DISCUSSION

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

Generating Facility

Type

Term Years

MW Capacity

Annual Deliveries

Online Date

Project Location

Esmeralda

Geothermal

20

40 MW

319 GWh

December 31, 2010

Imperial County, California

Energy Division examined the contract on multiple grounds:

PPA is consistent with SDG&E's Commission adopted 2007 RPS Plan

California's RPS statute requires that the Commission review the results of a renewable energy resource solicitation submitted for approval by a utility.15 SDG&E's 2007 RPS procurement plan (Plan) was approved by D.07-02-011 on February 15, 2007.16 Pursuant to statute, the Plan includes an assessment of supply and demand to determine the optimal mix of renewable generation resources, consideration of flexible compliance mechanisms established by the Commission, and a bid solicitation protocol setting forth the need for renewable generation of various operational characteristics.17

PPA is consistent with identified resource needs

The stated goal of SDG&E's 2007 RPS Solicitation Plan has been to develop and maintain a diversified renewable portfolio that best fits SDG&E's resource needs. SDG&E's 2007 Renewable RFO supports this goal by promoting a diverse mix of renewable technologies and by allowing SDG&E to pursue a combination of both power purchase and ownership options including turn-key and joint venture. Consistent with its 2007 RFO, SDG&E solicited bids from renewable projects located both within California and out of state, provided that any renewable projects located outside of California meets the requirements set forth in PUC Code Section 399.16 and California Energy Commission (CEC) Eligibility Guidebook restrictions. The RFO solicited capacity and energy services from repowered, upgraded or new facilities. Products could include unit firm or as-available deliveries starting in 2008, 2009, 2010 or 2011. Thus, a wide range of diverse renewable projects was available to compare SDG&E's least-cost/best-fit analysis of the Esmeralda contract vis-à-vis the responses to the 2007 RFO. If approved, the 40 MW facility is expected to begin deliveries in 2011 of 319 GWh per year of geothermal generation, which is approximately 1.8 percent of SDG&E's forecasted 2011 annual retail sales18.

PPA is consistent with RPS procurement guidelines

There is no pre-established reasonableness standard for bilateral contracts. D.06-10-019 provides an interim authority allowing the Commission to approve contracts based on a reasonableness standard determined at its own discretion. In addition, Commission decisions have adopted interim guidelines for approving RPS bilateral contracts. Specifically, the Commission has said bilateral contracts must be reasonable and prudent (D.03-06-071, p. 59; D.06-10-019, p. 31). 19 The proposed PPA is consistent with Commission decisions regarding RPS bilateral contracts.

The Commission intends to adopt more explicit reasonableness review standards and criteria for RPS bilateral contracts in a decision in the near future. Until such decision is approved, the Commission will continue to consider the approval of RPS bilateral contracts on a case-by-case basis.

Consistency with Adopted Standard Terms and Conditions

The Commission set forth standard terms and conditions to be incorporated into RPS agreements in D.04-06-014, D.07-02-011 as modified by D.07-05-057,20 and D.07-11-02521. Standard Terms and Conditions (STC) were identified in confidential Appendix B of D.04-06-014 as "may not be modified". On November 16, 2007, the Commission adopted D.07-11-025, which reduced the number of non-modifiable terms from nine to four, and refined the language of some of these terms in response to an amended petition for modification of D.04-06-014.22 The Commission compiled the most updated STCs in D.08-04-009, and excluded the supplemental energy payments term, such that there are now thirteen STCs of which four are non-modifiable.

"May Not be Modified" Terms

The PPA does not deviate from the non-modifiable terms and conditions.

"May be Modified" Terms

During the course of negotiations, the parties identified a need to modify some of the modifiable standard terms in order to reach agreement. These terms had all been designated as subject to modification upon request of the bidder in Appendix A of D.04-06-014 and in D.07-11-025.

PPA is a viable project

SDG&E believes the project is viable because:

Project Milestones

The PPA identifies the agreed upon project milestones, including the commercial operation date.

Permitting and Site Control

The developer is pursuing the necessary permitting and site control activities to allow development of the project. In 2000, the manager of Esmeralda applied for noncompetitive U.S. Department of Interior, Bureau of Land Management (BLM) leases which will encompass 100% of the projects land requirements. On February 1, 2008 BLM issued the Final Environmental Impact Statement for the Truckhaven Geothermal Leasing Area, which recommended the area for leasing.23

Financeability of resource

SDG&E believes that the project selected has a reasonable likelihood of being fully financed and completed as required by the PPA and will be available to deliver energy by the guaranteed commercial operation date. Esmeralda is currently seeking cash and tax equity from financial institutions and industry members.

Production Tax Credit (PTC)

The PPA price is dependent on the extension of the federal PTC as provided in Section 45 of the Internal Revenue Code of 1986, as amended.

