DISCUSSION

Description of the project

The following table summarizes the substantive features of the PPA. See Confidential Appendix C for a detailed discussion of contract price, terms, and conditions:

The ORNI 21 project represents a new geothermal facility located in the Imperial Valley. ORNI's parent corporation, Ormat Technologies of Israel, is an experienced developer and manufacturer of geothermal energy projects and equipment. SCE has a long established history of purchasing geothermal power from Ormat through qualifying facility (QF) contracts. In addition, the Commission recently approved ORNI 18, a 50-100 MW geothermal project with Ormat.²⁰ ORNI 21 is a new 30 MW geothermal facility that utilizes a geothermal binary power conversion technology. The project is located in Wister, California in Imperial County.

Approval of ORNI 21 is consistent with the State's objective of supporting renewable technologies, and will ensure California continues to increase its supply of least-cost best-fit renewable resources. The energy price is at or below the 2007 MPR. However, there are certain contingencies in the PPA that may bring the total contract payments above the MPR. Thus, the Commission considers this contract to be above the MPR, and will calculate any above-market costs pursuant to the rules adopted through implementation of SB 1036.

Energy Division examined the contract on multiple grounds:

· PPA is consistent with SCE's CPUC adopted 2007 RPS Plan and was executed through a competitive solicitation

· SCE's Bid evaluation process is consistent with CPUC's least-cost best-fit (LCBF) decision

· PPA conforms to CPUC's adopted Standard Terms and Conditions

· The project is viable

· The contract price is reasonable and above the MPR.

The PPA is consistent with SCE's CPUC-adopted 2007 RPS Plan

California's RPS statute requires the Commission to review the results of a renewable energy resource solicitation submitted for approval by a utility. ²¹ The Commission will then accept or reject proposed PPAs based on their consistency with the utility's approved renewable procurement plan (Plan). SCE's 2007 Plan includes an assessment of supply and demand for renewable energy and bid solicitation materials, including a pro-forma agreement and bid evaluation methodology documents. The Commission conditionally approved SCE's 2007 RPS procurement plan, including its bid solicitation materials, in D.07-02-011.

As ordered by D.07-02-011, on March 2, 2007 SCE filed and served its amended 2007 Plan. The proposed PPA is consistent with SCE's Commission-approved RPS Plan.

PPA fits with identified renewable resource needs

SCE's 2007 RPS Plan called for SCE to issue competitive solicitations for electric energy generated by eligible renewable resources from either existing or new generating facilities that would deliver in the near term or long term. The near term need is renewable energy which can be delivered to SCE on or before January 1, 2011. The evaluation criteria favor proposals for renewable energy sales from generating facilities which can begin Initial Operation prior to January 1, 2011. SCE also considered any new or repowered facilities that operate on co-fired fuels or a mix of fuels that include fossil fuel hybrid.

SCE's 2007 request for proposals (RFP) solicited proposals for projects that would supply electric energy, environmental attributes, capacity attributes and resource adequacy benefits from eligible renewable energy resources. SCE requested proposals based upon standard term lengths of 10, 15 or 20 years with a minimum capacity of 1 MW. SCE indicated a preference to take delivery of the electric energy at SP-15, but considered proposals based upon any designated delivery point within California. Additionally, SCE solicited for contracts that were located either within California, or if outside California, have the first point of interconnection in the WECC transmission system and have access to a transmission pathway capable of delivering the energy to a location within California.

While ORNI 21 does not intend to commence deliveries on or before January 1, 2011, ORNI 21 does fit SCE's identified renewable resource needs since SCE also requested projects that can deliver in the long-term. ORNI 21 is expected to commence deliveries by June 2012 and its first point of interconnection is in California.

PPA selection is consistent with RPS Solicitation Protocol

SCE distributed an RFP package that included a procurement protocol, which set forth the terms and conditions of the RFP, requirements for proposals, selection procedures, approval procedures and the RFP schedule. As part of the bid submission, SCE required bidders to submit comments on SCE's pro forma agreement, to execute non-disclosure agreements and to send a letter stating that the bidder agrees to be bound by the terms and conditions of the protocol. The protocol also requested that proposals contain complete, accurate, and timely information about the project's supplier, generating facility, and commercial terms and the pricing details of the proposal.

Consistent with D.07-02-011, SCE retained an independent evaluator (IE) to report to SCE's procurement review group about the 2007 RPS solicitation and to ensure that the solicitation was conducted fairly and that the best resources were

acquired. According to the IE Report submitted in supplemental AL 2198-E-A, the IE performed his duties overseeing the 2007 solicitation and has provided assessment reports to the PRG and the CPUC. See Appendix E for a detailed discussion of the IE's review of these projects.

SCE says that all proposed agreements were solicited, negotiated and executed in a manner consistent with SCE's 2007 RFP Protocol. All bids offered power from eligible renewable energy resources, submitted the standard forms, agreed to be bound by the protocol and signed a non-disclosure agreement.

Bid evaluation process consistent with least-cost best fit (LCBF) decision

The CPUC's LCBF decision²² directs the utilities to use certain criteria in their bid ranking. It offers guidance regarding the process by which the utility ranks bids in order to select or "shortlist" the bids with which it will commence serious negotiations.

