How To Answer The Six Cities' Protest Against The Power Line Project

Transcription

1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION San Diego Gas & Electric Company Docket No. EL MOTION FOR LEAVE TO ANSWER AND ANSWER ON BEHALF OF THE CITIES OF ANAHEIM, AZUSA, BANNING, COLTON, PASADENA, AND RIVERSIDE, CALIFORNIA Pursuant to Rules 212 and 213 of the Commission's Rules of Practice and Procedure, 18 C.F.R , (2014), the Cities of Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside, California (collectively, the "Six Cities") hereby move for leave to respond and submit their response to the Motion for Leave to Answer and Answer filed by San Diego Gas & Electric Company ("SDG&E"). See Motion for Leave to Answer and Answer of San Diego Gas & Elec. Co., San Diego Gas & Elec. Co., Docket No. ELI (filed Dec. 24, 2014) (the "SDG&E Answer"). I. MOTION FOR LEAVE TO ANSWER Rule 213(a)(2) of the Commission's Rules of Practice and Procedure (18 C.F.R ) normally prohibits answers to answers, unless such answers have been authorized by the decisional authority. However, the Commission frequently exercises The Six Cities filed a document-less Motion to Intervene in this proceeding on November 25, On the same date, the Six Cities also filed a protest. See Protest on behalf of the Cities of Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside, California, San Diego Gas & Elec. Co., Docket No. ELi (filed Nov. 25, 2014) (the "Six Cities' Protest").

2 its discretion to grant motions for leave to submit answers when doing so will clarify the issues, assist in the Commission's decision-making processes, or otherwise ensure an accurate and complete record. See, e.g., PJM Interconnection, L. L. C., 145 FERC J 61,035, at P 32 (2013); Wisconsin Pub. Serv. Corp., 144 FERC 61,093, at P 27 (2013); Iberdrola Renewables, Inc., et al., 137 FERC 61,185, at P 17 (2011); and Virginia Elec. and Power Co., 125 FERC 61,391, at P 26 (2008). The Six Cities' response will clarifr the issues in this proceeding (including by correcting inaccuracies in the SDG&E Answer), assist in the Commission's decision-making processes, and ensure a complete decision-making record. Therefore, waiver of Rule 213 to accept the Six Cities' response to the SDG&E Answer is appropriate and consistent with Commission precedent. For these reasons, the Six Cities respectfully request that the Commission accept their response set forth below. II. ANSWER The SDG&E Answer largely repeats arguments and information included in SDG&E's Petition For Declaratory Order seeking transmission incentives for the Sycamore Canyon-Penasquitos transmission line project (the "Sycamore-Penasquitos Line" or the "Project").2 Thus, the Answer provides little in the way of additional support for SDG&E's contention that the Project merits a 100-basis point adder to SDG&E's authorized rate of return on equity ("ROE"), and rejection of that request by 2 Petition for Declaratory Order, San Diego Gas & Elec. Co., Docket No. EL (filed Oct. 29, 2014) (the "SDG&E Petition" or the "Petition"). -2-

3 the Commission remains appropriate. The Six Cities observe, however, that the SDG&E Answer reflects a notable shift in focus from project risks and challenges emanating from the competitive solicitation process, permitting procedures, and involvement of Citizens Energy Corporation (all of which were extensively described in the Petition) to an emphasis on the risks and challenges arising from the timeline required for the Project's development. (See, e.g., SDG&E Answer at ) Nothing, however, in the SDG&E Answer suggests that risks and challenges associated with the contemplated Project timeline merit an ROE adder; rather, timeline-related risks and challenges, if any, can be fully addressed if SDG&E is authorized to recover 100% of its prudent abandoned plant costs in the event that the Project is ever abandoned for reasons outside of SDG&E's control, including failure to meet any project milestones or timing requirements. Setting aside SDG&E's discussion ofproject risks and challenges, the Six Cities have identified several needed corrections and misstatements in the Answer, which relate to SDG&E's discussion of the Six Cities' ROE analysis and reinforce that SDG&E's attempt to justify an exorbitant 11.05% ROE for the Sycamore-Penasquitos Line is ultimately unavailing. As an initial matter, SDG&E suggests that, by including a discounted cash-flow ("DCF") analysis with their Protest, the Six Cities are somehow launching an "imperniissible collateral attack" (SDG&E Answer at 18) on SDG&E's currentlyeffective ROE, which is set forth in the Offer of Settlement and Settlement Agreement -3-

