VIII. Cost Effectiveness

Edison examined different options to determine if it would be better to add a capacity-only resource, or a facility such as Mountainview, capable of providing both capacity and low-cost energy. To approximate the cost of adding a capacity-only resource, Edison used the economic costs and dispatch features of a new, equivalently sized combustion turbine (CT), and compared the costs of Mountainview to a newly-built CT and to the costs the CPA indicates for peakers. Edison also compared the costs of Mountainview to recently installed CCGTs and the estimated costs of a new CCGT installed. In all of Edison's comparisons Mountainview was a proven source of low-cost energy. Mountainview also presents transmission-related locational benefits, gas related locational benefits, and cost savings from self-providing ancillary services.

Edison also asserts that Mountainview will be a low-cost resource as it provides a cost-effective source of energy at a very low state-of-the-art heat rate of 7,100 Btu/kWh. In addition, if Mountainview is acquired now, from Sequoia at the proposed discount price, the benefit to ratepayers is increased. When Mountainview is compared to a new, equivalently sized combustion turbine (CT) facility, ratepayers still benefit from lower energy costs from the lower thermal heat rate of Mountainview.

Additionally, Edison points out that Mountainview is well-situated-in the heart of Edison's growing load center and on the site of Edison's former San Bernardino Generating Station. To begin, its size and location relative to the transmission grid provide system benefits. It will interconnect with Edison's San Bernardino 230 kV substation and provide generation competition in the eastern area of its service territory. Also, the location provides other system benefits such as voltage support, added reactive margin, and reduced system losses. It is also possible, Edison opines, that with the addition of Mountainview, Edison might be able to defer other major transmission grid expansion projects.

Mountainview also has flexible access to the natural gas delivery system. The natural gas fuel supply will be transported to the facility through a new 17.5-mile lateral pipeline to be constructed and owned by SoCalGas. This ensures that the gas supply is reliable, flexible, and competitively priced. In addition, Mountainview will have access to all major western gas basins, can choose among pipelines, and will have access to natural gas storage facilities owned by SoCalGas.

And finally, Edison argues that Mountainview will likely provide cost savings benefits for ratepayers from self-providing ancillary services such as spinning reserve, regulation, and voltage support, and may be able to sell these services to third parties.

In sum, Edison asserts that the proposed PPA will benefit consumers by securing the energy and capacity benefits of a substantial generation resource for Edison's customers at cost-based rates.

TURN is not satisfied with Edison's testimony on cost effectiveness. To begin, TURN contends that Edison's comparisons overstate the attractiveness of Mountainview. Next, TURN's challenges whether the cost estimates reflect reality. The quoted price was premised on Edison exercising its option by November 30, 2003; Edison not using any of the contingency included in the capital cost limit; the total fixed costs are expected to be higher than estimated; and Edison's projections did not include any estimates for capital additions, refurbishments, betterments, decommissioning, or incentive payments. Therefore, TURN urges the Commission to require, before it votes on the application, that Edison compile and present a summary of all cost categories and forecasted amounts for each category year. TURN advocates that this material be presented to Commission staff and Edison's PRG, entered into the record of this proceeding, and appended to the PPA as part of Edison's FERC filing.

TURN also criticizes the cost comparison presented by Edison for any comparable CCGT plant, and for the fact that Edison failed to compare the economics of Mountainview with alternative resource commitments that are available in the market. TURN's analysis of the facility over the 30-year term, indicates that ratepayers suffer higher costs for most of the first decade and net benefits only during the second and third decades of Mountainview's projected life. Still, TURN does support Mountainview-with its proposed conditions.

ORA opposes Edison's proposal on the ground that the Mountainview plant is not cost effective in its first year of operation and will not pass a first year cost effectiveness test until 2009-this contravenes the Commission's policy that consideration of new resource addition should focus on the first year of optimal need. ORA relies on TURN's analysis that Mountainview is not needed until 2008, two years after Mountainview is scheduled to come on line. Therefore, ORA questions the cost effectiveness of the project.

The Navajo Nation criticizes Edison's presentation on cost-effectiveness since Edison did not provide the all-in cost of energy for Mountainview. However, in its Mohave application, Edison did provide the comparative cost of as-delivered energy from Mohave. When the two facilities are compared, the Navajo Nation is sure that the Commission can only conclude that Mohave is more cost-effective than Mountainview, especially when the cost of natural gas is included. Under the PPA, Edison's ratepayers are responsible for paying the full cost of fuel to operate Mountainview, even if fuel is not delivered to Mountainview. Under an arrangement Edison is negotiating with SoCalGas, Edison will pay a 50% reservation charge, whether Edison uses the gas or not. The Navajo Nation opines that the price of natural gas will rise in the future, burdening ratepayers with the entire risk of gas price volatility in the future. Even Edison's witness conceded that as natural gas cost rise, coal-fired generation becomes more cost effective that natural gas-fired units, making Mohave a more cost-effective choice.

CCC alleges that Edison overstated Mountainview's cost-effectiveness as (1) compared with other CCGT plants; (2) in comparison to prices for QF contracts; and (3) in comparison with incremental renewable resources. In summary, CCC argues that other sources may produce more cost-effective options than Mountainview, but if Mountainview is approved, the development of coherent long-term procurement policies and investment in generation resources would be undermined.

We agree with TURN that Edison did not make an adequate showing on the cost-effectiveness of Mountainview and adopt TURN's proposal to require Edison to compile a summary of all cost categories and forecasted amounts that would be recoverable from ratepayers for Mountainview. The material will be presented to Commission staff and the Edison's PRG, entered into the record of the proceeding, and appended to the PPA as part of Edison's FERC filing.

In the absence of this information we can still make a finding that Mountainview is cost-effective because it is a new state-of-the-art high efficiency, low heat rate combined combustion facility that will produce energy efficiently, especially when it is compared with CT and other CCGTs. We do not need to address the merits of Mohave, and how it compares as a coal-burning facility to determine that Mountainview is cost effective.