ALJ/JPO/sid Mailed 2/25/2005

Decision 05-02-052 February 24, 2005

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application Pacific Gas and Electric Company (U 39 E) for Authority to Increase Revenue Requirements to Recover the Costs to Replace Steam Generators in Units 1 and 2 of the Diablo Canyon Power Plant.

Application 04-01-009 (Filed January 9, 2004)

Richard W. Raushenbush, Jennifer K. Post, and Sylvia D. Gardner, Attorneys at Law, for Pacific Gas and Electric Company, applicant.

Paul Angelopulo, Attorney at Law, for the Office of Ratepayer Advocates; Clyde S. Murley, Attorney at Law, for San Luis Obispo Mothers for Peace, Greenpeace, Sierra Club, Public Citizen, and Environment California; Matthew Freedman, Attorney at Law, for The Utility Reform Network; James Weil, for the Aglet Consumer Alliance; Alcantar & Kahl, LLP, by Michael Alcantar, Attorney at Law, for the Cogeneration Association of California; Ellison, Schneider & Harris, LLP, by Andrew B. Brown, and Douglas K. Kerner, Attorneys at Law, for the Independent Energy Producers Association; Daniel W. Douglass, Attorney at Law, for the Western Power Trading Forum; Adams, Broadwell, Joseph & Cardozo, by Marc Joseph, Attorney at Law, for the Coalition of California Utility Employees; Scott T. Steffen, Attorney at Law, and Christopher J. Mayer, for the Modesto Irrigation District; Amy Peters and James F. Walsh, for San Diego Gas and Electric Company; James Ross, Attorney at Law, for Midway Sunset Cogeneration Company; Carol A. Schmid-Frazee, Attorney at Law, for Southern California Edison Company; Alcantar & Kahl, LLP , by Nora Sheriff, Attorney at Law, for the Energy Producers and Users Coalition; Karen Tarranova, Attorney at Law, for the Sargent Canyon Cogeneration Company; interested parties.

TABLE OF CONTENTS

Title Page

INTERIM OPINION 2

I. Summary 2

II. Background 4

III. PG&E's Request 5

IV. Need for the SGRP 6

V. PG&E's Cost-Effectiveness Model 8

VI. Model Inputs 11

A. Cost of the SGRP 11

B. O&M Costs 14

C. Capital Additions-General 15

D. Capital Additions-Security Measures 18

E. Capital Additions-Seismic Issues 22

F. Extended Outage 24

G. Capacity Factor 25

H. Replacement Energy Prices 26

I. Degradation and Plugging Assumptions 30

J. Recovery of Capital Costs in the Event of an Early Shutdown 31

K. Discount Rate 33

L. License Recapture 34

M. The Risk of a Nuclear Accident and the Resulting Shared Costs 35

VII. Westinghouse Suit 36

VIII. TURN's Cost-Effectiveness Modeling 39

IX. ORA's Cost-Effectiveness Modeling 40

X. Cost-Effectiveness Conclusion 40

XI. Commission Legal Authority to Approve Rate
Recovery of SGRP Costs 44

XII. Reasonableness Review 45

XIII. Aglet Proposal of Guaranteed Savings. 48

XIV. Ratemaking Treatment 49

XV. Affirmation of Previous ALJ Rulings 51

XVI. Comments on Proposed Decision 54

XVII. Assignment of Proceeding 56

Findings of Fact 56

Conclusions of Law 71

INTERIM ORDER 76

INTERIM OPINION

I. Summary

By this interim order, we present our preliminary findings as to the cost-effectiveness of the steam generator replacement program (SGRP) proposed by Pacific Gas and Electric Company (PG&E) for Diablo Canyon Power Plant Units 1 & 2 (Diablo), and related matters. The review of the SGRP pursuant to the California Environmental Quality Act (CEQA) is currently in progress. We will issue a final decision on the SGRP only after the CEQA review is complete, considering the results thereof.

Based on our analysis of the SGRP as discussed herein, our preliminary determinations are:

· The SGRP is cost-effective.

· $706 million, as adjusted for actual inflation and cost of capital, is a reasonable estimate of the SGRP cost.¹

· We do not intend to conduct an after-the-fact reasonableness review if the SGRP cost does not exceed $706 million, however we are not precluded from doing so.

· If the SGRP cost exceeds $706 million, or the Commission later finds that it has reason to believe the costs may be unreasonable regardless of the amount, the entire SGRP cost will be subject to a reasonableness review.

· The maximum allowable SGRP cost (cap) is $815 million as adjusted for actual inflation and cost of capital.² PG&E will not be allowed to recover SGRP costs in excess of this amount.

· We intend to allow PG&E to record in the Utility Generation Balancing Account (UGBA) the revenue requirement associated with plant additions up to the cap as of the date of operation of each unit.³

· We intend to allow PG&E to include the revenue requirement associated with each unit in rates, up to $326 million for Unit 1 and $380 million for Unit 2 on January 1 of the year following commercial operation of each unit; subject to refund. PG&E will be required to file an advice letter to request authority to implement the above rate increase for each unit. The rate increase shall not take effect until and unless the advice letter is approved by the Commission.

· After completion of the SGRP, PG&E will be required to file an application for inclusion of the costs thereof permanently in rates, regardless of whether the costs exceed $706 million. If a reasonableness review is performed, it will be done in connection with the application.

Regarding the reasonableness review and ratemaking treatment, the above determinations are our preliminary intentions at this time. However, the Commission retains the discretion to require a reasonableness review, or to specify a different ratemaking treatment. In addition, the Commission retains the discretion to determine the appropriate ratemaking treatment, including the possibility of a reasonableness review of costs incurred, if the SGRP is cancelled for any reason.

By this opinion, we do not approve or disapprove the SGRP, guarantee or approve the recovery of any expenditures related thereto, or prejudge the outcome of the Commission's environmental review. We do, however, affirm the rulings of the assigned administrative law judge (ALJ) as discussed herein.