3. J-Power and Wellhead's PPAs and Lease Option Agreements Should Be Approved
As discussed below, we determine that the PPAs and lease option agreements with J-Power and Wellhead should be approved.
We have reviewed the confidential analysis provided in Exhibit C-3, and find that it provides adequate demonstration of a need for additional peaking capacity sufficient to justify the purchases under the J-Power and Wellhead PPAs. We also agree with SDG&E and DRA's position that use of the energy auction mechanism adopted in D.06-07-029 to meet this need would likely create greater risk than benefit to SDG&E's bundled customers.12 Under the best circumstances, SDG&E ratepayers would gain only a small amount, while the risk that they would lose money under such an auction far outweighs the benefits.
Delay in adding peaking resources can adversely affect system reliability, and can cause imbalances in negotiating power for procurement of such resources.13 While it would otherwise be appropriate to wait until determining the total LTPP needs of SDG&E in R.06-02-013 before reaching a decision on this application, the need to begin the process of construction of the peaker units in time to meet the projected need for the summer of 2008 requires that we make a determination without delay.14 Given SDG&E's current and unique situation, we are persuaded to approve these commitments prior to a final need determination in the LTPP proceeding, R.06-02-013. However, we note that the conclusions reached here today are based on a unique set of circumstances and should not be assumed to be applicable in a general sense.15
One potential concern with approving these projects is that adding gas fired resources such as these peakers could crowd out resources higher in the load order set forth in the Energy Action Plan (EAP). The LTPP process considers issues such as the EAP loading order in a comprehensive manner, to avoid such outcomes. Therefore, we expect that all Investor Owned Utilities (IOUs) will plan for meeting their needs through appropriate implementation of the loading order. Only once an IOU has exhausted all attempts to fill a net short position with preferred loading order resources should it look to traditional fossil generation to meet remaining needs.
SDG&E sought to meet this need through its October 16, 2006 RFO, which was developed in concert with its PRG and IE. Bids were evaluated by considering prices, depreciation, debt service, equity charges, federal and state taxes and estimated operation and maintenance expenses.16 Bids were then compared and the top choices were subjected to a credit analysis to identify the risks of failure to perform over the 25-year term of the projects.17 The final projects were selected based upon price, creditworthiness, delivery dates and location of the projects.18 Using these criteria, the J-Power and Wellhead proposals were accepted.
We find that SDG&E used a prudent process for selecting the J-Power and Wellhead projects from the RFO. We have previously directed IOUs to use a least-cost, best fit (LCBF) methodology when evaluating RFO bids.19 Based upon our review of SDG&E's process, it selected the LCBF proposals that met the reasonable location, delivery and creditworthiness requirements imposed by SDG&E.20
Furthermore, these projects meet the environmental tests that we apply to all such projects. The project will be built on SDG&E property, and therefore meets the requirement that IOUs give priority to generation projects on existing (brownfield) sites before using new (greenfield) sites.21 The peakers have expected capacity factors below the 60% threshold, and therefore they are exempt from meeting the Greenhouse Gas requirements set forth in D.07-01-039 and under statute.22 Local governments and the California Energy Commission (CEC) will ensure compliance with the environmental requirements of the California Environmental Quality Act (CEQA).23
We have reviewed the J-Power and Wellhead PPAs, and find that they prudently meet demonstrated need at reasonable costs. Each provides the benefits of peaking capacity, energy and ancillary services; helps meet resource adequacy goals; and provides local reliability benefits.
Both PPAs contain tolling provisions that provide that SDG&E shall provide the natural gas to operate the peakers. We have previously recognized that there are distinct advantages in some circumstances to such an arrangement. In D.02-08-065, we noted that "[t]olling arrangements have the potential to provide benefits to electric consumers through reduced electric price volatility and ensuring plants are available to meet peak demands."24 Such concerns are particularly relevant to units such as peakers, which are designed both to meet such peak demand as well as provide "black start" capability to ensure local system restoration in case of blackouts. We find that it is likely that such price and availability benefits will be provided by these PPAs.
We have also reviewed the lease option agreements, as well as the proposed lease agreements. These agreements provide reasonable protections for SDG&E and its ratepayers.
Therefore, we approve the PPAs and lease option agreements with J-Power and Wellhead. By approving agreements which will eventually lead to increased SDG&E ownership of generation facilities, we do not intend to signal that we are abandoning our commitment to the hybrid wholesale market. As stated above, these agreements are being approved due to unique circumstances, and this decision is not to be considered precedential.
12 Joint PHC Statement, p. 7.
13 Exhibit 2, p. 2.
14 Joint PHC Statement, p. 3-4.
15 A Commission Decision in R.06-02-013 is currently anticipated later this year.
16 Exhibit 2, pp. 5-6.
17 Id., p. 6.
18 Id., pp. 8-9.
19 D.04-12-048, Finding of Fact 86 and Ordering Paragraph 26(d).
20 We do not address whether this methodology would fully meet the LCBF requirements for future RFOs.
21 See D.04-12-048.
22 Exhibit 2, p. 2. SDG&E commits to limiting the operating hours to less than 60%.
23 Application, p. 7.
24 D.02-08-065, fn. 3.
