate and undergraduate business, engineering, and environmental studies programs in sustainability.

PG&E requests the Commission authorize recovery of $21.5 million in capital costs for the project, as well as recovery of actual operations and maintenance (O&M) costs and fuel costs.1 According to PG&E, the $21.5 million in capital costs includes a confidential contingency factor in the event of scope modifications during the development and engineering of the Fuel Cell Project.2 If actual capital costs exceed $21.5 million, PGE proposes it be allowed to begin recovery of the approved $21.5 million once the Fuel Cell Project becomes operational. PG&E would then file an application for recovery of amounts in excess of $21.5 million, allowing the Commission to determine the reasonableness of those excess costs. If total capital costs are below $21.5 million, PG&E will only recover the actual amount of capital costs, and ratepayers will receive the benefit of the lower cost.

Regarding O&M costs, PGE proposes it be allowed recovery of an estimated $5.79 million in non-fuel O&M for the initial four years of operation. PG&E proposes that it record a total initial revenue requirement of $6.2 million for both capital and O&M costs in its Utility Generation Balancing Account and remain in effect until superseded by rates to be established in a general rate case following commercial operation of the facilities. (Exh. 2, PG&E Supplemental Testimony at 5-2.) PG&E would establish a memorandum account to track actual O&M expenses and file an advice letter each year of operation to collect actual O&M expenses.

The fuel cell facilities will need natural gas as fuel. PG&E proposes fuel costs be recovered through the Energy Resource Recovery Account (ERRA) mechanism following commercial operation of the fuel cells. PG&E's application does not estimate fuel costs for the Fuel Cell Project, but during hearings, PG&E's attorney and witness Mr. Loveless estimated these costs at $1.34 million per year. (Hearing Tr, 12/10/09 at 204:6.)

PG&E proposes that revenues for the fuel cell facilities will be collected in generation rates, and that PG&E would recover any stranded costs associated with the Fuel Cell Project through a non-bypassable charge (NBC) for a 10-year period following commercial operation of the fuel cells, consistent with Commission determinations regarding which customers must pay such costs in Decision (D.) 04-12-048, D.06-06-035 and D.06-11-048.

Protests to PG&E's application were filed by the Commission's Division of Ratepayer Advocates (DRA), The Utility Reform Network (TURN), and jointly by the Western Power Trading Forum and Alliance for Retail Energy Markets (WPTF/AReM). Responses to the application on the issue of stranded cost recovery were filed by the California Clean DG Coalition (CCDC) and jointly by the Merced Irrigation District and Modesto Irrigation District (the Districts). A prehearing conference (PHC) on the PG&E application was held April 27, 2009.

2.2. SCE's Application

SCE's application, filed on April 27, 2009, bears great similarity to the PG&E application in that SCE requests Commission approval to install, own, and operate three fuel cell units with a combined capacity of up to 3.0 MW on three separate California state university campuses. Specifically, SCE proposes two systems of 1 to 1.4 MW each, located at CSU San Bernardino and CSU Long Beach and one 200 kW solid oxide fuel cell at UC Santa Barbara. The two larger systems would demonstrate combined heat and power (CHP, or cogeneration) applications and the smaller, 200 kW system at UC Santa Barbara would demonstrate an electricity-only high efficiency fuel cell where the waste heat is used in the generation process. Similar to the PG&E application, SCE seeks recovery of approximately $21.6 million in capital costs and $89 million in non-fuel O&M costs over the 10-year life of the fuel cells. In contrast to PG&E's application, SCE requests authorization to use $10.8 million in unspent and uncommitted Self-Generation Incentive Program (SGIP) funds to pay for 50 percent of the fuel cell programs capital costs.

SCE's proposed fuel cells would interconnect and operate in parallel with SCE's distribution system. The connection would be on the customer side of the meter so SCE can verify the reliability of the fuel cell operation and examine load characteristics such as local power quality and voltage stability.

