5. Determination and Selection of the Best Option
5.1. Supply Resources Request for Offers
SDG&E issued a 2010-2012 Supply Resources Request for Offers (2010-2012 RFO) to address, in part, the large bundled customer short position that needs to be filled over the next few years due to expiring CDWR contracts. SDG&E indicates that it is procuring its future net short incrementally and over time, rather than buying all of the identified short position in a single RFO, thus diversifying its purchased price of capacity and energy. SDG&E also conducted this competitive solicitation as a market test for the El Dorado Option to determine whether there are any opportunities to purchase a project with characteristics similar to El Dorado, but at a lower cost.
After analyzing the portfolio needs, SDG&E made a decision on product type and quantity to seek in the RFO. SDG&E sought supply resources to supply energy to bundled customers and/or meet other portfolio needs, including resource adequacy requirements,6 as follows:
Product 1 in the RFO was for demand response. The product requirements stated that each demand response project must be a means of reducing an end-use customer's demand and/or energy usage by at least 1.0 MW and be within SDG&E's service territory.
Product 2 in the RFO was defined as new generation capacity with a "preferred on line date of March 2010, but with consideration of offers for dates as early as March 2009 or as late as March 2012." The new generation had to "be located physically within SDG&E's service territory ... or have its sole generator transmission system interconnection (gen-tie) directly interconnected to the electric network internal to SDG&E's service area such that the unit supports SDG&E's local resource adequacy requirement." Recognizing that there may be qualified developers that do not have familiarity with the San Diego region and may not have a site readily available to them, SDG&E offered two of its own sites (Rainbow and Lonestar) to potential developers in order to garner the best possible response to its RFO. The sites were opened for power purchase agreements (PPA) and build-own-transfer (turnkey) offers.
Product 3 in the RFO was for resources able to compete with the services and characteristics offered by the El Dorado Option. Product 3 was for "one fully dispatchable, approximately 500 MW generation facility with a remaining useful life of at least 20 years capable of delivering unit contingent firm energy and capacity to SDG&E's service territory, with deliveries commencing between October 1, 2011 and March 31, 2012." Heat rates were generally held to be "... no higher than 8,000 btu/kWh, and the unit ... [was to] ... be capable of operating at capacity factors of 80% or more." Offers were to be "... PPA (tolls only) with an option offered at respondents' sole election for transfer to SDG&E at a price certain; or an acquisition by SDG&E." In every case, deliveries would begin no later than Q1 2012.
SDG&E indicates that it is continuing to work on negotiating contracts for Products 1 and 2 and may file any resulting contracts for approval by the Commission in the future. The results for Product 3 and the economic analysis of the associated offers are discussed further on in this decision.
SDG&E states that it consulted with its Procurement Review Group (PRG) and also worked with its Independent Evaluator (IE) to ensure that the solicitation was open, designed and evaluated without bias and likely to garner a robust response from the market. SDG&E indicates the following:
· The PRG was briefed on SDG&E's plans for the 2010-2012 RFO as early as October 13, 2006.
· On October 27, 2006, a PRG meeting was held to discuss, among other topics, the El Dorado Option.
· On March 1, 2007, draft RFO documents were sent to the PRG for their review prior to release publicly.
· On March 2, 2007, a call was held with Energy Division staff who had suggested changes that SDG&E incorporated into the RFO document prior to its release on March 9, 2007.
· On March 16, 2007, SDG&E again reviewed with its PRG the goals of the RFO, the process to be followed in the RFO and the need to be filled.
SDG&E states that it also consulted with its IE and provided it an opportunity to review and comment on the RFO document prior to its release. Additionally, SDG&E worked with the IE to resolve items that were brought to SDG&E's attention prior to issuing the RFO. SDG&E had chosen to continue with the same IE used for previous solicitations by the utility due to that entity's familiarity with SDG&E's portfolio and the PRG. After the RFO was underway, the IE asked to withdraw from this matter due to a potential conflict related to other work being done by the IE's firm. SDG&E therefore switched IE firms immediately prior to the receipt of offers. This change in IE was discussed with the PRG on two occasions.
On March 9, 2007, SDG&E issued its 2010-2012 RFO to the market. In order to achieve its goals of maximum participation and robust competition, SDG&E states that it took the following actions: (1) issued a press release, which was carried by major trade publications; (2) conducted a direct mailing (via e-mail) to a list of likely interested parties; (3) noticed the RFO on its web site; (4) posted all relevant documents on that site for access by any interested party; (5) convened a pre-bid conference on March 30, 2007, which was attended by almost 50 individuals; and (6) regularly updated its RFO web site with new information and responses to questions submitted in writing regarding the RFO.
5.2. Product 3 Results
The evaluation of the bids started with screening for conformance with the RFO. SDG&E received two conforming offers in Product 3, one of which was the El Dorado Option.
