7. Assignment of Proceeding

Michael R. Peevey is the assigned Commissioner. On September 21, 2009, this proceeding was reassigned to ALJ Jean Vieth.

Findings of Fact

1. SCE owns a 48% co-tenancy interest in Four Corners through 2016 and its rights and obligations with respect to Four Corners are stated in various agreements referred to collectively herein as the co-tenancy agreements.

2. SCE requested authorization to recover $178,593,000, its share of capital expenditures at Four Corners, as part of its general rate case for test year 2009 (A.07-11-011); that proceeding is now closed.

3. Four Corners makes up approximately 720 MW of SCE's resource portfolio.

4. In addition to currently applicable measures under SB 1368, CARB regulations pertaining to GHG emission limits and emission reductions measures will be operative on January 1, 2012.

5. Determining whether the capital expenditures for Four Corners fall within D.07-01-039's definition of new ownership investment has both policy and factual elements.

6. Given the important role Four Corners Units 4 and 5 have played and currently play in SCE's energy supply portfolio, the long-term contractual commitments SCE has made to its co-tenants under the co-tenancy agreements, and the limited time remaining under the those agreements, it is prudent to allow SCE to recover certain necessary capital expenditures at Four Corners incurred prior to January 1, 2012. This finding applies to SCE's previously requested Four Corners expenditures and any other as yet unapproved Four Corners expenditures incurred prior to January 1, 2012, so long as the total investment before 2012 does not exceed the previously requested amount of $178,593,000. Any actual recovery should be subject to Commission review and approval as further specified in Findings 7 and 8. Should any unanticipated, unforeseen or catastrophic event require SCE to incur expenses beyond $178,593,000, SCE should file a separate application for recovery of such expenses consistent with the requirements of Findings 7 and 8.

7. Recovery in rates is subject to a showing of reasonableness. For discrete investments of less than $1 million, this showing should be sufficient. For capital expenditures of $1 million or more, the reasonableness showing also should establish necessity, as further specified in Finding 8. If a capital expenditure of $1 million or more likely will extend the life of Unit 4 or Unit 5 beyond five years or some additional, five-year increment, SCE also should explain the precise nature and purpose of the physical modification(s) and why the capital expenditure is necessary.

8. SCE's necessity showing pursuant to Finding 7 should address the following issues which the Commission will consider to reach a determination on necessity:

9. SCE has certain legal obligations to its co-tenants but does not appear to lack all recourse to modify those obligations in order to avoid conflict with California law.

10. SCE should conduct a study on the feasibility of continuing to maintain its interest in Four Corners after the end of 2011 and should report on its study and propose a course of action prior to any final determination in the 2012 general rate case on rate recovery for investment at Four Corners described in Finding 6. The study should be used in SCE's showing on and the Commission's determination of the issue listed in Finding 8(c).

11. Since the financial risks have yet to be determined, SCE should not extend any of its existing co-tenancy agreements or enter into any new agreements to expand or extend its ownership interest in Four Corners without first obtaining Commission approval. SCE should explain how any such request is consistent with D.07-01-039.

12. The totality of the circumstances, including SCE's public apology, its recognition of the need for remedial action, and its agreement to undertake such action, support our determination not to open a formal investigation into whether errors and omissions in SCE's petition reach the level of a violation of Rule 1.1 of the Commission's Rules of Practice and Procedure.

13. In the general rate case for test year 2012 that it will file in 2010, SCE should report on the remedial activities undertaken to ensure that its pleadings are complete, accurate, and fully explain the bases for its positions.

Conclusions of Law

1. After January 1, 2012, SCE's ratepayers would be exposed to potential financial risks to bring Four Corners into compliance with the pollution control requirements established by CARB pursuant to AB 32; therefore, approving a wholesale EPS exemption for Four Corners would be unsound, as would approving an EPS exemption for capital expenditures made after January 1, 2012.

2. The Commission has discretion to modify the definition of new ownership investment and with the modification made herein, the framework for review and potential recovery of capital expenditures incurred for Four Corners prior to January 1, 2012, is consistent with SB 1368 and D.07-01-039.

3. Any recovery in rates of capital expenditures for Four Corners incurred prior to January 1, 2012, should be subject to review for reasonableness, as further detailed in the Ordering Paragraphs.

4. SCE's test year 2009 general rate case (A.07-11-011) is closed and should not be reopened to review the reasonableness of the capital expenditures for Four Corners.

5. A fair reading of relevant legal authority supports our determination not to open a formal investigation into whether errors and omissions in SCE's petition reached the level of a violation of Rule 1.1 of the Commission's Rules of Practice and Procedure.

