5. Reasonableness and Allocation of Project Costs

ORA, Border Generation and SDG&E recommend that the Commission defer the question of cost allocation to the Federal Energy Regulatory Commission (FERC), which they argue is "the regulatory body with jurisdiction to determine the justness and reasonableness of SDG&E's transmission rates."²³ At the same time, these parties urge us to direct SDG&E to proceed with construction under the assumption that FERC will allocate all of the project costs to SDG&E ratepayers, consistent with current FERC policy. They contend that this is appropriate because the projects are economic to SDG&E ratepayers, even under this cost allocation.²⁴ However, the level of net benefits to SDG&E ratepayers is directly dependent upon the costs of the upgrades. The range of $3 million to $7 million in annual net benefits discussed above could greatly diminish or disappear entirely if actual project costs are substantially higher than those projected in SDG&E's analysis, particularly if energy cost savings are adversely affected by less than anticipated new generation in the California-Mexico border region or by new generation development in San Diego North. SDG&E's testimony indicates that substantial cost increases could occur under a number of circumstances. We cannot reach a determination of economic need if the projects are allowed to go forward with considerable uncertainty regarding project costs, and the full risk of this uncertainty is allocated to SDG&E's ratepayers.

We have jurisdiction pursuant to Pub. Util. Code § 1005.5 to address this issue through the imposition of a cost cap.²⁵ Although the Miguel-Mission and Imperial Valley Projects address separate system components of SDG&E's transmission system, they are both designed to increase transmission capacity into SDG&E's load center during the same timeframe, are functionally interdependent (i.e., Imperial Valley Project cannot increase that transmission capacity unless Miguel-Mission Project is also built) and are jointly linked to the milestone conditions for proceeding with project construction (see below). Since the estimated costs for both upgrades exceed $50 million, we conclude that § 1005.5 is applicable in this instance. We will impose a cost cap of $55.4 million for the two projects, based on the estimates presented by SDG&E.

SDG&E has the burden of proving the reasonableness of its cost estimates, but has not done so in this proceeding. As we discussed in D.01-05-059, our consideration of those costs has bearing on the amount that SDG&E may seek from FERC.²⁶ We retain jurisdiction to review the reasonableness of SDG&E's final project expenditures pursuant to §§ 454.1, 463.5, 1005.5 and all other applicable law. We order SDG&E to file an application for such a review within 6 months of final completion of the Miguel-Mission and Imperial Valley upgrades. If SDG&E's reasonable costs for the projects exceed the cost cap, SDG&E may seek an increase in the cost cap pursuant to § 1005.5(b).

SDG&E's economic analysis also presents estimates of increased net operating revenues that are expected to accrue to specific generators with planned projects in the California-Mexico border region. (See Table 1.) Economic analysis of transmission upgrades should examine the allocation of benefits among various beneficiaries, such as generators, as SDG&E has done here. However, in this instance, it would not be reasonable to condition our finding of economic need on a requirement that specific generators contribute to project costs. Potential beneficiaries of the upgrades include current and future suppliers of power in Arizona (via SWPL), the Imperial Irrigation District and Mexico, not just the current sponsors of new generating facilities in the California-Mexico border region.²⁷ It is therefore not feasible to allocate the cost of these upgrades fairly among all of the private entities that will benefit from them, i.e., all generators and marketers whose power flows through the Imperial Valley substation and/or west of the Miguel substation. Moreover, as Border Generation points out, specific generators could not receive any firm transmission rights in return for their contribution to project costs. This is because the congestion at the Miguel and Imperial Valley substations is "intrazonal," and there are no firm transmission rights allowed within a CAISO zone.²⁸

Our imposition of a cost cap, coupled with the milestone conditions discussed below, protects ratepayers against forecasting errors that would substantially undermine or even eliminate the economic need for these projects. With these conditions, we find that the projects are economically justified under current FERC ratemaking policies that would allocate project costs exclusively to SDG&E's ratepayers.

However, we note that SDG&E's economic analysis also supports a ratemaking policy that allocates project costs to ratepayers throughout the CAISO control area. As discussed above, the net benefits projected for this broader base of ratepayers are substantial, i.e., $10 to $43 million per year. At the time this project went to hearing, FERC was considering modifying its ratemaking approach to allocate the costs of new transmission lines and upgrades across the entire CAISO ratepayer base, rather than to individual utility customers.²⁹

The record in this proceeding also indicates that proceeding with Miguel-Mission has cost allocation implications for the Valley-Rainbow Project that SDG&E has proposed in Application (A.) 01-03-036. Under this project, SDG&E would construct a new 500 kV line from SCE's Valley substation to a new substation at Rainbow. In conjunction with Miguel-Mission, the construction of Valley-Rainbow would enable additional amounts of generation entering Miguel (e.g., from the California-Mexico border region) to proceed north to SCE's and PG&E's service territories.³⁰ By D.02-12-066, we denied SDG&E's request for a CPCN for the Valley-Rainbow Project, without prejudice, stating that: "If SDG&E identifies a reliability or economic need for a similar transmission project in the future, SDG&E may file a new application seeing a CPCN for its proposed project. "³¹ Should SDG&E file such an application in the future, we will consider the interaction of the proposed project with Miguel-Mission as we evaluate the allocation of project benefits and costs for the proposed project. We will also utilize the record in this proceeding in our future interactions with FERC on transmission cost allocation issues.