Joint Petition for Modification
The Joint Petition seeks Commission approval of a revised ten-year PPA between OMEC and SDG&E, with a new on-line commencement date of May 1, 2009, and Put and Call options that could result in SDG&E owning the plant in 2019. The Put Option, exercisable at OMEC's sole discretion at the end of the ten-year PPA, would require SDG&E to purchase the Otay Mesa plant at a set price. The Call Option, exercisable at SDG&E's sole discretion at the end of the ten-year PPA, would require OMEC to sell the Otay Mesa plant at a set price. Pursuant to the terms of the Put Option, there would be no additional Commission review or approval required before OMEC's potential exercise of the option. Under the price set for the Put Option, SDG&E would own the Otay Mesa plant in 2019 at a price that would be significantly below that of the Net Book Value of the Palomar Energy Center2 (Palomar) in 2019.
Under the terms of the Call Option, SDG&E would seek further Commission review and approval prior to exercising that option. The agreed upon price for Otay Mesa under the Call Option is slightly higher than the Net Book Value for Palomar in 2019, but SDG&E believes the price will be significantly less than market alternatives available at that time. However, if SDG&E's predictions are wrong and it is not economic to own Otay Mesa in 2019 at the Call Option price, then the utility does not have to exercise that option.
SDG&E argues that the addition of these Options to the PPA gives the utility the opportunity to evaluate the value of Otay Mesa at the end of 10 years in light of other possible generation projects or aging plant retirements and not be left without generation necessary to serve its grid reliability needs. This way, if Otay Mesa is needed and its price is competitive with other market options, SDG&E can exercise the Call Option, and if the market does not support the Call Option, SDG&E gets Otay Mesa under the Put Option at a below market price.
Other revisions to the PPA in addition to the change in the in-service start date and the Put and Call Options include the following: two forms of incentive mechanisms, output and heat-rate; increase in equity to offset additional debt; FIN 46(R)3 filing requirements and recovery of additional costs associated from the impacts of this filing; and a request for cost allocation of the local area reliability costs of the Revised PPA to all customers in SDG&E's service territory.
No party filed opposition to the Joint Petition, and the filings by TURN/UCAN and Calpine supported the Joint Petition.
2 Palomar is a 500 MW (base load)/555 MW (peaking load) combined cycle natural gas-fired generation plant, approved by the Commission in D.04-06-011 as part of SDG&E's request to enter into a number of electric resource contracts, including the Otay Mesa plant. Palomar is in SDG&E's service territory, is similar in size and type to Otay Mesa, and is a SDG&E owned asset. Therefore, Palomar is a comparable asset against which to evaluate Otay Mesa.
3 The Financial Standards Accounting Board (FASB) issued FASB Interpretation No. 46(R) FIN 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, in 2003 (FIN 46(R)).
