8. Terms of the Generation Settlement

PG&E initially requested a 2003 generation revenue requirement of $1.022 billion. ORA, TURN, Aglet, and CCSF each recommended reductions to PG&E's request. The Generation Settlement resolves all contested issues raised in connection with PG&E's forecast 2003 electric generation revenue requirement and provides for a TY 2003 generation revenue requirement of $912 million,³⁹ as follows:

Table 5

Comparison of Generation Settlement
to PG&E and ORA Litigation Positions

(Millions of Dollars)

Unbundled Cost Category	PG&E Application	ORA Position	Generation Settlement	Reduction from PG&E's Application
Fossil	118	95	94	24
Hydro	345	302	323	22
Diablo Canyon	545	468	535	10
Purchased Power	14	9	3	11
Total	1,022	875	955	67

The components of the reduction from PG&E's application are the result of the Settling Parties compromise on several issues including:

8.1 Return on Regulatory Assets

PG&E requested that the unamortized balance of the WAPA, Helms and Loss on Sale of Power Plants regulatory assets be included in rate base and earn a return. ORA and TURN opposed PG&E's request. The settlement removes the return on these assets from the revenue requirements without prejudice and provides that the issue as to whether a return on these assets is appropriate will be addressed in the end-of-freeze phase of A.00-11-056, resulting in a $10 million reduction to PG&E's TY 2003 revenue requirement.

8.2 Amortization of the Statement of Financial Accounting Standard No. 109 (FAS 109) Regulatory Asset

PG&E proposed to amortize the outstanding balance of the Statement of Financial Accounting Standard No. 109 (FAS 109) flow-through regulatory asset over a three-year period beginning in 2003. ORA and TURN recommended that PG&E be required to amortize the FAS 109 flow-through regulatory asset over 20 years based on the remaining lives of the plant assets giving rise to the tax asset.

PG&E responded that in D.97-11-074 and D.02-04-016, the URG decision, the Commission recognized that the FAS 109 asset should be amortized over a period shorter than 20 years.

The Generation Settlement provides that the FAS 109 flow-through regulatory asset should be amortized over the remainder of the 10-year schedule adopted in D.02-04-016 (i.e., 9-year amortization beginning in 2003).

8.3 Diablo Canyon Depreciation

PG&E proposed to shorten the depreciable life of certain major plant components at Diablo Canyon to 15.8 years to reflect their anticipated replacement prior to the end of the operating life of the plant. The remainder of the functional plant equipment would be depreciated over 19 years. ORA and TURN recommended depreciating all of the Diablo Canyon plant over 21 years.

The Settling Parties agree that the functional plant at Diablo Canyon will be depreciated over 19 years, while common plant items such as fleet and computers would be depreciated in accordance with the depreciation schedule proposed for all such assets.

8.4 Diablo Canyon O&M Expense

PG&E forecast TY 2003 Diablo Canyon O&M expense using 2001 recorded costs as a base. ORA recommended using a 3-year average of Diablo Canyon recorded costs to forecast 2003 O&M expense, resulting in an $11 million reduction to PG&E's forecast Diablo Canyon O&M expense. ORA also recommended adjusting the 2003 forecast by an additional $2.3 million, reflecting ORA's lower estimate for the reactor vessel chemical cleaning project. As part of the Generation Settlement, the Settling Parties agreed to adopt PG&E's forecast.

8.5 Additional Security Costs at Diablo Canyon

The Generation Settlement authorizes an additional $3 million in revenue requirement ($2003) for additional security costs at Diablo Canyon to cover the expected cost increase associated with the Nuclear Regulatory Commission's April 29, 2003 orders increasing security requirements at nuclear power plants. Although the consideration of actual 2003 costs is inconsistent with prohibition of the use of actual 2003 data set forth in the ACR issued February 13, 2003, the Settling Parties support inclusion of these costs.

8.6 Post Test Year Capital Applications

Aglet recommended that we require PG&E to file a separate application supporting its requested rate recovery for Diablo Canyon refueling outages and the LP Turbine Rotor Replacement project. The Generation Settlement provides that the base revenue requirement includes one refueling outage. If PG&E forecasts a second outage in any one year, the authorized revenue requirement would be increased to reflect a fixed revenue requirement of $32 million ($2003) per refueling outage. PG&E agreed that the Low Pressure Turbine Rotor Replacement project would be reviewed in its next GRC.

8.7 Fuel Oil Inventories

ORA recommended that the Commission require PG&E to recover the return on fuel oil inventories through the Energy Resources Recovery Account. The Generation Settlement adopts PG&E's request to include recovery of the carrying costs on the fuel oil inventories in the 2003 GRC.