5. Discussion

5.1. Overview: Import of the New Information

How, if at all, should the information that the joint ruling adds to the record affect an assessment of whether the capital expenditures at Four Corners do or do not fall under D.07-01-039's definition of new ownership investment? This question goes to the heart of whether the rationale set out in the September 2, 2008 proposed decision must be revised. We conclude that the new information requires revisions.

SCE contends that the new information does not affect what it characterizes as the September 2, 2008 proposed decision's correct determination that SCE should be authorized to recover all of the approximately $178.6 in capital costs. SCE recognizes that the new information disturbs to some extent that proposed decision's reliance on SCE's contractual obligation to make the capital expenditures. But SCE argues the Commission could have authorized cost recovery solely as a policy matter - and should do so now. SCE presents its policy argument thus: (1) the Commission may exempt Four Corners from the Adopted Interim EPS Rules by finding that none of the capital expenditures are new ownership investment, as that term should be understood, given that all of the expenditures have some reliability purpose; and (2) if the capital expenditures are not new ownership investment, whether or not they are contractually required becomes immaterial. SCE's comments urge the Commission to reach this policy conclusion and to defer determination of the reasonableness and necessity of each of the specific capital expenditures to the 2009 GRC. (At the time SCE filed its comments, the 2009 GRC was still pending).

DRA, NRDC, and WPTF all disagree with SCE. First, they do not share SCE's policy perspective. Unlike SCE, they believe that determining whether the Four Corner's capital expenditures are new ownership investment turns on factual assessments. Their comments set forth several rationales and recommended procedures, some of them overlapping, but they all argue that the Commission needs additional information in order to determine whether the capital expenditures do or do not constitute new ownership investment - and that the new information, together with the existing record, is insufficient to make that determination.

DRA, for example, argues that the SCE must provide more information about the approval process for past capital expenditures, in order to establish the degree to which it has exercised discretion over previous approvals. WPTF contends that the critical information still missing is the long-term viability of Four Corners. DRA and WPTF both agree that SCE should be prohibited from recovering capital expenditures that SCE approved after the Commission adopted D.07-01-039 and prior to the granting of any exemption.

NRDC begins by recognizing that the Four Corners joint ownership contract allows parties to avoid new investments upon change of law and that D.07-01-039 requires LSEs to avoid new ownership investment. NRDC then argues that while SCE must act in good faith with respect to its partners, it also must prove (and has not) that the capital expenditures exclude investments that will extend the life of Units 4 or 5 by five years or more. NRDC argues that SCE still needs to show three things: a more complete description of the nature of the requested expenditures; a comparison of current investments with past ones, to establish that those now pending are not intended to extend plant life beyond five years; and "an analysis of the full costs of continued ownership given the current end-date for the ownership contract and the soon-to-be-instituted GHG emissions limit in California under AB 32."19

Thus, while SCE and the other parties have very different views of the import of the new information, none of them contends that the Commission may adopt the September 2, 2008 proposed decision without change.

5.2. Framework for Determining Recovery of Capital Expenditures at Four Corners

Do the capital expenditures at issue fall within D.07-01-039's definition of new ownership investment and if so, should we modify that definition? Close review of the existing record, including the parties' comments, leads us to conclude that this question has both policy and factual elements. Today's decision resolves the policy aspects and refers the factual determinations to SCE's 2012 general rate case , since the existing record, including the new information, does not permit us to answer the factual questions fully.

We begin by examining SCE's argument that recovery of all of the Four Corners capital expenditures may be authorized as a policy matter, if we simply find that none of them constitutes new ownership investment. SCE's petition also states:

Although D.07-01-039 does not clearly define the concept of life extension, the most reasonable interpretation is that investments trigger the EPS only if they are designed to and intended to extend the life of Four Corners beyond 2016, which is the terminal year of the Four Corners agreements.20

