XVIII. SDG&E Capital Additions

SDG&E asked for an increase in rate base as a result of capital additions installed154 since the last test year as well as forecast to occur in the test year itself. It explained155 that its request was influenced by such factors as safety and reliability, and included piping infrastructure, tele-metering equipment pressure monitoring and other projects.

Apart from the specific adjustments as discussed below that are found to be a more likely estimate for Test Year 2004, we otherwise adopt the SDG&E end-of-litigation position.

A. Gas Distribution

The range of estimates is as follows:

1. Geographic Information System and Maintenance & Inspections System

In SDG&E's initial direct testimony, the applicant projected capital expenditures of $7.2 million ($5.5 million in 2003 and $1.71 million in 2004) for a Geographic Information System (No. 00867) that would provide an automated system of mapping etc., that would improve the companies' ability to plan and manage the system, especially for maintenance and service restorations.157 ORA proposed to disallow these costs because the system has been delayed until 2008.158 In a response to an ORA data request, SDG&E acknowledged and disclosed this delay, and also a delay for a Measurement & Inspection System project (No. 02867).159 This project was originally forecast at $2.74 million ($0.9 million in 2003 and $1.836 million in 2004). In its response to ORA, SDG&E budgeted no costs for these projects to be in the test year capital expenditures but it did show $2.4 million dollars in 2004 capital expenditures for Pipeline Integrity Management.

In rebuttal testimony, SDG&E proposed that the Pipeline Integrity Management project should at least be substituted if ORA has an appropriate proposal to eliminate projects that have changed since the application was filed. SDG&E expects to spend $2.4 million in 2004. SDG&E argued that "a snap shot in time approach" is appropriate and that "the merits of the projects submitted at the time of the filing is what ought to be debated."160 In essence, they argue that over time there is always better information.

In this instance, SDG&E was in fact correcting its testimony with respect to three projects during the discovery phase of the proceeding. This decision repeatedly has found that the forecast methodology has to consider the likely changes from historical trends - i.e., a trend is not acceptable if it ignores identifiable changes in scope and scale. In this situation, we believe that it is a reasonable expectation to acknowledge during discovery known changes161 to the estimates in the application - in both directions, and then it is appropriate to increase or decrease the test year estimate. We will include the $1.71 million for 2004 capital expenditures that ORA proposed to disallow.

2. Budget Reduction Factor

ORA proposed an overall blanket adjustment to gas distribution capital expenditures based on a six-year average (1997-2002) of the difference between SDG&E's budget and actual costs. The range was as high as 11.6% and as low as 0%. ORA eliminated the two extremes and derived 8%.162 SDG&E argued the method is overly simplistic and its use would leave the company without sufficient funds to meet the various capital additions required to serve customers safely and reliably. It argued that SDG&E cannot always control events so a budget to actual comparison is necessarily reliable. This would be a stronger argument if the variance were not always a high-budget and lower-actual outcome.163 Nevertheless, ORA did not identify why SDG&E's estimates are high in the past, so we cannot address a specific problem; ORA assumed a continuum of error. We will not adopt a blanket adjustment in this situation.

3. Voice System Replacement Project

ORA proposed to disallow 10% of the 2004 forecast capital expenditure for this project based upon a conclusion that 10% of the system would not be in service by the end of 2004. ORA made the assertion that including the full estimate would over-compensate SDG&E for ORA's presumed five-year life of the rate case cycle. If we accurately reflected a forecast for rate base for every year between rate cases, which we do not, then only one-year's adjustment might be reasonable. The usual method of post-test year ratemaking is an index-type of adjustment; the specifics for SDG&E will be decided in Phase 2. Elsewhere, for SoCalGas' Software Development Budget Category 723, we adopted for ratemaking purposes ORA's adjustment to weight the addition to rate base to reflect the in service date. This adjustment is inconsistent with ORA's other recommendations, and given the degree of uncertainty inherent in estimates, a 10% adjustment is unreliably precise. We believe SDG&E that the system will be completed and in use in Test Year 2004 and therefore we adopt the SDG&E estimates, including the full $1.472 million for 2004.

4. Otay Mesa Betterment Project

Pressure betterment project 2466 would modify SDG&E's gas supply system to allow multi-directional flow through the Otay Mesa Metering Station (Otay Mesa);165 that means gas could alternatively flow northward from the Mexico and U.S. border into the SDG&E system interconnecting with TGN.166 SDG&E proposed to add $11.531 million to rate base ($3.763 million in 2003 capital expenditures and $ 7.768 million in 2004167). ORA did not take issue with the concept of the project, but it did object that until SDG&E has a contract with a gas supplier and approvals from both the Federal Energy Regulatory Commission and the U.S. Department of Energy, the project should not be included in rate base.168

SDG&E responded in its rebuttal testimony, Ex. 93, that the project was delayed, and the costs shifted between 2003 and 2004 still are the same total, and that the rate base addition should be weighted to reflect a July 1 in-service date in 2004. SDG&E did not clarify in Ex. 29, 55, or 93 that TGN is Transportadora de Gas Natural, which is an affiliated company, owned by SDG&E's parent Sempra Energy.169 TGN is the interconnecting company with SDG&E on the Mexico-U.S. border.

