VII. Issuance of a CPCN

In its application, Edison requests that the Commission find that a CPCN is not required for Mountainview.⁷ Specifically, Edison posits that were it to acquire and complete Mountainview itself, the CPCN could not be processed before the option expired in early 2004. In addition, Edison argues that a CPCN is not necessary because: (1) the proposed EWG/PPA structure does not require a CPCN since MVL will not be a "public utility " and (2) Edison is not "beginning" construction - the facility is already partially constructed.

California Public Utility Code Section 1001 reads in pertinent part:

`No . . . electric corporation . . . shall begin construction of a street railroad or of a line plant or system or of any extension thereof without first obtaining from the Commission a certificate that the present or future public convenience and necessity require or will require such construction.'

Because we are rejecting Edison's PPA, but a need for the plant has been demonstrated, we now determine that Edison, an electric corporation, should acquire, develop, construct, own, and operate Mountainview. Therefore, we find, consistent with PU Code Section 1001, that a CPCN is necessary for Edison to undertake these activities. The application as presented by Edison tendered to us the issue of whether a CPCN is required for this facility, and the parties to the proceeding developed the record on each and every element that must be addressed before this Commission can grant a CPCN.

In addition, TURN has expressed its preference that Mountainview proceed as a utility-owned project; ORA has urged the Commission to direct Edison to file a CPCN for Mountainview so it can be operated as a utility-owned asset; and CUE states a clear preference that Mountainview be utility-owned. The Navajo Nation also argues that a CPCN is necessary for the project.

Two different regulatory schemes define this Commission's responsibilities in reviewing Edison's application to own and operate Mountainview: Public Utilities Code §§ 1001 et seq., require that before Edison can resume construction of this project, this Commission must grant a CPCN on the grounds that the present or future public convenience and necessity require or will require construction of the project. Also, before granting a CPCN, the Commission generally considers an analysis of the financial impacts of the proposed project on the utility's ratepayers and shareholders. The Commission reviews the expected cost of the project and for those projects estimated to cost more than $50 million, such as this one, we set a cap establishing the maximum amount that the utility may spend on the project without seeking further Commission approval.

A. Environmental Review

Besides the CPCN prerequisites, Public Resources Code Sections 21000 et seq. (CEQA) require that the Commission, if it is the lead agency for the project, prepare an EIR assessing the environmental implications of the project for its use in considering the request for a CPCN. (See generally Re Southern California Edison Company D. 90-09-059 37 CPUC2d 413 421.)

As previously discussed, when MVL completed an AFC seeking a license for the project from the CEC, the CEC, as the lead agency, conducted an environmental analysis of the project.⁸ The CEC reviewed the impacts of Mountainview with respect to air quality, public health, hazardous materials management, worker safety, biological resources, cultural resources, paleontology, waste management, land use, noise, socio-economics, soil and water resources, traffic and transportation, visual resources, and alternatives.⁹ In sum, the CEC concluded that there were no significant impacts that would result from the construction and operation of the project, that could not be mitigated by specified conditions on the following topics: air quality, water resources, biology, land use, and visual impact.¹⁰

Independently of its obligations under CEQA, PU Code Section 1002 creates a statutory obligation for the Commission to consider the following factors in determining whether or not to grant a CPCN: (1) community values; (2) recreational and park areas; (3) historical and aesthetic values; and (4) influence on the environment. In the case of Mountainview these four enumerated criteria have already been thoroughly addressed as part of the CEC's environmental review. Moreover, in this application, there was no testimony presented by any party that called into question any of the findings made by the CEC in its environmental analysis relating to the community values, recreational and park areas, historical and aesthetic values, or influence on the environment associated with the proposed Mountainview project.

This Commission is further relieved of any CEQA obligation for Mountainview by Public Resources Code Section 21000(b)(6). This code section exempts public agency actions from CEQA if those actions relate to a thermal power plant previously certified by the CEC. This conclusion is consistent with the Commission's own regulations for implementing CEQA. Specifically, Rule 17.1 of the Commission's Rules of Practice and Procedure was developed to comply with CEQA. Rule 17.1(c) provides in pertinent part:

(c) Applicability. This rule shall apply to CEQA projects for which Commission approval is required by law, except projects for which an application must be filed with the California Energy Resources Conservation and Development Commission pursuant to Public Resources Code Section 25500.

In Decision 01-09-049, the Commission determined that it did not have to conduct a CEQA review to issue Edison a CPCN to construct a new 230 kV line because the CEC had fully reviewed the project pursuant to the Public Resources Code § 25500 certification process. The Commission concluded "Rule 17.1 of the Commission's Rules of Practice and Procedure specifically exempts projects subject to CEC review under Public Resources Code § 25500 from the requirement of preparing and submitting a proponent's environmental assessment and undergoing an environmental impact report."¹¹ Because the CEC reviewed Mountainview pursuant to Public Resources Code § 25500, and granted it a license in March of 2001, this Commission does not have to conduct further CEQA review -- the requirements have been satisfied.