This is the basis for SCE's claim that none of the capital expenditures should be deemed to be new ownership investment. It also is at the core of SCE's contention that we should ask "... not how long any installed equipment included within any particular capital project might be expected to last, but rather whether the project is needed to enable Four Corners to continue reliably operating until 2016."21 SCE points to the prepared testimony (and related workpapers) for its 2009 GRC as well as to a matrix attached to its comments that identifies each capital project for which SCE seeks cost recovery, describes the reason for the project, and summarizes SCE's basis for claiming the project should not be subject to the EPS. For example, the first capital project on the matrix is "HP Turbine & Controls Repl, U 5," which "Replaces & Upgrades Deteriorated Turbine components to sustain plant Reliability for remaining duration of existing contracts governing plant ownership."22 Under the matrix column titled "Basis for EPS Non-Applicability," SCE states:

(1) This project is not designed or intended to extend the life of one or more generating units beyond the remaining duration of existing contracts governing plant ownership. (2) This project does not increase the generator nameplate capacity of the plant/ Project restores and improves Unit MW gross output to approx. 815 MW from prior approx. 795 MW (generators nameplate rating is 818 MW). (3) The plant is already a base load plant. 23

SCE uses very similar, generalized language to describe the "Basis for EPS Non-Applicability" for each project. The matrix lists over 150 separate projects, some 30 of which were identified after the 2009 GRC filing. While SCE stresses the link to reliability, it concedes that some capital expenditures may have dual purposes - not only maintenance, but ensuring that "Four Corners retains some residual value" should SCE subsequently divest its interest.24

It is true that D.07-01-039 distinguishes between major refurbishments, such as repowerings, which it identifies as new ownership investment, and much more limited equipment replacements, which it excludes. As D.07-01-039 explains, the Commission was "... looking for the best and most workable approach to identifying changes in an existing powerplant that would increase the expected level of GHG emissions from the facility over the long-term." 25 Nothing in D.07-01-039 suggests a desire to reduce reliability by requiring the repair of all old parts, rather than replacement. But clearly, the overall objective of establishing the EPS in D.07-01-039 is to focus on

. . . new long-term financial commitments to electrical generating resources that will have major impacts on GHG emissions for many years to come. This enables us to prevent major LSE procurement `backsliding' that will make future GHG reductions more difficult.26

D.07-01-039's summary amplifies upon the need to prevent backsliding, as follows:

If LSEs enter into long-term commitments with high-GHG emitting baseload plants during this transition, California ratepayers will be exposed to the high cost of retrofits (or potentially the need to purchase expensive offsets) under future emission control regulations. They will also be exposed to potential supply disruptions when these high-emitting facilities are taken off line for retrofits, or retired early, in order to comply with future regulations.27

Redefining new ownership investment for Four Corners as broadly as SCE requests is problematic because it turns a blind eye to D.07-01-039's express admonition against backsliding. January 1, 2012, the date that CARB's AB 32 GHG rules will take effect, is fast-approaching. Among other things, questions about the costs for SCE and SCE's ratepayers of the continued operation of Four Corners Units 4 and 5, whether beyond 2012 or beyond 2016, remain unanswered. While we cannot conclude on the present record that approving SCE's request for a wholesale exemption for Four Corners would be sound, a narrower policy exemption, limited to costs authorized under the co-tenancy agreements prior to 2012, does not raise the same concerns. Most critically, expenditures made before CARB's GHG emissions take effect in 2012 will not risk running afoul of the 2012 rules.

Therefore, we find it prudent to allow Four Corners Units 4 and 5 an exemption from the Adopted Interim EPS Rules for capital expenditures prior to January 1, 2012, given the important role the plant has played and currently plays in SCE's energy supply portfolio, the long-term contractual commitments SCE has made to its co-tenants under the current co-tenancy agreements, and the limited time remaining under the those agreements. Accordingly, subject to a showing of reasonableness as further specified below, capital expenditures for Four Corners incurred prior to 2012 should be recoverable in rates. However, rather than distinguishing whether the expenditures are less than or more than $5 million and relying upon an industry standards life assessment examination for the latter group, as the proposed decision recommends, we adopt the more objective, more workable and, in many respects, more rigorous framework proposed in the NRDC/SCE joint comments. For discrete investments of less than $1 million, a reasonableness showing should be sufficient for determination of rate recovery. For capital expenditures of $1 million or more, SCE's reasonableness showing also should establish necessity. This necessity showing should identify whether the expenditure likely will extend the life of Units 4 or 5 beyond five years, ten years, or some additional five-year increment. If life extension by one or more five-year increments is likely, the showing should explain the precise nature and purpose of physical modification(s) and why the expenditure is necessary nonetheless, given the impact on life extension.