In Ex. 55, supplemental testimony served on June 16, 2003, in response to the Scoping Memo, SDG&E explained the role of the Otay Mesa project as follows:


"Although SDG&E can meet its long-term demand growth with the resource plan presented (in Ex. 55), there may be a need for additional infrastructure to accept new supply into the SDG&E system. In the long term, new gas resources may become available from an LNG plant sited in Baja, California, Mexico. SDG&E could use the reliability receipt point at Otay Mesa discussed in (Ex. 29) to take new supplies into the SDG&E system. In the event that this potential supply source develops, SDG&E will need to modify and expand its gas transmission system..." by a forecast of a further $232 million.170 (Emphasis added.)

This description is not sufficient to convince us that the current proposal is in fact used and useful now for ratepayer benefit in the test year, and therefore we will not include Project 2466 the Otay Messa Betterment in Test Year 2004 rate base.

Additionally, ORA proposed an Over Budgeting Factor adjustment that appears to be derived in the same fashion as the Budget Reduction Factor for gas distribution projects. ORA did a mathematical exercise to average the 1997 - 2002 six-year variance in budget to actual after dropping the highest and lowest. The range is 39.6% to 1.6% and even then the range is from 18.9% to 4.1% for the remaining four data points for an average of 9.7%.171 Once again, ORA had not analyzed the underlying cause for the variance. We do not know from ORA's exhibit, for example, whether every project was always under budget or whether this is a net figure. We also do not know whether managers were over-estimating costs in order to avoid overruns, in essence, looking good by beating an easy target. SDG&E's last rate setting procedure for capital expenditures was for a 1997 test year, so none of the intervening years' budgets relied on by ORA were prepared to withstand the scrutiny of a rate proceeding at the Commission. We would decline to make this blanket forecast adjustment had we included Otay Mesa in rate base.

B. Electric Distribution

The range of estimates is as follows:

C. Blanket Budgets

SDG&E had 121 capital budget items included in the Test Year 2004 revenue requirement, these were classed as either capital projects with over $500,000 in expenditures that generally increase the system capacity, or "blanket" items that are smaller routine items recurring from year to year. ORA pointed out that in the 2003 and 2004 forecasts, the 30 blanket items represented 80% and 85%, of those years' expenditures. SDG&E presented testimony that described the project management process including a description of the Capital Project Summary (CPS), which is a control tool for approval and project management.177 SDG&E provided a description, the purpose and scope for each work order, including the blanket work orders in Ex. 27, and also had supporting work papers and responses to data requests that were not always identified as an exhibit. These descriptions provided a clear and specific purpose for each project.

ORA examined a five-year average of the expenditures for SDG&E's blanket work orders. With four exceptions, ORA adjusted the forecast to rely on the average. The exceptions were projects with less than five years of history, and ORA accepted one for safety reasons, for two, it used the available average and it rejected the entire $7.5 million for information technology projects in 2004 because of a concern that the types of information technology projects included in the blanket cannot be forecast like capacity projects and also that there is a similar or duplicative project that also dealt with future information technology projects.178 As expressed before, we believe that reliance on forecast trends and averages is not enough; they are only tools and not a complete and independent forecast in their own right. ORA did raise a concern on the details in the one case, i.e., whether or not the information technology projects were duplicative.

What is disconcerting is that the SDG&E Settlement Agreement included an adjustment to the blanket category inconsistent with the ORA litigation position. There was no consideration of the specific litigation recommendations discussed above; the use of a five-year average plus three other unique changes. In settlement, instead, three specific projects not at issue in litigation are decreased a total of $5 million in both 2003 and 2004 estimates because of "reduced scope of work assumed in the Settlement."179 This reduction of scope is unfortunately not defined, and this is another example of why the Proposed Settlement is not adopted as reasonable in light of the whole record. Most of the $4 million reduction is for a Distribution System Capacity Improvements Program aimed at heavily loaded circuits.180 This project was never discussed in ORA's served testimony; nor was it the subject of examination in evidentiary hearings. We therefore adopt SDG&E's forecast for blanket projects because it is the most reasonable forecast.

