On June 21, 2016, Pacific Gas and Electric Company (“PG&E”) announced a plan to close down the state’s last remaining nuclear power plant, the 2.3 gigawatt Diablo Canyon plant near San Luis Obispo, by 2026. Diablo Canyon currently produces about 9% of the electricity California uses and supplies the electric needs of more than 3 million people. PG&E announced that it intends to replace the lost Diablo Canyon generation through a combination of energy efficiency measures and greenhouse gas (“GHG”) free energy resources (as further described below). If successful, it would be the first time that a large commercial nuclear power plant was replaced by entirely clean energy resources rather than coal or natural gas.

The Joint Proposal for Closing Diablo Canyon

The Diablo closure plan is set forth in a Joint Proposal agreed to by PG&E, several of the main environmental groups that have long called for Diablo Canyon’s closure, and two of the major labor unions that represent Diablo Canyon’s large workforce. PG&E currently plans to submit the Joint Proposal to the California Public Utilities Commission (“CPUC”) for approval by the end of July.

The closure of Diablo Canyon does not come as a major surprise. The Nuclear Regulatory Commission licenses allowing PG&E to operate the plant expire in 2024 and 2025. While PG&E had applied for 20-year license renewals for the plant, the re-licensing was fervently opposed by environmental groups, local residents, and others. Diablo Canyon is also facing billions of dollars of upcoming maintenance at the plant to comply with California’s Once-Though-Cooling regulations, which require the adoption of technologies at certain power plants to reduce the impacts of their water use on marine life and habitats. In the Joint Proposal, PG&E explains that it will seek to offset the capacity lost when Diablo Canyon is shut down in three steps, which it refers to as “tranches”:

  • Tranche 1: PG&E will obtain a target of 2,000 GWh of energy efficiency by 2025 through a solicitation process starting in June 2018. PG&E retains flexibility to propose its own utility-owned energy efficiency programs to meet this goal.
  • Tranche 2: PG&E will obtain an additional 2,000 GWh of GHG-free resources and/or additional energy efficiency measures through a second solicitation process starting in 2019.
  • Tranche 3: PG&E will procure whatever additional GHG-free energy resources are needed for it to provide 55% of its total retail sales from eligible renewable resources between 2031 and 2045 (which is over and above California’s current mandate that utilities procure 50% of their electricity from eligible renewable energy resources by 2030).

PG&E proposes to rely on the CPUC’s new Integrated Resource Planning process (Rulemaking 16-02-007) to identify what specific types and levels of renewables are needed in its service territory to meet the above procurement goals.

Many Parties Wary of PG&E’s Cost Allocation Proposals

On July 12, PG&E held its first of several meetings with interested parties to discuss the Joint Proposal. Along with other signatories to the Joint Proposal – including representatives from the Natural Resources Defense Council and organized labor – PG&E solicited feedback on the Joint Proposal from numerous interested parties. Many of the most vocal parties at this initial meeting were representing consumer protection groups, environmental groups, and community choice aggregators (“CCAs”) and electric service providers (“ESPs”) which offer competing electric service in PG&E’s service territory.

Many of the party representatives at the July 12 meeting voiced their concerns regarding PG&E’s cost recovery mechanisms set forth in the Joint Proposal. In particular, parties were concerned that PG&E has conditioned the effectiveness of the entire Joint Proposal on the CPUC approving a “non-bypassable” cost allocation mechanism through which PG&E would recover the costs of the Tranche 2 and 3 procurements described above:

PG&E’s commitment to replace Diablo Canyon energy with GHG-free energy resources under tranche 2 (Section 2.3) and tranche 3 (Section 2.4) is therefore conditioned upon CPUC pre-approval that any procurement PG&E makes associated with the Joint Proposal will be subject to a non-bypassable cost allocation mechanism that: 1) equitably allocates costs and benefits, such as [Renewables Portfolio Standard] and Resource Adequacy credits, associated with the procurement among responsible load serving entities; and 2) determines the net capacity costs of such procurement consistent with the methodology for the allocation of net capacity costs describes in California Public Utilities Code section 365.1(c)(2)(C).

See Joint Proposal, Section 2.6 (emphasis added). The CPUC permits the investor-owned utilities, including PG&E, to pass along certain costs via non-bypassable charges to customers that have chosen to switch from PG&E’s service to either CCA or direct access (i.e. ESP) service. One of the non-bypassable charges that PG&E is already authorized to pass on to CCA and direct access customers in its service territory is a Nuclear Decommissioning Charge to be used in part to shut-down and decommission the Diablo Canyon plant. Given that the CCA and direct access customers are already paying the Nuclear Decommissioning Cost as well as other non-bypassable charges, several parties at the July 12 meeting questioned the fairness and appropriateness of PG&E’s insistence in the Joint Proposal that the costs of its procurement to make up for Diablo Canyon capacity be spread among non-PG&E customers that receive their electric services from CCAs and ESPs.

Next Steps

Whether or not the CPUC will authorize PG&E to pass along the costs of Diablo Canyon procurement through non-bypassable charges will likely be a hotly-contested issue in the upcoming CPUC proceeding to address the Diablo Canyon shutdown. Given that PG&E has expressly conditioned its commitments in the Joint Proposal to replace Diablo Canyon with GHG-free resources on the CPUC’s pre-approval of non-bypassable cost allocation, the CPUC’s resolution of this issue could make or break the entire settlement regarding the closure of the Diablo Canyon plant.

About the Author:

Patrick Ferguson is an energy partner in Davis Wright Tremaine’s San Francisco office, where he focuses on energy policy, project development, and energy-related transactions in California and throughout the western United States. The views in this article are his own and do not represent the views of any of Davis Wright Tremaine’s clients.