4 filed in Docket No. ER This claim is absurd on its face; a plain reading of the Six Cities' Protest clearly reflects that no such challenge was made. In fact, the Six Cities were careful to acknowledge that the currently-effective ROE was established through a settlement. (See Six Cities' Protest at 18.) It is perfectly obvious that - as stated in their Protest - the purpose of the Cities' ROE analysis was to (i) show that SDG&E's currently-authorized ROE more than adequately compensates SDG&E for the risks and challenges of the Sycamore-Penasquitos Project and (ii) demonstrate that SDG&E's requested 11.05% ROE falls outside the range of reasonable returns produced by a DCF analysis. (Id.) To suggest otherwise is simply obfuscation. The SDG&E Answer attempts to bolster SDG&E's assertions that a proposed 100 basis point ROE adder is appropriate through the Supplemental Statement by Dr. Roger A. Morin on behalf of SDG&E, which is designated Exhibit No. SDG-14. Witness Morin's analysis, however, includes significant errors that undercut the validity of his testimony that the incentive ROE sought by SDG&E is within the zone of reasonable returns. (See SDG&E Pet'n - Exh. No. SDG-9 at 4:5-9, 5:4-12.) First, Witness Morin critiques the Six Cities' DCF analysis as producing results that he claims are "out of the mainstream," because the Cities' "recommended return is well outside the zone of currently allowed rates of return for electric utilities." (SDG&E Answer Exh. No. SDG-14 at 3:17-21.) Witness Morin, however, misses the point See Offer of Settlement and Settlement Agreement, San Diego Gas & Elec. Co., Docket Nos. ER , et al. (filed Feb. 4, 2014). The 10.05% ROE, which includes a 50-basis point adder associated with SDG&E' s continued membership in the CAISO, is described in the Offer of Settlement at Section The Commission has approved the Settlement. San Diego Gas & Elec. Co., 147 FERC 61,150 (2014). -4-

5 entirely of the Six Cities' ROE analysis. The Six Cities did not, in their protest of the SDG&E Petition, take a position on an allowable base ROE for SDG&E or "recommend" a return. As explained above and in their Protest, the Six Cities instead performed an analysis to assess whether SDG&E's authorized ROE of 10.05% plus the 100 basis point adder SDG&E seeks for the Sycamore-Penasquitos Line is within the range of reasonable returns and is just and reasonable.4 (See Six Cities' Protest at 18.) The Six Cities' analysis shows that the incentive ROE SDG&E requests exceeds the range of reasonable returns. (See Six Cities' Protest at 20.) The Six Cities stated that the currentlyauthorized ROE of 10.05%, which, the Cities note, is comparable to the ROEs that Witness Morin testifies represents the "mainstream of the allowed rates of return," (SDG&E Answer - Exh. No. SDG-14 at 4:11-2 1) "more than compensates SDG&E for its transmission investment" (Six Cities' Protest at 20). This is exactly the purpose of Witness Morin's own analysis. As he explained, I have been asked by SDG&E to develop an ROE range of reasonableness for its jurisdictional electric transmission operations that is consistent with the Commission's directives on this issue in order for the Company to demonstrate that with the requested incentive, SDG&E's ROE for the Project will be within the range of reasonableness. It is important to note that this is not a general rate case in which the base [ROE] for SDG&E's jurisdictional electric transmission operations will be established. SDG&E's ROE in effect at this time was established pursuant to a settlement of the Company's most recent transmission rate case. Accordingly, my testimony is far more limited than if! was asked to propose a specific ROE. SDG&E Pet'n - Exh. No. SDG-9 at 4:5-14. With respect to the "mainstream of the allowed rates of return" emphasized by Witness Morin, the Six Cities observe that, despite Witness Morin's description of these returns as "key benchmarks" that have been "recently authorized" (see SDG&E Answer - Exh. No. SDG-14 at 4:9 and 4:20-21), Dr. Morin provides no information to establish that these returns were established by Commission orders on the merits of litigated proceedings, as opposed to negotiated, non-precedential settlements. -5-