D. Project 230 - Underground Cable Replacement Program

UCAN proposed a specific adjustment to the underground cable replacement program, Project #230 that is included in the total Electric Distribution Blanket category, and is not a part of the Proposed Settlement's adjustment. SDG&E forecast capital expenditures of $25.213 million and $29.5 million in 2003 and 2004, respectively, to replace underground (unjacketed)

cables that may fail, or are forecast to fail. SDG&E has averaged $15-$18 million annually. (Tr. 534).181 UCAN tried to include 2002-recorded data in its proposed forecast, and we will not go to 2002 recorded on a piecemeal basis. The essential argument though is that SDG&E over-estimated the replacement requirements compared to historical trends, and with a 5% escalation, UCAN proposed a reduction of $6.963 million in 2003 and $10.337 million in 2004.

SDG&E responded that the correct trend is upward, replacing more cable because underground cable is now a high percentage of its system and cable maintenance and replacement is critical to reliability. SDG&E is also critical of UCAN's calculations.182 We are not prepared to reduce the level of funding for cable replacement. We find that SDG&E has raised valid concerns that UCAN over-estimated the rate of increase, and has not shown that the physical need for replacements is not true. We remind SDG&E that by including its forecast in rate base we expect the work to be performed.

E. Capital Projects Other Than Blanket & Information Technology - Electric

1. Escalation

Projects forecast from Base Year 2001 until the test years are initially estimated in 2001 dollars. The costs are then escalated for inflation to reflect 2002, 2003, or 2004 expenditures.

ORA reviewed 71 capital projects and proposed three adjustments, one was an overall adjustment to the cost escalation method and two were project-specific disallowances. ORA presented a clear simple example that demonstrated for projects that had a multiple-year construction life SDG&E had over-stated the escalation by applying the highest rate applicable only to the last-year's expenditures, to total costs instead of escalating each year's costs separately.183 ORA calculated adjustments of $816,000 in 2003 and $697,000 for 2004, solely for the poor calculation technique. We agree that escalation must be done accurately (even realizing the escalation rates are themselves only forecasts), and we expect SDG&E to correct any errors in this application in its work papers and spreadsheets (models) for the next rate case. We adopt ORA's disallowances.

2. Sorento Substation

ORA's second proposal was to reduce the 2003 cost for a future substation at Sorento by 50%, based on information from SDG&E after the application was filed, that actual cost were expected to be lower than forecast, so we would adopt this lower amount ($1.500 million in 2003) as a stipulation to later data.

3. Sustainable Community Energy Systems

The Sustainable Community Energy Systems (Sustainable Community) was a more contentious project, as ORA expressed concern that it would use ratepayer funding to support SDG&E's participation in competitive energy market services.184 The SDG&E testimony in Ex. 27 was not detailed and there was only one specific project discussed, Market Street in Mar Vista. The company proposes that "by working with the developer and builder from the ground up, SDG&E can assure that the best in energy efficiency, conservation and renewable energy technologies and practice are incorporated and work together to maximum (sic) the benefits and enhance the performance of each."185

What the Sustainable Community project appears to do is to place distributed energy generation and conservation techniques into new construction. This might include installing solar photovoltaic devices, fuel cells and other technology and advanced metering, control, and other related systems.186 SDG&E requested $2.0 million in 2003 and $8.0 million for 2004.187 ORA proposed limiting the 2004 expenditures to $4.3 million.188

UCAN was opposed to SDG&E's program as described, including post-test year expenditures, although it stated its strong support for the need to develop distributed generation and cites its active participation in the distributed generation rulemaking, R.99-10-025 and UCAN advocates that the San Diego Association of Governments (SANDAG), which is creating a task force and an action plan for supporting distributed generation technology, is a more appropriate entity to assume leadership. UCAN pointed to the lack of any process for "stakeholder" input into the SDG&E program, and contrasts that with SANDAG's more public process. UCAN expressed concern at the size of the funding request in light of the limited details of the program. We will adopt the Sustainable Community forecast reduction of $7.5 million as discussed in the next section.

a) Determining the Right Level of Capital Additions Funding

The Settlement Agreement has a substantially lower forecast than either SDG&E's request or even ORA's litigation position: $27.730 million in 2003 and $18.184 million for 2004.189 This is a reduction of $11.454 million in 2003 and $12.846 million in 2004 for a total effect of reducing the test year rate base by $24.3 million. The largest single adjustment is $5.7 million for the Sustainable Community project, reducing the 2003 and 2004 two-year total from $10.0 million to $4.3 million ($2.0 million in 2003 and $2.3 million in 2004). The balance of the reduction in the partial settlement is the result of deferring past the Test Year 6 specific additional projects in 2003 and five more projects in 2004.190

It is disconcerting to see this level of reduction and attendant detail appearing outside of litigated record; none of the 11 projects used to calculate this reduction were questioned in the written or oral testimony of any witness. All of these projects would otherwise appear to be important for reliability and new customer growth and should have been carefully reviewed by ORA. All of these 11 projects are categorized as capacity and substation projects, part of 69 projects included in Exhibit 27.191 Seven of the 11 projects are to resolve significant overload conditions as early as 2003, with overloads ranging from 2% at Telegraph Canyon to 20% at Palomar Airport. Because the majority of the costs for these 11 projects would only be deferred, it is very probable that the costs would promptly reappear in the form of rate base increases recorded in the attrition years following Test Year 2004. By the simple expedient of slipping costs into a later year, the Proposed Settlement looks better than it may really be.

