IV. Utility-Specific Issues

A. Diablo Canyon Decommissioning Cost Estimate

PG&E's Diablo Canyon decommissioning cost estimate assumes that Diablo Canyon Unit 1 will be shut down in 2021, and Unit 2 shut down in 2025. PG&E estimated decommissioning costs using two methodologies: DECON, which is where radioactive contaminants are removed or decontaminated shortly after cessation of operations; and SAFSTOR. PG&E estimates that the DECON alternative will cost $1.377 billion (in 2002 dollars) over a 20-year period starting in 2021, and that SAFSTOR will cost $1.363 billion (in 2002 dollars) over a 41-year period. In this proceeding, PG&E selected the DECON alternative, which results in removal of the Diablo Canyon units more quickly.

ORA does not oppose the decommissioning cost study upon which PG&E's estimate is based. However, ORA does oppose PG&E's contingency factor, rates of return, escalation rates, and low level radioactive waste (LLRW) burial cost estimates. These issues are addressed later in this decision under Common Issues.

ORA points out that PG&E informed the Nuclear Regulatory Commission (NRC) that it is fully funded regarding the NRC's minimum requirements for decommissioning Diablo Canyon, and needed no further funding at this time. While PG&E admits that it made the statement, it explains that the NRC's minimum requirements include only the costs associated with radiological decommissioning. In addition, the calculation of the decommissioning costs is required to be based on a 1986 cost estimate provided by the NRC. Thus while PG&E says that Diablo Canyon decommissioning is fully funded as far as the NRC's requirements are concerned, PG&E says its estimate in this proceeding is based on a site-specific study that uses current estimated costs, and includes non-radiological decommissioning and site restoration. As a result, the scope of work and, therefore, the resulting decommissioning cost, is significantly greater than required by the NRC.

The NRC's requirements are far more limited than those addressed herein. We find that PG&E's statement to the NRC does not contradict its statements in this proceeding, and has no bearing on this proceeding.

B. Humboldt Decommissioning Costs and O&M Expenses

Humboldt is currently in SAFSTOR mode following its shutdown in 1976. PG&E studied two alternatives: decommissioning starting in 2015, at a cost of $362 million in 2002 dollars; and early decommissioning starting in 2006 at an approximate cost of $300 million in 2002 dollars. PG&E recommends the early decommissioning alternative, which removes non-fuel related radioactive materials, while waiting for the federal Department of Energy to be able to take delivery of spent fuel. Since early decommissioning is less costly, we will adopt PG&E's recommendation.

ORA does not oppose the decommissioning cost study upon which PG&E's estimate is based. However, ORA does oppose PG&E's contingency factor, escalation rates, rates of return, and LLRW burial cost estimates. These issues are addressed later in this decision under Common Issues.

PG&E requests authority to recover the direct costs of its SAFESTOR O&M expenses for Humboldt for 2003 that it estimates to be $8.254 million. It also requests authority to adjust the administrative, general, tax, and allocated common plant amounts in this calculation in its 2003 general rate case. In addition, PG&E requests attrition for its SAFESTOR O&M expenses in the amounts of $218,000 for 2004, and $ 230,000 for 2005. ORA does not oppose these requests. Since the requests are unopposed, we will grant them.

C. Early and Partial Decommissioning of Humboldt

PG&E has already commenced early decommissioning activities at Humboldt. In Resolution E-3503, adopted December 3, 1997, the Commission authorized PG&E to spend $15.7 million on three decommissioning activities: mitigation of caisson in-leakage; removal and replacement of the ventilation stack; and a site radiological survey to support the decommissioning cost study. The Commission also found it reasonable to use the decommissioning trust funds to finance the three projects.

In Advice Letter 2095-E, submitted on March 28, 2001, PG&E requested authority to draw not more than $8.3 million from the Humboldt Bay decommissioning trust funds to finance three additional decommissioning expense categories: $0.95 million for decommissioning costs incurred above the $15.7 million authorized in Resolution E-3503; $3.5 million for additional design and licensing expenditures above the $7 million authorized in Decision (D.) 00-02-046; and $3.85 million for preparatory activities during 2001 through 2003 in anticipation of early transition from SAFESTOR to decontaminated status in 2004. In Resolution E-3737, adopted October 10, 2001, the Commission found it reasonable to use the decommissioning trust funds to finance the proposed projects. The request was approved in part subject to review of the requested expenditures in this proceeding, and subject to refund of any imprudent and unreasonable expenditures. The $3.5 million and $3.85 million requests were approved subject to the above provisions. The $0.95 million request was denied, without prejudice, until reviewed for prudence and reasonableness in this proceeding.

The three projects addressed in Resolution E-3503 were completed. The $0.95 million increase was primarily due to higher-than-expected levels of radiation in the suppression chamber, which required an expansion of the scope of the project, and increased costs for removal of the ventilation stack. ORA does not oppose PG&E's request to use the nuclear decommissioning trust funds to pay the $0.95 million in costs.

PG&E and ORA agree that the $3.5 million and $3.85 million activities authorized in Resolution E-3737 have not been completed. They also agree that the unfinished projects should be reviewed for reasonableness in the next NDCTP, after they have been completed.

Discussion

As recommended by the PG&E and ORA, we find that the $0.95 million expenditure was reasonable, and PG&E should be authorized to use the trust funds to pay for the expenditure. In addition, we find that the unfinished projects should be reviewed for reasonableness in the next NDCTP, after they have been completed.

D. Equity Turnover Assumption

In order to determine the net returns the trust funds will earn each year, it is necessary to make an assumption as to the amount of taxable capital gains that will be realized on equities during the year. This, in turn, necessitates an assumption as to the amount of equities sold each year.

PG&E assumed that 100% of the equities will be sold each year. It says that this assumption was adopted by the Commission in D.00-02-046. PG&E asserts that one cannot accurately predict when a portfolio manager will choose to sell a particular stock and take a capital gain or loss. PG&E's conservative approach is to assume that all of the trusts' equities are sold each year. This results in all of the annual gains or losses being taxed each year. Additionally, taxes are paid annually on all income and interest to the trust.

ORA points out that PG&E's forecast assumes that all trust fund earnings are taxed each year although, in reality, capital gains are only taxed when securities are sold. It argues that PG&E's assumptions ignore the benefits of deferring taxes by holding securities for a longer term. Therefore, PG&E's methodology overestimates actual taxes, causing an underestimation of future fund balances. ORA claims that PG&E's estimates do not accurately reflect how its funds are actually managed and taxed. For example, although PG&E fully taxes the trusts each year in its estimates, there will be no significant withdrawals from the decommissioning funds until 2021 and 2023, which means that, in reality, there will not be any significant capital gains until then. ORA believes that PG&E's approach does not accurately describe how the funds will actually be managed.

Discussion

PG&E's assumption of a 100% annual equity turnover rate is overly conservative. For 1999 through 2002, PG&E's annual equity turnover rate ranged from 18% to 27% for qualified trusts, with an average of 24%.³ For 2000 through 2002, its annual equity turnover rate ranged from 18% to 49% for non-qualified trusts, with an average of 29%. PG&E has given us no reason to believe that future equity turnover rates will be substantially different from the recorded turnover rates. Therefore, we will assume a 24% annual turnover rate for equities in the qualified trusts, and 29% for equities in the non-qualified trusts. For any year in which a higher amount of equities will need to be sold to pay for decommissioning costs, the higher amount should be used.