XII. Ratemaking Treatment

A. Construction Financing Costs

Under traditional ratemaking treatment of projects such as the SGRP, recorded expenditures earn AFUDC. When the project is completed, the expenditures and the AFUDC are put into ratebase. In this proceeding, SCE proposes that it be allowed to recover construction financing costs as they are incurred. No AFUDC would be accrued, and only the expenditures would be put into ratebase. SCE states that its proposal would: (1) reduce its financing requirements, (2) improve its financial metrics, (3) signal investors that the Commission is committed to supporting SCE's financial integrity, and (4) have no significant adverse impact on ratepayers on a present value basis.37

TURN states that there is no precedent supporting SCE's proposal. In addition, TURN represents that it would cost ratepayers an additional $3.6 million, and SCE has made no extensive showing of financial hardship in support of its request. TURN states that SCE's ratio of construction work in progress to total capitalization is currently 6% compared to more than 25% in the early 1980s when SONGS was built. In addition, TURN represents that SCE should be able to secure funds from its corporate parent under the "first priority condition" adopted in the original holding company decision, D.88-01-063, and interpreted in D.02-01-039.38 For these reasons, TURN opposes SCE's request.

Aglet states that upfront payment of construction financing costs requires ratepayers to pay for the SGRP, in part, before completion. Aglet represents that ratepayers would be at risk for recovery of these funds if the SGRP is not completed, or some external event, such as an earthquake, security concerns or a national shutdown of nuclear plants leads to a delay in completion of the SGRP or to plant closure. Aglet also says that upfront payment of financing costs is without precedent, and is essentially a loan from ratepayers to SCE. For these reasons, Aglet opposes SCE's request.

SCE's proposal is a substantial departure from normal ratemaking treatment of capital expenditures. It is without precedent, and would have ratepayers paying for a project before it is used and useful to them. Therefore, SCE would have to demonstrate some extraordinary need for us to consider it. In this case, SCE has not demonstrated that its proposal is needed in order to complete the SGRP. Other than the fact that its financial ratings are lower than when it built SONGS, SCE has shown no financial need for its proposal. In addition, SCE has not shown any ratepayer benefit that would offset the $3.6 million additional cost of its proposal. For the above reasons, we will not adopt it. The SGRP will accrue AFUDC instead.

B. Removal and Disposal Costs

SCE proposes that the costs for removing the original steam generators and disposing of them be recovered over the remaining lives of the original steam generators (2006-2011) through depreciation.

TURN recommends that SCE's proposal be denied, and that the costs be recovered through depreciation over the remaining life of SONGS. TURN also recommends that taxes associated with these costs be normalized (recovered with a deferred tax liability before the removal occurs, and a declining deferred tax asset after the removal occurs). TURN states that SCE's proposal to shift cost responsibility towards residential customers through funding reliance on the generation revenue requirement should be rejected. Instead, TURN recommends that an appropriate share of these costs be collected from direct access customers through the cost responsibility surcharge. TURN states that SCE's depreciation reserve for SONGS is far greater than would be expected for a plant that has reached the midpoint of its useful life. TURN also notes that in its 2006 GRC, SCE is requesting depreciation of the removal and disposal costs of the old steam generators at Palo Verde, as the result of an SGRP, over the remainder of the plant's useful life. TURN argues that it is appropriate to recover these costs over the remaining useful life of SONGS because the beneficiaries of the SGRP are the future customers that will be taking service from SONGS after the SGRP.

TURN argues that SCE's proposed tax flow through and gross-up would create high costs during 2006-2008, because the early collection of removal costs is treated as taxable income and grossed up to include the resulting taxes. The cost of removal deduction would be applied after the removal costs are incurred. TURN states that its normalization proposal would smooth the revenue requirement effect over the years through 2011.

TURN says that SCE's proposal to collect the removal and disposal costs through the generation revenue requirement, rather than from the nuclear decommissioning cost trusts (trusts), would exempt direct access customers from making any contribution. Therefore, TURN recommends that, if trust funds cannot be used for this purpose, SCE should be directed to collect an appropriate share from direct access customers through inclusion in the cost responsibility surcharge being addressed in Rulemaking (R.) 02-01-011.

Aglet supports TURN's position that removal and disposal costs should be recovered through depreciation over the remaining SONGS lives. Aglet opposes SCE's proposal for a separate balancing account for removal and disposal costs, because Aglet believes it is unnecessary.

A basic principle of depreciation is that the original cost of the item being depreciated, including any net salvage value, be recovered over the life of the item. The net salvage value, would include the cost of removal and disposal of the item being depreciated, and can be negative. However, the cost of removal and disposal of the original steam generators was intended to be paid for out of the trusts when SONGS is decommissioned, not out of the depreciation reserve.