In our discussion to reject the Proposed Settlements, we cite that the level of detail was insufficient overall to justify adoption of the settlement with any assurance that the applicants and consumers would have a clear expectation of service and the obligations imposed on SoCalGas and SDG&E to provide that service. The settling parties plead that the Commission should not "cherry-pick" the settlements, i.e., we should "adopt the Settlement Agreement without modification."192 In this instance, where the details involving the deferral of significant construction forecast in the application for 2003 and 2004 are project specific, it would not be reasonable to use the litigation positions of any party for setting Test Year 2004 rates. We adopt for ratemaking purposes the capital additions of $27.730 million in 2003 and $18.184 million for 2004. Recovery of the 11 deferred projects will be considered in subsequent rate adjustment proceedings when SDG&E can demonstrate the projects are in fact installed and placed in service. We consider this adjustment to be inclusive for the escalation error, and direct SDG&E to correct the method for its next rate proceeding.

F. Information Technology - Electric

SDG&E has a program of investments in information technology projects that include replacement of obsolete software and hardware systems, and the development of new systems and enhancements to existing systems. Examples of replacement of obsolete systems requested in this application include the Geographic Information System ($5.3 million in 2004, Project 868) and Distribution Customer Service ($4.14 million in 2004, Project 1294)193 two of several projects where ORA recommended changes. There were 15 projects in total included in Ex. 27 to develop the 2004 rate base estimate. ORA took exception to three, which we discuss below. We otherwise adopt as reasonable the Information Technology capital expenditures as proposed by SDG&E because we agree that the system replacements are necessary to maintain reliable service.

ORA argued that because there was no 2003 contract in-place for the Geographic Information System project it was unreasonable to include the $5.2 million 2003 estimate in deriving the final test year rate base. ORA did propose that the 2004 forecast of $5.3 million should be included because there would likely be work performed on the project.194 SDG&E's accepted this adjustment and one other ORA adjustment of $1.715 million in 2003 estimates for Project 99821, Outage Management System II (OMS II).195 ORA did accept the 2004 expenditure estimate for this second project.

SDG&E argued in rebuttal196 that for Project 1294, the $4.1 million 2004 costs for the Distribution Customer Service project represents in-house (SDG&E) costs and there would not be a contract to demonstrate the intention to perform the work as expected by ORA. We agree. Absent any argument that the project is unnecessary or otherwise incorrectly estimated, we will include this estimate for 2004 capital expenditures.

We adopt $4.847 million in 2003 and $11.741 million in 2004 for capital investments in information technology projects.

G. Hourly Billing System (Phase II) - Electric

This project will up-grade SDG&E's ability to handle billing for customers with interval meters. ORA's final recommendation was a reduction of $1.1 million in the 2004 expenditures because the system would not be used and useful within the test year and SDG&E agreed with this adjustment in its rebuttal testimony;197 therefore, we will adopt the reduction of $1.1 million in 2004 and include only the unchallenged $0.3 million for 2003 and the remainder of $0.9 million for 2004.

H. San Onofre Nuclear Generating Station - Electric

SDG&E owns a 20% minority-interest of the San Onofre Nuclear Generating Station (SONGS) along with two other minority-interest owners, the City of Anaheim and City of Riverside. Edison is the majority-owner and the operating agent. Beginning in 1985, the Commission has litigated the O&M and capital expenditures that are billed by Edison to SDG&E in the Edison rate proceedings for consistency and to avoid duplicate litigation. In this proceeding, SDG&E asked for $8.0 million198 of its costs for Test Year 2004 that are beyond the scope of the costs to be recovered in the Edison proceeding.

SDG&E recovers most of its costs for SONGS based upon the Commission's decision in Edison's A.02-05-004. In that proceeding, SDG&E made the following request:199

"In (A.02-05-004), SDG&E requests that the Commission:

· Approve SCE's forecasted SONGS costs as set forth in A.02-05-004.

· Approve $15.806 million as SDG&E's share of SONGS 2 & 3 capital additions for 2004 and authorize SDG&E to reflect this approved amount in calculating the depreciation expense and other costs associated with these capital additions in its Test Year 2004 cost of service proceeding (A.02-12-027/A.02-12-028).

