7. Milestone Schedule

As discussed above, the economic need for the Miguel-Mission and Imperial Valley Projects depends upon a threshold level of generation being developed in the California-Mexico border region and Mexico for export to California. SDG&E acknowledges that ratepayers would be economically disadvantaged if they paid for the upgrades and this generation is not developed.³⁵ As a solution, SDG&E proposes that licensing go forward for the projects, but that construction be tied to "certain generation development milestones or enforceable commitments from generation developers to proceed with their projects."³⁶ During evidentiary hearings, SDG&E stated that it would work with the other parties to develop such milestones for our consideration, subject to comment in the briefs.³⁷

Attachment 3 presents the SDG&E and Border Generation joint proposal for milestones coordinating the construction of the Miguel-Mission and Imperial Valley upgrades with construction of new generation projects.³⁸ The milestone schedule provides target dates for construction progress and presents a process for monitoring the achievement of these target dates.

We have reviewed the proposed milestone procedures and find them to reasonable, with two exceptions. The first relates to the threshold generation level, and the second to the verification process outlined in the proposal.³⁹

The milestones use 1350 MWs as the threshold generation level, that is, the level of generation that needs to meet specific milestones at periodic checkpoints in order for SDG&E to proceed with the next step of project development for the Miguel-Mission and Imperial Valley upgrades. Section A (General Principles) of the milestones states that this amount is selected because "once new generation in the Border area exceeds approximately 1350 MWs, the annual energy cost savings to SDG&E ratepayers could exceed the annual cost of both the Miguel-Mission Upgrade and the [Imperial Valley] Upgrade." However, this statement is not supported by the record because Case 3 does not include the costs of the Imperial Valley substation improvements. According to the economic study presented in this proceeding, the threshold for the Imperial Valley Project should be somewhat higher than Case 3 new generation levels (1360 MW) in order for both SDG&E and ISO ratepayers to realize annual net benefits.

In her proposed decision, the ALJ determined that the Case 4 threshold of new generation development (2360 MW) should be used as a threshold for construction of the Imperial Valley substation improvements, based on SDG&E's testimony that upgrades to the substation would not be needed until new generation approaches the amounts represented by Cases 4 and 5.⁴⁰ However, we are persuaded by SDG&E's comments on the proposed decision that a threshold lower than 2360 MW, but higher than Case 3, represents a reasonable requirement. In particular, SDG&E argues that a threshold level of 1660 MW would justify the project. We find that SDG&E's arguments are supported by the record, even though a separate scenario was not run with the assumption of 1660 MW of new generation. This can be seen by examining the results of Case 3 beyond the first year net benefits analysis: At 1360 MW of new generation, the economic analysis indicates that SDG&E ratepayers should experience net benefits from the Imperial Valley substation project over seven years, although not in the first year.⁴¹ At this same level of new generation, CAISO ratepayers (including SDG&E) are expected to experience net benefits of approximately $130 million over seven years.⁴² In sum, we find that the record indicates that the Imperial Valley substation is economic at a level of generation somewhat higher than 1360 MW, but well before the point at which 2360 MW of new generation (Case 4) develops. SDG&E's proposal to establish a threshold of 1660 MW is therefore reasonable, and will be adopted.

Accordingly, SDG&E should not make major financial commitments in the Imperial Valley Project unless and until new generation develops at a level of approximately 1660 MWs. Specifically, the milestones should be modified so that SDG&E will not proceed with ordering transformers (currently scheduled by the end of June 2002) or take the subsequent steps outlined in the milestone schedule for this project until at least 1660 MWs of new generation has achieved the corresponding generator milestones.

SDG&E and Border Generation propose the formation of a Verification Committee that will be comprised of selected representatives from their organizations. The Commission's Energy Division should also be represented on this Committee, and we delegate to the Assigned Commissioner the selection of that representative or representatives. Disagreements among Committee members concerning compliance issues, such as whether a missed milestone is significant enough to justify a delay of other milestones, should be resolved by the Assigned Commissioner, or her designee.

We also note that footnote 3 under "General Principles" concerning FERC jurisdication may reflect the views of SDG&E and Border Generation, but does not preempt this Commission from exercising what it considers to be its jurisdiction over transmission costs, as discussed above. We will remove language from the milestones that reflects assertions by the parties concerning FERC jurisdication.

Attachment 4 presents the milestones, as adopted herein.