6. Cost Recovery Framework

In D.04-12-048, the Commission authorized the utilities to utilize the Non-Fuel Generation Balancing Account (NGBA) to record the authorized operations and maintenance (O&M) and capital-related non-fuel revenue requirements associated with new turnkey/utility owned generation plants. SDG&E proposal for a cost recovery framework for the El Dorado Option consists of three elements as described below.

6.1. Fixed Revenue Requirement

As of the date El Dorado ownership is assumed by SDG&E, the monthly fixed revenue requirement would be recorded in the NGBA for recovery through SDG&E's commodity rates (Schedule EECC-Electric Energy Commodity Cost). This fixed revenue requirement would be recorded monthly to the NGBA and be balanced against billed revenues received from the rate component of Schedule EECC set to recover fixed El Dorado costs. For 2011, the year in which El Dorado is scheduled to go into service, the forecasted 2011 revenue requirement would be included in SDG&E's annual NGBA advice letter filing. However, prior to the in-service date of El Dorado, SDG&E would file an advice letter to identify the final El Dorado fixed monthly revenue requirement to be recorded to the NGBA.

Commodity rates that include the El Dorado authorized fixed revenue requirement may lead to recorded revenues that are higher or lower than the authorized revenues due to higher or lower than expected customer sales. Such over collections or under collections of the El Dorado authorized fixed revenue requirement would be recorded in the NGBA. For each calendar year following the in-service date, the El Dorado NGBA balance would be included in SDG&E's annual NGBA advice letter filing (filed in the 4th quarter) and annual consolidated electric rate change filing (filed in December) to be recovered in commodity rates effective January 1 of the following year.

6.2. Variable Operation and Maintenance and Non-Fuel Costs

SDG&E requests approval of a variable O&M rate to recover the El Dorado variable O&M non-fuel costs at the time the monthly fixed revenue requirement is approved. SDG&E proposes a variable O&M rate per MWh of generated output from the plant based on the estimated costs required to operate and maintain El Dorado. The authorized variable O&M non-fuel costs, equal to the authorized variable O&M rate times the MWh generated, would be recorded monthly to the NGBA.

Commodity rates based on recovery of the El Dorado projected variable O&M non-fuel costs may lead to recorded revenues that are higher or lower than the authorized revenues due to higher or lower than expected customer sales and/or higher or lower than expected generation output from El Dorado. Such over collections or under collections of the El Dorado variable O&M non-fuel costs would be recorded in the NGBA. For each calendar year following the in-service date, the El Dorado NGBA balance and the following year's projected variable O&M non-fuel costs based on the adopted variable O&M rate and estimated generation output would be included in SDG&E's annual NGBA advice letter filing (filed in the fourth quarter) and annual consolidated electric rate change filing (filed in December) to be recovered in commodity rates effective January 1 of the following year.

6.3. Fuel Costs

El Dorado fuel costs would be recorded in the Energy Resource Recovery Account (ERRA) for recovery through commodity rates. In the ERRA, actual fuel costs are compared with billed revenues with the balance (under- or over-collection) being amortized in commodity rates the following year. For 2011, the year in which El Dorado is scheduled to become an SDG&E plant, the forecasted fuel costs would be included in the annual ERRA forecasted revenue requirement application. In subsequent years, the El Dorado ERRA balance and following year's forecasted fuel costs would be included in SDG&E's annual ERRA forecasted revenue requirement application (filed in the fourth quarter).

6.4. Discussion

SDG&E's proposal to recover fixed revenue requirement and variable operation and maintenance and non-fuel costs through the NGBA and to recover fuel costs through the ERRA is generally consistent with the provisions discussed and adopted in D.04-12-048.¹¹ In that decision we state the following:¹²

In the LTPP proceeding SDG&E proposes a three-phase cost recovery framework for turnkey project cost recovery that starts with the filing for Commission approval of the project. In that filing, SDG&E will identify the ratebase and operations and maintenance (O&M) - related revenue requirements associated with the project for the first full calendar year of operation of the generation plant. SDG&E proposes to record costs associate with the turnkey plants to its NGBA and ERRA for recovery through SDG&E commodity rates. Under SDG&E's proposal, the Commission will adopt the annual revenue requirement of the applicable turnkey plant simultaneously with approval of the project. Prior to the operation of the turnkey generation unit, SDG&E will file an advice letter to incorporate any adjustments to the adopted revenue requirement.

SDG&E's proposal was adopted. However, in requesting approval to exercise the El Dorado Option, SDG&E did not identify the rate base and O&M costs for the first year of operation as specified above. At this point, we cannot determine the reasonableness of or adopt the associated revenue requirement. Since SDG&E will not assume ownership of El Dorado until October 1, 2011, adopting a specific rate base and O&M revenue requirement may be premature at this time. We will adopt SDG&E's proposed cost recovery framework, including its proposals related to setting the rate base and O&M revenue requirements through the NGBA advice letter process. However, we expect SDG&E to fully justify and support its rate base and non-fuel O&M expense forecasts and provide the associated revenue requirement calculations at the time it includes the forecasted 2011 revenue requirement in its NGBA advice letter filing. Only reasonable forecasted costs will be included for recovery in rates.

In adopting SDG&E's cost recovery mechanism, we are not precluding SDG&E from, at some point, requesting cost recovery for El Dorado through its general rate case process. It may be more efficient to consider the revenue requirement for El Dorado along with that for SDG&E's other assets.

¹¹ See D.04-12-048, mimeo., pp. 108 -112, Findings of Fact 65 through 67, and Conclusion of Law 35.

¹² D.04-12-0438, mimeo., pp. 109 -110.