3. SDG&E's Proposal

SDG&E seeks approval of a Power Purchase Agreement and First Amendment, and Second Amendment thereto (together, the Proposed Agreement) with Envirepel. SDG&E also seeks recovery of costs associated with the Proposed Agreement and issuance of certain findings related to compliance with RPS requirements established under § 399.11, et seq.

SDG&E explains its RFO was issued in response to the reduction of resources resulting from the loss of the dispatchable California Department of Water Resources (CDWR)/Williams contract (known as Williams D) from SDG&E's portfolio. The RFO was issued on May 24, 2006 and solicited projects that would deliver in 2007, 2008 and/or 2009. SDG&E contends the RFO was conducted in accordance with guidance provided in D.04-12-048 and was open to all resources (conventional and renewable) bidding all types of projects (turnkeys, buyouts and Power Purchase Agreements).

SDG&E states that it met with its Procurement Review Group (PRG) several times during the course of the RFO process to communicate the status of the evaluation, selection and contracting process. SDG&E says the Proposed Agreement resulted from a bid that was one of two renewable proposals that SDG&E received in response to its RFO. Both renewable bids were selected for the shortlist.

The Proposed Agreement involves the purchase of renewable (biomass) energy at Envirepel's Vista, California facility. This is a new facility. The Proposed Agreement states that delivery will begin no later than March 1, 2008. The Proposed Agreement will add approximately 1.5 MW of renewable energy to SDG&E's portfolio and will serve as a proof of concept project for Envirepel. The term of the Proposed Agreement is twenty two months, with five one-year options for extension of the Proposed Agreement (at SDG&E's option).

SDG&E states that approval of the Proposed Agreement will assist SDG&E in its efforts to achieve the RPS objective of a 20% renewable portfolio by 2010 by adding approximately 1.5 MW of renewable energy to SDG&E's portfolio. Once Envirepel is able to prove that its technology is successful, SDG&E envisions that it will be able to procure energy from additional Envirepel facilities pursuant to contracts that the parties have executed for larger projects using the same technology. SDG&E claims that the sooner that Envirepel is able to begin deliveries from its Vista facility, the sooner SDG&E will be able to eliminate risk involved with the new technology and move forward with larger Envirepel projects that will have a greater impact on SDG&E's renewable portfolio.

SDG&E points out that Envirepel has received RPS certification for the Vista facility.

SDG&E's proposes to use its Energy Resource Recovery Account (ERRA) to recover the costs associated with the Proposed Agreement from bundled customers. Based upon direction previously provided by the Commission,¹ SDG&E intends to seek relief from costs associated with debt equivalence issues through its cost of capital proceedings.

¹ See, D.07-02-011, mimeo., p. 32.