III. Long Term RFO Results

A. Summary and Review Criteria

The final contracts selected by PG&E in this long term RFO are summarized in the following table:

FACILITY	SIZE (MW)	CONTRACT TYPE	PLANNED OPERATIONAL DATE	TERM (YEARS)
Calpine Hayward	601	PPA	June 2010	10
EIF Firebaugh	399	PPA	Aug 2009	20
EIF Fresno	196	PPA	Sept 2009	20
Starwood Firebaugh	118	PPA	May 2009	15
Black Hills	116	PPA	May 2009	20
E&L Westcoast Colusa	657	PSA	May 2010	life
Wartsila Humboldt	163	EPC	May 2009	life
TOTAL	2,250

We approve the contracts on the basis that they (1) resulted from a fair, open and competitive bidding process, (2) comport with PG&E's procurement authority granted in our prior decisions, and (3) are cost-effective and reasonable.

Aglet recommends that we include, in this list of review criteria, consideration of whether the bidder can be reasonably expected to meet its contractual obligations. We address Aglet's particular concern with regard to this issue (the viability of the Calpine Hayward contract) in the context of whether the particular contracts reasonably meet the ratepayers' needs.

B. Solicitation and Contract
Selection Process

PG&E conducted an open, competitive and fair solicitation and contract selection process. We are pleased to make this finding based on the report of the Independent Evaluator, who monitored and critically reviewed the process,³ and the general consensus opinion of the active parties to this proceeding.

C. MW Amount

We approve as reasonable the amount of new generation that is anticipated to result from the selected contracts. We previously established that there is a need for 2,200 MW new generation in northern California by 2010 and directed PG&E to initiate an all-source solicitation to secure these resources. (D.04-12-048.) Although the 2,250 MW represented by the selected contracts exceed the authorized amount by 50 MW, this discrepancy is minimal and reasonably reflects the practical likelihood that the outcome of the RFO will not exactly match the authorized amount. In addition, the 2,250 MW includes the 163 MW Humboldt project, which is essentially a replacement for an existing, old plant and is designed primarily to serve local reliability needs.⁴

DRA and TURN contend that, taking into account the 530 MW Contra Costa 8 project recently authorized by the Commission (D.06-06-035), PG&E's proposal to add 2,250 MW of new generation exceeds the authorized amount of 2,200 MW by 580 MW (or 417 MW, excluding Humboldt). DRA and TURN contend that PG&E has not justified this excess amount, and therefore recommend that we reject some of the contracts.

We do not count the Contra Costa 8 project against the 2,200 MW authorized in D.04-12-048, as doing so would undermine our commitment to a comprehensive and cohesive process for evaluating the utilities' long-term procurement plans and to a competitive bidding and bid evaluation process for procuring resources pursuant to those plans. D.04-12-048 determined a need for 2,200 MW of new generation and directed PG&E to conduct a competitive bidding process to obtain it. Although we admonished the utilities that negotiated bilateral agreements are discouraged, we provided that such agreements would be evaluated on a case-by-case basis. PG&E's Application (A.) 05-06-029 applied for approval of the Contra Costa 8 project outside of the competitive bidding process, and we evaluated it on its individual merits and approved it without revising our prior procurement authorization. (D.06-06-035.) In the interest of preserving the integrity of our planning and procurement processes, we decline to revise it now.

DRA, in its comments on the proposed decision, counters that it will undermine the integrity of the long-term planning process if we do not count Contra Costa 8 against the authorized 2,200 MW. DRA's point is well-taken: Long-term planning and competitive solicitation are equally critical to fair and rational energy planning and procurement, and actions that undermine one side of the equation may be as damaging to the process as a whole as actions that undermine the other. In this case, as DRA's witness testified, the general view was that Contra Costa 8 was "a bargain that PG&E was able to snap up and go forward on. It seems to be separate from what is going on in the long-term RFO, if I understand." (Tr. Vol. 3, p. 259, DRA/Burns.) The project was already substantially permitted and partially constructed at the time PG&E acquired it, and its planned operation date is a year in advance of the planned operational dates of any of the projects selected in this RFO. (D.06-06-035, p. 11.) We did not count Contra Costa 8 against the authorized 2,200 MW when we approved the project; balancing the interests and circumstances, we determine that we will not do so now.

In its comments on the proposed decision, TURN charges that this determination is arbitrary and capricious because it is based on a rationale that is made after the issuance of D.04-12-048.⁵ This is not error. In our decision approving the Contra Costa 8 project, we acknowledged this issue, raised by the Independent Energy Producers (IEP), of whether, in light of our directive in D.04-12-048 that competitive solicitations are the preferred method for selection of new energy resources, it was appropriate to consider the project outside of such a solicitation. We determined that this issue should be considered in R.06-02-013 "or in another appropriate proceeding." (D.06-06-035, p. 4.) We necessarily address it here.

As a related matter, we note that some parties sought to challenge, in this proceeding, our need determination in D.04-12-048 either on the basis that it overstated need (e.g., because it underestimated departing load) or that it understated it (e.g., because it did not account for demand levels experienced during the recent heat storms of August 2006). We affirm the ALJ's rulings barring testimony on this issue as beyond the scope of this proceeding.⁶ Our long term procurement proceedings are intended to monitor changes in

forecasts. In order to permit timely action in response to Commission determinations of need for new generation resources, it is crucial that we not be sidetracked by second-guessing recent determinations absent evidence of significant errors.

