PUBLIC VERSION 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. ) ) ) ) ) R.01-10-024 MOTION OF SAN DIEGO GAS & ELECTRIC COMPANY (U 902 E) FOR APPROVAL TO ENTER INTO NEW ELECTRICAL RESOURCE CONTRACTS RESULTING FROM SDG&E’S GRID RELIABILITY CAPACITY RFP, AND FOR APPROVAL OF THE COST RECOVERY AND RATEMAKING MECHANISMS ASSOCIATED THEREWITH **redacted, public version** (subject to Protective Order) JEFFREY M. PARROTT 101 Ash Street HQ13 San Diego, California 92101-3017 Telephone: (619) 699-5063 Facsimile: (619) 699-5027 E-mail: JPARROTT@SEMPRA.COM Attorney for: SAN DIEGO GAS & ELECTRIC COMPANY October 7, 2003 Revised December 11, 2003 TABLE OF CONTENTS I. BACKGROUND OF SDG&E’S RFP....................................................................................3 II. THE RECOMMENDED PROPOSALS.................................................................................8 A. Demand Response Contracts ..........................................................................................9 B. Renewable Resource Contracts.....................................................................................10 C. Fossil Fuel Generation ..................................................................................................10 1. Ramco Recommended Proposal ............................................................................11 2. Palomar Recommended Proposal ..........................................................................11 3. a. SDG&E’s purchase of generating facilities from SER, an affiliate company, is consistent with all relevant affiliate transaction rules. ...............12 b. SDG&E’s negotiations with SER were conducted consistent with all pertinent affiliate rules and were at arms-length. ...........................................15 Calpine Recommended Proposal ...........................................................................16 III. NONE OF THE RECOMMENDED PROPOSALS REQUIRE THE COMMISSION TO ISSUE A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY................................................................................................................17 IV. THE ORDERS REQUESTED FROM THE COMMISSION IN THIS MOTION DO NOT REQUIRE ENVIRONMENTAL REVIEW BY THE COMMISSION PURSUANT TO THE CALIFORNIA ENVIRONMENTAL QUALITY ACT.............19 V. THE RECOMMENDED PROPOSALS SATISFY SDG&E’S GRID RELIABILITY NEEDS AND DISPLACE EXPENSIVE RMR ENERGY....................22 A. SDG&E’s Grid Reliability Capacity Needs..................................................................22 B. Reliability Must Run (“RMR”) Benefits of the Recommended Proposals...................24 VI. SDG&E PROPOSES COST RECOVERY AND RATEMAKING MECHANISMS FOR THE RECOMMENDED PROPOSALS RESULTING FROM THIS RFP THAT, CONSISTENT WITH AB 57, ASSURE FULL COST RECOVERY AND A REASONABLE RETURN ON SDG&E INVESTMENT .....................................................................................................................25 A. Demand Response Contract ..........................................................................................25 B. Renewable Resource Contracts.....................................................................................26 C. Calpine Purchase Power Agreement.............................................................................26 D. Utility Generation Investments .....................................................................................27 VII. THE FULLY NEGOTIATED AND EXECUTED CONTRACTS WILL BE REVIEWED BY THE ENERGY BRANCH FOR COMPLIANCE WITH THE APPROVED TERM SHEETS ............................................................................................30 VIII. SUPPORTING TESTIMONY ..........................................................................................31 IX. CONCLUSION ......................................................................................................................31 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 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 CAPACITY RFP, AND FOR APPROVAL OF THE COST RECOVERY AND RATEMAKING MECHANISMS ASSOCIATED THEREWITH Pursuant to Rule 45(f) of the California Public Utilities Commission (“Commission”) Rules of Practice and Procedure and the July 16 and August 21, 2003 rulings of ALJ Walwyn, San Diego Gas & Electric Company (“SDG&E”) hereby moves the California Public Utilities Commission (“SDG&E”) for an order authorizing: (1) SDG&E to enter into the electric resource contracts identified in this motion as the Recommended Proposals resulting from SDG&E’s Grid Reliability Capacity RFP (“RFP”) on the terms and conditions set forth in the Terms Sheets or contracts (included in the accompanying testimony) for each Recommended Proposal, and (2) SDG&E to adopt the cost recovery and ratemaking mechanisms proposed herein that will ensure SDG&E will recover all costs related to the Recommended Proposals and, where appropriate, will receive a fair and reasonable return on SDG&E investment. The Commission’s expedited and affirmative action on both requests is required in order for SDG&E to perform pursuant to the final contracts. The Recommended Proposals consist of six new electric resources that SDG&E has selected as “the winning bids” resulting from its RFP. Four of the six resources are 1 necessary to enable SDG&E to meet its electric grid reliability capacity needs and reserve margin requirements during 2005-2007 as detailed in SDG&E’s testimony on its Long Term Resource Plan (“LTRP”). They were also determined to be the most viable, economic alternatives bid in response to the RFP. The four resources include one demand reduction resource, one renewable resource, one combustion turbine intermediate unit, and one combined cycle power plant. Pursuant to the Term Sheets for the resources, SDG&E will take ownership and operate the intermediate unit and combined cycle power plant once those facilities are fully constructed and operational. While numerous benefits result from SDG&E ownership of those resources, SDG&E will not take ownership of them unless appropriate cost recovery and ratemaking mechanisms are instituted by the Commission to ensure SDG&E recovers all reasonable costs of, and a reasonable return on, the investments. The fifth resource, the Heliotron solar collector project, is a one megawatt experimental/demonstration project that could lead to the development of similar but larger-scale resources in SDG&E’s service territory in the future. The sixth resource, the Calpine Power Purchase Agreement (“Calpine PPA”), is a potentially beneficial, additional option for meeting SDG&E’s long-term resource needs and will provide additional in-state, state-of-the-art generation infrastructure consistent with the Energy Action Plan for California1 and articulated Commission policy.2 However, despite these broad-based benefits, SDG&E recommends the Calpine PPA only if the Commission orders the implementation of certain critical conditions that will ensure that the Calpine PPA is a positive over-all economic benefit to SDG&E’s customers and not an economic detriment to SDG&E’s shareholders. This motion is accompanied, and supported by, the testimony of numerous SDG&E witnesses. However, due to the time-consuming and lengthy negotiation processes that implicated several of the Recommended Proposals, the testimony supporting some of SDG&E’s proposed cost recovery and ratemaking mechanisms will 1 The Energy Action Plan for California was approved by the Commission on May 8, 2003, and developed in conjunction with the Consumer Power and Conservation Financing Authority (“CPA”) and the Energy Resources Conservation and Development Commission (“CEC”). 2 In D.02-10-062 the Commission stated: “In their resource planning, the utilities should consider both utility owned/retained and merchant generation sources. …[F]or the longer-term utilities should assess costs and benefits of various contracting and ownership strategies.” See also: Assigned Commissioner’s Ruling dated July 8, 2003, in R.01-10-024. 2 be served after the filing of this motion in order to incorporate the final negotiated terms into the cost recovery and ratemaking models. I. BACKGROUND OF SDG&E’S RFP On October 29, 2001, the Commission initiated the above-captioned OIR to establish ratemaking mechanisms that would enable California investor-owned electric utilities to resume purchasing electric energy, capacity, ancillary services and related hedging instruments to fulfill their obligation to serve and meet the needs of their customers. In so doing, the Commission acknowledged that the utilities must be provided “… flexibility in transacting for energy to meet their obligation to serve their customers …” so that the utilities “… can take advantage of market opportunities that result in the low and stable prices.”3 The Commission also acknowledged that the utilities desired assurance of more timely regulatory review and cost recovery for their procurement activities and costs. Such assurance ultimately came, at least in part, in the form of legislation, AB 57. In this rulemaking proceeding, the Commission has pursued its objectives by establishing a procurement planning and implementation framework marked by milestone utility and Commission deliverables. On December 19, 2002, the Commission adopted the utilities’ 2003 short-term procurement plans.4 Those plans addressed the utilities’ procurement activities in calendar year 2003, authorized contract terms for up to five years for transactions entered into under the plans, and allowed for the hedging of first quarter 2004 residual net short positions with transactions entered into in 2003. Approval of the plans ensured the utilities’ return to full procurement of their customers’ needs on January 1, 2003, consistent with the intent of the legislature5 and the Commission. Thereafter, on April 15, 2003, the utilities filed 20-year LTRPs covering their anticipated procurement needs between 2004 and 2023. On May 15, 2003, the utilities filed their short-term procurement plans for their anticipated procurement activities in calendar year 2004. 3 D.02-10-062, mimeo at 2. D.02-12-074. 5 Expressed in ABX1 X and AB 57. 4 3 In their LTRPs, the Commission required the utilities to include a mix of resources including conventional generation, distributed generation, demand-side resources, transmission and a reserve requirement.6 Pertinent to conventional generation the utilities were instructed to consider both utility owned/retained and merchant generation sources. The Commission stated: “While in the short-term the sources of such procurement may be limited, for the longer-term utilities should assess costs and benefits of various contracting and ownership strategies.”7 AB 57, approved by Governor Davis on September 24, 2002, requires electrical corporations to create and maintain a diversified procurement portfolio consisting of both short-term and long-term electricity and electricity-related and demand reduction products.8 AB 57 added §454.5 to the Public Utilities Code. Among other things, subsection (b) of §454.5 states that an electrical utility’s procurement plan shall include: “… (5) a competitive procurement process under which the electrical corporation may request bids for procurement-related service, including the format and criteria of that procurement process. … (7) The upfront standards and criteria by which the acceptability and eligibility for rate recovery of a proposed procurement transaction will be known by the electrical corporation prior to execution of the transaction. This shall include an expedited approval process for the commission’s review of proposed contracts and subsequent approval or rejection thereof. … (Emphasis added.) In reference to a competitive procurement process, § 454.5(c)(1) requires the Commission to: … specify the format of that procurement process, as well as criteria to ensure that the auction process is open and adequately subscribed. Any purchases made in compliance with the commission-authorized process shall be recovered in the generation component of rates. (Emphasis added.) 6 D.02-12-062, mimeo at 4. Id. at 19. 8 Public Utilities Code §454.5(b)(9)(B). 