6 the Cities' ROE analysis relative to the analysis used in Opinion No The first point overlooked by Witness Morin is that the proxy group in Opinion No. 531 was so large because the Commission was setting an ROE for a group of transmission-owning member utilities in ISO New England. Thus, the Commission necessarily expanded its credit ratings screen to encompass five notches (based on Standard and Poor's ratings) and six notches (based on Moody's ratings), because the New England transmission owners themselves had a range of credit ratings. In Opinion No. 531, the Commission ruled that [w]e affirm the Initial Decision's finding that it is appropriate to exclude from the proxy group those utilities 6 Coakley, Mass. Attorney Gen. et al. v. Bangor Hydro-Elec. Co., et al., Opinion No. 531, 147 FERC j 61,234 (2014), reh'gpending. Second, Witness Morin claims that the Six Cities' ROE analysis is flawed because the Cities' analysis failed to remove Xcel Energy Inc. ("Xcel") from the DCF proxy group on the basis that "Xcel is acquiring Pepco Holdings." (SDG&E Answer - Exh. No. SDG-14 at 8:11-14.) In fact, Exelon Corporation ("Exelon") is acquiring Pepco Holdings Inc. ("Pepco"). While Xcel and Exelon do have similar-sounding names, Xcel and Exelon are not, in fact, the same company, and Xcel is not involved in the Exelon- Pepco transaction. Third, Witness Morin complains that the Six Cities' proxy group is too small in comparison with the 38-company proxy group in Opinion No. 53J6 (SDG&E Answer - Exh. No. SDG-14 at 8:11-9:21.) However, Witness Morin ignores two key points about -6-

7 with corporate credit ratings more than one notch above or below the NETOs' credit ratings.... For a diverse group of utilities with a range of credit ratings, that approximation may require a credit rating band spanning more notches than the three that are typical in single utility cases. Opinion No. 531 at P 106. The Six Cities are not aware of the Commission having ruled that a five-to-six notch ratings screen is appropriate in the context of an ROE analysis for an individual utility.7 Rather, Opinion No. 531 supports the continued screening for companies within one notch of the rating for the subject company. Id. That is the methodology that the Six Cities used. The second key point Witness Morin ignores in his critique of the Cities' proxy group composition is the fact that the Cities acknowledged the potential limitations associated with a small, five-company proxy group and themselves performed a supplemental analysis with loosened credit rating screens, resulting in a 13-company proxy group. The results of this expanded analysis produced the same low-end result, the same median result, and a somewhat increased high-end result (9.23% instead of 8.73%). SDG&E's requested incentive ROE is still outside - by 182 basis points - the range of returns produced by the Six Cities' expanded analysis. ' The Commission's order in Taligrass Transmission, LLC, 125 FERC 61,248 (2008), cited in Opinion No. 531 (see P 106 n.207) as an example of precedent involving a five notch risk band, like Opinion No. 531, involved credit screens for multiple electric utilities that were investors in Taligrass Transmission, LLC, and Prairie Wind Transmission, LLC. Thus, while Taligrass supported reliance on a five-to-six notch risk band in Opinion No. 531, it does not support reliance on a five-to-six notch risk band for an individual utility, such as SDG&E. Taligrass, in fact, supports the continued use of the Commission's traditional screen, which is one credit ratings notch above and below the applicant utility. See Taligrass, 125 FERC 61,248 at P 77 (stating "[gliven the applicants' corporate credit ratings for each project and consistent with Commission precedent, the Commission used companies within a corporate credit rating band of one below to one above the applicants' investors"), citations omitted, emphasis added. See also Potomac- Appalachian Transmission Highline, L.L. C., 122 FERC 61,188, at PP (2008). -7-