6. SCE has met the requirements of Rule 16.4(d), regarding the timeframe for filing a petition for modification; the petition is properly filed.

ORDER

IT IS ORDERED that:

1. Decision 07-01-039 is modified to allow certain necessary capital expenditures for the period prior to January 1, 2012, for Units 4 and 5 of the Four Corners Generating Station (Four Corners) such that Southern California Edison Company (SCE) may recover a yet to be determined portion of the $178,593,000 capital expenditures and any other Four Corners capital expenditures incurred prior to January 1, 2012, but not previously approved by the California Public Utilities Commission (Commission), so long as the total, pre-2012 investment does not exceed $178,593,000. Any actual recovery shall be subject to Commission review and approval pursuant to subparts (a) through (c) of this Ordering Paragraph. Should any unanticipated, unforeseen, or catastrophic event cause SCE to incur expenses beyond $178,593,000, SCE shall file a separate application for recovery of such expenses, consistent with subparts (a) through (c) of this Ordering Paragraph. All investment at Four Corners incurred prior to January 1, 2012, is subject to the following qualifications:

a. Recovery in rates is subject to a showing of reasonableness in the general rate case for test year 2012 that SCE is required to file in 2010;

b. For each capital expenditure of $1 million or more, SCE's reasonableness showing must establish necessity, consistent with this subpart and subpart (c), below. SCE's necessity showing must identify whether the capital expenditure likely will extend the life of Unit 4 or Unit 5 beyond five years or some additional five-year increment and if such life extension is likely, the showing also must explain the precise nature and purpose of the physical modification(s) and why the capital expenditure is necessary nonetheless; and

c. SCE's showing on necessity must address the following four factors, which the Commission will consider in determining rate recovery: (i) whether the investment is necessary to prevent the risk of an imminent safety hazard or comply with state or federal environmental standards; (ii) whether the investment is necessary to continue basic operation of Unit 4 or Unit 5 within the period of SCE's existing contractual obligations; (iii) 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 and; (iv) the cumulative impact of all Four Corners capital expenditures examined in the 2012 general rate case.

2. Recovery in rates of capital expenditures for Units 4 and 5 of the Four Corners Generating Station forecasted to be incurred beginning January 1, 2012 and thereafter is denied.

3. Southern California Edison Company (SCE) must conduct a study on the feasibility of continuing to maintain its interest in Four Corners Generating Station (Four Corners) after December 31, 2011 and must include a report on its study and a proposed course of action. SCE must submit the study in its 2012 general rate case prior to a final determination on rate recovery for any investment at Four Corners described in Ordering Paragraph 1. SCE may submit the study as part of its necessity showing. The study must include consideration of the following:

a. Estimates of the costs of future investments in Four Corners if SCE were to maintain its interest in Four Corners, including estimates of the costs to bring Four Corners into compliance with the Emission Performance Standard;

b. Costs of greenhouse gas allowances or other greenhouse gas compliance costs beginning January 1, 2012, and thereafter, if SCE were to maintain its interest in Four Corners; and

c. Cost impacts of selling SCE's interest in Four Corners either by December 31, 2011, or in 2016 (the end of the current co-tenancy agreements).

4. Southern California Edison Company (SCE) must 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 approval from this Commission. In making any request for such approval, SCE shall explain how its request is consistent with Decision 07-01-039.

5. Southern California Edison Company must report, in the general rate case for test year 2012 that it will file in 2010, on its remedial activities to ensure that its pleadings are complete, accurate, and fully explain the bases for its positions.

6. The petition to modify Decision 07-01-039 filed by Southern California Edison on January 28, 2008, as subsequently amended, is granted to the extent consistent with this Order and is otherwise denied.

7. Rulemaking 06-04-009 is closed.

This order is effective today.

Dated October 14, 2010, at San Francisco, California.

I reserve the right to file a concurrence.

/s/ TIMOTHY ALAN SIMON

I reserve the right to file a concurrence.

/s/ DIAN M. GRUENEICH

I reserve the right to file a concurrence.

/s/ NANCY E. RYAN

I will file a dissent.

