III. Summary of Parties' Positions

A. SDG&E

SDG&E seeks Commission authorization to enter into contracts with Envirepel, Comverge, Ramco, Palomar, and Otay Mesa, and to have the Commission approve proposals for cost recovery and ratemaking mechanisms for each of the contracts. To support this authorization, SDG&E asks the Commission to find that: SDG&E's execution of the contracts is consistent with the utility's LTRP; the RFP was competitive, open, adequately subscribed, and consistent with Pub. Util. Code § 454.5(c)(1); and the contracts and their cost recovery and ratemaking mechanisms allow the utility to serve the needs of its customers at just and reasonable rates, benefit consumers, and are in the public interest.

B. TURN/UCAN

TURN/UCAN urge the Commission to reject and/or modify a number of the contracts that are the subject of SDG&E's electric resource contract motion. In summary, TURN/UCAN argue that SDG&E, instead of focusing on its near-term reliability needs as was stated in the RFP, appeared to devote its efforts to filling long-term resource needs, with the end result of leaving the utility with capacity well in excess of its needs.

In particular, TURN/UCAN challenge the RFP criteria, SDG&E's apparent selective application of the criteria to certain bids, the utility's analyses

of the bids, including the selection of conforming/non-conforming bids, SDG&E's lack of meaningful cost-effective analyses, CPUC staff involvement in negotiations with Calpine, and the utility's effort to include significant ratemaking changes in the RFP motion. TURN/UCAN suggest that the Commission reject some of the SDG&E proposals in toto and order modifications to others to make them more favorable for ratepayers. TURN/UCAN's specific recommendations will be discussed contract by contract, but in brief, they suggest that the Envirepel PPA be approved, the Ramco acquisition be approved, with modifications, the Comverge proposal be approved, but only if modified, and Palomar and Otay Mesa rejected. TURN/UCAN suggest alternative scenarios to meet the utility's near-term local reliability needs in lieu of either the Palomar and/or the Otay Mesa projects.

C. ORA

ORA recommends that the Commission approve the Ramco, Comverge, and Envirepel contracts because ORA finds them to be reasonable and SDG&E's analysis for their approval is compelling. However, ORA has concerns about both the Palomar and Otay Mesa contracts. While ORA supports Commission approval of Palomar, it conditions its recommendation on the Commission's rejection of the utility's request for a 75 basis point increase to its return on equity for this generation project. ORA argues that any increase to a utility's return on equity should be considered only in the cost of capital proceeding.

On the other hand, ORA recommends that the Commission reject the Otay Mesa PPA because SDG&E has basically satisfied any need for that plant with the Palomar contract. ORA sees no need for the utility to simultaneously enter into both agreements. Since Palomar will be a utility retained generation plant amortized over a 30-year life span, and Otay Mesa is a 10-year PPA, ORA views Palomar as a more attractive option for ratepayers. In addition, ORA opposes the Otay Mesa PPA because as proposed it would saddle ratepayers with cost recovery and rate making conditions that ORA does not find supportable.

D. PG&E

PG&E addressed only the Otay Mesa project and argues that the record supports finding that Otay Mesa may very well form an integral step for SDG&E to meet the utility's need for additional resources in the 2008 and beyond timeframe-exactly when Otay Mesa is scheduled to come online. PG&E's primary focus in this phase of the procurement proceeding is to urge the Commission to address the need and viability of the Otay Mesa project without any consideration of the reallocation of the DWR/Sunrise contract to PG&E. In its original October 7, 2003 filing, SDG&E specified that a condition precedent to the Otay Mesa PPA was the reallocation of the DWR/Sunrise PPA, and its appropriate associated costs, to PG&E. While SDG&E did not expand much on the rationale behind its desire to reallocate the Sunrise contract, PG&E opines that all of the DWR contracts, including Sunrise, entered into during the energy crisis, represent high cost power and place an above-market cost burden on ratepayers. It can be surmised that if SDG&E can remove Sunrise from its portfolio, its ratepayers' obligation would go down and it would need more capacity now.

