II. Background

Edison filed an application on July 21, 2003, seeking Commission authorization to enter into a PPA with a to-be-acquired wholly-owned utility subsidiary that currently has the rights, permits, and contracts to build a new state-of-the-art combined-cycle gas turbine (CCGT) generating station, known as Mountainview. Mountainview is located in Redlands, California, 60 miles east of the City of Los Angeles, within Edison's load center, with an expected net electrical output of 1,054 MW and with a low target heat rate of 7,100 Btu/kWh. The facility will use natural gas as its sole fuel, and the gas will be delivered via a new 17.5-mile gas interconnection lateral to be built by Southern California Gas Company (SoCalGas). The water supply for Mountainview will be treated reclaimed wastewater from the City of Redlands and groundwater from wells on the site.

Mountainview is presently owned by MVL, a wholly owned subsidiary of Sequoia Generating Company, LLC (Sequoia). Edison has entered into an option agreement with Sequoia for the right to acquire MVL in its entirety, as a wholly owned subsidiary, including existing entitlements and obligations. Sequoia has contractual arrangements intended to cover engineering, procurement, construction, major equipment and gas, water, and electric interconnections. In addition, MVL already completed an Application for Certification (AFC) from the California Energy Commission (CEC) and received a license for the project from the CEC in March 2001. As part of the AFC process, the CEC conducted an environmental analysis of the project-this process is the functional equivalent of preparing an Environmental Impact Report (EIR) pursuant to the California Environmental Quality Act (CEQA).

If acquired by Edison, MVL, an Exempt Wholesale Generator (EWG), will complete construction of the facility pursuant to Sequoia's already negotiated construction contracts, and MVL will commit the output of the facility to Edison as a dispatchable resource dedicated to Edison's customers at cost-based rates when it comes on line in 2006. Under the option agreement, if Edison acquires MVL by November 30, 2003, the price is fixed. Edison may extend the option term through February 29, 2004, but the price and option payments increase.

Edison proposes entering into a PPA with MVL. The Mountainview PPA is structured as a tolling agreement, giving Edison the responsibility for gas procurement, hedging, and plant dispatch. The PPA will not be a market-based contract; instead it is a cost-based contract providing for recovery of investment, fixed and variable costs, and a regulated rate of return, over the 30-year life of the contract. Edison proposes financing the acquisition of Mountainview as a wholly-owned subsidiary through existing debt and equity proceeds with the operation and maintenance costs recovered through the ratemaking mechanism established for recovering procurement costs. Edison structured the transaction to satisfy investors that they will receive their cost recovery under the federal Filed Rate Doctrine (FRD).

Because the option agreement has such an abbreviated term, Edison presented this generation opportunity to the Commission without requesting a CPCN and without engaging in a competitive bidding process. Numerous intervenors raised concerns that without the "market test" that a Request for Proposal (RFP) provides, the Commission would not have sufficient cost information to rule on the application. Parties were requested to brief whether a RFP was necessary, and if so, how could a meaningful one be done in a timeframe that would allow a Commission decision before the end of the year. Briefs on the RFP issue were received from the Alliance for Retail Energy Markets (AReM) and the Western Power Trading Forum (WPTF); Sempra Energy Resources (SER); Office of Ratepayer Advocates (ORA); Navajo Nation; Independent Energy Producers Association (IEP); California Cogeneration Council (CCC); Cogeneration Association of California (CAC)¹ and the Energy Producers and Users Coalition (EPUC);² Sequoia Generating Company (Sequoia); and Edison.

While the arguments in favor of conducting an RFP were strong, because of the expedited schedule dictated by the short-term option date, the Commission did not require Edison to conduct an RFP for Mountainview. Instead, the assigned Commissioner directed Edison's Procurement Review Group (PRG) to convene and examine Edison's proposal and review the un-redacted documents.

In addition, the mechanism Edison chose for this transaction, owning Mountainview as a wholly-owned subsidiary under a 30-year contract to the regulated utility that will be reviewed and approved by the FERC, instead of applying to the Commission for a CPCN, was also of concern to the Commission and many intervenors. Parties were asked to brief whether Edison's proposed mechanism was in the public interest from a ratepayer perspective. Briefs on this issue were received from CAC and EPUC; California Large Energy Consumers Association (CLECA); AReM; the Navajo Nation; ORA; the Utility Reform Network (TURN); and Edison. The briefs raised important issues that were explored on cross-examination.

Protests to Edison's application were received from AReM; the Center for Energy Efficiency and Renewable Technologies (CEERT); the California Manufacturers & Technology Association (CMTA); CLECA; CCC; CAC and EPUC; IEP; and ORA.

Commissioner Peevey issued a scoping memorandum on September 16, 2003, setting forth the procedural schedule and addressing the scope of the proceeding. Evidentiary hearings were held October 14 through 24, 2003, and post hearing concurrent briefs were received on November 6, 2003, from Edison, ORA, TURN, the Navajo Nation, CCC, CUE, Sequoia, IEP, CAC, and EPUC. The matter was submitted on November 6, 2003.