3. PG&E's Applications
3.1. Summary of A.09-10-022 and the Tracy Transaction
In response to the energy crisis of 2000 - 2001, DWR executed a contract with GWF Energy II LLC (GWF) to provide 340 MW of capacity from three facilities (the "DWR-GWF Contract"). Each facility has two gas turbines. The Hanford Facility (88 MW) and the Henrietta Facility (88 MW) are located in the cities of Hanford and Lemore, respectively, in Kings County. The Tracy Facility (164 MW) is located near the city of Tracy in San Joaquin County. The Hanford, Henrietta, and Tracy Facilities came online in 2001, 2002, and 2003, respectively.
The DWR-GWF Contract provides DWR with capacity and energy from the Hanford and Henrietta Facilities through December 2011, and from the Tracy Facility through October 2012. The cost responsibility for the contract was allocated to PG&E by D.02-09-053.
The DWR-GWF Contract is a fuel-conversion agreement, meaning that DWR buys the fuel and arranges to transport it to the facilities. GWF is then paid to convert the fuel into energy.8 The contract places limits on the maximum number of starts per month, the annual run hours, and ramp rates.
In A.09-10-022, PG&E requests approval of five contracts that PG&E has signed with affiliates of GWF (referred to individually and together as "GWF"). These contracts are referred to collectively as "the Tracy Transaction." The purpose of the Tracy Transaction is to (1) novate the existing DWR-GWF Contract to PG&E, and (2) enter a new 10-year PPA under which GWF will provide 299 MW of capacity, energy, and ancillary services to PG&E from an expanded Tracy Facility. PG&E represents that the five contracts are a package deal, and that all five contracts must be approved together or rejected together.
The five contracts that comprise the Tracy Transaction are as follows:
1. The Tracy Novation Agreement is a contract among DWR, GWF, and PG&E to novate the DWR-GWF Contract so that PG&E becomes the buyer under the DWR-GWF Contract and DWR is released of all its obligations.
2. The Tracy Replacement Agreement supersedes the novated DWR-GWF Contract. The Replacement Agreement is essentially identical to the novated DWR-GWF Contract, except that: (1) Contract provisions that are unique to a California state agency are removed; (2) obsolete provisions about the initial operating dates are deleted; and (3) PG&E receives increased operating flexibility in the form of ancillary services and reduced minimum run times for the Hanford and Henrietta facilities. The increased operating flexibility provides added customer benefits relative to the existing DWR-GWF Contract.
3. The Tracy Market Redesign and Technology Update (MRTU) Agreement modifies the Tracy Replacement Agreement to reflect the parties' obligations under the MRTU program of the California Independent System Operator (CAISO), such as the way participants schedule energy and the processes by which transactions are settled.
4. The Tracy Upgrade PPA expands the Tracy Facility from 154 MW to 299 MW (an increase of 145 MW) by converting the facility into a combined-cycle gas turbine (CCGT) facility. The expanded facility (hereafter, "the Tracy Upgrade") is scheduled to begin operations on June 1, 2013, but GWF may accelerate the online date to June 1, 2012. PG&E will buy capacity, energy, and ancillary services from the Tracy Upgrade for a 10-year period.
The air-cooled Tracy Upgrade is designed for flexible operations and ancillary services, including spinning reserves and regulating reserves. PG&E will have full dispatch rights, which will help PG&E to (1) meet its local reliability and resource adequacy obligations, and (2) integrate a growing amount of intermittent renewable generation.
PG&E selected the Tracy Upgrade from the many bids it received in response to its 2008 long-term request for offers (LTRFO). To demonstrate the Tracy Upgrade PPA is a good deal, PG&E provided a comparison of the levelized net market value of the Tracy Upgrade PPA to other short-listed bids. The comparison is confidential and was filed under seal.
5. The Tracy Transition Agreement will enable GWF to accelerate the online date of the Tracy Upgrade by modifying the Tracy Replacement Agreement. Under the Tracy Replacement Agreement, deliveries from the Hanford and Henrietta Facilities end on December 31, 2011, and deliveries from the Tracy Facility end on October 31, 2012. Under the Transition Agreement, deliveries from the Tracy Facility will be reduced one year to October 31, 2011. To replace the lost capacity, deliveries from the Hanford and Henrietta Facilities will be extended one year to December 31, 2012. Ending deliveries from the Tracy Facility one year early will allow GWF to construct the Tracy Upgrade sooner so that its online date can be accelerated from June 1, 2013 to June 1, 2012.
