7. Discussion
7.1. Standard of Review
PG&E requests Commission approval of three transactions. The purpose of each transaction is to (1) novate an existing DWR contract to PG&E, and (2) replace the novated DWR contract with a new long-term PPA. The three transactions will together result in long-term PPAs for 1,090 MW of capacity, including 254 MW of new capacity.34
We agree with PG&E, Calpine, and GWF that each transaction is indivisible, and that all the contracts that comprise a particular transaction must be approved together or rejected together. For each transaction, the costs and benefits of the novated contract are small relative to the long-term PPA. Thus, in deciding whether to approve a transaction, the novated contract is not a significant factor, and we may limit our analysis to the long-term PPA.
D.08-11-056 and the Implementation Ruling provide criteria for determining if the replacement of a DWR contract with a new long-term PPA should be approved. First, the new long-term PPA must be just and reasonable under § 45135 based on "relevant conditions, including market conditions in effect at the time of negotiation and for the period that such replacement contract would be in effect."36 Second, the long-term PPA must be "at least as beneficial for ratepayers as the existing [DWR] contract."37 Finally, the long-term PPA should "be reviewed by the Commission for consistency with the long-term procurement planning criteria, pursuant to [§ 454.5.]"38 All of these criteria will be met if there is a need for the capacity, energy, and ancillary services provided by the PPA and the PPA is reasonably priced. PG&E has the burden of demonstrating that each transaction meets the above criteria.
For the reasons set forth below, we conclude that the Tracy Transaction and the LECEF Transaction are not needed at this time, but they could be needed in the future. Accordingly, we deny without prejudice PG&E's request to approve these two Transactions. On the other hand, we find that the Peakers Transaction is just and reasonable, and we approve the Transaction.
7.2. The Tracy and LECEF Transactions
The Tracy Transaction and the LECEF Transaction will together procure 588 MW of long-term capacity, including 254 MW of new capacity. In order to approve the two Transactions, we must find they are consistent with PG&E's long-term procurement plan.39
In D.07-12-052, the Commission adopted PG&E's current LTPP pursuant to § 454.5.40 Under the adopted LTPP, PG&E is authorized to procure 1,112 MW to 1,512 MW of new capacity by 2015 to meet the needs of its customers.41 To procure the new capacity, PG&E issued a request for long-term offers in 2008. PG&E received 48 bids, and eventually selected three offers totaling 1,489 MW to fill the LTPP need of 1,112 MW - 1,512 MW. The three winning offers were the Mariposa project (184 MW), the Marsh Landing project (719 MW), and the Oakley project (586 MW). The Mariposa project was approved by the Commission in D.09-10-017. PG&E submitted the Marsh Landing and Oakley projects for Commission approval in A.09-09-021, which remains pending.
The Tracy Upgrade project and the LECEF Upgrade project were the next best offers received by PG&E in response to the 2008 LTRFO. The 254 MW of new capacity provided by these two projects, together with the 1,489 MW of new capacity provided by the three winning offers from the 2008 LTRFO, will provide PG&E with 1,743 MW of new capacity (assuming all five projects are built), which is 231 MW more than authorized by D.07-12-052.
Several of the Opposing Parties recommend that the Commission evaluate the Tracy Upgrade project and the LECEF Upgrade project in conjunction with the Mariposa, Marsh Landing, and Oakley projects and select the combination of projects that best meets PG&E's needs. We decline to adopt this recommendation for the reasons given by PG&E:
As PG&E demonstrated in its reply testimony, the winning bids in the 2008 LTRFO were superior offers, have better market value than other bids and are in the best interests of PG&E's customers. Replacing one of the winning bids with the Tracy and LECEF Upgrades would not benefit PG&E's customers, and would severely undermine the credibility of competitive procurement solicitations in California - detrimentally impacting future utility solicitations and increasing customer costs. This is not an approach that the Commission should adopt. (PG&E Opening Brief at 29-30. Footnotes omitted.)
PG&E selected the Mariposa, Marsh Landing, and Oakley projects to fill the need for new capacity authorized by D.07-12-052 because they were the winners of the 2008 LTRFO. This makes the Mariposa, Marsh Landing, and Oakley projects a better value for ratepayers than the Tracy Upgrade and the LECEF Upgrade if the Commission determines PG&E should procure capacity to the high end of the allowed range.42 The purpose of the latter two projects is not to fill the need authorized by D.07-12-052, but to hedge the risk that other projects will fail or be delayed significantly.
As described previously, the Upgrade PPAs exceed the new capacity authorized by D.07-12-052 by 231 MW. Today's decision does not revisit the amount of new capacity that PG&E is authorized to procure by D.07-12-052.43
We conclude that it is unjust and unreasonable for PG&E's ratepayers to pay for more capacity than PG&E's authorized need, particularly given the substantial costs involved. PG&E's electric rates have risen faster than inflation in recent years.44 It is unreasonable to exacerbate this trend by imposing unneeded costs on ratepayers, especially at a time when California residents are struggling with high unemployment and stagnant incomes.
