ALJ/CAB/tcg Mailed 9/8/2006

Decision 06-09-021 September 7, 2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024 (Filed October 25, 2001)

OPINION APPROVING REVISED POWER PURCHASE AGREEMENT
FOR OTAY MESA GENERATING PLANT AND
MODIFYING DECISION 06-02-031

Summary

This decision approves the Revised power purchase agreement (PPA) between San Diego Gas & Electric Company (SDG&E) and Otay Mesa Energy Center, LLC (OMEC), a wholly-owned indirect subsidiary of Calpine Corporation (Calpine), relating to the 583 megawatt (MW) natural gas-fired combined-cycle power plant under construction in southern San Diego County (Otay Mesa plant). Previously, in Decision (D.) 04-06-011, the Commission approved a ten-year PPA between SDG&E and Calpine for the Otay Mesa plant as part of a motion by SDG&E for approval of a number of electric resources that were chosen following a request for proposal (RFP). The Otay Mesa plant was the subject of an application for rehearing that the Commission granted. Following the rehearing, the Commission again approved the ten-year PPA between SDG&E and Calpine in D.06-02-031.

SDG&E, The Utility Reform Network (TURN), Utility Consumers' Action Network (UCAN), and the Division of Ratepayer Advocates (DRA) filed a Joint Petition for Modification (Joint Petition) of the two previous Commission decisions approving the Otay Mesa PPA to reflect the fact that the PPA, while generally containing the same terms and conditions as the original PPA, has been modified. Most significantly, the PPA now includes Put and Call Options. With the inclusion of the Put and Call Options, SDG&E will have the opportunity to own and operate the plant, with a 30-year useful life, following the expiration of the ten-year PPA. In addition, the new PPA changes the commencement date for the plant's operation from January 2008 to May 1, 2009, and also includes other moderate modifications.

We grant the request to modify D.06-02-031. We approve the Revised PPA for Otay Mesa because we find that it gives SDG&E a cost-effective, local area reliable resource, with a lower long-term cost to the utility's ratepayers than the original PPA and with the option that the utility can own the plant at the expiration of the PPA. The plant will be a state-of-the-art, dispatchable, low heat-rate, clean facility in SDG&E's service territory with the potential for 30 plus years of benefits. Because the Commission granted the application for rehearing of D.04-06-011, there is no need to modify that decision.