5. The Impact of the PPA

5.1. Surplus Energy

The PPA is for a baseload resource. BVES anticipates that the additional 2.4 Megawatt-hours (MWh) of renewable energy from the PPA may require an increase in surplus sales.27 Specifically, BVES assumed energy deliveries under the PPA would begin on September 1, 2010, then projected a surplus energy increase of 3,226 MWhs for September through December 2010. At current market prices (approximately $45/MWh for 2011 - 2012 baseload energy), this projected increase in surplus energy sales would add approximately $140,000 to total power supply costs for all of 2011.28 Starting in 2012, when the seasonal baseload product agreement under the Shell PPA expires, BVES does not expect to have a significant amount of surplus energy.

BVES is subject to the settlement agreement adopted in D.02-04-041 which addresses recovery of energy costs through August 31, 2011. The settlement agreement adopted in D.02-07-041 set a cap of $77.00 per MWh for the weighted average annual cost used to calculate the Energy Charge component of the Purchased Power Adjustment Clause balancing account. (See, D.02-04-041, Finding of Fact 5, and Ordering Paragraph 3.) Nothing in this decision in any way alters, amends, or otherwise modifies the previously adopted settlement or its operation for rate recovery of energy costs. Therefore, we find that BVES is able to recover its net costs for energy delivered to retail customers acquired pursuant to the LACSD PPA through August 31, 2011 (the end of the settlement period), subject to the limits of that settlement.

The balance of the LACSD PPA (the period beyond August 31, 2011) is not subject to the settlement agreement. The PPA with LACSD has a purchase price of $110/MWh at the delivery point. This purchase price is fixed for the life of the PPA. The levelized cost of the PPA is also $110/MWh. This levelized price is above the 2009 Market Price Reference (MPR) of $84.48/MWh for a 10-year contract set forth in Resolution E-4298.29 BVES seeks a finding that the costs are reasonable.30

In defense of the LACSD PPA, BVES notes that it is required to acquire renewable resources to meet 20 percent of its retail load requirements by 2010. BVES explains that, in response to its 2006 requests for proposals (RFPs) for renewable resources, it received three renewable energy project proposals. Prices ranged from $175/MWh (excluding transmission costs, which were anticipated to be substantial) to $335/MWh for these projects. In 2007, BVES issued RFPs for capacity and energy, including an option for bidders to submit bids for renewable resources. BVES received three proposals for renewable energy projects or hybrid renewable energy projects as a result of the 2007 RFP. BVES rejected each of these proposals as being imprudent.31 Only two proposals were received in response to a 2008 RFP solicitation by BVES. The cost of the first of these two contracts ranged between $184.50/MWh and $260/MWh, depending on whether the contract costs are levelized over twenty or ten-years (respectively). The levelized cost of the second contract was $222.46/MWh over a twenty-year period, and BVES notes that the cost would be substantially greater if the debt had to be recovered over a ten-year period.32

BVES believes "[t]hese three successive, unproductive RFP processes demonstrated a constrained and uncompetitive market for acquisition of relatively small amounts of RPS-eligible energy."33 In the wake of these unfruitful efforts, BVES pursued RPS opportunities through a bilateral-contracting processing. Though the levelized cost of the LACSD PPA of $110/MWh is above the applicable MPR of $84.48/MWh for a ten-year contract, the cost per MWh of the LACSD PPA is less than any bid solicitation BVES received (which was not later withdrawn). We will therefore approve the contract terms for the post-settlement period and BVES may recover its post-August 31, 2011 costs subject to meeting its obligation to prudently administer the LACSD PPA.

On balance it appears that while the LACSD PPA may produce an energy surplus and related additional cost, at this time any such surplus should be short in duration and, if managed properly, of minimal cost. Consistent with this outcome, we will approve the contract terms for the post-settlement period and BVES may recover its post-August 31, 2011 costs subject to meeting its obligation to prudently administer the LACSD PPA. Nothing in this decision in any way alters, amends, or otherwise modifies the previously adopted settlement or its operation for rate recovery of energy costs, and BVES is able to recover its net costs for energy delivered to retail customers pursuant to the LACSD PPA through August 31, 2011, subject to the limits of the settlement.

27 Application, Exhibit 2 at 7.

28 As this decision is being issued in the latter half of 2011, we believe these anticipated costs will be significantly lower.

29 BVES' application and calculations assume a start date in 2010.

30 The application was unopposed. Therefore, our record is limited to the application and prepared testimony submitted by BVES.

31 One proposal with a price of approximately $107/MWh was withdrawn due to uncertainty regarding the bid price and the bidder's ability to acquire essential land rights for the project. A second project was withdrawn because BVES' supply needs could not accommodate 28 MW of baseload energy. The third proposal was rejected because it required BVES to essentially turn over all of its power supply activities to the bidder and allow the bidder to arbitrage energy in the marketplace on its own behalf.

32 BVES states that "[i]t is not possible to accurately estimate the cost over a ten-year period since the bidder's initial investment is not know." Application, Exhibit 2 at 5.

33 Application, Exhibit 2 at 5.

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