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October 16, 2014

San Onofre Ratemaking Settlement Clears Final Hurdle For California PUC Approval

On October 9, 2014, Administrative Law Judges (ALJs) of the California Public Utilities Commission (CPUC) issued a proposed decision to approve a settlement of the ratemaking issues associated with the early retirement of Units 2 and 3 of the San Onofre Nuclear Generating Station (SONGS). With this decision, the settlement is ripe for final review by the CPUC, which could take place as early as November 20, 2014.

The settlement is supported by Southern California Edison (SCE) and San Diego Gas & Electric (SDGE), the two utility owners of the plant, as well as the California Office of Ratepayer Advocates, but faces opposition from other intervenors. While costly to the utilities’ shareholders, the settlement would remove a cloud of financial and regulatory uncertainty and enable the utilities to move forward without impairment to their financial integrity.

Following multi-year projects to replace their steam generators, the two units had resumed operating for a brief time when a tube leak was detected in the Unit 3 replacement steam generator (RSG) in January 2012, resulting the unit being shut down. At the time, Unit 2 was undergoing an outage for refueling and replacement of the reactor vessel head.

On investigation, both units were found to have tube degradation in their Mitsubishi-supplied RSGs and remained out of service. In succeeding months, costs mounted as the plants faced increasing regulatory burdens at the NRC not only to address the RSG issues but also new safety requirements emanating from the Fukishima disaster. As lead owner and operator, SCE concluded that continued operation would not be economic and decided to permanently close the plants in June 2012.

At issue in the CPUC proceedings was the treatment of pre- and post-shutdown RSG costs; other unrecovered plant capital costs; post-shutdown replacement power costs; O&M costs; and potential recoveries from insurance and from litigation against Mitsubishi.       Following several months of litigation, the utilities reached a settlement with the Office of Ratepayer Advocates.

In September 2014, the Assigned Commissioner and ALJs asked that the settling parties make modifications to the allocation of potential recoveries from insurance and Mitsubishi, and address the greenhouse gases from replacement power purchases. The parties re-submitted the settlement with the requested changes, and the ALJs issued their proposed decision to approve the settlement.

Key aspects of the settlement are:

  • All costs associated with the steam generator replacement project are removed from rates as of February 1, 2012, the date the units stopped operating, and utility revenue relating to the project after that date is refunded to customers;
  • The utilities get to recover 100 percent of replacement power costs;
  • The utilities get to amortize other remaining plant capital costs over 10 years, with a weighted average return on the unamortized portion based on costs of current debt and preferred stock;
  • The utilities are required to absorb 2012 O&M costs above levels previously approved by the CPUC, and may recover 2013 recorded O&M costs;
  • Ratepayers and the utilities will share any recovery from Mitsubishi 50/50, and ratepayers receive 95 percent of any insurance recovery; and

The utilities will help develop an RD&D program to deploy new technologies to reduce greenhouse gas emissions.

In considering the overall fairness of the settlement, the ALJs compared the revenue requirements resulting from settled items with the revenue requirements associated with parties’ litigation positions. The settlement revenue requirements for the two utilities combined were about $3.3 billion, versus $2.54 billion under the litigation position of the Office of Ratepayer Advocates, and $4.7 billion were the utilities to prevail on all issues.

In August 2014, SCE reported that it had recorded asset impairments totaling $806 million (pre-tax) relating to the anticipated settlement, and that the settlement would have a slightly positive effect on core earnings over the ensuing 10 years. The impairment equates to about 4 percent of SCE’s rate base, and the Company’s credit rating does not appear to have suffered, nor has it resulted in a dividend cut by its parent company, Edison International. With only a 20 percent ownership share in the plants, the financial impact on SDGE is likely to be smaller than SCE. These impacts do not take into account the utilities’ shares in possible recovery from insurance or litigation with Mitsubishi.

The final impact of the settlement will depend on the CPUC’s action on the recommended decision. Assuming the CPUC acts favorably, as appears likely, SCE and SDGE will have closed a chapter in a major nuclear plant misfortune without endangering their core utility mission. Not all utilities that have suffered major nuclear plant problems can say the same.

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