VII. Discussion

After digesting and considering the Comments and Reply Comments the Commission is still bothered by the choice facing it on whether or not to approve the SCE/LBG 10-year PPA. It is clear that all parties, other than SCE and LBG, are focused on the negative aspects of the project; cost, high heat rate and environmental issues. We are mindful of those aspects of the project. We equally share the concern of many that in approving the project we may be erring in favor of reliability, with a cost to all benefiting customers. But that does not make our analysis of the situation any easier as we still face the same issue: Is the LBG project a prudent "insurance policy" to ensure reliability for summer 2007 through 2009. As LBG discusses in its brief, the debate about whether the July 2006 Heat Storm was an aberration or a trend continues - with no chance it will be resolved before the Commission must act on this Application. The August ACR raised the same concerns. The Heat Storm of 2006 was unexpected and taxed the electricity resources beyond what the Commission and the LSEs had planned for - yet there were no service interruptions related to a lack of adequate generation. If the unexpected happened again, would the system resources hold for summer 2007, or would reliability be unacceptably compromised?

The Commission accepted and promulgated the industry standard that firm load should not be interrupted due to lack of resources more than "one-day-in-ten-years" (1 in 10) in D.02-12-074 and D.04-01-050. To ensure that the LSEs have resources sufficient to provide service at this level of reliability, the Commission adopted a PRM of 15% to 17%. The Commission based this PRM on its detailed analysis that a showing of PRM in this range would meet, or exceed, the industry standard of 1 in 10. All LSEs are to procure resources equal to their expected peak load plus 15% to 17%.

By all measurements, in 2007 SCE expects to have a physical PRM in SP26 of 19.1% - above the 15% required minimum and over the 17% recommended ceiling. However, it is a reality that actual loads and resources may differ from the forecasts. We cannot have certainty in advance about both the weather and the availability of reserves on any given day at any given time. We know that consistent with their respective long-term plans, the IOUs have many new resources coming on-line beginning in 2010. The question we are faced with in this Application is whether we have adequate resources for the 2007 through 2009 period to meet unexpected weather or resource availability. How much uncertainty is tolerable?

That is the question the Commission was faced with when the August ACR issued. The ACR directed SCE to take steps to increase its resources by adding some new in-basin peakers and decreasing demand on the system by increasing the air-conditioning recycling program for summer 2007. The question we address here is whether we should also add an additional 260 MW of in-basin peaking power.

Based on the report from the IE and the record in the proceeding, SCE appears to have operated the RFO in conformity with Commission direction and SCE's selection of the LBG project is not criticized since it appears to be the winning bid from a limited short list.

LBG plans on repowering four units totaling 260 MW with combustine turbines. The power plant was built in 1927 and closed in 2005. In general geographic terms, the site is at the Port of Long Beach. Based on the existing environmental externalities of the site, it is possible that repowering may be done on an expedited basis. If we approve the project, and the MWs are not needed, SCE's distribution customers will pay for an insurance policy for ten years that was never needed. Many parties question the project because of the high heat rate, a number that is confidential, but known publicly to be higher than new projects. The irony is, because of the high heat rate, the units might not get dispatched until all other lower cost resources are exhausted. Approving the LBG contract is just like any insurance policy - you buy it hoping you never have to use it.

On the other hand, if we do not approve the project and the resource is needed, the result may be even more expensive than the "insurance policy." An interruption in service has a cost to the individual business and residential customers who are without power, and the economy of the state as a whole could suffer both directly in the loss of products and services and the loss of income and taxes, and indirectly in making California less desirable as a place for business and jobs. No specific economic figures were produced in the record, so the Commission is not relying on this assumption in making this decision, but includes it as a point of reference.

The PD approved the LBG project on balance; we were persuaded that the LBG project is necessary to ensure reliability for the summers of 2007 through 2009, and on that basis approves the Application. This decision is not made with enthusiasm, nor because parties urged the Commission to follow this path. Even SCE was ambivalent about the project's need and cost-effectiveness. However, the Commission issued the August ACR directing SCE to make provisions for summer 2007 and this project is the only one from the summer 2007-track of the New Gen RFO that meets our requirement that it be on-line by next August. In addition, its locality is both what allows it to be quickly repowered, and what makes it attractive from a load serving perspective. No additional work or funds need to be expended to bring the energy from the LBG units to the heart of SCE's service territory.

In addition, we are assured by our review of the confidential version of the Exhibits that SCE has built into the PPA sufficient milestone checkpoints to assess the progress of the environmental permitting and construction on the project. If LBG is not performing pursuant to the contract timeframes, SCE does have off-ramps to reduce or eliminate its financial liabilities under the contract. We do expect SCE to scrutinize LBG's progress and prudently exercise appropriate options to protect benefiting customers.

We decide the vexing issue with the approval of the LBG project and authorize SCE to treat the capacity and energy from this PPA pursuant to the mechanism established in D.06-07-029. The benefits and costs of this PPA are to be shared by all benefiting customers.