Will Diablo close sooner than later

Mike F. Brown

OPINION by MIKE F. BROWN

On Nov. 8, Public Utilities Commission (PUC) Administrative Law Judge Peter V. Allen rendered his recommended decision with respect to the PG&E joint proposal for the closure of Diablo to the full Public Utilities Commission Board. The Commission has the final decision making authority. It may act on Dec. 14, but it is not clear if it could hear testimony, deliberate, and render a decision in one day.

If the Commission sustains the Allen’s recommendations, the plant may have to be closed sooner than later. Among the casualties will be an annual $22 million in local property taxes and almost $1 billion in direct, indirect, and imputed economic annual losses to the San Luis Obispo County and northern Santa Barbara County economies. PG&E payments to local jurisdictions to mitigate the losses between now and 2025 could be rendered null.

County residents (and customers throughout the PG&E service area) should not lose sight of the fact that this recommendation is the result of a rate setting process in which PG&E seeks $1.7 billion in customer rate increases, primarily, to pay for acquisition of huge amounts of “green” energy to replace the electricity generated by the power plant, $1.3 billion. The community impacts mitigation program, $85 million; employee retention program, $364.4 million; and $18.6 million for lost license renewal coats are significant but are ancillary to the big energy cost issue. As noted below, the Allen rejects and/or defers to a separate and future process most of PG&E’s request.

Key provisions of the recommended decision to the PUC Board include:

1. The retirement (closure) of the Diablo Nuclear Power Plan is approved. Based on the record of this proceeding, PG&E’s proposed 2024/2025 retirement schedule for Diablo Canyon provides a reasonable amount of time for the transition process, including further examination of replacement procurement.

Accordingly, PG&E’s proposed retirement schedule for Diablo Canyon is approved. If in the interim period the facts change in a manner that indicates Diablo Canyon should be retired earlier, the commission may reconsider this determination.

The highlighted sentence is important because the Allen contemplates the possibility that PG&E and its partners in the joint agreement could void that agreement and PG&E could petition to close the plant sooner or be forced to close the plant sooner by the State Lands Commission, which made the operation of the current cooling water discharge permit conditional on provisions of the joint proposal being accepted and operationalized.

2. The proposed energy replacement program is rejected and deferred to a separate set of proceedings (The Commission’s Integrated Resource Plan – IRP proceedings) which might take place in 2019.

PG&E had originally proposed a series of phased acquisitions of huge amounts of “green” energy over many years to replace the 2400 MGW generated by Diablo.

In its initial Application, PG&E proposed to partially replace Diablo Canyon with greenhouse gas-free resources in three tranches, consisting of:

1) 2,000 gross GWh of energy efficiency; 2) 2,000 GWh of GHG-free energy, including energy efficiency and Renewables Portfolio Standard (RPS) eligible energy resources; and 3) a voluntary 55 percent RPS commitment. (PG&E Application at 9.) PG&E described these three tranches as “[A] first step towards replacing Diablo Canyon with a portfolio of GHG-free resources.”

In rejecting the request Allen stated in part:

There is no reason to approve a $1.3 billion rate increase for a proposal that will most likely either fail to achieve its goal or will achieve a goal not worth reaching. Accordingly, PG&E’s Tranche 1 proposal is not adopted.

While we are rejecting the specific replacement procurement proposed here by PG&E, the larger question remains about what, if anything, should be done here to ensure that the retirement of Diablo Canyon will not result in an increase in GHG emissions. The answer to that is that we simply cannot tell based on the record in this proceeding. Given the time between now and 2024 and 2025, the rapid changes in the California electricity market, and the growth of renewable generation and CCAs, it is not clear based on the limited record in this proceeding what level of GHG-free procurement (if any) may be needed to offset the retirement of Diablo Canyon.

The IRP proceeding, however, is better equipped to make that determination. The IRP is supposed to incorporate the analysis leading to an optimized portfolio of resources, reflecting constraints such as GHG emissions, reliability, cost, and RPS and energy efficiency requirements, while ensuring safe and reliable electricity service at just and reasonable rates. (R. 16-02-007 at 13.)

In short, the IRP has the ability to look at a bigger picture than this proceeding, and can better analyze the potential impacts of the retirement of Diablo Canyon and its interaction with other dynamics in the electricity markets in a manner consistent with state policies. PG&E’s previous Tranche 2 and 3 proposals would better be considered in the IRP proceeding.