SDG&E requested that the Commission expedite consideration of its motion so that it could move forward on the contracts with certainty of their cost recovery. However, the request to reallocate the Sunrise contract to PG&E as a condition precedent to the Otay Mesa PPA has raised a complicated and contentious issue. The allocation of all of the DWR contracts is complicated

because the contracts place an above-market cost burden on all three utilities' ratepayers. As PG&E correctly argued, SDG&E's attempt to entangle the DWR allocation issues with its procurement planning, would have made it highly unlikely that the Commission could expedite consideration of its proposed contracts.

Recognizing this, on January 14, 2004, ALJ Walwyn issued a ruling severing consideration of the DWR/Sunrise contract from consideration in this RFP proceeding and deferring its consideration to another proceeding.²⁰ We affirm ALJ Walwyn's ruling. PG&E urges the Commission to consider the Otay Mesa contract on its own merits, standing alone and without any reference to or evaluation of the reallocation of the Sunrise contract. In point of fact, PG&E appears to argue as an advocate for the Otay Mesa project positing that the record indicates that SDG&E needs the resource to offset the potential loss of the South Bay power plant in 2009 (700 MW), to meet additional load growth of 200 MW in the 2008-2009 timeframe, and to fill in for the DWR contracts that expire on their own terms in 2010.

However, PG&E remains committed to its position that it is neutral on whether the Commission approves Otay Mesa, or for that matter, any of the proposed contracts. All PG&E wants the Commission to consider is whether the Otay Mesa PPA is supported on the record without any reference to, or consideration of, the reallocation of the Sunrise contract-especially to PG&E, as SDG&E requested in its October 7, 2003 motion.

E. Coral Power

Coral Power asserts that SDG&E does not need two large generation projects, each one over 500 MW, to satisfy the grid reliability needs identified in the RFP. If Palomar is approved, Coral does not see the need for Otay Mesa for grid reliability in the 2005-2007 timeframe. Coral suggests that the Otay Mesa project should not be considered in this phase of the proceeding, but instead would be more appropriately evaluated in connection with SDG&E's LTRP. Coral is concerned that if SDG&E is allowed to add Palomar in 2006, and Otay Mesa in 2008, SDG&E's LTRP will be pre-determined, and new transmission could be postponed. Instead, Coral recommends that the Commission consider alternative generation and transmission projects that could meet the utility's grid reliability requirements.

Coral also questions the fairness of the RFP process. For one, the RFP stated that the purpose of the RFP was to meet its grid reliability needs 2005-2007. On its face, Otay Mesa does not qualify. In addition, the RFP stated that all resources must be on-line by June 1, 2007, and projects not meeting that "hard date" deadline were deemed to be ineligible. Otay Mesa will not be on-line until January 1, 2008 because the transmission facilities needed to make Otay Mesa in full compliance with the delivery criteria in the RFP will not be done till then. Coral argues that it was not fair to other bidders to have SDG&E depart from its bid evaluation criteria to accommodate the Otay Mesa project. Other bids, such as InterGen and Nevada Hydro, for example, were rejected because they did not meet the RFP specifications.

Furthermore, Coral complains that while SDG&E espouses support for Otay Mesa because of its alleged energy price benefits, RMR benefits, the ability of the new facility to displace other, less efficient power plants, and the ability of Otay Mesa to meet reserve requirements, SDG&E failed to adequately and fairly compare Otay Mesa to other alternatives.

Finally, Coral opposes the Otay Mesa proposal because of conditions precedent SDG&E is demanding. Coral does not support the expense of the required transmission upgrades of $127 million, the fact that the project cannot be justified without the reallocation of the DWR/Sunrise contract, or SDG&E's request to increase its equity to maintain its debt/equity ratio.

