Decision 96-12-083 December 20, 1996
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
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Application of SOUTHERN CALIFORNIA EDISON COMPANY (U 338-E) for Authority to Make the Following Changes to its Present Ratemaking for Its Share Of Palo Verde Nuclear Generating Station Unit Nos. 1, 2, and 3: (i) Accelerate Recovery of the Company's Sunk Investment; (ii) Adopt Palo Verde Incremental Cost Incentive Pricing for its Incremental Costs; and (iii) Receive Related and Substantive and Procedural Relief. |
Application 96-02-056 (Filed February 29, 1996) |
(See Attachment 2 for appearances.)
On November 15, 1996, Southern California Edison Company (Edison or Company), The Utility Reform Network (TURN) and the Office of Ratepayer Advocates (ORA) (collectively referred to as Settling Parties) entered into a Settlement Agreement regarding all issues litigated during evidentiary hearings, which were held August 26-30, 1996.(1)/ The Settlement Agreement is in Attachment 1 to this Opinion. The Settling Parties were the only active parties to this proceeding. Thus, the Settlement Agreement is an all-party settlement, as discussed in more detail below. A settlement conference was held on November 15, 1996. By motion, the Settling Parties request that the Commission (1) adopt the Settlement Agreement pursuant to Rule 51.1 of the Commission's Rules of Practice and Procedure (Rules); (2) waive the limitation that settlements must be submitted within 30 days of the close of hearings as required by Rule 51.2 of the Commission's Rules and the 45-day comment period required by Rule 51.4.; (3) reduce the Proposed Decision 30-day waiting period required by Public Utilities (PU) Code ' 311(d); and (4) reduce the Proposed Decision comment period authorization in Rule 77.2 and 77.5. Pursuant to Rule 51.1(e), the Settling Parties jointly request that the Commission find the Settlement Agreement to be reasonable in light of the whole record, consistent with law, and in the public interest.
The Settlement Agreement is the result of negotiations between the Settling Parties. Its key terms are:
Edison will have the opportunity to recover its remaining investment (approximately $1.2 billion) in Palo Verde Nuclear Generating Station Unit Nos. 1, 2, & 3 (Palo Verde) beginning January 1, 1997 and ending December 31, 2001 (Recovery Period) and earn a reduced rate of return.
During the Recovery Period, Edison will earn a return of 7.35% on its Palo Verde Sunk Costs equivalent to an after-tax return on rate base.
Edison will recover its share of Palo Verde incremental operating costs through its operation of the Palo Verde Incremental Cost (PVIC) Balancing Account as follows:
Nuclear Fuel (Edison's cost);
Property Taxes (as billed by the Arizona Department of Revenue);
Incremental capital, as billed by Arizona Public Service (APS), the operator of Palo Verde, multiplied by 1.17 to account for Edison overheads;
Operations and Maintenance (O&M) expense (including APS loads) as billed by APS plus Edison's oversight function;
Administrative and General (A&G) expense, including A&G Expense related to nuclear insurance, Edison's oversight function and Edison variable A&G attributable to Palo Verde;
Income Taxes due on Incremental Capital by multiplying Incremental Capital (including Edison overheads) by 29%;
Income Taxes due on Nuclear Fuel by multiplying Edison Nuclear Fuel costs by 9%.
If the total cost of Incremental Capital, O&M Expense and A&G Expense exceed 95% of the levels forecast by Edison by more than 30% in any given year, Edison must demonstrate that the aggregate amount of these costs exceeding the forecast in that year are reasonable.
The Nuclear Unit Incentive Procedure (NUIP) for Palo Verde will continue through December 31, 2001, for purposes of calculating a reward only. The NUIP will reward Edison for any units performing above an 80% capacity factor for a fuel cycle by sharing equally the difference between the additional variable cost (nuclear fuel) and the replacement power cost(2)/ of the output above an 80% capacity factor.
If the annual Palo Verde site Gross Capacity Factor (GCF) is less than 55% in a calendar year, Edison will bear the burden of proof to demonstrate that the site's operations causing the GCF to fall below 55% were reasonable in that year. If operations are determined to be unreasonable by the Commission, Edison's replacement power purchases associated with that period of Palo Verde operations below 55% GCF may be disallowed.
After December 31, 2001, Edison may sell power generated by Palo Verde to any customer or groups of customers, including CPUC-jurisdictional customers, at market prices.
Any net benefits obtained due to operation after December 31, 2001, will be split 50/50 between Edison and its customers.
The Settling Parties state that they have each compromised strongly held views, and that the Settlement Agreement balances the various interests affected by Palo Verde ratemaking. Consequently, the Settling Parties request that the Commission adopt the Settlement Agreement as "reasonable in light of the whole record, consistent with law, and in the public interest."
