As I wrote last week, PG&E is proposing that a share of Diablo Canyon nuclear plant output be allocated to community choice aggregators (CCAs) as part of the resolution of issues related to the Integrated Resource Plan (IRP), Resource Adequacy (RA) and Power Charge Indifference Adjustment (PCIA) rulemakings. While the allocation makes sense for CCAs, it does not solve the problem that PG&E ratepayers are paying for Diablo Canyon twice.

In reviewing the second proposed settlement on PG&E costs in 1994, we took a detailed look at PG&E’s costs and revenues at Diablo. Our analysis revealed a shocking finding.

Diablo Canyon was infamous for increasing in cost by more than ten-fold from the initial investment to coming on line. PG&E and ratepayer groups fought over whether to allow $2.3 billion dollars.  The compromise in 1988 was to essentially shift the risk of cost recovery from ratepayers to PG&E through a power purchase agreement modeled on the Interim Standard Offer Number 4 contract offered to qualifying facilities (but suspended as oversubscribed in 1985).

However, the contract terms were so favorable and rich to PG&E, that Diablo costs negatively impacted overall retail rates. These costs were a key contributing factor that caused industrial customers to push for deregulation and restructuring. As an interim solution in 1995 in anticipation of forthcoming restructuring, PG&E and ratepayer groups arrived at a new settlement that moved Diablo Canyon back into PG&E’s regulated ratebase, earning the utilities allowed return on capital. PG&E was allowed to keep 100% of profit collected between 1988 and 1995. The subsequent 1996 settlement made some adjustments but arrived at essentially the same result. (See Decision 97-05-088.)

While PG&E had borne the risks for seven years, that was during the plant startup and its earliest years of operation.  As we’ve seen with San Onofre NGS and other nuclear plants, operational reliability is most at risk late in the life of the plant. PG&E’s originally took on the risk of recovering its entire investment over the entire life of the plant.  The 1995 settlement transferred the risk for recovering costs over the remaining life of the plant back to ratepayers. In addition, PG&E was allowed to roll into rate base the disputed $2.3 billion. This shifted cost recovery back to the standard rate of depreciation over the 40 year life of the NRC license. In other words, PG&E had done an end-run on the original 1988 settlement AND got to keep the excess profits.

The fact that PG&E accelerated its investment recovery over the first seven years and then shifted recovery risk to ratepayers implies that PG&E should be allowed to recover only the amount that it would have earned at a regulated return under the original 1988 settlement. This is equal to the discounted net present value of the net income earned by Diablo Canyon, over both the periods of the 1988 (PPA) and 1995 settlements.

In 1996, we calculated what PG&E should be allowed to recover in the settlement given this premise.  We assumed that PG&E would be allowed to recover the disputed $2.3 billion because it had taken on that risk in 1988, but the net income stream should be discounted at the historic allowed rate of return over the seven year period.  Based on these assumptions, PG&E had recovered its entire $7.7 billion investment by October 1997, just prior to the opening of the restructured market in March 1998.  In other words, PG&E shareholders were already made whole by 1998 as the cost recovery for Diablo was shifted back to ratepayers.  Instead the settlement agreement has caused ratepayers to pay twice for Diablo Canyon.

PG&E has made annual capital additions to continue operation at Diablo Canyon since then and a regulated return is allowed under the regulatory compact.  Nevertheless, the correct method for analyzing the potential loss to PG&E shareholders from closing Diablo is to first subtract $5.1 billion from the plant in service, reducing the current ratebase to capital additions incurred since 1998. This would reduces the sunk costs that are to be recovered in rates from $31 to $3 per megawatt-hour.

Note that PG&E shareholders and bondholders have earned a weighted return of approximately 10% annually on this $5.1 billion since 1998. The compounded present value of that excess return was $18.1 billion by 2014 earned by PG&E.