12. Project Cost

For projects estimated to cost more than $50 million, Pub. Util. Code § 1005.5(a) directs the Commission to specify a reasonable and prudent maximum project cost. In its July 20, 2009, prepared testimony, SCE forecasted the cost of Alternative 2 to be $137.443 million (in constant 2009 dollars excluding Allowances for Funds Used During Construction (AFUDC)). This is based on direct costs of $97.907 million plus a 30.6% contingency ($29.947 million), plus Pensions & Benefits and Administrative & General costs ($9.589 million). SCE notes that this figure does not take into account costs that may be required due to mitigation not identified at the time or final engineering, and requests the opportunity to update its cost estimate by advice letter once final engineering is complete.

Farm Bureau challenges the reasonableness of SCE's forecast of Alternative 2's costs for its use of a 30.6% contingency. Farm Bureau cites to Tehachapi Renewable, D.09-12-044, which rejects SCE's proposed 35% contingency in that application, and instead adopts a 15% contingency, as follows:

SCE requests contingency costs equal to 32% of total project costs excluding AFUDC, P&B, A&G costs. We believe this is too high for several reasons. First, the Project consists primarily of new transmission and substation facilities. California electric utilities and their construction contractors have extensive experience with this type of project.

In light of the extensive experience of California electric utilities and their industry partners in constructing transmission lines and substations, we are not convinced that a contingency of 32% is reasonable. Generally, by the time an electric utility files an application for authority to construct a power line or substation, the utility should know the final cost of the proposed project to within 15%. This is particularly true for the Project given that it will be constructed largely on existing rights of way. There should be little uncertainty regarding the cost to acquire land and rights of way for the project, and SCE has had access to most or all of route for planning, design, and engineering purposes.

Second, we believe that SCE's contingency of 32% is excessive in the current economic environment. A major purpose of SCE's contingency is to budget for the risk of significant increases in the cost of labor and materials. We believe this risk is small given that the unemployment rate in California is more than 12% and construction activity in the State is at recessionary levels. It is difficult to imagine a credible scenario where the cost of labor and materials increases by 32% over the course of the Project. In our opinion, a contingency of 15% for labor and materials is sufficient under present economic circumstances.

Finally, a contingency of 15% is consistent with Commission precedent. For example, D.08-12-058 adopted a contingency of 18.35% for SDG&E's Sunrise Powerlink Project, D.07-01-040 adopted a contingency of "almost 15%" for SCE's Devers-Palo Verde No. 2 Project, and D.01-12-017 adopted a contingency of 14.6% for PG&E's Northeast San Jose Project.

(Tehachapi Renewable at 70-71, citations omitted.)

Tehachapi Renewable went on to adopt the 15% contingency, but authorized the utility to seek an adjustment of the maximum reasonable and prudent costs once it had developed a final detailed engineering design-based construction estimate for the approved project route. (Id. at 90-91 and Conclusion of Law 26.)

This rationale applies equally to the facts of this application: SCE is experienced in constructing transmission lines and substations, Alternative 2 will be constructed largely on existing rights of way, and California unemployment remains high. For these reasons, we adopt a contingency of 15%, and apply it to the forecasted direct cost of $97.907 million. We adopt as reasonable and prudent a maximum cost of $122.182 million (excluding AFUDC). Once SCE has developed a final detailed engineering design-based construction estimate for Alternative 2, SCE may, within 30 days, file with the Commission an advice letter with the revised cost estimate and seek an adjustment of the maximum reasonable and prudent costs pursuant to § 1005.5(b).