HomeMy WebLinkAboutReso 1990-130 - Approving the rate settlement agreement entered into by and between the city of redding and pacific gas abnd elecric 411
RESOLUTION NO. 7(7_0(2
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF REDDING
APPROVING THE RATE SETTLEMENT AGREEMENT ENTERED INTO BY AND
BETWEEN THE CITY OF REDDING AND PACIFIC GAS AND ELECTRIC
COMPANY COVERING SUPPLEMENTAL POWER RATES .
WHEREAS, City Council adopted Resolution No. 86-76 on
April 7 , 1986 , approving a Rate Settlement Agreement between the
City of Redding and Pacific Gas and Electric Company; and
WHEREAS, by April 13 , 1990 , Pacific Gas and Electric Company
and the City of Redding intend to file a signed subsequent Rate
Settlement Agreement with the Federal Energy Regulatory
Commission, a true copy of which is attached hereto and
incorporated herein; and
WHEREAS , said changes are deemed to be in the best interests
of the citizens of the City of Redding; and
WHEREAS, the City of Redding intends to file a letter of
concurrence and intervention with the Federal Energy Regulatory
Commission;
NOW, THEREFORE, BE IT RESOLVED by the City Council of the
City of Redding as follows:
1 . That the foregoing recitals are true and correct.
2 . That the City Council of the City of Redding hereby
approves the attached changes to the Rate Settlement
Agreement, to be effective January 1 , 1990 , and hereby
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4110
I
waives the requirements of Section 35 . 13 of the Federal
Energy Regulatory Commission' s Regulations to the
extent necessary for acceptance of this filing; and
that a letter of concurrence and intervention shall be
sent to the Federal Energy Regulatory Commission on
behalf of the City.
I HEREBY CERTIFY that the foregoing Resolution was
introduced and read at a regular meeting of the City Council of
the City of Redding on the 20th day of March, 1990 , and was duly
adopted at said meeting by the following vote:
AYES : COUNCIL MEMBERS: Buffum, Johannessen, & Carter
NOES: COUNCIL MEMBERS: None
ABSENT: COUNCIL MEMBERS: Dahl
ABSTAIN: COUNCIL MEMBERS : Ful ton
SCOTT CARTER, Mayor
City of Redding
ATTEST:/jy
/ze.46
ETHEL A. NICHOLS , City Clerk
FORM APPROVED:
fNDALL A. HAY , City Attorney
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90_/ � 411
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 7 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 1 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
RATE SETTLEMENT AGREEMENT
PART I
1. The City of Redding and Pacific Gas and Electric Company
(Parties) agree that the supplemental power service provided to City of
Redding pursuant to the terms and conditions of the Agreement for Sale
of Electric Capacity and Energy, accepted for filing by the Federal
Energy Regulatory Commission (FERC or the Commission) in FERC Docket
No. ER80-577-000 and accepted as amended in FERC Docket Nos. ER86-563-
000 and ER89-300-000 (Sale Agreement) , shall be provided to City of
Redding (Redding) by Pacific Gas and Electric Company (PG&E) at the:
rates and pursuant to the terms and conditions specified below in this
Rate Settlement Agreement (Agreement) .
2 . The rates and rate formulas specified in this Agreement have been
developed through negotiations between the Parties. Consequently, the
Parties agree that rates and rate formulas specified in this Agreement
are not subject to challenge by either Party except as provided herein.
3. The Parties shall make every effort to ensure acceptance by the
FERC of this Agreement as agreed.
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
•
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 7 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 2 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
4. With the exception of the Diablo formula ratemaking mechanism
described in Part III, the rate agreement reached by the Parties is for
a three-year period effective January 1, 1990 through December 31, 1992
and consists of two elements. First, the Parties agree that the rates
to be effective as of the effective dates of this Agreement for the
supplemental power service to be provided by PG&E to Redding under the
Sale Agreement shall be the rates shown in Part II and referenced in
this Agreement.
5. Second, the Parties have agreed to continue to use the Fuel Cost
Adjustment mechanism (FCA) accepted for filing by the FERC in FERC
Docket ER87-104-000 and designated as Supplement No. 4 to Supplement
No. 1 to Service Agreement No. 9 under FPC Electric Tariff, Original
Vol. No. 2.
Issued by: Cordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
110
•
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 8 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 3 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
PART II
RATE SCHEDULES
The Parties agree to the following rates for the services described.
It is further understood and agreed that the following rates shall be
effective as of the effective date of this Agreement and shall remain in
effect, except as they may be changed in accordance with this Agreement.
SUPPLEMENTAL POWER SERVICE - RATE SCHEDULE FERC NO. R-1
1. Pursuant to Section III of the Sale Agreement, listed below are the
rates to be charged by PG&E to Redding, for supplemental power service
to be provided at 230 kilovolts at the delivery point specified in the
Sale Agreement.
Customer Charge: $1,790.18 per month
Demand Charge: $7.878 per kW per month
Energy Charge: $0.01100 per kWh
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
•
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 8 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 4 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
Diablo Basic Revenue Requirement Energy Rate: Calculated Pursuant to
Attachment 2 to Part III.
Diablo Performance Energy Rate: Calculated Pursuant to
Attachment 2 to Part III.
Billing Provisions:
(a) The sum of the FCA (as noted in Part I to this Agreement) ,
Diablo Basic Revenue Requirement Energy Rate, Diablo
Performance Energy Rate and the Energy Charge (jointly,
Energy Amount) will be included in each bill for service.
The energy revenues shall be the product of the total
kilowatt-hours for which the bill is rendered multiplied by
the Energy Amount per kilowatt-hour. The Energy Amount is
not subject to any adjustment for voltage or power factor.
(b) A Customer Charge will be included in each month's bill for
service.
(c) The Demand Charge will be included in each bill for service. The
demand revenues shall be the product of the total kilowatt-months
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
!II 411
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 8 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 5 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
for which the bill is rendered multiplied by the Demand Charge
per kilowatt-month.
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 6 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
PART III
RATE PROCEDURE
FOR DIABLO CANYON UNITS NO. 1 AND NO. 2
This Part III includes certain terms and conditions related to PG&E's Diablo
Canyon Nuclear Power Plant Units No. 1 and No. 2 (Diablo) .
1. The Parties shall implement rate mechanisms and a methodology for
Redding regarding Diablo Canyon that allows for PG&E to recover
Redding's proportionate share of costs and revenues on a basis that is
consistent and concurrent with costs and revenues authorized by the
CPUC for the retail jurisdiction. Pursuant to this goal, the Parties
agree to implement the rate mechanism and methodology contained herein.
2. On December 19, 1988 and March 22, 1989, the CPUC issued
Decisions 88-12-083 and 89-03-062, respectively, which ratified a
settlement reached by certain parties to the CPUC's Diablo ratemaking
proceeding (CPUC 1988 Diablo Settlement) . The CPUC 1988 Diablo
Settlement provides a performance-based pricing mechanism and
methodology for PG&E's recovery of costs related to the construction,
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 7 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
ownership and operation of Diablo. A copy of CPUC Decision 88-12-083
as revised by CPUC Decision 89-03-062 is provided as Attachment 1 to
this Part III.
3. This Part III shall become effective upon acceptance by
FERC, provided there is acceptance by FERC of all provisions
hereof, without change or condition, and this Part III shall not
become effective unless so accepted or approved unless otherwise
agreed by the Parties; provided further, that, if upon filing,
the FERC enters into a hearing to determine whether this Part III
is just and reasonable, or otherwise lawful, it shall not become
effective until the date when an order no longer subject to
judicial review has been issued by FERC determining this Part III
to be just and reasonable and lawful without changes or new
conditions unacceptable to either Party. In any event, should
the effective date of this Part III be delayed pursuant to this
Section 3, the rates and charges set forth in this Part III as
may be modified by FERC and implemented in accordance with this
Section 3, shall be applied retroactively to Redding's usage from
January 1, 1990.
issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
issued on: FERC Docket No.:
o •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 8 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
4. Unless otherwise agreed by the Parties, this Part III shall
continue in force and effect as long as both the Sale Agreement
and the CPUC 1988 Diablo Settlement are effective. However, the
mechanism for computing the true-up of the Diablo Rates shall
remain in effect until the last true-up of the Diablo Rates can
be performed, which shall be on or before July 1 of the calendar
year following the calendar year in which the Sale Agreement
and/or the CPUC 1988 Diablo Settlement terminates. If the Sale
Agreement is still effective and the CPUC or any agency or any
court of competent jurisdiction terminates, modifies or changes
the CPUC 1988 Diablo Settlement such that the mechanism and
methodology provided herein is no longer consistent with the CPUC
1988 Diablo Settlement, as modified, or the rate treatment
ordered by the CPUC with regard to Diablo plant-related costs is
no longer consistent with the CPUC 1988 Diablo Settlement, the
Parties agree to negotiate and implement consistent and
concurrent modifications of this Agreement which preserve the
intent of the Parties to maintain rate treatment which is
consistent and concurrent with CPUC rate treatment and recover
Redding's proportionate share of Diablo costs and revenues.
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 9 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
5. Except as expressly provided in this Part III, no
additional charges for Diablo shall be applied to Redding during
the term of this Part III.
6. Diablo decommissioning costs authorized by the CPUC, to be
collected in PG&E's CPUC jurisdictional base rates, will continue
to be included in PG&E's Demand Charge (and/or Energy Charge if a
portion or all of decommissioning costs are moved to the Energy Charge
by PG&E) to Redding and will not be a part of either the Diablo
Performance Energy Rate, the Diablo Basic Revenue Requirement Energy
Rate (jointly, Diablo Rates) , Customer Charge, or the FCA. Nuclear
Fuel expense as recorded in FERC Account 518 will continue to be
collected through the FCA.
7. Starting January 1, 1990, the Diablo Rates charged Redding
shall be calculated in accordance with the Diablo Rate mechanism
and methodology provided in Attachment 2 to this Part III.
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• 410
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 10 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
8. Any increase or decrease resulting from the true-up
procedure described in Section 2 of Attachment 2 to this Part III
will be collected as a separately identified surcharge or credit
derived from calculation of the amounts billed to Redding for
Diablo. Since the filing of the Abbreviated Notices of Rate
Change contemplated under this Agreement may, of necessity, occur
after the effective date for the Diablo adjustments agreed to by
the Parties, the Parties therefore agree that any increase or
decrease resulting from such adjustments contemplated under this
Agreement will be collected as a separately identified surcharge
or credit retroactively to the effective date of such
adjustments. This surcharge or credit will be derived from a
recalculation of bills issued by PG&E under Rate Schedule FERC
No. R-1 from the date of the FERC order permitting the proposed
rate to become effective, retroactive to the effective date for
the proposed rate established pursuant to this Agreement. In the
event that any rate adjustment made hereunder results in the
imposition of a surcharge, Redding shall have the option of
paying such surcharge in lump sum or paying such surcharge in
equal monthly payments up to, but not exceeding twelve months.
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
411 110
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 11 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
All surcharges or credits made pursuant to this Agreement shall
be with interest compounded monthly at an Interest Rate equal to
1/12 of the rate determined in accordance with Section
35.19a(a)(2)(iii)(A) of FERC regulations (18 CFR
§35.19a(a)(2)(iii)(A)) , as it may be amended.
9. If, during the term of this Agreement, the capacity factor
of Diablo is at or below the level which triggers floor payments
or abandonment as generally described in Appendix D, and Appendix
C, of the CPUC 1988 Diablo Settlement, the Parties agree to
negotiate and implement consistent and concurrent rate treatment
with that provided by the CPUC 1988 Diablo Settlement or ordered
by the CPUC.
10. During the term of this Part III, PG&E shall provide to
Redding in a timely manner copies of all documents provided to
the CPUC pursuant to the compliance requirement set forth in
Appendix H of the CPUC 1988 Diablo Settlement. Vith regard to
Diablo Canyon retail ratemaking, PG&E shall also provide to
Redding in a timely manner: 1) copies of all PG&E rate filings
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 12 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
with the CPUC, and 2) all CPUC decisions and orders. Further,
PG&E will promptly notify Redding of the occurrence or
anticipated occurrence of any event described in Section 9 above.
11. The mechanism for computing Diablo Rates specified herein
shall remain in effect for the term of this Part III, and shall
not be subject to change through application to FERC pursuant to
the provisions of Section 205 of the Federal Power Act, absent
agreement of the Parties hereto. The mechanism for computing the
true-up of the Diablo Rates specified herein shall remain in
effect until the last true-up of the Diablo Rates can be
performed. The last true-up of the Diablo Rates shall be done on
or before July 1 of the calendar year following the calendar year
in which the Sale Agreement and/or the CPUC 1988 Diablo
Settlement terminates.
12. The Parties have agreed that Redding will seek either no
suspension or no more than a one-day suspension of the effective
date of any adjustment in Diablo Rates made pursuant to this Part
III. In the event that any Party does request a one-day
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
411 •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 13 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
suspension in connection with any proposed adjustment in the
Diablo Rates, that Party agrees that the proposed effective date
of such adjustment will be deemed to be the day before the
initial proposed effective date, so that the effective date for
the rates established under this Part III, with a one-day
suspension, will be the same as the initial proposed effective
date. A one-day suspension, hearing, and other appropriate
relief pursuant to Section 205 of the Federal Power Act shall be
requested only on the basis of PG&E's alleged failure to
accurately apply the terms of this Part III to the computation of
the Diablo Rates or the accuracy of the data, not subject to CPUC
scrutiny as part of its administration of the CPUC 1988 Diablo
Settlement, used in such computation. A request for a one-day
suspension, hearing, and appropriate relief in a proceeding
involving the Diablo Rates shall not be based on disagreement
with the billing parameters, procedures, and mechanisms agreed to
herein. The Parties have agreed to defend and uphold both the
terms of this Part III and the rates established pursuant thereto
in any forum, whether judicial, administrative, or otherwise, in
which it is alleged that any terms of this Part III or any rate
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 14 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
established pursuant thereto is unjust, unreasonable, unduly
discriminatory or preferential, or otherwise unlawful or that
such term or rate results in a "price squeeze, " and agree that
neither Party shall initiate or pursue any action in any forum
based upon such allegations; provided, that Redding may request a
hearing pursuant to Section 206 of the Federal Power Act for the
sole purpose of showing PG&E's alleged failure to accurately
apply the terms of this Part III to the computation of the Diablo
Rates or the accuracy of data, not subject to CPUC scrutiny as
part of its administration of the CPUC 1988 Diablo Settlement,
used in such computation.
13 . The Parties have agreed to make or support any requests for
waiver of the FERC Rules and Regulations necessary to implement
the changes contemplated herein as of the effective date provided
in this Part III; provided, that PG&E provides Redding with a
copy of the final version of its proposed FERC filing, including
supporting data and applicable CPUC orders if any, at least
thirty (30) days prior to the date of filing with FERC, unless
otherwise agreed by the Parties. The Parties also agree that,
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
PACIFIC GAS AND ELECTRIC COMPANY Supplement No. 9 to
Rate Schedule FERC No. R-1 Supplement No. 1 to
Page 15 of 20 Service Agreement No. 9
Under FPC Electric Tariff
Original Volume No. 2
for any change in rates made pursuant to Part III of this
Agreement, PG&E may utilize an "Abbreviated Notice of Rate
Change" in filing all adjustments to Rate Schedule FERC No. R-1
pursuant to Section 35. 13 of the Commission's regulations under
the Federal Power Act (18 CFR § 35.13) . Said Abbreviated Notice
of Rate Change shall consist of: (a) a filing letter containing
any necessary calculations made in accordance with the formulas
set forth herein; (b) the underlying CPUC order or decision upon
which the adjustment is based; and (c) such other limited data as
the FERC, its staff, or Redding may specifically require.
Redding agrees to support a request by PG&E that the FERC waive
the requirements of Section 35.13 to the extent that such
requirements are not satisfied by the format described above.
Issued by: Gordon R. Smith, Vice President, Finance and Rates Effective:
Issued on: FERC Docket No.:
• •
Attachment 1 to Part III
CPUC DECISION 88-12-083
as revised by
CPUC DECISION 89-03-062
• 110 1Mc)irrytD
ALJ/RB/fs/pds*
Decision 88-12-083 December 19, 1988
BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF'CALIFORNIA
Application of Pacific Gas and )
Electric Company, for Authorization )
to Establish a Rate Adjustment )
Procedure for Its Diablo Canyon )
Nuclear Power Plant; to Increase )
Its Electric Rates to Reflect the ) •
Costs of Owning, Operating, ) Application 84-06-014
Maintaining and Eventually ) (Filed June 6, 1984 ;
Decommissioning Units 1 and 2 of the ) amended December 21, 1984 )
Plant; and to Reduce Electric Rates )
Under Its Energy Cost Adjustment )
Clause and Annual Energy Rate to )
Reflect Decreased Fuel Expenses . )
And Related Matter. ) Application 85-08-025
) (Filed August 12, 1985 )
(See Appendix A for appearances . )
•
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•
•
A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds*
INDEX
subject Page
OPINION 2
I . Summary of Decision 2
II . Introduction 4
A. Overview of the Diablo Canyon Nuclear
Power Plant Project 4
B. Procedural History 8
III . Background 11
A. PG&E's Decision to Design and Build
Diablo Canyon 11
B. Management 12
C. The Hosgri Fault and TMI Modification Period 16
D. The Mirror Image Error, the Design
Verification Program, and Project Completion 24
IV. Pre-Settlement Position of the Parties 30
A. Pre-Settlement Position of the DRA 30
1 . Corporate and Project Management 30
2 . Seismic Safety and the Hosgri Fault 33
3 . Design Verification Program 36
4 . Other Major Construction Problems 37
5. Quantification 38
B. Pre-Settlement Position of PG&E 39
1 . Corporate and Project Management 39
2 . Seismic Safety and the Hosgri Fault 45
3. Design Verification Program 49
4 . Quantification 52
V. Policy and Legal Issues 53
A. Standards Used in Review of the
Proposed Settlement 53
B. Binding Future Commissions 58
C. Interpretation of the Settlement Agreement
and the Implementing Agreement 63
D. Antitrust Allegations 66
E. Objections Raised by Opponents to
Certain Procedures 69
1. Objections to the Schedule 72
2. Motion to Compel Compliance with
Discovery Request 74
•
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•
A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds*
INDEX
Subject Page
3. Cross Examination of Witnesses 75
4. Settlement Negotiations 76
VI . Summary of the Settlement 77
VII . Testimony of Parties in Favor
of the Settlement 80
A. Testimony of PG&E Witnesses 80
1. Testimony of Richard A. Clarke 80
2. Testimony of George A. Maneatis 84
3. Testimony of Thomas C. Long 86
4 . Testimony of Peter D. Hindley 87
B. Testimony of DRA Witnesses 90
1. Testimony of William R. Ahern 90
2 . Testimony of Bruce DeBerry 95
3. Testimony of Lee—Whei Tan 97
4 . Testimony of Truman L. Burns 100
5. Testimony of Raymond J. Czahar 101
6 . Testimony of Richard A. Myers 106
7 . Testimony of Charles Komanoff 112
8. Testimony of Scott Cauchois 113
C. Testimony of AG Witnesses . . . .- 114
1. Testimony of David Marcus _ 114
2. Testimony of Richard B. Hubbard 116
3. Testimony of Michael J. Strumwasser 118
VIII . Testimony of Parties Opposed to the Settlement 119
A. Testimony of San Luis Obispo
Mothers for Peace 119
B. Testimony of Life on Planet Earth 121
C. Testimony of Toward Utility Rate Normalization 122
D. Testimony of the Redwood Alliance 123
1. Testimony of Stephen S. Bernow 123
2. Testimony of Robert Kinosian 128
IX. Analysis of the Settlement 129
Settlement Agreement 130
1. Exclusive Ratemaking 130
2. Term _ 130
3. Prices 131
4. Price Escalation after December 31, 1994 132
5. Peak Period Price Differentiation 133
•
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•
A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds***
INDEX
Subject Page
6. Balancing Account 133
7. Basic Revenue Requirement 135
8. Revenue 136
9. Floor 138
10. Decommissioning 144
11. Purchase Policy 145
12. Segregation of Costs 146
13. Abandonment Rights 149
14. Treatment After 30 Years 150
15. Jurisdictional Allocation 151
16. Safety 151
17. Effect of Change in Agreement 153
X. Further Discussion 154
A. Risk of Going to Hearing 154
1. The Hosgri Fault 154
2. The Mirror Image Error 159
B. Timing of the Settlement 164
C. Amount Offered in Settlement 164
D. Capacity Factor 168
E. Shifting of Operating Risk 171
F. Shutting Down Diablo Canyon 174
G. Rate Relief 175
H. Hearing Costs 176
I . Annual Energy Rate (AER) Adjustment 176
J. Ratemaking 178
K. Intervenor Compensation 179
L. Comments 180
1. The Floor Provision 180
2. Decommissioning 184
3. Safety Committee 184
4. Other 184
Findings of Fact 186
Conclusions of Law 192
ORDER 133 -
Appendix A - Appearances
Appendix B - Proposed Settlement Rules
Appendix C - Settlement Agreement
Appendix D - Implementing Agreement
Appendix E - Performance Based Pricing Comparison - Nominal Value
Appendix F - Performance Based Pricing Comparison - Present Value
Appendix G - Revenue Requirement Revisions and Account Adjustments
H - Compliance Filing
- iii -
• •
A. 84-06-014, A. 85-08-025 ALJ/RB/fa/pda*
OPINION
I. Summary of Decision
PG&E seeks to have the $5 . 5 billion cost of constructing
its Diablo Canyon nuclear power plant included in rate base. The
Commission's Division of Ratepayer Advocates (DRA) asserts that
only $1. 1 billion of those costs were prudently incurred and the
balance of $4.4 billion should be disallowed. The Attorney General
(AG) and others support the DRA. After four years of preparation
for trial PG&E, the DRA, and the Attorney General (the proponents)
agreed to a settlement under which Diablo Canyon costs are excluded
from rate base and are recovered over a period of 28 years under a
method called performance based pricing. This decision approves
and adopts the settlement. The DRA and the AG estimate that the
revenue to be received by PG&E from the settlement over the term of
the agreement is equivalent to a $2 billion rate base disallowance.
The settlement provides that ratepayers pay only for power produced
by Diablo Canyon at an escalating price determined by a formula
tied to the Consumer Price Index. All costs of the operation of
Diablo Canyon are paid by PG&E. The operating risks of the plant
are shifted from the ratepayers to the utility and its
shareholders. Opponents of the settlement argue that this shift of
risk and pricing give PG&E an incentive to disregard safety to
maximize profits . The decision finds the opposite to be more
likely because the risks of a safety violation plant shut down are
expensive and fall on PG&E, not the ratepayers .
The primary assumption supporting the $2 billion
equivalent disallowance is that over its term Diablo Canyon will
operate at a 58% capacity factor.
This assumption is based on our belief that substantial
evidence has been presented which supports the theory that Diablo
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• •
A.84-06-014, A.85-08-025 ALJ/RB/fs/pds*
decisions . The net change to 1989 revenue requirements is an
increase of $284,212, 000.
