5. Discussion
After review of the application, PG&E's testimony, PG&E's responses to two ALJ rulings, and evidentiary hearings, we can make a number of findings which taken as a whole support granting the application.
We find that the transactions proposed by PG&E will lead to a significant net reduction of GHG emissions at the levels claimed by PG&E. While benefits from reduction of payments to GWF associated with GHG emissions are included in PG&E's analysis, we also find, as PG&E witness Mr. Monardi testified, that there is an economic benefit to the net reduction of GHG emissions from the overall GWF transaction which has not been quantified in the application. We find that the shutdown of the five petroleum coke facilities will benefit local communities in Contra Costa County with a variety of specific, but unquantified, local and regional environmental improvements, as claimed by PG&E.1
We also find that the Henrietta and Hanford facilities will also offer PG&E a range of ancillary services and other capabilities, including spinning reserves, quick start capability, and a large number of starts and operating hours. While PG&E does not assign a dollar value to these services and capabilities, we find there is a positive value associated with them. Finally, we find that the Peaker PPAs may help meet PG&E's local RA requirements during the 10-year contract terms in the Fresno transmission constrained area, but only if there will be any additional local RA capacity need in that area. However, the RA value of these PPAs in the Fresno area may be zero. Therefore, we do not find a positive value for local RA capacity.
We note that there is no evidence of any unquantified costs.
After review of the record (including confidential material in testimony, responses to ALJ Rulings and evidentiary hearings), we find some uncertainty about the accuracy of PG&E's claim that the cost of the new contracts with the Hanford and Henrietta peaker plants would be $15 million less than the cost of the five petroleum coke baseload plants. PG&E witness Mr. Monardi provided credible testimony2 in closed session that PG&E's cost/benefit analysis may have underestimated certain benefits by approximately $7 million through the use of conservative assumptions with regard to a timing issue.
On the other hand, PG&E's confidential response to question number 1 to the September 2011 ALJ ruling showed that PG&E may have overestimated benefits in two areas. First, PG&E may have overestimated benefits in its capacity benefits model with regard to the value of the capacity for the two peaker plants by using too high market values for capacity in the later years of its analysis. This overestimation may be as much as $30 million. Second, PG&E may have overestimated the benefits stemming from the end of capacity payments to GWF for the petroleum coke plants; PG&E's contracts with GWF for these facilities provides that PG&E ends capacity payments in 2015 and 2016 (depending on plant), while the contracts last until 2020 or 2021 (depending on plants). This overestimation may be as much as $14 million.
A final issue involves the potential of damage payments from GWF to PG&E if the petroleum coke plants were to close before the end of the contractual periods in 2020 or 2021, depending on the plant. Based on the record, much of which involves confidential material on this point, we find that PG&E properly accounted for potential early termination damage payments in its cost-benefit analysis.
Therefore, the range of possible outcomes of a cost/benefit analysis of the overall GWF transaction varies from a positive value of $22 million to a negative value of $29 million. While it is not possible to assign probabilities to each of these outcomes, based on quantifiable factors we find it equally likely that ratepayer value may be either positive or negative. However, as discussed above, there are a number of real benefits that are not quantified in the application. In addition to those listed above, one further unquantified benefit is increased certainty: the pricing and terms of the PPAs provide more certainty to PG&E and ratepayers as a hedge against higher capacity costs than do the pricing and terms for the petroleum coke plants. These unquantified benefits make it more likely that the GWF transaction will provide overall ratepayer benefits. It is important to note that the ratepayer impact -- whether positive, negative or zero -- will be small compared to the total costs PG&E will incur over the span of the two PPAs. Therefore, we find that the most likely outcome of the GWF transaction will be slightly positive, but close to ratepayer indifference.
We now turn to a second analysis: whether the proposed GWF transaction is superior to other reasonable alternatives available to PG&E at this time. PG&E provided, in a confidential response to the November 2011 ALJ ruling, information about other recent transactions and offers for capacity. This material shows that potential offers in the market for capacity in the relevant area are both higher and lower than the capacity price in the proposed transaction with GWF for the Henrietta and Hanford plants. This material shows that PG&E has the opportunity to acquire similar capacity (both in terms of amount and purpose) for less than the price in the proposed transaction with GWF. We would not be likely to approve a proposed transaction which is significantly above market, absent a compelling rationale.
PG&E maintains that the proposed transaction is, in fact, about more than simply acquiring capacity at the Hanford and Henrietta plants; it is also about shutting down five heavily-polluting petroleum coke plants in Contra Costa County. In other words, it is a package deal.
Mr. Monardi testified that PG&E negotiated in good faith and obtained a reasonable negotiated outcome with GWF, an outcome which PG&E calculates provides overall ratepayer benefits. Nevertheless, analysis of recent contract prices shows that there may well have been opportunities to increase ratepayer benefits because the capacity prices for the peakers appear to be above market levels. In other words, PG&E may well have left money on the table.3 We emphasize that the utility is obligated to seek the best possible outcome and not simply one which provides minimal ratepayer benefits. Participants in Procurement Review Group meetings should evaluate potential deals from this perspective, and utilities should expect additional scrutiny if ratepayer benefits are not maximized.
Based on the above discussion, we will approve PG&E's application, including the Peaker PPAs and the Omnibus Agreement that terminates the existing QF PPAs. The deal provides some ratepayer benefits, includes large GHG emission reductions and provides other unquantified environmental and market benefits. We also approve PG&E's request for approval to recover costs incurred pursuant to each of the agreements through a debit to its Energy Resource Recovery Account and the recovery of stranded costs associated with the GWF transaction consistent with D.08-09-012.
1 Robert Sarvey claims that the closure of the petroleum coke plants will actually increase pollution, because of the combination of: a) alternative uses for the petroleum coke which would have been used to power these plants, and b) the GHG emissions from the Hanford and Henrietta plants. We do not find evidence to support Mr. Sarvey's claim that the petroleum coke from the closure of these plants will be used elsewhere, or if so, that such use would cause the totality of the GHG transaction to result in net additional GHG emissions.
2 A significant portion of Mr. Monardi's testimony contains confidential material and is under seal.
3 Alternatively, it is possible (but less likely) that PG&E could have negotiated a shutdown of the petroleum coke plants without also agreeing to the peaker PPAs, and then acquire similar capacity, energy and other benefits (with the likelihood of far lower GHG emissions compared to the petroleum coke plants) at a lower price than with the PPAs.