We are not persuaded by Calpine that because PG&E was authorized by D.06-06-035 to procure new capacity in excess of the LTPP, PG&E should be allowed to do so again. That decision adopted a settlement agreement which authorized PG&E to procure the CC 8 project outside the LTPP process. Under Rule 12.5, the adoption of a settlement agreement "does not constitute approval of, or precedent regarding, any principle or issue in the proceeding or in any future proceeding" unless the Commission expressly provides otherwise. There is nothing in D.06-06-035 that indicates the Commission intended to establish a precedent of any sort.
In addition, the factual circumstances at issue in D.06-06-035 were very different from the current proceeding. The Commission found in D.06-06-035 that the CC 8 project was a low-cost project that compared very favorably with other projects that had been recently approved by the Commission.45 That is not the case with the Tracy Upgrade and LECEF projects. Although we cannot discuss the cost of these two projects in detail because this information was admitted under seal, we generally agree with DRA and TURN's assessment that the two projects are a poor deal for ratepayers46 if only because they were not winners in the RFO process.
Assuming for the sake of argument that the Commission intended D.06-06-035 to set a precedent (which is not the case), the precedent was overturned by D.07-12-052. There, the Commission rejected PG&E's request to over procure new capacity to mitigate the risk of project delay and failure.47 We decline to reverse our holding in D.07-12-052, as doing so would force PG&E's customers to pay for costly and unneeded new capacity.
The primary reason PG&E seeks to procure more new capacity than authorized by D.07-12-052 is to hedge the risk of project delay and failure.48 The Commission addressed this issue in D.07-12-052 and concluded that the IOUs should hedge this risk by deferring the retirement of existing power plants.49
We see no reason to deviate from our prior holding. There is ample capacity available from aging facilities to address the risk of project delay and failure. As DRA and TURN observe, D.07-12-052 anticipated that PG&E would retire 4,200 MW of aging capacity by 2015.50 DRA represents there have been no retirements as of early 2010.51 The 4,200 MW of anticipated retirements is more than double the capacity for all of PG&E's fossil generation projects that are currently in various stages of approval and development (i.e., the 600 MW RCEC project, the 184 MW Mariposa project, the 719 MW Marsh Landing project, and the 586 MW Oakley project). In light of the large reservoir of capacity available from power plants slated for retirement, there is no need for PG&E to procure the 254 MW of new capacity from the Upgrade projects to hedge the risk that other projects will fail or be delayed significantly.
PG&E and the Supporting Parties assert that D.07-12-052 adopted a policy of transitioning away from aging power plants. The Commission stated:
We find merit in TURN's position that [aging] units represent a natural contingency for a number of uncertainties that the IOUs, and in particular PG&E, have raised in identifying their need for additional generation. However, we also recognize the benefits of transitioning from the use of these aging units... to new peaking and intermediate units with much greater flexibility that will better support the anticipated intermittent-heavy, GHG-constrained portfolios resulting from AB 32. (D.07-12-052 at 88-89.)
PG&E states the above passage from D.07-12-052 demonstrates that it is the Commission's policy to transition to new power plants to hedge the risk of project delay and failure. PG&E submits that the Upgrade projects are a good fit with the Commission's policy.
PG&E's characterization of D.07-12-052 is incomplete and inaccurate. It is true that D.07-12-052 adopted a policy to transition away from aging facilities. In fact, D.07-12-052 requires PG&E to retire 4,200 MW of aging capacity by 2015, and authorizes PG&E to procure sufficient new capacity to both replace the retired capacity and to meet projected increases in demand.52 At the same time, D.07-12-052 rejected PG&E's request to procure even more new capacity such as the Upgrade PPAs to hedge the risk of project delay and failure.53
GWF contends that D.07-12-052 addressed only abstract concerns about the risk of project delay and failure. GWF submits that the risk is now very real, and that PG&E has offered a concrete solution in the form of the Upgrade PPAs. We are not persuaded by GWF's argument. We find that D.07-12-052 adopted a solution to address the risk of project delay and failure that is not only practical, but superior to PG&E's proposal to procure expensive and unneeded capacity.
Finally, PG&E notes that the IE endorses PG&E's strategy of contracting for more capacity than authorized by D.07-12-052 to hedge the risk of project delay and failure. We accord little weight to the IE's opinion on this matter, as it appears the IE relied on information provided by PG&E and did not consider the many issues raised by the Opposing Parties. We are also concerned that the IE expressed an opinion on this matter. D.07-12-052 states the "purpose of an IE...is to ensure a fair, competitive procurement process."54 Thus, it is beyond the scope of the IE's responsibility to opine on whether PG&E should contract for more capacity than authorized by D.07-12-052.
In its comments on the proposed decision, PG&E argues that it was proper for the IE to opine on this matter because the "long-form template" for IE reports that was adopted by an ALJ ruling issued on May 8, 2008, in R.06-02-013, directs the IE to state whether a proposed IOU contract is reasonably priced, needed, and merits Commission approval. We agree with PG&E that the directions in the long-form report template could be interpreted that way.
