4. Request to Approve Amended and
Restated CPV Sentinel Contract
We approve the amended CPV contract.
Based on forecasts of the value of capacity, energy and ancillary services under 25 different electric power price scenarios (based on five heat rate scenarios and five natural gas price scenarios) and their associated probabilities, the net present value of the amended CPV contract is better than the original, combined CPV Sentinel I and II contracts. It is also better than the recently approved El Segundo amended contract (see D.10-10-029) and other contracts that were approved in D.08-04-011 and D.08-09-041.
SCE continues to need the new generation represented by the amended CPV contract in order to meet system reliability needs. In D.06-07-029 and D.07-12-052, the Commission authorized SCE to procure up to 3,200 MW of conventional new generation to meet system reliability needs through 2013. Some key drivers of this system reliability need at the time of these decisions were forecast load growth and the potential retirement of aging plants. To date, and including the capacity represented by the amended CPV contract, SCE has procured 2,556 MW. Of the procured new generation, only 750 MW is on-line.
In approving the CPV Sentinel I and II contracts, D.08-04-011 and D.08-09-041 re-affirmed that the projects' new capacity was needed for system reliability. Since then, California and the nation have suffered a severe recession, which reversed the trend of increasing load and actually resulted in a load decrease. However, even though the State's economy has yet to return to pre-recession growth levels and unemployment remains stubbornly high, there are signs of economic recovery and SCE's latest load forecast indicates load growth beginning in 2011.
In addition, the uncertainty of generator retirements has increased since the Commission's approval of the CPV Sentinel I and II contracts with the adoption of the California State Water Resources Control Board's (SWRCB) policy on May 4, 2010, concerning the phase-out of once-through cooling (OTC) generation. In SCE's service territory, there are 9,070 MW of generation that uses OTC technology, of which two units representing 670 MW are required to be in compliance with the new SWRCB's policy by December 31, 2015, and another 18 units representing 6,200 MW are required to be in compliance by December 31, 2020. The San Onofre Nuclear Generating Station, representing 2,200 MW, is required to be in compliance by December 31, 2022. There is considerable uncertainty at this point as to the extent to which these plants can comply with the new OTC policy or can justify the cost of compliance and continued operation. The CPV facility, which is located in the critical Los Angeles Basin local area, does not use OTC and can serve as a replacement for some of this OTC generation that may retire. Due to the extreme difficulty of obtaining offsets for emissions (especially for fine particulate matter, such as PM10) in the SCAQMD jurisdiction, the ability to replace retiring Los Angeles Basin generation with other new generation in the basin may be severely limited.
SCE engaged an Independent Evaluator to oversee its negotiation of the amended CPV contract, as required by D.04-12-048. SCE's Independent Evaluator, Sedway Consulting, which participated in all aspects of the amended CPV contract, concludes that SCE acted in an appropriate, fair and unbiased fashion in its negotiations, and believes that the amended CPV contract warrants Commission approval.
SCE consulted with its Cost Allocation Mechanism (CAM) Group regarding amending the CPV Sentinel I and II contracts and the finalization of the amended CPV contract, as required by D.07-12-052.
SCE retained Black & Veatch to provide independent engineering services to assess the reasonableness of the amended CPV contract. Black & Veatch verified that the amendments to the CPV Sentinel I and II contracts are attributable to actual and expected cost changes that have impacted the project and do not result in material increases in profit for CPV or risk-shifting from CPV to all benefitting customers. Black & Veatch concluded that the scope of the amended CPV contract is the same as the original agreements, that amended CPV contract's price is consistent with other similar projects and contracts, and that CPV's levered, after-tax equity internal rate of return as a result of the amended CPV contract is less than that resulting from the CPV Sentinel I and II contracts.
For all these reasons, we approve the amended CPV contract.