Substituting the Tracy Facility with the Hanford and Henrietta Facilities for a one-year period will lower costs for PG&E's customers because the Hanford and Henrietta Facilities are more flexible and efficient. PG&E will also pay less in 2012 for capacity from the Hanford and Henrietta Facilities than PG&E would pay for the same capacity in 2011 under the DWR-GWF Contract.9
PG&E calculates the Tracy Replacement Agreement, as modified by the Transition Agreement, has a levelized net market value that is superior to the DWR contract it replaces. The details and results of PG&E's calculation are confidential and were filed under seal.
3.2. Summary of A.09-10-034
In A.09-10-034, PG&E requests Commission approval of five contracts and two transactions with affiliates of Calpine Corporation (referred to individually and collectively as "Calpine"). The transactions are summarized below.
During the energy crisis of 2000 - 2001, DWR executed a contract with Calpine to provide 180 MW of capacity from four gas turbines at the Los Esteros Critical Energy Facility (LECEF Facility) in Santa Clara County (hereafter, "the DWR-LECEF Contract"). The LECEF Facility came online in 2003. The DWR-LECEF Contract expires on December 31, 2012. The cost responsibility for the contract was allocated to PG&E by D.02-09-053.
In A.09-10-034, PG&E requests approval of three contracts with Calpine regarding the LECEF Facility. These contracts are referred to collectively as "the LECEF Transaction." The purpose of the LECEF Transaction is to (1) novate the existing DWR-LECEF Contract to PG&E, and (2) enter a new 10-year PPA under which Calpine will provide 289 MW of capacity, energy, and ancillary services to PG&E from an expanded LECEF Facility. PG&E represents that the three contracts are a package deal, and that all three contracts must be approved together or rejected together.
The three contracts that comprise the LECEF Transaction are as follows:
1. The LECEF Novation Agreement is a contract among DWR, Calpine, and PG&E to novate the DWR-LECEF Contract so that PG&E becomes the buyer under the DWR-LECEF Contract and DWR is released of all its obligations.
2. The LECEF Replacement Agreement supersedes the LECEF Novation Agreement. The Replacement Agreement is essentially identical to the novated DWR-LECEF Contract, except that 180 MW of local capacity will be provided from other Calpine facilities during 2012 instead of from the LECEF Facility. This provision will facilitate the construction of the LECEF Upgrade described below. The replacement capacity will be provided by Calpine's Gilroy Energy Center (100 MW to 110 MW) and other Bay Area resource adequacy facilities (70 MW to 80 MW). The replacement facilities will be more flexible and fuel efficient than the LECEF Facility, which will lower costs for PG&E's customers.
PG&E calculates that the LECEF Replacement Agreement has a levelized net market value that is superior to the DWR contract it replaces. The details and results of PG&E's calculation are confidential and were filed under seal.
3. The LECEF Upgrade PPA expands the LECEF Facility from 180 MW to 289 MW (an increase of 109 MW) by converting the existing facility into a CCGT facility. The expanded facility (hereafter, "the LECEF Upgrade") is expected to be on line by July 1, 2013. PG&E will buy capacity, energy, and ancillary services from the LECEF Upgrade for a 10-year period.
The air-cooled LECEF Upgrade is designed for flexible operations and ancillary services, including spinning reserves, regulating reserves, and two starts per day. PG&E will have full dispatch rights, which will help PG&E to (1) meet its local reliability and resource adequacy obligations, and (2) integrate a growing amount of intermittent renewable generation.
PG&E selected the LECEF Upgrade from the many bids it received in response to its 2008 LTRFO. To demonstrate that the LECEF Upgrade PPA is a good deal, PG&E provided a comparison of the levelized net market value of the LECEF Upgrade PPA to other short-listed bids. The comparison is confidential and was filed under seal.
During the energy crisis of 2000 - 2001, DWR executed a contract with Calpine to provide peaking capacity from 11 gas turbines located at ten facilities (the "DWR-Peakers Contract"). The ten facilities have a combined capacity of 502.6 MW. The contract capacity is 495 MW. The facilities are listed below:
Peaker Facility |
Capacity (MWs) |
Gilroy 1 & 2 |
91.5 |
Gilroy 3 |
45.8 |
King City |
43.3 |
Yuba City |
45.8 |
Feather River |
45.8 |
Riverview |
45.8 |
Creed Energy Center |
47.2 |
Wolfskill |
45.8 |
Lambie Energy Center |
45.8 |
Goose Haven |
45.8 |
Total Capacity |
502.6 |
Contract Capacity |
495.0 |
DWR's dispatch rights are limited to 2,000 hours per year, and only during peak hours in the months of May-October and December-January. DWR does not have unit-specific dispatch rights, so DWR can call on an amount of capacity but not from specific units. Because of this limitation, certain Peaker units have been designated by CAISO as Reliability-Must-Run (RMR) units that receive extra payments under CAISO's interim capacity procurement mechanism.