F. InterGen

InterGen is an electric generation provider with projects that currently deliver energy into California but its ability to do so reliably is limited by transmission constraints at and around the Miguel substation. InterGen agrees that SDG&E put on a persuasive case that it needs to procure additional resources to satisfy ISO grid reliability capacity needs and reserve margin requirements for 2005-2007, and even supports the Comverge, Envirepel, Ramco, and Palomar proposals. However, InterGen opposes inclusion of Otay Mesa in the resource mix since it does not square with the objectives or the needs articulated by SDG&E. In particular, Otay Mesa is not needed for grid reliability, as described in the RFP, and might not even be needed until 2011. From InterGen's perspective this is compelling because by 2008 the Imperial Valley San Diego Expansion Plan (ISEP) will be on line and will increase the import capabilities of SDG&E into its service area, reduce SDG&E's need for RMR, and change the utility's local reliability needs by altering the G-1/N-1 reliability calculus.

InterGen agrees that Otay Mesa will provide basic capacity and energy to SDG&E. However, InterGen argues the project is not needed now, will not reduce RMR costs in any quantifiable way, will be a "mega watt for mega watt swap" for the Sunrise contract, and was chosen as a proposal in an unfair manner. Specifically, InterGen believes that it was prevented from bidding in the RFP based on certain criteria that were ultimately determined by SDG&E to be irrelevant to the Otay Mesa project-and only to that project.

Of particular concern to InterGen are the transmission upgrades of $127 million that will be required to interconnect Otay Mesa with the SDG&E grid. From InterGen's perspective, these upgrades will have no beneficial grid impact other than to interconnect Otay Mesa, but without the upgrades Otay Mesa cannot displace RMR requirements or meet reliability needs.

InterGen also opposes Otay Mesa on the grounds that SDG&E failed to evaluate it against alternative projects, like La Rosita 2 (LR2), an InterGen project, or for that matter, against other transmission projects. InterGen does not want the Otay Mesa transmission upgrades to have a negative impact on other transmission upgrades, especially the Mission Miguel line, or the ISEP-transmission lines that would facilitate the delivery of InterGen's energy into SDG&E's service area.

For all of the above reasons, as well as others advanced in its brief, InterGen urges the Commission to sever the Otay Mesa PPA from the SDG&E motion. This would prevent the problems that could occur if Otay Mesa goes forward, and would avoid limiting the Commission's options for SDG&E's LTRP. When these arguments are combined with InterGen's concerns over the flawed RFP process, transmission up-grade costs, uncertain RMR benefits, and the potential for delaying other transmission upgrades, InterGen believes Otay Mesa is not supportable to fill SDG&E's short-term reliability needs.

G. Dynegy

Dynegy urges the Commission to reopen the RFP process and defer consideration of Otay Mesa till a new RFP is complete. Dynegy supports

reopening the RFP on the grounds that for the completed RFP, SDG&E excluded bidding by existing plants and disregarded the Commission's policy preference for repowering at existing plants, i.e., "brown field" sites, instead of new "green field" sites. Dynegy is part of a partnership that owns and operates the Encina power plant, an existing plant located in SDG&E's load center and LRA, and on that criteria alone was excluded from the RFP. In addition, no new transmission lines or gas pipelines, or upgrades, are needed to interconnect Dynegy's resources to SDG&E, cost that could be saved in comparison with the other proposals. As an excluded potential bidder, Dynegy asserts that the RFP process was not fair since SDG&E deviated from the RFP for Otay Mesa, but excluded other bidders who might have been competitive with Otay Mesa.

Besides objecting to its own exclusion from the RFP, Dynegy also opposes the fact that Duke Energy's bid for Unit 4 was rejected. From Dynegy's perspective, the exclusion of Duke, and other existing generators from the RFP, made it impossible for SDG&E to validate its assumptions about existing power plants. For example, Dynegy argues, while new combined cycle plants, such as Palomar and Otay Mesa, are designed to operate as baseload plants running with a high capacity factor, they also require large capacity payments reflecting a large capital investment. By contrast, existing units may have higher prices for the energy they produce, but their capacity costs will be lower and their operation can be tailored to match the system's need for reliability.