We hereby clarify that the IEs hired by PG&E shall refrain from expressing an opinion on whether it is reasonable for PG&E to procure more new capacity than explicitly authorized by a Commission decision. Further, we direct Energy Division to revise the template to ensure that the IEs focus on their core responsibility of evaluating whether an IOU conducted a well-designed, fair, and transparent RFO for the purpose of obtaining the lowest market price for ratepayers, taking into account many factors (e.g., project viability, transmission access, etc.).
To facilitate compliance with D.07-12-052 and provide greater clarity going forward, Energy Division will revise Items H and I on the long-form template for IE reports on proposed PG&E contracts.
The scope of the IE's responsibilities and the content of the IE long-form report may be further refined in R.10-05-006 where we intend to examine IE-related issues,55 among other things.
7.2.3. There Is No Need for More New Capacity than Authorized by D.07-12-052
PG&E asserts that it needs the new capacity provided by the Upgrade PPAs to ensure it can serve its customers if a project fails or is delayed significantly. Based on our review of the record, we find there is no risk of a capacity shortage. As discussed previously, D.07-12-052 directed PG&E to address the risk of project delay and failure by deferring the retirement of aging plants. The plants slated for retirement have more than enough capacity to fully mitigate this risk. In addition, D.07-12-052 found that PG&E would have surplus capacity through 2013, 56 which provides further protection against the risk of project delay and failure.
The Opposing Parties cite two reports which reinforce our conclusion that there is no risk of a supply shortage. First, the CEC staff issued a report in October 2008 which states unequivocally that D.07-12-052 "over estimated the amount of capacity flowing North to South on Path 26 during PG&E peak demand periods by at least 1,900 MW."57 If the CEC staff report is correct, then PG&E has no need to procure 1,112 MW to 1,512 MW of new capacity authorized by D.07-12-052, and certainly no need to procure more capacity than authorized by D.07-12-052 in order to hedge the risk of project delay and failure.
Second, the Opposing Parties point to the CEC adopted report on December 2, 2009, titled The California Energy Demand 2010-2020 Adopted Forecast (hereafter, the "2009 Forecast"). The 2009 Forecast, when compared to the 2007 Forecast that was used by D.07-12-052, shows the CEC has reduced its forecast of peak demand in PG&E's planning area in 2015 by 597 MW.58 The CEC attributes the drop in forecasted demand to lower economic growth and increased energy efficiency. The reduction in forecasted peak demand is more than double the 254 MW of new capacity provided by the Tracy and LECEF Upgrades, which calls into question PG&E's claim that it needs these two projects to ensure reliability, particularly if the Commission approves both the Marsh Landing and Oakley Projects.
In their comments on the proposed decision, DRA and TURN assert that a report recently issued by CAISO confirms there is no need to procure the Upgrade PPAs to hedge the risk of project delay and failure. The CAISO's 2010 Summer Loads and Resources Operations Preparedness Assessment dated May 10, 2010,59 states at pages 1 - 4 that PG&E's service territory is forecast to have a planning reserve margin of 38.5% during the summer of 2010, primarily due to a slow recovery in electric demand from the economic recession and 1,760 MW of newly built capacity. We agree that the CAISO report shows there is no near-term need for the Upgrade PPAs.60
PG&E and GWF state that PG&E's need for new capacity has risen since D.07-12-052 due to the indefinite delay of the 180 MW San Francisco Peakers project. We recognize this project has been dormant for several years and shows no signs of development. However, the risk of a capacity shortage from the failure of this project and others is fully mitigated by the 4,200 MW of reserve capacity available in aging power plants slated for retirement.
We emphasize that today's decision does not revisit the Commission's determination in D.07-12-052 that PG&E has a need for 800 MW to 1,200 MW (now 1,112 MW to 1,512 MW) of new capacity by 2015. Today's decision affirms that if a project for new capacity fails, PG&E may execute a contract with another project to obtain the 1,112 MW to 1,512 MW of new capacity authorized by D.07-12-052, subject to the Commission's review and approval. Today's decision addresses a different issue, namely, whether PG&E should contract for more capacity than authorized by D.07-12-052 to hedge the risk of project delay and failure. We conclude that PG&E should not.
In their comments on the proposed decision, GWF and PG&E claim that a decision issued by the State Water Resources Control Board (SWRCB) on May 4, 2010,61 makes it impossible for PG&E to rely on 4,200 MW of aging capacity to hedge the risk of project delay and failure. The SWRCB decision requires power-plant owners to substantially reduce the use of once-through cooling (OTC). GWF and PG&E insinuate that the SWRCB decision will force the rapid retirement of the 4,200 MW of aging capacity, making it "difficult to imagine how...OTC generation provides a legitimate means to mitigate the risk of project delay or failure.62"
GWF and PG&E misconstrue the effect of the SWRCB decision. As noted by TURN in its Reply Comments, the SWRCB decision does not accelerate the retirement of 4,200 MW of aging capacity. To the contrary, the SWRCB decision indicates that the phase out of OTC generation in PG&E's service territory will occur at a slower pace than forecast by D.07-12-052.63
Furthermore, the SWRCB decision contemplates that OTC generation will remain in service until retrofitted or replacement capacity comes on line in a well-planned manner.64 To this end, the Commission recently instituted Rulemaking 10-05-006 where the Commission intends to adopt a new LTPP for PG&E that includes the elimination of OTC generation.65 In sum, to the extent 4,200 MW of aging capacity consists of OTC generation, it will continue to be available in one form or another (i.e., its existing form, retrofitted form, or replaced-by-new-capacity form) to hedge the risk of project delay and failure.
