XIX. Ratemaking Issues

Edison's application raises numerous ratemaking issues. To begin, Edison requests that the Commission allow it to recover the costs of operating Mountainview through the Energy Resource Recovery Account (ERRA). The ERRA is a Commission-approved balancing account in which Edison records fuel costs relating to Edison-owned generation stations, purchased power costs related to cogeneration and renewable contracts, existing interutility and bilateral contracts, and new procurement related costs that Edison began incurring on January 1, 2003 (D.02-10-062). Edison seeks authorization to recover through the ERRA the costs and incentives it will pay MVL for the operation of Mountainview. These costs include: (1) O&M costs; (2) capital costs; (3) availability incentives; and (4) heat rate incentives.

The PPA, as crafted by Edison, is a tolling agreement whereby Edison has the sole responsibility for gas procurement¹¹ and associated hedging. Edison wishes to recover these fuel costs through the ERRA.

In addition, Edison anticipates that MVL may want to contract with Edison for Edison to perform certain administrative functions. Edison proposes having revenues received by Edison from MVL recorded in a balancing account and subject to review in the ERRA.

Through the ERRA, Edison expects that the Commission can exercise expansive regulatory control over Edison's administration of the PPA by reviewing Edison's activities concerning URG expenses, contract administration, and least-cost dispatch operations. The Commission will review these expenses under a reasonableness review, subject to disallowances. The expenses reviewed by the Commission in the ERRA are not subject to FERC review.

IEP is concerned that there is uncertainty regarding what type of issues will be considered "contract administration," and suggests that this Commission clear up this issue before the PPA is approved. IEP agrees with Edison that use of the ERRA mechanism is a good and appropriate way to create cost recovery certainty for any of the utility's PPAs. However, IEP takes the concept one step further and suggests that the project go forward as a traditional utility project without the complexities of the PPA.

In addition to the ERRA proceeding, Edison proposes that other Mountainview costs be reviewed by the Commission in other proceedings. For example, Edison proposes that the working cash component of the capital recovery charge (CRC) be subtracted from Edison's consolidated working cash requirement as part of the utility's General Rate Case (GRC). In regards to Mountainview, the CRC, as set forth in the PPA, includes return on investment, return of investment, income taxes, and working cash.¹²

Turn's witness testified that this method leads to ratepayer indifference with respect to the PPA calculation, so TURN suggests that the Commission should codify the overall treatment of working cash in this decision.

Edison proposes that buyer overhead costs, including Edison's administrative and general and general plant costs, be included as part of Edison's GRC.

TURN also proposes that Edison be prohibited from collecting option payments made to Sequoia in the event that Mountainview does not receive regulatory approvals or fails to be pursued by Edison. TURN does not approve of having Edison in the position of assuming zero risk and transferring 100% of the risk to Edison ratepayers if the deal fails to be successfully completed.

IEP joins in this recommendation that Edison be precluded from recovering option payments-especially since IEP alleges that Edison attempted to circumvent the procurement process.

With the exception of the option payment recovery proposal, we adopt all of the ratemaking provisions advanced by Edison. We find it is in the interest of the Edison ratepayers to have Edison recover the costs of operating Mountainview through the ERRA; the working cash component of the CRC through the GRC; and overhead costs through the GRC. Through these ERRA and GRC proceedings, which are fully litigated proceedings, we can exercise sufficient regulatory control over Edison's administration of the PPA.

However, we agree with intervenors that allowing Edison to recover the option payments is not in the best interest of the Edison ratepayers. More importantly, this issue should be moot following the Commission's approval of the PPA. When we approve the PPA, or if Edison converts the application to a request for a CPCN, and Mountainview is approved as a utility owned generation facility, the burden then rests squarely on Edison to exercise the option, and ratepayers should bear no risk.