3. Joint Petition

On April 15, 2010, the Joint Parties filed a petition to modify D.09-04-010 to approve an amendment to the previously approved 2^nd APPA between PG&E and RCEC (1^st Amendment to 2^nd APPA). The key changes include a reduction to the energy capacity price and a one year extension to the expected delivery date. The Joint Petition seeks approval of the 1^st Amendment to the 2^nd APPA on the grounds that (1) the changes are necessary to preserve the fundamental purpose and benefits of the previously approved agreement, (2) it reduces the overall contract costs for customers, (3) it helps satisfy an identified resource need in PG&E's service territory, and (4) it provides PG&E with an "operationally flexible and environmentally beneficial new generation resource at a time when it is difficult to develop new generation in California."¹¹

Attached to the Joint Petition in support were the following appendices:

· Appendix A - specific language for proposed changes to D.09-04-010

· Appendix B - Declaration of Richard L. Thomas (Thomas Declaration), Vice President of RCEC, describing the chronology of approval for RCEC's PSD permit

· Appendix C - comparison matrix summarizing the amended terms and conditions between the 2^nd APPA and the 1^st Amendment and an explanation of the changes

· Appendix D - specific language of the 1^st Amendment to the 2^nd APPA

· Appendix E - Declaration of Charles E. Riedhauser (Riedhauser Declaration), PG&E's Director of Quantitative Analysis for energy procurement, describing the cost-effectiveness of the 1^st Amendment to the 2^nd APPA using an approach similar to the approach that PG&E used in its 2008 LTRFO, and concluding it will result in lower net customer costs than the 2^nd APPA and so represents improved value for PG&E's customers

· Appendix F - Declaration of Joseph P. Como (Como Declaration), attorney for DRA, describing his review of the 1^st Amendment to the 2^nd APPA, his finding of significant savings for customers over the life of the contract, and his conclusion that its adoption is in the public interest

· Appendix G - Declaration of Michel Peter Florio (Florio Declaration), senior attorney for The Utility Reform Network, describing his review of the 1^st Amendment to the 2^nd APPA, his finding of significant savings for customers over the life of the contract, and his conclusion that its adoption is in the public interest

PG&E filed a motion to allow portions of Appendices C and E, and all of Appendix D 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 June 18, 2010 ruling.

3.1. The PSD Permit Delays

Joint Parties explained that the ever-changing status of the PSD permit is the primary reason that PG&E initially sought to amend the original PPA approved in D.06-11-048, and again is the primary reason for the proposed 1^st Amendment to modify the adopted 2^nd APPA. A history of the PSD process for RCEC is set forth in detail in the Thomas Declaration, is undisputed, and is summarized here.

BAAQMD issued an amended PSD permit to RCEC on November 1, 2007 and an appeal was filed. In July 2008, the Environmental Appeals Board (EAB) of the EPA remanded the PSD permit to BAAQMD to correct a defect in the federal notice requirements. PG&E submitted its application, A.08-09-007, to amend the PPA on September 10, 2008. On December 8, 2008, BAAQMD re-issued a Draft PSD, two weeks prior to the settlement proposed by the Joint Parties represented by the 2^nd APPA. Joint Parties state that RCEC believed, based on its experience, that the final PSD permit would be issued in time to allow it to meet the expected delivery date contained in the 2^nd APPA. The 2^nd APPA was approved by the Commission on April 20, 2009.

However, on April 24, 2009, under a new federal administration, the EPA granted reconsideration and stay of a "grandfathering" provision concerning fine particulate matter, which BAAQMD had relied upon in its issuance of the Draft PSD permit. It was not until August 3, 2009, that BAAQMD issued a revised Draft PSD addressing public comments and the EPA stay. BAAQMD held another public hearing on the revised Draft PSD on September 2, 2009 and, after receipt of public comments, issued a Final PSD permit on February 3, 2010, along with a 235-page response to public comments. Ten appeals were subsequently filed, BAAQMD sought summary dismissal of four, and on April 14, 2010, EAB agreed as to two and ordered those appellants to show cause why the appeals should not be dismissed. The other appeals are currently pending.

3.2. Summary of 1^st Amendment to 2^nd APPA

The Joint Petition claims the proposed changes account for delays associated with the PSD permit and help "ensure that the benefits acknowledged by the Commission in D.06-11-048, D.09-04-010, and D.10-02-033 are realized at a lower cost to customers."¹² We are cognizant that the actual bi-lateral contract terms and conditions of power purchase agreements between utilities and non-affiliated third parties, other than defined contract summary terms, are presumed to be market sensitive for the benefit of ratepayers pursuant to D.06-06-066, and were filed under seal herein by authority granted in the ALJ Ruling of June 18, 2010. With that in mind, the changes to the 2^nd APPA contained in the 1^st Amendment are summarized below:

· A reduction to the Capacity Payment Rate

· A one-year extension to the expected initial delivery date to June 2013

· Modifications to date-driven provisions involving development, conditions precedent, critical milestones, and delivery of the project

