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PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION RESOLUTION E-3874

RESOLUTION

Resolution E-3874. Pacific Gas & Electric Company requests approval of a new renewable resource procurement contract with Buena Vista Energy, LLC. Pacific Gas and Electric Company's Advice Letter 2494-E is approved.

By Advice Letter 2494-E Filed on April 23, 2004.

__________________________________________________________

SUMMARY

PG&E requests Commission approval of a new renewable resource procurement contract with Buena Vista Energy, LLC.

Pacific Gas and Electric Company (PG&E) filed Advice Letter (AL) 2494-E on April 23, 2004, requesting Commission review and approval of a new renewable energy contract with Buena Vista Energy, LLC (BV), that would allow for the repowering of an existing 37.55 megawatt (MW) wind facility in the Altamont Pass area of northern California. The repowered wind facility will use state-of-the-art turbines that will result in significantly increased electricity production.

The new contract will replace an existing Interim Standard Offer 4 (ISO4) contract between PG&E and BV.

PG&E states that the price structure of the new contract will diversify PG&E's "exposure away from natural gas and [provide BV] greater price certainty." The new contract confers benefits to both PG&E and the developer, as discussed below.

PG&E demonstrated the contract confers price and other benefits in the ratepayers' interest. The PRG either supported or did not oppose approval of the contract.

PG&E made a sufficient showing that this contract is in the ratepayers' interest because it meets PG&E's obligation to procure renewable resources under long-term contract at or below the price benchmark adopted in D.02-08-071. The new price is also substantially lower than the existing contract price. The members of PG&E's Procurement Review Group (PRG) either supported or did not oppose the approval of this contract.

AL 2494-E is approved effective today.

PG&E requests that AL 2494-E be effective on June 2, 2004. AL 2494-E was protested by Modesto Irrigation District. PG&E responded to the protest. The subject of the protest is discussed below. This resolution approves AL 2494-E effective today.

This resolution finds that certain material filed under seal pursuant to Public Utilities (Pub. Util.) Code Section 583 and General Order (G.O.) 66-C, and considered for possible disclosure, should be disclosed for specific reasons.

BACKGROUND

The Commission provided guidance to the utilities on procuring renewable energy resources prior to full implementation of the Renewables Portfolio Standard (RPS) Program.

Decision (D.) 02-08-071 authorized the utilities to enter into procurement contracts between the effective date of the decision and January 1, 2003. The Decision adopted an interim reasonableness benchmark of 5.37 cents per kilowatt-hour for procurement contracts.

On August 13, 2003, the Assigned Commissioner in Rulemaking (R.) 01-10-024 issued a ruling, "Assigned Commissioner's Ruling Specifying Criteria for Interim Renewable Energy Solicitations" (ACR), which specified criteria for any further renewable energy procurement by the utilities prior to full RPS implementation. We stated in R.04-04-026 that we anticipate a solicitation conducted under the full suite of RPS parameters to occur by July 1, 2004.

The ACR set forth general process requirements:

1. A utility must abide by the terms of the Commission's first RPS implementation decision (D.03-06-071).

2. Utilities may engage in bilateral negotiations or may issue a competitive solicitation (request for offer (RFO)) to receive bids.

3. Issuance of an interim RFO by a utility does not constitute filing of a RPS procurement plan under the terms of D.03-06-071.

4. The utilities are allowed to "roll over" any under-procurement in 2003 into the Annual Procurement Target (APT)1 for 2004 without penalty. A decision not to issue an RFO prior to full RPS implementation will not waive this immunity. Conversely, any contract signed as a result of a bilateral negotiation or an RFO, and approved by the Commission, should count toward the APT.

5. Following PRG review of any proposed contracts, the utility may submit those contracts for Commission approval via Advice Letter.

The ACR also set forth criteria for interim procurement:

1. Any renewable procurement in the interim period must not anticipate the use of any Supplemental Energy Payments (SEPs) to be awarded by the California Energy Commission (CEC) pursuant to Public Utilities Code Sec. 383.5(d).

