2. Petition for Modification

The PFM was filed almost two years after D.08-09-041 was issued in order to gain approval of amendments to the previously-approved El Segundo Contract following unexpected delays to commencement of construction of the Facility. The key changes include a reduction to the energy capacity price and a 26 month extension of the expected delivery date to August 1, 2013. The PFM seeks approval of the Amended El Segundo Contract on the grounds that the Amended Contract (1) results in a net contract savings from a facility that will assist in the operational integration of future renewable resources in California, (2) is a repowered coastal resource that does not utilize once-through-cooling (OTC), and (3) meets the CAISO local capacity requirements for the Los Angeles Basin.

Attached to the PFM in support were the following appendices:

· Appendix A -Amended El Segundo Contract

· Appendix B - Declaration of Ranbir Singh, SCE's Manager of Portfolio Analysis and Valuation in the Energy Supply and Management group, who describes performing the contract valuation of the Amended El Segundo Contract in comparison to the El Segundo Contract

· Appendix C - redlined version of the El Segundo Contract showing all of the amendments in the Amended El Segundo Contract

· Appendix D - Independent Evaluation Report of the Amended El Segundo Contract by Sedway Consulting, Inc. to review the contract negotiations and perform an evaluation of the proposed amendments to the El Segundo Contract, using similar methodology to what it used in valuation of the New Gen Contracts.

· Appendix E - Independent Engineer's Review by R. W. Beck of proposed amendments to El Segundo Contract in order to assess their reasonableness.

SCE filed a motion to allow portions of its PFM and all of the attached appendices A-E to be filed under seal pursuant to the protections granted to market sensitive information as set forth in D.06-06-066. The motion was granted by the ALJ's October 15, 2010 ruling.

2.1. The SCAQMD Permit Delays

After SCE gained Commission approval of the El Segundo Contract, El Segundo began taking steps towards construction of the Facility. One step was to apply for an air permit from the South Coast Air Quality Management District (SCAQMD).¹¹

Federal law requires each major new and modified source of air pollution to undergo "new source review" to ensure that facilities install the best available control equipment, obtain offsets for any new emissions, and comply with other requirements to ensure that the new and modified sources do not adversely affect air quality. As relevant here, SCAQMD adopted a variety of rules to govern the use of offsets in the district, including an internal bank of offsets known as the Priority Reserve, and then permitted transfer of the offsets to power plants in exchange for mitigation fees.

In September 2007, Natural Resources Defense Council and other groups filed suit against the SCAQMD challenging its offset practices, particularly certain amendments to the Priority Reserve rule, and adoption of a pollution credit accounting and generation rule.¹² In July 2008, the court sided with the plaintiffs, finding the SCAQMD's rule changes are subject to the California Environmental Quality Act (CEQA), and enjoined the distribution of offsets from the Priority Reserve account until SCAQMD prepared the appropriate CEQA documentation. In November, the court also ordered SCAQMD to rescind the two rules.

As a result of these events, SCAQMD stopped issuing any air permits based on its Priority Reserve emission offsets or exemptions from these offsets. El Segundo was seeking such a permit and the freeze prevented El Segundo from obtaining the air permits needed to construct the Facility.

The California Legislature responded to the court ruling by enacting Senate Bill (SB) 827 which, among other things, allowed SCAQMD to apply an exemption from the emissions reduction credit requirement for replacement of electric utility steam boilers with combined-cycle gas turbines on a MW-for-MW basis.¹³ Thus, SCAQMD could issue emission offsets for new capacity to El Segundo so long as El Segundo made a MW-for-MW retirement of existing generation units at the same location where it will construct the Facility.

SCE represents that El Segundo subsequently received its SCAQMD permit for the Facility on July 13, 2010. However, in December 2009, environmental groups filed a lawsuit intended to block SB 827 from taking effect. On July 15, 2010, the Superior Court concluded that the environmental groups had no legal basis for their lawsuit and dismissed their challenge.¹⁴ Therefore, air permits issued by SCAQMD pursuant to SB 827 are currently valid.

SCE states that these delays made it impossible to complete construction of the Facility by the original expected delivery date of June 1, 2011. El Segundo approached SCE with an offer of amendments to the El Segundo Contract that would allow the project to proceed. The parties engaged in negotiations and agreed to a number of amendments which are described below.

2.2. The Amendments to El Segundo PPA

According to SCE, the air permit delays, described above, made it impossible for El Segundo to complete construction of the Facility by the original expected delivery date of June 1, 2011. Eventually, the parties agreed to amendments to the El Segundo Contract which moved the expected delivery date to August 1, 2013, reduced the capacity price, and made other changes, largely technical. However, there is little overall change in the fundamentals of the original agreement.

Under the Amended El Segundo Contract, SCE and its benefitting customers, still anticipate receiving up to 550 MW of expected contract capacity and associated energy from the project which will be constructed in El Segundo, California, and will consist of two One-on-One Siemans SGT6-5000F combined-cycle gas turbines featuring dry cooling technology and supporting generation equipment.¹⁵ The new units will replace older, dirtier steam generation units at a preferred brownfield site, where it can support grid stability and voltage support for the Los Angeles Basin.

In addition to the major changes in price and delivery date, the amendments made technical changes related to the CAISO market redesign and to relevant natural gas transportation tariffs, as well as some modifications to the parties' rights and remedies.

2.3. Evaluations of the Amendments
to the El Segundo Contract

As part of its PFM, SCE provided three evaluations of the proposed amendments to the El Segundo Contract, all using similar methods to the valuations made in the New Gen RFO. All three evaluations support the Commission's approval of the Amended El Segundo Contract.