Once a full environmental review of a project pursuant to CEQA has been conducted, CEQA provides that no subsequent review is necessary unless: (1) substantial changes are proposed for the project, or (2) substantial changes occur with respect to circumstances under which the project will be undertaken, or (3) new information becomes available which would substantially alter the analysis of significant impacts or mitigation measures.¹²

Sequoia, the current owner of Mountainview, initiated construction of the project as authorized by the CEC. When the option agreement is exercised and Edison becomes the owner of Mountainview, Edison will continue with the construction as authorized by the CEC. Since the sale of Mountainview is a paper/financial transaction, and does not result in any physical change to the environment, it does not trigger further CEQA review. The Navajo Nation cautioned that restarting construction after a 20-plus months halt in construction should be viewed as a triggering event and should necessitate further environmental review. We find that in the absence of substantial changes to the project, substantial changes in circumstances, or new information altering impacts or mitigation, further CEQA review is not required for restarting construction.

We accordingly conclude that the CEC's environmental analysis fully satisfies the environmental assessment requirement that must be met in order for this Commission to issue a CPCN for the Mountainview project.

B. Need for New Plant

We can expedite the review required to issue a CPCN to Mountainview, because we are addressing the issue of Edison's procurement needs in both this decision and in the procurement rulemaking, R.01-10-024. Until Edison submits and receives approval of its long-term plan, we are loath to approve long-term resource commitments. However, Mountainview can be added as a highly cost-effective option under Edison's long-term resource plan that was filed this past April in Commission proceeding R.01-10-024.

The record in this proceeding has established that Edison's acquisition, completion and operation of Mountainview is in the public interest. Moreover, Edison has established a need for the power from Mountainview in light of its growth projections for the foreseeable future, and the expiring Department of Water Resources (DWR) and QF contracts. Although it is unclear if Edison has a need for the entire 1,054 MW of capacity in the years 2006 to 2008, Mountainview can meet Edison's immediate need for dispatchable peaking and intermediate capacity to mitigate forecasted near-term capacity shortfalls. Edison has demonstrated that it will need the base load resources Mountainview can provide by 2010. In the interim, Edison can use the flexibility of this modern gas-fired generation resource to provide peaking capacity. Edison does not now own or have committed under contract sufficient generation to meet its customers' entire likely peak demands, now or especially in the future, as there is load growth.

In Edison's long-term resource plan filed in the procurement rulemaking, Edison predicts that its gap between committed capacity resources and likely peak demand will grow significantly between 2005 and 2012. Edison argues that it would be prudent for Edison to fill a sizeable portion of this gap with utility resources. Mountainview's online date of 2006 comports well with Edison's projected capacity needs both in the near-term and long-term.

TURN's "official position" is that new resources may be needed as early as 2008, but not in 2006. TURN is also concerned about the regulatory future surrounding the status of direct access, the adoption of a core/non-core framework, community choice aggregation, and the future of Mohave. In light of these issues, TURN fears that there will be stranded costs that could transform Edison's "unique opportunity" into a "unique burden" for ratepayers. TURN witness Marcus testified that if Mountainview, Mohave, and direct access all converged simultaneously it could place bundled customers at serious risk of "rate shock."¹³ To address this concern, TURN proposes that the Commission condition the approval of Edison's application on the requirement that all customers other than those currently receiving direct access will be obligated to pay for any stranded costs related to Mountainview for at least the first 10 years of its life. This can be accomplished by rolling Mountainview into the portfolio of resources used to determine exit fees for departing customers, or departing customers may take a pro rata share of Mountainview power through an off-take agreement between Edison and the customer's Electric Service Provider (ESP).

ORA is concerned that Mountainview will be too costly to ratepayers because they believe it will come on line before it is needed and will contribute to an oversupply of capacity, possibly creating stranded costs.

The Navajo Nation is not convinced that Edison has established the need for Mountainview. Specifically, Edison defines its need as a dispatchable, immediate resource, but then assumes that Mountainview will operate as a baseload facility after 2010. Considering the uncertainty of the future or of the stability of its customer base, the Navajo Nation questions the wisdom of the Mountainview facility - especially when Edison already owns Mohave.

IEP cannot address the issues of need and cost-effectiveness because it was denied access to confidential materials. In addition, IEP feels that need and cost-effectiveness are more properly addressed within the integrated planning process under review in the Commission's procurement rulemaking, R.01-10-024.