II. Introduction
A. Overview of the Diablo Canyon
Nuclear Power Plant Project
The Diablo Canyon Nuclear Power Plant (Diablo Canyon) is
located on the California coast in San Luis Obispo County, .
approximately halfway between San Francisco and Los Angeles . The
power plant consists of two nuclear powered pressurized water
reactor (PWR) units .. Unit 1 is capable of producing 1,084
megawatts of electricity (MWe) , and Unit 2 is capable of producing
1, 106 MWe.
When Pacific Gas and Electric Company (PG&E) announced
the project in February of 1963, Unit 1 was expected to go into
commercial operation on May 1, 1972 at a cost of $162,270,000 .
Unit 2 was expected to go into commercial operation in the summer
of 1974 at a cost of $157 ,400, 000 .
Unit 1 began commercial operation on May 7, 1985,
followed by Unit 2 on March 13, 1986 . The combined cost of both
units upon completion was $5.518 billion. PG&E filed these
applications requesting that the entire $5 .518 billion be included
in its rate base. The DRA opposed on the ground that approximately
$4.4 billion of those costs were imprudently incurred. The
Attorney General of the State of California (AG) and other
intervenors also opposed. After four years of preparation the
matter was set for hearing on June 27, 1988; on June 27 PG&E, the
DRA, and the AG announced a settlement and sought Commission
approval. Public hearings were held before Administrative Law
Judge (ALJ) Robert Barnett to determine if the settlement is in the
public interest. The adequacy of the settlement is the subject of
this decision.
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suitability issues during the Unit 1 review. The AEC staff issued
its SER in November 1969, and hearings were held in January 1970 .
After the hearings on Unit 2 had concluded, the Scenic Shoreline
Preservation Conference, Inc . (SSPCI ) moved to reopen the
proceedings alleging that new geological, seismological, and .
seismic design information cast doubt on the suitability of the
Diablo Canyon site.4 SSPCI proposed that the location and
orientation of several 1969 earthquake epicenters in the Diablo
Canyon area indicated the potential for seismic forces greater than
those anticipated by PG&E.
The Unit 2 construction permit proceedings were reopened
in August of 1970 to further examine those geological issues . The
AEC staff, and the AEC's consultants on geology and seismology, the
United States Geological Survey (USGS) , and the United States Coast
and Geodetic Survey (USC&GS) , respectively, and the ASLB deemed the
new information to be insufficient to indicate any problem with the
site. In December 1970, the ASLB authorized the issuance of a
Construction Permit for Unit 2 . Construction began in 1971 . When
the Preliminary Safety Analysis Report (PSAR) for Unit 2 was
submitted to the AEC in 1968, the phasing of Unit 2 was set at 26
months behind the Unit 1 schedule. 5
When Diablo Canyon was chosen as a possible site, PG&E
conducted initial geoseismic investigations of the area. This work
included preliminary geological studies by PG&E's geologist,
4 The building of Diablo Canyon was not without critics .
Intervenors participated in nearly every step of Diablo Canyon's
licensing process. The intervenors contested 76 separate issues in
15 AEC/NRC hearings .
5 The PSAR is required to be submitted by the utility to the
AEC/NRC as part of the construction permit application process .
The PSAR contains, among other things, a description of the plant
design criteria and its safety features, and a description of the
site suitability for a nuclear power plant.
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license for Unit 1. Shortly thereafter the so-called mirror image
error (discussed in Section III .D) was discovered. As a result,
the NRC mandated an Independent Design Verification Program ( IDVP)
for the project, which required PG&E to prove to the NRC that the
design of the plant was safe. This program started in 1982 and was
substantially completed by the end of 1983 .
On November 8, 1983, the NRC partially reinstated the low
power operating license to allow fuel loading of Unit 1 and
pre-criticality testing. In April 1984, the NRC completed the
reinstatement of the low power operating license and allowed PG&E
to conduct tests at up to 5% of rated power. In August 1984, the
NRC authorized issuance of a full power operating license for
Unit 1. Unit 2 received a low power operating license in April
1985 and a full power operating license in August 1985 .
Unit 1 entered commercial operation on May 7, 1985,
followed by Unit 2 on March 13, 1986 . The combined cost of both
units upon completion was $5 .518 billion.
B. Procedural History
This case is now before us to determine whether the
proposed settlement agreement entered into between PG&E, the DRA,
and the Attorney General, hereinafter the "proponents" , is
reasonable in light of the whole record, consistent with law, and
in the public interest. (Rule 51 . 1(e) . )
PG&E filed these applications to increase rates to
reflect the cost of owning, operating, maintaining, and eventually
decommissioning Units 1 and 2 of Diablo Canyon in June 1984, and
August 1985, respectively. The processing of the applications was
to be handled in three phases . The first phase consisted of two
parts, Phase lA and Phase 1B. Phase lei considered the expenses and
investment to be recognized for setting interim rates. Phase 1B
called for a more detailed investigation of the appropriate
expenses and investment to be recognized for interim rates, as well
as alternatives to traditional ratemaking. Phase 2 was to consider
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PG&E 's rate case expenditures for these proceedings beginning June
1986 until completion of the case. The reasonableness of such
expenditures was to be determined at a later date.
During the summer and fall of 1986 , we held the Phase 1B
hearings on interim rates for Unit 2 plus hearings on issues of
noninvestment related expenses , calculation of fuel cost savings ,
cogeneration and geothermal fuel savings, DCAA treatment, and
decommissioning expenses . In D. 87-03-029, we addressed the issue
of decommissioning, and authorized PG&E to increase rates by $53 . 2
million per year to cover the costs of decommissioning Units 1
and 2 .
In D. 87-10-041, we denied further interim rate relief to
PG&E, but authorized booking for later recovery reasonable
noninvestment expenses for the plant of up to $197 million
annually. Further hearings were ordered to review the
reasonableness of this amount. Prior to the hearings, PG&E and the
DRA stipulated to (1) the reasonableness of the amounts for
noninvestment costs that should be booked to the DCAA since the
beginning of commercial operation of the plant in May 1985 through
December 1987; and (2) an estimate of the noninvestment costs for
test year 1988. This stipulation was approved in D.88-03-067 .
Subsequently, in D.88-05-027, we ordered that the
noninvestment costs of the plant be moved from the DCAA to base
rates covering PG&E's electric service operations . We also
authorized PG&E to increase rates by $147 .4 million which, when
added to the $54 .2 million rate increase granted by D.85-12-085,
would recover estimated noninvestment costs for the Diablo Canyon
plant for test year 1988 . We also authorized continued booking to
the DCAA of $472 .9 million in interim rates, representing fuel
savings attributable to the operation of Diablo Canyon.
When the settlement was announced, we were scheduled to
begin the hearings in the reasonableness phase (Phase 2) of the
Diablo Canyon rate case. As a result of the proposed settlement,
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awarded a contract by the AEC to study the potential of using
nuclear fuel to generate electricity. In 1955, General ,Electric
and the Nuclear Power Group, Inc. (NPG) , of which PG&E was a
member, began work on Dresden 1 near Chicago. Dresden 1 was a
180 MW boiling water reactor. From 1953 to the late 1960 's,
sixteen PG&E engineers worked at NPG and at Dresden 1 on a
rotational basis . In 1956, PG&E announced plans for a 5 MW nuclear
plant at Vallecitos in California. The Vallecitos reactor was
operated for six years by PG&E. In 1958, PG&E participated with
approximately fifty other utilities to design and build a high
temperature gas cooled reactor, which became Philadelphia Electric
Company's Peach Bottom Unit 1 .
Plans for the 60 MW HBNPP were announced in 1958 by PG&E .
The Bechtel Corporation was the AE/CM, and General Electric
supplied the NSSS. Construction began in 1960, and the plant began
commercial operation in 1963. This was the seventh commercial
nuclear power plant to be licensed in the United States . HBNPP
operated until 1976 .
Also in 1958, PG&E was examining the feasibility of
siting a 325 MW nuclear power plant at Bodega Bay. This project
was abandoned after the discovery of an earthquake fault underneath
the proposed site. In 1963, PG&E announced plans to construct a
five unit nuclear power plant on the central California coast in
the Santa Maria Dunes region. The original proposed site of this
plant was at Nipomo. The site was soon changed to Diablo Canyon,
north of Nipomo, where the environmental impact was less
pronounced. PG&E began studying the geology of the Diablo Canyon
site in 1965.
B. Management
During the construction of Diablo Canyon, the Board of
Directors (Board) of PG&E held regular monthly meetings, and
numerous special meetings . Over the course of construction, the
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functional vice presidents and to senior management. When the need
arose, PG&E also used outside engineering consultants for highly
complex engineering issues.
The plant was divided into four systems or areas: the
• turbine building, the containment building, the auxiliary building,
and the intake structure. Each engineering discipline assigned a
Responsible Engineer for each system or area.
A number of different mechanisms were used for cost
monitoring and control of the project. The primary mechanism was
the General Manager Authorization (GM) , which is a request for
authorization of funds. The GM was used at the inception of the
project, and remained in use until 1982 when PG&E adopted a
different system for controlling the project's scope, cost, and
schedule. An approved GM was the authorization to take the -
necessary steps to build the project. The initial expenditures for
Unit 1 were authorized in November of 1966, and for Unit 2 in
January of 1968. The Unit 1 GM originally authorized $162,270,000,
and for Unit 2, $157,400,000. Revised GMs for both units were
approved throughout the project.
When the design of Diablo Canyon was started in the
mid-1960's, PG&E had in place engineering design procedures and
controls. Industry standards, such as the American Concrete
Institute (ACI) Building Code, the Institute of Electrical and
Electronics Engineers ( IEEE) standards, and the American Institute
for Steel Construction (RISC) Code, were adopted and employed where
appropriate. With respect to the nuclear safety related components
the initial design for Unit 1 was carried out according to
procedures prescribed primarily in Section III of the American
Society of Mechanical Engineers (ASME) Boiler and Pressure Vessel
Code. These standards were widely accepted by the nuclear industry
and by the AEC at that time, and they were incorporated in the PSAR
for Unit 1. These technical standards were supplemented over the
years by numerous procedural memoranda and directives.
•
•
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construction of the plant, the setting and installation of the
mechanical and electrical equipment, the installation of the wiring
and piping systems, and preoperational testing and startup.
C. The Hosgri Fault and
Till Modification Period
PG&E's initial geologic investigation of the Diablo
Canyon site was carried out by its Department of Engineering
Research between March and June 1965 . After it was decided that
the site appeared suitable from a geological and marine standpoint
PG&E hired a consulting geologist, Mr. Elmer Marliave, formerly the
Chief Engineering Geologist for the California Department of Water
Resources, to provide preliminary recommendations on the geology of
the area, and to plan a program of geologic exploration.
Mr. Marliave's preliminary conclusion was favorable, and he
proposed a program of staged exploration to rule out any geologic
or seismic hazards. As part of this program, it was suggested that
mapping of the geology of the proposed site be undertaken.
From June 1965 to December 1965, Mr. Marliave, along with
PG&E 's in house geologist, Mr. Micheli, studied the site. PG&E ' s
plan was to have Mr. Micheli produce a geologic map and report of
the site, and to have Mr. Marliave evaluate whether or not the site
was free of geologic hazards. Mr. Micheli prepared his report and
concluded that there were no apparent geological conditions which
would preclude the construction of a nuclear reactor at Diablo
Canyon. Mr. Marliave, after discussing the results of
Mr. Micheli's report with him, stated that he found nothing that
would cause him to change his original opinion as to the geologic
suitability of the site.
Dr. Richard Jahns, the Dean of the School of Earth
Sciences at Stanford University, was retained by PG&E in October of
1965 to conduct an independent investigation of the site and to
make recommendations on the site suitability. After examining the
site, he expressed a preliminary opinion that the site could be
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during the lifetime of the reactor. Drs . Benioff and Smitn's study
was included by PG&E in its Diablo Canyon Unit 1 PSAR.
The PSAR for Unit 1 was filed with the AEC in January
1967. The PSAR contained PG&E's analysis of its initial geoseismic
siting studies, along with descriptions of the various operating
systems of the plant. The geology and seismology portions of the
PSAR included a geology report by Dr. Jahns, a geology report by
Mr. Marliave, a geology report by Mr. Micheli, and a seismology
report by Drs . Benioff and Smith. These reports generally
concluded that the plant site was located in an area of low
seismicity, and that from the standpoint of geology and seismicity
the site was suitable. The geology report concluded that no active
faults were present beneath the site. PG&E did not conduct any
offshore studies of the area.
In order to design Diablo Canyon, PG&E had to determine
the maximum earthquake that could affect the plant. PG&E 's
evaluation of the maximum earthquake that could cause ground
shaking at the plant site was based on two premises: ( 1) that
primary earthquakes could occur on the San Andreas and Nacimiento
fault zones with magnitudes of 8 .5 and 7 .25, respectively; and
(2 ) that an aftershock originating on an existing fault would have
magnitudes ranging up to about 7 .5 and could produce surface
faulting along existing faults. Aftershocks occurring away from
existing faults would have magnitudes ranging up to about 6 . 75.
Given the absence of any identified faults in the immediate
vicinity of the Diablo Canyon site, PG&E determined that the
maximum ground acceleration would result from a San Andreas
aftershock, centered beneath the plant at a depth of 12 miles. The
highest potential acceleration under such a scenario would be 0. 2g.
The design or operating basis earthquake was calculated to be a
magnitude of 6.75. Thus, in the PSAR, PG&E proposed a design
earthquake acceleration of 0 .2g and a double design standard for
safety equipment of 0.4g.
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In the mid-1960 's, two Shell Oil Company geologists ,
Hoskins and Griffiths, found faulted strata about 2 to 4 miles west
of the Diablo Canyon site based upon offshore seismic reflection
profiles. A description of the fault was published in an
Association of Petroleum Geologists memoir made public in January
of 1971 . The so-called Hosgri Fault, named after the two Shell
geologists who discovered it, is in excess of 90 miles in length
and extends approximately from Point Piedras Blancas south to the
vicinity of Point Arguello. The fault trends in a northwest-
southeast direction roughly parallel to the central California
coastline. Douglas Hamilton, a PG&E geological consultant, became
aware of the memoir in October 1972, and notified PG&E of the
existence of the fault. Prior to the filing of the Final Safety
Analysis Report (FSAR) , 10 PG&E did not perform any offshore
studies or any other technical work to assess the magnitude of a
postulated earthquake that could be generated by the Hosgri Fault .
PG&E did, however, include a description of the Hosgri Fault in its
July 1973 FSAR. After submission of the FSAR, the NRC requested
additional geologic information on the source of a 7 .3 magnitude
earthquake that occurred offshore of the plant site on November 4 ,
1927 , as well as additional information related to faulting and
seismicity in the area of the plant. Shortly thereafter, the USGS
carried out an extensive offshore seismic reflection survey that
included the area offshore from Diablo Canyon. In November 1973,
10 The FSAR is required to be submitted by the utility to the NRC
as part of its operating license application. The FSAR contains,
among other things, a description of the facility, its design basis
and limits of operation, and a safety analysis of the structures,
systems, and components, and of the facility as a whole. The FSAR
also contains a description of the managerial and administrative
controls to be used to assure safe operation, including a
description of the operational quality assurance program.
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earthquake for the reactor site should be a magnitude of 7 . 5. The
NRC accepted the assessment of the USGS . PG&E was told -to redesign
the plant using a postulated magnitude 7 .5 earthquake occurring on
the Hosgri Fault, with a ground acceleration of 0 . 75g. Since this
position specified only general regulatory criteria for the
postulated earthquake on the Hosgri Fault, a consensus on the
detailed criteria to be used to evaluate the structural capability
of the plant had to be agreed Uoon. PG&E began a lengthy exchange
with the NRC to arrive at precise criteria and methodologies to be
used in evaluating the plant 's structures , systems, and components .
PG&E submitted its proposed evaluation criteria to the
NRC in July 1976 . In September 1976 , PG&E met with the NRC and
reached initial agreement on some of the criteria. In February
1977, the staff of the NRC accepted the remaining criteria to be
used in the evaluation of all major plant structures . However, the
ACRS raised questions about the evaluation criteria. Final
agreement on the criteria for the plant 's seismic design and
evaluation methodology was reached in July 1978 when the ACRS
issued a favorable letter of approval .
ASLB hearings were held in late 1978 and early 1979 on
the seismic safety issues of credible earthquakes on the Hosgri
Fault, ground motion, and the response of the plant to ground
motion. These issues were the subject of continuing challenge by
intervenors. On September 27, 1979, a favorable decision with
respect to seismic issues was issued by the ASLB.
Meanwhile, the accident at TMI occurred on March 28,
1979 . At the time of the TMI accident, Unit 1 was essentially
complete and awaiting a license. TMI had immediate regulatory
repercussions for Diablo Canyon because on May 21, 1979, the NRC
imposed a moratorium on the issuance of new operating licenses .
Additional delay was caused by intervenors who requested further
hearings on issues related to the TMI accident.
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accident which resulted in another review extending to September
1981 .
The Commissioners ' Statement of Policy that accompanied
NUREG-0694 required utilities to file a separate request for a
low-power license if they had met only those NUREG-0694 items
necessary for fuel loading and low power testing. The effect was
that utilities had to submit separate applications for low power
and full power licenses . Thus, in July 1980, PG&E filed a motion
with the ASLB requesting a license to load fuel and conduct low
power tests. This motion was opposed by then California Governor
Jerry Brown and other intervenors .
The NRC staff issued its SER supplement in August 1980,
which concluded that PG&E had met the requirements of NUREG-0694 .
In addition, the staff took the position that the issues raised by
the intervenors were not relevant to the low power operation of
Diablo Canyon. In July 1981, the ASLB issued a decision in favor
of PG&E, which authorized the NRC to issue a license for fuel
loading and low power testing up to 5% of rated power. On
September 22, 1981, the low power license was issued. Immediately
after the low power license was issued, PG&E began final
preparations for fuel loading of Unit 1 . On September 27 , 1981,
PG&E discovered a diagram error and voluntarily stopped fuel
loading. The discovery of the diagram error raised a new and
complex regulatory challenge.
D. The Mirror Image Error,
the Design Verification Program,
and Project Completion
Shortly after the NRC issued a low power operating
license for Unit 1, PG&E discovered an error in the seismic
analysis of systems supported from the annulus structure in the
containment building, commonly referred to as the mirror image
error or the diagram error. (The annulus structure is a steel
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•
although additional design errors had been discovered as a result
of the review. These results were presented to the NRC.
The NRC requested Brookhaven National Laboratories (BNL)
to perform a technical audit of the potential impact of the diagram
error on the containment annulus area. After reviewing the design
process, BNL suggested that the design audit process should be
extended to portions of the plant that were not directly affected
by the diagram error. The review was eventually expanded to
include the design of all Class I electrical and mechanical
equipment, instrumentation, HVAC systems, and piping and pipe
supports. In another BNL report, BNL concluded that various errors
had been made as early as the original design analysis, and
recommended that all pipe support designs be reevaluated.
Previously, in October of 1981 , the NRC had its staff
conduct an onsite review of the Diablo Canyon design control
process at the offices of both PG&E and Blume and Associates . The
NRC staff found that PG&E's quality assurance program (QAP) did not
effectively control the review and approval of design information
passing between PG&E and Blume and Associates and that the design
work by Blume and Associates had not been covered by a QAP prior to
July 1978.
The NRC suspended the operating license for Diablo Canyon
on November 19, 1981, and mandated that PG&E develop an Independent
Design Verification Program to review the design of all safety-
related structures, systems, and components . The IDVP was the most
comprehensive verification of a nuclear power plant design ever
undertaken in the history of the nuclear power industry.
The IDVP was done in two phases . In.._ December 1981, PG&E
proposed to the NRC a review program for Phase 1. Phase 1 was to
address what had to be done prior to fuel loading, and required a
design verification of all pre-June 1978 seismic related service
contracts utilized in the design process for safety related
structures, systems, and components . The contractors who would be
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A.84-06-014, A.85-08-025 ALJ/RB/fs/pds*
regular design activities so that PG&E could respond to the design
review effort.
PG&E decided to retain Bechtel Power Corporation to aid
in managing the completion of the project. Bechtel was selected
because it had the engineering resources to supplement PG&E 's
engineering workforce, it had an outstanding reputation in the
nuclear industry, and it had previously worked with PG&E on other
projects. Bechtel was responsible for completing the remaining
work that was necessary to ( 1 ) restore PG&E's suspended low power
license for the plant; (2 ) obtain a full power license for the
plant; ( 3) complete construction of Unit 2; and (4 ) provide
start-up engineering and construction support needed to bring both
units into commercial operation.
By April 1982 , a PG&E/Bechtel project completion team had
been formed. A project management organization was instituted and
a Bechtel executive was appointed the Project Completion Manager to
be responsible for the day-to-day management of the project. The
remainder of the team was composed of both PG&E engineers and
Bechtel engineers. The project team adopted a QAP based upon the
Bechtel program that had been previously approved by the NRC as
satisfying the Appendix B requirements . This modified QAP was
submitted to the NRC and approved; it remained in effect throughout
the project completion period.
During the course of the verification program, the NRC
used 1980's engineering methods and practices in its review of the
seismic design of the plant . In August 1982, PG&E announced a new
program to review and reanalyze the seismic design of certain
safety related structures , systems, and components using updated
engineering methods . In addition, although the NRC did not require
that a design verification program be conducted for Unit 2, PG&E
established a Unit 2 review program to examine the applicability
and impact on Unit 2 of the issues identified from the IDVP.
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IV. Pre-Settlement Position of the Parties
Prior to the announcement of the settlement, PG&E was
prepared to demonstrate that the $5 .5 billion spent on constructing
Diablo Canyon was reasonably and prudently incurred. The DRA and
the AG, as well as other parties were prepared to demonstrate that
the amounts spent by PG&E were imprudently incurred. The following
are their respective positions .
A. Pre-Settlement Position of the DRA
1. Corporate and Project Management
The DRA contends that PG&E 's management failures
contributed to the cost increases and schedule delays at Diablo
Canyon. When PG&E undertook the task of designing and building the
plant, it did not realize the management challenges and risks
inherent in the project. The senior managers of PG&E failed to
take any significant steps to create the type of organization,
plan, and controls that such a large project required. Instead,
PG&E relied on the traditional informal methods and approaches that
it had used on its much smaller past projects .
Although PG&E had used its traditional functional
organization on its previous engineering and construction efforts,
PG&E's choice of a functional organization rather than a project
management organization was inappropriate for a project of this
size and complexity. A functional organization, as used by PG&E,
is characterized by a grouping together of all similar and related
occupational specialties and a hierarchy of chain of command to
direct the .work. effort.
By the mid-1960 's, managers in a variety of industries
agreed that the functional organizational structure, with its
attendant informal planning and control, was an inappropriate means
of managing large projects . These managers believed that a project
management organizational structure was needed. A project
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amount of activities and decisions , and their interrelationships,
costly schedule slippages could result and did result.
The DRA is critical of PG&E for its failure to timely
develop and implement a critical path method (CPM) system for the
Diablo Canyon project. CPM refers to a computerized planning,
scheduling, and control system used by management to control the
construction of a project. CPM is based upon a network which
integrates and diagrams the simultaneous project activities that
must be carried out. PG&E failed to implement such a system until
September 1971 when the PROCON system was initiated. However, the
PROCON system fell short of a true CPM system because it focused
only on construction aspects , and failed to integrate the schedule
the other functional activities that were taking place. The DRA
alleges that the technology existed in the late 1960 's to produce a
computerized, comprehensive CPM network, and that such a system
should have been implemented by April 1968 . Without such a tool,
PG&E management could not adequately plan, monitor, and control all
of the activities . PG&E thereby lost its ability to eliminate or
mitigate the various delays that took place at Diablo Canyon.