SCE's LCBF bid review process used for its 2007 solicitation is in compliance with the applicable Commission decisions. SCE's LCBF analysis evaluates both quantitative and qualitative aspects of each proposal to estimate its value to SCE's customers and relative value in comparison to other proposals.

Quantitative Assessment

SCE quantitatively evaluates bids based on individual benefit-to-cost (B-C) ratios. It is this B-C ratio that is used to rank and compare each project. The B-C ratios measure total benefits divided by total costs according to the following equation:

B-C Ratio = Capacity Benefit + Energy Benefit_______________

Payments + Integration Cost + Transmission Cost + Debt Equivalence

The capacity benefits are assigned based on SCE's forecast of capacity value and a technology-specific effective load carrying capability (ELCC). SCE evaluates the project energy benefits using a production simulation model that compares the total production costs of SCE's base resource portfolio with the total production costs of the portfolio including the proposed RPS project. This calculation takes into account forecasted congestion charges, dispatchability and curtailability. This modeling methodology evaluates the impact of portfolio fit for all projects.

The market valuation of each project includes an assessment of the payments, an all-in price for delivered energy adjusted in each time-of-delivery period, and integration costs. By Commission policy (D.04-07-029 and clarified by D.07-02-011), integration cost adders for all proposals must be zero. Further, the transmission upgrade costs are estimated using SCE's transmission ranking cost report for resources that do not have an existing interconnection to the electric system or a completed Facilities Study.

The benefit-to-cost ratio for the ORNI 21 project was favorable in comparison to the bids in SCE's 2007 solicitations. The initial benefit to cost ratio ranked the highest for all bids in general, and for geothermal projects in particular. See Confidential Appendix A for more detailed bid comparisons.

Independent evaluator (IE) oversaw SCE's RPS procurement process

Consistent with D.07-02-011, SCE retained an IE, Sedway Consulting, to report to SCE's procurement review group about the 2007 RPS solicitation and to ensure that the solicitation was conducted fairly and that the best resources were acquired. According to the IE Report submitted in AL 2198-E-A, Sedway Consulting performed its duties overseeing the 2007 solicitation and has provided assessment reports to the PRG and the CPUC.

In its Independent Evaluator Report, Sedway Consulting concluded that SCE "conducted a fair and effective evaluation of the proposals that it received in response to its 2007 RPS RFO and made the correct selection decisions in its short list." Sedway Consulting performed its own evaluation of all 2007 proposals using its own proprietary model developed to simulate SCE's LCBF ranking results. The IE ranked all proposals using its model and compared the results to SCE's bid ranking results. The IE's ranking results were similar to SCE's, and as a result, Sedway Consulting agreed with SCE's short-listing decisions. In addition, the IE monitored SCE's short-listing discussions, contract negotiations and meetings with management where SCE made decisions, for example, regarding bid prioritizations and negotiation positions. Overall, the IE concludes that SCE conducted a fair and effective evaluation of its 2007 renewable energy proposals.

For the IE's contract-specific evaluation of the ORNI 21 project, see Confidential Appendix E.

Consistency with adopted Standard Terms and Conditions (STCs)

The ORNI 21 contract did not modify any of the non-modifiable STCs and complies with D.08-04-009.

Contract price is reasonable and fully recoverable in rates

The levelized energy price for ORNI 21 is at or below the 2007 MPR²³, but there are certain contingencies that may bring the total contract price above the MPR. As a result, we consider this contract to be above the MPR. While the total costs may exceed the MPR, the project's benefit to cost ratio compares favorably to SCE's 2007 short-listed RPS bids.

The contract complies with the requirements for above-market cost recovery since the contract contingencies meet the requirements pursuant to Pub. Util. Code § 399.15(d)(2) (see above), the contract price is reasonable, the project is viable, and the necessary above-MPR costs of the contract are de minimis. The Commission will determine through implementation of SB 1036 or other proceedings how to calculate the above-market funds needed for contracts whose energy price is at or below the MPR, but due to other contract contingencies, the total costs of the contract could exceed the MPR.²⁴ Any above market costs needed for this contract will be subject to the rules the Commission establishes through implementation of SB 1036 or other proceedings. This price reasonableness evaluation does not set a precedent for Commission review of other RPS contracts.

We find all of the costs in the contract to be reasonable since ORNI 21 is a viable project. We believe the project is viable for the following reasons: the project developer, Ormat, is an experienced geothermal developer with over 30 years of experience and has built several geothermal facilities in California, other states, and throughout the world.²⁵ In addition, the project will use binary power conversion technology, a proven geothermal technology that Ormat has developed and that most geothermal projects use when exploiting a geothermal resource with relatively low heat. In addition, the project is located in an area with a known geothermal resource. Lastly, Ormat is self-financing the project and the project is close to securing site-control.

Lastly, the PPA contemplates termination or amendments should certain contingencies materialize. SCE should file an Advice Letter with the Commission requesting CPUC approval if any material amendments to the contract are required.