The cost responsibility for the DWR-Peakers Contract was allocated to PG&E by D.02-09-053. The contract expires on July 31, 2011.
In A.09-10-034, PG&E requests Commission approval of two contracts with Calpine regarding the Peakers Facilities. These contracts are referred to collectively as the "Peakers Transaction." The purpose of the Peakers Transaction is to (1) novate the existing DWR-Peakers Contract to PG&E, and (2) execute a new long-term PPA for the same 11 Peaker units. PG&E represents that the two contracts are a package deal, and that both contracts must be approved together or rejected together.
The two contracts that comprise the Peakers Transaction are as follows:
1. The Peakers Novation Agreement is a contract among DWR, Calpine, and PG&E to novate the DWR-Peakers Contract so that PG&E becomes the buyer under the DWR-Peakers Contract and DWR is released of all its obligations.
2. The Peakers PPA replaces the Peakers Novation Agreement. Under the Peakers PPA, Calpine will provide 502 MW of capacity, energy, and ancillary services to PG&E through December 31, 2017, and 325 MW through December 31, 2021.10 There will be no physical changes to the Peaker Facilities as a result of the Peakers Transaction.
The Peakers PPA will provide PG&E with expanded operational flexibility, including (1) unit-specific dispatch at any time, (2) an increase in the annual hours that each unit can be dispatched, and (3) expanded dispatch range for each unit. The increased operational flexibility will help PG&E to ensure local reliability, satisfy resource adequacy obligations, and integrate intermittent renewable generation. PG&E will be able to claim the local capacity attributes of individual Peaker units for resource adequacy purposes, which should eliminate the need for CAISO to designate certain Peaker units as RMR resources.11
The Peakers PPA was not procured through a competitive process such as the 2008 LTRFO. To demonstrate the Peakers PPA is a good deal, PG&E provided a calculation that shows the Peakers PPA has a positive levelized net market value. The details and results of PG&E's calculation are confidential and were filed under seal.
3.3. Compliance with Commission Policies
PG&E submits that the proposed Transactions comply with the following Commission policies and requirements.
In D.08-11-056, the Commission directed the IOUs to endeavor to novate or replace the DWR contracts stemming from the 2000 - 2001 energy crisis. Each of the proposed transactions accomplishes this objective by novating and replacing an existing DWR contract.
In D.07-01-039, the Commission adopted the emissions performance standard (EPS) for long-term PPAs. The EPS applies to:
1. Contracts that have a term of five years or longer, and
2. Generating facilities that are designed and intended to provide electricity at an annualized capacity factor of 60% or greater.
If both (1) and (2) apply, the facility's carbon dioxide (CO2) emissions must be less than 1,100 pounds per MW hour (lbs/MWh).12 PG&E represents that the proposed transactions comply with the EPS for the reasons set forth below.
The Tracy Replacement Agreement, as amended by the Tracy Transition Agreement, has a term of less than five years. Accordingly, the EPS does not apply to the Agreement.
The Tracy Upgrade PPA procures 299 MW of capacity for a period of 10 years. PG&E estimates the Tracy Upgrade will emit CO2 at a rate of 916 lbs/MWh without duct firing, and 980 lbs/MWh with duct firing. Because these values fall below the cap of 1,100 lbs/MWh set by D.07-01-039, the Tracy Upgrade PPA complies with the EPS.
The LECEF Replacement Agreement has a term of less than five years. Accordingly, the EPS does not apply.
The LECEF Upgrade PPA procures 289 MW of capacity for a period of 10 years. PG&E estimates the LECEF Upgrade will emit CO2 at a rate of 933 lbs/MWh without duct firing, and 951 lbs/MWh with duct firing. Because these values fall below the cap of 1,100 lbs/MWh set by D.07-01-039, the LECEF Upgrade PPA complies with the EPS.
The Peakers PPA has a term of 12 years. PG&E represents that all Peaker units will have an annualized capacity factor of substantially less than 60%. Therefore, the EPS does not apply.
D.07-12-052 requires IOUs to demonstrate how each application for new fossil generation fits into the IOU's greenhouse gas (GHG) reduction strategy.13 PG&E states the Tracy Upgrade and LECEF Upgrade will be more efficient than the existing Tracy and LECEF Facilities, resulting in lower GHG emissions per MWh. In addition, because the two Upgrades will be operationally flexible, they will support PG&E's effort to integrate intermittent renewable generation and thereby enable an overall reduction in GHG emissions from PG&E's portfolio.