2. A solicitation must not anticipate the creation of the Market Price Referent (MPR) under development in the RPS process. Internal market benchmarks developed by the utility for bid evaluation are appropriate for preliminary evaluation, but should not be made public in the RFO or at any point in the solicitation process, and should not be referred to as the MPR.

3. Any internal benchmarks and details of their development should be provided to the Procurement Review Group (PRG) when the Preliminary Evaluation of submitted bids is performed, and to the Commission when any proposed contracts are ultimately submitted for approval.

4. Any RFO must clearly stipulate up front precisely how the utility will calculate adders for transmission upgrades and integration costs, and how the utility will assign capacity values and payments to as-available resources.

The RPS Program requires each utility to increase the amount of renewable energy in its portfolio, subject to requirements specified by the Legislature and the Commission.

The RPS Program, created by SB 1078 (Statutes of 2002, Chapter 516), requires each utility to increase the amount of renewable energy in its portfolio to 20 percent by 2017, increasing by a minimum of one percent per year. The Energy Action Plan (EAP) called for acceleration of this goal to reach 20 percent by 2010. R-04-04-026 encourages the utilities to procure cost-effective renewable generation in excess of their APTs for 2004, in order to make progress towards the goal expressed in the EAP.

In order for the output of a renewable resource to count toward a utility's RPS requirements, the resource must meet the requirements of an "eligible renewable energy resource" under the definitions of the program. Wind energy facilities, including facilities that are repowered with new turbines to increase their electricity output from the same or similar capacity, are eligible renewable energy resources. Repowered facilities must meet specific conditions set forth in Pub. Util. Code Section 383.5(d)(3) in order to receive SEPs in the RPS Program.

R.04-04-026 established a framework for further implementation of the RPS Program, including establishing baseline quantities and 2004 procurement targets for the utilities.

As stated above, the RPS Program requires each utility to increase the amount of renewable energy in its portfolio to 20 percent by 2017, increasing by a minimum of one percent per year. The Commission establishes an APT for each utility, which consists of two separate components: the baseline, representing the amount of renewable generation a utility must retain in its portfolio to continue to satisfy its obligations under the RPS targets of previous years; and the incremental procurement target (IPT), defined as at least one percent of the previous year's total retail electrical sales, including power sold to a utility's customers from its DWR contracts. R.04-04-026 established an interim 2004 APT for PG&E of 8,920 GWh to meet a 2017 target, and a generation target of 9,257 GWh to meet the 2010 target of the EAP. A proposed decision mailed on May 17, 2004, would revise PG&E's 2004 APT to 9,475 GWh.2

PG&E's PRG participated in review of the contract.

In D. 02-08-071, the Commission required each utility to establish a "Procurement Review Group" (PRG) whose members, subject to an appropriate non-disclosure agreement, would have the right to consult with the utilities and review the details of:

The PRG for PG&E consists of: California Department of Water Resources, California Energy Commission, Coalition of California Utility Employees, the Commission's Energy Division, Natural Resources Defense Council, Office of Ratepayer Advocates (ORA), and The Utility Reform Network (TURN). PG&E briefed its PRG regarding this contract on March 30, 2004.

NOTICE

Notice of AL 2494-E was made by publication in the Commission's Daily Calendar. PG&E states that a copy of the Advice Letter was mailed and distributed in accordance with Section III-G of General Order 96-A.

PROTESTS

Advice Letter 2494-E was protested by Modesto Irrigation District (MID) on May 13, 2004. PG&E replied to MID on May 18, 2004.

MID states that it "supports the use of renewable energy resources and does not object to the proposed new contract." However, MID requests that the Commission make clear that "the new contract cannot be included in PG&E's ongoing [Competition Transition Charge, or CTC] calculation and that the terminated contract being replaced must be removed from such calculation." MID cites Public Utilities Code section 367:

PG&E agrees in principle with MID. PG&E clarifies that the new PPA contains multiple contingencies that will affect the contract's effective date. The facility will continue to operate under the existing ISO4 contract until purchases begin under the new PPA. Therefore, the facility will remain in PG&E's ongoing CTC calculation under section 367 of Public Utilities Code until that time, at which point it will no longer be included in the calculation.

