10. Assignment of the Proceeding

Michael R. Peevey is the assigned Commissioner and Timothy Kenney is the assigned ALJ in this proceeding.

Findings of Fact

1. PG&E is authorized by D.07-12-052 to procure 1,112 MW to 1,512 MW of new capacity by 2015. To procure the new capacity, PG&E selected three winning offers from its 2008 LTRFO with a combined capacity of 1,489 MW. The 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. The Marsh Landing and Oakley projects were submitted for approval in A.09-09-021, which remains pending.

2. The proposed Tracy Transaction and LECEF Transaction will together procure 588 MW of capacity, including 254 MW of new capacity.

3. Since D.07-12-052 was issued, PG&E has requested 1,743 MW of new capacity in multiple proceedings, including 254 MW in the instant proceeding. The requested new capacity is 231 MW more than authorized by D.07-12-052.

4. The main purpose of the 254 MW of new capacity from the proposed Tracy Upgrade PPA and LECEF Upgrade PPA is to hedge the risk that other projects for new capacity might fail or be delayed significantly.

5. PG&E has not demonstrated that the new capacity from the Upgrade PPAs is necessary at this time to (i) hedge the risk that other projects for new capacity might fail or be delayed significantly, or (ii) integrate intermittent renewable generation.

6. The cost of the Upgrade PPAs is unreasonable when compared to the market price for capacity, energy, and ancillary services contained in the winning bids from PG&E's 2008 LTRFO.

7. D.07-10-017 and the Mariposa settlement agreement limit PG&E's procurement of new capacity from the 2008 LTRFO to no more than 1,512 MW. PG&E has requested authority to procure 1,743 MW of new capacity from the 2008 LTRFO, including 254 MW in the instant proceeding.

8. The Tracy Upgrade project and the LECEF Upgrade project will emit CO2 at a rate below the EPS limit of 1,100 lbs/MWH.

9. PG&E will have a need to acquire new capacity pursuant to D.07-12-052 if a Commission-authorized project for new fossil capacity fails, the Commission rejects the proposed Marsh Landing Project and/or Oakley Project in A.09-09-021, or other circumstances occur that create an unfilled need for the new capacity authorized by D.07-12-052.

10. The cost of the Upgrade PPAs would become reasonable if a fossil project authorized by the Commission fails or the Commission rejects the proposed Marsh Landing Project and/or Oakley Project in A.09-09-021, as PG&E will not have any cheaper alternatives available at that time from a competitive procurement process to fill the need for new capacity authorized by D.07-12-052.

11. PG&E has a need for the capacity provided by the Peakers PPA.

12. Resource Adequacy will be maintained or improved under the Peakers PPA relative to the existing DWR-Peakers Contract.

13. The cost of the Peakers PPA is consistent with the market prices of the winning offers from PG&E's recent intermediate-term RFO and 2008 LTRFO.

14. The cost of the Peakers PPA is reasonable.

15. All Peaker facilities will operate at a capacity factor of less than 60%.

16. PG&E hired an IE to prepare a report that included an assessment of the Tracy and LECEF projects as well as the IE's opinion on whether the Commission should approve PG&E's request to procure more capacity than authorized by D.07-12-052 for the purpose of hedging the risk that other projects for new capacity might fail or be delayed significantly.

17. In Resolutions ALJ 176-3243 and ALJ 176-3244, the Commission preliminarily determined that there is a need for evidentiary hearings in this consolidated proceeding. This preliminary determination was reversed by the Scoping Memo, but the Scoping Memo also provided an opportunity for parties to file motions for evidentiary hearings. There were no such motions.

Conclusions of Law

1. The Tracy Transaction, LECEF Transaction, and Peakers Transaction are indivisible transactions. Each transaction must be approved in its entirety or rejected in its entirety.

2. The Upgrade PPAs do not comply at this time with D.07-12-052, D.09-10-017, and the Mariposa settlement agreement.

3. The Tracy Transaction and LECEF Transaction are not just and reasonable under § 451 at this time.

4. Pursuant to D.08-11-056, it is in the public interest to novate the DWR-GWF Contract and the DWR-LECEF Contract to PG&E. PG&E should work with DWR to novate these contracts as soon as practical and submit the novated contracts for Commission approval using the Tier 3 advice letter process.