7 4 To comply with these statutory mandates the framework the Commission adopted in this proceeding contains requirements for updating utility procurement plans, expedited review procedures, and timely cost recovery mechanisms that conform to AB 57’s requirements.9 SDG&E decided to pursue an RFP for grid reliability capacity when it became apparent during its LTRP analysis that additional capacity conforming to the ISO grid reliability criteria was needed starting in 2005. Consistent with AB 57, SDG&E determined that an RFP process, as opposed to other alternatives like bilateral negotiations, was the most efficient and effective way to solicit cost-effective grid reliability capacity. However, SDG&E had to initiate the RFP process quickly in order to obtain the greatest number and variation of options for supplying its needs. Recognizing the permitting and construction timelines required for new generation resources, SDG&E initiated the development of the RFP a few weeks prior to the April 15, 2003 submittal of the LTRP. In order for new combustion turbines that might feasibly participate in the RFP to be brought on-line by June 1, 2005, SDG&E assumed that a December 31, 2003, Commission decision confirming the RFP results was necessary. Working backwards from that milestone, an RFP issuance in mid-May with responses due in mid-July was deemed an appropriate overall schedule. This allowed roughly 6 weeks to develop the RFP and associated documents and 2 months for bid preparation, consistent with the goal of filing this motion in September 2003. On May 16, 2003, SDG&E issued the RFP. The RFP is included as Attachment 1 hereto. At the present time, SDG&E’s LTRP is still under review by the Commission.10 The LTRP identifies the near-term need of SDG&E for in-basin firm capacity resources to support transmission grid reliability and identifies SDG&E’s preferred 20-year resource plan. As previously stated, the RFP process was initiated prior to the Commission’s decision on SDG&E LTRP out of necessity to accommodate the maximum number of potential bidders. Regardless, the acquisition of the energy 9 D.02-10-062, mimeo at 2. Opening Briefs were filed September 15, 2003, and Reply Briefs were filed September 22, 2003. 10 5 resources determined by SDG&E as the preferred contracts resulting from the RFP (“Recommended Proposals”) is consistent not only with SDG&E’s preferred “Balanced Portfolio” 20-year resource plan, but also with the alternative plans submitted by SDG&E on April 15, 2003. The RFP requested bids from all qualified resources, including turnkey natural gas-fired generating units, power purchase agreements, demand reduction products, renewable resources and any combination of those resources. The RFP was intended to allow for a wide variety of alternative resources to be considered in a manner consistent with AB 57. New, in-basin generation capable of providing the reliability dictated by RMR requirements set by the CAISO was an important alternative resource eligible under the RFP. On July 8, 2003, while SDG&E’s RFP was out for bid, Assigned Commissioner Peevey issued an Assigned Commissioner’s Ruling (“ACR”) identifying certain important policy considerations SDG&E and other parties interested in the RFP should take into account in making and evaluating the RFP bids. In pertinent part, Commissioner Peevey stated: … Consistent with this goal, in moving forward with its procurement activities resulting from the RFP process, SDG&E should focus on the following considerations: (i) California needs to ensure that its electrical generation system, including reserves, is sufficient to meet all current and future needs, and that this reliable and cost-effective electricity comes without over-dependence on a single fuel source and at reasonable prices. Toward this end, the state must, among other things, add new generation resources to meet anticipated demand growth, modernize old, inefficient and polluting plants and achieve and maintain appropriate reserve levels. (ii) Given the Commission’s rejection of the Valley/Rainbow transmission line, SDG&E will need to add new generation resources to meet anticipated load and to maintain adequate reserve levels. (iii) The San Diego area has aging inefficient plants located on the California coastline that should be replaced with more efficient, low emission, environmentally clean plants. 6 (iv) Moreover, due to the fact that a substantial portion of its in-basin generation comes from these aging inefficient plants, SDG&E’s RMR costs are very high. … In light of these principles, SDG&E should be prepared to seriously consider proposals in response to its RFP, or variants thereof, that include the eventual ownership by SDG&E of highly efficient, economical and environmentally superior power plants in San Diego that will provide a significant percentage of SDG&E’s total electric capacity resource requirement, including peak load plus reserve margin.11 (Emphasis added.) Based upon the issuance of this ACR, SDG&E allowed those responding to the RFP to supplement their bids consistent with the attributes and policy guidelines addressed in the ACR. SDG&E also aligned its evaluation criteria for the proposals to be consistent with the ACR. Specifically, SDG&E pursued “…such beneficial variants of conforming proposals that it received that will provide SDG&E’s ratepayers with superior reliability, economic and environmental benefits, but that also will conform to the principles of the state’s Energy Action Plan and to the other important Commission policies and goals...”12 The proposals SDG&E received in response to its RFP, and SDG&E’s evaluation of them, is addressed further below and in the accompanying testimony. It is important to recognize that throughout the RFP process -- developing the RFP, issuing the RFP, and reviewing and analyzing the bids – SDG&E’s Procurement Review Group (“PRG”)13 was constantly informed and consulted. The members of the PRG provided invaluable guidance and feedback on all aspects of the RFP thereby helping to ensure its credibility and fairness. Ultimately, SDG&E selected the Recommended Proposals for approval by the Commission because as a group, and individually, they meet the following criteria: • They result from an open, competitive and adequately subscribed RFP process. 11 July 8, 2003 ACR at mimeo pgs. 5, 6. Id. at 7. 13 SDG&E’s PRG includes individuals from the CEC, CPUC, NRDC, ORA, TURN, UCAN, CDWR and the California Farm Bureau Federation. 12 7 • They are diversified in nature, consisting of renewable, demand response and combustion generation resources. • They are cost-effective, particularly compared to the alternatives. • They provide not only for SDG&E’s near-term grid capacity reliability needs but also for SDG&E’s longer-term resource and reliability needs. • They further the state and Commission goals of acquiring renewable energy resources. • They are consistent with the objectives and mandates of AB 57. • They are consistent with Commissioner Peevey’s ACR and the state Energy Action Plan. • They are environmentally sound. • They provide for the ownership by SDG&E of highly efficient, economical and environmentally superior power plants in San Diego. • They will displace some high RMR costs. As required by AB 57, SDG&E requests that the Commission respond to this motion through an expedited review process whereby the upfront standards and criteria by which the acceptability and eligibility for rate recovery of the Recommended Proposals will be known by SDG&E prior to execution of the transactions.14 This is a particularly acute concern relative to SDG&E’s proposed investments in new generation facilities. Further, because the Recommended Proposals result from an open and competitive procurement process, the Commission must provide that all SDG&E purchases under the contracts will be recovered in the generation component of SDG&E’s rates.15 II. THE RECOMMENDED PROPOSALS The testimony of SDG&E witness Frank Thomas details the RFP process from issuance of the RFP to evaluation of the responding bids. The first meeting with 14 15 Public Utilities Code Section 454.5(b)(7). California Public Utilities Code Section 454.5(c)(1). 8 potential bidders was conducted several weeks after the RFP was issued. SDG&E sponsored a pre-bid meeting to allow potential respondents to ask questions about the RFP and the RFP process. The meeting was attended by 51 individuals representing 37 potential RFP respondents. Ultimately, 22 bids were received in response to the RFP. SDG&E conducted an initial screening of the 22 bids to determine which conformed to the fundamental requirements of the RFP. Those fundamental requirements included the location of the resources within SDG&E’s service territory or directly tied to SDG&E’s grid. Of the 22 bids, 13 were determined to be conforming and therefore subject to further evaluation. Those 13 bids consisted of 2 demand response proposals, 2 renewable energy proposals and 9 fossil fuel generation proposals. A. Demand Response Contracts One conforming demand response proposal, from Celerity Energy, did not result in a proposed contract for approval. While the Celerity Energy proposal was an innovative and creative approach, ultimately SDG&E determined that it did not qualify as a demand response program under the “Vision Statement,” a primary criterion in the RFP. The other conforming demand response bid was from Comverge. SDG&E is proposing as a Recommended Proposal for contract execution a contract with Comverge. Attached to the testimony of SDG&E witness Susan Sides is the fully negotiated contract with Comverge. The Comverge project consists of providing direct load control during the summer months to manage customer end-use equipment, particularly air conditioning equipment, for businesses with less than 100 kW usage and irrigation customers with demands less than 200kW. The contract with Comverge results in expected demand reduction levels of 8.7, 19.5 and 30.2 MWs of load response in 2005, 2006 and 2007, respectively. The annual capacity payment ($/MW) will be --------------------------------------------------------------------------- The energy payment ($/kWh) ------------------------------------------------------------------------------ The original bids made by Comverge in SDG&E’s RFP, the history of SDG&E’s negotiations with the company in this RFP process, and why SDG&E believes the contract terms and conditions are in SDG&E’s customers’ best interests are addressed in the testimony of Ms. Sides. 9 B. Renewable Resource Contracts SDG&E is proposing as Recommended Proposals contracts with both respondents that made conforming bids in the RFP. Attached to the testimony of SDG&E witness Vincent Bartolomucci is the fully negotiated contract with Envirepel and a Term Sheet with Heliotron. The Envirepel proposal is a biomass project (clean burning of green waste) that is capable of delivering 40 MWs net of firm capacity and energy for a term of 15 years and an additional 5 MWs of non-firm energy. The cost of the Envirepel energy is ------------ - --------------- The Envirepel project is required to achieve full commercial operation ------------------------------- The Heliotron project is a joint development project between SDG&E and Heliotron for an experimental/developmental facility that consists of a combination of solar collectors that heat water to approximately 200 degrees Fahrenheit, then stores the water in an insulated and enclosed tank. Due to its experimental character, the project has a plant size of 1 MW and will not contribute materially to SDG&E’s grid reliability capacity. SDG&E is entering into this cooperative arrangement with Heliotron to foster the development of this innovative technology. The original bids made by Envirepel and Heliotron in SDG&E’s RFP, the history of SDG&E’s negotiations with both companies in this RFP process, SDG&E’s evaluation of each company’s proposals, and why SDG&E believes the final contract and Term Sheet terms and conditions with each company are in SDG&E’s customers’ best interests are addressed in the testimony of Mr. Bartolomucci. C. Fossil Fuel Generation SDG&E witness Mr. Thomas explains in his testimony how and why SDG&E narrowed down the 9 conforming bids to the three final Recommended Proposals. The fossil fuel Recommended Proposals are Ramco’s 45 MW Chula Vista combustion turbine project, which Ramco proposes to sell to SDG&E on a turn-key basis, Sempra Energy Resources’ (“SER”) 555 MW (peaking load) Palomar combined cycle project, which Palomar proposes to sell to SDG&E on a turn-key basis, and Calpine’s 573 MW Otay Mesa project for which Calpine proposes to enter into a 10 year purchase power agreement with SDG&E. 10 1. Ramco Recommended Proposal SDG&E is proposing as a Recommended Proposal for contract execution the purchase from Ramco of a 45 MW LM6000 combustion turbine that Ramco will design, permit and construct in Chula Vista, California (in SDG&E’s service territory). SDG&E is acquiring the project as a “turn-key” where it will not take title to the generation facility until it is entirely constructed and in operating condition. SDG&E intends to use this facility for intermediate load requirements beginning in June 1, 2005. The price is $-------- ------- Mr. Thomas addresses this Recommended Proposal in depth, including the Term Sheet and the benefits to SDG&E, in his attached testimony. 