Eligible Costs and Cost Cap

The ALJ Ruling requested that parties comment on what types of costs incurred prior to permitting or certification should be eligible for approval of cost recovery pursuant to Section 399.2.5(c)(2), and what types costs should not be eligible. Further, the ruling asked whether the Commission should place limits on the amount of pre-permitting and pre-certification costs for which recovery is sought.

PG&E and SCE provide similar comments that the Commission should provide up-front assurance that it will allow recovery of any reasonable and prudent cost incurred prior to obtaining a permit or certificate, even if the studies or permit process result in a determination that the project should not be constructed. They provide examples of these costs as including, but not limited to, pre-construction development costs, pre-siting planning and feasibility studies, preparation of permit applications, environmental and engineering studies, programmatic mitigation efforts, and public or agency outreach. SDG&E echoes these comments, adding that costs might include public outreach and media, California Environmental Quality Act, environmental and engineering studies, abandoned facilities, applicable overheads and consultant expenses. SDG&E adds that all costs for pre-permitting and pre-construction activities for eligible facilities not otherwise recoverable through FERC-jurisdictional transmission rates should be considered in the advice letter and tracked in a memorandum account pending final recovery.

In contrast to the utilities, DRA suggests limits on the cost eligible for recovery. While DRA generally agrees with PG&E's list of eligible costs, DRA proposes that costs should be limited to direct, project-specific costs for items such as feasibility studies, legal and consulting services, and project engineering incurred prior to permitting or certification. DRA contends costs should not include construction and capital costs, or costs for long lead time equipment and abandoned plant. According to DRA, construction costs, either capital or expense, should not be eligible for recovery pursuant to Section 399.2.5(c)(2) because these costs should be included in the cost estimate contained in the utility's application for a CPCN or Permit to Construct (PTC) for the project. DRA maintains that once a utility files a CPCN or PTC application, the period defined as "prior to permitting or certification" is closed, and any costs incurred after an application is filed should be covered by the cost estimate for the project in the application or by regulatory expenses in the utility's generate rate case. Moreover, DRA states that construction and capital costs are eligible for backstop cost recovery to the extent they are not recoverable through FERC jurisdictional rates, through the provisions of Section 399.2.5(b)(4).

PG&E and SDG&E disagree with the limits proposed by DRA, stating that DRA's proposal runs counter to the statute's intent to facilitate the achievement of RPS goals. PG&E contends that costs incurred prior to permitting or certification are subject to uncertainty, can be substantial, and there is no basis to disallow their recovery simply because an application has been filed.

The parties have provided useful and informative comments on eligible costs. We will specify that for purposes of advice letters under Section 399.2.5.(c)(2), pre-permitting and pre-certification costs shall be defined as costs incurred before any application related to the transmission project is disposed of, whether through a Commission decision approving or denying the line, utility withdrawal of the application, or another action. This will allow recovery of costs that may be incurred even after an application for a CPCN or PTC has been filed. Further, we will allow recovery of costs even if the project is not ultimately approved. We also clarify that only those costs that are not already accounted for in a FERC transmission rate case, a general rate case at this Commission, or other filing may be recorded and recovered under Section 399.2.5(c)(2).

We find that costs in the following categories should be eligible for recovery; other costs are not eligible for recovery under Section 399.2.5(c)(2):

· Costs associated with identifying the need and/or best location for the transmission facility including environmental studies; engineering studies; and public outreach necessary for the preparation of permit applications;

· Costs related to preparation of local, state, and federal permit applications, including a Proponent's Environmental Assessment as required by Commission Rule 2.4(b);

· Costs associated with cancellation of long lead-time equipment purchases, such as transformers.

We allow only cancellation costs for long lead-time equipment because we agree with DRA that capital costs associated with the actual purchase of equipment should not be included as eligible. We also agree with DRA that we will not allow recovery of construction-related costs, other than long lead time equipment cancellation costs, because construction costs should not be incurred until after a permit has been obtained from the Commission. In accordance with Section 399.2.5(d), only costs that are not approved for recovery in transmission rates by FERC may be recovered using the advice letter procedures set out in this decision.

Only transmission projects, including substation upgrades, are eligible for cost recovery under this section. The costs of non-transmission projects to integrate renewables, such as flexible generation or electric storage, are not eligible for recovery under Section 399.2.5(c)(2).

Finally, all parties opposed the suggestion of a pre-determined limit on costs. DRA notes that while it supports restrictions on the types of costs eligible for recovery, it opposes any pre-set cost limit. According to DRA and LSA, any limit would be arbitrary due to the unique nature of each transmission project. LSA asserts that cost limits will run counter to the law's intent to promote prompt transmission development to support RPS goals. Similarly, the utilities oppose limits on the types or magnitude of costs that may be recovered, stating this would be contrary to the intent of the statute and counterproductive. SDG&E maintains that cost limits are not dictated by the statute and such costs can vary greatly for these facilities. PG&E states that advance assurance of cost recovery is critical to allow the utilities to invest in developing the transmission lines needed for renewables. SCE and PG&E claim there is no need for additional cost limitations, since actual cost recovery is limited to those costs that the Commission finds prudent and reasonable.

We agree. Since costs will vary by project, there should be no pre-set limit on the total amount of costs that a utility may request permission to record and recover in an advice letter under Section 399.2.5(c)(2). Because Section 399.2.5(c)(2) states the utility's ultimate recovery of any costs is "contingent upon the Commission finding that the utility administered the approved costs reasonably and prudently," a limit is unnecessary. Nevertheless, we will require any advice letter requesting cost recovery pursuant to Section 399.2.5(c)(2) to include a detailed estimate of expenditures, by type or category of cost.

The Director of Energy Division is authorized to develop standardized formats required for the presentation of cost estimates in advice letters.

Since the utility's showing in the advice letter will be the basis for the Commission's backstop cost recovery finding, it is reasonable to require that the utility provide with the advice letter a declaration by a utility officer at the vice president level or higher that demonstrates more than pro forma "information and belief." The declaration should include that, if the declarant does not have personal knowledge related to the information in the advice letter, the declarant has made reasonable inquiry of the person or persons responsible for compiling the information and on that basis believes the information to be true.