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 Report On The Negotiating Process Between San Diego Gas Electric And Combined-Cycle Bidders To The Request For Proposals For Grid Reliability Capacity James A. Boothe Economist Holland Knight LLP 50 California St, 28Eh Floor San Francisco, California 94111 Telephone: (415) 743-6900 Facsimile: (415) 743-6910 E-mail: james.boot11e@hklaw.com BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanism for Generation Procurement and Renewable Resource Development. Rulemaking 01-10?024 Report On The Negotiating Process Between San Diego Gas Electric And Combined-Cycle Bidders To The Request For Proposals For Grid Reliability Capacity Introduction This report is submitted pursuant to a request from San Diego Gas Electric to have a third?party, independent presence in its negotiations related to its Request for Proposals for Grid Reliability Capacity. On August 14, 2003, I entered into a consultant retention agreement with which included monitoring the negotiations between and the short-listed combined-cycle bidders to the RFP and preparing a report to the California Public Utilities Commission on the negotiating process. Given the presence of an af?liate as one of the short-listed combined- cycle bidders, my role was to provide a neutral and independent presence to assess whether the negotiations between and all the short-listed combined-cycle bidders were undertaken in an impartial, unbiased, and arms-length manner. My role was strictly one of an observer of the process. As discussed below, it is my opinion that conducted the negotiations in an impartial, arms-length manner. More speci?cally, I detected no trace of favortism or bias in negotiations with its af?liate. Materials Reviewed: In preparation for observing the negotiations, I reviewed Grid Reliability Capacity RFP and associated turnkey and power purchase model term sheets. I also reviewed the proposals from the three short-listed bid respondents: 1) Palomar Energy, LLC, a wholly?owned indirect subsidiary of Sempra Energy Resources 2) Otay Mesa Energy Center, LLC, a wholly-owned subsidiary of Calpine Corporation; and 3) ENPEX Corporation?s San Diego Community Power Project. In addition, I reviewed the e-mail log of contacts between and the three short-listed combined cycle-bid respondents to the RFP. Finally, I reviewed Affiliate Transactions Compliance Plan governing transactions between and its covered affiliates dated 5/21/02 implementing California Public Utilities Commission Af?liate Transaction Rules (Decision 97 -12?088). Overview of the Process conducted meetings and negotiations with three short?listed combined-cycle bidders over the period between August 19 and October 3, 2003.1 The meetings/negotiations with each of the short-listed combined-cycle bidders were conducted by a single team of personnel and outside counsel and advisers. Not all team members participated in all the negotiations. was represented by different counsel for the SER and Calpine meetings/ negotiations. All face-to-face meetings took place either at Century Park Court offices or at nearby hotel conference room facilities with the exception of one 1 Based on the fact that ENPEX has not begun the permitting and environmental review process at the California Energy Commission, determined, and ENPEX did not disagree, that San Diego Community Power Project was not a viable project for the Grid Reliability RFP requiring a commercial in-service date in the 2005?2007 timeframe. indicated its willingness to consider this project in the future because of its attractive economics and electric location on the system. However, did not pursue discussions with ENPEX beyond the initial introductory meeting discussed below. -3- site visit at Calpine?s request to its Otay Mesa project by members of negotiating team and technical advisors. In addition, there were numerous negotiations conducted between and the bidders by means of teleconferencing. The process began with separate one-on-one meetings with each of the short- listed bidders. Each bidder was given an opportunity to update on the status of its project. then made a presentation where it outlined: 1) its goals and objectives for the 2) an analysis of its future needs; 3) a review of the bid evaluation process; 4) an evaluation of the various bids submitted by each bidder; 5) an identi?cation of its risk mitigation requirements; and 6) an identi?cation of the regulatory approach to be followed.2 For the two short-listed bidders, SER and Calpine, judged by to have proposals that met the June 2006 in-service date for the combined-cycle project, requested that the bidders provide more detailed breakdown of cost and operational data and attempt to re?ne their bids based on preliminary evaluation of their bids. In an attempt to narrow the ?eld of competing proposals, communicated its interpretation that after the RFP was issued but prior to the negotiations, statements from the Commission indicated a preference for either utility ownership of power plants or short?term power purchase arrangements over longer term power purchase agreements. indicated that its senior management shared this view. As such, asked the bidders to focus their attention on the utility ownership and short-term power purchase options. 2 A subsequent meeting was held between and Calpine at Calpine?s Otay Mesa project site to further explore valuation and cost issues raised in the initial meeting. SER responded in writing to the cost issues raised at its initial meeting with and in a subsequent written date request to SER. Palomar: Following these initial meetings and the responses to issues raised therein, completed its evaluation process and in early September made the decision to pursue negotiations with SER whereby would acquire the Palomar Energy combined-cycle project on a turnkey basis. In reaching its determination to pursue negotiations with SER, deemed the Palomar Energy turnkey proposal to be the least-cost, best-?t project to meet its reliability need in the 2006 timeframe. An introductory meeting occurred between and SER where shared an executive summary of a proposed turnkey acquisition agreement. Negotiations on ?nalizing a term sheet began in mid-September and continued almost uninterrupted through early October when a detailed term sheet and cost reimbursement agreement were signed. The process was characterized by numerous rounds of negotiations and exchanges of draft term