4. Generation Expenses - Mohave
Generating Station

Mohave was shut down at the end of 2005. The 1999 Mohave Consent Decree required installation of pollution-control equipment or the ceasing of operations using coal fuel in January 2006. At the time SCE filed this application, SCE did not know whether Mohave would operate in 2006. Therefore, SCE prepared three cases to bound the range of foreseeable outcomes: (1) continued operation of Mohave without a break in service, (2) temporary shutdown of Mohave to allow installation of required pollution control equipment, and (3) permanent shutdown of Mohave after December 31, 2005. SCE stated that once it became clear which case will occur, SCE would amend the filing to eliminate the other two cases.

4.1. SCE's Proposal

For its application filing, SCE used the continued operation scenario as the assumed outcome for its showing. Due to the uncertainty and difficulty in forecasting Mohave costs, SCE also requested two-way balancing account treatment. SCE would record its share of all Mohave costs in the balancing account and all amounts in the balancing account would be subject to refund following reasonableness review.

In its September 26, 2005 update showing, the company asserts that continued operation remains the most appropriate scenario to use for the purpose of setting SCE's revenue requirement, even though uncertainty remains right now as to whether continued operation of Mohave will be achievable. Issues affecting Mohave's post-2005 coal supply (including slurry water supply) remain unresolved at present, and so the full range of Mohave outcomes still remain possible, from continued operation to permanent shutdown. Nevertheless, SCE contends that the Mohave co-owners and the other parties directly involved in Mohave's coal supply continue to pursue intensive negotiations, water studies, an environmental impact study and other related efforts to resolve the coal supply issues, and in SCE's view a successful resolution of all those issues remains possible. SCE states that achieving Mohave continued operations would mean important and valuable benefit to SCE's customers, in terms of both fuel diversity and reliability, especially in light of recent natural gas price increases.

SCE requests that the Commission, in setting the appropriate revenue requirement for Mohave, take into account the following considerations: (a) setting the revenue requirement based on the continued operation scenario represents a no-regret path, in which SCE has full latitude to pursue the possibility of continued Mohave operations, while SCE's customers remain protected from risk of unreasonable spending, and (b) setting the revenue requirements at any level other than the continued operation scenario could hamper the ongoing efforts by SCE and other relevant parties to resolve the issues necessary to allow continued operations at Mohave for the benefit of SCE's customers.

4.2 DRA's Proposal

For ratemaking purposes, DRA considers a temporary shutdown to be the appropriate scenario. DRA states that a temporary shutdown is more probable, given the likelihood that capital expenditures and construction associated with the environmental upgrades will not be completed by January, 2006, as required pursuant to the 1999 Mohave Consent Decree. As noted in SCE's testimony, the 1999 Mohave Consent Decree requires the installation of pollution-control equipment, or the cessation of operations using coal fuel in January, 2006. DRA states that assuming the Consent Decree is enforced, temporary or permanent shutdown should occur in the test year, and continue throughout the effective rate period. DRA cites a California Energy Markets article from August 2004, which noted the following:

Hence, even if the coal and water to run the plant past 2006 become available, the plant will have to be shut down while the environmental upgrades are made. SCE has said that could take until 2009 or 2010. (California Energy Markets, August 13, 2004, No. 784, p. 5.)

DRA recommends the Commission adopt the SCE's temporary shutdown scenario, with balancing account treatment.

4.3 TURN's Proposal

TURN's position is that the requirements of the Mohave Consent Decree clearly have not changed, and, as such, the plant must shut down after December 31, 2005. Given the unchanged circumstances, TURN recommends the Commission not authorize capital and Operation and Maintenance (O&M) spending as forecast in Edison's continued operations scenario.

TURN argues that SCE has not presented any new facts to support the idea that there will be a quick resolution of all the unresolved issues surrounding Mohave's continued operation (e.g., coal supply, water supply, environmental impact study, and the pollution control equipment deadline). Also, the difficulties and uncertainties are substantial enough that SCE itself does not include Mohave as part of its resource portfolio or supply forecast after December 31, 2005.

TURN notes that while SCE has promised to return O&M expense money it does not actually spend on Mohave (through two-way balancing account treatment), it has made no promise that it would not spend money unnecessarily. Also, SCE's proposal would provide the Company with funds that it could spend on unnecessary expenses and unnecessary capital additions. TURN states that those capital additions could all be done at a later stage, when the future of the plant is more certain.

TURN recommends that the Commission:

· Find that the "continued operation" scenario is not credible as all evidence indicates that Mohave will shut down for some period of time at the end of 2005.