In sum, Dynegy believes that the RFP as conducted deprived the SDG&E ratepayers of the opportunity to receive energy at a lower cost. Therefore, Dynegy asks that the Commission reopen the RFP and direct SDG&E to accept bids for grid reliability from existing plants that were excluded from the RFP, and that the Commission defer action on Otay Mesa until the RFP is complete.

H. Celerity

Celerity participated in the RFP and in fact was initially identified as a conforming bidder for its demand reduction product. However, after SDG&E presented Celerity's proposal to the PRG, and certain PRG members questioned whether Celeritry's proposal was consistent with a Vision Statement,²¹ SDG&E withdrew from negotiations with Celerity. Celerity's goal in this proceeding is to have the Commission interpret the Vision Statement in a manner that would support the Commission's authorization of a contract between SDG&E and Celerity.

Celerity's demand reduction proposal utilizes a dispatchable network of a variety of demand reduction resources, including load shedding or load transfer arrangements and customer-owned generation. One important feature of the Celerity proposal is its treatment of existing customer-owned diesel backup generation units, usually located at commercial and industrial facilities. Celerity converts these units to duel-fueled units that primarily burn natural gas, when necessary installs emission reduction equipment, and installs software and communications equipment that allows the utility to dispatch all or some of these resources within 10 minutes' notice. In summary, Celerity takes existing backup generation units, converts them to significant demand reduction resources, allowing the customer to drop load from the utility grid while continuing their business and operations.

Celerity supports its innovative demand reduction proposal on the basis that the utility benefits from the ability to drop load on short notice, improving the reliability of the grid, yet the customers' operations are not disrupted, and the environment benefits from cleaner burning backup units.

Some members of the PRG questioned whether the Celerity proposal qualifies as a "demand reduction." Celerity believes it is consistent with the Vision Statement since it reduces demand on SDG&E's grid at critical times. However, because it allows customers to avoid power interruption, it offers the prospect of much wider participation in SDG&E's demand reduction programs. Celerity advances that the only plausible reason some PRG members questioned whether this innovative proposal was consistent with the Vision Statement is one sentence in the Statement that indicated that demand response "does not include or encourage switching to use of fossil-fueled emergency back-up generation. . . "

Celerity argues that focusing on this single sentence (1) ignores the overall purpose of the Vision Statement, (2) the Vision Statement itself states that it is "intended as a starting point, . . . we intend to use this vision as a guide to our efforts, will continue to reevaluate its validity and assumptions as we progress, and will make any modifications, as necessary and appropriate, when new information becomes available,." and (3) the Vision Statement when read as a whole does not reveal any intent to exclude projects like Celerity's.

Based on these assumptions, Celerity asks the Commission to clarify the single sentence in the Vision Statement that the PRG members seized on, and indicate that it should not be interpreted to disqualify Celerity's proposal from consideration as a demand reduction product, and authorize SDG&E to complete negotiations of a contract. Celerity asserts that SDG&E is willing to finalize such a contract, along terms negotiated up to the point the PRG intervened and SDG&E withdrew from negotiations.

I. Nevada Hydro

Nevada Hydro/Elsinore Valley submitted two bids into the RFP, the Lake Elsinore Advanced Pumped Storage (LEAPS) and the Talega-Escondido/Valley-Serrano 500-kV Interconnect (TE/VS) projects. Together these projects were designed to allow SDG&E to better manage its resources and facilitate the use of renewable energy from geothermal and wind resources in the region. The LEAPS project consists of a 500 MW advanced pumped storage facility and associated power line route near Lake Elsinore that would improve water quality and help stabilize water levels in the lake. LEAPS was designed to store at least 200-300 MW of renewable energy for use during peak hours. TR/VS is an interconnect project designed to accommodate the LEAPS generation. Both proposals were deemed nonconforming and SDG&E did not negotiate further on the proposals.