2. Palomar Recommended Proposal SDG&E is proposing as a Recommended Proposal for contract execution the purchase from SER of a 500 MW (base load)/ 555 MW (peaking load) combined cycle natural gas-fired power generation plant to be built by SER (the “Palomar combined cycle project”). The Palomar combined cycle project is located in SDG&E’s service territory on a 20 acre site at the Escondido Research and Technology Center in Escondido, California. The project includes two General Electric Frame 7FA turbines and one General Electric D11-40” steam turbine. The purchase price is ---------------The Palomar combined cycle project is expected to go on-line in June 2006. SDG&E is acquiring the project as a “turn-key” whereby SDG&E will not take title to the generating facility until it is entirely constructed and in operating condition. Attached to the testimony of SDG&E witness Lad Lorenz is the fully negotiated Term Sheet with Palomar. Mr. Lorenz also describes the history of the negotiations between SDG&E and Palomar pertaining to Palomar’s bid and why SDG&E believes the Term Sheet terms and conditions are in SDG&E’s customers’ best interests. Affiliate transaction issues surfaced with the Palomar bid due to the fact that Palomar is owned by SER, an affiliate of SDG&E. SDG&E takes its affiliate transaction relationship duties and responsibilities very seriously. This Recommended Proposal has been, and will be, conducted in accordance with all relevant affiliate transaction rules. 11 a. SDG&E’s purchase of generating facilities from SER, an affiliate company, is consistent with all relevant affiliate transaction rules. The negotiations between SDG&E and SER for purchase of the Palomar facilities were in full compliance with all pertinent affiliate rules. Further, the sale of an electric generating facility from SER to SDG&E is within the boundaries of those rules. I. CPUC Affiliate Transaction Rules (D.97-12-088) Rule: (III.B.) Affiliate Transactions: Transactions between a utility and its affiliates shall be limited to tariffed products and services, the sale or purchase of goods, property, products or services made generally available by the utility or affiliate to all market participants through an open, competitive bidding process, or as provided for in sections V D and V E (joint purchases and corporate support) and Section VII (new products and services) below, provided the transactions provided for in Section VII comply with all of the other adopted Rules. 1. Compliance Status: SDG&E’s RFP was conducted through an open, competitive bid process in accordance with this Rule. The RFP specifically asked respondents to bid on a “turnkey” acquisition agreement for a natural gas-fired generating facility as one of the power purchase alternatives. Potential bidders were e-mailed the RFP. SDG&E’s web page gave an overview of the RFP and information for accessing more detailed information. The attachments to the RFP were posted on an SDG&E designated website managed by SDG&E power supply consultant, Sargent-Lundy LLC. This RFP website provided a publicly available forum for updated information and answers to respondent's questions. Given these facts, a future sale of the proposed Palomar power plant to SDG&E is in compliance with this Rule. Rule: (V.H.2.) Transfer of Goods and Services: 12 2. Transfers from an affiliate to the utility of goods and services produced, purchased or developed for sale on the open market by the affiliate shall be priced at no more than fair market value. Compliance Status: Since SDG&E used an open, competitive bid process for their RFP, the agreement to purchase the Palomar power plant is at Fair Market Value as required by this rule. (This rule may not be applicable since the sale of a power plant is more of an asset than a good or service.) II. PE/Enova Merger Rules (D.98-03-073, Attachment B) Rule: (3.a) Transfer of Assets, Goods and Services Transfers of assets or rights to use assets and transfers of goods and services produced, purchased or developed for sale will be priced based on the following: • Fair Market Value -- between utility Affiliates and the Parent Company, or between non-utility Affiliates and other utility Affiliates Compliance Status: SDG&E’s RFP was conducted through an open, competitive bid process. The RFP specifically asked respondents to bid on a “turnkey” acquisition agreement for a natural gas-fired generating facility as one of the power purchase alternatives. Since a bid process was used, the price for the sale of the proposed Palomar facility is at Fair Market Value in accordance with this rule. III. Affiliate Transactions Moratorium (D.02-10-062, D.02-12-074, and D.0306-076) In D.02-10-062, the order directing the California IOUs to resume full procurement responsibilities effective January 1, 2003, the Commission imposed a temporary moratorium on affiliate transactions for procurement purposes for two years or pending an updating of the Commission's affiliate transactions rules (whichever is earlier). (In D.03-06-076 the Commission modified D.02-10-062 to explicitly allow for brokered or “blind” transactions.) 13 Order from D.02-10-062: It is reasonable to place a moratorium on Edison, PG&E, or SDG&E dealing with their own affiliates in procurement transactions, beginning January 1, 2003, to allow for a careful reexamination and appropriate modification of our affiliate rules. This moratorium will continue until we have made appropriate modifications to our affiliate rules applicable to procurement activities, or for two years, whichever date is first. Utilities may propose to include specific affiliate transactions in their procurement plans but these proposals may not be implemented until the end of the moratorium. Based on comments, we are persuaded that transactions through the ISO that can be demonstrated to include multiple and anonymous bidders are permissible. The moratorium also does not preclude anonymous transactions conducted through brokers and exchanges. Compliance Status: Under the current moratorium set forth in D.02-10-062, the IOUs (PG&E, SCE, and SDG&E) are precluded from dealing with their own affiliates in procurement transactions for the dates outlined above (D.02-10-062, Finding of Fact 21). Utilities may, however, propose to include specific affiliate transactions in their procurement plans, but these proposals cannot be implemented until the end of the moratorium (Id.). In the recently concluded resource plan hearings, parties have addressed the issue of whether the moratorium should be continued. SDG&E maintains that the moratorium should be eliminated (see SDG&E Opening Brief, September 15, 2003, pp. 100-101). Based on the existing timing from D.02-10-062, if the moratorium is not extended in some manner, it would expire as of the beginning of 2005. Therefore, any possible Palomar acquisition may not fall within the ban depending upon when the Palomar deal would be “implemented.” Even if the ban is extended, however, there is ample justification to receive an affiliate transactions waiver from the Commission for this proposed transaction. Among the reasons justifying such relief are (1) the proposed transaction is the result of a competitive, fair, and open bidding process; (2) the proposed arrangement is an arms-length transaction; (3) the Commission and all non-market participant parties will have full and complete access to all materials, including confidential data, underlying the Palomar facility and all related transactions, and they can therefore make an independent evaluation of the value and benefits of the proposed 14 transactions; (5) all other interested parties who are ineligible to receive confidential materials under the Protective Order adopted in this proceeding have had a full and fair opportunity to review the proposed transactions through the public, redacted materials; and (6) existing affiliate transaction rules and guidelines are more than adequate to govern the relationship and activities should the Palomar proposal ultimately be approved. In sum, the current affiliate transactions moratorium is neither a restriction on the transaction nor its ultimate implementation. b. SDG&E’s negotiations with SER were conducted consistent with all pertinent affiliate rules and were at arms-length. Employees at SDG&E and its affiliate companies are aware of, and consistently receive training in, the affiliate compliance rules and are required to constantly and consistently comply with them in their daily work (to the extent they apply). However, due to the very obvious affiliate relationship issues engendered by SER’s bidding into the RFP, the Sempra Energy Affiliate Compliance Department issued specific memorandums separately to SDG&E and SER personnel involved in the RFP process as a reminder of the various affiliate guidelines that applied in their negotiations. Those guidelines encompassed relevant affiliate-oriented regulatory restrictions. Specifically, SDG&E employees were advised to follow, and did follow, the general “rule of thumb” that SER should be treated in the same manner as all other bidders (i.e., no preferential treatment). For example, responses to questions from SER personnel were made within the same time frame, and at the same level of confidentiality, as were applied to all bidders. SDG&E employees were also advised, and did follow, the following directions: • Information that pertains to and benefits all bidders and is provided to SER should also be provided to the other bidders through posting. Posting must be made on the RFP website as well as SDG&E’s affiliate transaction Internet site and, depending on the type of information, SDG&E’s OASIS website. For example, responses to questions that do not pertain to a specific project or proposal, but which would be of interest to all bidders such as system-wide transmission constraints should be posted. 15 • Information that specifically refers to SER’s power plant should be kept confidential just as other bidders’ specific information should not be provided to SER. For example, power plant interconnections, pricing, costs, site-specific transmission cost/impacts, etc. • SDG&E should provide SER and any other bidder only that information which is necessary for the purposes of negotiating a deal. Records were maintained of all communications that occurred between representatives of SDG&E and SER pertinent to the RFP. This includes electronic, written, taped, or oral communications such as meeting agendas, minutes, phone calls, calendars, correspondence, etc. SDG&E will maintain these records for 3 years. Finally, in order to provide an independent, third-party evaluation of the negotiations that occurred between SDG&E and SER in this RFP, Dr. James Boothe was retained to listen to all negotiation sessions for the purpose of reporting to the Commission his observations of those negotiations, from an affiliate transaction standpoint. Dr. Boothe will submit directly to the Commission his report on his observations and conclusions. 