San Diego Consumers Action Network 6975 Camino Amero San Diego, CA

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1 San Diego Consumers Action Network 6975 Camino Amero San Diego, CA May 11, 2015 To: Energy Division, Tariff Unit RE: Protest of SDG&E Advice Letter 2731-E SDG&E filed Advice Letter 2731-E on April 22, 2015, accompanied by its 25 th Quarterly Project Status Report ( QSP ). 1 In the AL, SDG&E asserts that the applicable price cap for the Sunrise transmission line project should be $ million, 2 and that SDG&E s actual expenditures for Sunrise have been $ million, for a cost overrun of $4.4 million. 3 Both claims are wrong. The correct number for expenditures is more than $1900 million, while the correct number for the cap is $ million. Thus SDG&E has overspent the CPCN-set price camp by more than $98 million dollars. SDG&E has pledged, in the above-referenced QSP, not to seek recovery at FERC of expenditures in excess of the original cost cap established by [the CPUC]. 4 The Commission should hold SDG&E to that pledge. The original cost cap set by the Commission was $ million. SDG&E should be required to inform the FERC that the amount by which it has overspent the cap is closer to $100 million than $4.4 million, and FERC should be informed that any attempt to include more than $ million of Sunrise expenditures in the determination of Sunrise-related rates would be a violation of a CPUC order, D granting a Sunrise CPCN with a cap. As will be explained below, Energy Division should reject the numbers presented by SDG&E in its advice letter, SDG&E should be required to inform FERC in the appropriate TO4 annual filings, of the Commission s revisions to the numbers contained in this advice letter and the Commission should inform FERC that it considers any expenditures above the cap to be unauthorized by it, and thus imprudent on the part of SDG&E, and thus not suitable for recovery. Our recommendations are explained, along with our analysis of SDG&E s numbers in greater depth below. 1 The advice letter itself is cited below as AL. The 25 th Quarterly Status report was Attachment A to the AL. The 25 th Quarterly Status Report, as resubmitted with minor corrections on April 23, 2015, is cited below as QSP. 2 AL, p Ibid. 4 QSP, p. 18, paragraph 23.

2 I. The appropriate cap is $ million, not $ million as asserted by SDG&E. SDG&E s QSP admits that the cap number it seeks, $ million, is based on the inclusion of 8 miles of undergrounded 500 kv line as part of the Sunrise project. 5 SDG&E also admits that Sunrise, as ultimately permitted and built, contains only 6.2 miles of underground 500 kv line. 6 The CPCN for Sunrise is unambiguous in stating that the cap should be reduced by $11.33 million for each quarter mile of underground line, below 8 miles, not ultimately required. 7 Thus the relevant cap for the Sunrise project, based on D , needs to take into account the 1.8 miles of undergrounding not performed. The required adjustment is 7.2*$11.33 million, or $81.6 million, to reflect the undergrounding of 7.2 quarter miles less 500 KV line than assumed in computing the $1883 million figure. 8 Thus the true Sunrise cost cap, with the adjustment called for in the original CPCN, is $ million. 9 SDG&E s attempts to muddle the issue by suggesting there is some ambiguity about adjusting the cost cap downwards for undergrounding not performed, but there isn t any. 10 The language in D uses the term shall, not if. 11 II. Actual expenditures have been more than $1900 million, not $ million as asserted by SDG&E. A. January 2015 settlement SDG&E s Advice Letter reports total expenditures of $ million, 12 of which $51.1 million is for a payment made in January 2015 to settle contractor claims relating to construction expenditures. 13 However, the actual expenditure made in January 2015 was not $51.1 million; it was $65 million (a number to which SDG&E freely admits). 14 SDG&E argues that the cap was set in terms of 2012 dollars, and therefore the January 5 QSP, p. 16, paragraph QSP, p. 4, paragraph 3. 7 D , p. 275: The maximum reasonable cost shall be reduced by $11.33 million (2012$) per quarter mile for that portion of the undergrounding that is not performed. (emphasis added) 8 The actual undergrounding not performed was = 1.8 miles, which is 7.2 quarter miles (1.8/.25 = 7.2). SDG&E rounds that off to 7 quarter-miles (QSP, p. 16, paragraph 18). However, there is nothing in D either mandating or authorizing such rounding off. 9 Adjusting the cost cap for 7.2 quarter miles of undergrounding not performed would reduce the cost cap to $ *$11.33 = $ $81.6 = $ million. 10 QSP. P. 16, paragraph 18: If the Decision is read to require reducing the cost cap (emphasis added) 11 D , p. 275: The maximum reasonable cost shall be reduced by $11.33 million (2012$) per quarter mile for that portion of the undergrounding that is not performed. (emphasis added) 12 QSP, p. 5, Paragraph QSP, p. 5, fn Ibid. [ 2

