CPUC Prez?s Involvement Could Affect Otay Mesa Deal

A California Public Utilities Commission vote on San Diego Gas & Electric?s bid for approval of more than 1,000 MW was postponed this week. The utility?s plans to procure new power through contracts with Calpine for the Otay Mesa plant?s output and to buy the Palomar power plant from a sister subsidiary remain under fire by consumer groups. In addition to opposing the deals on economic grounds, consumer groups also say they are questionable because of allegations that Michael Peevey, commission president, participated in negotiations for Otay Mesa, thus skewing the selection process. ?SDG&E and its customers were in the front car during the energy crisis roller coaster, and we have no desire to repeat that particular thrill,? said Lad Lorenz, SDG&E vice president of regulatory affairs, at a May 3 CPUC hearing. Lorenz defended SDG&E?s procurement plans as a way to avoid volatility and increase ratepayers? security. Lorenz said that Otay Mesa is not needed for grid reliability but does provide significant reliability benefits, especially by displacing old, inefficient plants. Lorenz?s acknowledgment means that while the plant offers pluses, the deal doesn?t conform with the utility?s request for proposals that sought contracts to boost grid reliability. Lorenz said that SDG&E is forecasting a 15 MW shortfall this year, which it expects to fill with renewables. This shortage is expected to mushroom to 1,900 MW in 2010, when many Department of Water Resources contracts expire, according to Lorenz. Even with the transmission upgrade needed to support Otay Mesa, pegged at $127 million by the CPUC, the plant is said to be the best deal for ratepayers. Lorenz said Otay Mesa will cost ratepayers between $60 and $70/MWh, comparable to or less than SDG&E?s current cost of energy. According to Calpine?s term sheet, the capacity cost for Otay Mesa is $117/kW-year plus $2/MWh in variable operation and maintenance. TURN points out that these costs exclude fuel, the debt-equivalence premium demanded by SDG&E, and transmission upgrade costs. While there?s little dispute that the region needs more generation, some question whether Otay Mesa is the best option for ratepayers. The Utility Reform Network, the Utility Consumers? Action Network, and the Office of Ratepayer Advocates called for the Otay Mesa contract to be scrapped this week so less expensive options such as repowering projects can compete. ?We?ll never know? how Otay Mesa and Palomar stack up because 16 of the 22 bids were immediately rejected and Otay Mesa and Palomar ?were modeled against each other,? said Matt Freedman, attorney representing TURN and UCAN. Factoring in transmission costs and the utility?s request for a premium on the contract to avoid adding debt to its balance sheet makes Otay Mesa costs quite steep, he added. Freedman criticized SDG&E?s construction of the contract. The utility wants contract terms to avoid having credit agencies downgrade its ratings because of increased debt. Freedman noted that rating agencies don?t agree on a formula for debt equivalency (see Circuit , April 30, 2004). If that approach is locked in, ?every party will hit you over the head? for the same treatment, he warned. PG&E maintains that the commission needs to consider debt equivalence of long-term contracts in its new procurement rulemaking. Calpine defended SDG&E?s bid process as open and fair. The ?term sheet? for Otay Mesa was made public last year, said Steve Schleimer, Calpine regulatory director. None of the losing bidders provided information that their projects had terms as good as or better than those for Otay Mesa, he said. The financial terms for Palomar, however, have been redacted. While not revealing specifics, Lorenz said Palomar and Otay Mesa will deliver power at prices comparable to current SDG&E costs. ?Not much is public, if anything,? on Palomar, because negotiations with subcontractors for the plant have not wrapped up and the data are deemed commercially sensitive, according to Al Pak, director of regulatory policy for Sempra Energy Global Enterprises. Going further in their charges of an unfair process, TURN and UCAN allege that Peevey pushed for selection of Otay Mesa throughout negotiations for the deal. As evidence, the groups asserted that commission staff representing Peevey participated in ongoing discussions between Calpine and SDG&E, with the intent of nailing down an agreement between the parties. ?In extensive notes taken by three individuals monitoring the negotiations, no other commissioner?s name is referenced,? said TURN and UCAN. The advocacy group has called for Peevey to recuse himself from the case because of his bias toward the deal. Enpex, one of the bidders rejected by SDG&E, said that if true, the allegations send a ?chilling message? for those working to develop new power sources for the state. In a letter to commissioners Carl Wood and Geoffrey Brown, Enpex noted that its bid was rejected on grounds that it couldn?t guarantee a 2007 on-line date, yet Otay Mesa?s on-line date was pushed back to 2008. According to commissioner Brown, the heat over Peevey?s role in Otay Mesa won?t likely be fatal. He did suggest that independent mediators be brought into certain negotiations. ?When you put out an alternate decision, are you neutral?? he asked rhetorically. On Palomar, TURN, UCAN, and the Office of Ratepayer Advocates recommended approval of the plant. SDG&E wants to buy the plant from another Sempra subsidiary, Sempra Energy Resources. TURN?s Freedman noted that this deal is in the mix despite the commission?s stated ban on affiliate transactions. He recommended that in exchange for giving Palomar the go-ahead, Sempra should be required to renegotiate its expensive long-term power contract with DWR (see Circuit , April 30, 2004). Sempra Energy Global Enterprises? Pak said that the company is renegotiating the contested contract and that approval of Palomar should not ride on whether the agreement is renegotiated.

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CPUC Prez?s Involvement Could Affect Otay Mesa Deal

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