The California Public Utilities Commission, on a split vote, approved San Diego Gas & Electric?s controversial deal to contract with Calpine for the output of the Otay Mesa power plant and buy the Palomar facility from a sister subsidiary. The commission approved several other contracts, which overall will provide an energy infusion to the San Diego region of more than 1,000 MW. But The Utility Reform Network has vowed to file an appeal after CPUC president Michael Peevey refused to recuse himself from the Otay Mesa vote. The package approved a demand-response program from Converge and gave the go-ahead to complete negotiations with Celerity for another demand-response program. Also in the package is a 40 MW renewables contract with Envirepel for a biomass project. Ed Guiles, chair and chief executive officer of SDG&E, praised the CPUC for approving the first new large-scale power plants in San Diego in more than two decades. ?Without new energy resources, our customers would face an energy shortage as soon as next year. Today?s decision will go a long way toward meeting those needs,? Guiles said in a statement. But Matt Freedman, TURN attorney, warned that the Otay Mesa commitment ?could be in limbo if we prevail in court.? Legal uncertainties could throw a wrench into the development of the plant, he said. Along with the Utility Consumers? Action Network, TURN demanded that Peevey recuse himself from voting on the deal, saying the commission president brokered the contract and could not vote impartially. Peevey rejected this call, saying that he would cast an unbiased vote and that he had no direct involvement in negotiations. Financing for Otay Mesa shouldn?t be affected by an appeal, according to Kent Robertson, Calpine spokesperson. The company is at ?some distance from pursuing financing. [We] don?t have a contract in place yet,? he said. Robertson added that funding is needed so construction can start in 2006, but there?s time before the 2008 on-line deadline for the CPUC to defend the appeal. Calpine has ?no reason to believe there are legal challenges that are insurmountable,? he maintained. Commissioner Geoffrey Brown, who held the swing vote, said the package of proposals would help ensure the economic and energy viability of the San Diego region even if they may be a bit more expensive than ?theoretical? proposals. He estimated that likely extra costs of approving Otay Mesa are less than 1 percent of SDG&E?s total rates. But alluding to the controversy over Peevey?s involvement in hammering out Otay Mesa, Brown said he came close to voting against the plan because of problems with the process. ?We cannot have a mercantile system where billion-dollar contracts are handed out like Mexican land grants,? Brown said. ?The contractual portion of the portfolio must be procured through arm?s-length open and transparent solicitations in which the utility has the proper incentives to select winners in the public interest.? Commissioner Carl Wood?s losing alternate plan, with only two votes, would have rejected the Otay Mesa deal on grounds that it ignored the objective of SDG&E?s grid reliability request for proposals, which sought projects with a 2007 on-line date. The Calpine-owned plant is expected to come on line in 2008. The record shows Otay Mesa is ?the most expensive option,? Wood said. Lad Lorenz, SDG&E vice president of regulatory affairs, has said Otay Mesa will cost ratepayers between $60 and $70\/MWh, comparable to or less than the utility?s current energy costs. TURN has argued that these calculations exclude fuel costs and transmission upgrade costs, as well as rate-recovery assurances (<i>Circuit<\/i>, May 7, 2004). On another hot-button issue, SDG&E?s move for debt equivalency, which would have offset the power-purchase agreement debt by increasing the return on the deal, was deferred to a cost-of-capital proceeding. The appeal of this treatment, which Pacific Gas & Electric is also seeking, is that it would protect utilities from credit-rating decreases. There appears to be no consensus on a viable formula to enact the protection. SDG&E?s request for an increase in return on equity from 10.9 percent to 11.65 percent for Palomar was also redirected to a cost-of-capital proceeding. The utility will be able to set up a regulatory asset to collect equity to help cover costs of acquiring the plants. According to the approved CPUC plan, total financing costs to ratepayers would not exceed those from a plant built by SDG&E. According to TURN, this mechanism increases the cost of Palomar by $16 million and adds $28\/kW to the total installed cost. While the term sheet for Otay Mesa is public, financial numbers for Palomar, owned by a Sempra subsidiary, are confidential. Approval of Palomar is another exception to the CPUC?s stated ban on approval of affiliate transactions.