8 Fourth, Witness Morin doubles down on his claim that 5.0% is the appropriate long-term gross domestic product ("GDP") growth rate, stating that the 4.39% rate used by the Commission in Opinion No A8 is "stale" and continuing to insist that the applicable growth rate is an "open issue." (See generally SDG&E Answer - Exh. No. SDG-14 at 9:22-11:11.) As the Commission is aware, Opinion No. 531-A was issued in mid-october, and there is no reason to conclude that the long-term GDP growth rate as adopted less than three months ago is already stale. Moreover, Witness Morin's claim that the long-term growth rate is still somehow an "open issue" in that proceeding is just wrong; the Commission has clearly issued a ruling on the applicable rate in Opinion No. 531-A. See Opinion No. 531-A at P 10. Finally, Witness Morin explains that Wisconsin Energy ("Wisconsin") should have been eliminated from the Six Cities' proxy group, because it was engaged in merger activity with Integrys Energy ("Integrys"). (See SDG&E Answer - Exh. No. SDG-14 at 8:11-14.) The Six Cities agree with this correction, but note that the elimination of Wisconsin and Integrys has no impact on their conclusion that SDG&E's requested 11.05% incentive ROE is outside the range of reasonable returns. The following charts reflect the relevant DCF ranges with Wisconsin and Integrys removed: 8 Coakley, Mass. Attorney Gen, et al. v. Bangor Hydro-Elec. Co., et al., Opinion No. 531-A, 149 FERC 61,032 (2014), reh'g pending. -8-

9 Summary 2-Step DCF Results for San Diego Gas & Electric Co. Applying Low High Median S&P & Moody's Screens Proxy Group 7.86% 8.73% 8.31% Summary 2-Step DCF Results for San Diego Gas & Electric Co. Applying S&P Screen Only Excluding High Outlier ITC Low High Median Proxy Group 7.86% 9.23% 8.3 8% The Six Cities' results, as modified by the elimination of Wisconsin and Integrys, show that the requested 11.05% incentive ROE remains well outside the upper end of the DCF ranges, which are unchanged as a result of eliminating the two companies. (See Six Cities' Protest - Exh. A at 1.) -9-

10 III. CONCLUSION Respectfully submitted, Law Offices of: Thompson Coburn LLP 1909 K Street, N.W., Suite 600 Washington, D.C (facsimile) Is! Margaret E. McNaul Bonnie S. Blair Margaret E. McNaul Rebecca L. Shelton Attorneys for the Cities of Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside, California January 8, 2015 WHEREFORE, for the foregoing reasons, the Six Cities respectfully urge the Commission to deny SDG&E's Petition for a Declaratory Order authorizing recovery of a project-specific 100-basis point adder to SDG&E's ROE associated with the Sycamore- Penasquitos Line. -10-

11 CERTIFICATE OF SERVICE I hereby certify that I have on this 8th day of January, 2015, caused a copy of the foregoing document to be sent to all parties on the list compiled by the Secretary of the Commission in this proceeding, by electronic mail or such other means as may have been specified by such party, pursuant to Commission Rule Law Offices of: Thompson Coburn LLP 1909 K Street, N.W., Suite 600 Washington, D.C (facsimile) 1sf Margaret E. McNaul Margaret E. McNaul Attorney for the Cities of Anaheim, Azusa, Banning, Colton, Pasadena, and Riverside, California

12 Document Content(s) Motion for Leave EL PDF