· Allow $10.110 million in capital additions forecast as part of the "interim shutdown" scenario in this rate case.

· Do not authorize the costs of any other capital projects in rates and evaluate those projects in A.02-05-046 (the Mohave case), where they can be considered as part of the overall cost effectiveness of the plant and be included in the capital costs of the plant restart.

· Authorize a total Mohave O&M budget of $12 million (2003 dollars) for plant operations in 2006 (based on a rapid rampdown toward a much lower number of employees to 70 FTE) and $6 million in 2007-2008 (50 FTE).

· Adopt two-way balancing account for the plant's O&M costs, if the number of staff is capped at 70 active FTE over 2006 and no more than 50 in 2007-2008.

· Allow existing net plant in rate base (as Plant Held for Future Use - PHFU), but do not allow any projects not used and useful before the end of 2005 into rates. All new capital additions should be capitalized as construction work in progress (CWIP) (Account 107) and should accrue allowance for funds used during construction (AFUDC). There should be no transfer of capital additions from CWIP to Property Held for Future Use until such time as the plant is used and useful for utility service.

4.4 Discussion

Of the three scenarios, temporary shutdown appears to be a reasonable approach at this time. The evidence indicates that continued operation will not happen, and Mohave will shut down for some period of time. Whether the shutdown will be permanent or temporary is not clear. Even if it is temporary, when it would restart is unknown. That would depend on how and how quickly SCE and the other relevant parties resolve the outstanding issues. We prefer to assume a temporary, rather than permanent, shutdown at this time, in case a return to operation is authorized at some time in the future. Depending on the circumstances, the continued operation or the temporary shutdown and return to operation of Mohave may provide significant benefits to SCE's customers. Implementation of a permanent shutdown scenario might preclude a return, or at best would likely preclude a timely return, to normal operation.

SCE has determined, and we will adopt, O&M expenses and capital related costs associated with a temporary shutdown scenario. In general, a temporary shutdown of Mohave requires that plant equipment be reliably maintained in order to enable a return to normal operations. The adopted costs relate to a temporary shutdown as envisioned by SCE, whereby return to normal operations would be once the environmental controls have been installed. We note that if Mohave shuts down and then returns to normal operations, when and the circumstances under which that return happens may be different than what is assumed in this decision. For example, SCE may be able to negotiate further operation of Mohave prior to installation of environmental controls.

Due to the many uncertainties related to this issue, SCE's request to establish a two-way balancing account is reasonable and will be adopted. SCE shall record its share of all Mohave O&M and capital related costs in the balancing account. Temporary rate recovery will be provided by the associated O&M expenses and capital-related costs adopted by this decision. Permanent recovery of costs, which may be higher or lower than the level adopted by this decision, will be based on the results of a future reasonableness review. By application, SCE shall make an affirmative showing of reasonableness on the need for, and extent of, all costs recorded in the balancing account.

As a general matter, the adoption of a two-way balancing account, with reasonableness review, should mitigate SCE's concern that setting the revenue requirements at any level other than the continued operation scenario could hamper the ongoing efforts by SCE and other relevant parties to resolve the issues necessary to allow continued operations at Mohave for the benefit of SCE's customers. No matter what revenue requirement level is set, SCE will ultimately only receive rate recovery for those costs that the Commission determines are reasonable. The only difference is that the balancing account may be over- or under-collected depending on what costs are included as part of this decision and what costs are ultimately found to be reasonable.

Rather than reducing the temporary shutdown scenario-related costs and imposing other conditions, as proposed by TURN, we are adopting the temporary shutdown costs projected by SCE and the two-way balancing account as proposed by SCE. Fine tuning the costs and procedures would be pointless unless we knew exactly when and under what conditions Mohave would return to operation. However, again, we are not prejudging the reasonableness of any of the costs. SCE must justify its actions in responding to whatever ultimately happens, whether it is continued operation, some form of temporary shutdown, or permanent shutdown. SCE must make a full reasonableness showing on its actions as well as on all costs booked to the two-way balancing account. Only costs found by the Commission to have been reasonably incurred will be permanently recovered in rates.

In summary, the adopted Mohave O&M expenses for the test year, under the DRA supported temporary shutdown scenario, amount to $19,997,000 (SCE's share), as opposed to SCE's requested amount of $41,002,000 or TURN's recommended amount of $12,000,000. For 2005 and 2006, the adopted capital additions amount to $5,338,000 (SCE's share), as opposed to SCE's requested amount of $13,951,000 or TURN's recommended amount of approximately $1,100,000.¹⁵

¹⁵ Approximation based on TURN's recommendation as modified in its opening brief.