The bottom line here is that the largest and most costly part of the Joint Proposal is rejected at this time and deferred to a complicated future proceeding, the outcome of which is uncertain. The financial uncertainty engendered could certainly be a major reason for abandoning the Joint Proposal.

3. The proposed $352.1 million Employee Retention and Transition Program is only partially approved at $160.5 million instead. Allen found many provisions in this portion of the proposal to be “overly generous.” In part the Allen stated: PG&E’s proposal appears to have a significant “free rider” problem that PG&E does not address, and as such the proposal is overly generous with ratepayer funding. The 1,500 employees eligible to receive the retention payments include all active full-time employees working at Diablo Canyon, plus those who support Diablo Canyon operations and those whose job or job functions would be eliminated as a result of Diablo

Canyon’s retirement. Contractors and temporary or rotational employees would not be eligible.
In short, PG&E is asking the ratepayers to pay for a retention payment for every full-time PG&E employee at Diablo Canyon. As PG&E puts it: “The Employee Retention Program is aimed to keep the entire employee population retained until Aug. 31, 2023.

One important reason for which PG&E requested the ratepayers to fund this program is to retain experienced skillful employees to operate the plant until it closes. This is important from a safety standpoint. Without the program, many employees may seek retirement or employment elsewhere. If PG&E cannot maintain a sufficiently expert workforce, it may have to close the plant sooner.

The Allen seemed irritated that PG&E allegedly negotiated some provisions of the Employee Retention and Transition Program in advance of PG&E approval of the rate increases.

Finally, it appears that PG&E (with the participation of at least some of its unions) has already executed retention agreements with its employees, presumably incorporating the terms proposed by PG&E in this proceeding. CCUE cites to these agreements, and the fact that 86 percent of IBEW 1245’s represented employees15 at Diablo Canyon have signed them, as showing that PG&E’s retention program is working. (CCUE Opening Brief at 13-14.) CGNP, however, points out that: “[T]he 86 percent only means that workers will accept free money until such times as they may quit.”

The retention payments negotiated and agreed to by PG&E and its unions require funding from ratepayers, and accordingly require Commission approval for their funding. Why PG&E and its unions executed these agreements with individual employees in advance of Commission approval is unclear, as at the time it entered into those agreements, PG&E did not have authority to make the payments that the agreements (appear to) promise. This puts the Commission in the position of potentially saying “no” to PG&E’s proposal, while the employees may already be thinking that the answer is “yes.” PG&E should not be making promises (even implied ones) to its employees that it does not know it can keep. PG&E is not authorized to recover in rates the cost of the existing agreements.

The tone of this rebuke (which may be overreaching) certainly does not encourage PG&E to attempt to find ways to make this portion of the Joint Proposal work in some other fashion and subjects it to further uncertainty. Funding the executed contracts would place the burden of the rejected costs on the PG&E shareholders, dis-incentivizing the company to fund other portions that have been rejected.

4. The proposed Community Impacts Mitigation Program (CIMP), $85 million, is rejected completely as being unfair and illegal. We quote extensively here because the ultimate findings and reasons for rejection raise questions about the fundamental competence of the County, San Luis Coastal Unified School District, and cities in negotiating and approving the terms of the CIMP in the first place.

Remember COLAB is a government watchdog, not a public investor-owned utility watchdog.
It turns out that the county and the San Luis Coastal Unified School District have been down this road before, in 1997. A very similar issue went before the PUC when a massive restructuring of electric energy rates took place which specified new accelerated depreciation formulae. The district and county claimed that the accelerated depreciation would negatively impact property taxes to which they asserted they were entitled, by $10 million per year with annually increasing negative impact. In that case the commission held that:

The County of San Luis Obispo and the San Luis Coastal Unified School District (county) seek protection against the risk that Diablo Canyon-related property taxes will decrease precipitously and jeopardize the ability of the county to provide basic public and educational services. If the threat actually materializes, the county wants to be made whole. By its recommendation, the county seeks adoption by the commission of a mechanism that insures that the county has the opportunity to recover the property tax revenues they had a reasonable expectation of receiving but for electric restructuring. (D.97-05-088 at 91.)