· Approve $67.585 million as SDG&E's share of SONGS 2 & 3 O&M expenses for 2004 (other than refueling outage expenses) and authorize SDG&E to reflect this revenue requirement in rates effective January 1, 2004.

· Approve $12.468 million as SDG&E's share of each SONGS 2 & 3 refueling outage that occurs in 2004 and 2005 and authorize SDG&E to file annual advice letters on November 1, 2003 and November 1, 2004 to specify the number of SONGS refueling outages expected to occur during the following year and the escalated cost per outage.

· Approve $2.635 million as SDG&E's share of SONGS 1 shutdown O&M expenses for 2004 and authorize SDG&E to reflect this revenue requirement in rates effective January 1, 2004."

As a result, in D.04-07-022, the Commission identified the reasonable 2004 capital expenditures and operating and maintenance expenses for SDG&E. The Commission explained its actions as follows:200


"Since SDG&E's costs for SONGS are predicated upon its 20% ownership share, the amounts requested by SDG&E must be adjusted to reflect the corresponding 100% level of capital and O&M costs for SONGS 2 & 3 as well as the amortization period adopted in this decision. We will approve SDG&E's requests as set forth above, subject to the adjustments required to reflect SONGS-related determinations made in this decision."

Based on D.04-07-022, this decision includes $7.597 million for 2004 capital expenditures and $41.848 million for 2004 operating expenses.201

I. SONGS Costs Not In Edison's Rate Case

1. New Security Requirements

On September 19, 2003, SDG&E served new testimony in Ex. 96 that added to the non-Edison costs in the proceeding the recovery of specific new requirements imposed by the Nuclear Regulatory Commission (NRC) on April 29, 2003, which was significantly after the testimony for Edison's proceeding or this proceeding was served on parties. SDG&E seeks in Ex. 96 to recover its share of the incremental costs associated with the NRC's Order Modifying Licenses adopting new security measures.202 SDG&E sought recovery of $14.469 million, as 2004 capital expenditures and $0.76 million of O&M expenses as its 20% share of total costs.203 We will not consider the 2005 O&M costs because they are beyond the test year for this proceeding.

As a threshold question, we must determine whether we can consider these costs within the scope of this proceeding. In its opening litigation brief, in footnote 124, SDG&E details that Edison entered into an agreement with parties to its proceeding to forgo reflecting the reduced Federal tax liability associated with the Jobs and Growth Tax Relief Reconciliation Act of May 28, 2003, in exchange for also foregoing the recovery of the new costs that result from the April 2003 NRC requirements. SDG&E argues in footnote 123:


"Per D.89-01-040 (p. B-26), the costs SDG&E seeks to recover to comply with the NRC's April 29, 2003 security orders are the proper subject of update testimony. Page B-26 of D.89-01-040 permits parties to serve testimony to address `Known changes due to governmental action such as changes in tax rates, postage rates, or assessed valuation.' The NRC is a governmental entity and the new security orders issued on April 29, 2003 fall clearly within the scope of this rule."204

This authority to update is clearly intended to address the ministerial application of a change for an activity already known to be necessary, and in fact reflects better facts than were used in the original estimate. If, for example mid-way through a rate case tax rates are known to be higher or lower than were used in the initial rate filing, then either ratepayers or shareholders are protected from the effects of a bad estimate by allowing an up-date of the rate.

We find that SDG&E's position fails under this argument for two reasons: first, it relied on a procedure for general rate cases filed in conformance with the rate case processing plan that was adopted and further modified by D.89-01-040, but A.02-12-028 is not such an application. As already discussed, for SDG&E the requirement to file a general rate case for Test Year 1999 was first suspended by D.97-12-041 and it has filed under the less rigorous conditions of a "cost of service" proceeding. The second and most compelling reason is that the new NRC requirements simply are not a "known change" that can be updated, for example, by substituting 39 cents for the current 37 cents charged for postage. These security costs are a previously unknown and new requirement that was not anticipated in SDG&E's filing.

The decision in Edison's application did not decide the question of whether the April 29, 2003 order by the NRC was consistent with the rate case processing plan; on September 29, 2003; Edison withdrew its July 15, 2003 motion to establish a balancing account.205 We are deciding the update question for these costs for the first time in this proceeding and we find them not to be an update within the meaning of D.89-01-040. To find totally new mandates to be merely an update could compel us to either delay major proceedings late in the schedule or to unduly rush our review of potentially significant new actions by other government bodies. We reject SDG&E's argument that these costs are includable as an update under Commission practices.

