4. Discussion

4.1. Need for CPV PPA

D.06-07-029 stated that California needs new capacity on-line as soon as 2009, especially in Southern California. The primary stated purpose of Phase I of R.06-02-013 was to incentivize new generation in the state and break the stalemate wherein neither the utilities nor the merchant generators had been willing to invest in the construction of new capacity.

To that result, D.06-07-029 directed SCE to solicit bids for up to 1,500 MW of new generation resources. SCE followed that instruction, and conducted an RFO seeking new generation that could be on-line by 2010. The CPV resource, 455 MW of new generation that could be on-line by August 1, 2010, was selected as an appropriate resource by SCE and confirmed by the IE.

Based on the testimony submitted by SCE in support of its application, and the Independent Report by the IE, SCE has conducted its RFO in a fair and reasonable manner and the selection of CPV is an appropriate selection.

However, as DRA discusses in its briefs, SCE still has an affirmative obligation to justify its need for these resources. We also are cognizant of DRA's argument that using multiple need tables - all of which use different assumptions and produce different need numbers - makes it difficult to conduct a thoughtful and thorough analysis of the data.

However, as argued by SCE, forecasting is not an exact science. As SCE's forecast witness Minick stated, his load forecasts change with time and due to changes in other assumptions and circumstances.¹⁰ Minick testified that SCE modified the numbers included in its February 28, 2007 application, before the date of the evidentiary hearings on May 30, 2007. For example, Minick made assumptions for San Diego Gas & Electric Company's peakers, but that assumption was reduced by 120 MW.¹¹ Minick also lowered SCE's demand-management program projections by 275 MW.¹² Minick also explained that SCE used different assumptions, and therefore reached different need forecasts, between its best-estimate plan and its required plan. In that regard, SCE's best-estimate plan had a lower implementation of the California Solar Initiative (CSI) than did the required plan, based on the CSI target SCE actually thought it would achieve.¹³

Minick also modified SCE's estimates of potential generic retirements. Minick, as well as other SCE witnesses, indicated that it was difficult to predict with certainty when the owner of an aging plant would decide that it was no longer economic to keep the plant on-line, and retire the facility.

In addition to the fact that the data in any one forecast is constantly updated as SCE receives new information, SCE also produced different "need" scenarios from high need to base case. When Minick was asked what was common among all the different need tables, he responded that "[T]he need grows rather dramatically between, let's say, 2009 and '10, '11 and '12. It is based on a lot of factors, but in most cases it grows so quickly that it will absorb quite a few megawatts from year to year . . . ."¹⁴ Continuing on, Minick indicated that SCE finds a need in its base case in 2011, and in the high need scenario as early as 2007 and 2008.

Factors in the economic, political and regulatory world are also always in flux. Just recently, the Arizona Corporation Commission rejected SCE's application for approval of the Devers-Palo Verde 2 transmission line from California to Arizona, which SCE had expected to provide approximately 900 MW of new capacity to California starting in 2009.¹⁵ SCE is continuing to pursue this transmission line, but even if it is ultimately approved, there will be a delay.

Therefore, no party today can accurately predict with certainty whether or not the energy from the CPV facility will be needed as early as August 1, 2010 when it is slated to come on-line. However, it appears reasonably certain that SCE will need additional resources by 2011, and under some assumptions, much sooner. Furthermore, when DRA asked SCE's witness Cini whether the start date of CPV could be postponed from 2010 to 2011, his response was "that would effectively kill the contract."¹⁶ Therefore, Commission's option is to either approve the CPV contract with the start date of August 1, 2010, or deny SCE's application.