DISCUSSION

The Commission's vote to make public certain non-price confidential information is in the public interest.

Certain contract details were filed by PG&E under confidential seal. However, Energy Division encourages the Commission to reveal the redacted sections so that the contract may be appropriately considered.

Attachment A to this resolution summarizes the contract and amendments. The attachment has been redacted due to the confidential nature of PG&E's filing.3 However, the Commission may vote to unredact the Attachment in full or in part.

Energy Division finds that certain material filed under seal pursuant to Public Utilities (Pub. Util.) Code Section 583 and General Order (G.O.) 66-C, and considered for possible disclosure, should be disclosed for the reasons discussed in this section. Accordingly, text in this resolution, marked "[REDACTED]" in the redacted copy, which contains the redacted information to be disclosed inside the brackets in the unredacted version, should be made public upon Commission approval of this resolution. We find that the public interest in non-price disclosure is not outweighed by the public interest in confidentiality.

Energy Division recommends that specific pricing information which appears [[[underlined in triple brackets]]], and is in light blue highlight in the unredacted electronic copy, or in gray highlight in the unredacted hardcopy, should not be made public under any circumstances. We wish to make clear that the decision we make here is based on the unique facts before us today, and we will adopt broadly applicable standards governing confidentiality in proceedings such as the procurement rulemaking (R.04-04-003).

The existing Qualifying Facility (QF) power purchase agreement (PPA) will be terminated and replaced with an Edison Electric Institute (EEI)-based contract of commensurate term. The new contract has a rate that is significantly lower than that of the existing QF PPA.

The existing Interim Standard Offer 4 (ISO4) contract contains both energy and capacity payments. The new PPA contains only an energy payment, and is a fixed contract price not indexed to natural gas prices (i.e. short-run avoided cost, or SRAC). PG&E states that this price structure will diversify PG&E's "exposure away from natural gas and [provide BV] greater price certainty." (AL 2494-E at p. 1).

Energy Division examined PG&E's request in AL 2494-E on multiple grounds:

_ accordance with the Commission's expressed preference for renewable resource repowering;

_ contingencies contained in the contract;

_ value to ratepayers conferred by the replacement of the ISO4 contract;

_ reasonableness of the contract;

_ fulfillment of PG&E's requirements under the Renewables Portfolio Standard (RPS);

_ PRG involvement;

_ validity of protests received and PG&E replies to protests.

The proposed contract is in accord with the Commission's policy preference for repowering existing renewable energy facilities and with a prior ruling on interim renewables procurement.

PG&E states that both contracting parties were encouraged by the Commission and TURN to pursue wind repowering "in a manner that increased renewable production yet saved ratepayers money." D.03-06-071 specifically encouraged repowering of renewable energy facilities:

In its comments on the prior draft decision, PG&E recommended similar treatment for all renewable technologies (PG&E Comments, p. 14.) D.03-06-071 stated that the Commission "will look at this broader issue of repowering renewable facilities on a going-forward basis." R.04-04-026 identified repowering as an issue that will be addressed in that Rulemaking.

As discussed above, the ACR set forth criteria and process requirements for renewable energy procurement by the utilities prior to full RPS implementation.

The proposed contract with BV meets the requirements of the ACR.

The proposed contract is contingent upon three conditions: 1) Commission approval, 2) issuance of necessary permits, and 3) extension of the federal Production Tax Credit (PTC).

This resolution satisfies the first condition. BV is wholly responsible for meeting the second condition. The third condition may be satisfied through passage of a bill currently pending before the U.S. Congress.

BV estimates it can complete construction of the repower project in six months. If an extension of the PTC requires that facilities begin delivery in 2004, then BV must begin construction of the project as soon as possible.

PG&E is interested in a new power purchase agreement with BV because the proposed project will meet PG&E's RPS requirements at a reasonable price and under reasonable terms, thus conferring value to ratepayers.

The repowering of BV's facility will result in increased electricity production that will apply toward PG&E's RPS requirements. BV would not be able to claim the federal production tax credit under the existing ISO4 contract. The new contract allows BV to claim this credit should the credit be reauthorized (a necessary contingency of the contract).