In summary, the El Dorado Option is for the purchase of 100% interest in the existing 480 MW combined cycle power plant. The unit is located in southern Nevada and will be capable of providing system resource adequacy to SDG&E's portfolio as an import, which is dynamically scheduled into the ISO on the Merchant Branch Group. The unit will also provide SDG&E's bundled customers with ancillary services and energy at a heat rate that is attractive relative to the market. The offered price of the El Dorado plant, as defined in the Equity Purchase Option Agreement, is equal to the closing book value of the plant at the time of transfer in 2011, which is currently estimated to be $189 million.
The sole conforming bid to compete with El Dorado in the Product 3 category (Competing Offer) is an industry standard combined cycle unit similar to El Dorado. The Competing Offer would be expected to operate in a similar manner as El Dorado and, as proposed, would be built within SDG&E's service territory.
5.3. Economic Analysis of Costs and Benefits
SDG&E performed an economic analysis to demonstrate why it believes customers will benefit significantly from selection of the El Dorado Option as compared with the Competing Offer. The evaluation considered the fixed and variable costs of El Dorado ownership and the Competing Offer, and quantifies the overall net present value cost impact to ratepayers of adding either El Dorado or the Competing Offer to SDG&E's bundled resource portfolio.
The modeling methodology used in this comparative analysis is consistent with the approach used in SDG&E's Grid Reliability RFP that resulted in a number of approved projects, including the Palomar Plant, and in the Otay Mesa PPA Rehearing Proceeding (D.06-09-021).
The economic analysis focused on both capital and operating costs. Capital costs included (1) capacity and fixed costs; (2) debt equivalency costs; (3) cost variations associated with plant size; and (4) transmission system upgrade cost differences.7 Operating costs included (1) system energy costs; (2) ancillary services benefits; (3) potential Greenhouse Gas (GHG) emissions costs; and (4) locational differences.
The result of SDG&E's analysis shows that its bundled customers are estimated to receive benefits of approximately $243 million under an expected case on a net present value (NPV) basis over the 25-year analysis period by exercising the option to procure the El Dorado plant as compared to the Competing Offer. SDG&E's analysis shows lower capital related costs of $316 million for El Dorado are offset to a degree by higher operating costs of $72 million. According to SDG&E, benefits related to the capital cost components result from SDG&E being able to procure El Dorado at book value. Operating costs/benefits related to system energy, ancillary services and GHG emissions are relatively close between El Dorado and the Competing Offer, which SDG&E notes would be expected since the plants are expected to operate in a similar manner. El Dorado has higher total operating costs primarily due to locational price differences related to its location outside of SDG&E's service territory versus the Competing Offer, which would be located in SDG&E's service area.
In order to test the robustness of the analysis, additional sensitivities were applied to both El Dorado and the Competing Offer that addressed (1) local resource adequacy; (2) locational marginal price differential; (3) transmission system upgrade costs; and (4) terminal value. The results of the sensitivity analysis show that SDG&E's bundled customers continue to receive benefits on a NPV basis over the 25-year analysis period by exercising the option to procure the El Dorado Plant as compared to the Competing Offer.
5.4. GHG Emissions Performance Standard Evaluation
D.07-01-039 set an interim GHG Emissions Performance Standard (EPS) for any new long-term commitments to baseload generation. SDG&E calculated the forecasted carbon dioxide (CO2) emissions per megawatt hour. Based on forecasted operation from its production simulation model, SDG&E calculated that the expected emissions would be less than 900 pounds/MWh over the 2012-2021 timeframe. This amount is below the EPS of 1,100 lbs/MWh. Thus, SDG&E asserts that the plant would pass the EPS recently adopted by the Commission.
SDG&E also checked the Competing Offer for compliance with the EPS. SDG&E calculated the expected emissions for the Competing Offer would also be less than 900 lbs/MWh over the 2012-2021 timeframe.
5.5. Selection
The 2010 -2012 RFO process resulted in SDG&E selecting the El Dorado Option for Product 3.8 Selection was a simple comparison of the revenue requirement impacts of the two offerings - the El Dorado Option vs. the Competing Offer. Based on the outcome of the analysis described above and detailed in SDG&E's prepared testimony, SDG&E maintains that the El Dorado Option is a superior alternative to the Competing Offer.
The PRG continued to be briefed after the RFO was issued. On April 27, 2007, SDG&E met with its PRG to discuss and review the proposed evaluation criteria to be used in making a selection. On June 20, 2007, SDG&E reviewed the results of its analysis and presented its proposed shortlist to the PRG, including its decision to exercise the El Dorado Option.
Methodologies and empirical data assumptions were proposed and considered by both the IE and SDG&E. The subjects covered isolation of key variables, consistency of analytical approaches and the possible presence of perceived bias. This process included numerous site visits, conference calls and e-mails with the IEs.