Sponsor's creditworthiness and experience

The developer has over 30 years of experience in the geothermal industry.

Technology and Fuel Quality

Geothermal is a proven technology and the project will be using "off-the-shelf" technology. The Truckhaven Geothermal Resource area in Imperial County is in a region with known geothermal resource areas. Esmeralda and Geothermex have estimated resource quality based on a test well drilled on an immediately adjacent parcel. The amount of geothermal steam for the project, however, will be more clearly known once extensive drilling has been completed.

Transmission

The project will connect to Imperial Irrigation District (IID) which will wheel the output from the project to the IV substation. If Sunrise Powerlink is approved and built, it would be available to connect Esmeralda generation from the IV substation to SDG&E's load and thus SDG&E's preferred transmission option due to reduced congestion costs. 24 The project could also interconnect to the transmission system use existing transmission if the Sunrise transmission link were not built or not in service.25

Contract price is reasonable

The Commission believes that the contract price is reasonable. The levelized contract price is below the 2007 MPR.26 Also, the Project's contract price compares favorably to other geothermal bids in the 2007 RPS solicitation. Confidential Appendix D includes a detailed discussion of the contract's pricing terms.

Qualitative factors were considered during bid evaluation

SDG&E considered qualitative factors as required by D.04-07-029 and D.05-07-039, e.g. credit and finance, project status, technology viability and participant experience, and consistency with RPS goals. If approved, SDG&E will contribute to the diversification of SDG&E's renewable technology portfolio and significantly increase SDG&E's RPS procurement in 2011 and beyond.

PPA will contribute to SDG&E's minimum quota requirement

Pub. Util. Code 399.14(b)(2) states that before the Commission can approve an RPS contract of less than ten years' duration, the Commission must establish "for each retail seller, minimum quantities of eligible renewable energy resources to be procured either through contracts of at least 10 years' duration or from new facilities commencing commercial operations on or after January 1, 2005." On May 3, 2007, the Commission approved D.07-05-02827 which established a minimum percentage of the prior year's retail sales that must be contracted with contracts of at least 10 years' duration or from new facilities commencing commercial operations on or after January 1, 2005. As a new, long-term contract, deliveries from this Project will contribute to SDG&E's minimum quota requirement.

Center for Biological Diversity's protests are rejected, and the PPA is approved without modification.

CBD protested AL 1963-E on two accounts.28 First, CBD requested that the contract should be modified to "remove any clause limiting delivery options to construction of the proposed the Sunrise Transmission Project". Second, CBD requested that approval of the contract be conditioned on CEQA review and approval of the Esmeralda project. The Commission rejects CBD's protest.

CBD requests that the contract should be modified to "remove any clause limiting delivery options to construction of the proposed the Sunrise Transmission Project".

CBD argues that predicating the project on Sunrise Powerlink is inappropriate for the following reasons:

SDG&E argues in their response to the protest that predicating the PPA on the Sunrise Powerlink is in the best interest of the ratepayer.30 They argue that the condition precedent is ensuring that ratepayers are not obligated to purchase generation if the generation is stranded (i.e. the generation is not able to reach where it is intended). Moreover, in response to CBD's concern that contract terms exclude consideration of all available transmission options and place an unreasonable restraint on meeting the requirement under the RPS, SDG&E argues that the Sunrise Powerlink will provide an additional transmission option to the project.

While the Commission acknowledges that the generation from the project can reach its intended delivery point (page 12), we find the condition precedent reasonable and reject CBD's request to remove the condition precedent.

Further, SDG&E's requested relief is not unjust, unreasonable, or discriminatory. First, the condition precedent contract term does not limit the contract. The contract is executed and accepted by both parties. Second, the condition precedent contract term does not discriminate or exclude against other delivery options. Generation from the Esmeralda facility may or may not use the new transmission referred to in the condition precedent. Third, the condition precedent does not require generation from the facility to use a specific transmission route. If anything, the condition precedent, as SDG&E noted in its reply, ensures an additional transmission option. Thus, the condition precedent is not unjust, unreasonable, or discriminatory pursuant to GO 96-B 7.4.2(6).

Additionally, the Commission recognizes that SDG&E has a statutory mandate to reach 20 percent RPS procurement by 2010. If SDG&E has deficits in RPS procurement targets, its shareholders may be subject to penalties. It is therefore within SDG&E's discretion to weigh the costs and benefits of conditioning this PPA on a new transmission line, while considering the costs to its ratepayers, its progress towards meeting its RPS goals, and the potential penalties its shareholders may be subject to.

Therefore, we reject CBD's protest that the condition precedent be removed, and the Commission will not require the PPA to be modified. To the extent there is any condition precedent in the contract that they want to change, the parties can mutually agree to waive that restriction or delete the condition precedent from the contract language.  However if such waiver or deletion were to occur and there is a material change in the contract, SDG&E would need to file an Advice Letter requesting Commission approval of the material change.