In addition, the DRA asserts that the actions of the
Board of Directors of PG&E were unreasonable in that the Board
failed to provide the leadership and direction that a major project
like Diablo Canyon needed. The DRA's consultant reviewed all of
the materials which the Board received over the course of the
project, and concluded that the Board failed to differentiate
Diablo Canyon from other less significant projects, and that the
Board would not have been able to monitor or evaluate the project
in any meaningful way using the information that was supplied to
it. The DRA also contends that the corporate records of PG&E
establish that the Board did not exercise any noteworthy role in
assessing the project's plan or organization, evaluating
alternatives for resolving geoseismic disputes in an expeditious
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and epicenter fault map prepared by the California Department of
Water Resources in 1964, which tabulated earthquakes of magnitude 4
or greater to 1961. The DRA asserts that additional data were
available .to PG&E at this time, including epicenter information
from earthquakes occurring during 1961 to 1966, and from
earthquakes in the magnitude 3 to 4 range. PG&E assumed in the
PSAR that the location of the 1927 earthquake, which was the third
largest recorded earthquake in onshore or offshore California in
this century, was the furthest from Diablo Canyon of the four
estimated locations of the epicenter. And PG&E omitted to discuss
reports of historic onshore damage resulting from earthquakes that
occurred in the area.
The DRA believes that PG&E suspected the existence of
major faults offshore of the plant site during the time of its
initial siting studies. Scientific techniques for identifying and
evaluating offshore faults, such as seismic reflection, were
available and were well known during the 1965 - 1968 period that
PG&E conducted its initial studies . Seismic reflection studies
were widely used by the oil industry for offshore exploration
during this period and in several nuclear plant siting cases,
including Bodega Bay and Bolsa Island. Aeromagnetic and gravity
studies were also capable of indicating the presence of faults, and
were routinely conducted in the 1960 's to evaluate offshore
geology. The DRA estimated that a sufficient offshore survey
during this time would have cost PG&E about $65,000.
Despite PG&E's responsibility for public health and
safety under the NRC's regulations, PG&E failed to conduct these
offshore seismic reflection studies . Reasonable prudence, in light
of the circumstances, would have required offshore studies . Thus,
the delay resulting from the discovery of the Hosgri Fault, and the
need to redesign and reconstruct significant portions of the plant
to withstand a large earthquake on the Hosgri Fault, could have
been avoided had PG&E conducted adequate initial geoseismic siting
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new design criteria, the plant was nearly completed at a cost of
about $1 billion. After the NRC ordered PG&E to meet the 7 . 5
design magnitude, an additional three years elapsed in which time
the essentially completed plant was redesigned and reconstructed.
Had PG&E undertaken prompt studies to examine the Hosgri Fault and
its risks, and retrofitted the plant to meet a higher design
criteria, the delays from 1976 to 1981 could have been avoided.
The plant would then have been operating prior to the Three Mile
Island accident, and the NRC licensing moratorium which followed
would not have delayed the commercial operation of the plant .
3. Design Verification Program
Shortly after the NRC granted a low power operating
license for Unit 1 on September 21, 1981, a PG&E engineer
discovered the mirror image error that had occurred during the
Hosgri modifications in 1977 . In addition to the discovery of the
mirror image error, more design errors were uncovered such as
( 1 ) parallel piping lines designed from a single set of assumptions
which were found to actually require separate analyses; and
(2 ) small bore piping shock absorbers which were needed but were
never designed or built. As a result, the DRA maintains that the
NRC lost confidence in PG&E, and in the adequacy of the design of
Diablo Canyon. On November 19, 1981, the NRC suspended the Unit 1
low power operating license and ordered PG&E to conduct an
Independent Design Verification Program to assure the NRC that the
design of Diablo Canyon met the applicable licensing requirements .
This NRC action was unprecedented. At the time the suspension
occurred, the plant was close to completion for a second time.
The DRA states that the IDVP incurred an additional cost
of approximately $2.5 billion and was directly attributable to
PG&E 's deficient engineering controls and quality assurance
program. The IDVP required PG&E to demonstrate that the safety-
related structures, systems, and components of the plant were
properly designed and met all applicable licensing criteria. At
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A. 84-06-014, A. 85-08-025 ALJ/RB/fs/pds*
were caused by late or unclear engineering information; (2 ) large
bore pipe installation was delayed by 9 months for Unit .1 due to
inadequate response to industry and professional guidance, and lack
of control over the contractor; (3) piping and pipe support
installation during the design verification program was delayed 176
days in the containment building and 235 days in the auxiliary
building for Unit 1, and additional costs of $230 million were
incurred due to inadequate control of the design process and
inadequate field inspection; (4 ) the additional costs of $26
million for Unit 1 and $6 million for Unit 2 for pipe rupture
restraints were caused by failure to monitor the contractor,
failure to properly follow the established design, manufacturing,
and installation standards, and the failure to verify the design;
(5 ) $31 million in added costs associated with the breakwater were
caused by deficiencies in the initial design and construction which
led to reanalysis, redesign, and repeated repairs in 1975, 1981,
and 1983; and (6) startup testing prior to commercial operation was
delayed 80 days for Unit 1 and 77 days for Unit 2 due to avoidable
startup problems and the late completion of construction activities
which should have been performed earlier to avoid interference with
testing.
5. Quantification
In summary, the DRA contends that. approximately $4 .4
billion in project costs were imprudently incurred on the Diablo
Canyon project due to PG&E's failure to conduct the necessary
offshore studies, its failure to timely address the discovery of
the Hosgri Fault, and its failure to adequately implement and
update the company's engineering management and quality assurance
procedures. Because of these shortcomings on the part of PG&E, it
took 16 years to construct the plant at a cost of $5.518 billion.
Without those errors and omissions, the DRA says that the plant
could have gone into commercial operation within a time frame
approximating plants whose construction started in the same era,
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A.84-06-014, A. 85-08-025 ALJ/RB/fs/pds*
formal actions that the Board took, and do not purport to be a
record of the questions, answers, and discussions that Cook place
at the various meetings . PG&E asserts that there were numerous
formal Board and Executive Committee actions pertaining to Diablo
Canyon, including the approval of GMs, and the approval of .public
documents such as Annual Reports, and Form 10-K Reports filed with
the Securities and Exchange Commission. The Board set the overall
policy of the company, approved major expenditures, selected senior
officers and monitored their performance, reviewed short and long
term plans, monitored efforts to achieve them, and provided advice
and counsel to the senior officers of the company.
Senior management served as a link with the Board to
advise on the progress of the project and obtain necessary
approvals. A senior or executive vice president, either directly
or through the president and chief operating officer, always had
primary responsibility for the management of the engineering and
construction activities on Diablo Canyon.
PG&E contends that its decision to be its own architect,
engineer, and construction manager on the project was prudent
because by the time Diablo Canyon was started the experience of the
PG&E engineering staff was commensurate with many of the
architect/engineering companies engaged in nuclear power plant
design and construction. PG&E had developed years of experience
with nuclear power while working on other nuclear projects. Other
utilities that made the same decision as PG&E to design and build
their own nuclear power plants were American Electric Power, Duke
Power, and the Tennessee Valley Authority.
PG&E also relied upon the expertise of its NSSS supplier,
Westinghouse. As part of its contract, Westinghouse furnished PG&E
with the documents, drawings , and specifications of the Indian
Point 2 project, whose reactor was virtually identical to the
reactors used at Diablo Canyon. The AEC staff, in their SER during
the construction permit proceeding for Diablo Canyon Unit 1 ,
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A.84-06-014, A.85-08-025 ALJ/RB/fs/pds**
circumstances of the IDVP in 1982 , the new organizational structure
of the project completion team was appropriate.
The shortcomings of PG&E's management of the project, as
alleged by the DRA, were refuted by PG&E which asserts that the DRA
did not spend sufficient time with PG&E managers to fully
understand the corporate culture of PG&E and the formal and
informal management systems used on Diablo Canyon. PG&E contends
that the keys to understanding the way in which PG&E managed its
projects were the long standing working relationships that had
developed between its employees and the team responsibility which
PG&E fostered. Contrary to what the DRA asserts, the management
group assigned to Diablo Canyon were capable individuals and had
highly refined methods for scheduling work, planning, rendering
decisions, resolving problems, reporting and controlling costs , and
meeting objectives in a timely fashion.
The PG&E working environment stressed the following
values to its employees: a company-wide perspective of PG&E 's goal
of providing reliable, affordable service to its customers;
lifelong career commitment; training and professional development
opportunities; open and effective communication; and individual
responsibility so as to imbue employees with a sense of
accomplishment when their part of the work was successfully
completed.
Under the direction and supervision of PG&E's senior
officers, the PG&E Engineering and Construction Departments managed
the design and construction of Diablo Canyon until 1982 . These two
departments shared the responsibility for managing the project, and
alternated the lead role depending on the type of work being
performed at the time. The Engineering Department was responsible
for the design and licensing of Diablo Canyon, while the
Construction Department was responsible for the actual
construction.
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A.84-06-014, A.85-08-025 ALJ/RB/fs/pds*
working level. If necessary, the problem would be reported upward
in the chain of command.
Contrary to what the DRA contends, the schedule tools and
reports that were used by PG&E's management to keep track of the
schedule at Diablo Canyon were highly refined. The following are
brief descriptions of some of the schedule tools and reports that
were used.
The Project Schedule: PG&E used critical path method
(CPM) techniques for the DCP. The project schedule was an
intermediate level schedule and integrated engineering,
procurement, construction, and startup activities. The project
schedule provided an up-to-date picture of the entire schedule and
status of the project.
Summary of Specifications Schedule: this schedule
contained a brief description of the contract and the name of the
manufacturer or contractor. This schedule was used for ordering,
monitoring, and controlling the work of General Construction and
Engineering.
PROCON Computer Scheduling: this computerized scheduling
process was implemented in 1971. The PROCON system produced a
printed or plotted CPM schedule for Diablo Canyon that listed for
each construction activity the earliest and latest possible start
and finish dates, the amount of scheduling float, evaluation of
alternative schedules, and the Effects of schedule changes on
project completion.
Management also met frequently to discuss the Diablo
Canyon schedules. These meetings included the Chief Executive
Officer's Advisory. Committee, and the Schedule Review Committee
meetings. Other tools included the General Construction Weekly
Progress Report, and the Project Engineer's Weekly Progress Report.
In addition, whenever schedule changes required senior management
approval, specialized written reports were prepared.
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The foundation for PG&E's conservative seismic safety
studies was fourfold: ( 1) PG&E retained the advice of the most
highly qualified independent experts in seismology and earthquake
engineering, who were recognized worldwide as experts in their
fields; (2 ) these experts were engaged to do whatever
investigations they considered necessary; (3) these experts
understood that they were to take as conservative a course as they
considered reasonable in determining whether a nuclear plant should
be built at Diablo Canyon, and if the site were appropriate, how
the plant should be designed to withstand any earthquake which
might reasonably be expected to occur in the area; and (4 ) that
when these experts gave PG&E their advice, the company took it.
The experts built in multiple layers of conservatism.
First, an extensive network of trenches were dug across the Diablo
Canyon site to hunt for evidence of potentially active faults that
might be capable of generating a rupture of the earth at the plant
site. Second, Dr. Benioff and Dr. Smith reviewed the seismic
history of California for faults that they believed could generate
earthquakes that would have the maximum effect on structures at
Diablo Canyon. They hypothesized the occurrence of a hypothetical
6 . 75 magnitude earthquake directly beneath the site. Third,
Dr. Blume added an additional layer of conservatism by determining
the response spectra that the structures, systems, components, and
equipment might experience. For the critical plant structures,
systems, and components, Blume and Associates used the double
design earthquake concept, i.e. , the plant was designed to
withstand earthquake motions twice as strong as those reasonably
expected.
These multiple layers of conservatism made Diablo Canyon
the most conservatively designed plant in the United States when it
was licensed for construction by the AEC in 1968. Diablo Canyon
was built to a seismic standard with a peak ground acceleration of
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A. 84-06-014, A. 85-08-025 ALJ/RB/fs/pds*
acceleration that even an earthquake of 8. 5 magnitude could
produce. Under accepted principles of the pre-San Fernando
earthquake era, a magnitude 7.5 Hosgri earthquake would not have
been thought capable of generating a peak ground acceleration of
more than 0.45g, which was very close to Diablo Canyon's actual
design of 0 .4g and quite a difference from the 0.75g adopted by the
NRC in 1976 .
. The 1971 San Fernando earthquake was a 6 .6 magnitude
earthquake, and recorded a peak ground acceleration of 1.25g, which
was double the maximum acceleration ever previously recorded. By
the mid-1970's, the data from the San Fernando earthquake began to
change the way in which critical facilities were designed. It was
in this light that the NRC determined in 1976 that Diablo Canyon
should be evaluated for the higher 0.75g standard. Thus, PG&E
submits that it is unreasonable to expect that PG&E should have
known in 1966 what the experts and government safety regulators did
not know and had no reason to believe at the time.
PG&E contends that its response to the identification of
the Hosgri Fault was reasonable and responsive to the NRC's needs .
When the Hosgri Fault was initially identified, neither the AEC nor
PG&E's experts believed that it was an active fault that was
capable of producing a significant earthquake. PG&E's geology and
seismic consultants advised PG&E that any earthquake potential
postulated for the Hosgri Fault was covered by the original seismic
design of the plant. The NRC on two occasions in 1974 publicly
opposed efforts to halt Diablo Canyon construction because of the
discovery of the fault. The offshore seismic studies that were
planned for proposed Units 3 and 4 in late 1972 and early 1973 were
cancelled, not because PG&E was afraid to learn the truth about the
Hosgri Fault, but because the California Coastal Zone Conservation
Act was passed which would have necessitated an additional permit
for Units 3 and 4, which PG&E expected would be difficult to
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A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds*
which PG&E contends were safety significant. During this time the
NRC was in the midst of intense scrutiny by Congress and the NRC 's
credibility as a safety regulator had been seriously eroded. PG&E
asserts that it was in this backdrop of politics that the NRC
decided to restore its credibility as a tough and competent safety
regulator by making an example out of PG&E by suspending its low
power operating license. PG&E decided not to contest the
suspension of the license because it felt this would further delay
fuel loading.
Contrary to the DRA's assertions, PG&E contends that the
NRC had consistently given good marks to PG&E's QAP. In periodic
reviews over the course of the project, the NRC staff always found
the Diablo Canyon QAP to be in overall compliance with NRC
regulations. There were occasional lapses in PG&E's QAP, but the
NRC never found anything that would cause it to lose confidence in
PG&E. PG&E contends that a QAP cannot catch every single error.
PG&E further contends that the relatively small number of errors
found during the IDVP review, and the randomness of those errors ,
is further proof that PG&E was in overall compliance with the NRC ' s
quality assurance regulations .
As the IDVP got underway, the undertaking became
complicated for several reasons . First, virtually all of the
communication between the outside reviewers and PG&E had to be in
writing or reduced to writing, which required more time. Second,
the NRC required PG&E to submit a semi-monthly status report for as
long as the license suspension was in effect. Third, the outside
reviewers were making increasing numbers of requests for highly
technical information to which PG&E had to respond. Compounding
this was an NRC staff request to report any potential concerns with
plant design as a formal error Dr open item. Fourth, the outside
reviewers were using sophisticated 1980's engineering methodologies
in their design verification activities and were beginning to
request information on design concerns that could only be provided
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A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds*
design through 1980 's eyes , discounting the fact that the design
was based on early 1970 's technology and disregarding the fact that
the models used in the original Diablo Canyon design had been
specifically reviewed and approved by the NRC staff at the time
they were submitted. Advances in computer technology and modelling
techniques made for more sophisticated analyses than were available
when the design was originally done .
When PG&E saw that the NRC staff and the IDVP reviewers
were going to use state of the art engineering analysis and
evaluation methods, PG&E decided to institute a program which
systematically reviewed the design of the plant using state of the
art techniques, and made modifications to the completed plant to
make it comply with current analytical techniques. PG&E viewed the
resulting modifications to be technological upgrades resulting from
the application of techniques that were not available at the time
of the original design. The fact that these changes were made had
nothing to do with the adequacy of either PG&E 's prior quality
assurance program or plant design. Indeed, PG&E contends that even
if the modifications were not done, the Diablo Canyon systems,
structures, and components would have performed their safety
functions in the event there was a 7 .5 magnitude Hosgri earthquake.
4. Quantification
PG&E concludes that the first year results of both units
demonstrate the quality of the system design and the reliability of
the systems and equipment. PG&E believes that Diablo Canyon's safe
operation and high operating ratios attest to the quality of PG&E's
management efforts, and that the overall cost of Diablo Canyon is
in line with those of other plants that went into commercial
operation at the same time. In PG&E's opinion, the entire $5 . 518
billion that was spent on the project was reasonably and prudently
incurred. Accordingly, the DRA disallowance is not warranted.
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A. 84-06-014, A. 85-08-025 ALJ/RB/fs/pds**
inter alia, that the methodology set forth in the stipulation was
an appropriate method of alternative ratemaking, and that, on
balance, the alternative ratemaking protected both ratepayer and
shareholder interests and resulted in just and reasonable rates .
(D.87-04-034, p. 17. )
There is a strong public policy favoring the settlement
of disputes to avoid costly and protracted litigation. (Datatronic
Systems Corp. v. Speron, Inc . ( 1986 ) 176 Cal . App. 3d 1168,
1173-74 . ) The cases discussed in the sections below on binding
future commissions and interpreting the settlement documents all
acknowledge the propriety of settlement in utility matters . As set
forth above, this policy extends to cases involving rate setting in
utility matters . A number of other states, as well as the Federal
Energy Regulatory Commission (FERC) have approved of the use of
settlements and stipulations in utility regulatory matters . (See
e.g. , Re Nine Mile Point Nuclear Generating Facility (N.Y. 1986 ) 78
PUR4th 23, appeal pending sub. nom. Kessell v. Public Service
Commission (N.Y. April 15, 1987 ) ; Re Potomic Electric Power Co.
(D.C. 1987) 81 PUR4th 587; Re Public Service Company of Indiana,
Inc . (Ind. 1986) 72 PUR4th 660; Re Cincinnati Gas and Electric Co.
(Ohio 1985) 71 PUR4th 140; United States v. Public Service
Commission of the District of Columbia (D.C. 1983) 465 A.2d 829 .
Although the settlement of a utility rate case is not a
class action, the settlement principles that apply in class actions
are analogous to the proposed settlement in this case in that it
settles numerous similar claims of similarly situated protestants ,
and, of course, all of PG&E's customers . As the appellate court
noted in Janus Films. Inc . v. Miller (2d Cir. 1986 ) 801 F. 2d 578,
at 582, the role of the court is greatly expanded when a consent
judgment or settlement judgment resolves class actions, shareholder
derivative suits, bankruptcy claims, antitrust suits brought by the
United States, and any suits affecting the public interest. In the
Diablo Canyon case, the settlement affects the interests of all
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A.84-06-014, A.85-08-025 ALJ/RB/fs/pds*
F. 2d 305, 314-315; Cotton v. Hinton ( 5th Cir. 1977 ) 559 F. 2d
1326 , 1330. )
The standard used by the courts in their review of
proposed settlements is whether the class action settlement is
fundamentally fair, adequate, and reasonable. (Officers for
,justice v. Civil Service Commission of the City and County of San
Francisco, supra, 688 F. 2d at p. 625 . ) The burden of proving that
the settlement is fair is on the proponents of the settlement.
(Grunin v. International House of Pancakes ( 8th Cir. 1975) 513
F. 2d 114, 123; Norman v. McKee (N.D. Cal . 1968) 290 F. Supp. 29,
32 . ) Proposed Rule 51 . 1(e) provides that this Commission will not
approve a settlement unless the " . . .settlement is reasonable in
light of the whole record, consistent with law, and in the public
interest. "
In order to determine whether the settlement is fair,
adequate, and reasonable, the court will balance various factors
which may include some or all of the following: the strength of
the applicant's case; the risk, expense, complexity, and likely
duration of further litigation; the amount offered in settlement;
the extent to which discovery has been completed so that the
opposing parties can gauge the strength and weakness of all
parties; the stage of the proceedings; the experience and views of
counsel; the presence of a governmental participant; and the
reaction of the class members to the proposed settlement.
(Officers for Justice v. Civil Service Commission of the City
and County of San Francisco, supra, 688 F. 2d at p. 625. )
In addition, other factors to consider are whether the
settlement negotiations were at arm's length and without collusion;
whether the major issues are addressed in the settlement; whether
segments of the class are treated differently in the settlement;
and the adequacy of representation. (Parker v. Anderson, supra,
667 F. 2d at p. 1209; Armstrong v. Board of School Directors,
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the parties to a settlement or stipulation sign the agreement,
those parties must convene:
"at least one conference with notice and
opportunity to participate provided to all
parties for the purpose of discussing
stipulations or settlements in a given
proceeding. Written notice of the date, time
and place shall be furnished at least seven
(7 ) days in advance to all parties to the
proceeding. " (Rule 51 . 1(b) . )
When a settlement or stipulation is contested on any
material fact by any party, the Commission will schedule a hearing
on the contested issue(s) as soon as possible after the close of
the comment period. (Rule 51 . 6 (a) . ) Parties to the proposed
settlement or stipulation are required to provide at least one
witness to testify concerning the contested issues and to undergo
cross-examination by the contesting parties. ( Id. ) The contesting
parties are also provided an opportunity to present evidence and
testimony on the contested issues . ( Id. ) Where the issue
contested is one of law or on an immaterial fact, the parties may
submit briefs to the Commission if no hearing is held. (Rule
56 . 1(b) . )
Moreover,
" [tic) ensure that the process of considering
stipulations and settlements is in the public
interest, opportunity may also be provided for
additional prehearing conferences and any other
procedure deemed reasonable to develop the
record on which the Commission will base its
decision. " (Id. )
All of these procedures and more were employed in this proceeding .
B. Binding Future Commissions
A major concern in this case is whether a future
Commission will adhere to the terms of a settlement agreement which
fixes the price to be paid for Diable, (' nyon electricity for the
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A.84-06-014, A.85-08-025 ALJ/RH/fs/pds**
time . Thus, the price of Diablo Canyon electricity compares
favorably
to other alternate scenarios. importance of the
Mr. Clarke also testified about the
that the settlement brings to PG&E and its shareholders .
stability rice of PG&E's stock has
• Over the past 19 months, the market p
fallen. This is due in part to the delay and uncertainty in
recovering the costs of Diablo Canyon. Onfthe
rsame day
s lthe
reduced
settlement was announced, the PG&E Board from $1 .92 per to
the annual common stock dividend byshareear
$1 .40 per share. This reduction represented $200 million perY
in reduced income for PG&E shareholders .
tion about what happens if
In answer to the ALJ ' s Qu
esthere is a balance in the floor payment memorandum account upon
expiration of the settlement, Mr. Clarke testified
.that
thed slate
is wiped clean, " meaning that PG&E keeps the mpoorly, or has
sa
in the event that Diablo Canyon is performing Ve
ry to be shut down, and the Commission was setting the rate of return,
he Commission should assume that Diablo Canyon is inrfaGtE 's
t lants . As
operating as well as all other nuclear P Clarke expects Diablo
expectations about the capacity factor, percent over the life of
Canyon to operate in a range of 65 to 70 P
the plant. His expectation is based on the assumption that ma there
or NRC mandated changes or requirements .
will not be any � recludes
pointed out that the capacity
limit of Diablo Canyon p
unreasonable profits, but he conceded that if there are
circumstances in operating Diablo Canyon that are so severe that it
jeopardizes PG&E's ability to serve its customers,
PG&E
mihthe apply
to the Commission for emergency rate relief
settlement.
