Background

In D.04-06-011, the Commission approved a motion filed by SDG&E to enter into new electric resource contracts, including one for the Otay Mesa plant. These contracts were the result of a RFP issued by SDG&E to solicit bids to procure energy to meet its short- and long-term grid reliability needs. TURN and UCAN filed a joint application for rehearing challenging SDG&E's choice of the Otay Mesa plant as a winning bidder in the RFP. TURN and UCAN alleged that Otay Mesa was not selected as a least cost/best fit (LCBF) resource from the RFP to meet the utility's grid reliability, but instead was selected to meet SDG&E's needs outside the scope of the RFP. In D.05-06-062, the Commission granted limited rehearing of Otay Mesa to determine if the generating plant could be approved on different grounds than as a winning bidder in the RFP.

In D.06-02-031, the Commission approved de novo, on rehearing, SDG&E's request for authorization to enter into a ten-year PPA with Calpine for Otay Mesa. The rehearing focused on whether the Otay Mesa PPA, when viewed as a bilateral contract and not as a winning bidder in the RFP, is reasonable and provides benefits to SDG&E's ratepayers. The decision found that Otay Mesa is reasonable and provides ratepayer benefits, and SDG&E was authorized to execute the PPA with OMEC.

After the Commission conducted evidentiary hearings (EH) on the rehearing phase for Otay Mesa, but before the Commission issued its decision on rehearing, on December 20, 2005, Calpine and various affiliates and subsidiaries of Calpine (but not including OMEC) filed voluntary petitions to restructure under chapter 11 of the United States Bankruptcy Code, in the U.S. Bankruptcy Court for the Southern District of New York, Case #05-60199. Therefore, in order to address concerns about Calpine's changed financial circumstances, after the Otay Mesa PPA was again approved by the Commission in February 2006, Calpine and SDG&E entered into discussions regarding modifications to the PPA. Most significantly, the parties discussed ownership and operating options, other than the ten-year PPA, for the Otay Mesa plant. The discussion continued from February through June 2006, and on June 14, 2006, Calpine and SDG&E reached an agreement whereby SDG&E would have an ownership option following the expiration of the ten-year PPA, and the plant's commencement date for operation was changed from January 2008 to May 1, 2009.

After reaching an agreement with Calpine, SDG&E continued to negotiate with the other stakeholders, TURN, UCAN, and DRA and on July 3, 2006, SDG&E, with the support of TURN, UCAN, and DRA, filed this petition for modification of D.04-06-011 and D.06-02-031.¹ As discussed further below, the Revised PPA accomplishes the primary objectives of SDG&E which is to preserve and improve upon the terms of the original PPA and get a state-of-the-art generation facility built in its service territory. The Revised PPA also creates the opportunity for SDG&E to obtain the plant at a fair and reasonable price after the expiration of the ten-year PPA. In addition, the revisions to the PPA address the concerns and objections TURN and UCAN had to the original PPA, rendering their Joint application for rehearing of D.06-02-031 moot.

EHs were held on SDG&E's original motion for approval of the electric resource contracts following the RFP, including the Otay Mesa PPA, and EHs were held de novo on the rehearing of the Otay Mesa PPA. The Commission has a complete evidentiary record on the PPA. In this Joint Petition, the parties are asking the Commission to again approve the Otay Mesa PPA, with its revisions that address the concerns TURN and UCAN had with the original PPA. Since this is an uncontested matter, there is no issue of material fact that would benefit from EHs.

¹ Following the issuance of D.06-02-031 on February 17, 2006, TURN and UCAN filed an application for rehearing.