CBD requests approval of the PPA be conditioned on CEQA review and approval of the Esmeralda Truckhaven project

The second part of CBD's protest called for Commission approval to be conditioned upon CEQA review and approval of the project. Protestants' arguments regarding CEQA lack merit for several reasons. First, the scope of this resolution is confined only to approval of SDG&E's anticipated costs as reasonable and the Commission herein expresses no opinion about any issue other than SDG&E's anticipated costs. Second, approval of SDG&E's anticipated costs (not the development plans) is not an "approval" of a "project" within the meaning of CEQA. (Public Resources Code Section 21065; CEQA Guidelines, Cal. Code Regs., tit. 14, §§ 15352(a), 15378.) Lastly, approval of this contract is not an "essential step" which commits the Commission to any particular course of action. For these reasons, protestants' arguments lack merit.

Approval of this contract does not in any way limit the review of project alternatives should future environmental reviews of the development projects require such analysis. Further, by this resolution the Commission is granting no rights to develop property and is not binding itself or any other party to any particular development plan. The Commission merely finds that, should the contemplated development plans come to fruition, SDG&E may account for such deliverables as a renewable energy resource, may recover certain costs in rates, and may enter into contracts with various parties.

It should also be noted that, on the federal level, the project is located on BLM land. The BLM will undertake the necessary environmental review pursuant to the National Environmental Policy Act.

While this resolution is approving the contract between the two entities, not the development of the facility itself, any project, as defined by CEQA, is subject to all applicable environmental laws. As such, the project will not go forward without meeting the relevant environmental laws and thus the ratepayer will not be subject to purchasing generation if the project is not built. Thus, the Commission does not condition the approval of the PPA on CEQA.

The Commission approves this PPA for the following reasons. First, the price in this PPA is reasonable when compared to the relevant MPR. Second, the project is reasonable when compared with bids received and evaluated under the 2007 RFO. Third, the project has been reasonably shown to be viable based on project development, site control, permitting, financing, resource studies, technology, and transmission needs leading to a reasonable likelihood of delivering as planned in 2011 and contributing to SDG&E's RPS quota. Approval of this Contract will increase in-state renewable energy generation and provide greater resource diversity.

Confidential information about the contract should remain confidential

Certain contract details were filed by SDG&E 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.

15 Pub. Util. Code, Section §399.14

16 http://www.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/64640.htm

17 Pub. Util. Code, Section §399.14(a)(3)

18 2011 forecasted sales were based on SDG&E's 2008 RPS Plan

19 "[The CPUC]...will allow prudent bilateral contracts only when such contracts do not require any PGC [Public Goods Charge] funds" (D.03-06-071 p. 59, CoL 31, OP 29).

"For now, utilities' bilateral RPS contracts, of any length, must be submitted for approval by advice letter. Such contracts are not subject to the MPR, which applies to solicitations, but they must be reasonable (D.03-06-017, mimeo., p. 59) the PPA is at least one month in duration (D.06-10-019 p. 29).

20 D.07-05-057 Order Modifying Decision 07-02-011 Regarding Definition of Green Attributes http://www.cpuc.ca.gov/word_pdf/FINAL_DECISION/68383.pdf

21 D.07-11-025, Attachment A http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/75354.PDF

22 On February 1, 2007, PG&E and SCE jointly filed a petition for modification of D.04-06-014. On May 22, 2007, a PD was filed and served. Prior to the PD being voted on by the Commission, PG&E and SCE filed an amended petition for modification of D.04-06-014.

23 The proposed action in the Final Environmental Impact Statement was to offer all BLM managed lands within the Truckhaven area for lease, subject to certain stipulations and mitigation measures to be applied at the development stage ( http://www.blm.gov/ca/pdfs/elcentro_pdfs/TruckhavenFEIS/00a_cover.pdf)

24 Independent Evaluator's Report for a Bilateral Long-Term Renewable Resource contract Offer from Esmeralda Truckhaven Geothermal LLC, p. 11

25 Ibid.

26 Resolution E-4118, Adopting the 2007 MPR, October 4, 2007, http://docs.cpuc.ca.gov/PUBLISHED/Final_resolution/73594.htm

27 http://www.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/67490.PDF

28 Sierra Club joined CBD in protesting AL 1963-E-A. This subsequent protest reiterated the arguments of the protest filed in regards to AL 1963-E.

29 GO96-B, Section 7.4.2(6) states that advice letters may be protested if "The relief requested in the advice letter is unjust, unreasonable, or discriminatory, provided that such a protest may not be made where it would require relitigating a prior order of the Commission." [reference added by Staff]

30 SDGE February 27, 2008 response, p. 2

Top Of Page