In D.04-12-048 and D.07-12-052, the Commission directed the IOUs to use brownfield sites whenever possible.14 PG&E states that the development of 254 MW of new capacity under the Tracy and LECEF Upgrade PPAs advances the Commission policy of using brownfield sites for new generation, since both projects will use existing power plant sites, electric transmission lines, natural gas interconnections, water supply lines, paved access roads, etc.
D.07-12-052 directed the IOUs to undertake "far greater scrutiny" of project viability following the failure of several projects.15 PG&E submits that the two Upgrade projects are highly viable because (1) both projects are modifications of currently operating facilities; (2) the CAISO transmission studies for each project are complete; (3) regulatory and permitting risks are minimal; and (4) GWF and Calpine are experienced developers.
3.4. Significant Benefits
PG&E submits that the Commission should approve the proposed Transactions because of the following benefits the Transactions will provide.
The central purpose of PG&E's contracting for 254 MW of new capacity from the Tracy Upgrade and the LECEF Upgrade is to hedge the risk that other projects for new capacity might fail or be delayed significantly. PG&E declares that if the Commission does not agree that the hedge is needed, the Commission should deny A.09-10-022 and A.09-10-034.
PG&E believes that recent experience demonstrates there is a substantial risk that projects will fail or be delayed significantly. Specifically, in D.06-11-048 the Commission authorized PG&E to procure 2,250 MW of new fossil capacity from seven projects. Since then, two of these projects have failed, two are under construction, and only two are in operation. The seventh project - the 600 MW Russell City Energy Center (RCEC) - recently received the last of its permits but has not yet started construction.
In D.07-12-052, the Commission authorized PG&E to procure 800 MW to 1,200 MW of new capacity, plus additional capacity to replace failed projects. Since D.07-12-052 was issued, two projects authorized by D.06-11-048 have failed. The failed projects had a combined capacity of 312 MW. Thus, the total new capacity authorized by D.07-12-052 is now 1,112 MW to 1,512 MW.
To obtain the new capacity authorized by D.07-12-052, PG&E has signed three contracts for 1,489 MW. One contract for 184 MW was approved in D.09-10-017. The other two contracts with a combined capacity of 1,305 MW were submitted for Commission approval in A.09-09-021.
In sum, PG&E now has four projects for 2,089 MW of new capacity that have not yet started construction. PG&E asserts that if any of these projects are delayed or fail, PG&E's ability to serve its customers could be jeopardized. PG&E believes the procurement of 254 MW of new capacity from the Tracy and LECEF Upgrade projects is a reasonable way to mitigate the risk of a supply shortage.
In D.07-12-052, the Commission determined that the 800 MW to 1,200 MW (now 1,112 MW to 1,512 MW) of new capacity authorized by the decision must be "dispatchable ramping resources that can be adjusted for the morning and evening ramps created by the intermittent types of renewable resources."16 PG&E avers that the two Upgrades will provide the quick start, fast ramping, and voltage-regulation capabilities that are needed to integrate high levels of renewables. The Peakers PPA will likewise provide dispatchable generation with quick-start capability from 11 Peaker units.
PG&E asserts the need for flexible generation has grown significantly since D.07-12-052 was issued. At that time, the renewables portfolio standard was 20%. Since then, the Governor has issued Executive Order S-21-09 which set a policy goal of 33% by 2020. The increase from 20% to 33% will require more load-following generation than contemplated by D.07-12-052.
PG&E states that the need for the Tracy and LECEF Upgrades was affirmed in a letter submitted to the Commission on February 1, 2010, from CAISO. According to the CAISO letter, the Tracy Upgrade and the LECEF Upgrade will provide the types of services needed by CAISO to respond to changing grid conditions caused by intermittent renewable resources.
Finally, PG&E reports that the Tracy Upgrade might someday use solar thermal energy to generate electricity from an adjacent 200-acre parcel. Initial studies indicate the 200-acre parcel could produce 35-40 MW when integrated with the Tracy Upgrade. PG&E and GWF have agreed that if GWF decides to use solar thermal power, the parties will discuss modifications to the Tracy Upgrade PPA to accommodate this use.
