Assignment of Proceeding

Michael R. Peevey is the Assigned Commissioner and Carol A. Brown is the assigned ALJ in this proceeding.

Findings of Fact

1. SDG&E, DRA, TURN, and UCAN filed a Joint Petition seeking approval of a revised ten-year PPA between SDG&E and OMEC, for power from the 573 MW Otay Mesa gas-fired, combined-cycle power plant, with an in service date of May 1, 2009, Put and Call Options, and other minor modifications.

2. The Otay Mesa PPA was originally brought to the Commission for approval by SDG&E as part of a portfolio of winning bidders from a 2003 RFP for new electric resources.

3. In D.04-06-011, we authorized SDG&E to sign the ten-year PPA with Otay Mesa, with a start date of January 2008.

4. TURN and UCAN filed an Application for Rehearing of D.04-06-011, and in D.05-06-062, we granted limited rehearing to determine if Otay Mesa could be approved on different grounds than as a winning bidder in the RFP.

5. On December 20, 2005, Calpine filed a petition under Chapter 11 of the United States Bankruptcy Code.

6. Following de novo evidentiary hearings on rehearing, we issued D.06-02-031, approving the Otay Mesa PPA because it was reasonable and would provide ratepayer benefits.

7. SDG&E and Calpine entered into discussions to refine the Otay Mesa PPA, seeking ways to make the building and operation of the plant less risky for SDG&E ratepayers in light of Calpine's changed financial situation.

8. By June 2006, SDG&E and Calpine reached an agreement whereby SDG&E would have some ownership option following the expiration of the ten-year PPA, and the plant's commencement date was changed from January 2008 to May 2009.

9. On July 3, 2006, SDG&E, with TURN, UCAN, and DRA joining, filed a Petition for Modification of the Commission's two previous decisions approving the Otay Mesa PPA, D.04-06-011 and D.06-02-031, seeking Commission approval of a Revised PPA for Otay Mesa.

10. The Revised PPA is reasonable and provides ratepayer benefits in excess of those we previously found for the original Otay Mesa PPA because the revisions allow SDG&E to get a state-of-the-art generation facility built in its service territory and SDG&E now has an option to obtain the plant at a fair and reasonable price after the expiration of the PPA, obviating the risks associated with future resource procurement from the plant.

11. At the end of the ten-year term of the Revised PPA, SDG&E has the right to exercise the Call Option, of allowing it to purchase the Otay Mesa plant at a price that compares favorably with Palomar adjusted to 2019 prices and avoids the risk of skyrocketing prices for either the plant or its output.

12. If market conditions in 2019 do not favor SDG&E's ownership of Otay Mesa, the utility does not have to exercise its Call Option. If OMEC exercises its right under the Put Option, the price SDG&E will pay is significantly below the Net Book Value of Palomar in 2019 dollars.

13. The change in the in-service date for the Otay Mesa plant from January 2008 to May 1, 2009 is more beneficial and cost-effective for the ratepayers, especially when coupled with the option SDG&E has to own the plant at the end of the ten-year PPA.

14. We find the other revisions to the original PPA, including the rate recovery to cover any filing and reporting requirements SDG&E might have with the SEC pursuant to FIN 46(R), with the agreed upon maximum amount eligible for recovery; the performance and heat incentive mechanisms with the agreed upon caps; and option for SDG&E to elect the superior cost-sharing mechanism for the allocation of the local area reliability costs to all be reasonable, in the interests of SDG&E ratepayers, and positive enhancements to the original PPA.

15. If future evidence suggests that FIN 46(R) does not require consolidation of the Otay Mesa plant with SDG&E's financials, then TURN and UCAN reserve the right to petition for an appropriate adjustment to SDG&E's capital structure. The agreed-upon caps (in nominal dollars) are as follows:

2009 - $16.0 million // 2010 - $15.5 million // 2011 - $15.0 million // 2012 - $14.4 million // 2013 - $13.9 million // 2014 - $13.4 million // 2015 - $12.8 million // 2016 - $12.3 million // 2017 - $11.8 million // 2018 - $11.2 million.

16. The Otay Mesa plant represents new generation in SDG&E's service territory, a goal that comports with our recent decision encouraging new generation for the state, D.06-07-029. SDG&E may allocate a portion of the local area reliability costs of the Revised PPA either through RMR contracts or the cost allocation mechanism adopted in D.04-12-048, whichever option is best for ratepayers.

17. We find it is reasonable and in the interest of SDG&E's ratepayers to approve the revised PPA for Otay Mesa and to modify D.06-02-031 accordingly.

18. We find it is reasonable to approve the acquisition by SDG&E of the Otay Mesa plant at the end of the ten-year PPA if OMEC exercises the Put Option.

Conclusions of Law

1. The Revised Otay Mesa PPA is reasonable, is in the public interest, and should be approved. The Revised Otay Mesa PPA includes the Put and Call Options at the expiration of the ten-year period; the changed in-service date from January 2008 to May 1, 2009; performance and heat incentives, with caps; limited cost recovery for SDG&E if it has increased costs for filing and reporting obligation under FIN 46(R); and the option for the utility to choose between RMR treatment or the cost sharing mechanism set forth in D.04-12-048, for the local area reliability costs.

2. With the joinder of TURN and UCAN in the Joint Petition, TURN and UCAN's application for rehearing of D.06-02-031 is moot.

ORDER

IT IS ORDERED that:

1. The Joint Petition for Modification of Decision 06-02-031, filed on July 3, 2006, is granted as set forth herein.

2. San Diego Gas & Electric Company (SDG&E) shall execute the Revised Otay Mesa Power Purchase Agreement (PPA) with Otay Mesa Energy Center, LLC (OMEC), a wholly-owned subsidiary of Calpine Corporation, which is the subject of this Joint Petition for Modification and includes the terms and conditions of the Letter Agreement filed with the Joint Petition.

3. SDG&E is authorized to record the costs of this Revised PPA in the Electric Resource Recovery Account and other appropriate accounts, depending on the cost allocation mechanism that is ultimately adopted for the Otay Mesa plant.

4. SDG&E is authorized to recover the costs, subject to the agreed upon caps and potential future adjustment to SDG&E's capital structure, associated with the equity re-balancing SDG&E deems necessary due to filing and reporting requirements of FIN 46(R) and the consolidation of the OMEC financial data with

SDG&E's quarterly and annual financial statements to the Securities and Exchange Commission.

5. Rulemaking 01-10-024 is closed.

This order is effective today.

Dated September 7, 2006, at San Francisco, California.

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