SCE's showing on necessity and our consideration of it should examine four factors:

This framework for review and potential rate recovery relies upon several additional principles and elements, some of which are implied above:

We conclude that we cannot treat the period from 2012 through 2016 in the same way, since this four-year period occurs after CARB's AB 32 rules take effect. Accordingly, we should deny SCE's request to recover in rates any capital costs planned for Four Corners Units 4 or 5 in 2012 or later, if the related capital projects will increase the life of the powerplant by five years or more. While we recognize that SCE has certain legal obligations to its co-tenants, SCE does not appear to lack all recourse to modify those obligations in order to avoid conflict with AB 32. Further, as NRDC and other parties point out, as yet we have no record on the comparative costs to SCE and its ratepayers of SCE's various, potential options going forward (retrofit and continued operation, divestment, etc.).

Consequently, SCE should conduct a study on the feasibility of continuing to maintain its interest in Four Corners after the end of 2011. This study should include consideration of the following:

1. Estimated costs of future investments in Four Corners if SCE maintains its interest in the powerplant, including estimated costs to bring Four Corners into compliance with the EPS.

2. Costs of GHG allowances or other GHG compliance costs beginning January 1, 2012, and thereafter, if SCE maintains its interest in Four Corners.

3. Cost impacts of selling SCE's interest in Four Corners either by December 31, 2011, or in 2016, when the present co-tenancy agreements terminate.

SCE should include a report on its study and propose a course of action in its 2012 GRC prior to any final determination on rate recovery for all investment in Four Corners reviewed in the GRC. The study should be used in SCE's showing on and the Commission's determination of necessity, particularly whether, in considering the cost and benefits and the prohibition on long-term investment at Four Corners, the investment is necessary within the period of SCE's existing contractual obligations.

Further, SCE should not extend any of its existing co-tenancy agreements or enter into any new agreements to expand or extend its ownership in Four Corners without first obtaining Commission approval. SCE should explain how any such request is consistent with D.07-01-039.

Granting this narrow policy exemption is consistent with SB 1368. First, as noted elsewhere in today's decision, while SB 1368 defines a number of terms, it does not define the key term at issue here: "new ownership investment." Accordingly, this Commission has discretion to define it in a way that is consistent with SB 1368's policy objectives, even if that involves defining it somewhat differently than we did in D.07-01-039. Because the exemption we are granting here is limited in scope and duration and because we are requiring SCE to undertake a study on the feasibility of continuing its interest in Four Corners after the end of 2011, we conclude that this exemption should not expose California to avoidable GHG compliance costs or future reliability problems. Furthermore, in light of SCE's existing investment in Four Corners, we conclude that the additional investment that may occur as a result of this exemption does not represent "backsliding".

We believe this guidance, as expressed in the Ordering Paragraphs of today's decision, sufficiently modifies D.07-01-039 to provide clarity regarding the scope of the partial exemption for Four Corners. There is no need to revise the generically applicable Adopted Interim EPS Rules to include this narrow, partial exemption for Four Corners.