The Settling Parties assert that the Settlement Agreement satisfies the criteria set forth in key Commission decisions on all-party settlements, including Decision (D.) 92-12-019 (All-Party Settlement Decision). In that decision, we outlined four criteria that must be satisfied in order to obtain approval of an all-party settlement. The parties must show:
a. That the settlement agreement commands the unanimous sponsorship of all active parties to the instant proceeding;
b. That the sponsoring parties are fairly reflective of the affected interests;
c. That no term of the settlement contravenes statutory provisions or prior Commission decisions; and
d. That the settlement conveys to the Commission sufficient information to permit us to discharge our future regulatory obligations with respect to the parties and their interests.
These criteria are consistent with and complementary to the general criteria for Commission approval of settlements in Rule 51.1(e). Rule 51.1(e) states that:
The Commission will not approve stipulations or settlements, whether contested or uncontested, unless the stipulation or settlement is reasonable in light of the whole record, consistent with law, and in the public interest. (Emphasis added.)
We have reviewed the Settlement Agreement and find that it meets each of these criteria.
The Settlement Agreement Fully Meets The Commission's Settlement Criteria For An All-Party Settlement
The Settlement Agreement Commands The Unanimous Sponsorship Of All Active Parties In This Proceeding
There are only three active parties to this proceeding: Edison, ORA, and TURN. Each of these parties is a Settling Party. Therefore, the Settlement Agreement commands the unanimous sponsorship of all active parties in this proceeding.
ORA represents the long-term interests of all California utility customers. TURN represents the interests of residential and small commercial customers. Edison represents the interests of the utility. Thus, these parties fairly represent the interests of the parties affected by the Settlement Agreement.
No Term Of The Settlement Contravenes Statutory Provisions Or Prior Commission Decisions
The terms of the Settlement Agreement do not contravene any statutory provisions or prior Commission decisions. However, the Settlement Agreement departs from the ratemaking methodology adopted for San Onofre Nuclear Generating Station Unit Nos. 2 and 3 (SONGS 2&3) in D.96-01-011 and D.96-04-059 in that it does not adopt Incremental Cost Incentive Pricing (ICIP) for Palo Verde. The SONGS 2&3 decisions adopted an ICIP for SONGS 2&3.
The Settlement Agreement Conveys Sufficient Information To The Commission
There is now an extensive fully developed evidentiary record upon which the Commission can judge the reasonableness of the Settlement Agreement. The evidentiary record contains direct and rebuttal testimony of the three Settling Parties and Edison's Revised Data Filing of October 15, 1996.
The Settlement Is Reasonable In Light Of The Record, Consistent With Law, And In The Public Interest
We now have before us an extensive, fully developed record upon which we can judge the reasonableness of the Settlement Agreement. One week of evidentiary hearings has already been held on this matter. The direct and rebuttal showings, upon which the proposed settlement is largely based, were presented by 11 witnesses. This record addressed all Palo Verde issues that are discussed in the Settlement Agreement. Moreover, consistent with the Administrative Law Judge's (ALJ) Ruling, dated September 25, 1996, Edison has provided revised data showing a five-year Palo Verde Sunk Cost Recovery Period and a five-year recovery period for Palo Verde Incremental Costs.
The Revised Data Filing was made necessary by the signing of Assembly Bill 1890 (AB 1890) by Governor Wilson on September 23, 1996, 24 days after the close of evidentiary hearings. AB 1890 required that "those costs and categories of costs for generation-related assets and obligations, consisting of generation facilities, generation-related regulatory assets, nuclear settlements and power purchase contracts . . . that may become uneconomic in a competitive generation market . . ." shall be recovered by December 31, 2001, with few exceptions. (PU Code § 367(a).) Edison's initial Palo Verde proposal had recommended recovery of Palo Verde Sunk Costs and adoption of a Palo Verde ICIP plan beginning January 1, 1997 and ending December 31, 2003, which was a 7-year period. After AB 1890 became law, Edison's proposal was no longer consistent with California law and therefore required revision. As a result, the ALJ issued his ruling requesting the parties to present revised data for a five-year period.
The Settlement Agreement resolves the issues concerning sunk and incremental cost recovery for Palo Verde during the transition period to a more competitive generation market. Edison's Palo Verde proposal, as modified by AB 1890, proposed accelerated recovery of Palo Verde Sunk Costs over a period beginning January 1, 1997 and ending December 31, 2001 and recovery of all incremental costs for Palo Verde through an ICIP, with prices beginning at 3.24¢/kWh in 1997 and ending at 3.52¢/kWh in 2001. ORA proposed modifications to Edison's requested sunk cost recovery and offered three alternatives to Edison's ICIP proposal: (1) continuation of traditional cost-of-service ratemaking for Palo Verde Incremental Costs; (2) recovery of incremental operating costs through market prices; and (3) adoption of ICIP prices for recovery of incremental operating costs beginning at 2.7¢/kWh in 1997 and ending at 2.3¢/kWh in 2001.