CCC claims that Edison has conceded that there are existing uncommitted resources that are available to fill most of the gap between Edison's projected need and its committed resources for at least the next nine years. Therefore, CCC argues that Edison has not demonstrated that Mountainview provides greater benefits than the benefits that Edison could secure through contracts with a mixture of long-term resources, including renewable and non-renewable QF resources. CCC's position is that if Mountainview is approved, Edison will be allowed to replace the power supplied under its expiring QF contracts with power from Mountainview and that will undermine state policy that encourages existing and new cogeneration.

CUE is adamant that Edison needs additional generation by 2006. CUE relies on a CEC October 2003 report, TURN's witness Bill Marcus, and testimony from Dr. Barkovich for CLECA, Thomas Beach for CCC, and Dr. Cicchetti for IEP for support that Edison needs more generation. And since Mountainview is a new combined-cycle plant, it should be cost-effective over the 30-year term because it provides below -cost capacity, low -priced energy, and reduces transmission losses. From CUE's perspective, even if Edison did not need the additional capacity in 2006 and it was not so cost effective for ratepayers, ratepayers benefit by securing generation now, during a period of oversupply, rather than waiting until supplies get tighter, and prices rise. CUE supports Mountainview even if Mohave does not close for any period of time.

Sequoia argues in support of both the need for Mountainview and its cost -effectiveness. In Sequoia's view, California faces a capacity shortfall in the near future, and unless capacity is added, the energy crisis may not be over. Sequoia takes this position even if Mohave stays operational and the QF and cogeneration power is available. Because of Mountainview's low heat rate, high efficiency, and location in Edison's load center, Sequoia believes the facility is even more cost effective.

We find that Edison has met its burden of showing that it needs the capacity of Mountainview. The acquisition of Mountainview is consistent with the Energy Action Plan, Item 3, jointly issued by this Commission, CEC, and California Power Authority (CPA). Edison has forecast that considering its existing resource base of utility-owned generation, QF contracts, inter-utility contracts, Department of Water Resources (DWR) allocated contracts, and transitional contracts, when combined with expiring contracts, forecasted load growth, and the assumed reserve requirements, it will need more capacity by 2006. Edison does admit that there are existing uncommitted resources to meet any gaps between now and 2006. However, moving forward, Edison forecasts a need for dispatchable, peaking and intermediate resources in the short-term, and baseload over the long term. Mountainview, with its 1,054 MW combined-cycle capacity, in Edison's service territory satisfies this resource need. We make this finding independently of any decision concerning the future of Mohave, or of QF or cogeneration contracts.

In order to ensure that ratepayers are not over burdened during the early years of the contract with stranded costs if all the power is not needed, we adopt TURN's proposal that all customers other than those currently receiving direct access be obligated to pay for stranded costs related to Mountainview for the first 10 years of its life. This provides additional financial certainty and cost recovery for Edison.

C. Cost Effectiveness

Edison asserts that Mountainview will be a low-cost resource as it provides a cost-effective source of energy at a very low state-of-the-art heat rate of 7,100 Btu/kWh. Edison examined different options to determine if it would be better to add a capacity-only resource, or a facility such as Mountainview, capable of providing both capacity and low-cost energy. To approximate the cost of adding a capacity-only resource, Edison used the economic costs and dispatch features of a new, equivalently-sized combustion turbine (CT), and compared the costs of Mountainview to a newly-built CT and to the costs the CPA indicates for peakers. Edison also compared the costs of Mountainview to recently installed CCGTs and the estimated costs of a new CCGT installed. In all of Edison's comparisons Mountainview was a proven source of low-cost energy. In addition, if Mountainview is acquired now from Sequoia at the proposed discount price, the benefit to ratepayers is increased.

Edison points out that another benefit of Mountainview is its location. The plant is well-situated-in the heart of Edison's growing load center and on the site of Edison's former San Bernardino Generating Station. To begin, its size and location relative to the transmission grid provide system benefits. It will interconnect with Edison's San Bernardino 230 kV substation and provide generation competition in the eastern area of its service territory. Also, the location provides other system reliability benefits such as voltage support, added reactive margin, and reduced system losses. It is also possible, Edison opines, that with the addition of Mountainview, Edison may be able to defer other major transmission grid expansion projects, resulting in further benefits to ratepayers.

Mountainview also has flexible access to the natural gas delivery system. The natural gas fuel supply will be transported to the facility through a new 17.5-mile lateral pipeline to be constructed and owned by SoCalGas. This ensures that the gas supply is reliable, flexible, and competitively priced. Mountainview will also have access to all major western gas basins, can choose among pipelines, and will be able to use natural gas storage facilities owned by SoCalGas.