While we strive to keep electric rates just and reasonable, and procuring excess power could increase the cost to ratepayers, having SCE caught in 2010 with insufficient electricity in its portfolio will definitely increase the cost to ratepayers. When a utility is "short" on its resources, the cost of covering that short fall has historically exceeded the cost of power from resources under ownership or contract. Emergency resource planning is expensive and often the utility does not get the best resources. Reasonable resource planning allows for better prices and better resources.¹⁷

Therefore, after reviewing the different need tables presented by SCE,¹⁸ weighing the difficulty SCE has in predicting future plant retirements with a specific degree of certainty, and factoring in the unknowns currently associated with the Devers-Palo Verde 2 transmission line, we find that it is reasonable to approve SCE's application for approval of the CPV PPA with the start date of August 1, 2010.

We find that the RFO conducted by SCE pursuant to our directive in D.06-07-029 was fair and reasonable and that the choice of this resource was also reasonable. Since this resource was selected to meet the system needs south of path 15, the costs and benefits of the CPV PPA should be spread among all benefiting customers pursuant to the cost allocation mechanism established in D.06-07-029.

4.2. Applicability of Senate Bill 1368 and the Commission's Greenhouse Gas Emissions Performance Standards

Section 2 of Senate Bill (SB) 1368 adds Section 8341(a) to the Public Utilities Code. Section 8341(a) provides that "No load-serving entity or local publicly owned electric utility may enter into a long-term financial commitment unless any baseload generation supplied under the long-term financial commitment complies with the greenhouse gases emission performance standard established by the commission, pursuant to subdivision (d)."

R.06-04-009 was opened to implement the provisions of SB 1368, and D.07-01-039 established a greenhouse gas (GHG) emissions performance standard (EPS). D.07-01-039 states that, "SB 1368 establishes a minimum performance requirement for any long-term financial commitment for baseload generation that will be supplying power to California ratepayers. The new law establishes that the GHG emissions rates for these facilities must be no higher than the GHG emissions rate of a combined-cycle gas turbine (CCGT) powerplant." The CCGT-equivalent emissions limit adopted by the Commission is 1,100 pounds of carbon dioxide (CO₂)/MWh.

The Decision further explains:

SB 1368 describes what types of generation and financial commitments will be subject to the EPS ("covered procurements"). Under SB 1368, the EPS applies to "baseload generation," but the requirement to comply with it is triggered only if there is a "long-term financial commitment" by an LSE. The statute defines baseload generation as "electricity generation from a powerplant that is designed and intended to provide electricity at an annualized plant capacity factor of at least 60%. ... For baseload generation procured under contract, there is a long-term commitment when the LSE enters into "a new or renewed contract with a term of five or more years."

The CPV facility will be operated as a peaking resource well below the threshold baseload capacity factor of 60%. Therefore, the EPS does not apply here.

4.3. Transmission Upgrade Uncertainties

A number of transmission upgrades associated with the Devers-Palo Verde #2 Transmission Project (DPV2) were assumed in conjunction with the transmission studies conducted for these projects. It is uncertain at this time when and if DPV2 will be constructed. Consequently, the California Independent System Operator (CAISO) performed a new Deliverability Study for the project without the DPV2 upgrades. The results of the study indicate that CPV is deliverable under the study's conditions. A copy of this "2007 Q3 Generation Deliverability Study Results-SCE and San Diego Areas" is provided in Attachment A (CPV's specific results can be found by looking at CAISO/SCE WDAT Queue Position No. 3).

4.4. Compliance with EAP Loading Order

D.04-12-048 and D.07-12-052¹⁹ require IOUs to utilize the Energy Action Plan (EAP) loading order when conducting procurement. To that end, one of the primary goals of the Commission's ongoing LTPP proceeding is to serve as the Commission's forum to integrate all procurement policies and related programs and serve as the check-in point on the EAP loading order. The focus of the Commission's review of the IOU's LTPPs is to ensure that the near-term policies and practices of IOU procurement can be made consistent with a set of Commission approved upfront standards and to ensure that the long-term resource plans demonstrate the appropriate portfolio management approaches. The Commission examines the LTPPs to verify that the IOUs are taking appropriate steps to procure resources that prioritize the loading order from the EAP; are consistent with the state's energy policy; and maximize preferred resources, while also optimizing least cost/best fit and maintaining reliability. The Commission will not approve plans that lack realistic and implementable provisions for meeting the EAP targets.