BV contends that it has the right under the ISO4 PPA to sell the output of the repowered project to PG&E. PG&E acknowledges and disputes BV's claim. However, both parties reached an agreement to execute a new PPA, which would allow BV to sell all output from the repowered facility to PG&E.

The ACR did not adopt an interim benchmark, but instead allowed the utilities to develop their own benchmarks and apprise the Commission and the PRG of their derivation and use in evaluating contracts. The ACR explicitly states that such a benchmark is not to be considered a MPR. The MPR is to be used in evaluating contracts under the RPS Program, and will not be available until the first RPS solicitation, which we anticipate no later than July 1, 2004.

The new contract price is below the benchmark price established by D.02-08-071. The contract allows PG&E to secure additional energy delivery over the historical deliveries from this facility, while fixing the price of future energy to guarantee compliance with the RPS Program. The price is not dependent on the short-run avoided cost of energy (SRAC). The new contract maintains the term length of the original contract while reducing the price.

No one can accurately predict long-term energy prices; renewable energy is no exception. We may find today that PG&E has entered into contracts at reasonable prices, and then renewable energy prices may decline unexpectedly below our estimations in the long-term. Given that uncertainty, Energy Division has applied its best understanding of current renewable energy prices and determined that the contract price and terms provide value to PG&E's ratepayers that will continue into future years of the RPS Program.

PG&E claims all "Environmental Attributes" associated with the project output.

In light of recent rulings by the Federal Energy Regulatory Commission related to "renewable energy credits," the new contract explicitly conveys any such credits to PG&E. Thus, PG&E retains all environmental attributes necessary to count the output of the resource toward its RPS requirements.

The output of the BV facility under the new PPA counts toward PG&E's RPS requirements.

PG&E seeks a finding that any new procurement pursuant to the contract qualifies as incremental procurement for purpose of determining PG&E's requirements under the RPS. Specifically, PG&E requests a finding that any deliveries above the "historical baseline level attributed to this resource" count toward the incremental portion of PG&E's Annual Procurement Target. PG&E provided an annual accounting of historical output in Confidential Attachment A.

The total output from this resource will count toward PG&E's Annual Procurement Target, regardless of whether it is used to maintain renewable baseline or meet incremental targets. Consequently, a separate accounting that applies a portion of the annual output toward baseline and a portion toward the incremental target is not necessary. The Commission will establish an APT for each utility annually. To the extent that a utility incurs a deficit, or procures excess renewable energy, it can use the flexible compliance mechanisms already established.

We noted above that repowered facilities must meet specific conditions set forth in Pub. Util. Code Section 383.5(d)(3) in order to receive SEPs in the RPS Program. In accordance with the ACR, the BV facility will not receive SEPs. Therefore, the conditions of that section do not apply.

The PRG either supports or does not oppose the contract amendments.

PG&E briefed its PRG regarding this contract on March 30, 2004. The PRG had access to the details of the contracts and amendments. PG&E notes in AL 2494-E that TURN and ORA support the contract, and other PRG members do not oppose it. We clarify, however, that Energy Division reserved its conclusions for review and recommendation on the contracts to the resolution process. Energy Division had to review the modifications independently, and allow for a full protest period before concluding its analysis.

The protest of MID seeking clarification of CTC treatment of this contract is reasonable and should be granted. This clarification does not change our approval of AL 2494-E. The clarification requested by PG&E in its reply to MID is reasonable and should be granted.

The BV facility will continue to operate under the existing ISO4 contract until purchases begin under the new PPA. Therefore, the facility will remain in PG&E's ongoing CTC calculation under section 367 of the Public Utilities Code until that time, at which point it will no longer be included in the calculation.

COMMENTS

Public Utilities Code section 311(g)(1) provides that this resolution must be served on all parties and subject to at least 30 days public review and comment prior to a vote of the Commission. Section 311(g)(2) provides that this 30-day period may be reduced or waived upon the stipulation of all parties in the proceeding:

Energy Division requests that the 30-day comment period for this resolution be reduced because: (1) a delay in approving the contract will prevent the developer from repowering a renewable energy facility, a policy goal encouraged by the Commission, and potentially frustrating the goals of the RPS Program, an outcome which is not in the public interest and would cause significant harm to the public welfare; and (2) because PG&E's Procurement Review Group has been active throughout the contract amendment process leading up to the advice letter and resolution, and members have expressed support for (or do not oppose) these amendments.

