IV. Application and Testimony in Support of the LBG Project

A. The Application

On August 14, 2006, SCE issued its New Gen RFO soliciting two types of proposals for new generation: fast-track projects that could come on-line prior to August 1, 2010 and standard-track projects that would be on-line prior to August 1, 2013. After the August ACR issued, SCE expanded the New Gen RFO and solicited projects that could be on-line by August 1, 2007. Projects proposed for August 1, 2007 were specifically evaluated as to their ability to be on line by that date. If not, the projects would be considered for possible inclusion in the fast- or standard-track evaluation.

In conjunction with its New Gen RFO, SCE also issued a RFO for an Independent Evaluator (IE) as required for certain resource solicitations pursuant to D.04-12-048 and for the cost sharing mechanism established in D.06-07-029. SCE hired an IE prior to issuing the New Gen RFO and the IE performed monitoring and evaluation functions for all required aspects of the summer 2007 solicitations, including a review of the bids and the final bid selection.

SCE considered a number of criteria in the evaluation of the summer 2007 projects including transmission impacts, debt equivalence, environmental characteristics, credit, capacity requirements and project viability. SCE used a basic net present value analysis in evaluating the offers that entailed estimating (1) value of energy and ancillary services, (2) costs of contract, and (3) the net value of (1) and (2 ). SCE first assessed the present value of the energy and ancillary service benefits of each offer, then assessed the present value of the costs of each offer. Costs include, but were not limited to, fixed costs; transmission upgrade costs; debt equivalence; greenhouse gas (GHG) cost adder; and credit and collateral adders. SCE then subtracted the present value of expected costs from the present value of expected benefits to determine the expected net present value of each offer.

SCE also considered capacity requirements and project viability in its evaluation. In summary, SCE concluded that its need assessment for summer 2007 indicates that its planning reserves, operating reserves and adverse scenario reserve margins may be adequate, but the match between need and resources is very tight. While the planning reserve margin (PRM) is 19.1%, with assumptions for transmission limitations and generating outages SCE is just over the 7% required operating reserves level and with the same assumptions for the 1-in-10 summer demand case SCE only has 40 MW above the 5% operating reserves margin.3

SCE received five offers from three sellers. SCE determined that one seller's offer did not conform to the Summer 2007 RFO requirements, but if it met the standard-track RFO criteria it could be considered there. Two out of three offers from another seller were dropped from consideration because of RFO compliance issues. SCE then proceeded to negotiate with the remaining sellers, LBG and another, for the two remaining projects. In confidential filings SCE provided both the indicative and final valuations of the LBG and the other offer and how they compared with one another. While all offers were expensive, the LBG project was the most cost-effective offer that met the RFO requirements and met the key objective of being on-line by August 1, 2007.

After consulting with its Procurement Review Group (PRG), SCE learned that the PRG was concerned with the price, the age of the units, environmental limitations on operating hours, the relatively high heat rates and GHG issues. The PRG did, however, not object to SCE's rejection of the other summer 2007 offers.

According to testimony from SCE, SCE carefully considered the PRG's comments as it evaluated the pricing and contract provisions of the LBG project in the context of the August ACR. To address the tension between the relatively high cost for an expedited repowering of old gas-fired units and the need for reliability certainty for summer 2007, SCE built into the contract terms that provide both financial incentives and sanctions to LBG to have the project completed on time. As SCE states "the contract provisions provide powerful financial incentives for LBG to maximize the likelihood that the entire project will come on-line by August 1, 2007."4 In addition, the contract does contain some "off-ramps" for SCE, so that SCE's obligations under the contract can be reduced or eliminated if LBG fails to perform.

In its brief, SCE addresses the arguments presented at the evidentiary hearing against the LBG project: whether SCE "needs" the resource, the cost, and whether the project can be on-line by August 1, 2007. In regards to the needs issue, SCE asks that the intervenors, in particular DRA and TURN, look at factors other than just the PRM for summer 2007. SCE concedes that the PRM is used in the context of long-term planning, but SCE argues that other measures, such as operating reserves under adverse condition should be considered in determining whether the LBG contract is needed for reliability in the near-term. As discussed in its prepared testimony, SCE predicts a very tight margin in adverse weather conditions for its summer 2007 operating reserves.

In response to criticisms over the cost of the LBG project, SCE responds that it is the most cost-effective resource that SCE could obtain that can be on-line by August 1, 2007 and is the result of an open and competitive solicitation. While TURN would like to compare LBG with some of Pacific Gas and Electric Company's (PG&E) to show that the LBG contract is expensive, even TURN stated that the data between the two utilities' projects were possibly not strictly comparable - in particular because of the August 1, 2007 on-line date. None of PG&E's new resources will be on-line by that date. Also, SCE argues that TURN's contention that the LBG contract is not available to provide RA credit in summer 2007 does not discredit the contract's ability to provide power and enhance reliability for SP26.