In the near-term (i.e., from November 2011 through December 2012), the Tracy Transition Agreement substitutes the existing Tracy Facility with the more efficient Hanford and Henrietta Facilities. The replacement units have a 13% better heat rate, resulting in lower fuel consumption and fewer greenhouse gas emissions per MWh of electricity produced. Similarly, during 2012 the LECEF Replacement Agreement substitutes the LECEF Facility with the more efficient Gilroy Facility during the period the LECEF Upgrade is being built.
Longer term, the Tracy Upgrade and LECEF Upgrade will be approximately 50% and 34% more efficient, respectively, at converting natural gas into electricity (without duct firing) compared to existing facilities. The improved fuel efficiency will produce a corresponding reduction in emissions.
The Tracy Upgrade PPA and LECEF Upgrade PPA will add new capacity that increases resource adequacy (RA). Although the Peakers PPA will not add capacity, it will provide superior RA compared to the exiting DWR-Peakers Contract. Under the Peakers PPA, PG&E will have call rights on the capacity from each Peaker unit. This will enable PG&E to claim the local RA attributes of individual Peaker units, which should eliminate the need for CAISO to designate certain Peaker units as RMR resources.
All three Transactions will provide PG&E with increased operational flexibility. This will enhance PG&E's ability to respond to changing grid conditions, which will be increasingly important as the amount of intermittent renewable generation grows.
The construction of the Tracy and LECEF Upgrades will provide local economic benefits. For example, PG&E estimates that construction of the Tracy Upgrade will provide 650,000 person-hours of construction jobs and 560,000 person-hours of secondary jobs. The local economic benefit will be approximately $18.34 million in wages and spending, which will provide a much needed boost for hard-hit San Joaquin County.
The IOUs are required by D.07-12-052 to have their RFOs for long-term procurement reviewed by an Independent Evaluator (IE) to ensure that the IOUs use a fair process to solicit, evaluate, and select projects. PG&E states this requirement applies to the Tracy Upgrade PPA and the LECEF Upgrade PPA because the two projects are being procured through PG&E's 2008 LTRFO, but not to the Peakers PPA for which there was no RFO.
PG&E hired Sedway Consulting, Inc., to serve as the IE for the 2008 LTRFO. The IE recommends that the Commission approve the Tracy Upgrade PPA and the LECEF Upgrade PPA because, in the IE's opinion, the projects are viable, the PPAs support the Commission's policy of repowering peaking facilities, the economics are reasonable, and the incremental capacity is a reasonable hedge against the risk that other projects will fail.17
PG&E avers that the proposed Transactions are just and reasonable for all of the reasons described previously. To summarize, the Transactions (1) achieve the Commission's objective of novating DWR contracts; (2) hedge the risk that other projects might fail or be delayed; (3) provide environmental benefits via brownfield development, lower emissions, avoidance of once-through cooling, and support for renewable generation; (4) are cost effective; and (5) provide economic stimulus. PG&E states these benefits are uniquely certain due to the strong viability of the Tracy Upgrade and LECEF Upgrade projects.
3.5. Requested Relief
PG&E asks the Commission to issue an order that does the following:
· Approves the Tracy Transaction, the LECEF Transaction, and the Peakers Transaction, together with all the agreements that comprise the Transactions.
· Authorizes PG&E to (1) recover costs incurred pursuant to each approved Transaction through the Energy Resource Recovery Account, and (2) recover any stranded costs.
· Authorizes PG&E to recover stranded costs from departing load customers via a non-bypassable charge, consistent with D.04-12-048 and D.08-09-012.
· Finds that each Transaction complies with the EPS.
· Finds that procurement under the Tracy Replacement Agreement, the LECEF Replacement Agreement, and the Peakers PPA provides resource adequacy to the same extent as procurement under the existing DWR contracts.
8 All the PPAs that are the subject of today's decision are fuel-conversion agreements.
9 PG&E Opening Brief at 3.
10 The Peakers PPA provides PG&E with unit-specific dispatch rights and local capacity in the Bay Area (Gilroy, Riverview, Creed, Lambie, and Goose Haven) through December 31, 2021. The contract also provides PG&E with unit-specific dispatch rights and local capacity outside the Bay Area (Feather River and Yuba City) and system capacity (King City and Wolfskill) through December 31, 2017.
11 PG&E estimates that in 2009, RMR designations for certain Peaker units will result in payments to Calpine of approximately $5 million.
12 D.07-01-039 at 8.
13 D.07-12-052 at 291, Conclusion of Law 6.
14 D.04-12-048 at 159 and D.07-12-052 at 89.
15 D.07-12-052 at 158-159.
16 D.07-12-052, Finding of Fact 43.
17 The IE did not submit an opinion on the Peakers Transaction.
