V. Discussion

The Commission must balance the conflicting positions of the utility and the intervenors in light of the scope established for this rehearing: is there evidence that the Otay Mesa PPA is beneficial to SDG&E ratepayers and is reasonable? SDG&E presented testimony comparing the costs to customers with and without the Otay Mesa PPA. In its analysis, Option 1 was with Otay Mesa and Option 2 relied on combined cycle contracts, new peaking capacity and local unit contracts. As referenced earlier, SDG&E then compared Option 1 against Option 2 in the categories of capacity costs, energy costs, ancillary services costs, financial risks associated with green house gas emissions, debt equivalence and RMR costs. SDG&E did assume adding the same amount of capacity to its resource plan under both options and both options utilized resources within the utility's service area. Taken on its own without challenge from opposing parties, SDG&E's testimony presented a convincing record that the Otay Mesa PPA gave its ratepayers a NPV savings of $86.5 when those six factors were evaluated between Option 1 and Option 2; when transmission congestion cost savings were included, the PPA produced an additional $32.1 in ratepayer benefits.

However, several parties countered SDG&E's position. TURN/UCAN, ORA and Chula Vista all questioned the wisdom of approving a ten-year PPA that gave SDG&E 573 MW of capacity starting in 2008, when the utility hardly needs any of that energy until 2011. If we limited our analysis to whether or not the utility needed all that energy to meet its grid reliability needs, we would have to conclude that the PPA should be deferred until 2011. By that date, most of the Department of Water Resource (DWR) contracts will have expired and the SBPP should have been retired. When these assumptions are coupled with the region's expected growth and the potential for other aging power plants to retire, the need is real and apparent.

TURN/UCAN also suggested that if the arrangement with Calpine was for a turn-key, utility-owned project, with a useful life expectancy of 30 years, having excess energy for three out of 30 years would not have the same negative impact on the ratepayers as the proposal in front of us. TURN/UCAN also suggest that if SDG&E waits until 2011 to procure a new resource, new technologies might be available with lower hear rates and higher efficiencies than OMEC.

However, those are not options before us for consideration. What is before us is a negotiated ten-year PPA between SDG&E and Calpine with an in-service date of January 1, 2008. Calpine's testimony indicated that Calpine has completed 80% of the engineering for the project, all permits have been secured and foundations have been poured. Equipment for the plant has been purchased and is sitting in boxes at the site.¹²

So if a three-year delay is not practical, what will SDG&E do with the Otay Mesa output during 2008-2010? SDG&E presented testimony that having the capacity available from OMEC would provide grid reliability and allow the aging and inefficient SBPP to retire, would reduce RMR payments by SDG&E customers for the more expensive power from SBPP and other less efficient producers, and would meet the utility's resource adequacy requirements. In addition, if there is still excess energy, the utility can sell it to another ESP, and the net would go to the ratepayers.

SDG&E's analysis of the "congestion benefits" of OMEC is also subject to differing interpretations. As previously discussed, the Commission approved the OMPPA Transmission Project in D.05-06-061 and that project is slated to go forward whether or not the Otay Mesa PPA is approved. However, if the PPA is approved, there will be "double" benefits resulting from the combination of the OMEC and the new transmission lines. Delivery of power from OMEC will travel free of congestion, thereby saving SDG&E ratepayers from paying congestion costs that could result from alternative energy sources, including the ones modeled in SDG&E's Option 2. Congestions costs appear to be a two-edged sword: while ratepayers benefit from reduced congestion costs, that means that the CAISO collects less Congestion Revenues from the utility, revenues that are then generally credited to the ratepayers to reduce transmission rates.

This is not just a simple analysis. To begin, congestion benefits depends on who is the transmission owner (TO) or holds the Congestion Revenue Rights (CRR). SDG&E's witness explained that there was considerable uncertainty as to who would hold the CRRs post 2007 when CAISO institutes a market redesign technology update (MRTU). CAISO is still deciding how rights to the transmission lines will be determined. In summary, there could be TOs and holders of CRRs on the transmission lines. The holders of the CRRs would pay the TOs for the rights to use the line, and then the CRR would collect congestion rents for use of the lines. If SDG&E is a TO, the amount a holder might bid for CRR could depend on whether the line is expected to be congested or not. So, if the combination of the OMPPA Transmission Project and the OMEC reduces congestion, there could be lower sale revenues flowing to SDG&E-if the CRRs are allocated to LSEs.

While it is important that the Commission properly evaluate the effect the reduction in transmission congestion costs could ultimately have on congestion revenues as we evaluate the benefits of the Otay Mesa PPA, this proceeding can not become a disguised rulemaking for a complete vetting of the many different dimensions of congestion relief. We will not decide any principles concerning transmission congestion relief, transmission congestion revenues, their relationship with one-another, or the application of the TEAM approach to generation options in this decision.

What we will evaluate here is the ratepayer benefit from paying less in commodity rates. Customer rates include both a transmission rate and a commodity rate. Reduced congestion charges should reduce the CAISO commodity charge and therefore reduce SDG&E's commodity rate. Whether that benefit is offset by a loss of congestion revenues is too speculative at this time to accurately assess due to the uncertainty surrounding what the CAISO will do with the MRTU and ownership and holder rights.