The majority of the other opposing parties, DRA, CARE and CMTA/CLECA are concerned with the cost, the environmental impacts of the peakers and whether the units will be on-line in time to provide reliability and benefits to the system. SCE discussed the cost issue as stated above: LBG was the most cost-effective qualified bidder from the RFO. In regards to the environmental and scheduling issues, SCE only discussed publicly the general terms of the contract5 whereby LBG commits to the completion of necessary environmental and construction milestones and there are appropriate financial provisions to encourage LBG to have the resource on-line, on time, and penalties if it does not.

In its comments supporting the PD, SCE again reiterates that the LBG contract is the most cost-effective option for additional capacity insurance for summer 2007, in the heart of SCE's load center, that was received in SCE's summer 2007 track solicitation. This insurance translates into protection against blackouts. In addition, in its comments, SCE made numerous editing suggestions to make the PD consistent with the record, all of which were adopted.

Concurrently with the filing of its post-hearing brief, SCE filed a request for Official Notice6 and asked the Commission to consider a report presented by the California Energy Commission (CEC), Electricity Analysis Office, at the December 11, 2006 Joint Agency Energy Action Plan Meeting, A Preliminary Look at Peak Loads and Resources for 2007 and Policy Issues to Consider (CEC Report).

This report addresses the outlook for SP26. Part of the CEC's report looked at the probability of the region meeting various levels of reserve margins in summer 2007 with and without proposed resource additions. The proposed resource additions include the LBG project as well as the SCE-owned peakers and the additional demand response programs SCE is initiating. The CEC's assessment provides determinations of the probabilities that the CAISO's Southern California control area will meet certain operating reserve margins in summer 2007. The CAISO has three emergency stages: when operating reserve margins sink below 7% it is a Stage 1; when operating reserve margins are below 5% it is a Stage 2; and when the operating reserve margin drops to 1.5% it is a Stage 3 and the CAISO initiates rolling blackouts to preserve the stability of the electric grid.

The CEC's report shows with all the proposed resource additions, the probability is 99% that SP26 will have enough resources to maintain the operating reserve margin above 1.5%, but without the LBG project and SCE's other new peaking units the probability drops to 93.3%. Put another way, the addition of new resources reduces the probability of the Stage 3 blackout in summer 2007 from 1-in-15 to 1-in-100.7

SCE argues that the CEC's updated assessment of peak loads and resources supports the approval of the LBG contract as a needed resource for the CAISO's reliability outlook - and based on the bids received to the Summer 2007 RFO, the LBG project is the most cost-effective resource available in the time frame.

Sedway Consulting was retained by SCE, following consultation with the Commission's Energy Division (ED) staff and SCE's legal counsel on the scope of the monitoring and evaluating the IE would do for the Summer 2007 RFO. Alan Taylor of Sedway Consulting performed the monitoring and evaluating detail and SCE submitted a report from Mr. Taylor in support of its application for approval of the LBG project. Mr. Taylor's report contained a litany of the activities he undertook as part of his consulting activities for the project and concludes with his assessment that the LBG contract "warrants the CPUC's approval."8 The IE does not unconditionally recommend the LBG project, but on balance notes that based on SCE's assessment of its reserves, "next summers's needs will be met but not by much of a margin," and that this project "represents a relatively competitively-priced insurance policy to be added to the SP15 physical supply."9 Continuing on, the IE's report notes that the contract is "fairly expensive for the proposed operating attributes of the project and that the decision to select and execute the contract was a close call."10

In D.06-07-029, the Commission established a cost and benefits sharing mechanism for new generation. SCE is asking the Commission to authorize this new cost recovery mechanism for the LBG units whereby the benefits of the capacity for RA and Local Area Reliability (LAR), cost of the PPA, and results from the sale of the energy rights in an energy auction11 to this resource will be shared with all benefiting customers in SCE's distribution system pursuant to D.06-07-029, decisions in R.06-02-013 and existing Commission rules and policies.

3 SCE Testimony, Exhibit 1 and 1C, pp. 13-14.

4 SCE Brief, December 18, 2006, p. 16.

5 Because of the confidential nature of the specific contract terms, the public version of documents only references broad concepts and does not provide any financial or schedule milestone particulars. However, the confidential documents contain specific details of the project.

6 For a discussion of SCE's Motion, see Section VII on Motions herein.

7 SCE's Brief, December 18, 2006, p. 5.

8 Independent Evaluator's Report, Exhibit 4, p. 5.

9 IE's Report, Exhibit 4, p. 4.

10 IE's Report, Exhibit 4, pp. 4-5.

11 Details of the energy rights auction process are under consideration in Phase 2 of the long-term procurement proceeding, R.06-02-013.

Previous PageTop Of PageNext PageGo To First Page