IV. Arguments

A. San Diego Gas & Electric Company

SDG&E defended its decision to enter into a contract with Calpine for the Otay Mesa output on the grounds that the contract will save money by alleviating transmission congestion and will allow the utility to meet its local area reliability (LAR) and resource adequacy (RA) requirements. Under current Commission directives on RA requirements, SDG&E is required to have 115 - 117% of the amount of power and capacity necessary to meet the needs of its bundled customers. At the present time, there is no LAR requirement, but the Commission has signaled its intent to examine the adoption of a LAR requirement in the near future.⁴ Conceptually, the LAR requirement would obligate any load serving entity (LSE), including SDG&E, that serves load in a load pocket, to procure a percentage of its capacity in the load pocket. As an example, if the LAR percentage is 50%, then SDG&E would have to acquire at least 50% of its load in the load pocket it serves. For comparison purposes, SDG&E posits that it currently has less than 30% of is resource contracts coming from its load pocket. With OMEC, SDG&E would have almost 45% in its load pocket.⁵

SDG&E compared the costs to its customers with and without the Otay Mesa PPA: Option 1 and Option 2. For both Options, SDG&E compared six categories: capacity & fixed costs; variable costs; ancillary service costs; debt equivalence costs, CO2 costs; and RMR costs. When capacity and fixed costs and debt equivalence costs were viewed individually, the Otay Mesa PPA did not provide benefits to ratepayers, but when all six factors were considered, SDG&E shows a net benefit to ratepayers of $86.5 million.

In addition to the six factors outlined above, SDG&E also analyzed the impact to ratepayers if the costs and benefits of the OMPPA Transmission Project are included in the evaluation for Option 1 and Option 2. A key component of this benefit analysis is reduced transmission congestion costs, and SDG&E and Calpine argue that when those cost savings are included with the net value savings, the ratepayer benefits are increased by $32.1 million.

B. Calpine Corporation

Calpine, as the builder/owner of the proposed OMEC, urges the Commission to approve the Otay Mesa PPA. Calpine argues that the record clearly demonstrates that the PPA is reasonable and provides significant, tangible, economic benefits to the utility's ratepayers of a NPV of $86.5 million over the term of the contract. In addition, Calpine agrees with the testimony and exhibits of SDG&E that show that if the costs and benefits of the OMPPA Transmission Project are also considered, ratepayers will receive benefits of a NPV of $118.6 million over the ten-year term of the PPA.

Calpine recites the Commission's prior findings that the Otay Mesa PPA will provide the following benefits to ratepayers: reduced RMR costs; a state-of-the-art, low heat-rate, economical, clean power source; increased overall efficiency and reliability in the utility's service area; an "insurance policy" in case of another energy crisis; reduced power shortages; and a way for older units to retire.⁶ Calpine argues that these benefits are still viable today and do not depend on whether the Otay Mesa PPA is a winning bidder in a RFP, or the result of a bilateral contract.⁷

Calpine challenges the viewpoint presented by TURN/UCAN and their witnesses' application of the California Independent System Operator's (CAISO) Transmission Economic Assessment Methodology (TEAM) to the Otay Mesa PPA. As Calpine contends, the TEAM "approach has never been accepted, much less used, to analyze generation projects and there is no reason to do so here. However, as SDG&E demonstrated, even if the TEAM approach is used to evaluate the Otay Mesa PPA-which it should not be-the Otay Mesa PPA still results in an "overall benefit" to SDG&E ratepayers and the CAISO."⁸

In its reply brief, Calpine reinforces its position that the TEAM methodology should not be used to evaluate a generation option. However, Calpine argues that if it is, the TEAM approach still shows that reductions in congestion charges will be greater than any reductions in congestion revenues, which leads to overall customer rate decreases.

C. Office of Ratepayer Advocates

ORA has consistently challenged SDG&E's assertions that it needs more energy in 2008-when the OMEC is scheduled to come on line. Since the PPA is for a ten-year term, and ORA does not see ratepayer benefits for the first three years, 2008-2010, ORA's calculation of ratepayer benefits is a negative NPV of $28.7 million over the ten-year terms. However, since there are demonstrable benefits beginning in 2011, ORA supports the PPA if it commences then.

ORA's analysis of the PPA focuses on the viable alternatives available to SDG&E in lieu of the OMEC. ORA finds fault with the utility's choice of only one alternative for the comparison, and also finds the assumptions for the alternative flawed. In summary, ORA argues that SDG&E overestimated the capacity and fixed costs for the alternative, underestimated the congestion benefits of the alternative, and gave OMEC RMR credit-credit not expected unless the OMPPA Transmission Project is completed.

ORA looks at SDG&E's service area need for resources to meet grid reliability of 0 MWs for 2008, 10 MWs for 2009 and 103 MWs for 2010 and opines that under the alternative option, the utility would NOT procure the entire 573 MWs of the OMEC's capacity for those three years, yet the utility did that in its comparison table. Without the Otay Mesa PPA, ORA reasons that SDG&E would have the flexibility to procure exactly what it was short, rather than being obligated to take over 500 MWs from the OMEC.

ORA also criticizes SDG&E's presentation of the expected congestion relief that the OMEC would produce using the OMPPA Transmission upgrades. SDG&E did not assume that the alternative procurement option would have the benefits of the new transmission upgrades, and assigned no congestion cost relief to the alternative.