The PUC rejected the county and San Luis School District’s arguments and ruled that such a provision would be illegal.

After citing the 1997 decision above, Allen makes the same finding in the current case and cites the 1997 case:

In that proceeding, the commission held that: “The county’s proposal that ratepayers pay for property taxes that PG&E does not incur is not permitted under either general rate-making principles or public utility law.” (Id. at 100.) As a result, the commission held that the county should direct its request for relief to the Legislature, not the commission.21 (Id.) The commission reaches the same result today.

Allen  goes on to state:

As in 1997, this commission is reluctant to require ratepayers to pay for the cost of local government services that are typically paid for by taxpayers, no matter how beneficial those services may be. Absent legislative authorization, utility rates should be used to provide utility services, not government services. While Resolution E-3535 subsequently did authorize ratepayer payment to the county and the School District, it is important to take into consideration what happened in between D.97-05-008 and Resolution E-3535.

After the commission’s decision was issued, the California Legislature passed into law chapter 282, section 8660-001-0462, paragraph 3, of Statutes of 1997. This new law states that if PG&E and the county and school district enter into a settlement that resolves claims by the latter parties relating to the effects of AB 1890(Brulte), enacted 1996, chapter 854, then PG&E may recover an additional amount, not to exceed $ 10 million, through base rates in 1998.

Allen denies the CIMP portion of the filing and suggests that the county, the school district, and other local jurisdictions to seek a remedy in the State Legislature if they so choose.

Accordingly, ratepayer funding of the CIMP is not authorized. If legislation specifically directs this commission to provide ratepayer funding for the CIMP (or a similar payment to the community), the commission would do so, as it did in 1998. PG&E may also choose to use shareholder funds to support the CIMP.

Consistent with this commission’s decision in D.97-05-088, and in the absence of legislative authorization, the CIMP is not approved. Utility rates should be used to provide utility services, not government services, no matter how beneficial those services may be. In addition, we have some concerns about the fairness of the CIMP under the proposed settlement.

Some questions:

Why should poor people in west Oakland pay higher electric rates to subsidize the SLO Board of Supervisors and other local governments’ failure (for years) to 1) seek to promote and relicense the plant and 2) diversify their economies?

Were the county, the school district, and city legal departments not aware of this prior determination as they negotiated the CIMP? What about their expensive San Francisco legal consultants?

Why would the Board of Supervisors undertake this large legal effort to compel PG&E to continue paying property taxes at the current operational rates when it is a stranded asset and eventually goes away? At the same time they have never sought legislation to obtain tens of millions in forgone property taxes from the large government subsidized solar farms in the eastern county.

What is the county’s backup plan if the plant is forced to close early, say in 2019? At one Board meeting we asked this question and we were told there is a plan. Where is it?

Most significantly, the County Board, the School District, and the cities have always known that there was an escape clause in the Joint Proposal. In fact COLAB has emphasized its potential in numerous updates and in appearances before the Board of Supervisors. Why was this not taken seriously?

The full text of the Administrative Law Judge Allen’s decision can be accessed here. It is 58 pages long but reads fast and is well worth a quick look. It provides many facts and insights into the closure issue.

Mike Brown is the Government Affairs Director of the Coalition of Labor Agriculture and Business (COLAB) of San Luis Obispo County. He had a 42-year career as a city manager and county executive officer in four states including California. He can be reached at mike@colabslo.org.

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One Comment about “Will Diablo close sooner than later”

  1. insidelookingout says:

    Sad sad sad. Do we all feel sorry for PG&E that they can’t meet their financial obligations without raping the rate payers and taxpayers? Sorry PG&E we all do have an idea of how much your monopoly business has and don’t really want to contribute more to pad your pockets. Is it really our responsibility to pay to retain your employees while still making a profit? We all know that government and most school districts are at the top of the list when it comes to being financially incompetent, but not PG&E. We do not want to be part of the PG&E welfare program as we are already supporting an incompetent welfare program. And please BOS and incorporated cities do not waste anymore of our tax money trying to extort PG&E for money that in reality, like any business closing, they do not owe you because plainly you do not have enough money to fight them let alone win. Maybe PG&E, their employees, government and school districts may have to have what they call a “correction” in the stock market.

    (1) 1 Total Votes – 1 up – 0 down

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