4. Discussion
The gravamen of the opposition to MEF II was focused first on SDG&E's request for an expedited decision and then on the process by which SDG&E chose the MEF II project. To begin, numerous parties challenged SDG&E's request to expedite the application and seek a Commission decision by September 4, 2008 - less than three months after the application was filed on June 16, 2008. The Commission did not expedite the application, so that issue is moot.
WPTF and UCAN were concerned with the process that led SDG&E to choose MEF II, a utility-owned asset, and not necessarily with whether MEF II was the least-cost, best-fit resource for the utility. Following the electricity market crisis of 2000-2001, the paradigm for electricity procurement shifted from the competitive process envisioned under the 1996 electricity restructuring to a hybrid market whereby both the regulated utilities and the independent power producers compete to provide power facilities. The Commission has signaled in numerous decisions its commitment to pursue policies and procedures that promote competition and customer choice, while maintaining a viable and workable electricity generation sector that assures reliable service at just and reasonable rates for customers. The Commission's preference for this end state was clearly established in D.07-12-052, the decision on the three IOUs' LTPPs for 2006-2015. D.07-12-052 recognized, however, that while the Commission is developing a functional competitive energy market, California is currently operating under a hybrid market.
D.07-12-052 stated "we continue to believe in a `competitive market first' approach. As such we believe that all long-term procurement should occur via competitive procurements, rather than through preemptive actions by the IOU, except in truly extraordinary circumstances."9 (Emphasis in original.) The decision further explained that before a utility could bring a resource to the Commission that met the "truly extraordinary circumstances" exception, "the IOU must make a showing that holding a competitive RFO is infeasible."10 The extraordinary circumstances were identified as Market Power Mitigation; Preferred Resources; Expansion of Existing Facilities; Unique Opportunity; and Reliability.
SDG&E alleges in its application that MEF II is the result of its 2008 Peaker RFO. However, because there were atypical circumstances surrounding the choice of MEF II "within the 2008 Peaker RFO," SDG&E also contends that should the Commission find that the resource was chosen outside of a competitive solicitation - MEF II meets every one of the five extraordinary circumstances listed above.
The Commission has carefully weighed SDG&E's application, supporting testimony, (including the IE's Report) and the utility's briefs in support of MEF II and we have some of the same concerns expressed by parties regarding the process through which the MEF II project was selected. It is clear that MEF II was not a winning bid from the 2008 Peaker RFO. In fact, the utility states that it invited bids for the Miramar site and did not receive a single bid to build a turnkey facility, using the turbines already owned by SDG&E. SDG&E then chronicles the steps it took utilizing other winners from the 2008 Peaker RFO, to execute the MEF II contract. While SDG&E can trace its choice of MEF II to bidders from the RFO, the relationship between the RFO and MEF II is very tenuous at best and does not give the Commission and the other parties as much assurance that the resource and price were the result of a fair, open, and vigorous competitive solicitation process as a bid selected directly out of (and contemporaneously with) an RFO solicitation.
D.07-12-052 did anticipate that there could be exceptional circumstances that would justify a utility choosing a resource outside of a competitive solicitation. However, the intervenors argued that MEF II does not meet these enumerated exceptions. On November 6, 2008, the Commission issued D.08-11-008 modifying D.07-12-052. D.08-11-008 again addressed when a utility could chose a contract outside of a competitive solicitation and stated: "While extraordinary circumstances are by definition difficult to identify a priori, our intention is to set a high bar for an "appropriate circumstance" for an IOU to circumvent the potential for private ownership by soliciting EPC bids."11
The Commission finds compelling many of the arguments presented by intervenors that MEF II does not meet the exceptions to the competitive RFO process identified by the Commission. In fact, as discussed below, we find little merit in SDG&E's arguments regarding whether the project conforms with four of the five extraordinary circumstances enumerated in D.07-12-052 (i.e., all but the reliability exception).
1. Market Power Mitigation: "The IOU must make a strong showing that as a result of some attribute of the desired resource, a private owner would have the ability to exert significant influence over the price of its development or of the price and quantity of its output (energy, capacity, or ancillary services)."
While D.07-12-052 did not provide specific guidelines for the "strong showing" an IOU must make that private ownership of the desired resource would result in market power, generally the Commission has defined a strong showing to involve some sort of benchmarking of a specific offer price to a comparable market price.
The tight local market SDG&E describes in its application as justification that UOG is needed to mitigate market power, including the (redacted) example SDG&E cites, could be a necessary condition to the exertion of market power, but its existence in and of itself does not represent a strong showing. In fact, SDG&E's decision to select bids out of its RFO and the IE's support of this decision do not support the conclusion that market power conditions requiring mitigation are present in SDG&E's service territory at this time.
2. Preferred Resources: "While we continue to rely on markets to deliver efficiently priced products for ratepayers, we see no reason to limit our options and intend to continue to deploy all resources available to us, including utility development and ownership, to meet California's vital environmental policy objectives."