Since it may be assumed that if the PPA is approved, SDG&E will have excess capacity, there was discussion at the EHs that the excess could be sold. In its reply brief, ORA emphasizes that the value of the PPA should not be based on the potential capacity of an investor-owned utility to sell its excess capacity.

From ORA's analysis of the PPA and the alternative option presented by SDG&E, ORA does not agree that the Otay Mesa PPA presents superior ratepayer benefits in comparison to other alternatives and urges the Commission either to reject the PPA outright, or delay it until 2011.

D. City of Chula Vista

Chula Vista is "home to or adjacent to major gas transportation and electric transmission and generation facilities, including the South Bay Power Plant (SBPP) operated by Duke Energy and the Otay Mesa Energy Center (OMEC) proposed by Calpine."⁹ The OMEC is located very near the border of Chula Vista and the infrastructure needed to support the facility crosses through extensive portions of the City. Chula Vista is supportive of the OMEC, and supported the OMPPA Transmission Project, because the City's long-term goal is to replace the SBPP, "a nearly 50-year old antiquated and inefficient unit located on Chula Vista's bayfront property ...[that] results in significant reliability must run (RMR) payments by customers of SDG&E to the operators of SBPP."¹⁰ Chula Vista also supports the OMEC because the City intends to implement a community choice aggregation (CCA) program and become a LSE. As an LSE, the City will be required to demonstrate resource adequacy, and the OMEC would allow Chula Vista to meet its LAR obligations. As Chula Vista frankly states, it does not care whether SDG&E, or another entity purchases the power from OMEC; the City will benefit if the energy center is built.

However, Chula Vista's support of the OMEC is not without restrictions: the City does not see the need for, or benefits to, SDG&E's bundled customers until 2011-the same time frame advocated by ORA. Chula Vista does not agree with the utility that OMEC will produce tangible benefits in 2008. Chula Vista reasons that by SDG&E's own data, the utility is already fully resource adequate, the utility assumed no load loss for the creation of a CCA provider during the term of the PPA, and SBPP is not certain to retire before 2011. The City supports the PPA if its start date is deferred until 2011, if the OMEC becomes a RMR unit and there is a one-for-one reduction of RMR status for the SBPP unit with OMEC and there is no departing load charge for any CCA for the costs of the PPA.

In its reply brief, Chula Vista proffers suggestions of other potential energy providers that are within San Diego's geographic area that possibly could provide energy that would meet LAR requirements. This is new information that was not vetted during the EHs, was not subject to cross-examination, and is presented too late in the proceeding to allow for comments. We therefore do not give it any evidentiary weight.

E. TURN/UCAN

In summary, TURN/UCAN claim SDG&E did not present sufficient, credible evidence to support the reasonableness of the Otay Mesa PPA and suggest that the utility fill its identified resource needs through alternative strategies. Specifically, TURN/UCAN urge the Commission to reject the PPA and require the utility to comply with the directives set forth in D.04-12-048 and use the competitive process to procure least-cost/best-fit resources following the loading order preferences established in the Energy Action Plan (EAP).

In particular, TURN/UCAN criticizes SDG&E's analysis of ratepayer savings from the "congestion benefits" of the Otay Mesa PPA. While TURN/UCAN do not claim that there will not be savings from reduced congestion on the transmission lines, their position is that this does not translate into a ratepayer benefit. Rather, congestion relief results in reductions in Congestion Revenues to be collected by the CAISO. Congestion Revenues are then generally credited to SDG&E ratepayers to reduce transmission rates.¹¹

In addition to not providing positive benefits for SDG&E ratepayers, TURN/UCAN also oppose the Otay Mesa PPA because of the utility's flawed modeling of alternative resource options. Like ORA and Chula Vista, TURN/UCAN question the need for the PPA pre-2011 and challenge SDG&E's assumption that they would procure as much as 573 MWs of replacement capacity beginning in 2008 if the PPA is rejected. TURN/UCAN claim it makes little sense for the Commission to approve a ten-year contract that is slated to be severely under-utilized in the beginning three years. Also, TURN/UCAN do not support SDG&E's choice of the Otay Mesa PPA because the utility did not consider the evolution of technology and likely improvements in generation facilities in its alternatives analysis, overstated debt equivalence costs, and did not consider utility-owned projects.

And finally, TURN/UCAN are concerned about Calpine's financial stability and some conditions precedent SDG&E put on its willingness to proceed with the PPA. In its reply brief, TURN/UCAN argue that Calpine's financial condition should cause the Commission concern due to the performance risks and litigation costs that would be associated with a bankruptcy proceeding. To ameliorate this risk, TURN/UCAN propose that if the Commission does approve the PPA that it not pre-approve the expenditure of ratepayer funds for SDG&E's involvement in a Calpine bankruptcy proceeding to preserve the PPA.

⁴ R.04-04-003 and/or its successor docket.

⁵ SDG&E Opening Brief, p. 13.

⁶ D.04-06-011, mimeo. at pp. 60, 66, 69, 82.

⁷ Calpine Opening Brief, pp. 2, 3.

⁸ Calpine Opening Brief, p. 6.

⁹ Initial Brief of Chula Vista, November 30, 2005, p. 2.

¹⁰ Chula Vista brief, p. 4.

¹¹ TURN/UCAN Opening Brief, p. 6.