TURN's testimony offered four alternatives to Edison's Palo Verde proposal. One alternative was to continue traditional ratemaking for Palo Verde. The other three alternatives were to accelerate recovery of Palo Verde Sunk Costs with some modifications proposed by TURN, and to recover incremental operating costs through: (1) market prices; (2) balancing account treatment (pass through of actual costs); or (3) ICIP prices beginning at 2.61¢/kWh in 1997 and ending at 2.47¢/kWh in 2001.
The Settlement Agreement is a compromise which chooses an alternative offered by TURN with some modification. The Settlement Agreement proposes to accelerate recovery of Palo Verde Sunk Costs, largely as proposed by Edison, and to use pass-through balancing account treatment to recover incremental operating costs.
The forecast revenues to be included in the Palo Verde Incremental Cost (PVIC) Balancing Account in each of the five years of incremental cost recovery under the Settlement, are derived from numbers presented by Edison, which were fully litigated. All of the concepts used in the Settlement were discussed in the evidentiary record and the Revised Data Filing and are supported by them.
The terms of the Settlement Agreement do not contravene any statutory provision or prior Commission decision. As mentioned above, the Settlement Agreement departs from the Commission policy, enunciated for SONGS 2&3 in D.96-01-011 and D.96-04-059 in that it does not adopt an ICIP for Palo Verde.
The Settling Parties compromised strongly-held positions in order to reach this proposed settlement. They firmly believe the Settlement Agreement is in the public interest and in the interest of Edison's customers. Edison will accelerate the capital recovery of its Palo Verde sunk investment so that its sunk costs, as of December 31, 1996, would be recovered by December 31, 2001. The revenue requirement increase associated with accelerated capital recovery of Palo Verde is mitigated by the reduced return on rate base of 7.35%. In addition, Edison has limited its ability to recoup the lost earnings associated with the reduced rate of return on Palo Verde sunk costs, by limiting the rewards available to it to those under the existing NUIP. Moreover, customers' responsibility for Palo Verde Incremental Costs is somewhat limited by the requirement of a reasonableness review should Incremental Capital, O&M Expense and A&G Expense exceed certain pre-set levels.
We must emphasize that this settlement concerns sunk costs and incremental pricing as estimated; it is not the final determination (although we do not expect actual sunk costs to differ substantially from those settled herein). The estimates must be adjusted as actual costs are recorded. Those adjustments can be done either in this proceeding or other proceedings, as the facts warrant. Transition costs are to be determined in other proceedings.
The Rule 51 waiver request was granted by ALJ Ruling of November 21, 1996. We affirm that ruling.
This Settlement Agreement complies with the Commission's requirements for all-party settlements as set forth in D.92-12-019.
The Settlement Agreement commands the unanimous sponsorship of all active parties to the instant proceeding.
The Settling Parties are fairly reflective of the affected interests.
No term of the Settlement Agreement contravenes statutory provisions of prior Commission decisions.
The Settlement Agreement conveys to the Commission sufficient information to permit the discharge of its future regulatory obligations with respect to the parties and their interests.
The Settlement Agreement is reasonable in light of the record, consistent with law, and in the public interest.
Edison shall establish rates and to recover costs incurred in accordance with the terms of the Settlement Agreement.
The requirements of Rule 51.2 to file settlements within 30 days of the close of hearings and the requirements of Rule 51.4 to provide a 45 day comment period for settlements are waived, as set forth in the ALJ Ruling of November 21, 1996.
Pursuant to stipulation, as provided in ' 311(d), the 30-day waiting period set forth in ' 311(d) is modified to permit issuance of a decision in this application as early as December 20, 1996.
Pursuant to stipulation, the comment period (outlined in Rules 77.2 and 77.5) for the Proposed Decision is modified as follows: Comments on the Proposed Decision may be filed on or before December 9, 1996, and reply comments may be filed on or before December 13, 1996.
The Commission concludes that the Settlement Agreement should be adopted.
IT IS ORDERED that:
The Settlement Agreement set forth in Attachment 1, is adopted.
Southern California Edison shall file within 10 days an Advice Letter setting forth the tariff charges authorized by this decision.
This order is effective today.
Dated December 20, 1996, at San Francisco, California.
P. GREGORY CONLON
President
DANIEL Wm. FESSLER
JESSIE J. KNIGHT, JR.
HENRY M. DUQUE
JOSIAH L. NEEPER
Commissioners
(1) Defined terms, identified by initial caps, are defined in Appendix A to Attachment 1, Settlement Agreement.
(2) After the commencement of the Power Exchange, the NUIP would be modified to compare additional variable cost (nuclear fuel) to market price rather than Edison's replacement power cost.