Setting aside the issue of "rents," there are benefits to ratepayers from reduced transmission congestion: the likelihood of potential reliability problems are decreased and ratepayers have the opportunity to receive the most efficient and economical energy to serve load, rather than having cheap energy shut-out due to transmission path constraints.

We conclude that the Otay Mesa PPA would be a state-of-the-art, low heat-rate, economical, clean power, in-service-territory "insurance policy." The question we have to answer is, whether it is the best policy at this time for the cost. Is it better to go with a project that comes with a reasonable certainty of being built within a two-year time frame,¹³ in a location that is well suited for the utility's needs, including LAR, grid reliability, RA, RMR requirements, G-1/N-1 requirements and deliverability, but has low expected capacity factors the first three years of the ten year PPA and might contribute to reduced transmission congestion revenues? Or, is it prudent to reject this PPA and see if there are alternatives that become available by 2011 that can provide the same, or perhaps even superior benefits to the ratepayers, but at a reduced cost?

As we discussed earlier, the intervenors urge us to wait. While we are as optimistic as TURN/UCAN that there will be technological advances creating more efficient energy options by 2011, we do not know what they are, where they will be, or what they will cost. Unless a viable option presents itself in SDG&E's load pocket, it may not help with congestion or LAR.

As we have had to do in previous procurement decisions, we need to evaluate the resource presented to us for consideration, under the terms that come with the resource, and either approve it, or reject it. As SDG&E stated in its reply brief, "a "delay" to 2011 is equivalent to denying the contract."¹⁴ While we may give direction to a utility about how to go about procuring resources and give guidance about types and categories of resources, we cannot remake a contract to suit our view of what would be ideal for the utility and its ratepayers. Specifically, we cannot approve the PPA, but tell SDG&E that they should not pay for or take power until 2011, nor can we tell Calpine to build OMEC and then sell it to the utility as a turn-key project.

We find Calpine's argument persuasive: we previously found in D.04-06-011 that the Otay Mesa PPA brought advantages to ratepayers and we enumerated a litany of benefits. Those benefits are the same now, as they were in June 2004, and are the same whether the PPA is evaluated as a winner bidder in a RFO, or as a bilateral contract.

We found¹⁵, and again find that the Otay Mesa PPA will provide the following benefits:

a. Provide substantial benefits both to the customers of SDG&E and to the state as a whole.

b. Allow [SDG&E] to reduce its RMR costs.

c. Provide state-of-the-art, low heat-rate, economical, clean power to SDG&E's service territory.

d. Increase overall efficiency and reliability in SDG&E's service territory.

e. Provide a cost effective "insurance policy" in the event of another energy crisis.

f. Allow older units in SDG&E[`s] service territory to eventually be retired [resulting] in electric generation within SDG&E's service territory [being] much cleaner and more efficient.

It has been eighteen months since our decision in D.04-06-011, and since that time the state has become even more concerned and focused on resource adequacy, not just for the three investor-owned utilities, but for all LSEs. We are also looking at LAR requirements.¹⁶ The OMEC is located in an ideal location to address reliability and resource concerns for all LSEs in the San Diego area. With its ability to connect with the OMPPA Transition lines, OMEC becomes an attractive replacement for the aging, less clean and less efficient, power plants the utility now has to rely on for RMR output.

So, despite the vexing issue of low expected capacity factors for 2008 through 2010, and the possibility of lost congestion rents, we find that the Otay Mesa PPA presents SDG&E with an energy resource that is reasonable and provides ratepayer benefits. We authorize SDG&E to execute the agreement with Otay Mesa Energy Center, LLC, a wholly-owned subsidiary of Calpine. There is no evidence in the record that a comparable facility, with the positive factors associated with the PPA, but without the negatives, is a realistic enough option to support our rejection of this PPA. No other project has come forward indicating that it is poised to be constructed in SDG&E's service territory in the near term, even though price and other key commercial terms related to the Otay Mesa PPA were known.

We also find reasonable TURN/UCAN's proposal concerning the financial risks associated with a possible Calpine bankruptcy, and adopt their provision that the utility does not have pre-approval to expend ratepayer funds for intervention in a Calpine, or in its wholly owned subsidiary Otay Mesa Energy Center, LLC, bankruptcy proceeding to preserve the PPA.

SDG&E should record costs relating to the Otay Mesa PPA in its Electric Resource Recovery Account (ERRA) for recovery of those costs through commodity rates. This is consistent with our previous policies for similar contracts.

¹² Calpine Opening Brief, p. 9.

¹³ At the time we are considering this PPA there is wide-spread publicity concerning possible financial problems Calpine might be experiencing. Our understanding is that the PPA has provisions built into it that protect SDG&E and its ratepayers, including credit support requirements and step-in-rights. (SDG&E Opening Brief, pp. 28-29.) These protections should ensure that the physical facility gets built no matter what the financial status is of Calpine. This understanding allows us to base our decision on the record of the proceeding and not on the daily news.

¹⁴ SDG&E Reply Brief, p. 1.

¹⁵ Calpine's Opening Brief, pp. 2-3, citing D.04-06-011.

¹⁶ R.04-04-003 and/or its successor docket.