5.3. Content of SCE's Petition

As noted above, the October 23, 2008 joint ruling requires SCE to explain why the new information was not made a part of its petition. The joint ruling also requires SCE to respond to concerns that the petition as filed is misleading and to address whether the Commission should open an investigation into whether SCE's actions and omissions violated Rule 1.1 of the Commission's Rules of Practice and Procedure.28 SCE's comprehensive response, which includes a report SCE commissioned from outside counsel, concludes that the totality of circumstances do not rise to the level of a violation of Rule 1.1.29

SCE's response concedes that the petition could have been clearer and states that the petition "does not meet the high standards for thoroughness and clarity that SCE sets for itself in our submissions to this Commission."30 SCE adds:

... the Petition could have been more precise and complete in developing and explaining our position ... we do recognize our obligation to be clear and complete in our submittals to the Commission. SCE will take remedial action in light of the MTO finding to ensure that our pleadings are complete, accurate, and fully explain the bases for our positions. We sincerely apologize for the time and effort spent by the Commission to review SCE's Four Corners contractual obligations, and the concerns arising from that review with respect to the Petition.31

On balance, we concur with the assessment of SCE and its outside counsel. We find that assessment to be quite candid in a number of instances - for example, the MTO report, which identifies several problematic statements in the petition and reviews them against legal authority on the nature of a "misleading" statement, acknowledges that several are a close call. Given all of the circumstances here, including SCE's public apology, its recognition of the need for remedial action, and its agreement to undertake such action, we conclude we will not pursue a formal investigation. However, SCE should report on its remedial activities in its forthcoming GRC filing. Among other things, SCE may wish to consult with San Diego Gas & Electric Company (SDG&E), which is preparing a professional responsibility class emphasizing Rule 1.1 as part of a settlement agreement the Commission approved in D.09-07-018.32 The settlement agreement was negotiated to resolve allegations, which SDG&E denied, that SDG&E had committed a Rule 1.1 violation in connection with the Sunrise Powerlink transmission project. Under the terms of the settlement agreement, the professional responsibility class will use a third-party facilitator and will be offered in San Francisco to SDG&E personnel, Commission staff, and outside parties; it also will be offered internally at SDG&E. SCE may wish to explore whether the course could be provided internally at SCE, as well.

5.4. Timeliness of SCE's Petition

Rule 16.4(d) of the Commission's Rules of Practice and Procedure requires that a petition for modification be filed and served within one year of the effective date of the decision proposed to be modified.  If more than one year has elapsed, the petition must also explain why the petition could not have been presented within one year of the effective date of the decision.  If the Commission determines that the late submission has not been justified, it may on that ground issue a summary denial of the petition.

SCE's filed its petition several days beyond the one-year anniversary of D.07-01-039's effective date. SCE's amended petition explains that SCE incorrectly identified the effective date as January 29, 2007 (the date the decision was mailed), rather than January 25, 2007 (the date the decision was filed). As SCE has explained its error and states that is has remedied the defect in its tracking system and because the late filing has caused no harm, the petition is properly filed.

19 Comments of the Natural Resources Defense Council on the Additional Information on Southern California Edison Company's Ownership Interest in the Four corners Generating Plant and Applicability of the Greenhouse Gas Emissions Performance Standard (NRDC Comments) at 4.

20 Comments of Southern California Edison Company on Assigned Commissioner and Administrative Law Judge's Ruling Entering Additional Information into the Record and Seeking Comments (SCE Comments on Joint Ruling), filed November 24, 2008 at 4.

21 SCE Comments on Joint Ruling at 4.

22 SCE Comments on Joint Ruling, Attachment A at 1.

23 Ibid.

24 Amended Petition at 3-4.

25 D.07-01-039 at 52.

26 D.07-01-039 at 35.

27 D.07-01-039 at 3.

28 The joint ruling refers to Rule 1, which predated Rule 1.1; the language of the two does not differ in any material way.

29 Response of Southern California Edison Company to Assigned Commissioner and Administrative Law Judge's Ruling Entering Additional Information Into the Record and Seeking Comments, including Appendix A, Report of Munger, Tolles & Olson LLP Regarding Review of Southern California Edison Company's January 28, 2008 Petition for Modification and Related Submissions in R.06-04-009 (SCE Response/MTO Report), filed November 6, 2008.

30 SCE Response/MTO Report at 2.

31 Id. at 2-3.

32 See Decision Approving Phase 3 Settlement of the Consumer Protection and Safety Division (2009), D.09-07-018, Attachment 1.

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