3. Application
SDG&E supports its application for the MEF II project on (1) Commission authorized need for new generation, (2) the competitive nature of SDG&E's 2008 Peaker RFO, and (3) the unique qualities of the MEF II project. The testimony served in support of the application includes the RFO Template that details these factors.
3.1. Need for New Resources
To begin, SDG&E states that D.07-12-052, the most recent long-term procurement plan (LTPP) decision, approved a resource need for SDG&E's bundled customers' local and system resource adequacy (RA) requirements of 133 megawatts (MW) for already approved peakers, plus up to 400 MW of additional power depending on the approval and timing on the Sunrise Powerlink transmission project (Sunrise). The decision opined that if Sunrise was approved and came on-line as anticipated, SDG&E would not need any additional power in addition to the 133 MW of approved peakers. SDG&E filed a Petition for Modification (PFM) of D.07-12-052 requesting additional procurement authority, even if Sunrise is approved, to meet its customers needs until power is actually available from the Sunrise project. On November 6, 2008, the Commission issued D.08-11-008 which granted SDG&E's PFM for the additional 400 MW. Therefore, SDG&E's request for the 46.5 MW associated with MEF II is within the utility's approved resource need numbers.
SDG&E also has unique local resource needs whereby the utility requires new, local generation in its service territory with or without the Sunrise Powerlink. When these resource needs are considered in light of the development and on-line date uncertainties associated with other yet-to-be built/completed projects in SDG&E's portfolio, the utility wants MEF II as a resource that can be on-line by summer 2009, as a hedge against the development risks of their other projects.
3.2. 2008 Peaker Request for Offers
As SDG&E details in its RFO Template, following the summer 2006 heat storm, the utility requested, and was granted, authority to procure resources that it needed, for the time frame it anticipated.2 On October 17, 2006, SDG&E issued the 2008 Peaker RFO seeking "new generating capacity resources [that] will be either turnkey projects owned by SDG&E or 25-year tolling agreements with Respondent for the life of the resource."3 To make the projects more attractive to the bidders, the utility offered specific sites under the utility's control, Miramar, Pala and Margarita, and also offered an already purchased turbine/generator as part of the bid package to developers. Offers at the Miramar site were limited to turnkey projects, since SDG&E already had a facility, Miramar Energy Facility I (MEF I), on the same property. SDG&E's witness testified that market interest in the RFO was high, and once all bids were in, the utility began the process of analyzing and comparing the merits of each entry, preparing a quantitative ranking of the bids and selecting a "short list"4 of developers.
In the RFO Template, SDG&E provides details of the entire RFO process, but in summary, an offer was received for Pala, but no offers were received for projects at Miramar or Margarita. SDG&E states that it then re-offered these two sites to all other developers on its short list, other than the developer for Pala. The short-list developers were offered the opportunity to reconsider an EPC contract and deliver a turnkey project to SDG&E at the Miramar site. Wellhead was the only developer to express an interest in Miramar.
SDG&E then entered into a contract whereby Wellhead would utilize the turbine/generator already contracted for by the utility. As SDG&E contends, based on its conduct in the 2008 Peaker RFO, "MEF II was offered to the market via a competitive solicitation."5 In addition, all parties that participated in the RFO had the option to consider utilizing the already purchased turbines.
As part of the RFO process, SDG&E utilized an Independent Evaluator (IE) and consulted with its Procurement Review Group (PRG). SDG&E's RFO Template discusses the involvement of both the PRG and IE in the RFO process, and the IE submitted a Report of the Independent Evaluator (IE Report) which is attached to the RFO Template. The IE Report by PA Consulting Group was initially prepared on May 1, 2007 for the Pala and Margarita projects, and revised on June 4, 2008 to include the MEF II project at Miramar. In general, the IE Report addresses the following questions: Role of the IE; Was the IOU's Methodology for Bid Evaluation and Selection Designed Fairly?; Was the Least Cost, Best Fit (LCBF) Evaluation Process Fairly Administered?; How Did the IOU Conduct Outreach to Bidders, and Was the Solicitation Robust?; Project-Specific Negotiations; Affiliate Bids and Utility-Owned Generation (UOG) Ownership Proposals; and Code of Conduct.