All parties in the proceeding have stipulated to reduce the 30-day waiting period required by PU Code section 31l(g)(1) to seven days.4 Accordingly, this matter will be placed on the first Commission's agenda twelve days following the mailing of this draft resolution. By stipulation of all parties, comments shall be filed no later than seven days following the mailing of this draft resolution. No reply comments will be filed.

Comments were timely received from Modesto Irrigation District (MID) and PG&E.

MID filed comments in support of this resolution (E-3874), stating "Resolution E-3874 as drafted grants MID's request for clarification" regarding CTC treatment of the new Buena Vista (BV) PPA. Specifically, the BV facility will continue to operate and remain in PG&E's CTC calculation under the existing ISO4 contract until the new PPA takes effect, at which point the BV facility will no longer be included in the CTC calculation. MID comments "The clarifications set forth in the draft Resolution accurately reflect MID's understanding of the applicable law. Thus MID supports the draft Resolution and urges the Commission to adopt it as proposed, if at all."

PG&E states that "following a paragraph in the Discussion section that lists the three contingent conditions for the contract to go into effect, there is a short paragraph that is currently redacted but that the DR proposes to unredact upon Commission approval. The first two sentences of this currently redacted paragraph could be released to demonstrate to the public why prompt approval of the BV contract is in the public interest. However, the last two sentences discuss commercially sensitive terms of the negotiated contract between BV and PG&E and do not serve the public interest by their release." PG&E goes on to ask the Commission to maintain the confidentiality of these commercially sensitive terms so that "PG&E's negotiating stance in the future will not be unduly compromised by the disclosure of this information."

The Energy Division has examined the redacted section referred to by PG&E above, and has determined that the information PG&E is requesting remain redacted does not serve the public interest by its release, and as such, is not required to be disclosed. The portion of the redacted section described above will be removed from the language of the DR.

PG&E, in their comments, also requested clarification with regards to when the new BV PPA will no longer be included for CTC calculation. The Energy Division provides such clarification by changing the language in the DR from; "The facility will continue to operate under the existing ISO4 contract until the new PPA takes effect" to "The facility will continue to operate under the existing ISO4 contract until purchases begin under the new PPA" at which time the facility will no longer be included in the CTC calculation.

FINDINGS

1. D.02-08-071 directed PG&E, SCE and SDG&E to file an Advice Letter to seek pre-approval of any contract for transitional procurement.

2. "Assigned Commissioner's Ruling Specifying Criteria for Interim Renewable Energy Solicitations," issued on August 13, 2003, specified criteria for any further renewable energy procurement by the utilities prior to full RPS implementation. The Ruling stated that a utility may submit renewable energy contracts for Commission approval via Advice Letter.

3. PG&E filed Advice Letter 2494-E on April 23, 2004, requesting approval of a renewable energy procurement contract with Buena Vista Energy, LLC (BV).

4. The new contract with BV would replace the existing ISO4 contract currently existing between BV and PG&E.

5. The RPS Program requires each utility, including PG&E, to increase the amount of renewable energy in its portfolio to 20 percent by 2017, increasing by a minimum of one percent per year. The Energy Action Plan (EAP) called for acceleration of this goal to reach 20 percent by 2010.

6. Output from repowered facilities may qualify for the RPS.

7. R.04-04-026 established an interim 2004 APT for PG&E of 8,920 GWh to meet a 2017 target, and a generation target of 9,257 GWh to meet the 2010 target of the EAP. A proposed decision of May 17, 2004, would revise PG&E's 2004 APT to 9,475 GWh.

8. The Commission required each utility to establish a Procurement Review Group (PRG) to review the utilities' interim procurement needs and strategy, proposed procurement process, and selected contracts.