In this case, there are two sets of steam generators, the original ones and the replacements, and costs of removal and disposal for each set. SONGS went into commercial operation in 1983 and 1984. Contributions to the SONGS trusts, which are set in Nuclear Decommissioning Cost Triennial Review proceedings, have been calculated based upon license lives ending in 2013. Therefore, by the time the SGRP is performed, roughly 80% of the removal and disposal costs of the original steam generators will have been accumulated in the trusts.39 If the SGRP is performed, the trusts cannot be used for the original steam generators because the original steam generators will be removed and disposed of prior to decommissioning. However, the trusts will be used for the replacement steam generators when SONGS is decommissioned.

By the time the SGRP is complete, current ratepayers will have already paid for about 80% of the cost of removal and disposal of the replacement steam generators through contributions to the trusts.40 If they are also required to pay for 100% of the removal and disposal costs of the original steam generators through depreciation before the SGRP is complete, they will have paid for a total of 180% of the costs of removal and disposal of one set of steam generators, thus subsidizing future ratepayers. Likewise, if the costs of removal and disposal of the original steam generators are charged only to future ratepayers by being depreciated over the remaining lives of the plant after the SGRP is complete, future ratepayers will have to pay for 100% of the costs of removal and disposal of the original steam generators through depreciation, as well as 20% of the costs of removal and disposal of the replacement steam generators through contributions to the trusts. This would amount to a total of 120% of the costs of removal and disposal of one set of steam generators; thus subsidizing current ratepayers.

Since current ratepayers will have paid for approximately 80% of the costs of removal and disposal of the replacement steam generators through contributions to the trusts by the time the SGRP is complete, they should only have to pay for 20% of the removal and disposal costs of the original steam generators through depreciation.41 As a result, we will authorize SCE to recover through depreciation 20% of the estimated costs of removal and disposal of the original steam generators ($22.2 million) over 2006-2011. The remaining amount will be depreciated over the remaining lives of SONGS after the SGRP is performed.

As to the issues of tax normalization and revenue requirement allocation regarding the depreciation costs, the record does not demonstrate why depreciation of the costs of removal and disposal of the original steam generators should be treated differently than other SONGS depreciation expenses. Therefore, we will not adopt TURN's recommendations. To the extent that TURN believes that the cost responsibility surcharge should include such depreciation costs, it should raise its proposal in R.02-01-011.

Aglet recommends that recovery of the undepreciated book value of the original steam generators, that would no longer be used and useful, be deferred until the Commission decides related issues in R.04-09-003.

SCE states that the original steam generators are included in a group account, and depreciated as such. This means that the undepreciated plant balance for the original steam generators is not separately tracked. SCE represents that it is not requesting a change in the depreciation expense for the cost of the original steam generators, and the net book value of the original steam generators will be zero by the time they are replaced.

R.04-09-003 pertains to gains or losses on sales of utility assets. SCE has not proposed that the original steam generators be sold. Indeed, it is unlikely that there would be a buyer if they were to be offered for sale. Therefore, it does not appear that R.04-09-003 would apply to them. Regardless of whether it would apply, R.04-09-003 is scheduled to be decided well before the original steam generators are disposed of. If a decision in R.04-09-003 should apply to them, there will be ample opportunity to do so. Therefore, we will not adopt Aglet's recommendation. We also note that, if the book value of the original steam generators is zero at that time, as SCE represents, the issue will be moot.

D. Potential Stranded Costs from Departing Load

TURN represents that SCE proposes to collect the SGRP costs through the generation revenue requirement charged to bundled customers. TURN says that while this is appropriate, some portion of the costs could become stranded in the event the Legislature enacts a core/non-core retail market structure, or the expiration of the ABX1 statutory suspension of direct access leads to significant migration away from bundled service. It states that under SCE's proposal, a current bundled service customer leaving for direct access at a future date would no longer pay the SGRP costs. TURN points out that the Commission, in connection with SCE's Mountainview project, and SDG&E's motion seeking approval of several new long-term generation projects (including Palomar, Ramco, and Otay Mesa), adopted the requirement that customers currently on unbundled service who subsequently leave for direct access should be obligated to pay for any stranded costs associated with these investments for no less than ten years of the operation of the facilities. TURN recommends this same treatment for the SGRP if approved. SCE supports TURN's recommendation.

The stranded cost issue is not unique to the SGRP, and is beyond the scope of this proceeding. Therefore, we will not address it herein. It is more appropriately addressed in connection with any consideration of reopening direct access.

