VIII. Other Outstanding Issues

A. Cost Recovery

By granting Edison a CPCN to acquire, develop, construct, own, and operate Mountainview as a utility-owned project, all cost recovery and rate-related aspects of Edison's activities associated with Mountainview will follow traditional utility ratemaking: straight-line depreciation of book investment, return on capital with a Commission-authorized rate of return and capital structure, a mark-up for tax liabilities, and recovery of operating expenses subject to a regulatory lag, incentives and expenditures for capital additions.

Also, by granting Edison a CPCN to acquire, develop, construct, own, and operate Mountainview as a utility-owned project, it will not be necessary for Edison to recover all costs of operating Mountainview, which it would pay pursuant to the FERC-jurisdictional PPA, through the Energy Resource Recovery Account (ERRA), or for the Commission to rule on various other Edison proposals for the review of various Mountainview costs in other Commission proceedings. Rather, Edison should only need to use the ERRA for Mountainview as a utility-owned facility to record fuel costs, as it already does for other Edison-owned generating stations, and the other Mountainview costs in question can be addressed, to the extent necessary as part of Edison's General Rate Case.

Moreover, by granting Edison a CPCN to acquire, develop, construct, own, and operate Mountainview as a utility-owned project, it is not necessary at this time for the Commission to address decommissioning costs for Mountainview or to adopt an expedited Advice Letter process whereby the Commission can pre-approve capital addition/betterment projects and certain reclassification of charges, though we would consider such an Advice Letter process if Edison still wishes the Commission to consider it.

B. Recovery of Initial Capital Outlay

Edison will be able to fully recover its acquisition, construction, and financing costs, subject to various cost-control mechanisms, at a cost of capital authorized by this Commission, through a monthly capital recovery charge. The rate of return for capital recovery is established at the level set by the Commission in Edison's annual Cost of Capital proceeding.

TURN also suggests leveling the MVL's capital costs over the first ten years of operation in order to minimize the early-year rate impacts associated with traditional straight-line depreciation. While we share the concerns of TURN and other interveners over the costs to ratepayers during the first decade of the contract, the total cost of the Mountainview project, in proportion to the other costs that go into Edison's ratebase, is relatively insignificant and levelizing them would not have a significant impact on rates. We therefore do not adopt this leveling methodology.

Edison seeks to recover the financing costs for Mountainview by recording the allowance for funds used during construction (AFUDC) during project planning construction, and then recovering those amounts in rates over the life of the facility. IEP urges the Commission to deny Edison this recovery, but we do not see any justification for this opposition. It is reasonable to allow Edison recovery of the financing costs of the project and therefore, we will allow Edison to recoup the recorded AFUDC amounts.

C. Recovery of Operating Costs

The largest O&M cost for Mountainview is the Contractual Services Agreement (CSA) with the service provider for maintenance of the facility. Edison provided testimony that that contract was vigorously negotiated to provide maintenance for the facility at a fair and reasonable cost. Edison will be able to recover the CSA costs as well as insurance, property taxes, and interconnection costs, through traditional rate base methods. We find that the record supports Edison's proposal to recoup fixed and variable O&M charges through a monthly service charge, subject to true up for historic costs, at each next overhaul cycle, and we adopt the proposal.

D. Incentive Mechanisms

The proposed PPA has two incentive mechanisms built in: the heat rate incentive and the availability incentive mechanisms. The heat rate incentive is designed to motivate the owner to maintain the plant in a reasonable condition so that the heat rate does not unreasonably degrade and the plant functions at an efficient heat rate. The target full load heat rate for the Facility is 7,000 Btu/kWh HHV at a "new & clean" condition, and the heat rate should not exceed 7,210 Btu/kWh HHV.

The availability incentive mechanism is designed to encourage efficient operation of the plant for the entire expected operating life of the plant.

Although we are not approving the PPA mechanism, we find the heat rate and availability incentive mechanisms to be in the public interest as they encourage Edison, as the owner of Mountainview, to produce efficient power at the lowest heat rate possible. Ultimately, this translates into lower rates for ratepayers, and, thus, we adopt these two incentive mechanisms. The incentive payments will be shared 50/50 between ratepayers and shareholders.

E. Financing

Edison's application requests that the Commission confirm that Edison may use existing debt financing and equity. We do confirm that Edison may use existing debt financing and equity at the utility level, as authorized in
D.98-02-104 and D.00-10-063. We find that this financing mechanism, using existing cash on hand and/or through the issuance of new securities, is the most cost-effective for customers and is preferable to project-level financing.

We also find that this Commission will set the rate of return for Mountainview through Edison's annual Cost of Capital proceeding.