We recognize that it is possible the Upgrade PPAs might be selected in the future to replace OTC generation.66 However, that is an entirely separate matter from the issue before us in this proceeding, namely, whether the Upgrade PPAs should be procured immediately to hedge the risk of project delay and failure.
7.2.4. PG&E Has Not Demonstrated that the Upgrade PPAs Are Needed to Support Renewable Generation
PG&E submits that the Commission should approve the Upgrade PPAs because, in part, they will provide load-following capacity needed to integrate a growing amount of intermittent renewable generation. Based on our review of the record, though capable of assisting in renewable integration, we find that PG&E has not demonstrated that the Upgrade PPAs are needed to integrate renewable generation. The 1,112 MW to 1,512 MW of new capacity that PG&E is authorized to procure by D.07-12-052 must be able to integrate intermittent renewable generation.67 To fill this need, PG&E has signed contracts for 1,489 MW of new capacity from the Mariposa, Marsh Landing, and Oakley projects. If approved, there is no evidence that these projects cannot provide all of the load-following capacity needed to integrate renewable generation through at least 2016, the last year of PG&E's LTPP adopted by D.07-12-052.
We recognize that after D.07-12-052 was issued, the Governor issued Executive Order S-21-09 that set a goal of increasing renewable power from 20% of PG&E's portfolio to 33% by 2020. Again, PG&E provided no evidence that the 1,489 MW of new capacity that it is procuring pursuant to D.07-12-052 cannot integrate the higher level of renewable generation. Nor did PG&E link needs in the year 2020 to the Upgrade projects that would come on-line in 2012 and 2013.
Turning to a related issue, CARE alleges that the LECEF Upgrade project will have start times of up to four hours, which makes it unsuitable for providing load-following power that is needed to integrate intermittent renewable power. We find that CARE's claim of start times of up to four hours is unfounded, as it is contradicted by the start times specified in the LECEF Upgrade PPA.68
The appropriate standard for determining if the cost of the Upgrade PPAs is reasonable is the market price for the capacity, energy, and ancillary services provided by the Upgrade PPAs. If the cost of the Upgrade PPAs is less than or equal to the market price, then the cost is presumptively reasonable. Conversely, if the cost of the Upgrade PPAs is higher than the market price, then the cost is inherently unreasonable. To ensure that ratepayers pay no more than the market price, the Commission encourages utilities to procure power using a competitive process that is fair and transparent.
PG&E used a competitive process to procure the new capacity authorized by D.07-12-052. As described previously, PG&E received dozens of offers in response to its 2008 LTRFO. The winning bids were the Mariposa, Marsh Landing, and Oakley projects. These projects together represent the "market price" for determining if the cost of the Upgrade PPAs is reasonable.
Significantly, the Tracy Upgrade project and the LECEF Upgrade project were bid into the 2008 LTRFO. Thus, the two Upgrade projects can be directly compared to the market price as represented by the winners of PG&E's 2008 LTRFO. In terms of ranking, the Upgrade projects were immediately below the winning bids and ahead of all other short-listed bids.
PG&E determined the market price for each short-listed bid using what it calls "levelized net market value" (hereafter, "net market value"). The net market value is the bid's benefits, both capacity and energy, minus its costs. The costs are reflected in the offered pricing.
PG&E presented calculations of the net market value of each Upgrade PPA using both the total capacity method and the incremental capacity method. The IE also calculated the net market value for each Upgrade PPA using different assumptions.69 The net market values of the two Upgrade projects as calculated by PG&E and the IE are worse than the winning bids in the 2008 LTRFO. CARE, DRA, and TURN provided confidential testimony that describes in detail why the cost of the Upgrade PPAs is above market and a poor deal for ratepayers.70 Based on this information, at this time, we find that the cost of each Upgrade project is above the market price and, therefore, unreasonable.
PG&E contends that the Opposing Parties improperly rely on the incremental capacity method to reach the conclusion that the Upgrade PPAs are overpriced. PG&E's states that the incremental capacity method and the total capacity method should both be used to assess the net market value of the Upgrade PPAs. We do not need to decide whether to use one or both methods, as either approach reaches the same result: the cost of each Upgrade PPA exceeds the market price for projects selected in the LTRFO.
