4. Discussion
4.1. Standard of Review for Settlements
We review this contested settlement pursuant to Rule 12.1(d) which provides that, prior to approval, the Commission must find a settlement "reasonable in light of the whole record, consistent with the law, and in the public interest." We find the settlement agreement meets the criteria for a settlement pursuant to Rule 12.1(d), and discuss each of these three criteria below.
4.2. Reasonable in Light of the Whole Record
4.2.1. Amendment is Justified
Ordinarily, a question about utility rates is measured by whether the price is "just and reasonable." (See California Pub. Util. Code § 451.) We first examine whether a proposed increase to the previously approved capacity price is just, that is, justified by actual delays and cost increases incurred by RCEC. We find that it is.
PG&E and RCEC entered negotiations to amend the original PPA because RCEC claimed it could no longer perform its obligations due to project delays and increased costs. In the Application, PG&E described its efforts to review the claimed delays and cost increases, particularly the detailed estimates of RCEC's increased costs for equipment, materials, and labor. The permitting delays are a matter of public record.
In May 2008, pursuant to a confidentiality agreement, RCEC provided PG&E with a cost comparison for the RCEC project between March 2006 and May 2008.33 PG&E later provided the Commission an independent evaluation of RCEC's claimed costs by Sargent & Lundy, LCC, global energy consultants, which found, "[a]t a summary level, the 2008 estimate is appropriately comprehensive and provides an overall cost estimate that is within reason for a facility of the proposed size and scope."34 (Public Revised Supplemental Testimony at 2-A1-1.) Sargent & Lundy provided an itemized list of costs and found some individual items lower or higher than RCEC estimates , but the result overall was "reasonable." Therefore, an amendment to price from the original PPA is justified.
4.2.2. Price is Reasonable
We now turn to whether the proposed capacity price increase is reasonable. The Commission has not yet developed standards for reviewing amendments, including price, to existing PPAs for non-renewable resources. However, a price amendment to a renewable PPA will only be considered if it is compared with bids in a recent RPS solicitation.35 We find this a suitable guideline to determine whether this settlement is reasonable.
Group Petitioners argue the 2nd APPA is an improper bilateral contract and, absent "extraordinary circumstances," approval would violate the Commission's policy of competitive bidding based on the Tesla decision as noted above. However, the RCEC project was selected in an RFO, and the terms and conditions of the 2nd APPA have been subject to a comparative analysis with bids received in both the 2004 and 2008 LTRFO solicitation. Consequently, the Tesla decision is inapplicable.
The original PPA was approved in D.06-11-048 with other 2004 LTRFO contracts after "a fair, open and competitive bidding process."36 The 1st APPA was generally similar to the original PPA with some important differences including price. In response to the Scoping Memo, PG&E submitted both its own side-by-side comparison of the 1st APPA and short-listed bids in PG&E's 2008 LTRFO, and a review of that comparison by an independent evaluator.37 The independent evaluator, Alan Taylor of Sedway Consulting, concluded that the pricing and economic characteristics of the 1st APPA were reasonably comparable to the economics of the short-listed offers in PG&E's 2008 LTRFO and compared favorably in overall ranking.38 DRA and TURN reviewed this comparative information and performed their own comparison of the 2nd APPA, taking into account all the evaluation criteria, and concluded RCEC would be competitive with the short-listed bids in the 2008 LTRFO if it were bid into that RFO. Therefore, Joint Parties have shown that the 2nd APPA is comparable, in price and other criteria, to the current market for PPAs, as established by PG&E's contemporary 2008 LTRFO.
Although the 2nd APPA has several changes, we find the basic transaction intact and reasonably modified to reflect current market conditions. Based on the foregoing, we find that the policy of competitive procurement is not violated by the amendments to the original PPA which resulted in the 2nd APPA before us here. Because no violation of competitive bidding occurred, the "extraordinary circumstances" standard from the Tesla decision does not apply.
4.2.3. Other Provisions are Reasonable
CARE and Group Petitioners contend the settlement is not reasonable in light of all the facts, which they argue must include not only contract provisions, but more speculative concerns such as the identity of future equity holders and environmental issues related to the physical site where the RCEC project will be constructed. However, most of the issues raised by CARE and Group Petitioners are not within the jurisdiction of the Commission or the scope of this proceeding.
Joint Parties assert the terms and conditions of the 2nd APPA are substantially better for ratepayers than the 1st APPA. As previously discussed, terms and conditions other than price were included in the independent evaluation of the 1st APPA which compared favorably to short-listed bids in PG&E's 2008 LTRFO using the same evaluation criteria.
