IX. Cost Recovery Issues Raised by § 399.25
A. Background
SCE states that its request for a CPCN for the Tehachapi-Vincent Transmission Project is conditioned on the establishment of clear cost recovery mechanisms in advance of construction. In 2005, SCE filed a petition with FERC for a declaratory order finding that the costs of Segments 1, 2, and 3 of the Tehachapi Renewable Transmission Project were eligible for recovery in transmission rates.32 In response, FERC provided the cost recovery assurance sought by SCE for Segments 1 and 2, granting rolled in rate-treatment for all prudently incurred costs, regardless of abandonment or cancellation of the project facilities.33 FERC's willingness to authorize cost recovery was based on its view that Segments 1 and 2 are appropriately considered network upgrades and the fact that SCE did not have control over the ultimate materialization of the anticipated future generators. This FERC order significantly limits retail ratepayer risk for Segment 2.
For Segment 3, however, FERC found that it appeared to be a generation-tie facility rather than a network upgrade, and accordingly Segment 3 was not eligible for rolled-in rate treatment under FERC precedent. (SCE Opening Brief, p. 4.)
Following the FERC order, we issued D.06-06-034 finding:
[I]n light of our determination in D.04-06-010 regarding the magnitude and concentration of the renewable resources located in the Tehachapi area...we find that the costs associated with high-voltage, bulk-transfer, multi-user transmission facilities, whether classified as "network" or "gen-tie," proposed to access known, concentrated renewable resource areas...are eligible for cost recovery under § 399.25. (D.06-06-034, mimeo. at p. 23.)
However, we also reiterated our intent in D.06-06-034 to address cost recovery, and the nature of the proposed facilities, on a project-specific basis within the context of a CPCN proceeding.34 As we recognized in D.04-06-010, a project-specific review in the context of a CPCN proceeding is necessary because "[t]he exact nature of the upgrades and the resource potential must still be established to determine if all of the resources can be developed in a way that is cost-competitive, taking into account transmission costs, and that Tehachapi projects are consistent with a best-fit procurement strategy." (D.04-06-010, mimeo., p. 16). Further, we also committed in D.04-06-010, to address Tehachapi upgrade cost recovery here:
...[W]hen a utility files a certificate application for Tehachapi upgrades, we will consider at that time the exact ratemaking treatment contemplated under § 399.25 and will also address project financing, as well as any additions to the record regarding need, as necessary." (Id., p. 18.)
B. Discussion
Section 399.25 (b)(4) ensures retail rate recovery of prudently-incurred costs for projects the Commission finds to be necessary to facilitate RPS compliance, to the extent that cost recovery is not otherwise available. Pursuant to the specific direction of D.04-06-010, the parties submitted briefs on the cost recovery issue in this proceeding. Rather than disputing this project's eligibility for cost recovery, the briefs focus on the appropriate treatment of the project costs if the backstop recovery mechanism is employed. The briefs in this proceeding were submitted after the Commission issued D.06-06-034, and accordingly reflect that Decision, but request some modifications. We reiterate that D.06-06-034 continues to be the controlling decision in this area, and the determinations made in D.06-06-034 regarding implementation of the cost recovery provisions of § 399.25 apply here.
There is no question that the Tehachapi-Vincent Transmission Project qualifies for cost recovery under §399.25(b)(4). As discussed above, D.06-06-034 defined certain types of facilities that would qualify for cost recovery under § 399.25(b)(4), including:
High voltage, bulk-transfer transmission facilities, whether classified as network or gen-tie, that are designed to serve multiple RPS-eligible generators where it has been established that the amount of added transmission capacity will likely be utilized by RPS-eligible generation projects within a reasonable period of time .... (D.06-06-034, mimeo., Finding of Fact 8.)
As set forth in Section III above, we find that the Tehachapi-Vincent Transmission Project is necessary, in part because it qualifies as such a high-voltage, bulk transfer facility that will be used imminently to serve multiple RPS-eligible generators. Consequently, it is appropriate to provide SCE assurance of recovery of prudently incurred costs, and we do so here.
Section 399.25 also requires the Commission to direct "the utility ... to seek the recovery through general transmission rates of the costs associated with the transmission facilities." Therefore, we direct SCE to first seek cost recovery at FERC through general transmission rates, as appropriate and consistent with prior FERC decisions. Further, we reiterate the holding of D.06-06-034: "§ 399.25 is not meant to substitute for the existing cost recovery mechanisms available to support transmission development, nor is it intended to change the ultimate cost responsibility of generators and utility ratepayers." (Id. at p. 28.) "Nothing in this decision is intended to relieve renewable generators from their responsibility for their fair share of the costs of non-network transmission facilities necessary to interconnect the generator with the network." (Id. at Finding of Fact 7.)
We affirm, consistent with D.06-06-034, that, notwithstanding the great likelihood of cost recovery through FERC wholesale rates for Segment 2, it is appropriate for SCE to continue to track its project costs through the memorandum account approved by the Commission in response to SCE Advice Letter 1833-E filed on December 13, 2004. Both the statute and D.06-06-034 anticipate that first FERC would act, and that this Commission would step in only if FERC disallows recovery of some costs. Thus, any consideration of cost recovery by this Commission would only come after FERC had finished its work.
The issues between SCE and DRA, regarding use of the ERRA proceeding to audit accounts and to move costs from the memorandum account to a balancing account, were appropriately resolved in D.06-06-034, which concluded that, to the extent applicable, review or audit of costs should occur in the utility's rate case, and not in the ERRA. We affirm that determination here. Until that time, the costs should remain in the memorandum account.35
Similarly, we find that general ratemaking treatment for this project should also occur in a general rate case, rather than being deferred to a later proceeding incorporating a prudency review.36
32 See Southern California Edison Company Petition for Declaratory Order in FERC Docket No. EL05-80, March 23, 2005.
33 FERC Order on Petition for Declaratory Order, Commission Determination, order F. (112 FERC 61,014) This represents a departure from the conventional rules applied to abandoned plant which limit the utilities ability to recover prudently incurred costs for abandoned or cancelled facilities to 50%.
34 Decision 03-07-033, D.04-06-010 and D.06-06-034 all contemplated that a specific project's eligibility for cost recovery under § 399.25 would be determined within the context of the project's CPCN proceeding. However, where a transmission project does not require a CPCN or Permit to Construct, D.06-06-034 provides a separate process for a need determination to provide assurance of cost recovery. See, e.g., D.06-06-034, mimeo. at pp. 18-20.
35 See D.06-06-034, mimeo. at p. 32.
36 While a prudency review is appropriate, it is a less suitable forum than a general rate case for examining rate design and general cost allocation issues.