We disagree with PG&E's claim that its 2008 LTRFO demonstrates the Upgrade PPAs are reasonably priced, as it shows they are the least expensive projects available to hedge the risk of project delay and failure. A basic tenet of economics is that the market-clearing price occurs at the intersection of marginal demand and marginal supply. As explained previously, PG&E does not need the Upgrade PPAs to hedge the risk of project delay and failure. Consequently, there is no demand for the supply of new capacity provided by the Upgrade projects. Rather, PG&E's demand for new capacity was established by D.07-12-052, which was filled at a lower market-clearing price by the supply of new capacity provided by the Mariposa, Marsh Landing, and Oakley projects. Thus, the 2008 LTRFO demonstrates unequivocally that the cost of Upgrade PPAs exceeds the market-clearing price for new capacity.
We recognize that the Tracy Transaction and the LECEF Transaction have many benefits, including the novation of DWR contracts, improved fuel efficiency, brownfield development, lower emissions, and the positive net market value of many of the contracts that comprise these Transactions. However, these benefits were insufficient to make these projects winners in the LTRFO.
In its comments on the proposed decision, Calpine asserts that the cost of the LECEF Upgrade PPA is reasonable because its price for capacity, operations, and maintenance is less than the proposed Oakley Project, one of the winning bids from the 2008 LTRFO. Calpine overlooks the benefits of the Oakley Project. PG&E testified that when both costs and benefits are considered, the net market value of the LECEF Upgrade PPA is worse than the Oakley Project.71
PG&E argues that because the Upgrade PPAs replace DWR contracts pursuant to D.08-11-056, none of the provisions in D.07-12-052 apply to the Upgrade PPAs, including the cap on the procurement of new capacity. We find no merit to this argument. D.08-11-056 requires any new PPA that extends the term of a DWR contract to comply with long-term procurement criteria adopted by the Commission pursuant to § 454.5:
[A]ny replacement agreement that would extend the term of a [DWR] contract should also be reviewed by the Commission for consistency with long-term procurement planning criteria, pursuant to Section 454.5. (D.08-11-056 at 81. See also the Implementation ruling at 11.)
The Commission adopted "long-term procurement planning criteria, pursuant to Section 454.5" in D.07-12-052.72 Each Upgrade PPA is an inseparable element of a transaction that replaces and extends the term of a DWR contract. Thus, D.08-11-056 requires the Upgrade PPAs to be consistent with D.07-12-052. For reasons stated previously in today's decision, the Upgrade PPAs will not be consistent with D.07-12-052 if the Commission approves the contracts in A.09-09-021, as PG&E would exceed the total capacity allowed in D.07-12-052.
Calpine and IEP assert that the Commission never intended to make the replacement of DWR contracts subject to D.07-12-056. Both parties are mistaken. The above-cited provision in D.08-11-056 requires replacement contracts such as the Upgrade PPAs to be reviewed for consistency with the long-term planning criteria that were adopted in D.07-12-052.
7.2.7. The Upgrade PPAs Do Not Comply with the Mariposa Settlement Agreement and D.09-10-017
In D.09-10-017, the Commission adopted a settlement agreement that authorizes PG&E to procure 184 MW of new capacity from the Mariposa project. Among other things, the Mariposa settlement agreement limited the amount of new capacity that PG&E may procure from its 2008 LTRFO to no more than 1,512 MW, including the Mariposa project.73 This limit on procurement was explicitly adopted by Ordering Paragraph 1.a of D.09-10-017:
The total need to be procured from the 2008 Long-Term Request for Offers will be limited to 1,512 megawatts under peak July conditions, inclusive of the 184 megawatt included in the Mariposa Power Purchase Agreement. (D.09-10-017 at 15, Ordering Paragraph 1.a.)
PG&E has signed contracts to procure a total of 1,743 MW of new capacity from the 2008 LTRFO (254 MW from the Upgrade PPAs, 1305 MW from the Marsh Landing and Oakley projects, and 184 MW from the Mariposa project). Consequently, we conclude the Upgrade PPAs do not comply with the Mariposa settlement agreement and D.09-10-017.
In its comments on the proposed decision, Calpine argues that the LECEF Upgrade PPA is not subject to the Mariposa settlement because the LECEF Upgrade was procured through the novation process, and not the 2008 LTRFO. Calpine's argument is unpersuasive. The LECEF Upgrade was bid into the 2008 LTRFO by Calpine, was evaluated extensively by PG&E during the 2008 LTRFO process, and was placed on PG&E's shortlist of offers from the 2008 LTRFO.74 Given the provenance of the LECEF Upgrade, we conclude that it is subject to the Mariposa settlement's limit on procurement from the 2008 LTRFO.
The criteria for deciding if the Upgrade PPAs should be approved are (1) whether PG&E has a need for the new capacity provided by the Upgrade PPAs, and (2) whether the cost of the Upgrade PPAs is reasonable. For the reasons stated previously in today's decision, we find that:
· PG&E has not demonstrated that the new capacity provided by the Upgrade PPAs is necessary at this time to either (a) hedge the risk of project delay and failure, or (b) integrate renewable generation.