/s/ JOHN A. BOHN

Concurrence of Commissioner Timothy Alan Simon

October 14, 2010 Commission Business Meeting

Item 37, Agenda ID #9734

As we taper our long term financial commitments with coal-fired generation in accordance with SB 1368, it makes sense that we clarify the rules for the reasonableness of projects associated with any remaining tenancy or co-tenancy agreements for such facilities. I fully support this Proposed Decision as it sets boundaries around the types of projects Edison may recover in rates so as to avoid extending the life of Four Corners by five years or more once the Assembly Bill 32 (Pavley/Nuñez) rules are in effect.1

Senate Bill 1368

In an effort to maintain the bright line established by the Emissions Performance Standard, set forth in Senate Bill 1368 (Perata), this Proposed Decision appropriately limits Southern California Edison's requested rate recovery for its ownership of Four Corners generating Units 4 and 5. It is important that we define "new ownership investment" as narrowly as possible in order to prevent the sort of regressive procurement practices that would run afoul of the EPS requirements contemplated in D.07-01-039, thereby derailing progress toward our GHG emissions reduction goals. By making recoverable investments subject to feasibility studies, this decision implements this definition in a manner that prevents unnecessary and avoidable GHG compliance costs for our ratepayers.

The framework provided in this decision for determining the reasonableness and necessity of discrete investments of more than $1 million in SCE's 2012 General Rate Case puts the appropriate regulatory boundaries around their remaining financial interest in Four Corners. Furthermore, I support the four factors delineated by the decision in measuring the "necessity" of such projects, and in particular, whether investments are needed to ensure reliable plant operation and to prevent safety and environmental hazards.2

Finally, it is important to note that the transition to a future in which California eliminates financial interests in generation that exceed the 1100 pounds per Megawatt hour threshold required by SB 1368 must be swift but balanced. When we consider that certain municipal contracts with coal generation will remain in play even as we implement our AB 32 rules, we must be patient and mindful of the costs of this transition to our ratepayers. Thus, we must exercise discretion as we make new investments in cleaner fossil and renewable resources, in addition to our eventual implementation of a 100% auction for GHG emissions allowances. This requires us to achieve the delicate balance of prudency and expediency while complying with our ambitious environmental mandates.

Embracing Forward-looking Technologies to Address Carbon Emissions

Looking forward, carbon sequestration and storage and other crucial clean technologies loom large as critical solutions that we must emphasize in California's post-coal existence. Natural gas and shale exploration, with full environmental review, will continue to sustain us as clean solutions in the green energy economy, and we will need to continue drilling and producing these natural advantages as a path to increased energy independence.

However, we also should continue to make wise investments in the technologies that can help us to leverage cleaner forms of all fossil fuels rather than abandon them unnecessarily. In addition, given that California has negligible coal resources, and those that remain are being retrofitted for cleaner uses. Thus, eliminating coal generation would have no immediate impact on California resource development. However, emerging carbon sequestration and storage technologies could have positive impacts for California ratepayers in the future, and therefore should not be summarily dismissed. This decision highlights the need to expedite research and investment in such technologies.

I appreciate the manner in which this decision resolves some of the challenging issues around the implementation of SB 1368, and look forward to the opportunities that lie ahead in a carbon constrained world.

Dated October 19, 2010, at San Francisco, California.

Concurrence of Commissioner Grueneich

October 14, 2010 Business Meeting, Agenda ID #9734, Item 37

I support the decision because it provides adequate safeguards to ensure that SCE's past and future investments in the four corners power plant comply with senate bill 1368, the greenhouse gas emissions performance standard for baseload generation. Of particular importance is our commitment to review the cumulative impact of all of SCE's investments in determining whether the spirit and the letter of the law has been met, and the requirement that SCE conduct a feasibility study on continuing its ownership interest in four corners.

However, I disagree strongly with the decision not to open an investigation into a potential rule 1.1 violation by SCE. That rule - which is titled "ethics" - requires any person appearing before this commission to never "mislead the commission or its staff by an artifice or false statement of fact or law."

In its petition for modification, SCE made representations regarding the scope of its contractual liability and the nature of its decision-making role under the four corners operating agreement. However, SCE failed to submit the agreement with its petition, even though rule 16.4 requires petitioners to support any factual allegation with specific citations to the record in the proceeding or matters that may be officially noticed.

Upon request of my office, SCE was required to submit the agreements for review. The so-called "new information" lead to the withdrawal of the original decision in this case and the preparation of a new decision based on the "new information".

Let me emphasize that the "new information" SCE submitted was not new; it was information that SCE had in its possession when it prepared and filed its petition for modification, a petition that its attorneys verified. This information showed that SCE had the right to request modification of the operating agreement to reflect changes in California law, including SB 1368, even though SCE claimed in its petition that it had little "discretion or choice" over its financial obligations under the operating agreement. On the facts before us - literally a change in the original proposed decision to a new proposed decision - SCE's statements and omissions were material to the outcome of this case.