While the Commission applauds (and, indeed, requires) SDG&E's focus on procuring conventional resources that will help integrate preferred resources - and in particular, intermittent renewable generation, the utility's attempt to extend the Preferred Resources exception to any generation resource that helps integrate preferred resources is an alarmingly broad attempt to redefine the extraordinary circumstances defined in D.07-12-052.
3. Expansion of Existing Facilities: "We can envision certain unique circumstances in which ratepayers would benefit from development on or expansion of an existing IOU asset that would not lend itself to the PPA project structure, but the IOU would need to make a strong showing that such development were clearly preferable to a resource that could be obtained via a competitive solicitation that would not necessarily result in utility ownership"
We note that D.08-11-008 has since eliminated this stand-alone exception, but we address here SDG&E's position that it applied to the MEF II project because the exception was in force at the time SDG&E submitted the application.
SDG&E's "strong showing" that the MEF II project makes use of existing facilities in a manner that is "clearly preferable to a resource that could be obtained via a competitive solicitation that would not necessarily result in utility ownership" is limited to the fact that it is located on a larger SDG&E facility that serves distribution and transmission operations and units will "share certain interconnection facilities, an on-site control room, paralleled gas compressors, etc."12 with the MEF I unit.
Again, SDG&E appears to be confusing a necessary condition with a strong showing - we take it as a given that UOG projects circumventing the competitive solicitation process under the expansion of existing facilities exception would have been on utility property and shared facilities with existing UOG. SDG&E's application provides no strong showing in support of this exception beyond this necessary condition.
4. Unique Opportunity: "An attractively priced resource resulting from a settlement or bankruptcy proceeding (we anticipate that these opportunities will diminish over time)."
The "unique opportunity" SDG&E cites for the MEF II project is that "In developing the RFO milestones and timelines, it became apparent that developers would encounter schedule difficulties in meeting summer 2008 on-line dates due to the long lead time required to obtain a turbine/generator,"13 so SDG&E pre-purchased equipment for the project that it claims would cost more to purchase now than the purchase price. While this may be the case, this state of affairs does not remotely resemble the type of opportunity articulated in D.07-12-052 as cited above. This sort of self-fulfilling prophesy in no way represents the "high bar" the Commission has set for procurement of UOG outside of a competitive solicitation, and we do not consider the MEF II circumstances as representative of a "unique opportunity."
5. Reliability: "Resources needed to meet specific, unique reliability issues (particularly under circumstances in which it becomes evident that reliability may be compromised if new resources are not developed, and the only means of developing new resources in sufficient time is via UOG."
We concur with SDG&`s assessment that there is an acute need for local capacity in its service territory by summer 2009 given the delays associated with a number of generation projects currently under development including resources selected in SDG&E's 2008 peaker RFO, and MEF II will provide peaking energy and capacity that will contribute to SDG&E meeting its local and system RA requirements.14
We also support the goals of realizing ratepayer savings and retiring aging, inefficient plants, and recognize that the expedited development of resources may obviate the need for the CAISO to sign up some of the aging plants in SDG&E's service territory on reliability-must-run (RMR) contracts is consistent with these goals.
While this goal is not explicitly stated as a component of the Reliability exception, it represents the type of consideration of ratepayer interests that the Commission must weigh in ruling on applications such as the MEF II application. So while we appreciate parties' requests for more prescriptive definitions of these exceptions, and we endeavored in the preceding paragraphs to provide additional guidance regarding the Commission's thinking in adjudicating them, we must balance this desire for specificity with the need to not restrict our decision-making abilities with overly-narrow definitions that would not best serve ratepayers.
The Commission finds that SDG&E needs MEF II due to the local reliability need it is facing as a result of a number of delayed local area generation projects. SDG&E did attempt to get MEF II built through the 2008 Peaker RFO, and while parties can now, with hindsight, critique what the utility did or did not do concerning the site and the RFO process, the end result was no bidder bid on the MEF II project. In addition, the IE has testified that the project is fairly priced and merits approval. Therefore, while we reiterate our commitment to an open, competitive process for the selection of procurement resources, we approve SDG&E's application to build and operate the MEF II project.
Regarding the requested rate treatment for MEF II, as described earlier in the decision, 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). In light of the modification to the 50/50 cost sharing requirement made in D.07-12-052, SDG&E's proposed approach is fairly consistent with the risk/reward mechanism approved by the Commission in the PG&E Gateway settlement, which we find to be a reasonable model for a mechanism of this sort, and no ratepayer advocacy group (or any party, for that matter) provided arguments against or recommended any modifications to the proposed mechanism. Consequently, we adopt the proposed mechanism, and determine that once the project is constructed and operating consistent with its design specifications, the construction costs (consistent with the adopted risk/reward mechanism) and operating costs of MEF II should be recoverable from bundled ratepayers through rates.
9 D.07-12-052, p. 206.
10 D.07-12-052, pp. 208-209.
11 D.08-11-008, pp. 19-20.
12 SDG&E A.08-11-008, p. 46.
13 Ibid, pp. 46-47.
14 As additional positive attributes, MEF II will be on a Brownfield site (since it will be developed on a site already developed for industrial use for the Miramar I project)