· If the contracts under review in A.09-09-021 are both approved, then the new capacity provided by the Upgrade PPAs will exceed, at this time, the amount of capacity authorized by D.07-12-056, the Mariposa settlement agreement, and D.09-10-017. PG&E has not demonstrated that it needs more new capacity than already authorized.
· If the contracts under review in A.09-09-021 are both approved, then the cost of the Upgrade PPAs exceed the market price at this time.
Based on the above findings, we conclude that PG&E should not proceed with the Tracy Transaction and the LECEF Transaction until PG&E has an unfilled need for new fossil capacity authorized by D.07-12-052 or subsequent decisions. This could occur under two scenarios. First, PG&E's request for approval of the proposed Marsh Landing Project and/or Oakley Project could be denied in A.09-09-021. Under this scenario, PG&E shall proceed immediately with the Tracy Transaction and the LECEF Transaction, which are "ready to go.75" PG&E shall demonstrate its compliance with this requirement by filing a Tier 1 advice letter containing executed copies of the contracts that comprise the Tracy Transaction and the LECEF Transaction76 30 days after the later of (1) today's decision, or (2) the issuance of a Commission decision in A.09-09-021 that rejects the Marsh Landing Project and/or Oakley Project.77
Second, if the Marsh Landing Project and the Oakley Project are approved in A.09-09-021, other events could create an unfilled need for the new capacity authorized by D.07-12-052 or subsequent decisions. If this occurs, PG&E may resubmit the Tracy Transaction, the LECEF Transaction, or substantially similar transactions for Commission approval via a Tier 3 advice letter. The resubmitted transaction(s) must meet all of the following requirements:
· The resubmitted transactions do not cause PG&E to exceed the new capacity authorized by D.07-12-052 or subsequent decisions.
· The resubmitted transactions have the same or better pricing structure for ratepayers (i.e., are no more costly to ratepayers in terms of out-of-pocket costs) than the transactions submitted in the instant proceeding.
· The resubmitted transactions provide at least the same level of operating flexibility as the transactions submitted in the instant proceeding.
· All the capacity provided by the resubmitted transactions can support the integration of intermittent renewable generation.
The resubmitted transactions may exclude the novation of existing DWR contracts if PG&E intends to seek, or has already sought, separate Commission approval for the novations.
PG&E's authority to resubmit the transactions using the Tier 3 advice letter process pursuant to today's decision shall expire the earlier of (1) the issuance of PG&E's next LTRFO for new fossil capacity,78 or (2) the issuance of a Commission decision adopting a new LTPP for PG&E.79
We conclude that it is reasonable for PG&E to proceed with the transactions under the previously identified scenarios because PG&E at that time will have an authorized need pursuant to D.07-12-052 or subsequent decisions for the new capacity provided by the transactions, and because the new capacity provided by the transactions will have been procured through a competitive process (the 2008 LTRFO) consistent with the Commission's preference for competitive procurement. In addition, the cost for the Upgrades' capacity will no longer be unreasonable, as PG&E at that time will have no cheaper alternatives available through a competitive procurement process. The transactions also comply with the EPS and advance PG&E's GHG reduction strategy.80
In D.08-11-056, the Commission determined that it is in the public interest to phase out DWR's role in supplying electric power to utility customers and identified several benefits from doing so.81 To achieve this goal, D.08-11-056 directed the IOUs to novate the existing DWR contracts and/or negotiate new agreements to replace the DWR contracts.
Today's decision does not grant PG&E's request for approval of the Tracy Novation Agreement and the LECEF Novation Agreement because these two agreements are inseparable elements of transactions that are not approved at this time. However, there is no reason why the Tracy Novation Agreement, the LECEF Novation Agreement, or substantially similar agreements, could not be submitted for approval on a standalone basis. Therefore, as contemplated by D.08-11-056, PG&E should work with DWR to novate the existing DWR-GWF Contract and the DWR-LECEF Contract to PG&E. We expect the novation to be accomplished expeditiously, as both contracts contain clauses that allow the contracts to be novated to PG&E upon DWR's request. PG&E may use the Tier 3 advice letter process established by the Implementation Ruling to submit the novated agreements for Commission approval.82
7.3. The Peakers Transaction
The Peakers Transaction consists of the Peakers Novation Agreement and the Peakers PPA. The two agreements must be approved together or rejected together. The Peakers PPA is a long-term contract under which PG&E will procure 502 MW of capacity from existing power plants through 2017, and 325 MW through 2021. The standard of review for the Peakers Transaction is whether PG&E has a need for the capacity, energy, and ancillary services provided by the Transaction and, if so, whether the cost is reasonable.
In deciding whether to approve the Peakers Transaction, we only need to consider the Peakers PPA and not the Peakers Novation Agreement. The latter Agreement will be in effect for only a short time. Whatever its merits, they are overwhelmed by the Peakers PPA that will be in effect until December 31, 2021.