· Modification of date-driven rights and liabilities of the parties related to issues of termination and default

· Other minor changes, i.e., correction of clerical errors, clarifications, administrative efficiencies, and updates on the project's status

PG&E, DRA, and TURN, who were among the parties to the settlement of PG&E's original application, state they reviewed and analyzed the 1^st Amendment prior to filing the Joint Petition.¹³ The changes, say the Joint Parties, do not alter the essence of either the original PPA or the 2^nd APPA, "namely, the agreement by RCEC to provide to PG&E energy capacity and energy from its 601 MW combined-cycle facility in Hayward for a ten-year term."¹⁴

3.3. Response to the Joint Petition

On May 20, 2010, Group Petitioners' filed a Response to the Joint Petition and stated that because the Group Petition was filed before the Joint Petition, it "must be" ruled upon first.¹⁵ The Group Response is very brief. The primary argument appears to be that the Joint Petition is an admission that some of the terms and conditions contained in the 2^nd APPA are no longer viable and, therefore, the petition itself is "an admission against interest and evidence in support of granting" the Group Petition.¹⁶

Their position is somewhat clarified when read in conjunction with the three motions for official notice of facts, previously ruled upon by the ALJ.¹⁷ In the three motions, designed to get "facts" arguably related to the PSD permit delays before the Commission, Group Petitioners claimed that because RCEC would not have the permit by September 1, 2009, it would be in default under the terms of the 2^nd APPA. The Group Response concludes that the 2^nd APPA is "over" and that if PG&E and RCEC want to enter into a new PPA, they must follow "appropriate procedures."¹⁸

The Group Response also specifically disputes a contention in the Joint Petition that the Commission has previously affirmed, in D.09-04-010 and D.10-02-033, that the RCEC project is a needed energy source. Instead, there has been no such affirmation of need because, the Group Response states, the subject was excluded from the proceeding by the Scoping Memo, a fact noted in both decisions.

Finally, the Group Response addresses the cost recovery mechanism issue but, since the issue has been withdrawn, the arguments will be neither described nor addressed here.

3.4. Discussion

The Joint Petition was timely filed within one year of the effective date of the petition proposed to be modified, pursuant to the requirements of Rule 16.4(d). It is also consistent with prior Commission practice for the Joint Parties to seek approval of the 1^st Amendment to the 2^nd APPA through a Petition for Modification (PFM). For example, in D.06-09-021, the Commission approved revisions to a previously approved ten-year PPA that were proposed in a PFM and included an extension of the on-line date for the underlying power plant. The Commission approved the PFM and found that the revised PPA, which reflected more extensive changes in terms than proposed here,¹⁹ would preserve the benefits of the previously approved PPA and ensure that a state-of-the-art generation facility would be built. The facts are sufficiently similar to support the Joint Parties' use of this procedural avenue of relief.

Group Petitioners instead argue that the Commission should view each of the PFMs separately and in the order filed: first, to grant the Group Petition reversing approval of the 2^nd APPA because it is in default and unreasonable and, second, to deny the Joint Petition by finding it the improper avenue of relief after the 2^nd APPA has been rejected. No legal support was offered for the position that the Commission must selectively view the facts or petitions in a particular chronological order, nor is there anything in the Commission's Rules that requires it. The Commission has undertaken its review of both petitions at the same time, following the Commission's action on two applications for rehearing which was concluded earlier this year. Recognition of the procedural efficiencies of first determining whether D.09-04-010 would be subject to rehearing was a prudent use of resources, before commencing the analysis of whether to modify that decision, which was in fact clarified in D.10-02-033.

The substance of Group Petitioner's argument flows through the Group Petition, Group Response, and supporting motions for notice of facts. It asks the Commission to find that, as of the date the Group Petition was filed on June 22, 2009, the EPA's reconsideration and stay of a "grandfathering" provision concerning fine particulate matter, would delay BAAQMD's issuance of the Draft PSD permit. In the various filings, Group Petitioners sought to establish that the PSD permit would not be issued within the contemplated time frame of the 2^nd APPA, that this was in fact a contract default, and that the contract was no longer feasible or operative. This request is speculative, exceeds the scope of the Commission's review in this proceeding, and is now moot, as discussed above. The parties to the contract have not claimed any default, nor asked the Commission to determine such. The Commission's review here is focused on whether the proposed changes to the previously approved 2^nd APPA are reasonable and in the public interest.

The Joint Parties concede and rely upon the delay, albeit unexpected, in the issuance of the PSD permit. The history of the permit process set forth above illustrates the unusual set of actions that resulted in a span of twenty six months from the time the first Draft PSD permit was issued, until the Final PSD permit was issued. We do not find it unreasonable that Joint Parties found it necessary to propose a 1^st Amendment to the 2^nd APPA after numerous appeals were filed against the Final Permit issued in February 2010. The 1^st Amendment to the 2^nd  APPA makes limited changes to extend the expected online delivery date by one year and reduce the capacity price to reflect recent market trends.