PG&E identified the following broad criteria used to select the 2008 LTRFO bids: "PG&E will primarily consider Market Valuation, Portfolio Fit, Credit, Participant Qualification, Project Viability, Technical Reliability (of equipment), Environmental Leadership, and Conformance with PG&E's non-price terms and conditions."39 Based on our review of the 2nd APPA, we observe that it would likely fare better than the 1st APPA in a side-by-side comparison, largely based on price but also on higher probability of performance by RCEC. From this information, it is appropriate to infer that the 2nd APPA's terms and conditions are reasonably comparable to the current market. DRA and TURN reached this conclusion as set forth in the Joint Motion and no specific objection was made by any party.
CARE mistakenly claimed that § 10.4 in the 2nd APPA would permit transfer of ownership and operation of the RCEC project without notice or opportunity for the public to comment. However, the provision reflects parties' rights and obligations regarding potential assignment of the Agreement or rights thereunder. It is unclear how CARE links the provision to some loss of public rights.
Group Petitioners correctly note that Section 9.3 of the 2nd APPA addresses the parties' rights and obligations for taxes, charges, fees or other costs for compliance with GHG regulations. However, they argue that the treatment of GHG costs is unreasonable because the actual costs are unknown. According to the Joint Parties, the fact that certain costs are unknown but will become known does not render a delegation of costs unreasonable. While DRA did briefly raise the issue in its Protest of the 1st APPA, it has now overcome that objection by approving the overall settlement agreement set forth in the 2nd APPA. We find the 2nd APPA represents a reasonable compromise of the parties' positions such that not all settling parties agree with every provision, but taken as a whole each finds the totality reasonable.
The next group of objections made by the non-settling parties can be described as opinion or speculation. For example, Group Petitioners believe RCEC should identify potential future equity holders. They also question the project's viability by stating that RCEC and PG&E have misled the Commission by failing to accurately describe the potential for further delays getting the air permit from BAAQMD or reveal that CEC may reopen the permit because RCEC has not filed required reports and paid certain fees. Similarly, CARE speculates that RCEC may not be able to timely meet project milestones and that PG&E will not enforce damages because it allegedly has failed to do so.
These arguments were largely unsupported and not helpful to the analysis. Although the future physical and financial viability of RCEC is unknown, the project now has all but one permit, RCEC says it owns or holds long-term leases for all of the land for the project site, has secured the necessary emission credits and water rights for the project, and already owns the gas and steam turbines.40 These are substantial preliminary steps that place RCEC in an advanced position to complete the project in order to recoup its costs.
The third type of objections made by CARE and Group Petitioners can be broadly described as environmental concerns related to the actual RCEC project site. These parties assert that the 2nd APPA for fossil-fueled capacity represents a move away from procurement of renewables and the power plant itself will adversely impact the surrounding community. However, the Commission has no jurisdiction over the siting and permitting of the RCEC project and, not surprisingly, such issues are outside the scope of the proceeding. In particular, Group Petitioners repeatedly, and despite clear direction to the contrary, kept offering information and argument about the potential for thermal plumes and other air hazards from the RCEC project site which they believe could affect the Hayward airport, local aviation,41 and nearby communities. We do not diminish the importance of such concerns, but after consistently advising Group Petitioners that the Commission lacked any jurisdiction over such matters, we do not address these issues further here because they are outside the scope of this review.42
We also take into consideration that the Commission has long favored the settlement of disputes. This policy supports many worthwhile goals, including reducing the expense of litigation, conserving scarce Commission resources, and allowing parties to reduce the risk that litigation will produce unacceptable results.43
Therefore, we find the 2nd APPA is reasonable in light of the whole record.
4.3. Consistent With the Law
The 2nd APPA submitted for approval by the Joint Parties conforms to the requirements for settlements set forth in Article 12 of the Rules. In accordance with Rules 12.1(a) and (b), a properly noticed settlement conference was held on December 18, 2008 to discuss the terms of the settlement and the Joint Motion contained a statement of the factual and legal considerations adequate to advise the Commission of the scope of the settlement and of the grounds on which adoption is urged.
The Joint Parties believe that the terms of the 2nd APPA comply with all applicable statutes and prior Commission decisions, and reasonable interpretations thereof. In agreeing to the terms of the 2nd APPA, the Joint Parties claim they have explicitly considered the relevant statutes and Commission decisions and believe that the settlement is consistent with them.
