ALJ/CAB/sid DRAFT Agenda ID #3438

Ratesetting

5/27/2004 Item 39

Decision PROPOSED DECISION OF ALJ BROWN (Mailed 4/6/2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024 (Filed October 25, 2001)

(See Appendix A for a list of appearances.)

OPINION APPROVING MOTION OF SAN DIEGO GAS & ELECTRIC

COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW

ELECTRIC RESOURCE CONTRACTS RESULTING FROM

SDG&E'S GRID RELIABILITY REQUEST FOR PROPOSAL

TABLE OF CONTENTS

Title Page

OPINION APPROVING MOTION OF SAN DIEGO GAS & ELECTRIC

COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW

ELECTRIC RESOURCE CONTRACTS RESULTING FROM

SDG&E'S GRID RELIABILITY REQUEST FOR PROPOSAL 2

I. Summary 2

II. Background 2

A. San Diego Gas & Electric Company 4

B. The Basis for SDG&E's RFP 7

C. Preparation and Circulation of the RFP 9

D. Bid Evaluation 11

E. Proposed Projects Resulting From the RFP Process 13

III. Summary of Parties' Positions 14

A. SDG&E 14

B. TURN/UCAN 14

C. ORA 15

D. PG&E 16

E. Coral Power 18

F. InterGen 19

G. Dynegy 21

H. Celerity 22

I. Nevada Hydro 24

J. SER 26

K. Calpine 26

IV. Discussion 27

A. Demand Response: Comverge 32

1. Cost Recovery and Ratemaking Mechanism 35

2. Conclusion 35

B. Demand Response: Celerity 36

C. Renewable: Envirepel 38

1. Cost Recovery and Ratemaking Mechanisms 39

2. Conclusion 39

D. Ramco 39

1. Cost Recovery and Ratemaking Mechanisms 40

2. Conclusion 42

E. Palomar 43

1. Cost Recovery and Ratemaking Mechanisms 45

2. Affiliate Transaction Issues 46

3. Conclusion 47

F. Otay Mesa 50

a) Reasons to Approve the PPA 56

b) Commission Involvement 57

c) There Was No Unfairness in the RFP Process 61

d) Consideration of Otay Mesa Should Not Be Deferred to the New LTRP Proceeding 63

e) SDG&E's Need for Otay Mesa Power 65

f) The Benefits of a 10-Year PPA 66

g) Transmission Upgrades 67

h) SDG&E's Conditions 68

G. The Value of This RFP Process 68

H. Procedural Issues 70

1. Dynegy Request to Re-open the RFP 70

2. Nevada Hydro Request for an "Interconnect Study" 71

3. SDG&E Motion to Strike Portions of Briefs 73

V. Comments on Proposed Decision 74

VI. Assignment of Proceeding 74

Findings of Fact 74

Conclusions of Law 80

ORDER 81

Appendix A - List of Appearances

OPINION APPROVING MOTION OF SAN DIEGO GAS & ELECTRIC

COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW

ELECTRIC RESOURCE CONTRACTS RESULTING FROM

SDG&E'S GRID RELIABILITY REQUEST FOR PROPOSAL

I. Summary

In this decision, we approve the five proposals that SDG&E presented to meet its short-term and long-term grid reliability needs. These proposals were the result of an open and competitive Request for Proposal (RFP) process that solicited bids from all qualified resources, including turn-key natural gas-fired generating units, power purchase agreements (PPA), demand response programs, and renewable resources. Out of 22 bids received, these five proposals were identified as conforming to the RFP specifications and were found to be the least cost/best fit choices for meeting the utility's need to have a diversified portfolio of resources to meet its customers grid reliability needs, are consistent with SDG&E's long-term resource plan (LTRP), benefit consumers, and are in the public interest. The proposals include a demand response program from Comverge, a renewable resource contract with Envirepel, and contracts for three gas-fired facilities, Ramco, Palomar, and Otay Mesa. Ramco is a turn-key combustion turbine intermediate unit, Palomar is a turn-key 500/555 MW combined-cycle power plant, and Otay Mesa is a 10-year PPA for a 485/573 MW combined cycle facility.

In addition, we authorize SDG&E to continue negotiations with Celerity on a demand response contract.