In considering whether the changes are reasonable and in the public interest, the Commission's review prioritizes the capacity price and expected delivery date of the resources. In both of these categories, the 1^st Amendment to the 2^nd APPA is acceptable. When approving the 2^nd APPA, the Commission required an independent review of PG&E's first amendments to the PPA, and established the amendment to price was justified and reasonable when placed in comparison to short-listed bids in the 2008 Long Term Request for Offer (LTRFO) solicitation.²⁰ DRA and TURN, ratepayer representatives, then reviewed this information and performed their own comparison to the terms of the 2^nd APPA offered in settlement. Taking into account all of the evaluation criteria, each concluded that the 2^nd APPA would be competitive with short-listed bids in the 2008 LTRFO, and was thus comparable in price and other criteria, to the current market for PPAs.

As set forth in the Como Declaration and Florio Declaration, DRA and TURN have once again performed a qualitative comparative analysis of the proposed changes and concluded that the 1^st Amendment to the 2^nd APPA will result in reduced customer costs, is in the public interest, and should be adopted. No evidence to the contrary has been submitted.

Group Petitioners also indirectly raised the issue of whether the energy capacity was still needed by disputing that the Commission affirmed the need in D.09-04-010 and D.10-02-033, as alleged in the Joint Petition. Their argument is mistaken because the Commission has acknowledged the need in those decisions and elsewhere. In D.09-04-010, the Commission referred to the Scoping Memo issued in this proceeding where the proposal by some parties to review the need for the project was rejected because "[T]he Commission has previously determined the need for the PPA with the RCEC project in D.04-12-048."²¹ In D.10-02-033, the Commission said it was "not legally required to reexamine the determinations of need and cost-effectiveness that were made in D.04-12-048 and D.06-11-048."²²

We generally agree that, at some point, a previously approved PPA which has been subject to numerous delays and revisions, should eventually be re-considered in the next Long Term Procurement Planning proceeding. Notably, in the proposed decision on PG&E's 2008 LTRFO (A.09-09-021), the Commission examined issues of reduced projected demand in relation to previously projected resource adequacy needs and planning reserve margins. The Commission acknowledged that the projected need included the delayed RCEC project and said :

While we acknowledge that a potential failure of the Russell City project could have an impact on PG&E's procurement, we do not believe it appropriate to weigh this factor in our deliberations here. In addition to the project's failure being wholly speculative at this time,²³ we note that should the project fail, the terms of D.07-12-052 allow PG&E to procure generation in an offsetting amount. (Proposed Decision at 25.)

Therefore, we decline to visit the issue of need which the Commission has repeatedly found to be outside the scope of this proceeding. However, we caution PG&E that if there is insufficient progress towards the actual construction of the RCEC project by the commencement of its next LTRFO proceeding, then the Commission may decide to include the project in its re-evaluation of the utility's future procurement needs.

The Joint Petition's request to modify D.09-04-010 should be granted. We approve the 1^st Amendment to the 2^nd APPA for RCEC because we find that it gives PG&E a cost-effective, local area reliable resource,²⁴ with a lower long-term cost to the utility's ratepayers than the 2^nd APPA. The plant will be a state-of-the-art, low heat-rate, clean facility in PG&E's service territory with the potential for many years of benefits. The Final PSD permit has been issued and the expected delivery date is in sight, assuming the pending permit appeals are promptly resolved. Thus, the RCEC project remains viable and the originally approved ten-year PPA essentially intact. The project design and operational benefits for RCEC did not change between the original PPA, the 2^nd APPA, and the 1^st Amendment to the 2^nd APPA. The primary changes in the 1^st Amendment to the 2^nd APPA were to account for unforeseen permit delays, and provide a reasonable agreement among representative parties which is in the public interest.

3.5. Modifications Required

The Joint Petition includes, as Appendix A, suggested edits to D.09-04-010, as modified by D.10-02-033, to accomplish the revisions discussed above. A substantial portion of the proposed revisions related to the issue of the cost recovery mechanism for RCEC which was withdrawn by the Joint Parties from the Joint Petition. Therefore, the revisions required to accomplish the modifications discussed above have been set out in Attachment A to this decision. The revisions incorporate, in substantial part, the revised language proposed in the Joint Petition, but in the interest of improved clarity, do not adopt the proposal verbatim.

¹¹ Joint Petition at 9.

¹² Joint Petition at 7.

¹³ Joint Petition at 8.

¹⁴ D.10-02-033 at 5.

¹⁵ Group Response at 1.

¹⁶ Group Response at 1.

¹⁷ ALJ Ruling on various Motions dated June 18, 2010.

¹⁸ Group Response at 2.

¹⁹ For example, put and call options were added to give San Diego Gas & Electric Company an option to purchase the power plant at the end of the ten-year contract term (D.06-09-021 at 2).

²⁰ D.09-04-010 at 16-17.

²¹ D.09-04-010 at 3, citing Scoping Memo and Ruling at 2.

²² D.10-02-033 at 4.

²³ Reference to the Joint Parties filing of the Joint Petition on April 15, 2010.

²⁴ Joint Petition at 8.