PPA is a viable project

SCE believes that the viability of the ORNI 21 project is high. The Commission is aware, however, that the project may face some project viability risks. More specifically, the ORNI 21 project may face risks since the project is still in an early development phase, is dependent on the expiring production tax credit, and transmission upgrade needs are unknown On the other hand, the project is viable, as described below. Thus, the risks are somewhat mitigated, and the project is on balance in the ratepayer interest.

Project Milestones

The PPA identifies the agreed upon project milestones, including, interconnection agreement, project financing, construction start and commercial operation deadlines.

Financeability of Resource

ORNI 21 intends to finance the development and construction phases of the project through its own funds. As a result, the viability for financing of this project is high.

Production Tax Credit (PTC)

ORNI 21 is contingent upon the extension of the federal production tax credit (PTC) as provided in Section 45 of the Internal Revenue Code of 1986, as amended. The PTC is set to expire December 31, 2008, and ORNI 21's expected initial online date is December 2012. The PTC has been extended several times in recent history, and there is potential that it will be extended again. Expiration of the PTC poses a project viability concern for this project since it is uncertain if and when it will be extended.

Sponsor's Creditworthiness and Experience

ORNI's parent corporation, Ormat Technologies of Israel, is an experienced developer of geothermal energy that has been providing SCE renewable geothermal energy under various qualifying facility (QF) contracts since 1984.

Transmission Upgrades

SCE does not anticipate that transmission will be an impediment to the completion of the project. ORNI 21 is located in the Imperial Irrigation District (IID) and recently filed its interconnection application with the IID July 2008. While the interconnection process is in the early stages, Ormat has indicated that meeting the online date should not be a problem.

SCE does not know if upgrades will be needed to SCE's system, but has informed Ormat that upgrades will be required on the CAISO system. The ORNI 21 project, similar to the ORNI 18 project, may not initially deliver the energy to SCE's service territory because transmission upgrades may be necessary to transmit the energy from IID to SCE's territory. However, because the RPS program allows the RPS-eligible energy to be delivered anywhere in California, SCE can remarket the energy until the necessary transmission upgrades are completed. Since the need for upgrades are not yet known, transmission may be a risk.

Site-Control

ORNI 21 has nearly completed site control of the location. ORNI 21 has approximately 80% of the leases needed in order to complete development of the project and is close to securing the remaining leases.

Fuel/Technology

The capacity factor for the ORNI 21 project is 95%. Technology risk is not a concern since ORNI 21 will use a binary power conversion technology, a proven technology that is employed by most geothermal developers utilizing fuel sources with relatively low heat. Ormat has been primarily responsible for the development of this technology and has successfully developed, financed, constructed and operated projects based on this technology over the past thirty years.

According to Ormat, the quality of the geothermal source for the ORNI 21 project will be able to provide the necessary heat for the output required under the contract. Ormat believes that there is ample resource heat and fluid deliverability to supply and sustain, at the very least, a 30 MW generator, with a good prospect of expanding beyond this minimum. SCE has had several meetings with Ormat's geotechnical and drilling staff regarding the nature of the geothermal reservoir, geothermometry survey results, and resource delivery expectations. Ormat, however, will only be able to determine the resource's potential beyond 30 MW upon further exploration of the site.

The Commission denies DRA's protest

DRA recommends that the Commission limit its approval of SCE's proposed contracts as follows:

· The Commission should limit its approval of AL 2198-E to only the initial project size for all contracts.

· The Commission should require SCE to disclose whether the prices of the three contracts are above or below the MPR for purposes of SCE's entitlement to SEPs.

The pricing, terms and conditions of the ORNI 21 PPA are the same regardless of whether the developer exercises the expansion option or only builds the initial project capacity. Thus, the Commission does not find a need to limit approval of the ORNI 21 contract to only the initial project size. Commission approval of the contract with the expansion options is in the ratepayer interest since the price is reasonable, the project is viable, and will contribute towards SCE's RPS obligations.

As for DRA's second point, SCE disclosed in the reply comments that the energy price was at or below the MPR. While the energy price is at or below the MPR, this resolution clarifies that there are certain contract contingencies that may bring the total price of the contract above the MPR.

The Commission rejects DRA's protest on both accounts.

Confidential information about the contract should remain confidential

Certain contract details were filed by SCE under confidential seal. Energy Division recommends that certain material filed under seal pursuant to Public Utilities (Pub. Util.) Code Section 583 and General Order (G.O.) 66-C, and considered for possible disclosure, should be kept confidential to ensure that market sensitive data does not influence the behavior of bidders in future RPS solicitations.

²⁰ Resolution E-4126, http://docs.cpuc.ca.gov/Published/Final_resolution/80216.htm

²¹ Pub. Util. Code, Section §399.14

²² D.04-07-029

²³ 2007 MPR, Resolution E-4118 http://docs.cpuc.ca.gov/PUBLISHED/Final_resolution/73594.htm

²⁴ See Administrative Law Judge Ruling Requesting Post-Workshop Comments on Implementation of SB 1036. http://docs.cpuc.ca.gov/efile/RULINGS/84374.pdf

²⁵ http://www.power-technology.com/projects/mokai/mokai3.html