And finally, Edison argues that Mountainview will likely provide cost savings benefits for ratepayers from self-providing ancillary services such as spinning reserve, regulation, and voltage support, and may be able to sell these services to third parties. Any monies received from the sale of these services will reduce ratepayer costs.

TURN is not satisfied with Edison's testimony on cost-effectiveness. To begin, TURN contends that Edison's comparisons overstate the attractiveness of Mountainview. Next, TURN challenges whether the cost estimates reflect reality: the quoted price was premised on Edison exercising its option by November 30, 2003; Edison did not use any of the contingency included in the capital cost limit; the total fixed costs are expected to be higher than estimated; and Edison's projections did not include any estimates for capital additions, refurbishments, betterments, decommissioning, or incentive payments. Therefore, TURN urges the Commission to require, before it votes on the application, that Edison compile and present a summary of all cost categories and forecasted amounts for each category year. TURN advocates that this material be presented to Commission staff and Edison's PRG and entered into the record of this proceeding.

TURN also criticizes the cost comparison presented by Edison for any comparable CCGT plant, and for the fact that Edison failed to compare the economics of Mountainview with alternative resource commitments that are available in the market. TURN's analysis of the facility over the 30-year term, indicates that ratepayers suffer higher costs for most of the first decade and net benefits only during the second and third decades of Mountainview's projected life. Still, TURN does support Mountainview-with TURN's proposed conditions.

ORA opposes Edison's proposal on the ground that the Mountainview plant is not cost effective in its first year of operation and will not pass a first year cost-effectiveness test until 2009, contravening the Commission's policy that consideration of new resource additions should focus on the first year of optimal need. ORA relies on TURN's analysis that Mountainview is not needed until 2008, two years after Mountainview is scheduled to come on line. Therefore, ORA questions the cost-effectiveness of the project.

The Navajo Nation criticizes Edison's presentation on cost -effectiveness since Edison did not provide the all-in cost of energy for Mountainview. However, in its Mohave application, Edison did provide the comparative cost of as-delivered energy from Mohave. When the two facilities are compared, the Navajo Nation is sure that the Commission can only conclude that Mohave is more cost-effective than Mountainview, especially when the cost of natural gas is included. The Navajo Nation opines that the price of natural gas will rise in the future, burdening ratepayers with the entire risk of gas price volatility in the future. Even Edison's witness conceded that as natural gas costs rise, coal-fired generation becomes more cost effective than natural gas-fired units, making Mohave a more cost effective choice.

CCC alleges that Edison overstated Mountainview's cost-effectiveness as (1) compared with other CCGT plants; (2) in comparison to prices for QF contracts; and (3) in comparison with incremental renewable resources. In summary, CCC argues that other sources may produce more cost-effective options than Mountainview, but if Mountainview is approved, the development of coherent long-term procurement policies and investment in generation resources would be undermined.

We agree with TURN and the Navajo Nation that Edison did should make an additional showing on the cost-effectiveness of Mountainview and provide the all-in costs of Mountainview, and adopt TURN's proposal to require Edison to compile a summary of all cost categories and forecasted amounts that would be recoverable from ratepayers for Mountainview. The material will be presented to Commission staff and Edison's PRG and entered into the record of the proceeding.

In the absence of this information, we can still make a finding that Mountainview is cost-effective because it is a new state-of-the-art high efficiency, low heat rate (7,100 Btu/kWh) combined combustion facility that will produce energy efficiently, and environmentally beneficially, especially when it is compared with CT and other CCGTs. We do not need to address the merits of Mohave, QFs, or cogeneration facilities to determine that Mountainview is cost-effective.

D. Cost Cap

A review of Edison's testimony shows that out of the total projected costs for the Mountainview project, assuming a closing date of November 30, 2003, only 10% or so of the forecasted expenses contain any degree of uncertainty. Taking as a given that the project is not closing by November 30, 2003, we can increase the degree of uncertainty a little.. Edison has asked for a contingency allowance that TURN, as a member of the PRG with access to the confidential financial figures, thinks is too high. Edison has asked for a contingency that equates to a 75% margin of error before a 50/50 cost sharing mechanism between ratepayers and shareholders is employed.

We do not find that a contingency allowance of this magnitude is in the public interest, because it does not encourage Edison to bring the project in at cost, or at the lowest cost overrun. We therefore will reduce the total contingency amount to either 5% of the total project cost estimates, or 50% of the costs projected to be subject to uncertainty, whichever is higher. We do not adopt the 50/50 sharing mechanism. Instead, we approve placing the project's capital costs into ratebase and using traditional ratemaking treatment for a cost-of-service, utility-owned generation plant.

If there are cost overruns that exceed either contingency allowance, Edison may pass the additional costs on to shareholders, or come to the Commission, on an expedited schedule, and request, if justified, a higher contingency allowance adjustment.