2. Testiaon of Geo
e A. tis
Mr. Maneatis' testimony focused on the effects of the
settlement on Diabio Canyon plant operations .
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A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds*
examination of Diablo Canyon, as well as to conduct additional site
visits .
Mr. Maneatis testified that the safety committee will
report on its findings and make recommendations for improved safety
measures on an annual basis . PG&E is required to respond to the
report, which will be distributed to the Governor, the Attorney
General, the CPUC and the California Energy Commission. The safety
committee will be adequately funded with an initial annual budget
of half a million dollars . This budget will attract qualified
experts and allow the safety committee to seek any assistance that
it may require.
On cross examination, Mr. Maneatis testified that he had
met with some of the NRC Commissioners and their staff on an
informal basis in June 1988 to notify them that PG&E was
considering settling the Diablo Canyon case using an alternative
form of ratemaking. The NRC did not convey any concerns to him
about performance based pricing. He also stated that if there is
some extraordinary event in the future that is beyond PG&E 's
control, and it impairs PG&E from discharging its utility
obligations, PG&E would come to the Commission and request relief .
3. Testimony of Thomas C. Long
Mr. Long explained the terms of the settlement and how
the settlement will be implemented by PG&E over the short term and
the long term.
For the most part, Mr. Long's testimony was a technical
exposition of the various accounting changes necessary to implement
the settlement and need not be recounted. What is important to
ratepayers, however, is his recommendation for spreading the rate
increase which will follow this decision. The amount of the rate
increase is $284 million, or 5.2% of presently authorized
revenues .
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he
PG&E defined the Diablo Canyon bewhen DiablOits to be tCanyon is
reduction in costs of other generation types
an available resource, i .e. , when Diablo Canyon is in the resource
mix. There are four general categories of savings: ( 1) savings
from the reduced use of fossil fuel and other fuels, andother
reduced purchases; ( 2) savings from reduced prices paid
ford to Qand
geothermal steam; ( 3) savings from reduced prices p
(4 ) capacity savings . The latest calculation of the Diablo Canyon
benefits was done mid-1988 using a production simulation model .
Mr. Hindley's analysis projects that at a 58% lifetime
capacity factor, ratepayers will save approximately $265 million
because of the operation of Diablo Canyon, andat
a 65 % lifetime
e
capacity factor, ratepayers will save about $67
the savings are considered in conjunction with the unquantified
ch
social benefits derived from the uaee totreducedon of Dfossil fuel plant
Canyon, su
as a reduction in air emissions d
operation, fuel diversity, and the shifting of opsratifnal risk,
PG&E believes that the settlement represents
a comethod of electricity generation for ratepayers .
PG&E also measured the cost effectiveness
tofDiablo
ratepayers
Canyon under the settlement by comparing t
under traditional ratemaking with full recovery, to the costs to
performance based pricing. The costs to
ratepayers under Pe amount to $12 . 305 billion
ratepayers under traditional ratemaking
at a 58% capacity factor, and $12 . 361 billion at a 65% capacity
15 Due to the apparent use of different assumptions,
Mr. Hindley's analysis on the cost effectiveness ofeDf blodCanyon
differs from the analysis that the DRA and the AG perform
calculating the equivalent disallowance. Since the purpose behind
each analysis was different, we
cost effectiveness
wourselves
analysishand the
the discrepancies between th
equivalent disallowance analysis .
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•
B. Testimony of DRA Witnesses
The following witnesses testified for the DRA,in favor of
the settlement: William R. Ahern, Bruce DeBerry, Lee-Whei Tan,
Truman Burns, Raymond Czahar, Richard Meyers, Charles Romanoff, and
Scott Cauchois.
1. Testimony of William R. Ahern
Mr. Ahern, the Director of the DRA, supports the
settlement. He testified that, unlike traditional cost of service
ratemaking, the settlement allows PG&E to receive from its
customers a price based upon the actual electricity produced by
Diablo Canyon. According to Mr. Ahern, the advantages to
ratepayers of performance based pricing have been widely recognized
in the federal Public Utilities Regulatory Policy Act of 1978 and
in the CPUC's alternative generation program. Under those
programs, as well as the settlement in this case, if the plant
operates poorly the owner suffers . If it operates well, the owner
is rewarded with higher revenues . The operating risks are shifted
from the ratepayers to the utility and its shareholders .
Mr. Ahern testified that given the examples of poor
nuclear plant performance and the high risks associated with
nuclear plants, the shifting of the operating risk from the
ratepayers to the utilities is of real value to the ratepayers . He
referred to the Rancho Seco, San Onofre Unit 1, and Humboldt Bay
nuclear power plants which incurred extraordinarily high costs
coupled with low production. Under traditional cost of service
ratemaking, these burdens were borne solely by the ratepayers .
Nuclear plants can experience recurring needs for new additions and
high costs any time after initial construction is finished. The
NRC may require new programs and facilities to promote safety.
Under the settlement, the costs for plant modifications ,
operations, maintenance, insurance, security, and other plant
activities are shifted from the customers to the utility.
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A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds*
•
PG&E's rate base. This estimate of a $2 billion equivalent rate
base disallowance assumes that PG&E will operate Diablo,Canyon at a
capacity factor of 58% over the next 28 years .
He said that if different assumptions about future plant
operation and costs were used, the resulting equivalent rate base
disallowance could be materially different. For example, the DRA
estimates that if the plant is operated at a 70% capacity factor
for the next 28 years, the result would be an equivalent rate base
disallowance of less than $800 million. On the other hand, an
assumption of a capacity factor of 40%, which is Rancho Seco's
average capacity factor, results in an equivalent disallowance of
nearly $4 billion.
In the DRA's estimation, one of the major advantages to
the settlement is that PG&E will immediately forego recovery of
about $2 billion in Diablo Canyon costs now undercollected in the
DCAA that PG&E could recover, with interest, if the CPUC were to
allow the full $5 .5 billion construction cost into PG&E 's rate
base. This waiver of $2 billion makes up approximately $1 . 2
billion of the $2 billion equivalent rate base disallowance.
In the DRA's opinion another way of judging the
reasonableness of the settlement is to compare the rate base
disallowances that were made on other high cost operating nuclear
power plants. The $2 billion equivalent disallowance in this case
exceeds any other state 's rate base disallowance adopted for a high
cost operating nuclear power plant. Mr. DeBerry's testimony
provides more details .
The fixed and variable prices in the settlement were
negotiated and are not related to any specific forecast. Mr. Ahern
states that the pricing structure should be viewed in the context
of the whole settlement package, including the waiver of the $2
billion in the DCAA balancing account and the waiver of litigation
costs .
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provisions the treatment of prolonged outages under the settlement
is more favorable to PG&E's customers than traditional ratemaking.
The abandonment provision puts a cap on the amount that PG&E can
request after the abandonment of Diablo Canyon, which is a major
advantage over traditional ratemaking because the procedure for
removing a plant from rate base can take years, and the ratepayers
are responsible for reasonable uncollected ownership costs of the
plant.
Mr. Ahern points out, on the other hand, that if the
Commission were to adopt the DRA's rate base recommendation of $1 . 1
billion at a prudence hearing, and if Diablo Canyon were to operate
very well, with low capital additions and low operating and
maintenance costs for 30 years and with no prolonged outages, then
the ratepayers would be better off under traditional rate base and
cost of service ratemaking. However, for the Commission to do
this , it would have to resolve all the the disputed factual issues
in the case in favor of the DRA.
As Mr. Ahern testified, the settlement is a 30-year
agreement, covering all Diablo Canyon costs . In the absence of a
settlement, the Commission would have to hold a prudence hearing on
the initial cost of the plant, as well as a prudence hearing for
the capital additions made after commercial operation up to the
test year 1990 of PG&E's next general rate case. In that rate
case, the Commission would also need to adopt new levels of future
capital additions to put in rate base and new levels of operating,
maintenance, and administrative expenses. Every year, the
Commission would have to assess nuclear fuel costs in PG&E's fuel
cost offset proceedings. In addition, over the next 28 years,
there would be many other proceedings to address the costs incurred
at Diablo Canyon. Under the terms of the settlement, all of those
CPUC reviews would be avoided. According to Mr. Ahern, this is a
major benefit to PG&E's customers .
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•
In other states, according to Mr. DeBerry, some nuclear
plants have had similar experiences where the capital additions
costs exceed their original construction costs . For example, the
Beaver Valley plant in Pennsylvania built in 1976 at a cost of $295
million has added over $319 million in capital additions, which is
equivalent to 112% of its original costs . The David Besse plant in
Ohio which was built in 1977 for $271 million has had $353 million
in capital additions or 129% of its original cost.
Although the above examples are unusual, Mr. DeBerry
testified that studies of capital additions over a wide range of
nuclear plants confirm that historically capital additions have
increased substantially. In a study by Komanoff Energy Associates ,
which is explained in detail further in this dei-• _ 4 ^., =ring :_
period from 1972-1986, capital additions on a per kilowatt basis
increased by 424% in constant 1986 dollars . In 1972 , average
capital additions were $7 . 50 per kilowatt in constant 1986 dollars ;
by 1986 , capital addition costs had increased to $39 . 20 per
kilowatt in constant 1986 dollars . In a study by the Energy
Information Administration, capital additions increased from $4 . 3
million per plant per year to $29 . 7 million per plant per year for
the period from 1975-1984 . Under the settlement, the ratepayers
will not have to bear the risk of paying for the costs of greater
than expected capital additions for Diablo Canyon.
Mr. DeBerry noted that nuclear power plant performance is
difficult to predict. Plants that operate well in the early years
may become poor performers in later years . In California, Rancho
Seco operated at a 51.5% capacity factor for its first 11 years .
However, its non-operation in the last two years has resulted in a
lifetime capacity factor of 39 . 1% . Another example is that of
SONGS 1 . During the first 12 years , SONGS 1 ran at an average
capacity factor of 72%. But from 1980-1987 , SONGS 1 had only
averaged a 28% capacity factor, resulting in a 52 .2% lifetime
capacity factor. With respect to Westinghouse 4-loop reactors ,
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settlement. The DRA's quantification of Diablo Canyon's equivalent
disallowance under performance based pricing is derived from two
separate forecasts of revenue requirements: one_forecast under
traditional ratemaking, and a forecast under the performance based
pricing settlement.
The forecast of revenues under traditional cost of
service ratemaking assumes that Diablo Canyon is included at full
cost in PG&E's rate base. Over the expected remaining 29 year life
of Diablo Canyon, the ratepayers ' revenue requirements will be a
function of both fixed costs associated with the $5 .7 billion
investment which includes all capital costs incurred to the
commercial operation dates of both Diablo Canyon units, plus the
first year' s capital additions after commercial operation for both
units, plus PG&E's forecast of capital additions thereafter, plus
annual operating expenses, such as fuel and operations and
maintenance expenses . The DRA assumed that the Diablo Canyon rate
case would be completed by the end of 1989, and that the DCAA
deferred cost would increase to approximately $3.4 billion by year
end 1989. This $3.4 billion DCAA balance is then amortized over a
five year period beginning in 1990.
The revenue requirements for performance based pricing
have also been forecast for the same 28 year period. Under
performance based pricing, the revenue requirement for Diablo
Canyon will be a function of the escalated initial starting price
times the energy (kWh) production of Diablo Canyon. The DRA's
analysis assumes a capacity factor of 58%, with a net maximum
dependable capacity of 1,073 MW for Unit 1 and 1,087 MW for Unit 2 .
The total annual expected energy output of Diablo Canyon is
approximately 10,970 gigawatt hours (gWh) . The annual energy
output of Diablo is then multiplied by that year's escalated
performance based pricing rate to yield that year's total revenue
requirement .
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applying the conversion factor to the net present value revenue
requirement difference between traditional ratemaking and
performance based pricing of $2 .6 billion, an equivalent rate base
disallowance for Diablo Canyon of about $2 .025 billion ($2 .6
billion/1.26) is derived. That is, if $2 . 025 billion of Diablo
Canyon's investment cost were disallowed for ratemaking purposes
under traditional ratemaking, the net present value of each revenue
recuirements stream in Appendix F would be eclial .
4. Testimony of Truman L. Burns
Mr. Burns, a Regulatory Analyst with the DRA, explained
the methodology that the DRA used to estimate Diablo Canyon revenue
recuirements under the settlement. The DRA used Data Resources
Inc . (DRI ) Fall 1987 report to forecast the CPI for the next 28
years which averages 5 . 7% over the long term. The DRA assumes that
the annual generation of Diablo Canyon is 10,979 gWh, based upon
the maximum dependable capacity of 1, 073 MW for Unit 1, and 1 , 087
MW for Unit 2, and a capacity factor of 58%.
According to Mr. Burns, the benefit of the hydro spill
provision is that PG&E 's ratepayers will not be forced to take
power from Diablo Canyon when lower cost hydroelectric power is
available, in contrast to conventional ratemaking, where the
ratepayers would still be required to pay the fixed cost of .Diablo
Canyon, even when the company is utilizing cheaper hydro power.
Mr. Burns elaborated on the floor payment memorandum
account (FPMA) , which is to be used to record all floor payments
received by PG&E, to accrue interest on the floor payments
received, and to record all repayments . If the floor is invoked
during the term_of. the agreement, and in subsequent years, Diablo
Canyon's capacity factor never exceeds 60%, PG&E will not have to
repay any of the floor payments . PG&E can make additional floor
repayments if it chooses to do so, e.g. to restore the level of the
specified capacity factor. If PG&E were to abandon or retire
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operating life of the plant is expected to be 30 years beyond
Unit l 's commercial operation date in 1985, and Unit 2 's commercial
operation date in 1986; (3) the cost of capital from 1989 through
2016 is expected to average 4 .0% over the long run for returns on
long term debt and preferred stock, and an expected average of 71.
for return on common equity; (4 ) a long-term inflation factor of
5.7%, which was taken from the Fall 1987 DRI forecast; (5) a
discount rate of 11 . 5%; ( 6 ) federal tax rates in 1986 of 46%, in
1987 of 40%, and in 1988 and thereafter of 34%; (7) a state tax
rate of 9%; and (8) a property tax rate of 1% of the net
depreciated rate base.
The key assumptions used in calculating the annual
operating expenses for the COSR forecast are as follows : ( 1 ) the
operations and maintenance expenses for the year 1988 are based on
the stipulated values from CPUC D.88-03-067, and for years 1989
through 2016, the 1988 base value is escalated at inflation plus
2%; (2 ) the administrative and general expenses for the year 1988
are also based on the stipulated values from CPUC D.88-03-067, and
for years 1989 through 2016 , the 1988 base value is escalated at
inflation; (3) for the years 1985 through 1987, Diablo Canyon's
nuclear fuel costs are those costs reported in PG&E's Uniform
Monthly Fuel Operational Report, and for 1988 through 2016, the
estimate is derived from PG&E's March 1988 long-term nuclear fuel
cost projections; 17 and (4) annual capital additions through 2016
were taken from PG&E's October 1986 cost effectiveness study, which
17 These fuel cost projections were based on a 65% lifetime
capacity factor. The DRA assumes that at a 58% capacity factor,
nuclear fuel costs per kWh would be higher than at a 65% capacity
factor because at a higher capacity factor, nuclear fuel is
financed over a shorter period of time than at a lower capacity
factor. Thus, the DRA believes that its nuclear fuel estimate is
conservative.
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would receive annual revenues (that year's PBP prices multiplied by
generation) as if Diablo Canyon had achieved a 36% capacity factor
in 1991, a 33% capacity factor in 1992, and a 30% capacity factor
in 1993. The same declining capacity factors apply for Scenario B.
And in Scenario C, the declining payments are based on 33%, 30%,
and 27% capacity factors .
Under each scenario, the resulting equivalent
disallowance was greater than the $2 .025 billion DRA equivalent
disallowance. The equivalent disallowance under Scenarios A, B,
and C were calculated at $2 .362 billion, $2 .292 billion and $2 .217
billion, respectively. From the standpoint of the ratepayers, the
floor payment provision of PBP is superior to traditional COSR
assuming a TCF.
The DRA also evaluated four abandonment scenarios .
Scenario A assumes that abandonment begins in 1993, that there are
no floor payments, the amortization of the net remaining plant and
capital additions rate base without AFUDC takes place over
10 years, and that $2 . 5 billion is recovered by PG&E under the PBP
abandonment provision. Scenario B assumes that abandonment begins
in 1993, that there are no floor payments, that the amortization of
the net remaining plant and capital additions rate base without
AFUDC takes place over 5 years, and that $2 .5 billion is recovered
by PG&E under the PBP abandonment provision. Scenario C assumes
that abandonment begins in 1998, that there are no floor payments,
that the amortization of the net remaining plant and capital
additions rate base without AFUDC takes place over 5 years, and
that $2 billion is recovered by PG&E under the PBP abandonment
provision. Scenario D assumes that floor payments were received in
1993 through 1995, that there is actual abandonment in 1996, that
the amortization of the net remaining plant and capital additions
rate base without AFUDC takes place over 5 years, and that $2 . 2
billion is recovered by PG&E under the PBP abandonment provision.
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additions. The following are the results of the DRA's sensitivity
analyses:
(1985 $ Millions)
Base Case, Equivalent Disallowance at
11.5% Discount Rate: $2 , 025
1 . Discount Rate Sensitivity for Base Case
Discount Rate: 9.2% 12% 13 . 1% 13. 8% 17%
2031 2020 2007 1997 1932
2. Capacity Factor (CF) Sensitivity for Base Case
CF: 40% 50% 55% 60% 64% 70%
3909 2862 2339 1816 1397 769
3 . O&M Escalation Sensitivity for Base Case
O&M Escalated at:
CPI + 0% CPI + 2% CPI + 3%
1720 2025 2216
4 . Capital Additions Escalation Sensitivity for Base Case
Capital Additions Escalated at:
CPI + 0 CPI + 2% CPI + 4%
1841 2025 2270
The witness testified on cross examination that he was
aware of Mr. Clarke's expectation that Diablo Canyon would operate
at a capacity factor of higher than 58%, and that the current ECAC
proceeding assumed an overall capacity factor of 70. 7%. However,
he felt that the DRA's assumption about a 58% capacity factor is
reasonable when compared with the national average of large nuclear
power plants. He further testified that he was not disturbed that
the settlement did not take into account the cost effectiveness of
Diablo Canyon because PG&E needs future capacity.
6. Testimony of Richard A. Myers
Mr. Myers is a Senior Utilities Engineer with the DRA.
He testified on the reasonableness of the DRA's assumptions about
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•
Mr. Myers compared the O&M expenses for individual plants
which have been in operation for several years or more and found
that the increase in O&M expenses for these plants were comparable
to, or only slightly lower than the increase in the average O&M
expense. He concluded that the O&M expense for older plants had
been increasing almost as fast as that of the newer plants . He
also concluded that it was typical for annual nuclear O&M expenses
to be below $10 million in the mid-1970's, while the current O&M
expenses for those same plants are now $40, $50, or $60 million or
more. As an example, the Rancho Seco nuclear plant had O&M
expenses of $7 million in 1976 , but in 1985 the O&M expense for
that plant was $93 million.
With respect to Diablo Canyon's O&M expenses, the
recorded expenses have been above the average O&M of other nuclear
plants, but within the range of variance. In January 1988, as part
of the interim rate proceedings for Diablo Canyon, PG&E and the DRA
stipulated that the reasonable O&M expenses for 1988 would be $85
million per unit, assuming that both units would be undergoing
refueling outages in 1988. In D. 88-05-027, the Commission
determined that those amounts were reasonable.
The frequency with which refueling outages take place is
a significant factor which affects the estimate of future O&M
expenses. Incremental expenses, in addition to the normal O&M
expenses, are incurred during refueling outages at nuclear plants
because of the increased work during these outages which cannot be
effectively performed while the plant is in operation. The higher
the capacity factor of any given plant, the more frequent refueling
outages will be, which will cause a utility to incur higher O&M
expenses.
Mr. Myers reviewed the frequency of refueling and other
major outages of other nuclear plants . On the average, refueling
outages occur about twice every three years . This has been the
case at Diablo Canyon as well . Unit 1, which has been in operation
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decision, the Commission also determined that $31 . 6 million was a
reasonable estimate of A&G expense for 1988. Also, in p.86-12-095,
the Commission determined that an additional $11.7 million in
Diablo Canyon related A&G expense was reasonable for Test Year
1987 .
As for the assumptions pertaining to nuclear fuel
expenses, data for these expenses for other U.S. nuclear plants
were compiled for the years 1978, 1979, and 1982 through 1986 .
The DRA's projections for nuclear fuel expense also relied on
figures provided by PG&E for the price of nuclear fuel for 1988
through 2016 . In the late 1970 's nuclear fuel expense was mainly
in the range of 2 to 5 mills per icWhr, but by 1986 the range was
from 6 to 10 mills per kWhr. This is roughly an 11% increase per
year. The CPI increased at an annual rate of 7% per year from 1978
to 1986 . The rate of increase of nuclear fuel expense has slowed
in recent years, and is near the escalation rate of the CPI . When
the figures supplied by PG&E, which are used in the DRA estimate,
are compared to the historical cost paid by other utilities for
nuclear fuel and the escalation of those historical costs, the
figures appear to be reasonable. If the average nuclear fuel cost
keeps going up at the same rate as the projected CPI, PG&E's
figures will actually be lower than average in 1989, higher than
average from 1990 to 1994, then lower than average from 1995 to
2016 .
The DRA estimates that the reasonable lifetime capacity
factor for Diablo Canyon will be in the range of 55% to 65% . In
order to calculate an equivalent disallowance of plant costs under
the terms of the Diablo Canyon settlement compared with traditional
ratemaking procedures, the DRA assumed a 58% capacity factor for
the next 28 years. The choice of this number was based on the
group of plants which have characteristics most similar to Diablo
Canyon, i.e. Westinghouse four loop PWRs, which have a capacity
factor of 58%. Of this group, the plants which have operated for
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7. Testimony of Charles Komanoff
Charles Komanoff is a director and principal of KEA, an
energy and economic consulting firm. The purpose of his testimony
was to elaborate on the DRA's assumption about future capital
additions to Diablo Canyon.
KEA used its database containing the rate of expenditures
for capital additions at U.S. nuclear plants for the period
1970-1986 . KEA developed three alternative statistical models
using this data and applied it to Diablo Canyon to develop
estimates of the likely amounts that will be required to upgrade,
repair, and maintain Diablo Canyon.
