Decision PROPOSED ALTERNATE DECISION OF PRESIDENT PEEVEY

(Mailed 4/6/2004)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms for Generation Procurement and Renewable Resource Development.

Rulemaking 01-10-024 (Filed October 25, 2001)

(See Appendix A for a list of appearances.)

OPINION APPROVING MOTION OF SAN DIEGO GAS & ELECTRIC

COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW

ELECTRIC RESOURCE CONTRACTS RESULTING FROM

SDG&E'S GRID RELIABILITY REQUEST FOR PROPOSAL

TABLE OF CONTENTS

Title Page

OPINION APPROVING MOTION OF SAN DIEGO GAS & ELECTRIC

COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW

ELECTRIC RESOURCE CONTRACTS RESULTING FROM

SDG&E'S GRID RELIABILITY REQUEST FOR PROPOSAL 2

I. Summary 2

II. Background 2

A. San Diego Gas & Electric Company 4

B. The Basis for SDG&E's RTP 5

C. Preparation and Circulation of the RFP 6

D. Bid Evaluation 8

E. Proposed Projects Resulting From the RFP Process 11

III. Summary of Parties' Positions 11

A. SDG&E 11

B. TURN/UCAN 12

C. ORA 13

D. PG&E 13

E. Coral Power 15

F. InterGen 17

G. Dynegy 18

H. Celerity 20

I. Nevada Hydro 22

J. SER 24

K. Calpine 24

IV. Discussion 25

A. Demand Response: Comverge 30

1. Cost Recovery and Ratemaking Mechanism 32

2. Conclusion 33

B. Renewable: Envirepel 33

1. Cost Recovery and Ratemaking Mechanisms 34

2. Conclusion 35

C. Ramco 35

1. Cost Recovery and Ratemaking Mechanisms 36

2. Conclusion 37

D. Palomar 44

1. Cost Recovery and Ratemaking Mechanisms 47

2. Affiliate Transaction Issues 47

3. Conclusion 48

E. Otay Mesa 50

a) Reasons to Approve the PPA 55

b) Commission Involvement 57

c) There Was No Unfairness in the RFP Process 60

d) Consideration of Otay Mesa Should Not Be Deferred
to the New LTRP Proceeding 63

e) SDG&E's Need for Otay Mesa Power 64

f) The Benefits of a 10-Year PPA 66

g) Transmission Upgrades 66

h) SDG&E's Conditions 67

F. The Value of This RFP Process 70

G. Procedural Issues 72

1. Dynegy Request to Re-open the RFP 72

2. Nevada Hydro Request for an "Interconnect Study" 73

3. Celerity Request for Clarification 75

4. SDG&E Motion to Strike Portions of Briefs 76

V. Comments on Proposed Decision 77

VI. Assignment of Proceeding 78

Findings of Fact 78

Conclusions of Law 83

ORDER 84

Appendix A - List of Appearances

OPINION APPROVING MOTION OF SAN DIEGO GAS & ELECTRIC

COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW

ELECTRIC RESOURCE CONTRACTS RESULTING FROM

SDG&E'S GRID RELIABILITY REQUEST FOR PROPOSAL

I. Summary

In this decision, we approve the five proposals that SDG&E presented to meet its short-term and long-term grid reliability needs. These proposals were the result of an open and competitive Request for Proposal (RFP) process that solicited bids from all qualified resources, including turn-key natural gas-fired generating units, power purchase agreements (PPA), demand response programs, and renewable resources. Out of 22 bids received, these five proposals were identified as conforming to the RFP specifications and were found to be the least cost/best fit choices for meeting the utility's need to have a diversified portfolio of resources to meet its customers grid reliability needs, are consistent with SDG&E's long-term resource plan (LTRP), benefit consumers, and are in the public interest. The proposals include a demand response program from Comverge, a renewable resource contract with Envirepel, and contracts for three gas-fired facilities, Ramco, Palomar, and Otay Mesa. Ramco is a turn-key combustine turbine intermediate unit, Palomar is a turn-key 500/555 MW combined-cycle power plant, and Otay Mesa is a 10-year PPA for a 485/573 MW combined cycle facility.