3. Calpine Recommended Proposal SDG&E is proposing as a Recommended Proposal a 10-year PPA with Calpine Corporation, but only if the Commission adopts as part of its approval of the Term Sheet certain specific and critical conditions that will ensure SDG&E’s customers will recognize an overall benefit from the contract and SDG&E’s shareholders will not be disadvantaged. As finally negotiated, the Calpine PPA pertains to a combined cycle natural gas-fired power generation plant in a 2x1 GE Frame 7FA configuration with a nameplate rating of 485 megawatts (average annual baseload) and 573 megawatts (average annual peaking load) in the Otay Mesa area of San Diego County. SDG&E will make capacity payments of $117 per kW/year, payable monthly. There are also variable O&M payments required. This project has already received siting and environmental approval from the CEC. While SDG&E and Calpine negotiated various alternatives for SDG&E to benefit from this generation resource, ultimately the only proposal acceptable to SDG&E was this 10-year PPA, beginning on June 1, 2007, and only if certain 16 conditions were ordered by the Commission. The Term Sheet for this Recommended Proposal is included with the testimony of SDG&E witness Lad Lorenz. SDG&E doesn’t need the energy from the Calpine PPA for the grid reliability capacity addressed in its RFP. The contract term doesn’t begin until June 2007. Regardless, there are a number of redeeming benefits provided by the generating facility itself which, under the right conditions, should be captured for the benefit of SDG&E’s long-term resource needs and the State’s need for additional new, clean and efficient generation infrastructure. The conditions essential to the economic viability of the Calpine PPA (and therefore are conditions precedent to SDG&E executing the contract) are addressed in the testimony of SDG&E witness James P. Avery. In short, they are: (1) reallocation of the CDWR Sunrise contract from SDG&E to PG&E, (2) expedited review by the Commission of the necessary SDG&E transmission upgrades to make the Calpine generation eligible for RMR status and fully dispatchable to the CAISO, and to assure that all the energy from the facility can be delivered to SDG&E’s customers, and (3) recognition of the Calpine PPA as the equivalent of additional SDG&E debt negatively impacting SDG&E’s credit standing, thereby requiring a corresponding addition of equity to SDG&E’s capital structure (as addressed by SDG&E witness Charles A. McMonagle). III. NONE OF THE RECOMMENDED PROPOSALS REQUIRE THE COMMISSION TO ISSUE A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY Public Utilities Code Section 1001 precludes an electrical corporation such as SDG&E from beginning the construction of a line, plant, or system, or any extension thereof, without first obtaining from the Commission a certificate that the present or future public convenience and necessity require or will require such construction (otherwise known as a “CPC&N”). However, none of the Recommended Proposals, including the fossil fuel proposals, addressed in this motion require SDG&E to construct anything (certain transmission network upgrades will be required for some of the proposals but those upgrades will be processed separately consistent with the 17 Commission’s CPC&N or G.O. 131-D requirements). Therefore, a CPC&N is not required from the Commission for SDG&E to execute the contracts to implement the Recommended Proposals. To be sure, the fossil fuel Recommended Proposals require the construction of electrical generation facilities. In all cases16, however, SDG&E is not constructing the facilities, has and is not permitting the facilities, is not taking the construction risk on the facilities, and is not obligated to purchase the facilities until and unless they are in full operating condition meeting certain agreed upon performance specifications. The Term Sheets for the Palomar and Ramco projects, and for the Calpine PPA, reflect these facts. Apart from the fact that a CPC&N is not legally required by Section 1001 for SDG&E to execute the contracts memorializing the Recommended Proposals, substantively the matters that would otherwise be addressed in a CPC&N proceeding if SDG&E were constructing the generation facilities are either outside SDG&E’s control (and therefore the Commission has no jurisdiction to regulate them) or encompassed within this motion. Both the generation facilities to be constructed by Palomar and Calpine were subject to the provisions of Division 15 of the California Public Resources Code (“PRC”) and, specifically, the certification process required by Section 25500 et seq. of the PRC. The California Energy Commission fully certified and licensed both projects.17 Given that fact, if SDG&E was the project developer and constructing either generation facility (or even the Ramco project) SDG&E would need to address in a CPC&N application a project implementation plan, cost estimate information, and a design and construction management and cost control plan.18 And, for a project estimated to cost more than $50 million, SDG&E would need to submit evidence on the maximum cost the Commission should find to be reasonable and prudent for the project.19 In the case of the Palomar and Ramco projects, and the Calpine PPA, the project developers, and not SDG&E, are responsible for carrying out project implementation 16 The Heliotron project being an exception as it is a joint development project between SDG&E and Heliotron. 17 For Palomar, docket no. 01-AFC-24, final decision adoption date August 6, 2003; for Calpine, docket no. 99-AFC-05, final decision adoption date April 18, 2001. 18 Public Utilities Code Section 1003.5. 18 including maintaining the design, construction, completion, and operation dates. In the case of the Palomar and Ramco projects, SDG&E is paying one predetermined price for each generation facility; the project developers are responsible for managing their budgets appropriately, including financing and construction expenses. Likewise, the project developers, not SDG&E, have sole control over cost controls, construction progress information systems, and the contractual and working responsibilities and interrelationships between management of the project and other parties involved in the project. The major item SDG&E does have control over in these “turn-key” projects is price. SDG&E negotiated a set price for each Recommended Proposals based on the delivery of a specified product or facilities meeting specified criteria. By this motion, SDG&E is requesting an order from the Commission authorizing SDG&E to sign contracts based upon, and incorporating, the terms and conditions in the Term Sheets for each project. Those Term Sheets specify the price SDG&E will pay, and specific attributes of the products and facilities SDG&E will receive. If the Commission does not find the price, term, products or facilities pertaining to any of the Recommended Proposals reasonable and prudent then the Commission should not authorize SDG&E to enter into contracts for them. IV. THE ORDERS REQUESTED FROM THE COMMISSION IN THIS MOTION DO NOT REQUIRE ENVIRONMENTAL REVIEW BY THE COMMISSION PURSUANT TO THE CALIFORNIA ENVIRONMENTAL QUALITY ACT The authorizations SDG&E is requesting in this motion -- to enter into contracts to acquire the various energy resources identified as Recommended Proposals and to implement the cost recovery and ratemaking mechanisms pertinent thereto -- do not invoke the California Environmental Qualify Act (“CEQA”). CEQA applies only to the discretionary approval by public agencies of “projects.” Projects are defined generally as activities that may cause either a direct physical change in the environment, or a 19 Public Utilities Code Section 1005.5. 19 reasonably foreseeable indirect physical change in the environment.20 In this motion, SDG&E only requests the authority to enter into contracts to acquire energy resources from third parties. Such a request does not fall within the 3 types of agency actions that constitute a project under CEQA: (a) an activity directly undertaken by a public agency; (2) an activity supported by a public agency through grants, loans or subsidies; or (3) an activity involving the issuance of a lease, permit, license or other entitlement for use by one or more agencies. (See, Pub. Res. Code § 21065(c); 14 Cal. Code Regs. §15378.) Execution of the desired contracts will not result in any physical change to the environment because it is a preliminary step towards the possible development of a project. If a proposed activity does not have the potential for resulting in a direct or reasonably foreseeable indirect physical change in the environment, then it is not a project as defined by Section 15378 and is not subject to CEQA. (14 Cal. Code of Regs. § 15060(c)(2).) This definition effectively excludes from CEQA all agency actions that will have a legal, economic, social or other effect but will not have an effect on the physical environment. (See, 14 Cal. Code of Regs. §§ 15064(e), 15378(b)(5) & 15382.) For example, in County of Amador v. El Dorado County Water Agency, a resolution authorizing negotiations for preparing an initial, conditional offer to purchase a hydroelectric project did not equate to project approval. (Ibid. at 76 Cal.App4th 931.) Here, all third parties would be responsible for the licensing, permitting and environmental compliance requirements (including CEQA) necessary to develop, construct and operate their individual facilities. SDG&E’s only obligation is to either pay for the energy resources provided by the third parties (in the case of power purchasetype agreements) or to take ownership and control of fully constructed generating facilities that meet certain predetermined specifications. The actions the Commission is requested to take in this motion pertain simply to SDG&E’s legal and financial activities rather than approval of particular “projects” as defined by CEQA. Furthermore, each of the developers of the energy resources for which SDG&E requests approval to sign contracts as Recommended Proposals is required by those contracts to comply, or has already complied, with the CEQA requirements pertaining to those resources. In the cases of Heliotron and Enviropel, as a condition of their contracts 20 Public Resources Code Section 21065; 14 California Code of Regulations Section 15378(a). 20 with SDG&E those companies must obtain all federal, state and local permits necessary to operate their facilities. In the case of Comverge, by contract Comverge must comply with all applicable laws, ordinances, rules and regulations necessary to design, build, own and operate its direct load control system. In the case of Ramco, Ramco is required to obtain all the Governmental Approvals (as defined in the Term Sheet) that are required in order for SDG&E’s to take ownership of the completed Facility (as defined) and begin operation.21 And in the cases of Palomar and the Calpine Otay Mesa project, the CEC has fully licensed those facilities, which included conducting all necessary environmental review. As a result, even if SDG&E’s contract with Palomar or Calpine were determined to be a “project” (which they should not) a statutory exemption would apply to exclude the Commission’s approval of those contracts from CEQA review. California Public Resources Code Section 21080(b)(6) excludes from CEQA review “actions undertaken by a public agency relating to any thermal powerplant site or facility … if the powerplant site and related facility will be the subject of an environmental impact report, negative declaration, or other document, prepared pursuant to a regulatory program certified pursuant to Section 21080.5, which will be prepared by the” CEC. The CEC conducted such a review of the Palomar and Calpine facilities, as reflected in the CEC’s Final Commission Decision, Order dated August 6, 2003 (for Palomar, docket no. 01-AFC-24) and the CEC’s Final Commission Decision, Order dated April 18, 2001 (for Calpine, docket no. 99-AFC-05). Once a proposed activity undergoes such an environmental review, and an EIR is certified or a mitigated/negative declaration is adopted, CEQA provides that neither a subsequent EIR nor mitigated negative declaration or negative declaration needs to be prepared unless substantial changes are proposed to the project, substantial changes occur with respect to circumstances under which the project will be undertaken, or new information of substantial importance becomes available which would substantially alter the analysis of significant impacts or mitigation measures.22 Those conditions are not present in this case wherein SDG&E is requesting approval to purchase the Palomar facility only after it is fully constructed and in operating condition, 21 22 See, page 11 of Ramco Term Sheet. California Public Resources Code Section 21166 and CEQA Guidelines Section 15162. 21 and in the case SDG&E is only requesting authority to sign a purchase power contract with Calpine. Therefore, no further CEQA analysis of those projects is necessary. In sum, any and all of the proposed energy resources will undergo (or have undergone) any necessary environmental review under CEQA when the respective owner or developer seeks (or sought) an entitlement to proceed with the particular resource project. This motion does not seek such an entitlement. V. THE RECOMMENDED PROPOSALS SATISFY SDG&E’S GRID RELIABILITY NEEDS AND DISPLACE EXPENSIVE RMR ENERGY A. SDG&E’s Grid Reliability Capacity Needs In this rulemaking, for it’s showing on its LTRP SDG&E developed and tested four distinctly different candidate portfolios to address its supply needs. The portfolios were designed to illustrate the relative merits of different resource planning approaches and policies, thereby providing the Commission with a sound basis for deciding on a preferred plan for SDG&E. The portfolios emphasized either on-system fossil generation; resources delivered over added transmission; resources delivered over added transmission, but with additional fuel diversity by including an off-system coal-based resource; or in the case of SDG&E’s recommended Balanced Portfolio, a balanced approach that includes the best elements of each portfolio.23/ Each portfolio was tested under numerous uncertainty variables, including fuel prices, demand, and market prices, resulting in an expected cost and environmental 23 (1) On-System Generation Portfolio: The vast majority of SDG&E’s future resource needs are met by generation built within SDG&E’s service area. Because the San Diego area has limited fuel source options, the generation constructed in San Diego is exclusively natural gas fired, although some renewable power is assumed to develop in the area (an assumption that is common among all the portfolios); (2) Transmission Addition Portfolio: New transmission import capability is added in 2008 and 2012. Most of the resources in this case are acquired outside SDG&E’s service area in order to make use of such transmission import capability; (3) Transmission Addition with Fuel Diversity: Same as the Transmission Addition Portfolio, but models the impact of adding a coal-fueled resource of about 500 MW to provide fuel diversity; and (4) Balanced Portfolio: Increased transmission capability in 2008, additional on-system generation both prior to and after the transmission addition, and off-system resources, including the fuel diversity represented by a coal-fueled resource (Anderson/SDG&E, Exhibit 66, p. 5). 