The company's own analysis is primarily described in the Singh Declaration which is limited to the change in economic value from the original El Segundo Contract. However, SCE states it also reviewed the Amended El Segundo Contract's "generator attributes and other qualitative factors" to determine whether they fit system needs and met various contractual and regulator criteria.¹⁶

The Beck Report is more technical and focuses on whether the Amended El Segundo Contract is similar to the original Contract, reasonable, and feasible. The Sedway Report reflects review of the negotiation process and the economic benefits of the Amended El Segundo Contract to SCE and its benefitting customers, as part of its overall analysis of the amendments proposed in the PFM.

2.3.1. Singh Declaration

Ranbir Singh is SCE's Manager of Portfolio Analysis and Valuation in the Energy Supply and Management Group. He had responsibility for performing SCE's internal valuation of the Amended El Segundo Contract.¹⁷ Singh stated that SCE used the Least Cost/Best Fit methodology to value the Amended El Segundo Contract, a "nearly identical" analysis as that applied to the El Segundo Contract during the New Gen RFO.¹⁸ The objective of the analysis was to assess the change in value between the El Segundo Contract and the Amended El Segundo Contract.

SCE applied a net present value (NPV) analysis that included forecasting: (1) the value of capacity, energy, and ancillary services, (2) contract costs, and (3) the net value of both (1) and (2) under 25 different electric power price scenarios to capture valuation under various possible future market conditions.¹⁹ The result was a calculation of positive economic benefits to SCE and its benefitting customers under the terms of the Amended El Segundo Contract.

2.3.2. Beck Report

R.W. Beck, Inc. (Beck) is a well established national company that provides technically based business consulting in numerous fields, including power generation and electrical utilities. SCE retained Beck to provide an engineering analysis of the proposed amendments to the El Segundo Contract, particularly to review whether the Amended El Segundo Contract's new proposed pricing was reasonable and justified by changes in equipment, construction, and financing costs that had occurred during the Project's delay.²⁰

Among other things, Beck examined the status of required permits for construction of the Facility (Project), financial models which included the forecasted rate of return, and documentation of any price changes for materials, equipment, etc. anticipated for the Project. Beck was asked to verify that the amendments arose from changes in the regulatory environment, market conditions for financing, and other cost changes, and to assure that the Amended El Segundo Contract would not result in material increases in profit for El Segundo or risk shifting to SCE or its benefitting customers.

On August 24, 2010, Beck issued its report (Beck Report) which concluded, inter alia, that:

· The scope of the Project is substantially the same as in the El Segundo Contract;

· Projected cost changes are in the range expected based on the nature of the changes in the development plan and schedule;

· The pricing in the Amended El Segundo Contract is reasonable;

· El Segundo is on track to obtain or has obtained the appropriate permits; and

· The sequence and duration of the milestone activities and duration of the Project schedule support the planned operation date.

The report did not make a recommendation or offer a conclusion as to whether the Commission should approve the Amended El Segundo Contract.

2.3.3. Sedway Report

Sedway Consulting, Inc. (Sedway) is a well known energy consulting firm that provides companies in the electric and natural gas industries with services in such areas as resource planning, competitive bidding, resource acquisition, market analysis, and strategic planning.²¹ Sedway claims a specialization in competitive bidding solicitations for new power supplies.²² It has acted several times in this state as an Independent Evaluator of the RFO process and in the selection of power purchase agreements for SCE and Pacific Gas & Electric Company (PG&E) beginning with PG&E's 2004 Long Term RFO and continuing through SCE's 2006-2008 New Gen RFO.

Following the issuance of D.08-09-041, Sedway continued to monitor communications between SCE and the Contract counter-parties, including the negotiations between SCE and El Segundo to amend the El Segundo Contract.²³ SCE retained Sedway to assess the economic benefits of the Amended El Segundo Contract by evaluating its price changes and schedule shift using the same tools and assumptions used to evaluate the Contracts in SCE's New Gen RFO.²⁴ Sedway also reviewed the Beck Report.

On August 24, 2010, Sedway provided its report (Sedway Report) to SCE which concluded that the revised prices and schedule shift are "anticipated to yield substantial savings for benefitting customers...."²⁵ (Sedway noted that its estimate was comparable to that developed by SCE, but different "because SCE used its latest market assumptions.")²⁶ The Sedway Report also listed a variety of non-economic factors that made the Amended El Segundo Contract and Project an attractive addition to SCE's supply portfolio including that the Project:

· will be a brownfield development (aligned with the Commission's preference for new generation on existing generation sites);

· will use dry cooling technology and replace an existing facility that relies on OTC technology;

· is in the western portion of the Los Angeles Basin where SCE is likely to need generation to support retirement of existing coastal plants that use OTC technology; and

· will be an efficient combined-cycle facility that will consume less fuel and produce fewer emissions than most existing gas-fired plants in the area.²⁷

These factors were also cited as part of the Commission's analysis of the El Segundo Contract in D.08-09-041.

Sedway concluded that SCE appropriately negotiated the Amended El Segundo Contract and that it should be approved by the Commission.²⁸

¹¹ SCAQMD is the regional agent for the U.S. Environmental Protection Agency for issuing air quality permits.

¹² Natural Resources Defense Council et al. v. South Coast Air Quality Management District (Sup. Ct. Los Angeles County, 2007, No. BS 110972).

¹³ See SCAQMD Rule 1304.

¹⁴ http://www.martindale.com/environmental-law/article_Alston-Bird-LLP_1100600.htm

¹⁵ PFM at 6.

¹⁶ PFM at 15.

¹⁷ Appendix B, Singh Declaration at ¶ 2.

¹⁸ Id. at ¶¶ 3-4.

¹⁹ Id. at ¶ 6.

²⁰ Appendix E, Beck Report at 1; Appendix D, Sedway Report at 3.