XII. Reasonableness Review

PG&E requests authority to recover the costs, up to $706 million without further reasonableness review, and to recover recorded costs in excess of that amount if the Commission determines such additional costs to be prudent and reasonable. PG&E represents that its proposal is consistent with the treatment given to power purchase contracts by § 454.5. PG&E contends that the legislative intent of § 454.5 is to provide utilities and their investors with greater certainty of cost recovery.

TURN states that § 454.5 applies to power purchase contracts, subject to a number of conditions, and does not apply to the SGRP because it is not part of an approved procurement plan. TURN further represents that procurement plans are subject to a public solicitation, with the bids reviewed by a review group, and with the list of evaluated bids submitted to the Commission as part of a request for approval. TURN states that this process was not followed for the SGRP, and the spirit of § 454.5 should not be applied to it.

TURN argues that PG&E's contention, that § 463.5 allows the Commission to avoid an after-the-fact reasonableness review if an estimate of reasonable costs has been adopted in advance, does not prohibit the Commission from doing so. TURN recommends that the Commission should conduct a reasonableness review regardless of what the actual costs turn out to be, in order to provide PG&E with an incentive to minimize project costs. TURN also contends that PG&E's proposal to review only costs in excess of its estimate is unworkable because there is no practical way to differentiate costs that are over PG&E's overall cost estimate from those that are below it. ORA recommends that the Commission should not pre-approve PG&E's cost estimate because PG&E's estimate of procurement costs was low, the contingency amount for installation costs was reduced to only 2%, and the 20% contingency in the owner's costs is unsupported. Aglet argues that PG&E's proposal to forego a reasonableness review, if SGRP costs are less than or equal to $706 million, shifts the risks of SGRP costs to ratepayers without a corresponding benefit.

Under PG&E's proposal, if the costs exceed $706 million, the additional costs would be subject to a reasonableness review. To examine this recommendation, assume that the actual costs are one dollar over the $706 million limit, and we want to review it for reasonableness. Before we can assess the reasonableness of the expenditure of that dollar, we have to identify what it was spent on. Therein lies the problem.

A project of this magnitude will have hundreds, and possibly thousands of components that are performed over the life of the SGRP. Some of them will cost more than anticipated, and some will cost less. The total project cost is the sum of the costs of these components. To the extent that the $706 million limit is exceeded, the amount over the limit will be the sum of the excess costs of the components that exceeded the estimated costs, less the sum of the cost reductions due to components that cost less than anticipated. Therefore, any costs over the limit will be a net result of the individual costs of the components. It thus appears unlikely that any costs exceeding the limit will be due to a single component. To complicate matters further, PG&E's estimate is not broken down to a fine level of detailed cost components, and the estimated cost includes significant contingencies. This is to be expected since this is early in the project. However, the result is that a reasonableness review of costs over the limit will likely necessitate a review of most, if not all, of the project costs.

A traditional after-the-fact reasonableness review looks at the decisions and resulting expenditures that were made over the life of the project and assesses their reasonableness. Reasonable costs are those resulting from reasonable decisions made over the life of the project by a person with the appropriate education, training and experience based on information that could and should have been available and considered at the time. A project could be reasonable at the start, and become unreasonable to continue later on. Unreasonable costs could be incurred even though the SGRP itself is reasonable. What we have analyzed herein is whether the project appears reasonable at this time based on the information available at this time. We are dealing with estimated costs rather than recorded costs. Therefore, if the SGRP is completed for $706 million or less, the recorded costs are not necessarily reasonable. Likewise, a higher cost is not necessarily unreasonable.

Based on the above, if SGRP costs do not exceed $706 million, we do not intend at this time to require a reasonableness review. However, if the project costs exceed $706 million, or the Commission later finds that it has reason to believe the project costs may be unreasonable regardless of the amount, the entire project cost will be subject to a reasonableness review. The SGRP includes Unit 1 and Unit 2. Some costs will be attributable to both units. Therefore, to avoid issues related to allocation of costs between the units, we will determine whether a reasonableness review is needed after the SGRP is complete for both units.