He compared the DRA analysis with KEA's analysis . The
DRA used the projected stream of annual capital additions which
PG&E adopted in its October 1986 cost effectiveness study of Diablo
Canyon. This stream has a present worth cost of approximately $1 . 2
billion in 1986 dollars, which is equivalent to $88 million per
year on a constant levelized basis ( in 1986 dollars) . The primary
statistical model of KEA indicates that capital additions for
Diablo Canyon will have a present worth cost of approximately $2 . 2
billion in 1986 dollars, which is equivalent to $163 million per
year on a constant levelized basis. The model 's estimate exceeds
the PG&E estimate used by DRA by slightly over $1 billion, or $75
million per year on a levelized basis in 1986 dollars .
The two other KEA models have somewhat lower rates of
capital additions for Diablo Canyon than the primary model,
although they still exceed PG&E's estimate. The average capital
additions costs from the three KEA models are two thirds greater
than PG&E's assumed rate, a difference equivalent to approximately .
$800 million on a life cycle basis or $60 million annually in 1986
dollars.
In estimating future capital additions, PG&E assumed zero
escalation beyond 1995. Even if an escalation factor of 4% were
added to the PG&E figures, the average Diablo Canyon capital
•
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11 . 3% . The choice of 11 . 5% also compares favorably with rates used
in regulated industries and with rates found in other studies .
C. Testimonv of AG Witnesses
The following witnesses testified for the AG in favor of
the settlement: David Marcus, Michael J. Strumwasser, and
Richard B. Hubbard.
1. Testimony of David Marcus
David Marcus is a consultant with a background in the
energy field. Mr. Marcus was retained by the AG for the purpose of
calculating the equivalent disallowance associated with the
proposed settlement.
Mr. Marcus explained that an equivalent disallowance
calculation involves a comparison between the net present value
(NPV) of PG&E's revenues from the settlement, and the NPV of PG&E's
revenues for Diablo Canyon under traditional ratemaking. The
equivalent disallowance is the amount of the Diablo Canyon capital
costs, before commercial operation, that would need to be
disallowed by the Commission in order to produce the same NPV under
the settlement as under the traditional COSR. The equivalent
disallowance was done on a company wide basis .
The following assumptions were made by Mr. Marcus for
computing PG&E's revenues under the settlement: ( 1) a discount
rate of 11.5%; (2) an overall capacity factor of 58%18 which is
the time weighted average performance through January 31, 1988 of
83 U.S. nuclear plants over 700 megawatts capacity in commercial
operation; and (3) for the variable price component after 1994 , and
18 The 58% overall capacity factor is based on an eighteen month
fuel cycle, and two in service inspection outages for each unit.
That is, the plant is assumed to operate at 75% capacity for
fourteen months, and at zero capacity for four months for
refueling. Then every ten years, there is an additional three
month outage for each unit for maintenance and inspection.
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76 . 7% . Both units at Diablo Canyon are currently operating at a
combined capacity factor of 67% after three completed fuel cycles .
2. Testimony of Richard B. ward
Mr. Hubbard, the Vice President of MHB Technical
Associates (MHB) , testified for the AG in support of the
settlement. The purpose of his testimony was to provide an
evaluation of the Independent Safety Committee (Committee) to be
created under the proposed settlement. MHB has conducted studies •
in the past pertaining to the safety, quality, reliability, and
economic aspects of nuclear power generation facilities.
The Committee has four key characteristics . First, the
composition of the Committee will consist of three experts who have
knowledge, background, and experience in nuclear facilities .
Mr. Hubbard believes that three Committee members will provide for
a divergence of opinion. He believes that the most important
factor in selecting the Committee members is their qualifications
to address the technical issues that the Committee members will
face.
The second characteristic is that the Governor, the
Attorney General, and the Chairman of the California Energy
Commission will each appoint one member from a list of candidates
nominated by the President of the CPUC, the Dean of Engineering at
the University of California at Berkeley, and PG&E. Mr. Hubbard
believes that the selection process is an appropriate method for
retaining experts who will be independent, and who will provide
objective judgments based solely on the technical merits .
Third, the Committee's objectives will be to review
Diablo Canyon operations, conduct technical studies, and to make
recommendations regarding the safety of Diablo Canyon to PG&E and
to state officials. The Committee will have a fair amount of
freedom to evaluate any document in the possession of PG&E that
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routinely have bonuses or penalties based on performance
objectives.
3. Testimony of Michael J. Sasser
Mr. Strumwaeeer I. a Special Assistant Attorney General
who testified in favor of the settlement. The purpose of his
testimony was to show that the settlement is reasonable for PG&E
ratepayers.
He has four reasons why he believes that the settlement
benefits ratepayers. The first is that the settlement is
equivalent to a disallowance of more than $2 billion assuming a
capacity factor of 58%. In Mr. Strumwasser's opinion, that
equivalent disallowance compares favorably the likely results of
fully litigating the prudence case. Although he believes that the
evidence would support a disallowance exceeding $2 billion, he does
not agree that the entire $4 .4 billion disallowance recommended by
the DRA is justified. Based upon the history of past Commission
decisions and other factors, there is a substantial risk that the
Commission might disallow less than $2 billion. Thus, an
equivalent disallowance which exceeds $2 billion is an attractive
• number.
Mr. Strumwasser's second reason is that the settlement
shifts the performance risks of the operation of Diablo Canyon from
the ratepayers to PG&E. Under traditional ratemaking, the
ratepayers pay for a return of and a return on all of the plant's
reasonable capital costs, and for all reasonable operating and fuel
costs . These payments continue despite the performance or non-
performance of the plant. Under the settlement, ratepayers pay a
price for electricity only when Diablo Canyon is producing power,
subject only to the floor provisions of the settlement.
His third reason is that the settlement shifts the risk
of future cost overruns from ratepayers to PG&E. Under traditional
ratemaking, ratepayers must pay for all reasonable operating costs
and reasonable costs for capital additions even if they are
•
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SLOMP's concerns are in four areas. The first concern is
that the proposed settlement creates a conflict between plant
safety and the financial rewards to PG&E. That is, the performance
based pricing mechanism creates an incentive for PG&E to maximize
plant operation so as to maximize revenues and to disregard safety
concerns that only affect safety but do not enhance plant
performance.
SLOMP cites various NRC memorandums expressing concern
over incentive pricing and the AG's August 23, 1985 response to
Commissioner Vial's request that value based pricing be examined.
The AG's response outlined steps that should be taken in the event
value based pricing was adopted for Diablo Canyon, including
obtaining a commitment from the NRC to take broad and aggressive
measures to ensure the public safety. Among the recommended
measures were increased NRC onsite inspection staff, increased NRC
audits, and monitoring of safety related policies and practices at
PG&E headquarters. SLOMP believes that those steps are the minimum
requirements that must be in place to mitigate the problems
associated with a price structure based upon performance. However,
Ms . Swanson points out that none of those steps were adopted as
part of the proposed settlement.
SLOMP's second concern is the way in which the members of
the Independent Safety Committee are nominated and selected. To
obtain qualified members for the Committee, it is likely that the
nominees will have ties to the nuclear industry. SLOMP feels that
the nominations and appointments of the Committee members will be
done by the utilities 'and by Commission related bodies . In
. addition, none of the nominees are nominated or appointed by any
citizen group.
The third concern is that the information that the
Committee is entitled to is no more than what the general public
can obtain. Ms. Swanson said that the Committee can only get the
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plant. LOPE believes that under the settlement the ratepayers will
have to pay for PG&E's $4 .4 billion in mistakes .
The third criticism of the settlement is that it leaves
decommissioning costs untouched. LOPE believes that this is unfair
to ratepayers because it will not account for the real cost of
decommissioning Diablo Canyon. Thus, the burden of the true cost
of decommissioning will be borne by ratepayers in the future.
LOPE's fourth criticism is that under the settlement, the
ratepayers will end up having to buy electricity from Diablo Canyon
at the prescribed prices even if cheaper electricity is available
from other sources . LOPE asserts that this will cause large users
to leave the PG&E system to produce their own electricity or to
seek cheaper electricity. As a result, small users will end up
paying the highest price for electricity because they can't afford
to disconnect.
C. Testimony of Toward Utility Rate Normalisation
Sylvia M. Siegel testified on behalf of TURN in
opposition to the settlement.
She testified that the CPUC is obligated to regulate
utilities and to ensure that rates are just and reasonable.
Although California uses a future test year to set rates, that does
not mean that it is reasonable to forecast what conditions or
prices will be for a nuclear power plant for the next thirty years .
If Mr. Clarke's expectations about Diablo Canyon's future operation
are correct, or if the capacity factors used by the CEC or in the
ECAC proceedings are reflective of future operation, PG&E will more
than offset the equivalent disallowance of $2 billion in the
future, and even possibly come out with hardly any disallowance.
She said that the projections made by the proponents are
speculative. TURN believes that further computer runs should be
done using assumptions that are different than those the proponents
have used. She believes there are other reasonable scenarios under
which PG&E would be able to recover its entire investment in a
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He described the overall structure of the settlement and
its expected impact. In calculating costs Dr. Bernow used his own
projections of Diablo Canyon O&M costs and capital additions costs,
and the DRA's assumptions about capital cost recovery, discount
rate, and capacity factor. He also used PG&E's production costing
simulations to compute the avoided energy costs . Using a discount
rate of 11.5%, Dr. Bernow determined that the levelized future cost
of electricity under the settlement is 11 .81 per kWh. Under
traditional COSR, the levelized cost is 13. 10 per kWh, whereas
under avoided cost or value pricing the cost is 5. 1t per kWh.
Dr. Bernow testified that the settlement attempts to
achieve several objectives .at the same time: reasonable rates for
Diablo Canyon power, a fair treatment of the Diablo Canyon costs,
protection of ratepayers from further risk of cost escalation,
incentives for good operating performance, and avoidance of costly
and time consuming litigation. However, in the pursuit of these
objectives, Dr. Bernow feels that the settlement adversely impacts :
( 1) economical system planning; (2) safe Diablo Canyon operation;
(3) the ultimate decommissioning of the plant; and (4) future
ratemaking and operations .
With respect to the issue of system planning, Dr. Bernow
stated that system planning for utilities should include
appropriate plant retirement decisions . The objective of electric
utility operations and planning is to provide reliable electrical
power to customers at the lowest cost feasible. Instead, the
settlement locks PG&E ratepayers into purchasing the power produced
by Diablo Canyon for the next 28 years, at a levelized cost of
about 12 cents per kWh. Dr. Bernow believes that this combination
of 28 years and set prices effectively precludes reasonable
decisionmaking with respect to the timing of Diablo Canyon's
retirement. Under the settlement, PG&E has the incentive to
operate the plant as much and as long as possible even if it is not
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decommissioning costs. However, since the distinction between
operating costs and decommissioning costs is not always clear,
Dr. Bernow feels that it is inappropriate to segregate the
decommissioning costs from the rest of the plant's costs . Without
the settlement, the costs of ultimate decommissioning as well as
any ongoing operation and maintenance costs are both passed on to
ratepayers. Under the settlement, since O&M costs are absorbed by
PG&E, this could set up a conflict between what is attributable to
O&M costs and what is attributable to decommissioning costs . If
more costs were shifted to decommissioning, the ratepayers would
end up paying increased decommissioning expenses.
The fourth concern is the settlement's impact on future
ratemaking and operations . Under the settlement, PG&E is in effect
selling the output of Diablo Canyon to itself . Dr. Bernow's
concern is that some of the risks of operation have been shifted to
PG&E shareholders which may affect PG&E's cost of money,
particularly if Diablo Canyon performs poorly. In that instance,
PG&E may face situations in which rational planning or ratepayer
interests are in conflict with PG&E's shareholder interests .
Furthermore, the settlement may create a situation in which the
Commission jeopardizes its jurisdiction over the rates at Diablo
Canyon since, in Dr. Bernow's estimation, an unregulated subsidiary
of PG&E might be set up to operate Diablo Canyon. In such an event
the FERC may assert jurisdiction.
Dr. Bernow opposes the settlement as written. He also
recommends that the Commission should hold a hearing as to whether
the continued operation of Diablo Canyon is cost effective. If,
however, the Commission is inclined to approve the settlement,
Dr. Bernow recommends several changes be made with respect to the
settlement:
(a) Consider restructuring the payments under
the settlement so that the revenues per kWh
of electricity production are more in line
with the value of the power. According to
Dr. Bernow, this would decrease both the
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In calculating the impacts of Diablo Canyon upon system operation,
PG&E used a computerized dispatch simulation model . Two cases were
run, one with Diablo Canyon and one without. In the case without
Diablo Canyon, PG&E assumed that it would not build new generating
capacity to replace Diablo Canyon, nor would there be any
replacement energy purchases . Dr. Bernow believes that this is an
unrealistic assumption.
Dr. Bernow also responded to Mr. Hindley's criticism of
his treatment of the capacity value of Diablo Canyon and PG&E's
claim that the dependable capacity of Diablo Canyon was reduced
from 2, 160 MW to 1,392 MW. With respect to the first criticism,
Dr. Bernow's use of a zero capacity value for 1988 to 1991 reflects
the course of action that PG&E would take in the event that Diablo
Canyon were shut down since surplus capacity is expected to last
through 1999 . As to the second criticism, Diablo Canyon's capacity
was not reduced. Rather, Diablo Canyon's 2, 160 MW of nuclear
capacity was replaced with 1 , 392 MW of combined cycle capacity.
According to Dr. Bernow, combined cycle capacity has much better
system reliability than nuclear capacity, and therefore it is not
necessary to replace every MW of Diablo Canyon's capacity.
2. Testimony of Robert Kinosian
The Redwood Alliance called Robert Kinosian, who is
employed by the DRA, to testify regarding two studies which he
prepared in January and August of 1988 about the cost effectiveness
of Diablo Canyon.
Mr. Kinosian's January analysis compares the operating
costs of Diablo Canyon ( fuel costs, O&M, A&G, capital additions,
and decommissioning) to the costs of replacement power without the
operation of Diablo Canyon. For 1988, the operating costs of
Diablo Canyon were calculated by Mr. Kinosian to be $458 million or
38 . 1 mills per kWh. The cost of not operating Diablo Canyon and
purchasing replacement power for 1988 was calculated by
Mr. Kinosian to be $387 million or 32 .2 mills per kWh. Most of the
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those effects; additional explanations and some changes can be
found in the Implementing Agreement.
Settlement Agreement
This Settlement Agreement is made among Pacific Gas and
Electric Company (PG&E) , the Division of Ratepayer Advocates
(DRA) of the California Public Utilities Commission (CPUC) ,
and the Attorney General of the State of California. The
Agreement covers operation and CPUC jurisdictional revenue
requirements associated with each unit of the Diablo Canyon
Nuclear Power Plant (Diablo Canyon) for the 30-year period
following the commercial operation date of each unit.
1. Exclusive Ratemaking
This Agreement sets forth PG&E's exclusive
method for recovering any CPUC jurisdictional
costs of owning or operating Diablo Canyon for
the term of this Agreement.
The Settlement Agreement covers the price ratepayers pay for
Diablo Canyon power regardless of change of ownership of Diablo
Canyon to third parties or affiliates of Diablo Canyon. The
Settlement Agreement is intended to govern regardless of the
organizational or financial structure or form of ownership of
Diablo Canyon.
2. Term
The term of this Agreement shall be from
July 1, 1988 to May 6 , 2015 for Diablo Canyon
Unit 1 and from July 1, 1988 to March 12, 2016
for Diablo Canyon Unit 2 .
The Unit 1 operating license expires April 23, 2008 and the
Unit 2 operating license expires December 9, 2010. If not extended
by the NRC, the units will be deemed abandoned on their respective
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Energy Commission) estimate that over the long run alternate fuel
prices will increase at a rate faster than the general rate of
inflation.
We have previously discussed the issue of our authority to
bind future Commissions . As we stated earlier, although we have
specifically held that we cannot bind the actions of a future
commission, we do intend that all future commissions give all
possible consideration to the fact that this settlement has been
approved based upon the expectations and reasonable reliance of the
parties and this Commission that all of its terms will remain in
effect for the full term of the agreement.
This position is fully consistent with the provisions of the
Public Utilities Code, requiring the Commission to ensure that
rates charged by a public utility are just and reasonable. Based
upon a careful analysis of the evidence of record, we find that the
rates resulting from the settlement agreement are reasonable. We
specifically recognize the great benefit to the ratepayers of the
shift of operating risks from the ratepayers to the company. Under
traditional ratemaking methodology, the ratepayers would have to
pay for Diablo Canyon regardless of its production.
4. Price Escalation after December 31. 1994
Beginning on January 1, 1995, the escalating
price shall be increased by the sum of the
change in the Bureau of Labor Statistics ' year-
end national consumer price index during the
immediately concluded year and 2.5 percent
divided by two.
A forecast of the CPI will be used for setting rates for the
ECAC test period. For example, in the year 2000, assuming a CPI
increase of 5% annually, the price is 14 .0460/kWh. In the year
2016, same assumption, the price is 22 .788C/kWh. In approximately
April of each year the ECAC filing is made including a forecast of
the following year's Diablo Canyon price based on a forecast of the
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hereafter in the deferred debit account
established pursuant to .D.86-06-079 or
otherwise directly associated with the
Diablo Canyon rate proceeding.
B. PG&E shall be entitled to retain all
amounts collected as interim rates for
Diablo Canyon through June 30, 1988, and
those amounts shall no longer be subject to
refund.
C. It is the intention of the parties that the
rates established by this Agreement shall
be effective immediately upon approval of
the Agreement by the CPUC.
•
D. The DCAA shall be maintained until the time
to seek judicial review has expired without
review being sought or until all court
challenges are terminated, whichever is
later (this date shall be referred to as
the "final approval date" ) . The amounts
collected by PG&E in base rates for Diablo
Canyon costs (excluding decommissioning
costs) from July 1, 1988 until the final
approval date shall be subtracted from the
amounts that would have been received under
this Agreement from July 1, 1988, to
compute the net amount that would have been
received under this Agreement. Upon the
final approval date, PG&E shall either
refund or amortize and collect in rates for
a period not to exceed three years as set
by the Commission the amount that is equal
to the difference between the amount
received under interim rate relief from
July 1, 1988, and the net amount that would
have been received under this Agreement
from July 1, 1988 .
This paragraph sets forth a major concession by PG&E, the
waiver of the accruals in the DCAA. On July 1, 1988 the DCAA
balance was about $1 .975 billion, based on full recovery of all
costs . Foregoing recovery of this amount by itself provides an
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E. As provided in Paragraph 7C, PG&E shall
include in base rates the full revenue
requirement at the authorized rate of
return on the utility assets . This shall ,
be called the "basic revenue requirement. "
The "utility assets" are defined in the Implementing
Agreement and amount to $1 . 056 billion. They are included in the
settlement to avoid an accounting problem which would have required
PG&E to take a larger write-off against earnings. The BRR will be
adjusted in PG&E's annual attrition proceeding or general rate
case. For details, see the Implementing Agreement.
8. Revenue
Except for decommissioning as set forth in
Paragraph 10, the costs of the Safety Committee
provided for in Paragraph 16, and except as
modified by Paragraph 9 , the revenue to PG&E
shall be computed as follows:
A. The "Diablo Canyon annual revenue" shall
equal the sum of fixed and escalating
prices as set forth in Paragraph 3, and as
adjusted by the escalation provision of
Paragraph 4 and the peak period price
differentiation provision of Paragraph 5,
multiplied by annual Diablo Canyon net
generation.
B. PG&E shall receive in rates, through its
Energy Cost Adjustment Clause (ECAC) , the
difference between the Diablo Canyon annual
revenue and the basic revenue requirement.
C. If the difference between the Diablo Canyon
annual revenue and the basic revenue
requirement is less than or equal to zero,
PG&E shall still receive the full basic
revenue requirement . However, in that
case, PG&E shall be deemed to have
triggered the floor provision under
Paragraph 9 .
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In balancing the evidence of record, the rates resulting from
the prices set in the Agreement over the duration of the Agreement
appear to be just and reasonable. Furthermore, we have already
acknowledged that we cannot bind future Commissions . The
Commission retains the authority to regulate in furtherance of our
constitutional and statutory obligation.
Therefore, we conclude that in adopting and approving the
settlement, there is no abdication of our duty to fix just and
reasonable rates . We do, however, expect that future commissions
will abide by all terms of the settlement, and uphold the decision
as we would any traditional ratebasing decision, unless in doing
so, it would compromise the responsibility of the Commission under
the Constitution and Public Utilities Code .
Please refer to Section X. I . of this decision for our
discussion of the AER adjustment.
9. Floor
A. Except as provided in Paragraph 8C, an
annual revenue floor can be triggered at
PG&E 's option. In the event that the
revenue produced by the formula in
subparagraph 9B is greater than the basic
revenue requirement, the floor shall be the
basic revenue requirement plus the amount
by which the formula revenue exceeds the
basic revenue requirement. In the event
that the revenue produced by the formula is
equal to or less than the basic revenue
requirement, the floor shall be the basic
revenue requirement.
B. The formula revenue shall be the sum of the
then current fixed and escalating prices
multiplied by a specified capacity factor
multiplied by the megawatt (MW) rating.
For 1988 through 1997, the specified
capacity factor is 36%; it is reduced by 3%
in 1998 and again by 3% in 2008. Each time
the floor is triggered, 3% shall also be
deducted from the specified capacity
•
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The operation of the floor payment is one of the most
controversial elements of the settlement. Our concern is the
potential for abuse.
Subparagraph 9(C) provides for repayment of the floor
payments and appears straightforward. PG&E shall repay the floor
payment with interest from 50% of the revenues received from
subsequent year operations over a 60% capacity factor. Giving
ordinary meaning to the words "payments received shall be repaid
with interest" we would conclude that a debt is created. PG&E says
no and the DRA and AG agree with PG&E. PG&E goes on to say that
9(C) means that it must repay the floor payments only from 50% of
the revenues received from subsequent year operations over a 60%
capacity during the term of the agreement. At the hearing, PG&E
said if the agreement expires before the floor payments are repaid
it keeps the money. The DRA and AG disagree with this
interpretation. They contend that 9 (C) means that if the floor
payments haven't been repaid by the agreement termination date,
this Commission may exercise its discretion in disposing of the
funds in the FPMA; the Commission may permit PG&E to keep the
money, or refund the money to the ratepayers, or do anything in
between. At oral argument PG&E 's attorney backed away from PG&E 's
earlier position that PG&E kept the money and said that the
Commission could dispose of the funds in any "lawful " manner. But
he was forthright in saying that he believed a refund to ratepayers
would be illegal as either retroactive ratemaking or the
confiscation of PG&E's property.
