10. Assignment of Proceeding

Michael R. Peevey is the assigned Commissioner and Victoria S. Kolakowski is the assigned ALJ.

1. SDG&E has entered into a PPA and lease option agreement with J-Power to develop approximately 86.5 MW of gas-fired peaking generation on 16.5 acres of SDG&E's 202 acre Pala substation in northern San Diego County, to which the generators will be connected. The commercial online date will be May 31, 2008, and the delivery term of the PPA is expected to be from May 31, 2008 through May 31, 2033.

2. SDG&E has entered into a PPA and lease option agreement with Wellhead to develop approximately 44 MW of gas-fired peaking generation on 1.68 acres of SDG&E's 19 acre Margarita substation in Orange County, to which the generators will be connected. The commercial online date will be July 1, 2008, and the delivery term of the PPA is expected to be from July 1, 2008 through December 31, 2033.

3. For both the J-Power and Wellhead projects, during the duration of the PPA, the developer would own and operate the facility, and SDG&E would have exclusive off-take rights to both energy and ancillary services from units. SDG&E will serve as the scheduling coordinator for the units with the CAISO. SDG&E would provide natural gas to fuel the generators. The units would be considered resource adequacy units subject to the dispatch and operational rules under the CAISO tariff.

4. At the end of each lease, ownership of the peaker generators constructed on that site will transfer to SDG&E without cost.

5. The parties have agreed to defer discussions of the capital structure issues arising from this application to A07-05-007.

6. SDG&E has demonstrated a need for additional peaking capacity to meet the needs of its bundled customers that exceeds the generation capacity of the projects proposed by J-Power and Wellhead.

7. Purchasing power to meet the demonstrated need in an energy auction poses greater cost risks to SDG&E bundled ratepayers than the likely benefits of using such an auction.

8. Delay in approval of peaking generation could result in shortfalls as early as the summer of 2008.

9. SDG&E used a prudent process for selecting the J-Power and Wellhead projects from among competing projects offered into its October 16, 2007 RFO. The process selected the best fit and least cost proposals that fully met the location, delivery and creditworthiness requirements imposed by SDG&E.

10. The J-Power and Wellhead PPAs prudently meet demonstrated need at reasonable costs. Each provides benefits of peaking capacity, energy and ancillary services and helps meet resource adequacy and local reliability goals.

11. The use of tolling agreements for gas for the peakers should provide reduced electric price volatility, and will help ensure the peakers are available to meet peak demands and black start capability.

12. The J-Power and Wellhead lease-option agreements provide reasonable protections for SDG&E and its ratepayers.

13. SDG&E will record revenues associated with lease payments to the TCBA equal to the revenue requirement costs associated with the land values recorded in rate base. The balance in the TCBA is amortized in the CTC rate component, which is applicable to both bundled and direct access customers.

14. Any revenues associated with lease payments that exceed the revenue requirement associated with the land values in rate base will be recorded to the ERRA account.

15. Operation of the peakers constructed under the option agreements will not interfere with SDG&E's provision of utility service to its customers.

16. Operation of the peakers is a productive purpose for the use of the substation land covered by the agreements.

17. SDG&E' public (redacted) Exhibits 1 through 6 and confidential (unredacted) Confidential Exhibits C-1, C-2, C-3, C-4 and C-6 are identified herein and have been offered by SDG&E as testimony.

18. SDG&E has provided declarations with each of its confidential exhibits that meet the requirements of D.06-06-066. The contents of those exhibits qualify them for confidential treatment pursuant to D.06-06-066.

1. SDG&E's PPA with J-Power and its associated lease option agreement should be approved, as they prudently meet demonstrated need at reasonable costs.

2. SDG&E's PPA with Wellhead and its associated lease option agreement should be approved, as they prudently meet demonstrated need at reasonable costs.

3. SDG&E should be allowed to recover in power purchase costs through its ERRA, as the purchases are for the benefit of its bundled customers.

4. SDG&E should record revenues associated with lease payments to the TCBA equal to the revenue requirement costs associated with the land values recorded in rate base.

5. SDG&E should record to its ERRA account any revenues associated with lease payments that exceed the revenue requirement associated with the land values in rate base.

6. SDG&E's agreements to lease substation land provide useful purposes for the land without interfering with SDG&E's provision of utility services, and therefore meets the requirements under § 853(b) of a waiver of the § 851 requirements for the limited purposes of constructing peaker units pursuant to these agreements, provided that they are the same as those attached to the lease option agreements..

7. SDG&E' public (redacted) Exhibits 1 through 6 and confidential (unredacted) Confidential Exhibits C-1, C-2, C-3, C-4 and C-6 should be entered into the record of this proceeding.

8. SDG&E has met the requirements of D.06-06-066 for Confidential Exhibits C-1, C-2, C-3, C-4 and C-6, and those exhibits should be filed under seal.

ORDER

IT IS ORDERED that:

1. San Diego Gas and Electric Company's (SDG&E) power procurement agreement (PPA) and lease option agreement of May 9, 2007 with J-Power, USA Development Company, Ltd. is approved.

2. SDG&E's PPA and lease option agreement of May 1, 2007 with Wellhead Power Margarita, LLC is approved.

3. SDG&E is authorized to recover payments made pursuant to the PPA by means of entries into its Energy Resources Recover Account (ERRA), subject to annual review of those payments.

4. SDG&E shall record to the Transition Cost Balancing Account any revenues associated with payments made under any lease executed pursuant to the lease option agreements, up to the revenue requirement costs associated with the land values recorded in rate base.

5. SDG&E shall record any revenues associated with lease payments that exceed the revenue requirement associated with the land values in rate base to the ERRA account.

6. Any leases executed pursuant to the lease option agreements approved herein are exempt from the requirement of Commission approval found in Pub. Util. Code § 851 pursuant to Pub. Util. Code § 853(b), provided that they are the same as those attached to the lease option agreements.

7. SDG&E' public (redacted) Exhibits 1 through 6 and confidential (unredacted) Confidential Exhibits C-1, C-2, C-3, C-4 and C-6, as described herein, are entered into the record of this proceeding.

8. Confidential Exhibits C-1, C-2, C-3, C-4 and C-6 are filed under seal pursuant to D.06-06-066 and shall remain sealed for a period of three years from the effective date of this decision.

9. Application 07-05-023 is closed.

This order is effective today.

Dated September 6, 2007, at San Francisco, California.

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