5. If future events create an unfilled need for the new capacity authorized by D.07-12-052, PG&E may be able to procure one or both of the Upgrade PPAs and not exceed 1,512 MW of new capacity. Under this scenario, the Upgrade PPAs would be just, reasonable, and in compliance with D.07-12-052, D.09-10-017, and the Mariposa settlement agreement.

6. If the Commission rejects the proposed Marsh Landing Project and/or the Oakley Project in A.09-09-021, PG&E should proceed immediately with the Tracy Transaction and the LECEF Transaction. To demonstrate its compliance with this requirement, PG&E should submit executed contracts for both transactions via a Tier 1 advice letter.

7. If events other than those identified in the previous Conclusion of Law create an unfilled need for the new capacity authorized by D.07-12-052 or subsequent decisions, PG&E should be allowed to resubmit the Tracy Transaction and/or the LECEF Transaction, or substantially similar transactions, for Commission approval using the Tier 3 advice letter process. The resubmitted transaction(s) should be subject to the conditions specified in the following order. PG&E should be allowed to exclude the novation of DWR contracts from the resubmitted transaction(s) if PG&E intends to seek, or has already sought, separate Commission approval for the novations.

8. The Tracy Upgrade PPA and the LECEF Upgrade PPA comply with the EPS and are a reasonable fit with PG&E's GHG reduction strategy.

9. The Peakers Transaction is just and reasonable under § 451.

10. The Peakers PPA is not subject to the EPS.

11. The Peakers Transaction should be approved.

12. PG&E should be authorized to recover the net costs it incurs under the Peakers Transaction, including stranded costs.

13. PG&E should be allowed to recover stranded costs from departing load customers via a non-bypassable charge pursuant to D.04-12-048 and D.08-09-012.

14. The IE is not authorized by D.07-12-052 to opine on whether PG&E should be allowed to procure more new capacity than authorized by D.07-12-052.

15. The long-form IE report template for proposed PG&E contracts should be revised as set forth in the body of today's decision.

16. There is no need for evidentiary hearings. The changed determination on the need for hearings should be approved in accordance with Rule 7.5.

17. Contra Costa Generating Station, LLC's July 9, 2010, motion for party status should be denied.

18. The following order should be effective immediately.

ORDER

IT IS ORDERED that:

1. The Peakers Transaction described in Application 09-10-034 is approved.

2. If the Commission rejects the proposed Marsh Landing Project and/or the Oakley Project in Application (A.) 09-09-021, Pacific Gas and Electric Company shall proceed immediately with both the Tracy Transaction described in A.09-10-022 and the Los Esteros Critical Energy Facility Transaction described in A.09-10-034. Pacific Gas and Electric Company shall file a Tier 1 compliance advice letter containing executed copies of the contracts that comprise the Tracy Transaction and the Los Esteros Critical Energy Facility Transaction 30 days after the later of (i) today's decision, or (ii) the issuance of a Commission decision in A.09-09-021 that rejects the proposed Marsh Landing Project and/or Oakley Project.

3. If future events other than those identified in the previous Ordering Paragraph create an unfilled need for the new capacity authorized by Decision (D.) 07-12-052 or subsequent decisions, Pacific Gas and Electric Company may resubmit the Tracy Transaction and/or the Los Esteros Critical Energy Facility Transaction, or substantially similar transactions, for Commission approval via the Tier 3 advice letter process. The resubmitted transaction(s) must (a) not exceed the new capacity authorized by D.07-12-052 or subsequent decisions; (b) have the same or better pricing structure for ratepayers than the transactions submitted in the instant proceeding; and (c) provide at least the same level of operating flexibility as the transactions submitted in the instant proceeding. All of the capacity provided by the resubmitted transaction(s) must be able to support the integration of intermittent renewable generation. The resubmitted transaction(s) may exclude the novation of existing contracts if Pacific Gas and Electric Company intends to seek, or has already sought, separate Commission approval for the novation(s).

