XV. Recovery of Initial Capital Outlay

Edison designed the Mountainview PPA to permit MVL full recovery of its acquisition, construction, and financing costs-subject to various cost-control mechanisms, at a cost of capital authorized by this Commission, through a monthly capital recovery charge. The rate of return for capital recovery is established at the level set by the Commission in Edison's annual Cost of Capital proceeding.

The PPA establishes a sharing mechanism, 50/50 between ratepayers and shareholders, if Edison exceeds the construction cost estimate limit, instead of subjecting the overage to a reasonableness review. IEP opposes this sharing mechanism, and instead suggests that the Commission deny Edison recovery of any costs above the current construction cost estimates. TURN proposes to reduce the projected capital cost limit by 50%. Edison responds to the IEP and TURN proposals by stating that if this was a CPCN proceeding, the cost estimates might even have a higher variability. Edison does not see any justification for modifying the contract to adjust the cost estimates-especially considering the abbreviated option period. We also agree with Edison that imposing a limit with a sharing mechanism for any overruns is a reasonable methodology in lieu of a maximum prudent and reasonable cost level during the CPCN process-unless Edison is moved to follow our suggestion of proceeding by way of a CPCN instead of the PPA.

A review of Edison's testimony shows that out of the total projected costs for the Mountainview project, assuming a closing date of November 30, 2003, only 10% or so of the forecasted expenses contain any degree of uncertainty. Taking as a given that the project is not closing by November 30, 2003, we can increase the degree of uncertainty a little. Edison has asked for a contingency allowance that TURN, as a member of the PRG with access to the confidential financial figures, thinks is too high. Edison has asked for a contingency that equates to a 75% margin of error before the 50/50 cost sharing mechanism is employed.

We do not find that a contingency allowance of this magnitude is in the public interest because it does not encourage Edison to bring the project in at cost, or at the lowest cost overrun. We therefore will reduce the total contingency amount to either 5% of the total project cost estimates, or 50% of the costs projected to be subject to uncertainty, which ever is higher. We do not adopt the 50/50 sharing mechanism.

If there are cost overruns that exceed either contingency allowance, Edison may pass the additional costs on to shareholders, or come to the Commission, on an expedited schedule, and request and justify a higher contingency allowance adjustment.

TURN also suggests levelizing the MVL's capital costs over the first ten years of operation in order to minimize the early-year rate impacts associated with traditional straight line depreciation. While we share TURN, and other intervenors concerns over the costs to ratepayers during the first decade of the contract, the total cost of the Mountainview project, in pro portion to the other costs that go into Edison's ratebase, is relatively insignificant and levelizing them would not have a significant impact on rates.

Edison seeks to recover the financing costs for Mountainview by recording the allowance for funds used during construction (AFUDC) during project planning construction, and then recovering those amounts in rates over the life of the facility. IEP urges the Commission to deny Edison this recovery, but we do not see only justification for this suggestion. It is reasonable to allow Edison recovery of the financing costs of the project and therefore, we will allow Edison to recoup the recorded AFUDC amounts.