Nevada Hydro, like many other participants in this proceeding, allege that the RFP process was fundamentally unfair because SDG&E applied bid requirements inconsistently and from Nevada Hydro's perspective this allowed the utility to manipulate the outcome of the RFP. Not only does Nevada Hydro think its rejection from consideration was unfair, it also alleges that the selection of Otay Mesa as a finalist was predetermined. Specifically, Nevada Hydro claims that Otay Mesa should not be a considered contender now since (1) it will not contribute to grid reliability capacity, as required by the RFP, (2) its gen-tie did not satisfy grid reliability requirements as set forth in the RFP without $127 million in upgrades, and (3) it will not go online until January 1, 2008, past the required online date of June 1, 2007, a "hard date" that was used to eliminate other bids.

The disparate application of the RFP threshold criteria is disturbing to Nevada Hydro especially since they were eliminated from consideration by SDG&E because the utility believed the LEAPS project would not be on line by June 1, 2007. At the hearing, SDG&E witnesses testified that they did some cursory research, and determined that due to permitting delays LEAPS could not meet the "hard date" of June 1, 2007. However, Nevada Hydro argues that date was not used to exclude Otay Mesa when the transmission upgrades necessary for its grid reliability would not be completed until January 1, 2008.

Under cross-examination by Nevada Hydro, SDG&E's witness, Thomas, testified that a primary reason the LEAPS project was rejected was because SDG&E determined the project was "highly speculative" primarily because it would not come online by June 1, 2007.

When the RFP process is viewed in toto, Nevada Hydro alleges that its focus was either too narrow, or the outcome was predetermined. If the proposals set forth by SDG&E are authorized by the Commission, it will lead to an unbalanced resource mix with 94% of the utility's generation being gas-fired; there will be no increase in system reliability; ratepayers are at risk for the speculative nature of the price of gas; there is no emphasis on environmental benefits; and there is no promotion of renewables. On the other hand, if LEAPS had been considered as a viable contender in the RFP, it could have provided many of the missing benefits.

To remedy the unfair RFP, Nevada Hydro asks the Commission to require SDG&E to perform a "non-tariff" interconnect study for both the LEAPS and TE/VS Interconnection projects, at no cost to the parties, and to direct the utility to commence meaningful negotiations with the parties to create and execute contracts.

J. SER

SER urges the Commission to approve its Palomar proposal. As SER posits, Palomar not only meets SDG&E's short and long-term resource adequacy needs, but also was the most favorable gas-fired bids submitted in the RFP, and was determined to be the "best fit, least cost" project in the RFP. In addition, as SER claims, Palomar has the advantage of being environmentally friendly, technologically advanced, and located in an urbanized customer load center.

SER's only competition for size and scale is Otay Mesa. SER distinguishes Palomar from Otay Mesa because Palomar does not need the extensive transmission upgrades that Otay Mesa does, it has a superior heat rate obtained through Palomar's use of reclaimed water cooling, and it gives SDG&E a turnkey generation asset.

SER echoes the assertions by SDG&E that all dealings and negotiations between SDG&E, and itself, an affiliate, were done in compliance with any and all applicable ATRs, were arms-length, and the choice of SER was the best option from a level playing field.

K. Calpine

Calpine supports the Motion by SDG&E for approval to enter into the requested five new electric resource contracts. More particularly, Calpine urges the Commission to approve both the Palomar turnkey acquisition and the Otay Mesa 10-year PPA. It is no surprise that Calpine would champion its own project, Otay Mesa, but Calpine presents forceful arguments in support of both large generation projects without suggesting a preference for one over the other. From Calpine's perspective, both projects offer reliable, realistic, and cost-effective opportunities for SDG&E to satisfy both its immediate 2006 and 2007, and its intermediate 2008 - 2010 local reliability needs, and its longer term energy and capacity needs. Calpine offers further justification for both Palomar and Otay Mesa on the basis that they represent new generation immediately available to be built, the prices each offers result from a competitive RFP solicitation and reflect market prices, and will provide SDG&E ratepayers with significantly reduced RMR costs.

In sum, Calpine requests that the Commission find that the terms and conditions of the Otay Mesa PPA are reasonable and that SDG&E's execution of the PPA is in the best interest of the ratepayers. Calpine then asks the Commission to approve the Palomar and Otay Mesa projects and the rate recovery as requested by SDG&E.