22 outcome of a given portfolio, as well as probability distributions illustrating their volatility (risk). This analysis provided the Commission with the necessary information to evaluate the lowest cost considered against exposure to price volatility inherent in choosing a resource strategy. In testimony and hearings, SDG&E urged the Commission to adopt its Balanced Portfolio to guide SDG&E’s future resource planning and procurement. In common with all the other portfolios, the Balanced Portfolio begins with full use of cost-effective and available energy efficiency, demand response, and renewable resources. It then turns to additional on-system generation to preserve grid reliability, followed by an additional transmission interconnection in 2008, or as soon thereafter as it can be permitted and constructed. However, no matter which portfolio the Commission adopts for SDG&E’s LTRP, the resource additions in the years of 2004-2007 are the same in all four portfolios. This RFP was specifically targeted at obtaining resources for the last three years of that time period. The resource additions proposed for 2004-2007 included: • The addition of cost-effective energy efficiency • The addition of distributed generation • The addition of cost-effective demand reduction programs • The addition of renewable power to meet the renewable portfolio standard • The addition of new supply side resources to meet load and planning reserves. To meet grid reliability needs, a portion of the anticipated need had to be from new resources in the SDG&E service territory As addressed in the testimony of SDG&E witness Robert Anderson, the Recommended Proposals provide SDG&E with resource additions in all of the categories but the first two. As for energy efficiency, SDG&E filed on September 23, 2003, for approval and funding of additional cost-effective energy efficiency programs in R.01-08028. Relative to distributed generation, proposals from developers of distributed generation resources were eligible to bid into this RFP but no bids were forthcoming. The Recommended Proposals will provide up to 30 MWs of demand response resources in 2007 and beyond, filling this program need; will add one renewable project to provide a portion of the generic renewable power resources SDG&E modeled as 23 additions in 2005-2007; and will provide supply side resources located in SDG&E’s service area that will fill most of the remaining need and reserve margin requirements in 2005-2007. Therefore, the grid reliability capacity that SDG&E was attempting to fill for the 2005-2007 time frame in the RFP process will be substantially resolved. Further, the resource additions reflected by the Recommended Proposals are all consistent with resources that SDG&E would have to add by no later than 2008 in all four of SDG&E’s proposed LTRP portfolios. B. Reliability Must Run (“RMR”) Benefits of the Recommended Proposals The costs associated with the RMR contracts for units located in SDG&E’s service area are passed on to SDG&E’s customers. In 2003, SDG&E’s customers are forecasted to pay over ------- ------------------------ This cost is expected to continue to increase each year as additional capacity is added to meet the growing RMR need. One of the benefits SDG&E customers will receive from the Recommended Proposals is that SDG&E anticipates being able to meet some of its service area RMR needs with the resources selected in this RFP. These resources will meet the growing need for RMR units and/or replace some of the existing RMR units and their associated costs. Absent these new resources the ISO would look to procure other, potentially more expensive resources to meet RMR need and charge SDG&E customers for them. It is not possible to know the exact savings customers will realize. Future RMR costs are uncertain for several reasons. However, SDG&E estimates the net present value of the RMR savings from the Ramco and Palomar projects will be in the range of ---------------- ------ over the 2006-2015 period. Should the Commission approve the Calpine PPA with all associated conditions, additional RMR benefits will likely be achievable. 24 VI. SDG&E PROPOSES COST RECOVERY AND RATEMAKING MECHANISMS FOR THE RECOMMENDED PROPOSALS RESULTING FROM THIS RFP THAT, CONSISTENT WITH AB 57, ASSURE FULL COST RECOVERY AND A REASONABLE RETURN ON SDG&E INVESTMENT A. Demand Response Contract As explained by SDG&E witness Susan Sides, the mechanism for the recovery of costs associated with the demand response contract should follow the precedent established in D.03-03-036 for current demand response programs with one exception, as explained below. Consistent with Ordering Paragraphs (OP) 8 and 9 of D.03-03-036, one-time setup, capital and on-going costs associated with O&M and A&G expenses that are incurred to develop and implement, or in reasonable anticipation of implementing, the demand response program should be recorded in an Advanced Metering and Demand Response Account (“AMDRA”). The year-end balance in the AMDRA will be recovered from all customers through distribution rate changes effective on January 1 of the following year. In addition, the costs of any incentive payments provided to participants of the demand response program should be recorded in the AMDRA. This is a change from the D.03-03-036 recovery treatment where the incentive costs are recovered through commodity rates. In D.03-03-036, demand response programs are only available to bundled service customers. However, the demand response program resulting from this RFP is available to both bundled service and direct access customers. For this reason, incentive costs should be recorded in the AMDRA for the purpose of recovering these costs from all customers through distribution rates. Finally, revenue shortfalls resulting from the demand response program are not expected to be an issue because SDG&E has balancing account treatment for commodity costs/revenues and has proposed balancing account treatment for distribution costs/revenues in its Costs-of-Service filing (Prepared Direct Testimony of Johannes Van Lierop, pp. JVL-38 through JVL-39). However, if the Commission does not adopt balancing account treatment for distribution costs/revenues, the Commission must allow SDG&E to file for recovery of projected annual distribution revenue shortfalls through the AMDRA. 25 As electricity procurement contracts, the costs and expenses related to these demand response contracts are subject to Public Utilities Code Section 454.5, subsections (c)(1) and (d)(2). These contracts result from an open and adequately subscribed auction process and are in furtherance of, and consistent with, SDG&E’s LTRP. Therefore, once approved by the Commission, SDG&E is guaranteed full recovery of the costs and expenses related to these contracts and those costs and expenses are not subject to afterthe-fact reasonableness reviews. However, due to the unique nature of these contracts and existing Commission precedent for cost recovery of demand response contracts, as addressed above their costs should be recovered through distribution rates instead of generation rates. B. Renewable Resource Contracts The proposed renewable resource contracts reflect supply-side procurement resources that will provide firm capacity and energy to SDG&E’s bundled service customers. For this reason, consistent with the manner in which existing renewable costs are recovered currently, the costs relating to the renewable resource contracts should be recorded in the Electric Resource Recovery Account (“ERRA”) for the purpose of recovering them through commodity rates (SDG&E’s Schedule EECC). As electricity procurement contracts, the costs and expenses related to these renewable resource contracts are subject to Public Utilities Code Section 454.5, subsections (c)(1) and (d)(2). These contracts result from an open and adequately subscribed auction process and are in furtherance of, and consistent with, SDG&E’s LTRP. Therefore, once approved by the Commission, SDG&E is guaranteed full recovery of the costs and expenses related to these contracts and those costs and expenses are not subject to after-the-fact reasonableness reviews. C. Calpine Purchase Power Agreement The proposed Calpine ten-year purchase power contract is a supply-side procurement resource that will provide firm, dispatchable capacity and energy to SDG&E’s bundled service customers. For this reason, consistent with the manner in which SDG&E’s existing purchase power agreement costs are recovered currently, the costs relating to Calpine’s purchase power contract should be recorded in the Electric Resource Recovery Account (“ERRA”) for the purpose of recovering those costs through 26 commodity rates (SDG&E’s Schedule EECC). As explained in the testimony of SDG&E witness Charles McMonagle, those costs must include a return on the accumulated equity SDG&E must recognize to offset the debt equivalency rating agencies assign to SDG&E as a result of the PPA. As an electricity procurement contract, the costs and expenses related to this PPA are subject to Public Utilities Code Section 454.5, subsections (c)(1) and (d)(2). This contract results from an open and adequately subscribed auction process and is in furtherance of, and consistent with, SDG&E’s LTRP. Therefore, once approved by the Commission, SDG&E is guaranteed full recovery of the costs and expenses related to this contract and those costs and expenses are not subject to after-the-fact reasonableness reviews. D. Utility Generation Investments Pursuant to SDG&E’s Recommended Proposals, SDG&E intends to enter into contracts to purchase the fossil fuel generating facilities developed by Ramco and Palomar. These purchases will mark SDG&E’s first investments in new generation facilities since well before electric restructuring began and AB 1890 was conceived. In fact, these investments will be the first investor-owned utility investments in generating facilities in California, completely under California regulation, in over a decade. The political and regulatory environment toward electric generation assets and, more broadly, the energy markets over that time period have been in a constant state of change trying to implement deregulated electric markets, then reacting to unexpected and unprecedented increases in wholesale and retail energy prices, and now trying to sort through the confusion caused by the flawed deregulated market design; a design that has virtually all electric customers paying additional costs. Meanwhile, in various legislative and administrative forums the future of direct access (“DA”) continues to be debated. This chaotic and ever-changing energy environment has caused, and is causing, constant recalibration of state and Commission policies toward the present and future rights and obligations of investor-owned utilities, providers of DA, community aggregators, local jurisdictions proposing municipalization, and other stakeholders in the energy service industry. It is against this backdrop that SDG&E now proposes to take the initiative to invest in generation assets within its service territory to enhance the 27 reliability of its electric service to its customers. Obviously, SDG&E’s initiative is not without substantial risk. The potential for stranded generation investment is as great now as it has ever been. Legislative and Commission policies relative to a public utility’s obligation as the electric provider of last resort continue to be in flux. As addressed more thoroughly in the testimonies of SDG&E witnesses James Avery, Johannes Van Lierop and Charles McMonagle the current substantial uncertainty surrounding state and federal energy policy, the lack of clear legislative direction on recovery of investment in generation assets as compared to purchase power contracts, the considerable uncertainty pertaining to the stability of SDG&E’s future retail customer base, and the general risks inherent