4. Criteria for Utility Owned Generation

A second issue we must address in this proceeding is whether the applications meet the Commission's criteria for UOG and whether the utilities conducted or needed to conduct competitive solicitations for the Fuel Cell Projects according to applicable Commission guidance.

In D.07-12-052, the Commission stated its preference that the utilities competitively procure new generation, and discussed specific circumstances for UOG outside the competitive solicitation, or Request for Offer (RFO), process. The decision describes five categories that might warrant UOG outside of competitive procurement, which are market power mitigation, preferred resources, expansion of existing facilities, unique opportunities resulting from a settlement or bankruptcy, and reliability. The decision further states:

Because the Commission has a strong preference for competitive solicitations, in all cases, if an IOU proposes a UOG outside of a competitive RFO, the [investor-owned utility] must make a showing that holding a competitive RFO is infeasible. (D.07-12-052 at 210-211.)

For the Fuel Cell Projects, the most applicable category for UOG outside the competitive RFO process is "preferred resources" which the decision describes, in order of preference, as:

. . . energy efficiency, demand response, renewables, distributed generation and clean fossil-fuel. However, a utility may only develop a clean fossil-fuel UOG outside of the RFO process if it utilizes an advanced or emerging technology that the market is unlikely to develop. (Id. at 211, n. 240.)

In allowing for UOG outside the RFO process, the decision states the Commission's competitive market first principle:

We want to make it clear that we continue to believe in a "competitive market first" approach. As such we believe that all long-term procurement should occur via competitive procurements, rather than through preemptive actions by the IOU, except in truly extraordinary circumstances. (Id. at 209, emphasis in original.)

WPTF/AReM urge the Commission to reject the applications on the grounds that both PG&E and SCE have failed to demonstrate their projects meet these criteria for UOG projects, as established in D.07-12-052. Specifically, WPTF/AReM contend the applications conflict with the Commission's "competitive market first" principle, PG&E and SCE have failed to demonstrate the Fuel Cell Projects are warranted as truly extraordinary circumstances, and the utilities have failed to prove that holding a competitive solicitation, or RFO, is infeasible.

In addition, WPTF/AReM allege the Fuel Cell Projects do not meet the strict requirements in D.07-12-052 that clean fossil fuel be an advanced or emerging technology that the market is unlikely to develop. According to WPTF/AReM, there is a vigorous and active fuel cell market with numerous manufacturers and suppliers. Therefore, the projects do not qualify for an exception under this definition. WPTF/AReM assert the utilities should procure the proposed fuel cells through competitive solicitations to independent power producers rather than as UOG.

In response, both utilities maintain that the UOG requirements in D.07-12-052 do not apply in this case. PG&E contends the requirements in D.07-12-052 may not apply to this application because the UOG requirements section of that decision states up front that the UOG requirements primarily address "conventional generation resources," and that there may be "additional factors associated with utility-ownership of renewable and other loading order or non-conventional resources that have not been fully vetted in this proceeding." (Id. at 197, n. 233.) SCE asserts that the UOG requirements do not apply because its Fuel Cell Project is not a procurement project with the objective of serving load, but a demonstration project.

Even if the requirements of D.07-12-052 do apply, PG&E and SCE assert that the Fuel Cell Projects fall under the exception for preferred resources because they are distributed generation and clean fossil fuel. SCE contends fuel cells meet the definition of an advanced or emerging technology that the market is unlikely to develop, based on the scarcity of fuel cell projects in the state. According to SCE, only 20 fuel cell projects representing 12 MW of capacity have been installed in California. (Exh. 100 at 5.) Moreover, PG&E and SCE contend that holding a competitive RFO is infeasible because the State has indicated a preference for utility ownership of the facilities. (Exh. 2 at 1-6; Exh. 100 at 6.) In response, WPTF/AReM counter that the site owners' desire for utility ownership does not meet the criteria for a truly extraordinary circumstance or infeasibility of holding a competitive solicitation.

4.1. Discussion

The parties debate whether the criteria for UOG in D.07-12-052 apply to these applications. PG&E and SCE claim that the discussion in D.07-12-052 regarding when the Commission would allow UOG without a competitive solicitation does not apply to these two proposed UOG projects. This is puzzling given that D.07-12-052 contains a lengthy discussion of when a utility could pursue UOG without a competitive solicitation, such as to install preferred resources including DG and clean fossil fuel. We find that the criteria in D.07-12-052 do apply to these applications to install and operate utility-owned fuel cells. Therefore, we will review whether the applications meet the criteria for exemption from competitive solicitation.

First, we agree with PG&E and SCE that the Fuel Cell Projects are preferred resources because they are distributed generation and clean fossil fuel. This means that, as preferred resources, the projects fit into one of the five categories for UOG outside of a competitive RFO. Next, we agree with the utilities that the Fuel Cell Projects involve an advanced and emerging technology that the market is unlikely to develop. Even with support through SGIP incentives, the installation of fuel cells has lagged in California. Plus, both PG&E and SCE propose to include electric-only fuel cells within their projects, which are novel, high efficiency designs that have not yet been studied to the same degree as larger fuel cell cogeneration options.

Finally, we find that an RFO is infeasible for the Fuel Cell Projects because the circumstances of both applications involve a unique partnership between either SCE or PG&E and the state universities for educational and demonstration purposes. To achieve these educational and demonstration benefits, the state universities and the State's Department of General Services prefer the utilities retain ownership of the fuel cell facilities and the State and utilities enter into a simple ground lease agreement, thereby avoiding the complex State acquisition process. (Ex. 2, Attachment 1B; Ex. 100, Attachment A at A-5.) While we agree with WPTF/AReM that an RFO should not be considered infeasible simply because the site owner does not want one, we find that in this case, the unique partnership between the utilities and the state universities warrants an exception in this limited circumstance. Numerous letters from campus officials speak to the partnership, collaboration and utility ownership envisioned by this project. We agree with PG&E that to require third-party ownership by an unknown third-party would essentially kill the projects.

In summary, we find that both applications have complied with the criteria for UOG in D.07-12-052.