There is no dispute that PG&E has a reasonable need for the amount of capacity provided by the Peakers PPA. If PG&E did not contract for the Peakers capacity, PG&E would have to obtain 502 MW of capacity elsewhere. In light of these circumstances, we find that PG&E has a need for the capacity provided by the Peakers PPA.
The Peakers PPA extends the use of all existing Peaker capacity and provides PG&E with significantly improved operating flexibility from each Peaker unit. Therefore, we conclude that the Peakers PPA will maintain or improve resource adequacy relative to the exiting DWR contract.
The Commission strongly favors the procurement of long-term PPAs through a competitive process that is open and transparent in order to ensure that the cost of the PPAs is reasonable. That did not occur with the Peakers PPA, which is disconcerting given the large amount of capacity involved, the length of the contract, and the considerable costs.
However, the record of this proceeding contains one market-based benchmark for assessing if the cost of the Peakers PPA is reasonable. Specifically, DRA reports that the average cost of the Peakers PPA over the 11-year contract is within the range of prices of the winning bids from PG&E's most recent intermediate-term RFO.83 This shows the cost of the Peakers PPA is consistent with the current market price for capacity contracts spanning several years.
The record also includes PG&E's calculation of the net market value of the Peakers PPA. PG&E's calculation shows that the Peakers PPA has a positive net market value, which suggests the contract is a good deal for ratepayers. Based on these two benchmarks, we find that the cost of the Peakers PPA is reasonable.
TURN urges the Commission to reject the Peakers PPA because PG&E's calculation of the net market value of the Peakers PPA assumes rising RA prices over the next several years. If RA prices rise less than PG&E forecasts, which TURN believes is likely, then the Peakers PPA is a poor deal.
TURN's argument is unpersuasive. As explained previously, the cost of the Peakers PPA is reasonable when compared to the winning bids from PG&E's most recent intermediate-term RFO and LTRFO.
DRA argues that the Peakers PPA should be rejected because:
PG&E has not provided sufficient information for DRA to assess whether the modified terms of the [Peakers PPA] Novation are just and reasonable... DRA would prefer to see PG&E novate the [DWR-Peakers Contract] in the near identical form... then reexamine PG&E's need for that contract assuming Calpine submits it in a competitive solicitation after the contract expires in 2011. The cost to ratepayers of extending this existing contract by ten years rather than entering a new long-term contract when the next LTPP proceeding identifies a need, appears to outweigh the benefits. (DRA Opening Brief at 16 - 17.)
DRA does not cite a particular reason why the cost of the Peakers PPA is unreasonable. Instead, DRA seems to imply that PG&E might get a better deal in a future RFO. This is not sufficient grounds to reject the Peakers PPA.
The EPS applies to IOU contracts with generation facilities that have a term of at least five years and an anticipated capacity factor of at least 60%. PG&E presented undisputed testimony that the EPS does not apply to the Peakers PPA because the anticipated capacity factor is less than 60%.84
We conclude the Peakers Transaction is just and reasonable under § 451. We therefore approve the Transaction. PG&E is granted authority under § 454.5(d)(2) to recover the net cost85 that it incurs under the Peakers Transaction via the Energy Resources Recovery Account.86
We also grant PG&E's unopposed request to recover any future stranded costs associated with the Peakers PPA from customers, including departing load customers. PG&E may recover stranded costs from departing load customers via a non-bypassable charge in accordance with D.04-12-048 and D.08-09-012.
In its comments on the proposed decision, AReM/CLECA urges the Commission to reject the Peakers PPA because it was not procured through a competitive process. We reject this recommendation, as there was no requirement for PG&E to use a competitive process with respect to the Peakers PPA. To the contrary, PG&E was authorized by D.08-11-056 to negotiate new bilateral contracts, without of a competitive RFO, to replace existing DWR contracts, which is what occurred here.87
34 The amount of capacity drops to 913 MW beginning January 1, 2018.
35 D.08-11-056 at 52, 83, 90 (Conclusions of Law No. 5-7) and 94 (Ordering Paragraph 11). The text at 52 refers to § 454, but the term "just and reasonable" appears in § 451. Later references in D.08-11-056 are to § 451.
36 D.08-11-056 at 67, 83, and 90, Conclusion of Law No. 7.
37 D.08-11-056 at 75, and Implementation Ruling at 10.
38 D.08-11-056 at 81, and Implementation Ruling at 11.
39 D.08-11-056 at 81, and Implementation Ruling at 11.
40 D.07-12-052 at 290 (Conclusion of Law 1) and 300 (Ordering Paragraphs (OPs) 1, 2, and 4).
41 D.09-10-017 at 3, Footnote 2.
42 Today's decision in no way prejudges whether the proposed Marsh Landing and Oakley projects will be approved or rejected in A.09-09-021.
43 Scoping Memo at 4, Item 3.
44 PG&E's average bundled electric rates for residential service rose from 12.7 cents per kilowatt hour (KWh) in 2004 to 16.3 cents/KWh in 2009, an increase of 28.3% over five years. ( http://www.cpuc.ca.gov/NR/rdonlyres/6E9249FE-922C-46F4-B7EA-66F3C56D81A6/0/AnnualAverageBundledCustomerRates2000_2009_Corrected.PPT). We take official notice of this information pursuant to Rule 13.9 and California Evidence Code § 452(h).