3 2015 payment needs to be discounted back to 2012 dollars to be properly measured against the cap. 15 SDG&E explains that it reduced the $65 million contractor payment to $51.1 million in order to express it in 2012 dollars. However, SDG&E has clearly overstated the appropriate de-escalation from January 2015 to Assuming 2012 dollars refers to the value of money averaged across the calendar year 2012, de-escalating the $65 million payment in January 2015 back to 2012 would require removing 2 ½ years of inflation. The CPI change from mid-2012 to January 2015 was under 1.8 percent, 16 which would de-escalate $65 million back to approximately $63.8 million. 17 That is $12.7 million more than the $51.1 million figure cited by SDG&E. 18 So even if SDG&E s proposed de-escalation is appropriate in principal, SDG&E s numbers are off by $12.7 million. Thus the correct total expenditures for Sunrise have been at least $12.7 million higher than those filed by SDG&E in its Advice Letter, or about $1900 million. 19 B. Post-commercial environmental mitigation expenditures At FERC, SDG&E repeatedly attempted to argue that mitigation costs for Sunrise were capital costs even if they were post-commercial operation costs, and should be treated as such for ratemaking purposes (all parties agree that pre-cod mitigation costs are capital costs). 20 It eventually agreed to recover such post-cod mitigation costs as expenses rather than capital costs. 21 However, since treating them as capital costs was SDG&E s original position at the time the Sunrise costs were being determined for cap-setting purposes, it is appropriate to continue to treat them that way for determination of compliance with the cap (alternatively, the cap would have to be retroactively reduced to reflect treating these costs as expenses rather than capital items) OSP, p. 5, fn U.S. Government Bureau of Labor Statistics, CPI Detailed Report Data for January 2015 (available online at Table 1 shows a CPI-U index value for January 2015 of Table 24 shows the average 2012 CPI-U index value of The increase from 2012 to January 2015 was thus / =.0179 = 1.79%. This is the change for the entire period, not the annual change. 17 $65 million / =$63.85 million. 18 SDG&E s implicit deflation rate is ((65/51.1)^0.4)-1 =.101 = 10.1 percent per year for the 2½ years from mid to January $ million (QSP, p. 5, paragraph 6) plus $12.7 million = $ million. 20 xx. 21 QSP, pp , paragraph 11 and fn. 19, and also paragraph 12.

4 In its Advice Letter, SDG&E has correctly included post-commercial mitigation costs. 22 However, it has done so on a discounted basis, as with its January 2015 contractor settlement costs. 23 And unlike the situation for the contractor costs, SDG&E has not provided any data as to the actual costs from which it calculated the deescalated costs in 2012 dollars. Thus there is no way from the AL or QSP to verify that SDG&E has correctly projected its ultimate mitigation costs, or correctly de-escalated them to 2012 dollars. It is quite likely that SDG&E has applied the same excessive deescalation rates to its post-2012 mitigation costs as to its January 2015 contractor settlement costs. If so, it has underestimated the ultimate cost to ratepayers of post- COD mitigation costs, and thus further underestimated its Sunrise cost overrun. C. Citizens Energy The cap established in the Sunrise CPCN was a cost cap for the full cost of the Sunrise project. During construction of Sunrise, SDG&E agreed to lease a portion of the line to Citizens Energy, with Citizens making a lump sum payment to SDG&E of approximately $83 million to cover in advance to cover the full capital lease costs (and additional payments in each successive year to cover its share of ongoing Sunriserelated expenses). 24 Thus the costs reported to the CPUC and FERC for determining compliance with the CPUC s cost cap should include all expenditures to construct Sunrise, and should not net out the $80+ million lump lease payment received from Citizens. The Advice Letter appears to have correctly included costs which were subsequently reimbursed through the $80+ million Sunrise lease payments from Citizens. However, there is enough ambiguity in the Advice Letter that the Commission should make sure that this is indeed the case. 25 In addition, the Commission s ruling on the Advice Letter should require SDG&E to accurately report to FERC on its compliance with the cost cap, including costs which were subsequently covered by the $80+ million lease payment from Citizens. The fact that the $80+ million reduces SDG&E s FERCjurisdictional TRR for Sunrise is true, since otherwise those costs would be recovered both from Citizens and from CAISO TAC rates that include Sunrise, but it is also true that the $80+ million did not reduce the cost of Sunrise and thus did not affect SDG&E s cost cap in any way. 22 QSP, p. 5, paragraph QSP, p. 5, fn FERC proceeding ER See 138 FERC 61,129, paragraph 11.for the $83 million figure. 25 For example, the QSP references current FERC rates as being based on expenditures that are below the cost cap, but the $ million expenditure cited may be a number that excludes the $80+ million of expenditures covered by the Citizens lease payment. QSP, p. 17, paragraph 21. [ 4

