6. PG&E's Response to the Opposing Parties
6.1. The New Capacity Is Authorized by D.08-11-056
PG&E disputes the Opposing Parties' claim that the Upgrade PPAs exceed the new capacity authorized by D.07-12-052. PG&E states that D.08-11-056 encouraged the novation of DWR contracts to the IOUs. In doing so, the Commission provided the IOUs with broad latitude to negotiate new contracts. Using this authority, PG&E negotiated the Upgrade PPAs. PG&E contends that because these contracts were negotiated pursuant to D.08-11-056, the 254 MW of new capacity provided by the Upgrade PPAs does not count towards the 1,512 MW of new capacity authorized D.07-12-052.
6.2. The Hedge Is Needed and Consistent with D.07-12-052
PG&E disagrees with Pacific Environment and TURN's claim that PG&E will have surplus capacity until 2014, making the Upgrade PPAs unnecessary. While D.07-12-052 found that PG&E would have a surplus capacity, that was based on the assumption that both the 600 MW RCEC project and the 180 MW San Francisco Peakers project would be operational. However, the former has not yet begun construction, and the latter will probably never be built.31 Given the status of these projects, PG&E may have a capacity deficit as soon as 2012.
PG&E says it cannot wait for projects to fail before it takes action given the long lead time to hold a competitive solicitation, obtain Commission approval of the RFO winners, and to permit and build a project. PG&E believes the Upgrade PPAs provide an important insurance policy. If no projects fail, the Commission can account for the additional resources in the next LTPP proceeding and adjust accordingly.
PG&E argues that the Opposing Parties mistakenly interpret D.07-12-052 as requiring PG&E to hedge the risk of project delay and failure by deferring the retirement of aging power plants. PG&E contends that D.07-12-052 did not intend to defer retirements indefinitely. Rather, the Commission held that retirements should be deferred "until these uncertainties are addressed."32 PG&E has addressed the uncertainties with the Upgrade PPAs.
Furthermore, D.07-12-052 directed the IOUs to contract for new capacity to force the retirement of aging power plants.33 PG&E avers that the Upgrade PPAs advance the Commission's policy of transitioning away from aging power plants and towards modern, flexible facilities that support the integration of intermittent renewable resources.
6.3. PG&E Used a Competitive Process
PG&E disputes AReM/CLECA's claim that the Upgrade PPAs were not procured through a competitive process. PG&E responds that these projects were selected though a very competitive process - PG&E's 2008 LTRFO. The Tracy Upgrade and LECEF Upgrade were two of the 48 offers received in the 2008 LTRFO and competed head-to-head with the other offers.
The winning offers were presented to the Commission for approval in A.09-04-001 (the Mariposa project) and A.09-09-021 (the Marsh Landing and Oakley projects). The Tracy and LECEF Upgrades were the next best offers, and are now being presented to the Commission for approval as a part of the novation of DWR contracts, consistent with D.08-11-056.
6.4. The Mariposa Settlement Does Not Bar the Transactions
PG&E disagrees with CARE's assertion that PG&E is estopped by the Mariposa settlement agreement from procuring more new capacity than authorized by D.07-12-052. PG&E responds that D.07-12-052 does not apply because the Upgrade PPAs are being procured as part of the novation process authorized by D.08-11-056.
6.5. The Upgrade PPAs Are Reasonably Priced
PG&E argues that CARE, DRA, and TURN improperly rely on the incremental capacity method alone to reach the erroneous conclusion that the Upgrade PPAs are over priced. PG&E explains there are two basic ways to value projects that expand the capacity of an existing facility. Under the total capacity method, the expanded facility is treated as single unit. Under the incremental capacity method, the expanded facility is divided between the existing capacity and incremental new capacity, and each is valued separately. PG&E recommends that both methods be used to assess the value of the Upgrade PPAs.
PG&E contends that it is improper to rely solely on the incremental capacity method as recommended by CARE, DRA, and TURN, since this method overstates the cost of the incremental capacity. This is because the incremental capacity method assigns all costs incurred to upgrade the entire facility to the incremental capacity only, even though the existing capacity benefits from these costs, too. For example, part of the cost of the Upgrade PPAs goes to improving the fuel efficiency of the entire facility, not just the incremental capacity.
PG&E maintains that even if the incremental capacity method is used as the sole method to value the Upgrade PPAs, which PG&E opposes, the Upgrade PPAs are reasonably priced. The IE used the incremental capacity method and found that the cost of the Upgrade PPAs is reasonable. PG&E also notes that the Upgrade PPAs were among the best offers from PG&E's 2008 LTRFO, which demonstrates that the price of the insurance provided by the Upgrades is reasonable.
6.6. The Peakers PPA Is Reasonably Priced
TURN claims the net market value of the Peakers PPA would be lower if PG&E had used a lower forecast of RA prices in its calculation of net market value. PG&E responds that its calculation reflects PG&E's best estimate of future RA prices. PG&E uses consistent RA prices for all contract valuations, including offers received in response to the 2008 LTRFO, intermediate-term RFOs, and renewable resource solicitations. PG&E's forecast of RA prices have been vetted by several IEs and provided to PG&E's Procurement Review Group. This shows that PG&E's forecast of RA prices is reasonable.
PG&E opposes DRA's recommendation to require the Peakers capacity to be procured through competitive process such as the next intermediate-term RFO. PG&E says there is no guarantee that prices in an intermediate-term RFO would be any better than the Peakers PPA, particularly since many of the Peaker units are in local areas where capacity is often sold at a premium.
31 D.07-12-052 at 116, Table PGE-1, Line 8 (showing 180 MW addition in 2009 which represents the San Francisco Peakers project).
32 D.07-12-052 at 97.
33 D.07-12-052 at 88-89 and Table PGE-1, line 5, "Retirements (Laddered reduction of Aging Units)."