We would otherwise find that SDG&E could file a separate application to seek recovery of the new security obligations that were not anticipated and not forecast at any level of specificity in A.02-12-028. But there is an appropriate and compelling reason why we should consider the recovery of the NRC-imposed program costs now and that is our obligation to provide adequate rates for SDG&E to provide safe and reliable service. The possibility that terrorists206 could target SONGS or any other operating reactor is cause for concern. ORA in its opening litigation brief expressed support for SDG&E's recovery of its share of these costs but pointed out that the costs have not been subject to any reasonableness review207 as would occur if it had sufficient time to examine the Edison specific proposals and the NRC's subsequent approval.

We find that it is in the public's interest for us to consider these costs at this time provided we also safeguard the economic interests of ratepayers.

In its reply brief, SDG&E argued that ORA had the opportunity to review these costs, five weeks from the service of Ex. 96 and the time when the witness testified. SDG&E also argued the testimony is an allowable update and not supplemental. We disagreed above with the characterization of these costs as an update. Even though ORA did not argue that it would have needed to examine the costs with Edison, and not SDG&E, we will emphasize that we want these costs reviewed before we allow final recovery; and in the middle of litigating the entire case for both SoCalGas and SDG&E, we would not have wanted a hurried review of the costs, even had ORA tried to review them. A detailed review here would have been counter to the convention that joint costs are litigated in Edison's proceeding and not in SDG&E's. Edison may have foregone its opportunity for recovery in its test year in A.02-05-004, but any ongoing capital recovery and future O&M expenses are likely to be at issue in Edison's next proceeding. The ratepayers of either company would not have been well served by a rushed review here.

SDG&E provides details of the specific capital expenditures proposed to comply with the NRC requirements In Attachment B to Ex. 96. We will allow SDG&E, subject to refund, to include the Test Year 2004 incremental revenue requirements solely for these expenditures that are beyond the scope of capital expenditures in A.02-05-004. When the Commission has its first opportunity to review the actual program costs, and provide interested parties due process, it will be in a subsequent Edison or joint Edison-SDG&E application, where any over-collection will be refunded by SDG&E to its ratepayers. What we authorize here is a one-way balancing account. We have not reviewed these costs in detail, nor do we have in the record an indication of the NRC's approval that the proposals are adequate. We believe that making the revenue requirement subject to refund is a balance that ensures SDG&E has the revenue to fund its share of the costs as currently forecast and the ratepayers have a 2004 cap of capital expenditures $14.469 million, and $0.76 million of O&M expenses until there is a thorough review with due process.

SDG&E provides details of the specific incremental O&M expenses in Attachment B to Ex. 96. These too are specific costs of $ 0.76 million in 2004 that are incremental to costs recoverable from A.02-05-004. We will allow these incremental security costs in the test year 2004 revenue requirements and require

SDG&E to record these costs in a second balancing account,208 subject to refund, and require supporting documentation to show that the costs are solely attributed to the new security requirements. The estimates are for 43 full-time equivalent positions and related costs; this O&M balancing account may only record these costs, for up to 43 positions, after first accounting for all positions funded in A.02-05-004. As with the capital expenditures, we are granting revenues in rates now, subject to refund at the full amount as forecast, and this balancing account with a cap is a reasonable safeguard for ratepayers in exchange for SDG&E avoiding the requirement to incur these costs without rate relief until a later application could be litigated.

Before we will authorize final recovery of any of these costs, SDG&E209 must make a clear and complete showing that (1) the recorded costs are attributable solely to new security activities and investments that are required by the April 29, 2003 NRC orders; (2) the recorded costs are truly incremental, i.e., they are not included in this Phase 1 decision; (3) if any current (i.e., included in this proceeding) security activities or planned investments are supplanted by compliance with the new NRC requirements, so that costs for those activities and investments are reduced, such cost reductions are properly accounted for; (4) the costs must be incurred by SDG&E and the other plant owners, and not by taxpayers; and (5) the recorded costs are otherwise reasonable. The balancing accounts as authorized in this decision in no way reduce SDG&E's burden of proof to justify the reasonableness of recovering these costs.

2. Other Costs Not Billed by Edison

SDG&E sought recovery of $2.0 million for three items in this application of SONGS costs that are not in the Edison case.210 These costs were unopposed, except for one by UCAN, and are adopted as proposed by SDG&E; they are discussed solely to clarify and distinguish them from the security costs above and the much larger costs that we imported from A.02-05-004 in D.04-07-022.

SDG&E sought to recover costs allocated to it for the Department of Energy's decontamination and decommissioning of uranium enrichment plants. Title XI of the Energy Policy Act of 1992 created a fund for this purpose and SDG&E's 2004 share for its 20% interest in SONGS is $1.2 million. No party disputed this amount.