4. Pacific Gas and Electric Company's authority to resubmit the Tracy Transaction, the Los Esteros Critical Energy Facility Transaction, or substantially similar transactions pursuant to the previous Ordering Paragraph shall expire the earlier of (i) the issuance of Pacific Gas and Electric Company's next long-term request for offers for new fossil capacity, or (ii) the issuance of a Commission decision adopting a new long-term procurement plan for Pacific Gas and Electric Company.

5. Pacific Gas and Electric Company may not proceed with the Tracy Transaction and the Los Esteros Critical Energy Facility Transaction unless there is an unfilled need for new capacity under the circumstances set forth in Ordering Paragraphs 2 and 3.

6. Pacific Gas and Electric Company shall work with the California Department of Water Resources (DWR) to novate to Pacific Gas and Electric Company as soon as practical DWR's existing contracts to purchase power from the Tracy Facility and the Los Esteros Critical Energy Facility. Pacific Gas and Electric Company may submit the novated agreements for Commission approval using the Tier 3 advice letter process.

7. Pacific Gas and Electric Company may recover via the Energy Resources Recovery Account the net costs it incurs under the Peakers Novation Agreement and the Peakers Power Purchase Agreement, including any stranded costs. The recovery of stranded costs, if any, from departing load customers shall be implemented via a non-bypassable charge in accordance with Decision (D.) 04-12-048 and D.08-09-012.

8. The Energy Division is directed to revise the long-form template used by Independent Evaluators to report on proposed contracts submitted for Commission approval by IOUs as set forth in the body of today's decision.

9. There is no need for evidentiary hearings in this proceeding.

10. Contra Costa Generating Station, LLC's July 9, 2010, motion for party status is denied.

11. Application (A.) 09-10-022 and A.09-10-034 are granted and denied to the extent set forth above.

12. Application (A.) 09-10-022 and A.09-10-034 are closed.

This order is effective today.

Dated July 29, 2010, at San Francisco, California.

I reserve the right to file a dissent.

I reserve the right to file a concurrence.

Dissent of Commissioner Dian M. Grueneich

July 29, 2010 Business Meeting, Agenda ID# 3258, Item 41

Today we have before us two major procurement decisions, Decision (D.)10-07-042 and D.10-07-045, both involving Pacific Gas and Electric Company (PG&E).

D.10-07-042 is Administrative Law Judge (ALJ) Kenney's Proposed Decision (PD) in Application (A.) 09-10-022/A.09-10-034, seeking approval, among other issues, for novation of contracts from the Department of Water Resource to PG&E, and procurement of 254 MW of expanded generation from the associated GWF Tracy and Calpine Los Esteros natural gas-fired powerplants. This procurement before us in tandem with the procurement considered in D.10-07-045, if approved in full, would add a total of 1,559 MW of new natural-gas, fossil-fired plants to PG&E's system.

The agenda today does not have us address these items concurrently, though the central issue in the two PDs is the same - whether PG&E ratepayers should fund thousands of millions of dollars of new fossil-fired generating capacity in the PG&E service area. Instead we now take up now the novations PD - that of ALJ Kenney. Our agenda shows that we will address later in this meeting the Long Term RFO PD, that of ALJ Farrar, in D.10-07-045.

Let me begin with my conclusion. On D.10-07-042, the ALJ Kenney novations PD, I do not support the outcome presented in the revised proposed decision, which - given the ALJ Farrar Long Term RFO PD before us today - approves procurement of 254 MW of expanded generation. I do, however, support the original novations PD from ALJ Kenney which found PG&E did not have a need for the 254 MW and denied the matter without prejudice. Thus, I will vote no on the novations PD from ALJ Kenney.

The past two years have been marked by the largest economic downturn since the Great Depression, substantially reducing demand for electricity. At the same time, the commission has invested heavily in ambitious energy efficiency, demand response, distributed generation, and advanced metering programs that will significantly reduce demand. While I anticipate that demand for energy services will be revived by the upswing in the state's economy, these demand side investments will temper against the risk of a steep increase as seen in the past. Without a doubt, these demand side program effects will continue to increase during the coming years.

The arguments to approve the full procurements at issue in these PDs rely on an outdated forecast of demand that was completed in 2007 based on 2006 data. This forecast -- which predates the economic downturn - assumes PG&E will need between 928 and 1328 MW of new generation by 2020. I direct your attention to the table presented overhead titled "2007 Long Term Procurement Plan Range Adjustments." On the first line, it presents this range of need determination.