sheets where business, technical, economic, and risk issues were vigorously debated. Otay Mesa: I conducted two distinct negotiations with Calpine during this period. The ?rst set of negotiations, in late September, dealt with a turnkey acquisition proposal for the Otay Mesa Energy Center. A second set of negotiations, during early October, dealt with a ten-year power purchase agreement from the Otay Mesa Energy Center. Both sets of negotiations with Calpine were supplemental to the then ongoing grid reliability capacity negotiations with SER and were undertaken according to for purposes of acquiring economical reliability must run resources to offset existing RMR resources provided that certain precedent conditions are satis?ed. The parties were unable to reach an agreement in principal on the economic terms for an turnkey acquisition. However, the second set of negotiations resulted in a signed term sheet outlining the principal terms for a ten-year power purchase contract. This second set of negotiations was -5- characterized by numerous rounds of negotiations and exchanges of draft term sheets over a compressed period of time during the ?rst three days of October. Analysis of Negotiating Process The basis for the following observations, in addition to the written material described above, was attendance at all meetings/negotiating sessions between and the short-listed combined-cycle bidders and attendance either in person or via teleconference at internal staff meetings between August 18th and October 3rd. In addition, I attended either in person or via teleconference three Procurement Resource Group meetings held by during this period. pursued the negotiations with SER and Calpine in a single-minded effort to seek the lowest-cost, best-fit combined-cycle resource for its ratepayers. exhibited a consistently strong advocacy of the need for ratepayer bene?ts in its negotiations with both SER and Calpine over an array of issues that were negotiated. The clarity and strength in which each party?s positions were advocated was evident throughout the negotiations. The critical negotiating issues and positions discussed internally with negotiating team were consistent with the issues and positions advocated throughout the negotiations. showed an equivalence in its willingness to deal with both SER and Calpine. also demonstrated an equivalence in its ?exibility with SER and Calpine. Both parties were similarly treated in terms of allowing the airing of all issues. treated both bidders equivalently in terms of requests for additional information by which could re?ne its analysis of the submitted bids. There was no discernable difference observed in tenor and temperament toward either of the bidders during the meetings/negotiations and in internal strategy discussion sessions dealing with the negotiations. There was a consistency of application in bid evaluation among all the short-listed bidders. A strong effort was made by to compare the competing bids on an -6- ?apples?to-apples? basis so that various?term power purchase arrangements and turnkey acquisition proposals could be analyzed and evaluated in a fair and equitable manner. The negotiating team?s level of intensity and advocacy of its positions were indistinguishable between the separate negotiations conducted with Calpine and SER. By its nature, the turnkey proposal being an acquisition of assets, the negotiations between and SER were more detailed and covered a more extensive list of controversial issues than was the case in the Calpine power purchase negotiations. However, the negotiations between and its af?liate, SER, were conducted in an arms-length manner at all times during the process. Each party was represented by its own counsel, business and technical experts who strongly advocated their respective positions on the issues that arose during the negotiations. In one instance on the credit requirement issue, a senior executive from corporate parent, along with a senior executive, participated on behalf of in its negotiations with SER. SER was represented by one of its senior level executives who had also not been previously involved in the face-to-face negotiations. views and position on the credit requirement issue were not diminished in the slightest by the involvement of an executive from the corporate parent. non-negotiable bottom line position was strongly defended and led to a resolution of this issue and conclusion of the negotiations. Conclusion commitment to a fair, arms-length negotiating process was clearly articulated within the negotiating team and to the short-listed combined- cycle bidders with whom negotiated. By both its words and its actions, conducted the negotiations in an impartial, unbiased, and arms-length process with both SER and Calpine. CERTIFICATE OF SERVICE I, the undersigned, state that I am a citizen of the United Sates and am employed in the City and County of San Francisco; that I am over the age of eighteen (18) years and not a party to the within cause; and that my business address is Holland Knight, 50 California Street, 28th Floor, San Francisco, California 9411 1. On October 16, 2003, I served a true copy of the REPORT ON THE NEGOTIATING PROCESS BETWEEN SAN DIEGO GAS ELECTRIC AND COMBINED-CYCLE BIDDERS TO THE REQUEST FOR PROPOSALS FOR GRID RELIABILITY CAPACITY on all the parties identified on the attached service list via electronic mail. I certify and declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. Executed on October 16, 2003, at San Francisco, California. Barbara T. Chen PRG AND CPUC SERVICE LIST R-01-10-024 bxw@ cpuc.ca.gov; ckt@ cpuc.ca.gov; cleni energy.state.ca. us; dbachrach nrdc.org; cpuc.ca.gov; fdeleon energy.state.ca.us; freedman @turn.org; fxg@ cpuc.ca.gov; hraitt@ energy.state.ca.us; cpuc.ca.gov; cpuc.ca.gov; kdw@ woodruff-expert-services.com; m?orio@ turn.org; mshames ucan.org; rliebert@ cfbf.com; sjl@ cpuc.ca.gov; sst@ cpuc.ca.gov; cpuc.ca.gov; dks@cpuc.ca.gov; jf2@cpuc.ca.gov; jmh@cpuc.ca.gov; kms@cpuc.ca.gov; .kok@cpuc.ca.gov; Iau@cpuc.ca.gov; llk@cpuc.ca.gov; imc@cpuc.ca.gov; lp1@cpuc.ca.gov; rm@cpuc.ca.gov; meb@cpuc.ca.gov; mzr@cpuc.ca.gov; nil@cpuc.ca.gov; pva@cpuc.ca.gov; rmd@cpuc.ca.gov; sro@cpuc.ca.gov; ajo@cpuc.ca.gov; alo@cpuc.ca.gov; aWp@cpuc.ca.gov; cm2@cpuc.ca.gov; cmw@cpuc.ca.gov; cpe@cpuc.ca.gov; dpa@cpuc.ca.gov; gig@cpuc.ca.gov; ljr@ cpuc.ca.gov; loe@cpuc.ca.gov; ram@cpuc.ca.gov; tam@ cpuc.ca.gov PRG Members and CPUC Service List Page 1 of 1