The second item was $0.800 million in 2004 for SDG&E's share of the cost to store spent fuel (used and no longer useful) from SONGS Unit 1. UCAN argued that 100% of the capital cost of spent fuel storage should be disallowed, because this project was part of the capital spending specifically requested in the Incremental Cost Incentive Proceeding (ICIP) and it was deferred past the ICIP period in large part as a result of ratepayer-funded decommissioning spending at SONGS 1.211 It is not clear that UCAN is targeting this $0.8 million; its comments refer to its positions in A.02-05-004 on fuel storage. We defer to A.02-05-004 for all costs in that proceeding and to the extent we are looking at unique and separate fuel storage costs here, we conclude that SDG&E is seeking current operating costs for storage and these are not the same costs that concerned UCAN in A.02-05-004. We find the $0.8 million in 2004 for SONGS Unit 1 spent fuel storage to be a reasonable test year expense.

The final cost is the $0.020 million ($20,147 to be precise) annual payment to the Department of the Navy for its share for a site easement on Camp Pendleton, where SONGS is located. This cost is reasonable and is adopted.

Finally, SDG&E requested $5 million212 in other costs, for depreciation, taxes and franchise fees, nuclear insurance, uncollectables and rate of return. These are addressed elsewhere and included in the appropriate accounts. Depreciation and return are calculated based upon inclusion of the capital additions from D.04-07-022 to SDG&E's existing plant accounts in the adopted results of operations. Insurance is addressed in administrative and general expenses and the remainder are included in the results of operations in the appropriate accounts.

J. SDG&E Line Extension Issues

UCAN raised as an issue that SDG&E was not in compliance with the Commission's policy on ratepayer versus developer funding of certain capital costs for transformers, services and meters. Citing to D.97-06-098, UCAN argued that customers (through base rates) should provide only those costs that are "revenue justified" and therefore per se reasonable to attract new customers.213 SDG&E argued the issues are correctly includable in R.92-03-050 - ongoing now for 12 years - and we will not pursue this further other than observe that UCAN's objections are not based on an examination of specific past line extension calculations to demonstrate that SDG&E has incorrectly applied its tariffs. The policy objections to line extension calculations belong in the Rulemaking. We cannot unravel the UCAN policy proposal from the other forecast issues - primarily how many extensions are likely in the test year - and we therefore reject UCAN's proposal.

154 Ex. 28, 9. RDP-84, Table RDP-CAP-1.

155 Ex. 28, pp. RDP-86 ff.

156 Ex. 302, p. 22-1.

157 Ex. 28, p. RDP-107.

158 Ex. 302, p. 22-2, and Ex. 98, p. RPD-3.

159 ORA Data Request SDG&E - 42, Response to Question 5, attached to SDG&E Ex. 98.

160 Ex. 98, p. RPD-3.

161 This is distinguishable from the discussion later in this decision on "updating" for SONGS security enhancements, which were not requested at all in the original application and SDG&E was therefore not correcting its early estimates.

162 Ex. 302, p. 22-3.

163 Ex. 98, pp. RPD-4 through RPD-7.

164 Ex. 302, p. 22-1.

165 This gas supply system should be distinguished from the Otay Mesa generation project, which this Commission recently addressed in D.04-06-011, in R.01-10-024. See decision mimeo., p. 53, ff.

166 Ex. 29, p. MDM-20

167 Ex. 93, p. MDM-3.

168 Ex. 302, p. 23-4.

169 See: Section A: Organizational Structure, Chart B-2, 2002 Annual Affiliate Transaction Report, SDG&E, transmittal dated April 29, 2003 shows that Sempra owns 67% of Transportadora de Gas Natural de Baja California. This report is filed annual with the Energy Division in compliance with D.93-02-019.

170 Ex. 55, pp. DMB-4 and DMB-5.

171 Ex. 302, p. 23-3.

172 SDG&E Comparison Exhibit, p. 140.

173 ORA opening litigation brief, p. 227.

174 Rebuttal Ex. 75, p. DLG-17, SDG&E reduced the 2003 request from $2.0 million to $0.

175 This figure is the result of subtracting the escalation adjustment from SDG&E's request and calculating the difference between that amount and the final 2004 ORA recommendation of $26.641 million. For 2003, there is a $2,000 rounding error when the three specific adjustments are subtracted from the SDG&E 2003 request.

176 Ex. 302, p. 21-11.

177 Ex. 27, p. DLG-128.

178 Ex. 302, pp. 21-4 through 21-8.

179 SDG&E Attachment D, Settlement Comparison Exhibit, p. 143.

180 Ex. 27, p. DLG-172. Project 97248 - Distribution System Capacity Improvements Program.

181 UCAN opening litigation brief, p. 97.

182 Sempra opening litigation brief, pp. 70-73.

183 Ex. 302, pp. 21-9 through 21-10.

184 Ex. 302, p. 227 and Table 21-7 in Ex. 302, p. 21-8. Ex. 302 recommends only $4.308 million, which results in a disallowance of $3.691 million (8.000 - 3.691 = 4.308).