in the ownership and operation of major generation facilities above and beyond the risks associated with electric distribution facilities require that utility investment in new generation be supported strongly by a regulatory compact that both (i) ensures the full recovery of all capital and operating costs over the life of the generation investment, and (ii) recognizes the additional investment risk associated with investment in electric generation facilities through a return on the generation investment that is set at a basis point premium over SDG&E’s adopted return on equity for distribution rate base. Providing SDG&E with this regulatory compact will allow SDG&E’s customers to recognize the numerous benefits associated with utility owned and operated generation assets. Those benefits include: (1) the ability of the Commission to directly regulate the price, terms and quality of the generation service provided by an SDG&E-owned and operated generation facility, (2) the financial stability and permanence that is inherent in SDG&E’s ownership of generation assets, (3) the ability of SDG&E’s high-quality workforce (both management and labor) to operate and maintain utility generation assets, and (4) the fact that in the long run utility ownership and operation is often a least cost alternative to purchase power contracts. Further, when generation facilities are under the ownership of a regulated public utility the California Public Utilities Code provides customer protections not otherwise available if the generation facility is owned by a merchant operator, such as the requirement that the Commission must approve any sale of the generation facility to a third party. In the testimony of Dr. Van Lierop a discrete generation ratemaking plan for SDG&E’s investment in generation assets is described in detail. There needs to be a 28 generation ratemaking plan separate from distribution ratemaking for several reasons: generation facilities have cost drivers that are different from cost drivers of the electric distribution system; the procedural process and recovery mechanism for generation investments needs to ensure timely recovery of costs and avoid after-the-fact reasonableness reviews; and generation costs should be recovered from bundled customers through the Electric Energy Commodity Charge (“EECC”) and not from all customers taking service from SDG&E at the distribution level. The generation rate plan provided by Dr. Van Lierop requires the Commission to adopt the initial revenue requirements that can be recovered by SDG&E simultaneously with approval of the new generation investments. This provides assurance that SDG&E will recover all reasonable costs without hindsight review. The Commission must also adopt a revenue requirement update and ratemaking process that will govern cost recovery for the new generation facilities for a ten-year period from the time the facilities are purchased and go into service. The ratemaking process will have three phases—the initial phase beginning with the first in-service date through the first full year of operations, the next three full years of operations, then a test year followed by four attrition years. Dr. Van Lierop describes in detail the O&M escalation and capital attrition that will occur during each of the three generation ratemaking phases. Mr. McMonagle addresses the reasons why SDG&E requires a ROE on the generation investments 75 basis points higher than the ROE adopted by the Commission for SDG&E’s distribution rate base. First, Mr. McMonagle relies upon the input of SDG&E witness Dr. Morin who provides analysis that investments in generation assets normally require a return of 75 to 100 basis points over the return on utility distribution assets. Second, Mr. McMonagle references Public Utilities Code Section 454.3 that provides for an increase of from one-half to one percent in the rate of return otherwise allowed a utility on its electric plant for investments by the utility in generation assets capable of meeting applicable environmental pollution standards which also produce electricity at a cost less than that of electricity generated by existing facilities utilizing nuclear power or fossil fuel. SDG&E’s proposed investments meet that criterion. Mr. McMonagle also addresses why it is reasonable to establish a regulatory asset that will allow SDG&E to recover a return on the equity it must set aside to purchase the 29 generation assets. SDG&E should be reimbursed for its financing costs while the generation facilities are under construction in the same general way that AFUDC covers financing costs for CWIP investments. It is prudent for SDG&E to accumulate equity (and debt) in advance of the payment date for the generation facilities to maintain credit standards and to assure that payments can be made when due. The amounts in the regulatory asset will be recovered through depreciation over the lifetime of the generation facilities, like other capital costs. VII. THE FULLY NEGOTIATED AND EXECUTED CONTRACTS WILL BE REVIEWED BY THE ENERGY BRANCH FOR COMPLIANCE WITH THE APPROVED TERM SHEETS Except in the case of fully negotiated contracts submitted to and approved by the Commission in the course of its action on this motion, to the extent the Commission approves SDG&E’s Recommended Proposals based on Term Sheets submitted in this motion, once those Term Sheets are converted into completed and signed contracts, SDG&E shall submit copies of the contracts to the Energy Division under the protection of Public Utilities Code Section 583 and G.O. 66-C in order to allow the Energy Division to review the contracts and confirm that they conform to the approved Term Sheets in all material respects. Should the Energy Division not object in writing to the Commission and SDG&E to any such contract within 5 business days after submittal, the contract shall be deemed in conformance and no further Commission approval shall be required for SDG&E to fully execute its obligations under the contract. Should the Energy Division object in writing within the 5 business days then SDG&E and the appropriate representatives from the Energy Division shall immediately meet and confer to attempt to resolve all concerns identified by the Energy Division. If so resolved, the Energy Division shall immediately issue written confirmation of such resolution to both the Commission and SDG&E. If unresolved, the Commission shall immediately appoint an administrative law judge to arbitrate the unresolved concerns and issue in an expeditious manner a draft decision for the Commission that will address and resolve the Energy 30 Division concerns. The Commission will act on the draft decision in an expeditious manner. VIII. SUPPORTING TESTIMONY The testimony filed with this motion to provide factual support is attached hereto as follows: Testimony of James P. Avery Testimony of Frank Thomas Testimony of Vincent D. Bartolomucci Testimony of Susie E. Sides Testimony of Latimer P. Lorenz Testimony of David M. Korinek Testimony of Robert B. Anderson Testimony of Johannes Van Lierop Testimony of Michael M. Schneider Testimony of Charles A. McMonagle Testimony of Roger A. Morin IX. CONCLUSION WHEREFORE, based upon the foregoing, SDG&E requests that the Commission take the following action: 1. Issue an order authorizing SDG&E to execute contracts in conformance with the Recommended Proposals and their respective Term Sheets or Contracts. For approved Term Sheets, the Commission’s order should require the resulting fully negotiated and executed contracts to be submitted to the Energy Division for expedited review to determine whether they include all material terms from the approved Term Sheets, in conformance with Section VII, above. 31 2. Issue an order approving SDG&E’s proposals for cost recovery and ratemaking mechanisms for each of the approved Recommended Proposals. 3. Issue an order approving and authorizing the conditions necessary for SDG&E’s execution of a purchase power agreement with Calpine: (1) regulatory recognition of the debt equivalence of the Calpine PPA through an offsetting equity adjustment to SDG&E’s capital structure, (2) reallocation of the CDWR/Sunrise PPA and appropriate associated costs to PG&E, and (3) appropriate and expedited regulatory processing of the necessary transmission upgrades for the Calpine project. 4. Issue an order that SDG&E that earn an ROE on its generation investments that is 75 basis points higher than its authorized return on distribution investments. 5. Issue an order permitting SDG&E to establish a regulatory asset that will allow SDG&E to recover a return on the equity it must set aside to purchase the generation assets by rolling the regulatory asset into the generation rate base, as described in the testimony of Mr. McMonagle. 6. The Commission in its decision adopting the foregoing orders make the following findings of fact and conclusions of law: a. SDG&E’s execution of the contracts for the Recommended Proposals is consistent with SDG&E LTRP b. SDG&E’s execution of contracts reflecting the Recommended Proposals is consistent with, and pursuant to, a competitive procurement process that was open, adequately subscribed and otherwise consistent with Public Utilities Code Section 454.5(c)(1) c. SDG&E’s execution of contracts reflecting the Recommended Proposals further SDG&E’s ability to fulfill its obligation to serve its customers at just and reasonable rates, and are otherwise in the public interest 32 d. A CPC&N from the Commission is not required for SDG&E to enter into or fully execute any of the contracts reflecting the Recommended Proposals e. No review under the California Environmental Quality Act is necessary for the Commission to act on this motion Respectfully submitted this 7th day of October, 2003. ________________________________ Jeffrey M. Parrott 101 Ash Street, HQ13 San Diego, CA 92101-3017 Telephone: (619) 699-5063 Facsimile: (619) 699-5027 E-mail: jparrott@sempra.com Attorney for: San Diego Gas & Electric Company 33 REQUEST FOR PROPOSALS GRID RELIABILITY CAPACITY Issued: Pre-Bid Meeting: Proposals Due: May 16, 2003 May 28, 2003 July 14, 2003 San Diego Gas & Electric Company Electric and Gas Procurement Department 8306 Century Park Court, San Diego, CA 92123-1593 ELECTRIC PROCUREMENT - REQUEST FOR PROPOSALS GRID RELIABILITY CAPACITY San Diego Gas & Electric Company CONTENTS Section Page 1. SCOPE OF SUPPLY .............................................................................................................. 1 2. RFP COMMUNICATION ..................................................................................................... 2 3. RFP SCHEDULE ................................................................................................................. 3 4. RFP RESPONSE.................................................................................................................. 3 5. BACKGROUND .................................................................................................................... 4 5.1 Description of SDG&E Service Area ........................................................................................ 4 5.2 Need for Grid Reliability Capacity ............................................................................................ 7 5.3 Interconnection Studies.............................................................................................................. 7 6. RESOURCE CRITERIA ........................................................................................................ 7 7. PROPOSAL EVALUATION ................................................................................................... 9 8. PROPOSAL DURATION ..................................................................................................... 12 9. CONFIDENTIALITY ........................................................................................................... 12 10. CREDIT TERMS AND CONDITIONS ............................................................................... 13 11. PROPOSAL COSTS ........................................................................................................ 13 12. CONTINGENCIES .......................................................................................................... 13 13. REJECTION OF PROPOSALS ......................................................................................... 14 14. SUPPLEMENTAL INFORMATION ................................................................................... 14 ELECTRIC PROCUREMENT - REQUEST FOR PROPOSALS GRID RELIABILITY CAPACITY San Diego Gas & Electric Company CONTENTS Section Page 15. DEFINITIONS ................................................................................................................ 