To accede to PG&E's interpretation could lead to an anomalous
result. If PG&E receives floor payments which are not repaid, the
Commission can consider those payments when determining PG&E's
recovery on abandonment. But should the balance in the floor
payment account exceed the value of Diablo Canyon on abandonment,
PG&E's position is that PG&E cannot be required to refund the
excess. If that were true, PG&E could earn more by shutting the
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Inputs: CPI = - 5.0 % per year
FPMA = 10.0 % per year
Floor trigger = Col . (d)
Actual C.F. = Col. (e)
DIABLO CANYON SETTLEMENT AGREEMENT
Pro Forma Floor Payment Calculations
Spec- Floor Act- Abandon- Annual
Energy ified Pmt. ual Formula sent FPMA FPMA
Year Price C.F. (1, if C.F. Revenue . Rights Entry Balance
(c/kwh) (%) taken) (%) (S million) (S million) (S million) (S million)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
1988 7.800 36 268 3, 000 0 C
1989 8.335 36 568 2,900 0 0
1990 8 .931 36 608 2, 800 0 0
1991 9.596 36 654 2 ,700 0 0
1992 10.337 36 704 2 ,600 0 0
1993 11.164 36 760 2, 500 0 0
1994 11.885 36 810 2,400 0 0
1995 12.213 36 832 2,300 0 0
1996 12.553 36 855 2,200 0 0
1997 12.906 36 879 2,100 0 0
1998 13.272 33 829 2,000 0 0
1999 13.652 33 852 1,900 0 0
2000 14.046 33 877 1,800 0 0
2001 14.455 33 903 1,700 0 0
2002 14.879 33 929 1,600 0 0
2003 15.319 33 957 1,500 0 0
2004 15.775 33 985 1,400 0 0
2005 16.248 33 1,015 1,300 0 0
2006 16.739 33 1,045 1,200 0 0
2007 17.249 33 1,077 1,100 0 0
2008 17.778 30 1,009 1,000 0 0
2009 18.327 30 1,040 900 0 0
2010 18.896 30 1,073 800 0 0
2011 19.486 30 1,106 700 0 0
2012 20.099 30 1 0 1, 141 - 600 1, 141 1, 141
2013 20.735 27 1 0 1,059 500 1,059 2,314
2014 21.394 24 1 0 972 400 972 3, 517
2015 22.078 21 0 0 0 0
2016 22.788 21 0 0 0 0
Total 3 3,172
End 2014 FPMA balance 3,517
•
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c shall continue ( 1 ) to be subject to the
obligation to repay with interest from one-
half of the revenues from production in
subsequent years in excess of a 60%
capacity factor and (2) to be taken into
consideration by the Commission in deciding
a reasonable abandonment payment to allow
PG&E.
c. All repayments of floor payments from one-
half of the revenues from production in
subsequent years in excess of a 60%
capacity factor shall be applied to FPMA
balances as follows: ( 1) interest, then
principal on the nonrefundable balance; and
then (2) interest, then principal on the
refundable balance.
Implicit in 9D is the power of the Commission to order
PG&E to abandon Diablo Canyon if operation falls below the floor
capacity factor in three consecutive calendar years . The
Commission would then set the amount PG&E would be entitled to upon
abandonment pursuant to Paragraph 13 .
10. Decommissioning
This Agreement shall have no effect on revenues
for the cost of the eventual decommissioning of
Diablo Canyon, which shall receive ratemaking
treatment in accordance with Commission
policies for decommissioning nuclear plants .
Two issues have arisen from this innocuous sentence. First,
decommissioning expense is a function of the operation of the
plant. In general, the more equipment that is added to the plant
the more costly the decommissioning; further, certain equipment may
cost more to decommission than other equipment. It is quite
possible for PG&E to make improvements to the plant to promote
efficiency which it would not make if it had to consider either the
increase in decommissioning costs or whether this Commission would
disallow the cost of the improvements as being imprudently
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•
shall, however, have the right during such
conditions to sell Diablo Canyon output.
See the Implementing Agreement for the definition of hydro
spill. The effect of this paragraph is that the ratepayers are
obligated to pay for Diablo Canyon power as if it were purchased by
PG&E under a power purchase contract at the escalating prices set
forth in this agreement.
12. Segreaation of Costs
A. For ratemaking purposes, all Diablo Canyon
costs shall be segregated from other PG&E
operations . No costs of Diablo Canyon
shall be included in rates, except as
provided in this Agreement. Diablo Canyon
costs include any and all costs incurred by
PG&E as a result of Diablo Canyon
ownership, including but not limited to
administrative and general expenses,
operations and maintenance expenses, fuel-
related costs, and any payment of the costs
of accidents at other nuclear plants
assessed to utilities owning nuclear
plants .
B. PG&E shall keep full records, including
reasonably contemporaneous accounts, to
allow identification and auditing of all
costs directly allocable to Diablo Canyon.
These records shall be consistent with the
Uniform System of Accounts and applicable
accounting requirements of the CPUC.
The paragraph in the settlement Agreement that could be
expectedto cause the most litigation over the life of the
agreement is Paragraph 12, which shifts the risks of Diablo Canyon
from the ratepayers to PG&E. Elsewhere in this opinion we have
discussed the benefits received by the ratepayers as a result of
the shift of risk. In this portion of the opinion, we discuss the
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resulting from the Settlement Agreement was not in effect. We are
to assume that Diablo Canyon is operating as well as other nuclear
plants; no better, no worse. Were Diablo Canyon to perform very
badly, that should not be considered in determining PG&E's rate of
return. If, however, poor performance of Diablo Canyon affects
PG&E's cost of capital , e .g. bond interest is higher, then a
downward adjustment should be made. In that instance, the
Commission would impute a cost of embedded debt reflecting PG&E as
if it had Diablo Canyon in rate base assuming a $2 billion
disallowance, and operating an "average" nuclear plant, all under
traditional ratemaking. The objective of these complex adjustments
is to make sure that the risk being transferred to PG&E is not
turned back to the ratepayers through the rate of return.
As a practical matter each time PG&E applies for an increase
in its rate of return or the DRA seeks a decrease, a number of
studies are required to comply with the Settlement Agreement, among
which are ( 1 ) a separations study allocating revenues and costs
between Diablo Canyon and non-Diablo Canyon, (2 ) a rate of return
study comparing PG&E as a nuclear plant operator with other nuclear
plant operators, (3 ) a study comparing the "average" nuclear plant
operation with Diablo Canyon to determine if Diablo Canyon is
within the "average" range, (4 ) if PG&E is found to be below
average, a study to determine if the below average performance has
adversely affected PG&E 's cost of capital and, if so, to make the
appropriate adjustment and ( 5) a study to determine PG&E 's
investment in Diablo Canyon under traditional ratemaking assuming a
$2 billion disallowance.
Two results of those studies could be (a) investors perceive
increased risks to PG&E because of the shift to shareholders of the
operating risks heretofore borne by ratepayers and demand a higher
return on equity. Under the settlement that higher demand must be
rejected. And (b) PG&E pays higher interest on its debt because of
the perceived increased risks. Under the settlement that increased
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The abandonment provisions are complex, and made more so when
considered in conjunction with the floor payments. As the
Settlement Agreement gets closer to its termination date options
become available to PG&E which are detrimental to the ratepayer.
The proponents are of the opinion that should PG&E ever seek to
abandon Diablo Canyon, PG&E would recover under section A. ( 2 ) which
provides for a maximum recovery of $3 billion less $100 million per
year starting in 1989 (unless there is a nationwide shutdown of all
nuclear plants) . No one described a scenario which would invoke
section A. ( 1) . Pursuant to Paragraph 9 "Floor, " PG&E is entitled
to obtain floor payments when Diablo Canyon's operation falls below
the specified capacity factor. And PG&E may obtain these floor
payments throughout the life of the agreement without repayment if
the revenue received from subsequent year operations does not
exceed a 60% capacity factor, and without explanation or
abandonment if the operation does not fall below the floor capacity
factor in three consecutive calendar years . The amount of the
yearly floor payment can be substantial . Rather than abandon, it
would pay PG&E to shut down the plant, seek floor payments for
three years, and then abandon the plant. This negates Section
A. ( 2 ) . This result can be mitigated by limiting the amount to
which PG&E is entitled under the floor payments, which we have
done. See our discussion in Section IX. 9 (Floor) and Section X.L.
In the event of abandonment of the plant, the utility assets will
be removed from rate base.
14. Treatment After 30 Years
PG&E shall file an application by May 1, 2014
requesting whatever ratemaking treatment it
wishes for Diablo Canyon for the period
beginning May 7, 2015 for Unit 1 and March 13,
2016 for Unit 2 . Nothing in this Agreement
shall preclude the Commission from setting
rates on any lawful basis .
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committee consists of three members, one each appointed by the
Governor, the Attorney General, and the Chairman of the California
Energy Commission. The committee is to review Diablo Canyon
operations for the purpose of assessing the safety of operations
and suggesting recommendations for safe operation. The committee
will receive quarterly reports of some, but not all, Diablo Canyon
records and has the right to conduct an annual examination of the
Diablo Canyon site. It may request additional records and site
visits. It cannot make unannounced inspections. It has no
enforcement powers. It is funded as an operating expense of PG&E
charged to the ratepayers . Its initial budget is approximately
$500, 000 which increases in proportion to the Diablo Canyon price
increases .
The opponents argue that performance based pricing gives an
incentive to PG&E to maximize profits at the expense of safety.
PG&E has an economic motive to avoid safety related curtailments
and maintenance, especially for safety related problems that do not
affect plant performance. Because of this profit motive, safety
concerns, it is argued, become even more exacerbated and should be
met by vigorous supervision, not by an ineffectual committee,
without enforcement powers, politically appointed, which meets once
a year and reviews documents long after the fact. The Mothers for
Peace assert that the safety committee "is an empty attempt to
appease the public 's safety concerns . We would go further and say
that the Safety Committee would give the public the mistaken
impression that it is protected, when the committee cannot and
would not add to public safety. As a result, the establishment of
the so-called Safety Committee is worse than having no Safety
Committee. "
The AG and the DRA strongly support the safety committee.
While conceding that it has no enforcement powers, the proponents
argue that the safety committee's activities will complement those
of the NRC. Because of the strong public concern for safety,
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We cannot bind future commissions; however, we do expect that
future commissions will abide by the terms of the settlement, and
uphold the decision as they would any decision, including those
based on traditional ratebasing, as long as such action is in
compliance with applicable law.
Z. Further Discussion
A. Risk of Going to Hearing
The most important element in determining the fairness of
a settlement is the relationship of the amount agreed upon to the
risk of obtaining the desired result. The desired result in this
instance being the inclusion of Diablo Canyon in PG&E ' s rate base
at a value of either $5.5 billion ( favorable to PG&E) or $1 . 1
billion (favorable to the DRA and its supporters) . Although the
amount in controversy, $4 .4 billion, is great, that in itself does
not measure the risk. The measure is the relative strength of each
party's case.
Risk, in the context of a settlement approval , need not
be measured with precision, nor can it, without an opportunity to
see and hear witnesses and cross-examine them in the underlying
action. But if risk cannot be measured precisely in this instance,
still it must be measured. To that end, we believe it sufficient
to analyze the risks involved in going to trial on the two major
issues of this case: the Hosgri Fault discovery and the mirror
image error.
1. The Hosgri Fault
The facts surrounding PG&E 's failure to locate the Hosgri
Fault, its eventual discovery, and PG&E's reaction to that
discovery are set forth in Section III .C . PG&E admits that it did
not perform the kind of offshore seismological study necessary to
discover the Hosgri Fault; it says it wasn't needed. PG&E admits
that it did not revise the response spectra for Diablo Canyon when
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8. The epicenter of the 1927 earthquake, first
located by Dr. Perry Byerly off the coast
of Santa Barbara, was generally accepted in
the 1960's at the Byerly location, as shown
on the California Department of Water
Resources epicenter map.
9. At the time the AEC approved PG&E 's seismic
work, the USGS knew about the Hosgri Fault,
having identified it in 1968 and mapped it
in 1970, and testified in 1970 in support
of PG&E 's seismic design.
10. After the publication of the Hosgri Fault
location in the early 1970's, neither
PG&E 's consultants nor the AEC 's staff
changed their opinions . Twice during 1974
the AEC opposed efforts to halt
construction because of the discovery of
the offshore feature.
11 . It was not until 1976 that the NRC required
a reevaluation of the plant to 0 . 75g peak
acceleration.
The DRA views the evidence differently. It argues that
safe design is the most important aspect of nuclear plant design,
that geoseismic siting studies at best are imprecise, involve
significant uncertainty, and allow for different interpretations
over which experts can be expected to differ. Therefore, the DRA
asserts, conservatism in analysis and design is paramount and PG&E
was not conservative.
The DRA was prepared to present witnesses and exhibits
which would have shown, and might have persuaded us, that:
1. PG&E failed to perform any but the most
perfunctory offshore seismic analysis . At
the time of PG&E's investigation in the
1960's, seismic reflection techniques were
well known, were available, were cheap, and
were used by PG&E's consultants at other
prospective sites.
2 . PG&E's consultants failed to evaluate the
location of the 1927 earthquake southwest
of the site.
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11. Acting promptly, PG&E should have conducted
offshore explorations and disclosed the
results to the AEC by July 1973 .
12. In 1975, a USGS study reevaluated the
location of the 1927 earthquake, found the
Byerly location to be in error, and said
that the earthquake could have occurred on
the southern end cf the Hosgri Fault.
13. From the date PG&E learned of the Hosgri
Fault in ;ctober 1972 until the NRC ordered
a reevaluation in May 1976, PG&E continued
to construct the plant and essentially
completed it . The redesign came three
years after PG&E had knowledge of the
Hosgri Fault and, therefore, was much
costlier to implement .
PG&E's witnesses and the DRA's witnesses are in conflict
on every major point of the seismological issues . Some of the
conflict is a difference of opinion, e.g. , the degree of
conservativeness used by PG&E in its seismic investigations . Scme
of the conflict is more factual, e.g. , Did the USGS know of the
Hosgri Fault prior to 1970 when it approved PG&E's seismic designs?
Both sides present their position through experts, well qualified,
experienced, and of stature in their fields . The stakes are high.
To adopt the DRA's position in toto, the disallowance could be as
much as $4.4 billion; to adopt the position that PG&E 's original
seismic studies were reasonable but that PG&E should have
recognized its error in 1972 and commenced the needed modifications
could result in a disallowance of as much as $3.4 billion. The
risk to the DRA is not quite as large. If PG&E's position were
adopted, there would be no disallowance for its failure to discover
or recognize the implications of the Hosgri Fault, but the question
of the mirror image error would remain. The risk to the DRA on the
Hosgri Fault issue is approximately $2 billion. In our opinion,
there is substantial evidence which could sustain a decision for
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well controlled, formal methods that a
quality assurance program would have
mandated.
6. After the mirror image error was disclosed
and further investigation revealed
additional design errors, the NRC lost
confidence in the adequacy of the design of
Diablo Canyon.
7 . Because of the loss of confidence, a review
of the adequacy of the entire design of
Diablo Canyon was undertaken and numerous
errors were found; so many that PG&E chose
to abandon its justification of the plant
design, and, instead, did a complete
reanalysis of all major structures and
piping installation, making the necessary
modifications .
8 . PG&E was cited by the NRC for making a
Material False Statement, a violation of
NRC regulations, concerning the
independence of consultants working on the
verification process . As a penalty, the
NRC imposed strict reporting requirements
and procedures to assure an independent
review. Those procedures caused the
redesign effort to become cumbersome, time
consuming, and very expensive.
9. The IDVP required literally tens of
thousands of design reanalyses and
modifications . For example, about 27, 000
pipe supports were reanalyzed, resulting in
modifications to over 55% of the pipe
supports in Unit 1 and 80% of the pipe
supports in Unit 2.
10. The cost of complying with the IDVP and
restoring the NRC's confidence in PG&E and
in the design of Diablo Canyon was $2 .4
billion.
PG&E emphatically disagrees with the DRA's assertions .
PG&E states that the mirror image error was minor and did not
compromise plant safety. It argues that the entire design
verification program was politically motivated. It was not that
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IDVP imposed. Therefore, the NRC had
reasons other than design error for
imposing the IDVP and those reasons
concerned the Congress ' view of the NRC.
7 . The NRC suspended PG&E 's license and
imposed the IDVP as a reaction to
Congressional criticism, as symbolic
gestures designed to restore the NRC's
credibility as a tough and competent safety
regulator.
8 . The Diablo Canyon design was not reviewed
retrospectively, using the design
techniques and methods of the construction
period (which had been approved by the
NRC) , but was reviewed using state-of-the-
art analysis . The NRC employed the
Brookhaven National Laboratory as
consultants to review the IDVP according to
the most modern standards .
9 . Advances in computer technology and
modelling techniques made far more
sophisticated finite element analyses
possible by the time the IDVP reviewers
•
were examining Diablo Canyon than were
possible when the design was originally
done.
10 . As a result, over one billion dollars was
spent on plant modifications to make the
completed plant comply with the most up-to-
date analytical techniques. These
modifications were upgrades, not the
correction of errors .
11. At least one billion dollars of the DRA's
proposed $2 .4 billion mirror image error
disallowance was attributable to costs for
normal plant completion and regulatory
compliance activities which would have been
incurred regardless of the mirror image
error.
12 . Finally, if an economically sound
quantification method were used (the
Revenue Requirement Operations) to
determine the cost of the mirror image
error, rather than a $1 .4 billion mirror
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of each side through depositions, and the inherent uncertainty of
any kind of juridical decision, is reasonable.
B. Timing of the Settlement
One helpful test of the adequacy of a settlement relates
to the progress of the litigation at the time the settlement is
offered. The more one knows about the merits of the controversy,
the easier it is to decide if a settlement is fair. In this
instance, the proceedings went to the day of hearing before the
settlement was reached. Hundreds of volumes of prepared testimony
were received and thousands of pages of discovery were exchanged.
The only thing lacking was cross-examination of the witnesses in
open court and much of that was anticipated in extensive
depositions . The proponents of the settlement had more than enough
information to reach a reasonable resolution of the issues and
those opposed had that same information available to them. No one
can complain of a lack of availability of competent information
upon which to base a judgment regarding the adequacy of the
settlement.
The Commission is almost as knowledgeable as the parties .
Although we do not have the benefit of the depositions nor are we
privy to the settlement discussions, the record before us provides
ample information regarding the merits of the settlement. The
amount in controversy is known, the amount and other benefits
offered can be determined with a reasonable degree of accuracy, and
the risks of litigation can be reliably analyzed. The timing of
the settlement could not have been better.
C. Amount Offered in Settlement
The amount offered in settlement is not a fixed sum or an
easily determinable sum, but is an amount which can only be
estimated based on the life of the settlement agreement and the
assumptions regarding Diablo Canyon's reliability over that life.
The DRA and the AG have estimated the offer to have a present value
equivalent to a $2 billion reduction in rate base, which PG&E has
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costs for plant modifications, operations, maintenance, insurance,
security, and other plant activities are shifted from the customers
to the utility.
The settlement is estimated to provide for an equivalent
rate base disallowance of about $2 billion, using a set of
reasonable or conservative assumptions about future Diablo Canyon
operation and costs, including a 58% capacity factor. This means
that the settlement treats PG&E's customers financially over the
life of the plant as if the Commission had disallowed $2 billion of
Diablo Canyon's construction costs from PG&E's rate base.
Estimates of equivalent rate base disallowances can, however, vary
widely with different assumptions about future plant operation and
costs . For example, a 70% average plant life capacity factor
assumption results in an equivalent rate base disallowance estimate
of less than $800 million, while an assumption of a capacity factor
as poor as Rancho Seco's, about 40% , results in a disallowance
estimate of nearly $4 billion. A $2 billion disallowance exceeds
any other state's disallowance adopted for an operating nuclear
plant.
A number of the settlement 's provisions provide PG&E with
some downside risk protection, particularly the floor price
provision. Under reasonable scenarios, however, the settlement 's
treatment of prolonged outages is more favorable to PG&E 's
customers than traditional ratemaking. The abandonment provision
protects ratepayers while providing limited protection to PG&E.
Under traditional cost of service ratemaking, a plant stays in
rate base until removed by the Commission, which can take years
(Humboldt) , and the customers are responsible for reasonable
uncollected ownership costs . The settlement's abandonment
provision limits the amount that PG&E can request after Diablo
Canyon abandonment, and the other parties can oppose the request.
We are of the opinion that PG&E does not believe the
equivalent disallowance is $2 billion. PG&E has agreed to the
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method for valuing Diablo. As the United States Supreme Court has
recently affirmed, utility regulators are not limited to a single
ratemaking method, but are free to adopt other methods as
appropriate to particular circumstances . (Duquesne Light Co. ,
supra, 102 L.Ed. 2d at 662-663 . )
D. Capacity Factor
The DRA and the AG have based their $2 billion settlement
amount on a number of assumptions regarding PG&E 's operation of
Diablo Canyon, the most controversial being the capacity factor.
The capacity factor percentage is derived by dividing the kilowatt
hours actually generated in a given period by the maximum amount of
kilowatt hours which could be generated in the period. The
principal reason for low capacity is downtime. When a plant or a
unit operates , it operates at near 100% capacity and when it is
down, it is at 0% capacity. All nuclear plants have downtime for
scheduled outages, refueling outages being the lengthiest, which
prevent the capacity factor from exceeding 80% or so. It is the
unscheduled outages which bring the capacity factor below
expectations . Those kinds of outages include plant modification to
meet more stringent regulatory requirements , replacing steam
generators or pipes , unexpected salt water corrosion, and
accidents . The DRA and the AG have assumed that PG&E will operate
Diablo Canyon at a 58% capacity factor for the next 28 years . We
will accept the assumption, but not with the fervor of its
proponents . Our analysis of the underlying statistics leads us to
conclude that if the plant operates for 28 years, and that is a
very big "if, " it will operate at well above a 58% capacity factor
but it is this risk of significant outages that reduces the
capacity factor and makes the assumption of a 58% capacity factor
reasonable.
A review of the testimony highlights the dispute
surrounding the adoption of a 58% capacity factor. Mr. Myers , the
DRA witness, concluded that it appears most likely that Diablo
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Diablo Canyon's current performance is above average; it is
operating at a 67% capacity factor after three completed fuel
cycles.
PG&E, while accepting the 58% capacity factor for the
purpose of this settlement has , in other proceedings, taken a
markedly different view. Mr. Clarke testified that PG&E expects _=
operate the plant at a 65% to 70%s capacity factor. At 70% the
equivalent disallowance would be approximately S500 million. In
PG&E's 1988 ECAC proceeding the estimate for 1989 is near 70% and
the California Energy Commission's (draft report) estimate of
capacity is near 72% for 1988 . Mr . Maneatis testified that if PG&i
could maintain a capacity factor of between 73% and 75% over the
remaining life of the plant it would sustain no disallowance , a_l
other assumptions being the same. A 1987 PG&E 20-year nuclear fuer
forecast assumed a 67% capacity factor, and a 1988 PG&E five-year
nuclear fuel forecast assumed a 65% capacity factor.
The 58% capacity factor estimate is based on averages of
nuclear plants, some that operate much better than average and some
that operate much worse. The opponents to the settlement contend
• that none have operated for 30 years, at most 15 years for a
comparably sized plant, that none of the analysts made a specific
analysis of Diablo Canyon taking into account that it has been the
most closely inspected plant ever constructed, and that none
considered the views of the managers of the PG&E as to how well the
plant is expected to operate. We have not ignored those factors .
In fact, this is not the first time we have relied on national
historical averages . (See e.g. , D. 86-07-004 ; where we directed the
utilities to use national averages when a particular plant has a
short operating history for purposes of Standard Offer #4 . ) In
addition, because the weight of the evidence supports a 58%
capacity factor and because of the importance we attach to shifting
the operating risks from the ratepayers to the company and the high
risk of unscheduled outages, we accept the 58% capacity factor of
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millions of dollars . That burden, which conventionally is imposed
on the ratepayers, is now to be borne by PG&E.
