13. Assignment of Proceeding

Rachelle B. Chong is the assigned Commissioner and Katherine Kwan MacDonald is the assigned Administrative Law Judge in this proceeding.

1. PG&E proposes building the CAES Project that will use off-peak energy, such as intermittent wind energy, to inject compressed air into an underground saline rock formation. The CAES project would then use the compressed air to power a generator during peak periods when renewable energy is not otherwise available

2. The CAES Project is to be completed in three phases. The project cost for all three phases is $356 million.

3. The DOE awarded PG&E a $24.9 million Smart Grid Demonstration grant to co-fund up to 50% of Phase 1 of the CAES Project.

4. The completed project will be located in Kern County and have a generation capacity of 300 megawatts for up to 10 hours.

5. Phase 1 of the CAES project includes geologic reservoir verification, National Environmental Policy/California Environmental Quality Act permitting/siting, CAISO System Impact Study, baseline for evaluating project performance and preliminary plant design.

6. Phase 1 of the CAES Project will determine the technical and economic feasibility of using saline rock formations as a storage reservoir for compressed air energy storage facilities.

7. The CAES Project is a unique, innovative project that is designed using advanced technologies and a new storage reservoir, which distinguishes the project from first generation compressed air energy storage projects.

8. Since legislation makes greenhouse gas reduction a requirement of California energy policy, the CAES project helps comply with this requirement by enabling large-scale deployment of intermittent renewable resources and peak load management capabilities which will reduce greenhouse gas emissions by reducing reliance on fossil fuel energy use.

9. Compressed air energy storage technologies are at a stage where a project presents unique technical and design challenges depending on the geographic location and type of storage reservoir.

10. PG&E's funding of Phase 1 of the CAES Project will constitute not more than 50% of the costs of Phase 1.

11. PG&E's funding of Phase 1 represents a good and fair value for its ratepayer investment.

12. Because the use of compressed air energy storage holds the promise of reducing greenhouse gas and improving grid reliability, flexibility, security, and interoperability with available and reliable bulk storage capabilities to integrate renewable resources and to respond to smart grid signals, Phase 1 offers benefits to ratepayers and to PG&E.

13. PG&E has complied with the notice requirements of Rule 3.2(c) and (d) of the Commission's Rules of Practice and Procedure.

14. The budget submitted for the CAES Project contains sufficient detail for the Commission to determine that the costs associated with Phase 1 are reasonable.

15. PG&E has utilized the knowledge and experience gained from the first generation CAES projects to reduce the cost of Phase 1.

16. The record demonstrates that the costs that PG&E will incur from participating in the funding of Phase 1 of the CAES Project are reasonable and total no more than 50% of the total costs for Phase 1.

17. PG&E will utilize a competitive RFO process to complete the project in the most cost effective manner.

18. It is reasonable to require PG&E to submit progress reports to the Energy Division on the same schedule as required by the DOE over the course of Phase 1 of the CAES project.

19. It is reasonable to require PG&E to file and serve a final report within
90 days of the conclusion of Phase 1 on the service list for this proceeding. The report must contain the information listed in Attachment A, which summarizes the data obtained during Phase 1, provides an analysis of Phase 1 and comes to a conclusion regarding whether or not it is reasonable to move to Phase 2.

20. PG&E must make separate applications to the Commission for approval of subsequent phases of the CAES project.

21. CFC filed a NOI on November 30, 2009.

22. CFC is a customer whose participation would cause it financial hardship.

23. PG&E requests authority to establish a memorandum account to track the costs incurred on this project and a process to recover the revenue requirements booked to that account. Once PG&E receives approval from DOE and the Commission, PG&E proposes to transfer the balance in that account to the Distribution Revenue Adjustment Mechanism annually through the Annual Electric True-up advice letter filing.

2. The costs of Phase 1 of the CAES project, up to $24.9 million, that PG& E will incur are reasonable.

3. California statutes including AB 32 (Stats. 2006, Ch. 488), AB (Stats. 2006, Ch. 47-1) 1925, SB 1368 (Stats. 2006, Ch. 598), and Executive orders S-7-04 and
S-3-05 call for greenhouse gas reduction.

4. PG&E has met the notice requirements of Rule 3.2(c) and (d) of the Commission's Rules of Practice and Procedure.

5. It is reasonable to authorize PG&E to recover the costs of Phase 1 of the CAES project up to a total of $24.9 million.

8. It is reasonable for PG&E to establish a memorandum account to track the costs incurred on this project and a process to recover the revenue requirements booked to that account. The amount transferred is limited by the total expenditure cap of $24.9 million established by this decision. PG&E should not track or recover costs to be paid for by Recovery Act Funds or grants received from the CEC.

ORDER

IT IS ORDERED that:

1. Pacific Gas and Electric Company is authorized to recover up to
$24.9 million in costs for Phase 1 of the Compressed Air Energy Storage demonstration project.

2. Pacific Gas and Electric Company must submit progress reports to the Energy Division every six months over the course of Phase 1 of the Compressed Air Energy Storage demonstration project. The submission of a progress report to Energy Division does not reopen the proceeding.

3. Pacific Gas and Electric Company must file with the Commission and serve the final report on the service list for Application 09-09-019 within 90 days of the completion of Phase 1 of the Compressed Air Energy Storage demonstration project. The final report must address the issues in Attachment A to this decision. The submission of this report does not reopen the proceeding.

4. Pacific Gas and Electric Company must utilize California's competitive Request for Offer process to complete the project in the most cost effective manner.

5. Pacific Gas and Electric Company shall file a Tier 1 advice letter to establish a memorandum account to track the costs incurred on this project and a process to recover the revenue requirements booked to that account. Pacific Gas and Electric Company may propose to transfer the balance in the memorandum account will be transferred to the Distribution Revenue Adjustment Mechanism annually through the Annual Electric True-up advice letter filing. The amount transferred is limited by the total expenditure cap of $24.9 million established in this proceeding.

6. Pacific Gas and Electric Company must inform the Commission if the California Energy Commission awards the $1.3 million in research funding sought for this project and reduce the amount sought for recovery through rates by an amount equal to the amount received from the California Energy Commission.

7. Application 09-09-019 is closed.

This order is effective today.

Dated January 21, 2010, at San Francisco, California.

Attachment A.

PG&E must file a final report with the Commission that includes information required by the DOE on the costs and benefits of the project at the conclusion of Phase 1. In addition, PG&E must include the following additional information in the final report filed with Commission:

1.0. Update Project Management Plan

2.0. Geologic Reservoir

3.0. NEPA & State Environmental Quality Act Compliance

4.0. CAISO System Impact Study & Approval

5.0. Baseline for Evaluating Project Performance

6.0. Update/Refine Plant Preliminary Design

7.0. Final Engineering & Design

8.0. Plant Spec's, RFO, Equipment Procurement, & Contracts

9.0. Smart Grid Plant Control & Communication System

10.0. California Public Utilities Commission Approval Process

The report must include a conclusion by PG&E as to whether or not it is technologically and economically feasible to proceed to Phase 2.

(END OF ATTACHMENT A)

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