In regard to Miramar and MEF II, PA Consulting reviewed SDG&E's financial analysis and the Miramar selection process. From the IE's review of the Miramar documents, "the selection . . . did not disadvantage any bidder at any point in the RFO. No bidders offered to build on that site, so none were eliminated in order to contract with Miramar. Furthermore the site and turbine were offered to Wellhead Power only after the shortlist was determined and all other shortlisted bidders were made the same offer. . . . Therefore, there is no unfairness in SDG&E's selecting this UOG proposal."6
3.3. MEF II
From SDG&E's perspective, MEF II is the least cost, best fit, opportunity for its ratepayers. The 46.5 MW simple cycle gas-fired combustion turbine facility will connect at the 69 kilovolt voltage level to the SDG&E system with an intertie to the MEF I facility and will provide peaking energy and capacity for meeting the utility's local and system RA as well as ancillary service needs, such as black start and non-spinning or quick-start reserves.7 As an RA supply addition, the unit will be dispatchable by the California Independent System Operator (CAISO) under the RA tariff provisions.
Pursuant to the EPC contract, Wellhead will undertake the permitting, construction and testing of the project and be responsible for all pre-commercial operations permitting. During the construction period, SDG&E will provide the Miramar facility site and the turbine. Upon completion and successful passing of performance criteria, Wellhead will be relieved of its obligation under the EPC contract and once the facility is in commercial operation, SDG&E becomes the responsible owner and operator.
The total project cost for MEF II as currently projected is $56.5 million and SDG&E's testimony indicates that is a competitive price.8 SDG&E's application describes the interconnection costs to physically connect MEF II to the existing Miramar substation and the transmission system upgrades required to make the full capacity of MEF II deliverable. SDG&E proposes a construction risk/reward mechanism in which: (1) shareholders take no construction risk (and have no reward opportunities) for construction costs within 5% of the $56.5 million project cost estimate, (2) shareholders take 10% of the construction risk/reward for the band that is 5% over (or under) to 15% over (or under) the estimated project cost, and (3) cost overruns in excess of 15% of the estimated project cost are subject to recovery through a regulatory review process (and shareholders have no reward opportunities for savings resulting from actual costs being greater than 15% below the estimated project cost).
MEF II also meets the Commission's greenhouse gas (GHG) emission performance standards (EPS) for long-term contracts entered into by the investor-owned utilities (IOUs) as established in D.07-01-039. Under the EPS, a load-serving entity may enter into a long-term commitment to take power from a peaking power project (e.g., a facility with an estimated annual capacity factor less than 60%) without meeting the more stringent emissions requirements adopted in D.07-01-039. MEF II is a peaking project that will have an annual capacity factor less than 60%, and is therefore compliant with the EPS.
In addition, since MEF I is located on the site and has been on-line since summer 2005, MEF II will be built on a brownfield site consistent with Commission established procurement priorities. By utilizing an existing site, other greenfield sites will be preserved. In addition, there are certain economics that can be realized for both MEF I and MEF II since they can share common facilities.
3.4. Rate Treatment
SDG&E projects that the total cost for MEF II will be $56.5 million. The components of the revenue requirement include ratebase; return; depreciation; taxes; and operating and maintenance expenses (O&M). SDG&E will record and recover MEF II costs as follows: non-fuel O&M and capital-related revenue requirements will be recorded in the Non-Fuel Generation Balancing Account (NFBA) for recovery from customers and fuel costs will be charged to the Energy Resource Recovery Account (ERRA). NFBA and ERRA costs are recovered through electric commodity rates applied to bundled service customers. SDG&E will seek recovery of the MEF II revenue requirement in SDG&E's next general rate case. When construction of MEF II is complete, SDG&E will file an advice letter with the Commission that provides an update of the final construction costs and associated revenue requirements.
2 Rulemaking 06-02-013 Scoping Memo, dated September 25, 2006 at pp. 26-27.
3 SDG&E's Opening Brief, September 30, 2008, p. 5, citing the RFO Template at Section II.A (p. 14).
4 RFO Template, Exhibit 1, pp. 22-23.
5 SDG&E Opening Brief, p. 8.
6 RFO Template, June 16, 2008, Attachment 9, SDG&E Miramar 2, IE Template, p. 7-2.
7 RFO Template, Exhibit I, p. 29.
8 Id., pp. 25-28, and SDG&E Opening Brief, p. 10.
