V. Ratemaking Treatment

A. Background

Prior to the transition period, both environmental and non-environmental decommissioning cost estimates had been included in base rates and were being collected over time. Pursuant to Pub. Util. Code § 367, and D.97-11-074, decommissioning costs that the utility would retain became a transition cost that had to be collected during the rate freeze. In 1997and 1999, the Commission approved PG&E's site-specific cost estimates to remediate assumed environmental contamination at each divested power plant site and authorized recovery through the TCBA.⁵

In 1998, the Commission adopted this same ratemaking methodology for HPPP decommissioning costs, when it adopted the agreement between PG&E and CCSF on the future of HPPP. The Commission said:

PG&E's proposal for treatment of decommissioning, remediation, and site restoration is based on the treatment we adopted for these types of costs in D.97-11-074 and is consistent with SB 1589. Specifically, the amortization of decommissioning costs should occur through the mechanism of the TCBA, rather than "in the CTC." We will follow D.97-11-074, and approve PG&E's proposal to the extent it is consistent with that decision. (D.98-10-029, mimeo., pp. 9-10.)

The methodology PG&E has followed in this proceeding to estimate and recover decommissioning costs is the same as that adopted for other power plants and already approved for HPPP. Although the HPPP is slated to be closed, rather than divested per se, the cost recovery of decommissioning costs is similar to that of divested plants.

B. PG&E's Proposal

PG&E's primary recommendation is that its environmental and non-environmental remediation cost estimates be debited, net of accruals, to the TCBA.

As its secondary recommendation, PG&E supports use of the Hazardous Substance Mechanism (HSM) to recover the environmental decommissioning costs. According to PG&E, this recovery mechanism would allow recovery of the actual costs incurred to remediate the site to whatever level the regulatory agencies require, and would thus vitiate the parties concerns over the cost estimates presented in this case. However, as the parties do not significantly dispute PG&E's non-environmental decommissioning cost estimate, PG&E proposes that these costs be debited, net of all accruals, to the TCBA.

C. Position of CCSF

CCSF acknowledges that the ratemaking treatment for HPPP proposed by PG&E is the same treatment adopted by the Commission in D.97-11-074, D.98-07-092, and D.98-10-029 for PG&E's plants sold at auction. However, CCSF argues that these decisions do not consider the issues raised in this proceeding by CCSF and others.

CCSF urges the Commission to set aside previous ratemaking treatment and adopt a one-way balancing account for HPPP environmental and non-environmental costs. According to CCSF, a one-way balancing account and reasonableness review is necessary for several reasons. First, the Commission must ensure that ratepayers are not adversely impacted by PG&E's propensity to overestimate decommissioning costs. Second, if PG&E is permitted to retain funds not used for decommissioning, it will have a perverse incentive to cut corners on the cleanup. Third, under PG&E's proposal, ratepayers would not receive the benefits of any recovery of insurance proceeds or third-party contributions related to environmental cleanup costs at HPPP. Finally, under PG&E's proposal, PG&E has a financial incentive to delay cleanup, according to CCSF.

D. Position of SAEJ

SAEJ recommends that funding for HPPP remediation be provided through the HSM, and any funding not submitted to the HSM be placed in a one-way balancing account.

SAEJ contends that in spite of the efforts by PG&E to characterize the site, significant uncertainties remain regarding the scope and extent of cleanup required to achieve residential standards. According to SAEJ, studies conducted by the United States Environmental Protection Agency have found that even after full characterization and a feasibility study, cleanup costs for a site can vary by an average of 25%. Because of perceived uncertainties related to PG&E's estimate, SAEJ believes that as the HPPP cleanup goes through regulatory review, the costs could skyrocket.

Therefore, SAEJ, argues that unless a proper mechanism is employed to allocate ratepayer money, either ratepayer money may be wasted or the remediation may be inadequate as PG&E tries to protect its shareholders. For this reason, SAEJ believes the HSM should be employed in this case.

E. Position of ORA.

ORA believes that additional proceedings are necessary to ensure that ratepayers receive the benefit of the remediation they pay for. Also, ORA argues that because the Commission has never ordered a residential level of remediation for HPPP or any other decommissioned facility, the previously applicable accounting methodologies, ratepayer protections, cost estimates, incentives and obligations must be reviewed, prior to undertaking the actual remediation. And, because of the substantial uncertainty that ORA perceives with regard to PG&E's estimate, ORA joins CCSF in recommending that a one-way balancing account be established. Additionally, ORA would impose a cost cap, presumably, equal to the amount of PG&E's original estimate based on a commercial/industrial level cleanup standard, which estimate ORA recommends be approved in this proceeding.

F. Response of PG&E.

PG&E responds that CCSF has provided no evidence that a one-way balancing account, or any other ratemaking treatment, is necessary to avert PG&E from either delaying or cutting costs of decommissioning. PG&E argues that CCSF provides no reason why these perverse incentives would be more likely to exist with the decommissioning of HPPP than at the other plants. PG&E points out that the Commission has acknowledged time and time again, it is appropriate for ratemaking to encourage utility cost savings by providing profit incentives. And one of the purposes of regulation of natural monopolies is to simulate the cost-cutting incentives provided by competition. According to PG&E, the HPPP decommissioning costs are no different from the many categories of costs covered by the Commission's ratemaking mechanisms and CCSF's alleged "Imprecise Nature of the Costs" argument is no reason to adopt a one-way balancing account.