185 Ex. 27, p. DLG-143.

186 Ex. 27, pp. DLG-181 and DLG-182 provide more detailed list of objectives.

187 Ex. 27, p. 197, Appendix A.

188 ORA opening litigation brief, p. 227.

189 Correction to Settlement Agreement Attachment D, p. 147, provided on January 12, 2004, to the ALJ's Second Request for Additional Information. Answer 5: "The settling parties wish to note two errors on page 147 of the JCE (Joint Comparison Exhibit) that make it appear that the settlement outcome is higher than the SDG&E end-of-hearings position for this set of capital projects. First, the settling parties intended that the 2003 funding level for the `Sustainable Community' capital project (CPS 2264) be maintained at the $2.0 million as proposed by SDG&E but that the 2004 funding level be reduced from $8.0 million to $2.3 million (for a total funding level of $4.3 million). However, the rationale for this reduction was omitted and the 2004 reduction was not made in the settlement Results of Operations model." And further, "there is a typographical error in the box identifying the settlement amounts. The correct figures should read `$27,730' for 2003 and `18,184' for 2004 (this includes the correction for the Sustainable Community project identified above)."

190 SDG&E Settlement Comparison Exhibit, pp. 146 and 147 in 2003 defers: $1.980 million for the Spectrum New 69/12 kv substation; $2.350 million for the Sorrento Valley substation; $0.785 million for the EastGate new 12 kv circuit 1,154 and $0.739 million for circuit 1155; $3.6 million for substation land at Dana Point; and $2.0 million for substation land at Otay Ranch. In 2004, it defers: $1.282 million for the Valley Center 2nd Bank of transformers; $1.629 million for the Telegraph Canyon New 12 kv C1222; reusing an existing transformer to reduce the cost of the Santa Ysabel substation rebuild saving $1.772 million; reducing the costs of the Palomar Substation 3rd Bank and Circuit by $1.465 million; and deferring or canceling $0.998 million for the Cabrillo New 12 kv Circuit 485.

191 Short descriptive testimony and a tabulation of all of these 69 projects are at pp. DLG-158 through DLG-182 and DLG 197 through DLG-199.

192 December 19, 2003 Motion of Joint Parties for SDG&E's Proposed Settlement, p. 2.

193 Ex. 27, pp. DLG-149 ff., and DLG 197 ff.

194 Ex. 302, p. 21-12.

195 Ex. 75, p. DLG-23.

196 Ex. 75, p. DLG-22.

197 Ex. 302, p. 9-28 corrected in Ex. 302E on p. 9-2 provide ORA's recommendation and Ex. 74, p. EF-55 provides SDG&E's concurrence.

198 Ex. 38-E, p. MOR-3. See Table MRO-1 and footnote 1.

199 D.04-07-022, mimeo., p. 60.

200 D.04-07-022, mimeo., p. 61.

201 These expenses are included in Accounts 517, 519, 520, 523, 524, 525, 528, 529, 530, 531, and 532, in the results of operations in support of this decision.

202 See Ex. 96, Attachment A is the entire April 29, 2003 NRC Order and cover memo entitled "Issuance of Order Requiring Compliance With Revised Design basis treat for Operating Power Reactors."

203 Ex. 96, Table MRO-1 and MRO-2.

204 Sempra opening litigation brief, p. 249 (electronic version) p. 245 (mimeo.).

205 Sempra opening brief, Footnote 124. Further, we may take judicial notice of the motion and its withdrawal in A.02-05-004.

206 The NRC Order (Ex. 96, Att. A, p. 2) refers to "the current threat environment" and the "events of September 11, 2001." We see no reason to be coy in our decision about why we will make an exception to consider these costs at this late stage of the proceeding.

207 ORA opening litigation brief, p. 189.

208 Balancing accounts have an associated expectation of recovery. They are accounts that have been pre-authorized by the Commission, and it is the recorded amounts - and not the creation of the accounts themselves - that the Commission reviews for reasonableness. Memorandum accounts, in contrast, are accounts in which the utilities book amounts for tracking purposes. While the utilities may later ask for recovery of the amounts in those accounts, their recovery is not a given. In this instance we approve the program, but the costs are subject to further review, so a balancing account is the appropriate mechanism.

209 As with most other SONGS costs, this review may be in an Edison proceeding, except for any costs unique to SDG&E that should be addressed in SDG&E's next appropriate rate case.

210 All three items are described in Ex. 38 and Ex. 38-E, pp. MRO-5 through MRO-6.

211 Opening brief - UCAN, p. 300.

212 Ex. 38 and Ex. 38-E.

213 UCAN opening litigation brief, pp. 103-119. UCAN provides an extensive recital of its testimony in Ex. 604.

Previous PageTop Of PageNext PageGo To First Page