Despite these facts, the proposed decision declines to open an investigation because SCE has apologized, submitted its own consultant's report on SCE's actions in this case, and promised to train its employees better. The decision does not even slap SCE on the wrist; instead it praises SCE for hastily conducting its own investigation which concluded that the petition was not misleading.

However, the facts lead to the conclusion that the commission was mislead, since the result was a new decision.

The obligation of the regulated utilities to be truthful is critical to this commission's ability to effectively oversee and regulate the actions of the utilities. In many, many areas of regulation, this commission relies on the self-reporting of the utilities and accords a great deal of discretion to the utilities to comply with our rules. This type of oversight is effective only if we can rely on the utilities to be truthful. And we guarantee truthfulness by sending strong, clear, consistent messages that any form of misrepresentation will not be tolerated.

In this case we have statements that, in SCE's own words, led to "misunderstandings and confusion as to the fundamental bases of the requested relief" and which were material to the outcome of the case. Yet we decline to exercise our jurisdiction to investigate and impose sanctions as appropriate.

I disagree with this course of action.

DISSENT OF COMMISSIONER BOHN ON D.10-10-016

In this decision, the Commission has approved Southern California Edison's (SCE) request to exempt certain expenditures made for the Four Corners coal plant from the statutory prohibition on cost recovery for investments made in relatively highly polluting facilities enacted in AB 1368 and contained in P.U. Code section 8340. AB 1368 specifically precludes this Commission from authorizing recovery of long term financial commitments in baseload power plants that are more polluting than a combined cycle facility. In D.07-01-39, we adopted our rules for implementing AB 1368, indicating that capital investments that extend the life of existing power plants by five or more years are considered new long term investments and are not recoverable under AB 1368. There is no exemption in AB 1368 to grandfather in existing coal plants such as Four Corners.

Despite this prohibition, SCE made continued investments in Four Corners. SCE's testimony in its last general rate case indicates that many of these capital additions were to continue operation of Four Corners beyond 5 years, to at least 2016, the end date of its contractual agreements with its co-owners, and fall outside of the allowance the Commission established in D.07-01-039. SCE stated to the Commission that it had no other option given its contractual agreements with the other co-owners of the facility. In fact, as addressed in this proceeding, SCE's statements were factually incorrect. SCE was not required by existing contractual terms to make these investments. Thus we have had to revisit this issue as to whether these costs can be approved by the Commission.

However, before I address the cost recovery issues, I first must state my concerns with SCE's having provided the Commission with incorrect information regarding their contractual obligations for Four Corners. It is not disputed that SCE did in fact provide the Commission with inaccurate, self-serving information that misled the Commission about the nature of SCE's commitments to fund improvements to the Four Corners plant. I cannot agree with the decision that there is no need for consideration of potential sanctions against SCE for failing to comply with the Commission's rules simply because the correct facts ultimately came to light and SCE belatedly admitted that it had provided misleading information to the Commission.

Returning to the issue of SCE's recovery of over $170 million in new investment in Four Corners, AB 1368 was clear regarding what sorts of long term investments are allowed and which are not. P.U.Code Section 8341(b) (1) states:

The commission shall not approve a long-term financial commitment by an electrical corporation unless any baseload generation supplied under the long-term financial commitment complies with the greenhouse gases emission performance standard established by the commission pursuant to subdivision (d)

It is not disputed that Four Corners provides baseload generation that does not comply with the established greenhouse gas emission performance standard, nor that SCE's over $170 million in expenditures were in part for continuing the long-term operation of the facility, through 2016 and beyond. While I appreciate the conclusion in this decision that the Four Corners plant plays an important role in supplying relatively low cost energy and capacity to SCE's customers, I cannot agree with the decision that this constitutes a basis for non-compliance with the law prohibiting recovery of these investments. If the legislature had wanted to allow continued investment in existing coal plants, it could have exempted them from the prohibitions in AB 1368. It did not. I am simply not convinced that the newly proposed conditions upon which we would allow recovery of these investments are consistent with the law. AB 1368 did not condition the prohibition on long-term investments in this way, nor did it provide the Commission with authorization to create exemptions from AB 1368's requirements.

I appreciate that the decision crafts these new conditions such that they will likely only apply to Four Corners and not create a large loophole allowing continued investment in other highly polluting facilities. However, I believe that underscores the fact that in this decision we are not so much rationally interpreting AB 1368 as we are attempting to create an exemption for Four Corners where none exists in the law.

Dated October 14, 2010 in San Francisco, CA .

/s/ JOHN A. BOHN

John A. Bohn

Commissioner

1 Decision Granting in Part Petition of Southern California Edison Company to Modify Decision 07-01-039, (D.10-10-016), at 5.

2 Id at 18.

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