9. The PRG for PG&E is comprised of: California Department of Water Resources, California Energy Commission, Coalition of California Utility Employees, the Commission's Energy Division, Natural Resources Defense Council, Office of Ratepayer Advocates, and The Utility Reform Network.

10. The PRG either supports or does not oppose the contract amendments.

11. Certain material filed under seal pursuant to Public Utilities (Pub. Util.) Code Section 583 and General Order (G.O.) 66-C should be disclosed for the reasons discussed in this section. Text in this resolution, marked "[REDACTED]" in the redacted copy, which contains the redacted information to be disclosed inside the brackets in the unredacted version, should be made public upon Commission approval of this resolution. Specific pricing information which appears [[[underlined in triple brackets]]], and is in light blue highlight in the unredacted electronic copy, or in gray highlight in the unredacted hardcopy, should not be made public under any circumstances.

12. PG&E's proposed contract satisfies the requirements of the ACR of August 13, 2003.

13. The contract price provides value to PG&E's ratepayers.

14. The output of the BV facility under the new PPA counts toward PG&E's RPS requirements.

15. Nothing in this resolution prejudges the development of a RPS Market Price Referent nor any other criteria for evaluating RPS contracts.

16. The terms of the proposed contract are reasonable and should be approved.

17. AL 2494-E was protested by Modesto Irrigation District (MID) on May 13, 2004.

18. MID requests that the Commission clarify that the proposed new contract does not qualify for CTC treatment under Pub. Util. Code section 367.

19. PG&E responded to the protest of MID on May 18, 2004, clarifying that the facility will continue to operate under the existing ISO4 contract until purchases begin under the new PPA. Therefore, the facility will remain in PG&E's ongoing CTC calculation under section 367 of the Public Utilities Code until that time, at which point it will no longer be included in the calculation.

20. The requests of PG&E and MID for clarification should be granted.

21. We should approve AL 2494-E effective today.

THEREFORE IT IS ORDERED THAT:

1. The request of the Pacific Gas and Electric Company to enter into a new renewable energy contract with Buena Vista Energy, LLC, as requested in Advice Letter AL 2494-E, is approved.

2. This Resolution is effective today.

I certify that the foregoing resolution was duly introduced, passed and adopted at a conference of the Public Utilities Commission of the State of California held on June 9, 2004; the following Commissioners voting favorably thereon:

            _____________________

I reserve the right to file a concurrence.

/s/ LORETTA M. LYNCH

Commissioner

Attachment A: Summary of BV Contract and Comparison to Existing ISO4 Terms (provided in Confidential Appendix C of AL 2494-E)

Terms

Current ISO4

Proposed New Contract

Power Prices

[[[REDACTED]]]

[[[REDACTED]]]

Term

10 years remaining. Expires August 2014.

10 years. Expires late 2014 or early 2015 (depending on repower schedule)

Performance Incentives

As-delivered capacity payments heavily weighted toward summer months (May-October)

Pay only for MWh delivered

Project Size

37.55 MW

38 MW

Purchase Obligation

Above nameplate purchase obligations at ISO4 prices potentially subject to dispute

Purchase obligations and pricing clearly defined

Line Losses

CPUC jurisdictional

FERC jurisdictional

Environmental Attributes

ISO4 contract silent on Environmental Attributes

Environmental Attributes transferred to PG&E

RPS Treatment

Unclear RPS treatment

Counts towards RPS requirements

1 The APT is the minimum amount of renewable generation the utility must procure each year to meet its RPS requirement, subject to the flexible compliance mechanisms authorized in D.03-06-071.

2 Draft Decision of ALJ Allen, "Opinion Adopting Standard Contract Terms And Conditions"

3 PG&E filed attachments to AL 2494-E subject to Pub. Util. Code Section 583, General Order 66-C, and the provisions of the May 1, 2002 Protective Order in R.01-10-024.

4 Energy Division requested that PG&E, MID, and Buena Vista Energy, parties to this matter, stipulate to a reduced comment period by e-mail dated May 25, 2004. PG&E, MID, and Buena Vista Energy stipulated to a reduced comment period in replies to Energy Division dated May 26 and 27. Energy Division recognizes that May 31 is a holiday.

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