45 D.06-06-035 at 20, Findings of Fact 10 and 11.
46 DRA Exhibit 7-C at 9 - 21, and TURN Exhibit 5-C at 13 - 15.
47 D.07-12-052 at 97 - 100.
48 PG&E Exhibit 3 at 2-9.
49 D.07-12-052 at 96 - 99.
50 D.07-12-052 at 116, Table PG&E-1, Line 5. (Note: There are two pages numbered 116. Table PG&E-1 appears on the second page 116 that immediately follows page 120.)
51 DRA Opening Brief at 13.
52 D.07-12-052 at 87-89 and 116, Table PG&E-1, Line 5.
53 D.07-12-052 at 97 and 99.
54 D.07-12-052 at 140.
55 Order Instituting Rulemaking 10-05-006 at 17.
56 D.07-12-052 at 116, Table PG&E-1, Line 26.
57 Revisiting Path 26 Power Flow Assumptions at 3. See also 1 and 7. ( http://www.energy.ca.gov/2008publications/CEC-200-2008-006/CEC-200-2008-006.PDF).
58 2009 Forecast at 55, Table 10, Column 4, Row 21 (25,163 MW) minus Column 2, Row 21 (25,760 MW). The 2009 Forecast is incorporated into the CEC's 2009 Integrated Energy Policy Report (IEPR) at 52-54. The CEC adopted the 2009 IEPR on December 16, 2009.
59 The CAISO report is available at: http://www.caiso.com/2793/2793ae4d395f2.pdf. We take official notice of the CAISO report pursuant to Rule 13.9.
60 DRA Reply Comments at 2, and TURN Reply Comments at 4.
61 The SWRCB decision is available at: http://www.swrcb.ca.gov/water_issues/programs/npdes/cwa316.shtml#otc. We take official notice of the SWRCB decision pursuant to Rule 13.9 and California Evidence Code § 452(b).
62 GWF Opening Comments at 2.
63 SWRCB Decision, Attachment 1, Section 3 E, Table 1. See also TURN's Reply Comments at 1 - 3.
64 SWRCB decision, Attachment A, Items 1.I and 1.J.
65 Order Instituting Rulemaking 10-05-006 at 9 and 12 - 15.
66 Today's decision in no way prejudges when and how OTC generation will be retrofitted or replaced.
67 D.07-12-052 at 277, Finding of Fact 43.
68 The LECEF Upgrade PPA is confidential and was filed under seal.
69 The calculated net market values are confidential were admitted under seal.
70 CARE Exhibit 12-C at 2 - 4, DRA Exhibit 7-C at 9 - 21, and TURN Exhibit 5-C at 13 - 15.
71 PG&E Exhibit 2-C, Chapter 3, Appendix 3.
72 D.07-12-052 at 14, 290 (Conclusion of Law 1) and 300 (OPs 1, 2, and 4).
73 D.09-10-017 at 4 and Attachment A at 2 and 3.
74 PG&E Opening Brief at 20 - 21.
75 GWF Opening Comments on the proposed decision at 3, 7, and 13. See also Calpine's Opening Comments at 3 and 7.
76 The contracts that comprise the Tracy Transaction and the LECEF Transaction are identified in Section 3.1 and 3.2.1 of today's decision.
77 This requirement is consistent with TURN's recommendation in its Opening Brief at 1-2, and in TURN's Opening Comments on the proposed decision at 1. See also Calpine's Opening Comments at 11, Fn. 38; GWF's Opening Comments at 12-13; and Calpine's Reply Comments at 4.
78 The Upgrades may be bid into PG&E's next LTRFO for new fossil capacity.
79 The re-submittal of the Upgrade PPAs will be subject to the policies and requirements contained in the Commission's decision adopting PG&E's next LTPP.
80 PG&E Exhibit 1 at 3-8 to 3-10, and PG&E Exhibit 2 at 3-7 to 3-9.
81 D.08-11-056 at 3, 9 - 10, and 29 - 34.
82 Implementation Ruling at 18, Ruling Paragraph 6.
83 DRA Exhibit 7-C at 6. The range of contract prices from the recent intermediate-term RFO are confidential and were admitted into the record under seal.
84 PG&E Exhibit 2 at 3-8.
85 The net cost is the sum of the costs that PG&E incurs pursuant to the terms and conditions of the Peakers Novation Agreement and the Peakers PPA, less any revenues (or reduction in costs) that PG&E receives under these agreements.
86 It is unclear if any Peaker units may be used to provide capacity to PG&E under the LECEF Replacement Agreement that PG&E may resubmit for Commission approval. To the extent the same Peaker units are used to provide capacity to PG&E pursuant to two or more contracts, PG&E may recover the cost for the same capacity only once, and only at the lowest contracted price.
87 D.08-11-056 at 52 and 75.