SCE proposes to issue a competitive solicitation for engineering, procurement and construction bids to install the fuel cell facilities to be owned by SCE. SCE notes that D.07-12-052 provides for very limited circumstances where utilities can pursue utility-owned generation (UOG) outside of a competitive process. SCE contends that the fuel cells it proposes qualify as preferred resources as they are both distributed generation (DG) and clean fossil fuel generation because the natural gas used to fuel the fuel cells will produce a small amount of carbon dioxide, and there will be only minimal greenhouse gas (GHG) emissions from the fuel cells. Thus, SCE believes that its application falls within the limited circumstances allowed by D.07-12-052 for utility generation outside of a competitive process.

With regard to ratemaking for the project, SCE's requests authorization of $21.6 million in estimated capital costs. As in the PG&E application, SCE's capital cost estimate includes a confidential contingency factor in case of scope modifications during the development and engineering of the program and unique site characteristics that could cause unforeseen costs. Regarding O&M costs, SCE estimates total 10-year non-fuel O&M costs of $8.9 million.3 In addition, SCE explains that on-going costs for the mechanical systems that use waste heat, including back-up thermal systems for use during fuel cell outages, will be borne by the host campuses in exchange for use of the waste heat from the two CHP fuel cell systems.

Also similar to PG&E, SCE proposes a reasonableness review if capital costs or O&M expenses are higher than its estimates. Specifically, if capital costs or O&M expenses are in excess of its estimates in this application, SCE shall file testimony in the annual ERRA reasonableness proceeding to seek recovery of any excess amounts. If capital costs and O&M expenses are less than estimated, SCE shall only recover actual recorded costs from its ratepayers.

A unique feature of SCE's application is its proposal to use a portion of existing uncommitted SGIP funds to "buy-down" 50 percent of the estimated capital costs, or $10.8 million, to reduce initial project costs to a level that approaches market prices. SCE contends its proposal to use SGIP funds, although not expressly allowed by the Commission in D.01-03-073 that established SGIP, is appropriate because of lack of progress in fuel cell development in California.

Another unique feature of SCE's application is its request to diverge from the NBC guidance set by the Commission in prior decisions. SCE proposes that the above-market costs of its Fuel Cell Project be the responsibility of all of SCE's customers, including Direct Access, Departing Load, and Community Choice Aggregation customers. The estimated above-market costs of the annual fuel cell program revenue requirements would be included in the calculation of the vintaged Cost Responsibility Surcharge applicable to Direct Access, Departing Load, and Community Choice Aggregation customers.

SCE's application was protested by the California Energy Storage Alliance (CESA), Debenham Energy, DRA, TURN, and WPTF/AReM. The California Municipal Utilities Association (CMUA) filed a response to the application to provide information and clarify SCE statements in its application regarding cost recovery for the project from certain "departing load" customers.

2.3. Procedural History and Consolidation

Following a motion for consolidation by DRA, the PG&E and SCE applications were consolidated by the Administrative Law Judge (ALJ) at a PHC on June 22, 2009. A scoping memo for the consolidated cases was issued on June 25, 2009.

The scoping memo set forth 6 issues to be examined in the consolidating proceedings as follows:

Hearings on the consolidated applications were held on December 9, 2009 and December 10, 2009. The Energy Producers and Users Coalition (EPUC) was granted party status so that it could file a brief on stranded cost recovery issues. Opening briefs were filed on December 30, 2009 and the case was submitted with the filing of reply briefs on January 13, 2010. Bloom Energy Corporation (Bloom) filed a motion for party status on March 22, 2010 so it could file comments on the proposed decision in these consolidated cases. Bloom's motion was granted on March 29, 2010.

1 PG&E's original application requested $21.3 million in capital costs for 2.9 MW in fuel cell generating capacity. PG&E revised its project to 3.0 MW and $21.5 million in capital costs in its Supplemental Testimony of August 10, 2009 (Exhibit 2).

2 Both PG&E and SCE requested confidential treatment of the contingency percentage in their applications, noting that public release of the contingency rate could compromise utility negotiations with fuel cell vendors. Confidentiality granted by ruling of February 22, 2010.

3 SCE's application does not provide an estimate for fuel costs for the project.

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