XIII. Cost-Effectiveness Conclusion

Our base case, as addressed in the previous discussions, is for SCE only and includes the following adjustments to SCE's cost-effectiveness calculations based on its 2006 GRC:

· SGRP cost of $680 million, excluding AFUDC.

· The cost-effectiveness analysis is for SCE only.

· O&M costs 10% above SCE's estimate.

· Capital additions 25% above SCE's estimate.

· $78.8 million for transmission mitigation.

· Unit 2 and Unit 3 shutdown, without the SGRP, in the middle of 2012.

· SDG&E and Anaheim do not participate in the SGRP.

· The ownership shares for SDG&E and Anaheim are reduced by 0-14% and 0-2.2% respectively. The resulting ownership range for SCE is 82.00-98.21%, with a mid-point of 90.10%.

· Construction financing costs are recovered through inclusion of AFUDC in ratebase after the SGRP is complete.

· SGRP costs are allowed in rates, subject to refund pending a reasonableness review, on January 1 of the year following the commercial operation date of each unit.

· SCE is authorized to depreciate a total of 20% of its ownership share of the estimated costs of removal and disposal of the original steam generators over the period 2006-2011.41

In order to test the sensitivity of the results to variations in the inputs to the calculations, we will include the following changes to the above:

· 92% and 84% capacity factor.

· 10% higher SGRP cost.

· 16% (one standard deviation) higher gas cost.

· 10% higher O&M costs.

· 10% higher capital additions.

· One year outage.

· Split shutdown.42

The following table shows the NPV, in 2004 dollars, of seven scenarios illustrating the results of our cost-effectiveness analysis.43 An eighth scenario is also included that illustrates the results of our analysis if our base case is revised to utilize the O&M costs and capital additions estimated by SCE based on the 2006 GRC.

Table of Results

Scenario Assumptions Capacity factor44 SCE Ownership Share

1 Base 92% (6.5) (71.0) (135.2)

2 Base 92% (78.4) (142.8) (207.0)

+10% higher 88% (291.9) (337.2) (382.2)

SGRP cost 84% (505.5) (531.6) (557.5)

3 Base 92% 518.6 408.0 297.6

+16% higher gas cost 88% 296.7 205.6 114.7

4 Base 92% (274.4) (316.6) (357.0)

+10% higher O&M 88% (488.0) (511.0) (532.3)

5 Base 92% (64.1) (124.9) (185.5)

+10% higher 88% (277.7) (319.4) (360.7)

Capital Additions 84% (491.2) (513.8) (536.0)

6 Base 92% (170.9) (221.7) (272.4)

+one year outage 88% (384.4) (416.2) (447.6)

7 Base 92% 213.5 184.1 154.7

+split shutdown 88% 60.7 51.2 41.6

8 Base (using SCE 92% 405.3 308.8 212.5

For the reasons discussed previously in this decision, we do not consider a 92% capacity factor, an 84% capacity factor, or a one-year outage likely. In addition, the above analysis demonstrates that the split shutdown scenario (Scenario 7) is more costly than shutting both units down when one unit reaches the plugging limit.45 This means that, if the SGRP is not performed, both units would be shut down when either unit reaches the plugging limit. Therefore, we find that our base case (Scenario 1) using an 88% capacity factor is reasonable, and appropriate for use in determining the cost-effectiveness of the SGRP.

The above analysis demonstrates that our base case has an NPV of negative $220.1-310.4 million, depending on SCE's ownership share. However, this does not include a GHG adder that would decrease the net cost of the SGRP by $375.6-313.5 million depending on SCE's ownership share, thus increasing its NPV by that amount.46 It also does not consider the unquantified safety, public health, and environmental risks and effects associated with SONGS that would reduce the cost-effectiveness of the SGRP. We have no reason to believe that the unquantified safety, public health, and environmental risks and effects associated with SONGS would completely offset the GHG adder. We also note that the above table demonstrates that variations in the gas price, capacity factor, ownership percentage, O&M costs, capital additions, and SGRP costs could make the SGRP more or less cost-effective. As a result, we conclude that the SGRP is marginally cost-effective. That is, it is about equally likely to be cost-effective as not cost-effective.

41 $22.2 million times SCE's ownership share is the total amount to be recovered over the period 2006-2011.

42 Under a split shutdown scenario, Unit 2 would shut down in the middle of 2012, and Unit 3 would shut down in January 2016 if the SGRP is not performed.

43 The NPV is the net present value of the revenue requirement resulting from the total net costs and benefits of the SGRP, including the SGRP costs.

44 Reducing the capacity factor reduces the replacement energy costs because SONGS is generating less energy that needs to be replaced.

45 The base case scenario (Scenario 1) is less cost-effective than the base case scenario with the split shutdown (Scenario 7). The only difference between the two scenarios is the split shutdown. For the NPV to increase due to inclusion of the split shutdown, the net cost of operating SONGS without the SGRP would have to increase. Therefore, the split shutdown scenario is more costly than shutting down both units at the same time.

46 See section VII.O. for a discussion of the GHG adder. The GHG adder for the base case is $375.6 million for a 98.21% ownership share and $313.5 million for an 82.00% ownership share at an 88% capacity factor.

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