5. Discussion

Even though this application is unopposed, we still evaluate the application to determine if SCE conducted the New Gen RFO in a fair and reasonable manner and if the choice of CPV, El Segundo, Walnut Creek and Wellhead as resources to serve the needs of SCE's service territory was also reasonable. In particular, we reviewed the testimony submitted by SCE in support of its application that included an Independent Evaluation Report (IE Report) prepared by Sedway Consulting, Inc. (Sedway), the description of the product requirements for bid participants, the notices for the RFO, information on meetings with the Procurement Review Groups (PRG) and the Cost Allocation Methodology (CAM) Group, the criteria SCE used in evaluating and selecting the offers, the need for the new generation, and SCE's compliance and consistency with Commission decisions.

To begin, we reviewed the testimony submitted by Sedway, the IE retained by SCE to oversee the RFO process. In the IE Report, Sedway details the tasks it undertook pursuant to the New Gen RFO and concludes that:

Independent Evaluation Report

¬ SCE's bid evaluation methodology and selection processes were designed fairly;

¬ SCE conducted a fair and effective evaluation of the offers that it received in response to the solicitation; and

¬ SCE made appropriate and unbiased selection decisions in choosing the four contracts.

Sedway was provided with access to all necessary materials and meetings and was able to parallel SCE's evaluation process with its own evaluation of offers. Sedway chronicles the receipt of 22 new plant-specific, or technology-specific, offers as well as 12 additional offers from SCE's Fast Track RFO, and discusses how each offer was evaluated, including the communications with the counterparties. As the process progressed, one offer was disqualified, some offers were withdrawn by the bidders, remaining offers were told to "refresh," some offers failed to meet the refresh deadline or were withdrawn, another project was rejected, and negotiations continued with the remaining counterparties. As the process continued, final capacity prices were submitted and these offers evaluated. In the end, SCE selected the four contracts, CPV, El Segundo, Walnut Creek and Wellhead for execution. Both SCE and Sedway employed the Least Cost Best Fit (LCBF) approach for evaluating and selecting the contracts, and Sedway believes this methodology was fair and appropriate and resulted in the selection of the best projects.

Product Requirements

SCE's New Gen RFO solicited offers for the sale of electrical capacity, energy, ancillary services and resource adequacy benefits from new resources. The project was to provide incremental capacity to south-of-path (SP)-26, not already identified on the California Energy Commission's (CEC) database as "in operation" or "under construction" and had to have a remaining design life of at least 30 years. Renewable power projects, repowers, transmission projects, qualifying facilities (QF) and projects relocated from outside California to the SP-26 area could submit bids if they met the eligibility requirements.

In addition, SCE required that the bidding generating units be able to participate in the CAISO's short-term unit commitment market and generating units had to be able to start, synchronize to the system and be available for loading upon five hours' notice. The projects had to be dispatchable and SCE had to have the right to provide dispatch instructions to the generating unit for the CAISO Day-Ahead, Hour-Ahead and Real Time Markets as well as be able to start and ramp up within the time specifications given by SCE.

Projects had to have an initial delivery date on or before August 1, 2013 and have a maximum term length of 10 years. Projects had to be at least 25 MW, except for QF projects which had to be at least 1 MW.

Release of the New Gen RFO Documents

SCE's testimony sets forth in detail the notices it made available over the course of the RFO solicitation period and the IE confirmed the availability of the documents.

Consultation with PRG and CAM Group

The IOUs are required to consult with their PRG before entering into contracts for a delivery period longer than three months. Consistent with this, SCE met regularly with its PRG through all appropriate stages. In addition, D.07-12-052 required the IOUs to meet with a CAM Group for any resource that the IOU sought recovery of the costs pursuant to the cost recovery mechanism established in D.06-07-029. SCE formed a CAM group for this New Gen RFO and met regularly with the group for a discussion of the resources subject to this application.

Evaluation Methodology

In summary, SCE used the following criteria in its evaluation and selection of the Standard Track offers:

LCBF: First to value each contract and address the least cost portion and second to select the set of contracts that best meets all the constraints and preferences required to meet SCE's system needs.

Market Valuation: Forecasting the value of energy and ancillary services, contract costs and the net value of both. SCE does this analysis under 25 different electric power and natural gas price scenarios to capture future market conditions. Based on the resulting net present values and associated probabilities, SCE computed a probability-weighted net present value for each offer submitted in the Standard Track RFO. SCE first assessed the present value of the energy and ancillary service benefits of each offer, and then the present value of the costs of each offer. Costs included fixed costs; fuel costs; transmission upgrade costs; greenhouse gas (GHG) adder costs; credit and collateral adders; and debt equivalence. SCE then subtracted the present value of expected costs from the present value of expected benefits to determine the net present value of each offer.

SCE then calculated the net present value of each offer based on both the costs and benefits. Contracts were then ranked by this merit order and then adjustments were made to meet Commission objectives and other SP-26 system characteristics. SCE then followed four phases for offers from the RFO: indicative offer submittal; shortlist; negotiations; and final bidding offer submittal.

Need for New Generation

To begin, SCE determined the regional physical needs for SP-26 for generation from the expected regional load and the physical resources that are anticipated to be available for years into the future. SCE built off of the procurement authorization previously given to SCE by the Commission in D.06-07-029 and D.07-12-052 and selected the four contracts based on its estimation of the SP-26 system need for new generation as well as what SCE's share is of system need for its bundled customers.

Compliance and Consistency with Commission Decisions

Both D.06-07-029 and D.07-12-052 directed SCE to issue RFOs for long-term contracts for new generation resources, and the four contracts that are the subject of this application are the results of SCE's Standard Track RFO. SCE states in its application that it followed all established Commission protocol in its RFO process from the solicitation through the final bid evaluation and selection process, including retaining an IE, and consulting with SCE's PRG and CAM Group. In addition, SCE posits that with respect to the Walnut Creek contract with Edison Mission Energy, an SCE affiliate, SCE used Sedway for all meetings and communications with the affiliate. Sedway confirmed in its IE Report that Edison Mission Energy was not afforded any preferential treatment in the evaluation of its offers it in the negotiation of final PPAs.

SCE's application also includes testimony on its attempts to ensure the robustness of the RFO process through e-mail notifications, press releases and posting information and documents on SCE's website. SCE also describes the collaborative steps it took with the South Coast Air Quality Management District (SCAQMD), CAISO and SCE's transmission group (with a Federal Energy Regulatory Commission Standards of Conduct monitor).

SCE also propounds that it makes extensive efforts to ensure that its procurement choices are consistent with the State's Energy Action Plan (EAP) and loading order of preferred resources. SCE claims that the contracts for CPV, El Segundo, Walnut Creek and Wellhead were only chosen after energy efficiency, demand response, renewables, combined heat and power, distributed generation and repowering of existing sites had been exhausted in a cost-effective manner. In particular, SCE states that it takes three steps to ensure that its procurement decisions are consistent with the EAP: ensures that its demand-side management programs, renewable procurement, and QF procurement are accurately forecasted so that SCE only uses conventional resources as a last resort; it does not "close out" its energy needs via conventional resources for years ahead; and it uses a greenhouse gas (GHG) adder in the evaluation of contracts greater than five years in duration to effectively assess the environmental benefits of all resources.

In addition, SCE solicited, and chose, resources that can support the integration of intermittent resources. SCE's goal is to have generation projects that facilitate its incorporation of preferred resources into its portfolio and provide required system reliability.