E. SGRP Cost Cap

TURN recommends that if the SGRP is approved, the cost should be capped at SCE's current estimated cost, and that ratepayers should not be responsible for costs above that level whether the costs are reasonably incurred or not. It says that this is essential to preserve at least some semblance of cost-effectiveness for ratepayers.

Aglet recommends that, if its guaranteed savings proposal is not adopted, the Commission should impose a cost cap to provide SCE with some incentive to control costs, and to limit ratepayer exposure to cost overruns, and to help ensure that the SGRP is cost-effective.

ORA recommends that a strict cost cap of $700 million including removal and disposal of the original steam generators, as adjusted for inflation and the cost of capital, be adopted if the SGRP is approved. This would also include replacement energy costs if the SGRP is delayed. As an alternative, ORA recommends a 50/50 sharing of any reasonable costs above the cap.

SDG&E takes no position regarding a cost cap for SCE. However, if the SGRP goes forward, and SDG&E is required by the Commission to participate in the SGRP, SDG&E states that a cost cap should not be imposed on it, because it has no control on the costs, as opposed to SCE which does.

We impose a cost cap as discussed later in this decision. This proceeding does not address whether SDG&E should participate in the SGRP. Therefore, we will not address whether a cap should apply to SDG&E in this decision.

F. Other Ratemaking Issues

Aglet opposes a separate balancing account for capital related revenue requirements. Aglet states that it would not object to SCE recovering capital related costs in rates beginning on the commercial operating date if its guaranteed savings proposal is adopted. However, if it is not adopted, Aglet recommends that the Commission authorize a deferred debit account similar to a Major Additions Adjustment Clause (MAAC) account. The account would record monthly revenue requirements subject to refund following the reasonableness review. Aglet states that past MAAC accounts have recorded revenues from interim rates, but that SCE has not shown that interim rates are needed.

The Commission has routinely established MAAC accounts for major capital projects and provided interim rate recovery, subject to refund, prior to the conclusion of a reasonableness review. In this instance, interim rate recovery would begin when SONGS resumes commercial operation after the SGRP is complete for each unit. Since the ratepayers will be receiving service at that point, it is reasonable that they begin paying for it at that point. Therefore, we will establish similar accounts herein. Implementation of interim rate recovery will be by advice letter.

Aglet states that, if the Commission allows any inflation adjustments to the adopted project costs, they should be limited to ordinary inflation. Aglet argues that SCE should not be allowed additional costs simply because the costs increased. Aglet suggests that adjustments for inflation be limited to recorded changes in the Consumer Price Index, All Urban Consumers, as published by the U.S. Bureau of Labor Statistics.

In this decision, costs are expressed in 2004 dollars. Actual costs will be expressed in nominal dollars when they are recorded. A meaningful comparison of recorded costs with the costs specified herein will require all costs to be converted to equivalent year dollars. An inflation adjustment will be necessary to accomplish this. We intend that the inflation adjustment be made based on reliable publications such as the Consumer Price Index published by the U.S. Bureau of Labor Statistics. We do not intend that the costs be adjusted merely because recorded costs are different than forecasted herein. Since no party addressed this issue in the record, the selection of the appropriate inflation adjustment applicable to recorded SGRP costs will be addressed in SCE's application to include SGRP costs permanently in rates.42

ORA recommends that SCE be required to submit progress reports on the status of the SGRP as it proceeds in order to monitor progress, and ensure that a reliable cost history will be available for the reasonableness review. ORA has not demonstrated in this proceeding that periodic progress reports would materially assist in any future reasonableness review. Therefore, we will not require them at this point. However, ORA is free to ask for information at any time pursuant to § 309.5(e) and § 314(a).

37 Financial metrics include interest coverage, the ratio of total debt to total capital, the ratio of cash flow to total debt, the ratio of cash flow to construction expenditures, etc.

38 The "first priority condition" requires the parent holding company to infuse all types of capital into its utility subsidiary when necessary to fulfill the utility's obligation to serve.

39 This assumes that the next Nuclear Decommissioning Cost Triennial Review utilizes the 2022 license expiration dates. Continued use of the 2013 license expiration dates will cause a higher percentage to be accumulated.

40 Current ratepayers are those who receive service up to the completion of the SGRP in approximately 2011. They are the ratepayers who will have received electricity generated by SONGS using the original steam generators. Future ratepayers are the ratepayers who will receive electricity generated by SONGS using the replacement steam generators.

41 Likewise, future ratepayers would pay for 80% of the costs of removal and disposal of the original steam generators through depreciation, and 20% of the costs of removal and disposal of the replacement steam generators through contributions to the trusts.

42 In order to implement interim rates through the advice letter process as discussed above, it will be necessary to make a preliminary determination of the inflation adjustment. However, the final inflation adjustment will be set in the application to include SGRP costs permanently in rates.

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