A public utility such as PG&E under traditional
regulation operates in a sheltered workshop environment. Its rates
are fixed by the Commission to cover its operating costs and a
reasonable return on rate base. If a plant goes out of service,
rates are set to cover that cost. On a theoretical level, the
Commission could disallow imprudent costs, but except for major
construction projects such as Diablo Canyon and San Onofre, that
rarely happens. The phenomenon of an increase in employees in the
year prior to a rate case and their subsequent decrease after rates
are raised is not unknown in utility regulation. The point is that
the risks of utility operation are usually borne by the ratepayer
but the benefits of efficiency are not always attained. Utility
management does not have the same incentives which are attributed
to the private sector. This is not to say that the ratepayers do
not benefit from regulation - they do - and the benefits are
substantial, particularly protection from abuse of monopoly power,
but in the case of the Diablo Canyon settlement, one can readily
see the benefits to both the ratepayers and PG&E of the shift in
risk. Nothing expresses the risks in this shift of risk better
than PG&E's insistence on a floor payment provision and an
abandonment provision. Risk obviously has its limits.
The floor payment provision, while giving limited
protection to PG&E, aptly illustrates the shift of risk from the
ratepayers to PG&E. The floor, at most, provides revenues
equivalent to those earned by operations at a 36% capacity factor,
well below the industry average 58% capacity factor. In case of a
shutdown and invocation of the floor, the loss of revenue would be
substantial, and the repairs required to regain efficiency would be
expensive. Under conventional regulation that loss of revenue and
cost of repairs would be borne by the ratepayers; under the
settlement PG&E is responsible. Over the life of the agreement one
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satisfied that the settlement, rather than increasing the concern
for safety, actually reduces the concern. The testimony of the
Director of the DRA is representative, and persuasive. He
testified that shifting the operating risks from the ratepayers to
PG&E provides PG&E with a strong incentive to operate Diablo Canyon
efficiently, carefully, and safely. Since revenue is tied to
performance, it is to PG&E's interest to operate so that the
possibility of shutting down the plant is reduced to the minimum.
In our opinion, it would be economically irresponsible (not to
mention morally reprehensible) for PG&E to neglect safety for short
term gain; and we cannot envision long term gain if safety is
neglected. The threat of an NRC shutdown with the likely
imposition of an Independent Safety Verification Program is a risk
even the most avaricious investor would not hazard. It is more
likely that PG&E would lower its safety guard if the ratepayers
bore the risk than when PG&E bears it. In effect, PG&E is betting
the company that it will operate safely and profitably.
F. Shutting Down Diablo Canyon
The evidence presented by the Redwood Alliance regarding
the savings to be achieved if Diablo Canyon were shut down is not
persuasive. Dr. Bernow testified that his study of the economics
of closing the plant was preliminary and more investigation was
needed. But he also testified that should the additional
investigation confirm his preliminary analysis that it would be
economically justified to shut down Diablo Canyon, then the revenue
analysis should be expanded into a social and environmental cost
benefit analysis. PG&E's testimony on plant shutdown, also
preliminary, reaches the exact opposite conclusion. We need not
reconcile the two positions as the evidence, admittedly, is
insufficient and to obtain an adequate record would require, at the
very least, months of preparation and months of hearing time. One
of the purposes of the settlement is to avoid spending those
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prices by formula for 28 years is a "crystal ball calculation" and
they recommend adjusting the settlement price every two:or three
years based on current market constraints . Implicit in the crystal
ball comment is the expectation that over time market rates will be
more favorable to the ratepayers than the settlement prices . We
are not as sanguine as the opponents . More to the point, price is
but one element of the settlement and cannot be isolated without
destroying the settlement . We believe the price is reasonable.
H. Bearing Costs
Although a relatively minor item, as a result of the
settlement tens of millions of dollars are expected to be saved in
hearing costs, both for this hearing and for future hearings . PG&E
estimates it has about $100 million in sunk costs of litigation
(which under the settlement it waives) and expects another $10
million in costs should a full prudence hearing be held. The
Commission's costs are much lower, but still significant. We
believe that not only will the savings be substantial if a prudence
hearing is foregone, but also down the road we will avoid hearings
every two or three years for the next 28, on Diablo Canyon capital
improvements, prudence, operations, and rates; a more than
substantial savings for the ratepayers .
I. Annual Energy Rate (AER) Adjustment
The settlement requires that Diablo Canyon revenues be
excluded from PG&E's AER. Nuclear fuel expenses are now subject to
AER recovery, and those expenses will be removed. In addition;
PG&E expenses for replacement or displacement fuel due to operation
of Diablo Canyon will be removed from AER recovery, through an
annual adjustment at the end of each AER forecast period. For
example, if Diablo Canyon production is greater than amounts
forecast in a given ECAC proceeding, then PG&E expenses for other
fuels will be reduced from the ECAC forecast, and PG&E would
increase its earnings through the AER. The annual AER adjustment
will reduce customer costs by crediting the ECAC balancing account
•
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models. The DIER should be developed in much the same way, by
calculating operating costs for two scenarios, both of which should
assume QFs-in, for which Diablo Canyon output is 10% above and 10%
below the capacity factor or availability factor assumed in the
calculation of the QF IER. The DIER is then the difference in
costs between the two scenarios , divided by the difference in
Diablo Canyon generation and by the same UEG gas rate used in the
QF calculation. This calculation should not be difficult because
all model assumptions have been made in the process of determining
the QF IER. If the specified 10% deviations are so small as to
yield erratic DIER values , PG&E should revise the deviations
appropriately and justify its revisions .
PG&E should make the calculations using the model
conventions and resource assumptions adopted in A. 88-04-057 , its
current ECAC proceeding, and report the resulting DIER with its
first annual Diablo Canyon compliance filing. Future DIERs should
be litigated in ECAC proceedings , not simply provided by PG&E.
J. Ratemakinq
To implement the settlement we must authorize revisions
to PG&E's revenue requirements , customer rates, and ratemaking
account balances .
The revenue requirements and rates adopted will become
effective January 1, 1989 . Revenue requirements will be changed
for four of PG&E's rate elements: Base Energy Rate, Energy Cost
Adjustment Clause (ECAC) rate, Annual Energy Rate (AER) , and Diablo
Canyon Adjustment Clause (DCAC) rate. The net change to 1989
revenue requirements (relative to currently authorized revenues,
not present rate revenues) is an increase of $284 .212 million, as
developed in Appendix G. This is an increase of 5. 2% over
currently authorized revenues .
This decision will not authorize actual customer rates .
Rather, the authorized revenue changes will be incorporated into
the revenue allocation and rate design developed in PG&E's current
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Practice under which they seek compensation, nor have they complied
with the provisions of the rules. Under these circumstances, we
cannot find them eligible to claim compensation.
The Mothers for Peace and Rochelle Becker, and the
Redwood Alliance also filed requests for compensation, and these
parties did comply with our rules . The Mothers for Peace and
Rochelle Becker request $30, 000 to cover their reasonable expenses
of participation in this proceeding. The Redwood Alliance seeks
$110,400. We find that they have met the requirements of our Rules
and will therefore find them eligible to claim compensation.
L. Comments
This decision was issued as a Proposed Decision.
Comments were filed by PG&E, the DRA, the Attorney General , the San
Luis Obispo Mothers for Peace, the Redwood Alliance, and William M.
Bennett.
PG&E asserts that the Proposed Decision makes substantive
changes to three elements of the settlement: ( 1) to the floor
provisions, (2) to decommissioning costs, and ( 3) to the safety
committee. PG&E asserts that the changes to the floor and
decommissioning provisions unfairly alter the balance of interests
negotiated in the settlement. The DRA and the AG support the
comments of PG&E.
1. The Floor Provision
The Proposed Decision found that any money in the FPMA
would be subject to potential refund by the Commission. The
finding was made to insure that the Commission had the power to
ameliorate a possible inequity resulting from the FPMA holding more
money at the time of abandonment of Diablo Canyon (or termination
of the settlement) than the value of Diablo Canyon at that time.
We were concerned that any money collected by PG&E under our order
would not be subject to refund unless we specifically made it so.
(City of Los Angeles v. PUC ( 1972 ) 7 Cal . 3d 331, 356; PT&T v. PUC
(1968) 62 Cal. 2d 634 . ) PG&E says that this result was never
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nonrefundable FPMA balances; and then
(2) principal (including past interest) ,
pro rata between the refundable and •
nonrefundable balances . -
d. If, in taking the balance in the FPMA into
account in determining a reasonable
abandonment payment to allow PG&E pursuant
to Paragraph 13C of the Implementing
Agreement, the Commission decides to use
any portion of the balance in the FPMA to
offset any portion of the maximum
abandonment right payment, the FPMA balance
shall be offset pro rata between the
refundable and nonrefundable amounts in the
FPMA.
To use the Proposed Decision's example (p. 140 , in year
2012 the floor payment calculated according to the formula in the
Settlement Agreement could be $1 . 141 billion, but the maximum
abandonment payment would be $600 million. If there were no
balance in the FPMA, in year 2012 PG&E would receive $600 million
of floor payments subject only to repayment from subsequent
operational revenues or potential offset against abandonment
rights, and $541 million subject to potential full refund by order
of the Commission. The interest accruing on each portion of the
FPMA balance would be classified in the same manner as the
principal. If the floor were invoked again in year 2013, the floor
payment would be $1 .059 billion. Since the maximum abandonment
payment would be $500 million, there would be a balance of at least
$1 . 141 billion in the FPMA, and there is already $600 million of
nonrefundable floor payments as a result of floor payments made in
year 2012, then all floor payments in year 2013 would be subject to
potential full refund.
The difference between the Proposed Decision's treatment
of the FPMA and PG&E's proposal is shown by the following example:
Should Diablo Canyon be abandoned when its maximum abandonment
payment was $300 million after drawing floor payments in accordance
with the example in the preceding paragraph (and no repayments
•
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million with $400 million from the nonrefundable portion and $200
million from the refundable portion. The result is PG&E retains
$1.2 billion and the potential refund is only $300 million; this is
unacceptable. We remind PG&E that under the settlement, the
Commission has the discretion to permit PG&E to retain the entire
FPMA, refundable and nonrefundable amounts, plus awarding PG&E the
entire maximum abandonment right payment. We will adopt the first
and second paragraphs of PG&E's proposal , modify the third
paragraph, and reject the fourth. This decision has been modified
accordingly.
2. Decommissioning
PG&E asserts that the Proposed Decision would transfer
all costs of decommissioning to PG&E if there were ever increased
costs related to income taxes . PG&E has proposed language to make
clear that should tax benefits be lost only the increased taxes
would be paid by PG&E; the ratepayers would continue liable for the
decommissioning costs under the terms of the settlement. As this
was our intent, we will modify the decision accordingly. This is
agreeable because the settlement provides that all Diablo Canyon
output (except during a hydro spill condition) goes to the
ratepayers at the prices set forth in the settlement. Should this
output not go to the ratepayers then the ratepayers would not be
liable for decommissioning costs .
3. The Safety Committee
PG&E urges us not to withdraw from the nominating process
of members of the safety committee, arguing that we are an
important ingredient in the nominating process and that our
participation will help assure the safe operation of the plant. On
further reflection, we will participate as requested.
4. Other
The Mothers for Peace commented that the Proposed
Decision included facts regarding the Hosgri Fault and the mirror
image error which the parties were not allowed to litigate and that
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held in San Luis Obispo. As they are extraneous, there is no point
in discussing them. The participation of the San Luis Obispo
parties, however, did much to focus our attention on particular
issues in this case, especially on safety issues, and they have
made a substantial contribution to our analysis and decision, but
they have not persuaded us to adopt their recommendations .
The Redwood Alliance commented, as did the San Luis
Obispo parties, that our discussion and findings on the Hosgri
Fault and the mirror image problem are in error. For the reasons
previously stated, we believe our discussion and findings are
appropriate. The Alliance also commented that Finding 13, where we
found that the evidence on shutting down Diablo Canyon was not
persuasive, is wrong. The Alliance merely reargues its posit_cn.
We will not change the finding. Mr. Bennett, in his comments , also
merely reargues his prior position regarding lack of due process
and other perceived errors; his argument has not improved with
time.
Because of corrections to the formulas being applied in
this case (Appendix G) , the amount of revenue increase authorized
by this decision is $284 , 212,000 rather than the $261,318,000
described in the Proposed Decision.
Findings of Fact
In our findings regarding the adequacy of the settlement
we have made specific findings on all material issues. We do not
believe it necessary to make separate findings on every paragraph
in the Settlement Agreement and the Implementing Agreement. Our
general finding that the agreements are in the public interest is
sufficient.
1. PG&E seeks to include the cost of constructing its Diablo
Canyon nuclear power plant in its rate base in the amount of $5 . 5
billion.
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5a. There are substantial litigation risks to both the DRA and
PG&E, and corresponding risks to the ratepayers, in going to
hearings on these issues and it is reasonable to approve a
settlement which appropriately balances this risk.
6. The timing of the settlement was exceptional. It came
after prepared testimony had been exchanged, other exhibits and
information had been exchanged, and depositions and discovery
almost completed. Only a trial would have provided more
information. The settling parties were sufficiently informed of
the merits of each other's case to enable them to make a
knowledgeable judgment regarding the strengths and weaknesses of
each other's case. Similarly, the Commission has adequate
information upon which to make an informed judgment of the adequacy
of the settlement.
7. The DRA's and A 's estimate of the dollar value of the
settlement - an equivalent rate base disallowance of approximately
$2 billion - is reasonable and is based on reasonable assumptions .
8. The assumption that Diablo Canyon will operate over the
life of the agreement at a 58% capacity factor is reasonable.
9. The assumptions regarding the inflation rate, operation
and maintenance expenses, capital additions, and the discount rate,
etc . , that are the foundation of the equivalent disallowance
estimate are reasonable.
10. The most important benefit to the ratepayers of the
settlement is the shift of the risk of operating Diablo Canyon from
the ratepayers to PG&E. Because of this shift, PG&E assumes the
risks of poor operations, plant outages, all operation and
maintenance expenses including unforeseen extraordinary expenses,
all capital addition costs including unforeseen extraordinary
costs, and premature abandonment. The ratepayers share a small
part of these risks through the floor payment and abandonment
payment provisions of the settlement.
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a. In any year in which floor payments, when
added to the preexisting balance In the
FPMA exceed the maximum abandonment payment
for that year, then such additional floor
payments shall be designated as refundable
floor payments and received by PG&E subject
to potential refund (plus interest) by
order of the Commission upon termination of
the FPMA if, at that time, the Commission
finds that a refund is the preferable
disposition.
b. All other floor payments received by PG&E
(and interest thereon) shall not be subject
to refund, but in accordance with Paragraph
c shall continue ( 1 ) to be subject to the
obligation to repay with interest from one-
half of the revenues from production in
subsequent years in excess of a 60%
capacity factor and (2 ) to be taken into
consideration by the Commission in deciding
a reasonable abandonment payment to allow
PG&E.
c. All repayments of floor payments from one-
half of the revenues from production in
subsequent years in excess of a 60%
capacity factor shall be applied to FPMA
balances as follows: ( 1 ) interest, then
principal on the nonrefundable balance; and
then (2 ) interest, then principal on the
refundable balance.
20. By exercising its rights to obtain floor payments, PG&E
agrees that the Commission may order a refund to ratepayers of the
money in the FPMA in accordance with Finding 19, if the Commission
finds that a refund is the preferable disposition.
21 . We interpret Paragraph 10 of the Settlement Agreement to
mean a) that if PG&E were to transfer Diablo Canyon and thereby
lose its decommissioning costs tax deduction, the Commission could
require that ratepayers not pay any such additional costs, and
b) the settlement agreement does not prevent imprudently incurred
decommissioning expenses from being disallowed in any future
decommissioning hearing pertaining to Diablo Canyon.
•
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A. 84-06-014, A.85-08-025 ALJ/RB/fs/pds**
32 . Adjustments to ratemaking accounts required by the
settlement to allow recovery of Diablo Canyon energy purchase costs
during the period July 1 - December 31, 1988 cannot be made until
after the revenue changes authorized by this decision become
effective.
33 . The settlement requires that the account adjustments for
the period July 1 - December 31, 1988 be consolidated into a single
adjustment to PG&E's ECAC account.
34 . All parties had adequate time to prepare for the
settlement hearings . To the extent that they were not prepared is
the result of inadequate funding and insufficient staff to fully
participate in a case of this magnitude.
35 . The Public Solar Power Coalition and the Abalone Alliance
are not eligible to claim compensation in this proceeding.
36 . The Redwood Alliance and the San Luis Obispo Mothers for
Peace and Rochelle Becker are found eligible to claim compensation
in this proceeding.
Conclusions of Law
1 . The rulings of the Presiding Administrative Law Judge
should be affirmed.
2 . The use of the proposed settlement procedures should be
affirmed.
3. The Settlement Agreement and the Implementing Agreement,
as interpreted by this decision, should be approved and adopted.
4 . This Commission cannot bind future Commissions in fixing
just and reasonable rates for PG&E. Nevertheless:
To the extent permitted by law, the Commission
intends that this decision be binding upon
future Commissions . In approving this
settlement, based on our determination that
taken as a whole its terms produce a just and
reasonable result, this Commission intends that
all future Commissions should recognize and
give all possible consideration and weight to
the fact that this settlement has been approved
based upon the expectations and reasonable
reliance of the parties and this Commission
- 192 -
•
A. 84-06-014, A. 85-08-025 ALJ/RB/fs/pds***
C. A decrease of $8 .846 million in Annual
Energy Rate (AER) revenues; and
D. A decrease of $472 .856 million in Diablo
Canyon Adjustment Clause (DCAC) rate
revenues, which shall terminate the DCAC
rate.
6 . PG&E shall incorporate the above revenue changes into
rates authorized in its current ECAC and attrition proceedings,
Application (A. ) 88-04-020, A. 88-04-057, A. 88-07-037, and Advice
No. 1226-E.
7. PG&E shall, in filing tariff provisions to implement this
decision, modify the formula to calculate the annual revenue
adjustment which excludes the impacts of Diablo Canyon operation
from revenues received through its Annual Energy Rate (AER) ,
substituting the Diablo Incremental Energy Rate (DIER) for the
proposed system average heat rate.
8 . PG&E shall calculate the 1989 value of the DIER for the
current ECAC forecast period, as described in this decision and
shall report that value in its first annual Diablo Canyon
compliance filing.
9 . PG&E shall adjust its ECAC account balance to allow
recovery of Diablo Canyon energy purchase costs as if the
settlement had been effective during the period July 1 -
December 31, 1988, according to the method described in Appendix G.
The ECAC account adjustment shall be made as soon as the necessary
data are available, but no later than January 31, 1989 .
10. PG&E shall on March 31 of each year commencing in 1989
through the year after Diablo Canyon is retired or abandoned file a
Diablo Canyon Compliance Report as described in Appendix H.
11. The tariff filings authorized by this decision shall
conform to General Order 96-A, shall be marked to show that they
were authorized by this decision, and shall become effective 5 days
after the-date filed, but no earlier than January 1, 1989. The
• - 194 -
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A.84-06-014, A.85-08-025 ALJ/RB/fs/pds*
APPENDIX A
List of Appearances
Applicant: Peter W. Hanschen, Attorney at Law, and Messrs .
O'Melveny & Myers, by Joseph M. Malkin and Charles C. Read,
Attorneys at Law, for Pacific Gas and Electric Company.
Interested Parties: John K. Van de Kamp, Attorney General, by
Andrea S. Ordin, Michael J. Strumwasser, $ark J. Urban, and Peter
Kaufman, Deputy Attorneys General, for the State of California;
Rochelle Becker, for San Luis Obispo Mothers for Peace (SLOMP) and
for herself; William. M. Bennett, for himself; Robert M. Teets, Jr. ,
for himself; Henry Hammer, for Life on Planet Earth; William
Knecht, by Philip Presber, Attorney at Law, for California
Association of Utility Shareholders; Laurie McDermott, for
Consumers Organized for Defense of Environmental Safety (CODES) ;
Morrison & Foerster, by Preston Moore, Thomas J. Long, and Thomas
Vinje, Attorneys at Law, and Sylvia M. Siegel, for Toward Utility
Rate Normalization (TURN) ; Harvey Mark Eder, for Public Solar Power
Coalition; Bryan Gaynor, Attorney at Law and James S. Adams, for
Redwood Alliance; Roger Herried and Don Eichelberger for Abalone
Alliance; Messrs. Chickering & Gregory, by C. Hayden Ames, Attorney
at Law, for Chickering & Gregory; Richard K. Durant and Stephen E.
Pickett, Attorneys at Law, for Southern California Edison Company;
Stephen L. Baum and Jeffrey X. Guttero, Attorneys at Law, for San
Diego Gas & Electric Company; Kenneth Haggard, for Concerned Cal-
Poly Faculty and Staff; Michael McQueen, Attorney at Law, for Union
Oil Company of California; Reed V. Schmidt, for California Street
Light Association; Messrs . Armour, St . John, Wilcox, Goodin and
Schlotz, by James D. Squeri, Attorney at Law, for California
Building Industry Association; Messrs . Downey, Brand, Seymour &
Rohwer, by Deborah Kay Tellier, Philip A. Stohr, and Christopher T.
Ellison, for Downey, Brand, Seymour & Rohwer; Octavio Lee, for the
State Board of Equalization; A. Kirk McKenzie, Attorney at Law, for
California Energy Commission; Wayne W. Truxillo, for the City of
Santa Clara; Harrison Call. Jr. , for Call Company, Ltd. ; Alice Loo,
for John Vickland, Attorney at Law, for San Francisco Bay Area
Rapid Transit; William B. Marcus and Jeff Nahigian, for Economic
Consultant Services, JBS Engineering, and the Independent Energy
Producers Association; Barbara Barkovich, for California Large
Energy Producers Association; Linda J. Dondanville, for Unocal
Geothermal Division; Norman J. Furuta, Attorney at Law, for
Department of the Navy; Leonard Snaider, Attorney at Law, for City
and County of San Francisco; Dellon E. Coker, and David A.
McCormick, Attorneys at Law, for the Department of the Army; and
Thomas B. Robinson, Dan Hauser, and Gordon E. Bruno, for
themselves.
Division of Ratepayer Advocates: Edward W. O'Neill, Arocles
Aguilar, Kathleen C. Maloney_, and Steven Weissman, Attorneys at
Law, and Bruce DeBerry and Joel Tolbert.
Commission Advisory and Compliance Division: James Weil, James
. Pretti, and John Peeples .
(END OF APPENDIX A)
• •
A. 64-06-014 , A.85-06-025
APPENDIX B
Page 1
The following article is proposed for addition to the
Rules of Practice and Procedure:
Article 13.5 - Stipulations and Settlements
51. (Rule 51) pefinitions.
The following definitions apply for purposes of this article.
(a) 'Party" or Parties' means any person who has filed an
appearance in the proceeding.
(b) 'Commission Proceeding" means an application, complaint,
investigation or rulemaking before the California Public
Utilities Commission.
(c) "Settlement" means an agreement between some or all of
the parties to a Commission _proceeding on a mutually acceptable
outcome to the proceedings. In addition to other parties to an
agreement, settlements in applications must be signed by the
applicant and in complaints, by the complainant and defendant.
(d) 'Stipulation' means an agreement between some or all of
the parties to a Commission proceeding on the resolution of any
issue of law or fact material to the proceeding.