We agree with Joint Parties that the 2nd APPA is substantively consistent with the Commission's policies and decisions. The Commission has previously determined the need for the project and the 2nd APPA will satisfy that new resource need. The facility will be modern and will provide PG&E certain operational and environmental benefits consistent with Commission direction that new generation resources be flexible to accommodate the intermittent nature of renewable resources and lead to the retirement of aging plants.44
Group Petitioners argue that approval of the 2nd APPA would violate various federal laws regarding air traffic and safety, reward RCEC for misleading the CEC, and contradict Commission policies that favor competitive procurement. We have previously concluded that the 2nd APPA does not violate the policy of competitive procurement and the alleged violations of federal laws or CEC permit conditions by RCEC are outside the scope of this proceeding.
Therefore, we find that the 2nd APPA is consistent with the law.
4.4. In the Public Interest
As shown above, the 2nd APPA is a reasonable compromise of the Joint Parties' respective positions on individual issues and taken as a whole is fair and reasonable. There is a sound record basis for our findings and a representative array of parties in support of the settlement. In particular, the settlement represents the interests of ratepayers through DRA and TURN, employees who build, operate, and maintain power plants through CURE, and the seller and buyer of the energy capacity and energy through RCEC and PG&E, the parties to the 2nd APPA.
The proposed settlement is in the interest of PG&E's customers because approval of the 2nd APPA provides an opportunity for PG&E's customers to receive 601 MW of power beginning 2012. The City of Hayward has shown its support through an agreement with RCEC to exchange some real estate parcels and RCEC will donate $10 million to help fund a new Hayward Library.45
Since environmental concerns were argued vigorously by the non-settling parties, it is important to note that such matters have been considered by the appropriate governmental agencies. Finally, the agreement between the Joint Parties may avoid the cost of further litigation.
Based on the foregoing, we find that approval of the 2nd APPA is in the public interest.
4.5. Emissions Performance Standard
In January 2007, the Commission adopted the Emissions Performance Standard (EPS),46 which requires that baseload generation facilities designed and intended to provide electricity at an annualized plant capacity factor of at least 60 percent demonstrate that the net emissions rate of each baseload facility underlying a covered procurement is no higher than 1,100 lbs. of carbon dioxide (CO2) per megawatt hour. Based on the definitions provided in the EPS decision,
the RCEC contract is a covered procurement. The EPS decision further requires that investor-owned utilities indicate in their applications that resources comply with the EPS requirements. However, PG&E filed its original application for this project in April 2006, before the EPS was adopted, and it did not address this issue in its applications for the 1st and 2nd APPAs.
On March 20, 2009, PG&E filed documentation in this docket that indicated the project would be in compliance with the EPS. Comments on this filing pointed out that the heat rate value used by PG&E to derive an emissions rate for the unit may not represent average operating conditions (e.g., factoring in cold starts and operation below full capacity). Energy Division staff have re-calculated the emissions rate for more conservative, average heat rate, and the Commission is satisfied that the project does comply with the EPS based on likely average emissions rates for the project.
33 Application at 6.
34 Revised Supplemental Testimony at 2-A1-1.
35 Resolution E-4150 at 8.
36 D.06-11-048 at 6-7.
37 PG&E Revised Supplemental Testimony at 1-1, Attachment 1-2; Confidential Revised Supplemental Testimony at Attachments 1-1, 1-2.
38 Id. at 1-A2-2 to 1-A2-3.
39 From PG&E's 2008 LTRFO Protocol at 13, found at http://www.pge.com/b2b/energysupply/wholesaleelectricsuppliersolicitation/allsourcerfo/.
40 Testimony at 1-4, 1-6.
41 CEC denied a request for reconsideration by Group Petitioners based on the airport safety concerns because CEC found the underlying decision addressed airport and aviation issues in detail. (Order Denying Petitions for Reconsideration, etc. (Nov. 7, 2007) at 6-7.)
42 CARE, Rob Simpson, and Group Petitioners submitted information which indicates each has been actively involved in the CEC, BAAQMD, and local planning process for the RCEC project. These parties are knowledgeable about the multi-layered approval process for power plants and seem poised to continue their efforts and arguments in the proper forum.
43 See D.08-01-043, citing D.05-03-002.
44 See D.07-12-052 at 23, 106.
45 PG&E Testimony at 1-6.
46 D.07-01-039 at 3.
