IV. Cost-Effectiveness Evaluation

In order to determine whether SDG&E should participate in the SGRP, we analyze whether it is cost-effective to do so.

In its cost-effectiveness evaluation, SDG&E calculated the present value of the revenue requirement associated with the total net benefits and costs resulting from the SGRP from October 2009 through October 2022 (NPV). SDG&E utilized three scenarios: the Low Cost Scenario, the Most Likely Cost Scenario, and the High Cost Scenario. The Most Likely Cost Scenario represents SDG&E's estimate of the cost effectiveness of its participation in the SGRP. The other scenarios represent the range of possible outcomes. SDG&E's principal modeling inputs are as follows.

A. Alternative to SONGS

SDG&E assumed that a gas-fired combined cycle combustion turbine (CCCT) power plant would be built as an alternative to SONGS if SDG&E was not to retain its ownership share of SONGS as a result of not participating in the SGRP. The CCCT was assumed to be in operation by January 1, 2012, with power being obtained through a short-term power purchase agreement, at the same price as the CCCT, until it is completed.

B. Discount Rate

SDG&E used a discount rate equal to its most recent 2005 weighted average cost of capital of 8.23%.

C. Escalation Rates

For SONGS and CCCT O&M costs, SDG&E used a 2.75% escalation rate based on the Global Insight Third Quarter 2005 Regional Forecast that used an average of the 2009-2022 Consumer Price Index, Urban Los Angeles.

For SONGS capital additions, SDG&E used the Handy-Whitman Index for Nuclear Capital Costs in the Pacific Region. The escalation rate therein is 2.82% based on the Global Insight 4th Quarter Power Planner.

For CCCT capital additions, SDG&E used the Handy-Whitman Index for Steam Generation Capital Costs in the Pacific Region. The escalation rate therein is 2.45% based on the Global Insight 4th Quarter Power Planner.

D. SGRP Costs

In D.05-12-040, we determined that the reasonable cost of the SGRP is $680 million in 2004 dollars ($569 million for replacement steam generator installation, and $111 million for removal and disposal of the original steam generators) excluding AFUDC. SDG&E's share of this amount is $136 million. For SGRP costs SDG&E used its estimate of its share of the estimate adopted in D.05-12-040 in its Low Cost and Most Likely Cost Scenarios. This estimate is $142 million in 2004 dollars ($117 million for replacement steam generator installation, and $25 million for removal and disposal of the original steam generators), excluding AFUDC. The difference between its estimate and $136 million is caused by its use of current SCE contractual overhead rates and inclusion of SDG&E's own Administrative and General overheads. SDG&E increased this value by 15% for its High Cost Scenario ($163 million).

E. O&M Costs and Routine Capital Additions

SDG&E used the O&M costs and routine capital additions in D.05-12-040 for its Low Cost and Most Likely Cost Scenarios. For the High Cost Scenario, SDG&E increased the O&M and routine capital additions costs by 10.6% and 18% respectively. The increases were based on the differences between SCE's four and five year ahead budgeted amounts and recorded expenditures for 1992-2004.

F. Capacity Factor

SDG&E used the 88% capacity factor adopted in D.05-12-040 for its Low Cost Scenario. It used 85.5% for its Most Likely Cost Scenario based on the average recorded capacity factor for 1994-2004. For its High Cost Scenario, SDG&E used 83% based on recorded capacity factors for 1992-1995 and 2004.

G. Supplemental Power Cost

For its Most Likely Cost and High Cost Scenarios, SDG&E added supplemental power purchased to obtain the amount of energy that would be generated at an 88% capacity factor. This was done so that all three scenarios yielded the same amount of power and were thus comparable. The supplemental power was assumed to be provided by a CCCT identical to that used as the alternative to SONGS.

H. Greenhouse Gas and Nuclear Adders

SDG&E assumed that the green house gas adder (in dollars per kilowatt-hour), that reflects the environmental cost of fossil-fired generation, would be the same as a nuclear adder that reflects the security, safety, public health and environmental risks of nuclear generation. This means that the green house gas adder and the nuclear adder canceled each other out in the cost-effectiveness evaluation.

SDG&E estimated its Nuclear Decommissioning Trust contributions at $12 million per year for 2009-2022.

SDG&E prepared its Most Likely Scenario gas price forecast in a manner consistent with the Market Price Referent gas price forecast methodology adopted in D.05-12-042. The 2006-2011 prices are based on NYMEX Henry Hub and Clearport forecasts. The 2015-2022 prices are based on an average of forecasts from the California Energy Commission's (CEC) Energy Information Administration and private consultants. The prices for 2012-2014 are a blend of the other two forecasts. The Low Cost and High Cost Scenario prices were prepared according to the CEC's "90-10" methodology.3

SDG&E estimated that if it did not participate in the SGRP, it would need additional transmission capacity along with the CCCT. This would be obtained by accelerating the reconductoring of two transmission lines at a cost of $9.9 million ($2006).

3 California Energy Commission "Forms and Instructions for the Electricity Resources and Bulk Transmission Data Submittal" prepared in support of the 2005 Integrated Energy Policy Report, p. 56.

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