(e) 'Contested' describes a stipulation or settlement that
is opposed in whole or part, as provided in this article, by any
of the parties to the proceeding in which such stipulation or
settlement is proposed for adoption by the Commission.
(f) "Uncontested' describes a stipulation or settlement that
(1) is filed concurrently by all parties to the proceeding in
which such stipulation or settlement is proposed for adoption by
the Commission, or (2) is not contested by any party to the
proceeding within the comment period after service of the
stipulation or settlement on all parties to the proceeding.
51.1. (Rule 51.1) proposal of Settlements or Stipulations.
(a) Parties to a Commission proceeding may stipulate to the
resolution of any issue of law or fact material to that
. proceeding, or may settle on a mutually acceptable outcome to .
that proceeding, with or without resolving material issues.
• • •
A.84-06-014, A.85-08-025
APPENDIX B
Page 2
Resolution shall be limited to the issues in that proceeding and
shall not extend to substantive issues which may come before the
Commission in other or future proceedings.
(b) Prior to the formal filing of any stipulation or
settlement, the settling parties shall convene at least one
conference with notice and opportunity to participate provided to
all parties for the purposeWritten notice of the date,
settlements in a given proceeding.
time and place shall be furnished at least seven (7) days in
advance to all parties to the proceeding. Notice of any
subsequent meetings may be oral, may occur less than seven days
in advance and may be limited to prior conference attendees and
those parties specifically requesting notice.
(c) Attendance at any stipulation or settlement conference or
discussion conducted outside the public hearing room shall be
limited to the parties to a proceeding.
Parties may by written motion propose stipulations or
settlements for adoption by the Commission in accordance with
this article. The motion shall contain a statement of the
factual and legal considerations adequate to advise the
Commission and parties not expressly joining the agreement of its
scope and of the grounds on which adoption is urged.
When a settlement pertains to a proceeding under the Rate
Case Plan, the settlement must be supported by a comparison
exhibit indicating the impact of the settlement in relation to
the utility's application. If the participating Staff supports
the settlement, it must prepare a similar exhibit indicating the
impact of the proposal in relation to the issues it contested, or
would have contested, in a hearing.
(d) Stipulations and settlements should ordinarily not
include deadlines for Commission approval, however, in the rare
case where delay beyond a certain datewo t de d validate etthe edbasis
for the proposal, the timing urgency
nd
fully justified in the action.
(e) 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.
• •
A.84-06-014, A.85-08-025
APPENDIX B
Page 3
51. 2 . (Rule 51.2) Timing.
Parties to a Commission proceeding may propose a stipulation
or settlement for adoption by the Commission (1) any time after
the first prehearing conference and (2) within 30 days after the
last day of bearing.
Page 51.3. (Rule 51.3) riling.
Parties proposing a stipulation or settlement for adoption by
the Commission shall concurrently file their proposal in
accordance with the rules applicable to pleadings (See Article
2) , and shall serve the proposal on all parties to the
proceeding. •
51.4 . (Rule 51.4) Comment Period.
Whenever a party to a proceeding does not expressly join in a
stipulation or settlement proposed for adoption cy the Commission
•
in that proceeding, such party shall have 30 days from the date
of mailing of the stipulation or settlement within which to file
comments contesting all or part of the stipulation or settlement,
and shall serve such comments on all parties to the proceeding.
Parties shall have 15 days after the comments are filed within
which to file reply comments. The assigned administrative law
judge may extend the comment and/or response period on motion and
for good cause.
51.5. (Rule 51.5) Contents of Comments.
A party contesting a proposed stipulation or settlement must
specify in its comments the portions of the stipulation or
settlement that it opposes, the legal basis of its opposition,
and the factual issues that it contests. Parties should indicate
the extent of their planned participation at any hearing. If the
contesting party asserts that hearing is required by law,
appropriate citation shall be provided. Any failure by a party
to file comments constitutes waiver by that party of all
objections to the stipulation or settlement, including the right
to hearing to the extent that such hearing is not otherwise
required by law.
411
A.84-06-014 , A.85-08-025
APPENDIX B
Page 4
•
51.6. (Rule 51.6) Contested Stimulations and Settlements.
(a) If the stipulation or settlement is contested in whole
or in part on any material issue of fact by any party, the
Commission will schedule a hearing on the contested issue(s) as
soon after the close of the comment period as reasonably
possible. Discovery will be permitted and should be well
underway prior to the close of the comment period. Parties to
the stipulation or settlement must provide one or more witnesses
to testify concerning the contested issues and to undergo cross
examination by contesting parties. Contesting parties may present
evidence and testimony on the contested issues.
(b) The Commission may decline to set hearing in any case
where the contested issue of fact is not material or where the
contested issue is one of law. In the latter case, opportunity
for briefs will be provided.
To ensure that the process 'of considering stipulations and
settlements is in the public interest, opportunity may also be
provided for additional prehearing conferences and any other
procedure deemed reasonable to develop the record on which the
Commission will base its decision.
(c) The Commission may decide the merits of contested
stipulation or settlement issues without further application of
these rules if the record contains substantial evidence upon
which to base a reasoned decision.
(d) Stipulations may be accepted on the record in any
proceeding and the assigned administrative law judge may waive
application of these rules to the stipulation upon motion and for
good cause shown.
51.7. (Rule 51.7) Commission Resection of a Stimulation or
Settlement.
The Commission will decline to adopt a proposed stipulation
or settlement without hearing whenever it determines that the
stipulation or settlement is not in the public interest. In that
event, parties to the stipulation or settlement may either
withdraw it or they may offer it as joint testimony at hearing on
the underlying proceeding.
• 410
A.84-06-014 , A.85-08-025
APPENDIX B
Page 5
51.8. (Rule 51.8.) Adoot;on B Edina Not Precedential.
Commission adoption of a stipulation or settlement is binding
on all parties to the proceeding in which the stipulation or
settlement is proposed. Unless the Commission expressly provides
otherwise, such adoption does not constitute approval of, or
precedent regarding, any principle or issue in the proceeding or
in any future proceeding.
51.9 (Rule 51.9) 7nad.missibility.
No statements, admissions, or offers to stipulate or settle,
whether oral or written, made in preparation for, or during
negotiations of stipulations or settlements shall be subject to
discovery, or admissible in any evidentiary hearing unless agreed
to by all parties participating in the negotiation.
All information obtained during the course of negotiations
shall be treated as confidential among the participating parties
and their clients and shall not otherwise be disclosed outside
the negotiations without the consent of the parties participating
in the negotiations.
If a stipulation or settlement is not adopted by the
Commission, the terms of the proposed stipulation or settlement
are also inadmissible unless their admission is agreed to by all
parties joining in the proposal.
51.10. (Rule 51.10) Aoolicability.
These rules shall apply on and after the effective date of
the decision promulgating them in all formal proceedings
involving gas, electric, telephone and Class A water utilities.
In proceedings where all parties join in the proposed
stipulation or settlement, a motion for waiver of these rules may
be filed. Such motion should demonstrate that the public
interest will not be impaired by the waiver of these rules.
Any party in other proceedings before the Commission may file
a motion showing good cause for applying these rules to
settlements or stipulations in a particular matter. Such motion
shall demonstrate that it is in the public interest to apply
these rules in that proceeding. Protests to the motion may be
oral or written.
(END OF APPENDIX B)
A. 84-06-014 , A.85-08-025
APPENDIX C
11.1 E tNT AGREE=T
This Settlement Agreement (Agreement) is made among
Pacific Gas and Electric Company (PG&E) , 'the Division of
Ratepayer Advocates (DRA) of the California Public Utilities '
Commission (CPUC) , and the Attorney General of the State of
California. . The Agreement covers operation and CPUC
jurisdictional revenue requirements associated with each unit of
the Diablo Canyon Nuclear Power Plant (Diablo Canyon) for the
30-year period following the commercial operation date of each
unit. _
1. EXCLUSIVE RATEMAKING
This Agreement sets forth PG&E's elusive method for
recovering any CPUC jurisdictional costs of owning or operating
Diablo Canyon for the term of this Agreement.
2. TERM
The term of this Agreement shall be from July 1, 1983 to
May 6, 2015 for Diablo Canyon Unit 1 and from July 1, 1988 to
March 12, 2016 for Diablo Canyon Unit 2.
3.. PRICES
The prices for Diablo Canyon power shall consist of a fixed
price and an escalating price. The fixed price shall be 31. 5
mills/kWhr. The escalating price shall be as follows:
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411
A.84-06-014 , A. 85-08-025
APPENDIX C
July 1, 1983 46. 50 mills/kWhr
January 1, 1989 51.85 mills/kWhr
January 1, 1990 57.81 mills/kWhr
January 1, 1991 64 .46 mills/kWhr
January 1, 1992 71.87 mills/kWhr
January 1, 1993 80. 14 mills/kWhr
January 1, 1994 87.35 mills/kWhr
4 . PRICE ESCALATION AFTER DECEMBER 31, 1994
Beginning on January 1, 1995, the escalating price shay: be
increased by the sum of the change in the Bureau of Labor
Statistics' year-end national consumer price index during the
immediately concluded year and 2.5 percent divided by two.
5. PEAR PERIOD PRICE DIFFERENTIATION
Beginning on January 1, 1989, the fixed and escalating
prices shall be time differentiated to reflect the benefit of
increased operation during peak periods. The prices shall be
multiplied by the following allocation factors depending on time
of operation:
A. A factor of 1.3 for the equivalent of the first 700
hours of full operation for each unit between 10 a.m. and 10
p.m. on weekdays during June through September.
B. A factor of 0.7 for the equivalent of the first 700
hours of full operation for each unit for any hours of the year
not covered by (a) .
•
- 2 -
e • •
A.84-06-014 , A.85-08-025 .
APPENDIX C
C. A factor of 1.00 for output not covered by (a) or (b) .
6. BALANCING ACCOUNT
A. PG&E waives all rights to amortize in rates the
amounts that have accrued in the Diablo Canyon Adjustment
Account (DCAA) from the respective dates of commercial operatic-
of Units 1 and 2 through June 30, 1988. PG&E also waives its
rights to collect any litigation expenses recorded or recordable
hereafter in the deferred debit account established pursuant to
D. 86-06-079 or otherwise directly associated with the Diablo
Canyon rate proceeding.
B. PG&E shall be entitled to retain all amounts collected
as interim rates for Diablo Canyon through June 30, 1988 , and
those amounts shall no longer be subject to refund.
C. It is the intention of the parties that the rates
established by this Agreement shall be effective immediately
upon approval of the Agreement by the CPUC.
D. The DCAA shall be maintained until the time to seek
judicial review has expired without review being sought or until
all court challenges are terminated, whichever is later (this
date shall be referred to as the "final approval date") . The
amounts collected by PG&E in base rates for Diablo Canyon costs
(excluding decommissioning costs) from July 1, 1988 until the
final approval date shall be subtracted from the amounts that
would have been received under this Agreement from July 1, 1988,
to compute the net amount that would have been received under
- 3 -
i •
A. a4-06-214 , A.85-08-025
APPENDIX C
this Agreement. Upon the final approval date, PG&E shall either
refund or amortize and collect in rates for a period not to
exceed three years as set by the Commission the amount that is
equal to the difference between the amount received under
interim rate relief from July 1, 1988, and the net amount that
would have been received under this Agreement from July 1 , 1968 .
7. BASIC REVENUE REQUIREMENT
A. PG&E shall identify and maintain as separate plant or
other accounts for future rate recovery, two utility assets in
the total amount (after tax) of no more than $1. 175 billion.
B. One utility asset shall be made up of the excess of
equity allowance for funds used during construction (AFUDC) over
capitalized interest pursuant to Statement of Financial
Accounting Standards No. 34 , accrued by PG&E from the start of
construction to the commercial operation of each unit. The
other utility asset shall consist of certain other incurred
costs, including deferred taxes on prior flowthrough timing
differences, write-down of nuclear fuel to market and loss on
reacquired debt, but not including the write-off of any amounts
in the DCAA as provided in Paragraph 6 above.
C. These utility assets shall ie depreciated and
collected in base rates on a straight line basis, starting
July 1, 1988, using a 28-year life. PG&E shall be entitled to
earn its authorized rate of return on these utility assets.
Since a significant portion of both utility assets does not have
•
•
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Ill •
A.84-06-014 , A.85-08-025
APPENDIX C
a tax basis, appropriate taxes shall be computed on the
depreciation component and collected in base rates.
D. Nothing in this Agreement shall prohibit the
Commission from denying rate recovery on one or both of these
utility assets pursuant to Public Utilities Code Section 455 . 5 .
E. As provided in Paragraph 7C, PG&E shall include in
base rates the full revenue requirement at the authorized rate
of return on the utility assets. This shall be called the
"basic revenue requirement."
8 . REVENUE
Except for decommissioning as set forth in Paragraph 10,
the costs of the Safety Committee provided for in Paragraph 16,
and except as modified by Paragraph 9, the revenue to PG&E shall
be computed as follows:
A. The "Diablo Canyon annual revenue" shall equal the sum
of fixed and escalating prices as set forth in Paragraph 3 , and
as adjusted by the escalation provision of Paragraph 4 and the
peak period price differentiation provision of Paragraph 5,
multiplied by annual Diablo Canyon net generation.
B. PG&E shall receive in rates, through its Energy Cost
Adjustment Clause (ECAC), the difference between the Diablo
Canyon annual revenue and the basic revenue requirement.
C. If the difference between the Diablo Canyon annual
revenue and the basic revenue requirement is less than or equal
to zero, PG&E shall still receive the full basic revenue
- 5 -
• •
A.84-06-014 , A. 85-08-025
APPENDIX C
requirement. However, in that case; PG&E shall be deemed to
have triggered the floor provision under Paragraph 9.
D. Except as specifically provided in this Agreement, the
operation of Diablo Canyon pursuant to this Agreement and all
revenues associated with this Agreement shall be excluded from
reasonableness reviews, AER risk allocation, and target capacity
factors. Replacement or displacement power costs associated
with the level of Diablo Canyon operation shall be recognized in
ECAC rates. There shall be no issue in any proceeding as to the
reasonableness of PG&E in operating Diablo Canyon or purchasing
Diablo Canyon output so as to cause replacement or displacerent
power costs to be incurred. The reasonableness of PG&E in
choosing among replacement or displacement power sources shall
be subject to ECAC review.
E. If the ECAC ceases to be used for PG&E ratemaking, a
new ratemaking mechanism shall be developed to carry out the
terms of this Agreement.
9. FLOOR
A. Except as provided in Paragraph 8C, an annual revenue
floor can be triggered at PG&E's option. In the event that the
revenue produced by the formula in subparagraph 9B is greater
than the basic revenue requirement, the floor shall be the basic
revenue requirement plus the amount by which the formula revenue
exceeds the basic revenue requirement. In the event that the
revenue produced by the formula is equal to or less than the
- 6 -
. • •
A.84-06T014 , A.85-08-025 -
APPENDIX C
basic revenue requirement, the floor shall be the basic revenue
requirement.
B. The formula revenue shall be the sum of the then
current fixed and escalating prices multiplied by a specified
capacity factor multiplied by the megawatt (MW) rating. For
1988 through 1997, the specified capacity factor is 36% ; it is
reduced by 3% in 1998 and again by 3% in 2008. Each time the
floor is triggered, 3% shall also be deducted from the specified
capacity factor. The MW rating shall be the net Maximum
Dependable Capacity of 1073 MW for Unit 1 and 1087 MW for
Unit 2.
C. The floor payments (including the basic revenue
requirement) received shall be repaid with interest from 50% of
the revenues received from subsequent year operations over a 60%
capacity factor. In addition, the original specified capacity
factor for a year may be re-established at PG&E's option through
repayment with interest. The interest rate shall be the
interest rate on 10-year single A utility bonds as listed in the
last issue of Moody's Bond Survey published in the year in which
the floor provision is invoked.
D. If operation falls below the floor capacity factor in
three consecutive calendar years (whether or not PG&E invokes
the floor) , then PG&E must tile an application either seeking
abandonment, as described in Paragraph 13, or explaining why it
believes continuation of this pricing package, including the
regulatory asset, is appropriate.
- 7 -
- 410 411
A.84-06-014 , A.85-08-025
APPENDIX C
10. DECOMMISSIONING
This Agreement shall have no effect on revenues for the
cost of the eventual decommissioning of Diablo Canyon, which
shall receive ratemaking treatment in accordance with Commission
policies for decommissioning nuclear plants.
11. PURCHASE POLICY
PG&E shall have the right and obligation to purchase all
Diablo Canyon output, except during hydro spill conditions on
the PG&E system. During hydro spill conditions, ratepayers
shall not pay for Diablo Canyon output to the extent of the
hydro spill. PG&E shall, however, have the right during such
conditions to sell Diablo Canyon output.
12. SEGREGATION OF COSTS
A. For ratemaking purposes, all Diablo Canyon costs shall
be segregated from other PG&E operations. No costs of Diablo
Canyon shall be included in rates, except as provided in this
Agreement. Diablo Canyon costs include any and all costs
incurred by PG&E as a result of Diablo Canyon ownership,
including but not limited to administrative and general
expenses, operations and maintenance expenses, fuel-related
costs, and any payment of the costs of accidents at other
nuclear plants assessed to utilities owning nuclear plants.
B. PG&E shall keep full records; including reasonably
contemporaneous accounts, to allow identification and auditing
- 8 -
Ill I
A. 84-06-014 , A.85-08-025
APPENDIX C
of all costs directly allocable to Diablo Canyon. These records
shall be consistent with the Uniform System of Accounts and
applicable accounting requirements of the CPUC.
13 . ABANDONMENT RIGHTS
•
A. If PG&E requests special ratemaking treatment for both
units of Diablo Canyon in the event of prolonged or permanent
outages, it may ask for recovery of no more than the lesser of
these two amounts:
(1) The floor payments which would be paid according to
Paragraph 9, for 10 minus (n) years, where (n) is the number of
years for which unrepaid floor payments have been received by
PG&E; or
(2) 53.00 billion in capital costs through 1988 , reduced
by $100 million per year of operation after 1988. In the event
of a nation-wide shutdown of all nuclear plants (not just
Westinghouse plants) , the capital cost amount computed under
this subparagraph may be increased to include the non-equity
portion of reasonable direct costs of capital additions, reduced
by straight-line depreciation.
B. If PG&E requests special ratemaking treatment for only
one unit of Diablo Canyon, it may ask for recovery of no more
than one-half the lesser of (1) and (2) .
C. Nothing in this paragraph shall preclude the Attorney
General or DRA from opposing a PG&E abandonment request
requested under this paragraph.
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A.84-06-014 , A.85-08-025
APPENDIX C
14 . TREATMENT AFTER 30 YEARS
PG&E shall file an application by May 1, . 2014 requesting
whatever ratemaking treatment it wishes for Diablo Canyon for
the period beginning May 7, 2015 for Unit 1 and March 13, 2016
for Unit 2. Nothing in this Agreement shall preclude the
Commission from setting rates on any lawful basis.
15. JURISDICTIONAL ALLOCATION
The revenue under Paragraphs 7 and 8 above shall be
computed on a CPUC jurisdictional basis. -
16. SAFETY
An Independent Safety Committee shall be established and
shall operate as described in Attachment A which is hereby
incorporated by reference herein.
17. EFFECT OF CHANGE IN AGREEMENT
Except for an Implementing Agreement, which will be
prepared and executed as soon as possible, this Agreement
represents the complete agreement among PG&E, DRA and the
Attorney General as of the data of this Agreement. This
Agreement is subject to approval by the CPUC. Except as
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A. 84-06-014 , A.85-08-025
APPENDIX C
expressly provided herein or except as may be agreed to by all
parties to this Agreement, any material change in this Agreement
shall render the Agreement null and void.
DATED: Junel`1 , 1988 JOHN K. VAN DE KAMP
ATTORNEY GENERAL
DATED: June --`'f, 1988 CA FORNIA PUBLIC UTILITIES
COMMISSION
DIVISION OF RATEPAYER ADVOCATES
By �iv.,.CC._
William R. Ahern, Director
DATED: June, 1988 PACIFIC GAS AND ELECTRIC COMPANY
Y
7 ) 1.4-,
Richard A. Clarke, Chairman
of the Board and Chief
Executive Officer
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A.84-06-014 , A.85-08-025
APPENDIX C
XTTACIiMENT A
•
SAFETY =141TTEE
•
I. Composition of Committee.
1. An Independent Safety Committee (the "committee")
shall be established consisting of three members, one each
appointed by the Governor of the State of California, the Attor-
ney General and the Chairman of the California Energy Commission
("CEC") , respectively, serving staggered three-year terms. The
committee shall review Diablo Canyon operations for the purpose
of assessing the safety of operations and suggesting any recom-
mendations for safe operation. Neither the committee nor its
members shall have any responsibility or authority for plant
operations, and they shall have no authority to direct PG&E per-
sonnel. The committee shall conform in all respects to applica-
ble federal laws, regulations and Nuclear Regulatory Commission
("NRC") policies.
2. Committee members shall. be selected from a list of
candidates jointly nominated by the President of the California
Public Utilities Commission (the "CPUC") , the Dean of Engineer-
ing of the University of California at Berkeley, and PG&E.
a. At the time of the committee's initial formation,
• the President of the CPUC, the Dean of Engineer-
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A.84-06-014 , A. 85-08-025
APPENDIX C
ing, and PG&E shall jointly provide a list of
nine candidates. The Governor shall appoint a
member for a one year term, the Attorney General
shall appoint a member for a two year term, and
the Chairman of the CEC shall appoint a member
for a three year term. Each year thereafter, the
President of the CPUC, the Dean of Engineering,
and PG&E shall jointly provide to the appropriate
appointing authority a list of three candidates
as alternatives to reappointment of that author-
ity's designated committee member whose term is
expiring. The incumbent shall be deemed an
additional nominee. Each such subsequent
appointment shall be for a three year term.
b. Should a committee member not complete the
appointed term, the authority who appointed that
member shall appoint a replacement to serve for
the unexpired portion of the term from a list of
three candidates nominated by the President of
the CPUC, the Dean of Engineering and PG&E in
accordance with the appointment procedures set
forth below in subparagraphs d., a. , and f.
c. The President of the CPUC, the Dean of Engineer-
ing, and PG&E shall propose c =I:dates only
persons with knowledge, background and experience
•
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A. 84-06-014 , A.85-08-025
APPENDIX C --
in the field of nuclear power facilities.
d. Should the President of the CPUC, the Dean of
Engineering and PG&E be unable to agree upon
candidates in the first year, each shall sub-it
to the other two a list of four nominees. The
President of the CPUC, PG&E and the Dean of
Engineering may each strike any two of the eight
names proposed on the other two nomination lists.
The names remaining after the exercise of this
right to strike shall be submitted to the three
appointing authorities.
e. Should the President of the CPUC, PG&E and the
Dean of Engineering be unable to agree upon a
list of three nominees in any year after the
first year, each shall submit to the other two a
list of two nominees. The President of the CPUC,
PG&E and the Dean of Engineering may each strike
any one of the four names proposed on the other
two nomination lists. The names remaining after
exercise of this right to strike shall be sub-
mitted to the appointing authority.
f. In any year in which there is no agreement on a
joint list, should any nominating authority fail
to submit a separate list of nominees, the other
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