I will use this table to illustrate that there are at least four reasons why authorization of the full procurement proposed by PG&E is not reasonable. Those items are shown on the table, in the "adjustments" category. All of these matters have been presented in the record before us.

First, let me start with the line entitled "Path 26 Mistake." A CEC analysis released in October of 2008 - a full year before CPUC review of these applications began - concludes that PG&E's 2007 need determination overstated the amount of peak power flowing from north to south on path 26 by at least 1900 MW. As the report states, "the 3000 MW north to south capacity flow assumption... used in the CPUC's LTPP decision D.07-12-052 is clearly not correct." This single error in the 2007 need determination cancels out PG&E's entire authorized need.

The second line of adjustments is labeled "2009 CEC forecast adjustment." The CEC 2009 forecast determined that PG&E's forecasted demand in 2015 is now 567 MW lower than anticipated by the commission in 2007 due to a revised economic forecast and the CPUC's 2009 approval of the 2010 - 2012 expanded energy efficiency portfolios. For the PG&E service area alone, ratepayers are committed to spend over $1 billion for energy efficiency programs through 2012. Given this expenditure, it makes no sense to assume zero savings from these programs.

The third adjustment takes into account energy efficiency savings between 2013-2020. This uses information from a may 2010 CEC report that finds that the state's lowest quantity of energy efficiency savings that can be expected to occur will avoid an additional 1,731 MW of peak demand between 2013 and 2020 in the PG&E territory. Like the first two items, this avoided demand is not accounted for in the 2007 need determination.

Finally, the fourth adjustment shows the impact of the commission's recent approval of PG&E's request to build 500 MW of solar PV. This 500MW is above and beyond the contribution of renewables assumed in the 2007 procurement authorization. The number in this table assumes a 40% capacity factor, resulting in 200 MW of peak capacity and further reducing the need for new generation.

The result, as you can see, is clear. Rather than PG&E needing 928-1,328 MW of new procurement, PG&E's need is negative, between 2,500 MW to almost 3,000.

Over-procurement creates at least two major problems. First, it burdens ratepayers by making them pay for assets that will be underused. In these difficult economic times, we must be mindful of the strain this puts on Californians. And second, over-procurement contradicts the policy of procuring preferred resources from the loading order adopted by the Commission. If PG&E over-procures fossil generation, the cost-effectiveness of preferred resource programs diminishes.

Both PDs decline to revisit the 2007 procurement authorization on the theory such a revisit - though clearly warranted by current facts - will disturb the settled expectations of the market. Nonsense! Settled expectations of the market have flown out the window since 2007.

The global economy has suffered, and is continuing to suffer, through the worst economic downturn since the Great Depression. Virtually every business, large and small, and virtually every individual, rich or poor, has adjusted their expectations and altered their spending habits to conform to the realities of markets turned upside down, decreased demand and shrinking budgets. Approval of PG&E's proposed procurements will wrap us in a time warp to continue business as usual. Such approval even walls us off from the impacts of our own recent decisions. Our obligation is not to ensure that generators can continue as if the economic crisis never happened or we never learned of the mistakes and omissions in our 2007 need determinations. Our obligation is to ensure that our decisions have a legitimate factual basis, and that ratepayers' interests are protected.

Since 2005, this commission has allowed PG&E rates to rise 28%. As many of you know, I am very disturbed that our actions sometimes reflect the belief we hold an ever-expanding checkbook of ratepayer money. We should use a standard for our decision making that we only approve rate increases on a clear demonstration of necessity. That standard is not met here.

I am very sympathetic to the economic situation of the cities that would host these fossil-fired powerplants and their desire to create jobs. But, as my fellow commissioners remind me, we are not a job creation agency. The price per job from these powerplants is exceptionally high, and we have no basis on which to choose using ratepayer money to create jobs for one city but not another.

I, therefore, dissent to the novations PD from ALJ Kenney.

Dated July 29, 2010, at San Francisco, California.

/s/ DIAN M. GRUENEICH

DIAN M. GRUENEICH

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