D. Cost-Effectiveness and Reasonableness

TURN, DRA, and Aglet challenge certain aspects of particular contracts and recommend that the Commission adopt various measures to remedy the alleged deficiencies. We reject their recommendations. It is undisputed that all of the selected contracts are cost-effective. We find that they reasonably meet the resource need identified in D.04-12-048.

TURN asserts that the Colusa PSA, which provides for the developer to build the plant and then sell it to PG&E, is inferior to a PPA structure for the project, which was also offered to PG&E. Specifically, the Colusa PPA option provided somewhat greater economic benefits according to PG&E's and the Independent Evaluator's quantitative analyses, and would have provided performance guarantees that would require PG&E to pay the seller less if the plant does not perform up to the negotiated standards. TURN recommends that the Commission adopt a set of performance-based ratemaking mechanisms for Colusa to compensate for the PSA's estimated lower value to ratepayers.

We reject TURN's recommendation. PG&E's selection of the Colusa project, as proposed for transfer to PG&E, is reasonable under Commission standards. Among other things, a utility action is reasonable if it comports with what a reasonable manager would do, and if it resulted from a reasonable process; it need not be the optimum act, but must be within the

spectrum of reasonable acts.⁷ It is undisputed that the Colusa PSA was selected pursuant to a fair and competitive process. We also consider whether the utility action can be logically expected to accomplish the desired result at the lowest reasonable cost consistent with good utility practices,⁸ taking into account non-quantitative factors, the choice between a Colusa PPA and a Colusa PSA was at best a "close call."

In its comments, TURN asserts that the proposed decision factually errs in stating that no party disputes that all of the selected contracts are cost-effective. TURN asserts that, to the contrary, the EIR Fresno and Tierra Energy Hayward PPAs are not cost-effective and that this lack of cost-effectiveness formed the primary basis for TURN's recommendation that they be rejected. TURN's statement of its litigation position is contrary to its testimony and briefs. In its opening brief, TURN addressed the relative value of the EIF Fresno and Tierra Energy Hayward PPAs in the context of its position, rejected above, that approval of all of the selected contracts will result in the overprocurement of resources. While TURN's witness Mr. Woodruff characterized the contracts as having the least value of any of the selected contracts, and recommended that the Commission reject them if the Calpine project does not go forward, he did not recommend that they be rejected for not being cost-effective. Notably, neither TURN nor any other party challenged the evidence presented by Aglet that demonstrated, using the Black model, that all seven of the proposed contracts are cost-effective.

DRA recommends that the Commission authorize cost recovery for only nine of the 10 engine generators in the proposed Humboldt replacement project, on the basis that PG&E's own transmission planning personnel recommend replacing the existing 135 MW with no more than 150 MW (as compared to the 163 MW represented by 10 engine generators). The record evidence, however, indicates that PG&E's transmission planning personnel subsequently recommended maximum replacement generation of 168 MW, that the project as proposed was selected through an open, competitive and fair solicitation and contract selection process, and that the 10^th engine generator provides value at relatively low incremental price. PG&E's selection of the 10-engine generator Humboldt project is reasonable under the Commission standards described above, and there is not sufficient cause to modify its action.

Aglet recommends that the Commission approve the Calpine Hayward PPA only if PG&E obtains step-in rights in the event Calpine fails to honor the contract, on the basis that Calpine cannot be reasonably expected to meet its contractual obligations as demonstrated by its efforts, in bankruptcy court, to invalidate an existing power purchase contract with PG&E. We are not persuaded that the Calpine Hayward PPA poses an undue or exceptional risk of nonperformance. PG&E is dealing with a Calpine entity that is not in bankruptcy, and one of the parties to the agreement is General Electric, which is undisputed to be one of the nation's soundest counterparties. There is insufficient cause on this record to require PG&E to obtain step-in rights which, at this juncture, could adversely affect project financing and likelihood that the project will be built.

³ D.04-12-048 requires the use of an independent evaluator in resource solicitations where there are affiliate bidders, bids for utility-built projects, or bids for turnkey projects to be acquired by utility.

⁴ D.04-12-048, Ordering Paragraph 4, authorized PG&E to justify to the Commission why higher MW levels may be desirable.

⁵ TURN also claims that the rationale is inappropriate since no party in this proceeding proposed it until PG&E filed its reply brief. We remind TURN that we are bound by the record evidence and the law, not by the parties' characterizations of either. Thus, for example, the fact that no party challenged the ratemaking proposals for Colusa and Humboldt for violating Commission precedent until TURN and others filed comments on the proposed decision - and even if no party had ever done so -- does not bar us from considering that legal basis, as appropriate.

⁶ See, e.g., ALJ's Ruling Striking Testimony of Modesto Irrigation District, Merced Irrigation District, and Pacific Gas and Electric Company, August 15, 2006.

⁷ Re Southern California Edison Company [D.90-09-088] 37 CPUC2d 488, 499-500.

⁸ Ibid.