5 III. SDG&E has overspent its cap by $98+ million, not $4.4 million. As shown above, SDG&E has exceeded the Commission-set cost cap by $4.4 million (the amount to which SDG&E admits), plus $81.6 million (the cap reduction due to less-than-maximal undergrounding) plus $12.7 million (the part of the $65 million payment in January 2015 that SDG&E tries to avoid counting due to excessive deescalation to 2012 dollars), plus potential additional amounts due to its treatment of post-cod mitigation costs. The sum of these various components is at least $98.7 million, and may well exceed $100 million (with possible uncounted costs for excessive de-escalation of post-cod mitigation expenditures). IV. Proposed Commission actions In filing this protest, SDCAN requests that the Energy Division take the following actions in regards to AL2731-E: A. Reject SDG&E s numbers The Commission should reject the numbers in SDG&E s Advice Letter, and adopt numbers that reflect the issues identified in this protest, as more precisely quantified during the review of this Advice Letter. B. Require SDG&E to provide FERC with correct numbers that are consistent with the Commission s determination in this proceeding The Commission should not allow SDG&E a second bite at this apple, in the form of making the same arguments to FERC that it will have made and lost in this Advice Letter. SDG&E should be required to inform FERC in the appropriate TO4 annual filings, as adopted by the Commission in regards to this advice letter. FERC should be informed of the appropriate values for the Sunrise cost cap, the actual dollars spent, and the resultant cost overrun. C. Request FERC to disallow any expenditures in excess of the cap as imprudent The Commission should attempt to prevent SDG&E from reneging on its commitment in this Advice Letter not to seek FERC recovery for expenditures in excess of the CPUC-set cap. The CPUC already is a party in SDG&E s TO4 proceeding. It should request that FERC to honor the Sunrise cost cap. SDG&E has known since before it 5

6 began construction of Sunrise that the Commission had set a cost cap, and what that cap was. SDG&E has made repeatedly quarterly filings with the CPUC claiming that its actual expenditures were below the cap and that its ultimate expenditures were expected to be no more than the cap. 26 SDG&E never sought any increase in the cost cap, despite its obligation to do so if it expected to exceed the cap by more than $18-19 million. 27 SDG&E s attempt to belatedly increase the cost cap for increases in mitigation costs is inappropriate in light of SDG&E s admission that the Commission has already rejected uncertainty in mitigation costs as a basis for increasing the cost cap. 28 Now, with its $65 million settlement in January 2015, more than two years after commercial operation, SDG&E wants to ignore the cost cap and be excused for doing so. The Commission should inform FERC that it considers any expenditures above the cap to be unauthorized by it, thus imprudent on the part of SDG&E, and not suitable for recovery at FERC. As the QSP itself points out, the cost cap is the maximum cost determined to be reasonable and prudent, 29 and thus expenditures in excess of the cap must be considered imprudent. SDCAN will gladly make its experts and analysis available to Energy Division staff if it has any questions about this protest or SDG&E s reply to this protest. Respectfully submitted, Michael Shames On behalf of SDCAN Cc: Megan Caulson, SDG&E : MCaulson@semprautilities.com Energy Division Tariff Unit EDTariffUnit@cpuc.ca.gov 26 Quarterly Status Reports See also QSP, p. 12, paragraph D , p. 294, Ordering paragraph 6(b), requiring an advice letter filing to increase the cap within 30 days of the time SDG&E has a final construction cost estimate exceeding the cap by more than one percent. ( SDG&E shall )(emphasis added) 28 QSP, p. 10, paragraph QSP, p. 9, fn. 15, quoting D , p. 293, Ordering paragraph 6(a). See also D , pp [ 6