Further, PG&E argues that the circumstances at Humboldt Bay Power Plant (Humboldt), where PG&E proposed a one-way balancing account for decommissioning costs, are not analogous to HPPP.

With regard to using the HSM, as recommended by SAEJ, PG&E agrees that it is an appropriate recovery mechanism for environmental decommissioning costs. Actually, PG&E's preference is for all of its decommissioning costs to be recovered at the time they are incurred, rather than have to rely on the adoption of a cost estimate developed several years before the costs are incurred. Although not originally contemplated in this proceeding, PG&E agrees that actual environmental decommissioning costs could be recovered through the HSM, if the mechanism is available, rather than through the TCBA prior to the end of the rate freeze.

G. Discussion

Estimating costs for large projects such as the HPPP decommissioning are by their very nature, highly uncertain. While PG&E anticipates the majority of the decommissioning work to take place in 2005, it is quite possible that the decommissioning may be delayed, and may be completed for less than $65.1 million (in 2003 dollars). Project delays⁶ or costs below the estimated cost would benefit PG&E shareholders and provide no benefit to the ratepayers that contributed to the decommissioning fund. Therefore, we will require a one-way balancing account be created for the HPPP decommissioning funds.

A one-way balancing account for the HPPP decommissioning will ensure that the money collected for decommissioning will be spent on decommissioning. Should any money be left in the balancing account at the conclusion of the decommissioning activities, that remaining money shall be returned to ratepayers. The balancing account treatment provides two significant benefits: 1) it eliminates any incentive for PG&E to inflate its cost estimates⁷; and 2) it insures that no incentives exist to cut corners during the cleanup process.

SAEJ proposes that the HSM should be used to fund PG&E's HPPP decommissioning activities unless the funding source would be subject to a one-way balancing account, to avoid any incentives PG&E might face to cut remediation costs to protect its shareholders. We agree with SAEJ that protections need to be put in place to ensure that the proper level of cleanup is done; this decision adopts the use of a one-way balancing account, and therefore SAEJ's request that all HPPP remediation be funded through the HSM is denied.

As noted earlier in this decision, D.98-10-029 adopted a ratemaking methodology for HPPP decommissioning wherein the Commission would approve PG&E's site specific to remediate assumed environmental contamination at the Hunters Point site and authorize recovery through the TCBA. However, we will allow PG&E to seek recovery of future sediment remediation costs related to HPPP through the HSM because these costs are not included in PG&E's estimate.

H. California Environmental Quality Act (CEQA)

SAEJ argues that the Commission should require an environmental impact report (EIR) before any decision is made on funding not covered by the HSM because a funding decision may adversely affect the environment.

We disagree. CEQA requirements only apply to a "project."⁸ The activities that must be considered by CEQA include the whole of the underlying action undertaken, supported or authorized by a public agency that may affect the physical environment.⁹ If the agency's approval is a necessary step and the activity has the potential to result in significant impacts to the physical environment, the activity must be treated as a project subject to CEQA. If however, agency action merely establishes its ability to take a later action that will affect the environment, but does not commit the agency to a definite course of action, that action is not a "project" subject to CEQA. (See Kaufman & Broad v. Morgan Hill Unified School District, (1992) 9 Cal.App.4^th 464, citing to Bozung v. Local Agency Formation Commission, (1975) 13 Cal.3d 263; Fullerton Joint Union High Sch. Dist. V. State Bd. Of Edu. 32 C3d 779, 796 (1982).)

Contrary to the argument of SAEJ, the Commission's adoption of a cost estimate will not preclude implementation of activities required by a regulatory agency having permitting authority over the HPPP decommissioning activities. The Commission has never suggested otherwise. In fact, it has explicitly stated that this proceeding is not to establish a decommissioning plan for HPPP. (ALJ February 4, 2000, Ruling.) And, as the caption for this docket indicates, this proceeding was premised on recovery of decommissioning costs as transition costs through the TCBA.

Under California Public Resources Code Section 21080(b)(8), CEQA does not apply to the establishment, modification, structuring, restructuring or approval or rates, tolls, fares, or other charges. This proceeding falls squarely within this statutory exemption. PG&E has presented cost estimates for decommissioning HPPP in future years based on the best information available today. As with most cost estimates used to establish rates, the estimate to be adopted in this proceeding is based on future events. CEQA review is likely to be required when PG&E applies for its decommissioning permits, closer to the time that decommissioning actually occurs. At that time, the lead agency, likely CCSF, will initiate CEQA review, and SAEJ will have the opportunity to participate in that review. The Commission has not initiated such a review in this ratemaking proceeding.

SAEJ cites Shawn v. Golden Gate Bridge Etc. District (1976) 60 C.A.3d 699) to support its argument that the ratemaking exemption to section 21080 does not apply. That case does not support SAEJ's argument. It was decided in 1976, prior to when the ratemaking exemption was added to Section 21080 by Stats. 1978, ch. 356 (effective July 5, 1978).

In summary, we conclude that this ratemaking proceeding is not a project under CEQA.