Among other things, each LTPP planning cycle includes expectations of the supply of various procurement resources, including energy efficiency, demand response, renewables, distributed generation and non-renewable generation over the long-term time horizon. Some of the other procurement dockets have established targets, goals, and policies that affect the supply of certain procurement resources in the short or longer terms. In each LTPP, and subsequent request for new generation, the utility must demonstrate that the choices it makes are consistent with a Commission-approved 10-year resource plan designed to exist within any and all policy constraints and that will enable the IOU to adequately meet its bundled customer load needs.

There is no explicit discussion in the fast-track application addressing the EAP loading order. However, SCE's 2006 LTPP provided information on how it complied with Commission directives on the loading order, and the SP-26 resource need tables provided in this proceeding were developed consistent with SCE's standard planning methods and its LTPP. SCE's 2006 LTPP states that the utility "...strives to ensure that the State's Energy Action Plan (EAP) and Loading Order are followed through its efforts to plan, implement and administer cost-effective and reliably achievable demand-side management (DSM) programs and its continued national leadership in procurement from renewable resources." (Section III.A.4 of Volume 1A of SCE's 2006 LTPP, entitled "How SCE Follows the Loading Order When Making Procurement Decisions.") SCE goes on to describe three specific actions it takes to ensure its procurement decisions are consistent with the EAP:

º First, prior to every competitive procurement for conventional resources (e.g., fossil fuel sources) SCE updates its procurement needs by first refreshing the latest forecasts for DSM programs, any renewable procurement, and any QF procurement to ensure conventional procurement is last in filling its procurement needs. That is, conventional resources are used for "residual" procurement.

o Second, SCE does not "close out" its energy needs via conventional procurement multiple years forward. Instead, it layers in procurement needs over time ("ratably"), which ensures that conventional resources do not "crowd out" preferred resources.

o Finally, SCE applies a greenhouse gas adder to all contracts greater than five years in duration.

4.5. Least-Cost, Best-Fit Evaluation

D.04-12-048 requires the IOUs to utilize a least-cost, best-fit (LCBF) methodology when evaluating RFO bids.²⁰ While SCE does not explicitly describe an LCBF methodology in its application, the process employed in evaluating bids and selecting RFO winners was described in significant detail. In response to an ED data request, SCE provided additional details on the confidential specifics of their LCBF methodology. Based on this supporting documentation, ED has confirmed that SCE satisfied its LCBF methodology requirement.

¹⁰ "The forecast in the amount of resources in future years changes with time. Sometimes it goes up, sometimes it goes down." Tr., 31:6-8.

¹¹ Tr., 38:19-20.

¹² Tr., 38:22-28, 39:1.

¹³ Tr., 41:4-14.

¹⁴ Tr., 91:15-19.

¹⁵ SCE's Opening Brief, June 20, 2007, pp. 2-3.

¹⁶ Tr., 181:10-11.

¹⁷ We also note that when this new generation resource comes on-line, it will replace older, less efficient peaking resources and reduce greenhouse gas emissions.

¹⁸ As stated above, SCE's base case scenario indicates a need for additional resources by 2011, and the high need scenario indicates a need as early as 2007 and 2008.

¹⁹ At the time SCE filed its application for approval of both Blythe and CPV, only the decision on the 2004 LTPP, D.04-12-048 was extant. In December 2007, the Commission issued D.07-12-052 on the 2006 LTPP. For any Commission direction on procurement protocols applicable to the Blythe and CPV PPAs, reference to either LTPP decision is appropriate since there is no difference in the 2007 decision that would affect our consideration of these projects.

²⁰ D.04-12-048, Finding of Fact 86 and Ordering Paragraph 26d.