SDG&E's prepared testimony included a copy of the Independent Evaluator's Report: SDG&E's Product 3 Selection for its March 9, 2007 request for Offers for Supply Resources (IE Report).9 VHC's opinions and conclusions regarding the selection of the El Dorado Option are summarized as follows:10
As discussed above, VHC reviewed SDG&E's bid receipt and evaluation processes and methods, as well as spot-checking data and calculations. In addition to conducting on-site and telephone interviews and discussions with SDG&E personnel, VHC reviewed bid-related materials and quantitative analyses, recommended refinements, and initiated numerous discussions.
VHC concludes that SDG&E has run a fair and unbiased solicitation for Product 3, resulting in its selection of the El Dorado project. No preference was shown for the El Dorado affiliate bid. As noted earlier, SDG&E provided the acquisition costs of the El Dorado project in the RFO solicitation, in order to allow other bidders to estimate the benchmark costs that their offers would need to beat in their bids.
VHC concurs with SDG&E that the El Dorado project is a lower cost option than the "Offer" and is the appropriate Product 3 resource selection. VHC has noted areas where it may have used different assumptions in the economic evaluation for Product 3. Overall, VHC believes that SDG&E's set of assumptions for the Product 3 evaluation have led to the comparative costs of the El Dorado project being somewhat higher than they might otherwise have been estimated to be. However, even using such relatively conservative assumptions, the costs of the El Dorado bid remain considerably lower than the costs of the "Offer." VHC does not see a likely scenario where the "Offer" would be a superior selection to the transfer of the El Dorado plant to SDG&E.
Although, not considered in the evaluation, the smaller, shorter-lived El Dorado project may also allow greater flexibility in the future to comply with more stringent rules and regulations regarding CO2 emissions reductions.
5.6. Discussion
The RFO process, as conducted by SDG&E for 2010 -2012 and as described above is a reasonable means for determining whether the El Dorado Option is the least cost, best fit resource to fulfill the associated bundled customer resource need identified by SDG&E in its LTPP. The Competing Offer, a new combined cycle unit similar to the existing El Dorado unit, provides a reasonable comparison to El Dorado for the purpose of making such a determination. We also note that SDG&E's PRG was kept informed during the entire RFO process, and no party responded to or protested this application.
SDG&E's economic analysis of the El Dorado Option and the Competing Offer is consistent with that adopted in prior Commission decisions. We have reviewed SDG&E's analysis and the results appear reasonable. As indicated, the principal factor that leads to the selection of the El Dorado Option is the value of the purchase price being based on the depreciated value of the plant at the time of the October 1, 2011 purchase. Also, as indicated above, the IE Report reviewed SDG&E's economic analysis. In VHC's judgment, the bids were evaluated fairly, enabling SDG&E to make a reasonable comparison of the values of the bids and to make an appropriate Product 3 selection.
We also acknowledge SDG&E's analysis that shows the El Dorado plant would pass the GHG EPS recently adopted by the Commission.
For these reasons, we find SDG&E's selection of the El Dorado Option for Product 3 of the 2010-2012 RFO to be reasonable. This sufficiently demonstrates that the El Dorado Option is the least cost, best fit alternative to fulfill the associated bundled customer resource need identified by SDG&E in its LTPP. Also, ensuring the addition of the El Dorado plant to SDG&E's bundled resource portfolio now is a significant step in SDG&E's strategy to procure its future resource needs gradually and over time, thus diversifying its purchased price of capacity and energy. It is in the interest of SDG&E's bundled ratepayers for SDG&E to exercise its option to purchase the El Dorado plant, and SDG&E's request to do so should and shall be approved.
6 Although the RFO solicited demand response and conventional resources, it did not solicit renewables (and was thus not a true All-Source RFO) due to the release the following business day (on March 12, 2007) of SDG&E's 2007 Renewable Portfolio Standard RFO.
7 The RFO required that all offers for new projects provide a California Independent System Operator System Impact Study so SDG&E's analysis could assess any transmission system upgrade costs (beyond the "gentie") that would be required to make the plants deliverable. SDG&E did not receive such a study for the Competing Offer and thus made an assumption for this analysis that costs would be similar to the cost for integrating the Palomar combined cycle plant. In its prepared testimony, SDG&E discusses this analysis, as well as a sensitivity that evaluates lower transmission system upgrade costs.
8 The Settlement Agreement for the El Dorado Option is contained in both Exhibits 1 and 2. The Equity Purchase Option Agreement is contained in Exhibit 3.
9 The report was prepared by Van Horn Consulting (VHC), which began its role as IE on May 17, 2007. VHC assumed the role previously performed by PA Consulting, which had reviewed the design of the solicitation and the early evaluation criteria. VHC's IE Report included a discussion of PA Consulting's review.
10 IE Report, p. 16. VHC's use of the term "Offer" refers to what SDG&E calls the "Competing Offer" in its testimony.