14 16. PROPOSAL RESPONSE FORMS ..................................................................................... 15 17. TERM SHEETS .............................................................................................................. 15 18. ATTACHMENTS............................................................................................................. 16 No. Title 1. Alternative II Proposal Response Forms 2. Alternative III Proposal Response Forms 3. Alternative II Model Term Sheet 4. Alternative III Model Term Sheet 5. Credit Application 6. Model Guaranty 7. Model Letter of Credit 8. Alternative II and III Performance Specifications 9. Proposal Response Form Instructions and Cover Letter San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 1 May 16, 2003 Revision 0 1. Scope of Supply San Diego Gas and Electric Company (SDG&E) is issuing this Request for Proposals (RFP) for dedicated firm capacity resources to support transmission grid reliability within the SDG&E service territory. The capacity needs are: Year Additional Capacity Need (MW) Cumulative Capacity Need (MW) 2005 69 69 2006 120 189 2007 102 291 Proposals will be accepted for all or a portion of the capacity needs in each year and for one or more of the three annual capacity needs. Capacity must be available beginning June 1 of each year. Capacity from any one facility in excess of capacity need will be given due consideration relative to future capacity needs1. Proposed resources must be located within SDG&E’s service territory (as more specifically described herein) or have the generator transmission system interconnection (gen-tie) directly interconnected to the electric network internal to SDG&E’s service area. Proposed resources may include a) capacity from new facilities, b) new incremental capacity at existing facilities, c) capacity from existing facilities not counted by the ISO as supporting reliability within SDG&E’s service territory, or d) demand reduction capacity not currently committed to existing programs. The capacity resources may be proposed on the basis of any of the following alternatives: Alternative I. Demand Reduction Product - An agreement for metered load reduction under SDG&E dispatch control that provides a minimum of 1 MW in firm load reduction within the ISO’s 10minute response requirement. The contracted level of demand reduction shall be consistent with applicable ISO Tariff, Protocol, Participating Load Agreement, or operating practice requirements for not less than 2 hours and up to 8 hours during any single event. The proposed demand reduction must comply with ISO tariff and protocols related to demand reduction, as may be amended from time to time. Provisions for metering, monitoring demand reduction, and compliance settlement are required. The proposed demand reduction product must be in alignment with the CPUC's Demand Response Vision Statement: "California Demand Response: A Vision for the Future (2002-2007)," as referenced in the current rulemaking proceeding R.02-06-001. Alternative II. Power Purchase Agreement (PPA) - Up to 10-year PPA for capacity, associated energy, and ancillary services from a renewable or fossil resource that can meet the capacity and reliability criteria requirements described herein. The generating facility and transmission interconnection must be designed and constructed in conformance with ISO’s various reliability agreements, procedures, protocols, and standards, as delineated in Section 6 of this RFP. The Respondent will own and operate the facilities and is responsible for development, permitting, financing, and construction of the facilities. If a natural gas-fired generating unit is proposed, Respondents shall also provide an option price for SDG&E to acquire the facilities along with all leases, permits, and other licenses to enable SDG&E to operate the facility at the end of the PPA term. Alternative proposals that 1 Additional capacity offered in excess of the needs identified will also be considered relative to the potential to displace existing less efficient and higher cost capacity. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 2 May 16, 2003 Revision 0 do not offer SDG&E a purchase option will be considered if they provide a discount to the PPA relative to the base proposal. This RFP is separate from and does not constitute SDG&E’s solicitation for renewable resources under the Renewable Portfolio Standard being addressed by the CPUC in R.01-10-024. SDG&E encourages proposals for renewable products that can meet SDG&E’s needs, as described herein. Proposals contracted for under this alternative shall not be eligible for subsequent reliability must run (RMR) contracts with the ISO for the term of the PPA and SDG&E shall have all scheduling and dispatch rights. Alternative III. Turnkey Acquisition Agreement for a Natural Gas-Fired Generating Facility Develop, permit, and construct a new natural gas-fired generating facility to be acquired by SDG&E upon achieving commercial operations. The generating facility must be located on land owned by the Respondent, with land ownership transferred to SDG&E as part of the generation facility acquisition. The generating facility and transmission interconnection must be designed and constructed in conformance with ISO’s various reliability agreements, procedures, protocols, and standards, as delineated in Section 6 of this RFP. Respondents are also encouraged to propose options through alternative financing or sharing of commercial risks that would reduce the cost to SDG&E. Natural gas-fired generating facilities proposed under Alternative III and new facilities proposed under Alternative II shall be designed and constructed in conformance with the Performance Specifications, available from the RFP Website. 2. RFP Communication All questions or other communications regarding this RFP should be submitted via e-mail by the specified deadline, as applicable, to SDG&E’s power supply consultant, Sargent & Lundy LLC at SDGE.RFP@sargentlundy.com. SDG&E will not accept questions or comments in any other form, except during the pre-bid conference. This RFP and all subsequent revisions, including responses to questions and other supplementary information, will be available on the RFP Website. Potential Respondents are responsible for checking the RFP Website for subsequent updates, notices, and postings. E-mail requests for access to the RFP Website may be made to SDGE.RFP@sargentlundy.com. The following information is required of prospective Respondents: 1 Name of Company 2 Company Address 3 Company Representative: ƒ Name ƒ Phone number ƒ E-mail address 4 Indication of intent to bid: ƒ Year 2005 Capacity ƒ Year 2006 Capacity ƒ Year 2007 Capacity San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 3 May 16, 2003 Revision 0 Instructions on access and use of the RFP Website will be sent to the prospective Respondent’s e-mail address. 3. RFP Schedule The following schedule and deadlines apply to this RFP (SDG&E reserves the right to revise this schedule at SDG&E’s sole discretion): Release of RFP May 16, 2003 Pre-bid conference, 1:00 p.m PDT May 28, 2003 Question submittal cut-off date: 5:00 p.m. PDT June 27, 2003 Proposals Due by 5:00 p.m. PDT July 14, 2003 Preliminary screening and Procurement Review Group (PRG) review July 15 to July 19, 2003 Final screening and PRG review July 20 to August 25, 2003 CPUC submittal September 7, 2003 Begin contract negotiations September 7, 2003 Contract effective date October 31, 2003 CPUC approval * * For ownership agreements, CPUC approval shall entail the issuance of a Certificate of Public Convenience and Necessity in a form satisfactory to SDG&E in its sole discretion. Post October 31, 2003 The pre-bid conference will be held at the following address starting at 1:00 pm PDT: San Diego Gas & Electric Company 8306 Century Park Court Building 6, Seminar Rooms 1& 2 San Diego, CA 92123-1593 Conference participants must sign in with Security in Building 6 prior to proceeding to Seminar Rooms 1 and 2. A list of pre-bid conference participants will be provided on the RFP Website . 4. RFP Response SDG&E requires that all proposals submitted pursuant to this RFP contain, at a minimum, the information requested in Attachment 9 – Performance Response Form Instructions and Cover Letter (posted on the RFP Website). San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 4 May 16, 2003 Revision 0 SDG&E further requires that Respondents submitting proposals that include the construction of new generation facilities provide adequate detail to allow SDG&E to determine whether the proposed capacity will economically and reliably meet SDG&E’s capacity requirements. SDG&E will review and may utilize all information, if any, submitted by a Respondent that is not specifically requested as a part of the Proposal Response Forms. Also, SDG&E reserves the right to request additional information from Respondents during the proposal evaluation process. SDG&E reserves the right to modify the RFP schedule if, in the sole opinion of SDG&E, such modifications are necessary. Potential Respondents are responsible for accessing the RFP Website for updated RFP schedules and possible amendments to the RFP or the process. All proposals must be submitted to the RFP Website by 5:00 p.m. PDT, July 14, 2003. One original proposal signed by an authorized officer of the Respondent shall also be sent to the address shown below and must be received by SDG&E by July 17, 2003. All content of the electronic proposal submittal and the original signed proposal shall be identical. All proposal materials and information submitted shall be subject to the confidentiality provisions of Section 9 of this RFP. San Diego Gas & Electric Company Electric and Gas Procurement Department 8306 Century Park Court, MS 41D San Diego, CA 92123-1593 Attn: Procurement Department, Building 4 5. Background 5.1 Description of SDG&E Service Area SDG&E provides electric service to approximately 1.3 million customers in San Diego County and the southern portion of Orange County. SDG&E also provides natural gas service to approximately 775,000 gas customers. The electric customer base comprises 89% residential and 11% commercial and industrial customers. The relatively low percentage of commercial and industrial load is unique among California’s IOUs, and has implications on demand response available to reduce resource needs. SDG&E’s service area has two major electric generation plants, the Encina plant and the South Bay plant, with a total capacity of approximately 1,635 MW. In addition, there are approximately 525 MW of combustion turbines, 30 MW of renewable power plants, and 170 MW of cogeneration facilities that supply resources directly to the electric network in the service area. Only about 350 MW of this generation is under contract to SDG&E. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 5 May 16, 2003 Revision 0 Figure 1 shows a simplified diagram of SDG&E’s service area and the electric transmission topology in San Diego County and the southern portion of Orange County. TRABUCO Figure 1 SDG&E Service Area & Simplified Transmission Topology MARGARITA CAPISTRANO LAGUNA NIGUEL RIVERSIDE CO. CRISTIANITOS ORANGE CO. Existing Major Generation Plants Existing 230 kV Substation Existing 69 kV Substation Existing 138 kV Substation Existing 500 kV Transmission Line Existing 230 kV Transmission Line Existing 138 kV Transmission Line Existing 69 kV Transmission Line County Boundaries San Diego County Service Area Orange County Service Area Note: Map not to scale TALEGA BORREGO SAN DIEGO CO. SAN ONOFRE WARNERS SAN LUIS REY RINCON LILAC ENCINA NARROWS VALLEY CENTER ASH ESCONDIDO SANTA YSABEL ESCO CREELMAN POWAY BOULDER CREEK POMERADO IMPERIAL CO. PENASQUITOS SYCAMORE CANYON LOS COCHES ALPINE DESCANSO LOVELAND GLENCLIFF MISSION CRESTWOOD OLD TOWN BOULEVARD BARRETT MAIN STREET MIGUEL CAMERON TO IMPERIAL VALLEY SOUTH BAY TO TIJUANA MEXICO SDG&E’s electric transmission network comprises 130 substations with 884 miles of 69-kV, 265 miles of 138-kV, 349 miles of 230-kV, and 215 miles of 500-kV transmission lines. Local (“on system”) generating resources are the Encina plant (connected into SDG&E’s grid at 138 kV and 230 kV), the South Bay plant (connected at 69 kV and 138 kV), and a number of combustion turbine facilities located around the service territory (connected at 69 kV). Imported resources are received via the Miguel Substation as the delivery point for power flow on the Southwest Power Link (SWPL), which is SDG&E’s 500-kV transmission line that runs from Arizona to San Diego along the U.S./Mexico border, and via the SONGS 230-kV switchyard SDG&E’s only direct interconnection with the CAISO Service Area. SDG&E operates a local gas transmission system without storage capability (see Figure 2). Capacity within SDG&E’s gas transmission system for gas-fired generation will be available per SDG&E’s tariff. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 6 May 16, 2003 Revision 0 At both the Rainbow and San Onofre metering stations, SDG&E receives gas transported through the Southern California Gas Company (“SoCalGas”) transmission system. SDG&E's transmission system includes a 30-inch diameter pipeline and a 16-inch diameter pipeline that extend south from the Rainbow metering station, located at the Riverside/San Diego county line. The 30-inch pipeline is approximately 50 miles in length and extends south and west to the Tecolote city-gate regulator station located in Linda Vista. This pipeline has a maximum allowable operating pressure (MAOP) of 705 pounds per square inch gauge (psig) for the northern 11 miles, and 595 psig for the remainder. Approximately 80% of the gas received at Rainbow is transported through this pipeline. The 16-inch pipeline is approximately 49 miles long and extends south to the Mission city-gate regulator station. During peak demand conditions, the Rainbow compressor station boosts pressure into the 16-inch pipeline up to its MAOP of 800 psig. These two pipelines are interconnected at two locations: through a 12-mile, 16-inch cross-tie at the approximate midpoint of the two pipelines, and through a 4-mile, 30-inch cross-tie near the southern end of the pipelines. A 20-inch pipeline begins at the eastern end of the 30-inch cross-tie at Miramar, and extends San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 7 May 16, 2003 Revision 0 seven miles east to the Carlton Hills city-gate regulator station located in Santee. A 36-inch diameter, 800 psig MAOP pipeline extends 30 miles south from the 20-inch pipeline just west of the Carlton Hills city-gate regulator station to the Harvest Road city-gate regulator station in Otay Mesa at the southeast end of SDG&E’s gas system. A 30-inch diameter, 800 psig MAOP pipeline extends 3.7 miles from the Harvest Road city-gate regulator station to the U.S./Mexicoborder. A 12-inch diameter pipeline, commonly known as the “Coastline,” extends 43 miles south from the San Onofre metering station near the Orange/San Diego county line to La Jolla. This pipeline is owned and maintained by SoCalGas and is interconnected with SDG&E’s other transmission pipelines through four separate cross-ties. The coastline has a MAOP of 400 psig. 5.2 Need for Grid Reliability Capacity SDG&E is obligated to meet its firm demand pursuant to the ISO’s statewide grid planning criteria under both normal and contingency conditions. The additional capacity needs identified in Section 1 of this RFP reflect the additional firm resources (or firm demand reduction) that SDG&E must procure to meet the ISO reliability criteria. Resources bid in response to this RFP must have an electrical point of interconnection within SDG&E’s two-county service area shown in Figure 1. However, the resource is not required to be physically located within the service area as long as the gen-tie connects directly into SDG&E’s two-county electric network. Interconnection with the 500-kV Southwest Power Link or the Imperial Valley 500/230kV Substation are not acceptable delivery points for proposals under this RFP because the reliability resource requirement shown above is based on a contingency condition with the SWPL out of service. Similarly, direct interconnection to the San Onofre switchyard or the 230-kV lines from San Onofre to either Talega Substation or San Luis Rey Substation are not acceptable for the purpose of this RFP because these network facilities are fully utilized for the reliability condition of concern. Furthermore, external resources that would need to be imported over SDG&E’s interconnections with neighboring systems are unacceptable for the purpose of this RFP because the reliability requirement is calculated based on SDG&E’s maximum import limits. 5.3 Interconnection Studies If a Respondent has previously obtained interconnection studies pursuant to SDG&E’s Transmission Owner Tariff (located at http://www2.sdge.com/tariff/document7.pdf), SDG&E will utilize the transmission costs identified in such studies for its evaluation of the proposal. If adequate interconnection studies have not previously been conducted, SDG&E will conduct a preliminary interconnection study at its own cost in order to estimate interconnection and network upgrade costs for the purpose of bid evaluation. However, SDG&E shall not be bound by its preliminary estimates and prior to actual interconnection, successful Respondents will be responsible for all costs associated with performing more detailed interconnection studies pursuant to SDG&E’S tariff. 6. Resource Criteria 1. The Respondent shall be financially and operationally responsible for all costs for land, development, permitting, and construction. 2. The Respondent shall be financially and operationally responsible for the transmission gen-tie up to the point of interconnection with SDG&E’s transmission network and, for gas-fired facilities, the gas pipeline interconnection and lateral supply pipeline to the site. See http://www.sdge.com/tariff for gas and electric tariff information. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 8 May 16, 2003 Revision 0 3. The Respondent must have all necessary water rights consistent with the energy resource needs. The Respondent must own and have clear title to the land on which the facility is located. For Alternative II and Alternative III, ownership of the land and water rights must be transferable to SDG&E. Resources located on leased properties with lease terms longer than the term of the PPA/demand reduction contract will be considered for Alternative I and Alternative II upon review of the lease terms. 4. Respondent must procure all necessary emissions offsets for gas-fired facilities. For Alternative II and Alternative III, emission offsets and/or credits must be transferable to SDG&E. 5. Respondent will provide personnel required to operate the Facility. For Alternative III, Respondent shall train SDG&E’s or its designee’s operating personnel in the operation and maintenance of the Facility. 6. Renewable resources shall include all environmental attributes (REC) as part of the supply of capacity and corresponding energy. 7. Resources must have a firm demonstrated capacity (or load reduction) that can be scheduled in accordance with the requirements contained in the ISO tariff (available at the ISO Website at: (http://www.caiso.com/docs/2002/02/04/200202041544542455.html). 8. Natural gas-fired generation technology options that will be considered for Alternative II and Alternative III include: a. Combustion turbine peaking facility b. Simple cycle facility with staged conversion to a combined cycle c. Combined cycle unit 9. Natural-gas fired generating facilities shall be designed, permitted and operated to provide for the following minimum annual operations, within the provisions for start-ups as specified by the Respondent in the Proposal Response Forms: a. Combustion turbine peaking facility – operation between minimum and 100% load for a minimum of 2,600 hours per year b. Other facilities – continuous operation between minimum and 100% load adjusted for scheduled maintenance outage allowances 10. Each proposal must provide for a minimum capacity of 25 MW for fossil generation and 1 MW for renewable generation or demand response. Respondents proposing combined cycle technology are encouraged to identify incremental increases in cost for staged conversion. 11. For Alternative III, SDG&E will be responsible for the purchase and transportation cost of natural gas to the plant site during commissioning and after commencement of commercial operation. 12. For Alternative II, the Respondent will be responsible for the purchase and transportation cost of natural gas to the plant site for gas-fired facilities. The Respondent shall provide sufficient firm means of natural gas transportation to support full load operation during the entire term of the PPA. 13. For Alternative II, SDG&E will have all rights to schedule and dispatch the generation or demand resource. SDG&E reserves the right to schedule operations and dispatch the generation resource as needed, with the exception of when the resource is unavailable due to forced or schedule outages. 14. For Alternative II, Generation resource operations will be scheduled in accordance with the ISO Tariff Schedules and Bids Protocols (Original Sheet No. 536 et seq.), and Dispatch Protocol (Original Sheet San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 9 May 16, 2003 Revision 0 453 et seq.), as from time to time modified. ISO compliant real-time metering of the generation or demand resource will be required for Energy Management System (EMS) data. 15. Generation resource operations will be scheduled in accordance with the ISO Tariff Schedules and Bids Protocols (Original Sheet No. 536 et seq.), and Dispatch Protocol (Original Sheet 453 et seq.), as from time to time modified. ISO-compliant real-time metering of the generation or demand resource shall be required for Energy Management System (EMS) data. 16. Generation resources must be capable of providing the following ancillary services in accordance with ISO Ancillary Services Requirements Protocol (Original Sheet NO. 398 et seq.): a. Spinning reserve based on the unit ramp rate characteristics provided by the Respondent on the Proposal Response Forms. b. Voltage support within the power factor band of 0.90 lag to 0.95 lead at the rated capacities provided by the Respondent on the Proposal Response Forms. 17. For Alternative II, all other ancillary services available to be provided in the PPA from the generation resource shall be identified separately. 18. Permitting information provided by the Respondent shall include status of existing and required additional new permits, along with a permitting schedule. 19. The following existing generation resources will not be considered for this RFP because they do not qualify as new capacity to meet the grid reliability: c. Capacity with a contract with SDG&E d. Any capacity Signed up under existing SDG&E demand response programs e. South Bay Power Plant – Units 1-4 and the combustion turbine f. Encina Power Plant – Units 1-5 and the combustion turbine g. Kearny Cts – unit 1 and Power blocks 2 and 3 h. Miramar Power Block i. El Cajon CT j. Cal Peak Border, El Cajon, Enterprise units – k. Larkspur – units 1 and 2 7. Proposal Evaluation Threshold criteria for proposal acceptance shall be based in part on the following topics: 1. Technology and operational flexibility 2. Reliability 3. Development risk San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 10 May 16, 2003 Revision 0 4. Corporate capabilities and proven experience 5. Ability to meet schedule Proposals that are determined to meet the threshold requirements will be evaluated on the basis of a least cost/best fit (LCBF) analysis. The two components of the LCBF analysis that are of primary importance to SDG&E in its evaluation of proposals for capacity to meet grid reliability are: 1. Overall resource portfolio cost 2. Transmission system upgrade costs necessary for the generation resource to satisfy grid reliability requirements While the primary need is for capacity, secondary benefits such as associated energy and additional ancillary services shall be evaluated to develop the total benefit/cost. SDG&E will place high emphasis on the proposal pricing in its evaluations, not only in terms of the initial cost to SDG&E, but also the long-term costs. To the extent possible, SDG&E seeks to monetize the components of each proposal. Where cost information is known and can be applied to such characteristics, it will be incorporated into the cost analysis. Nonetheless, there are inherent attributes or characteristics that cannot be quantified and therefore, must be considered on a qualitative basis. For example, even if a proposal passes the threshold criteria evaluation, the relative strength of each proposal with regard to the threshold criteria will be considered, along with cost, in the final selection of resources. SDG&E will hire the services of an engineering consultant to assist SDG&E in assessing the quantitative and qualitative attributes of the proposals received as well as in reviewing the overall evaluation results. The LCBF process will generally include the following steps: 1. Separate the proposals by energy product type: demand reduction, baseload, peaking and others. 2. For each energy product type, rank the proposals by total cost, exclusive of transmission system expansion costs (e.g., network upgrades associated with interconnection and delivery) “downstream” from the generator tie2 and gas supply costs. 3. In the event that more than 12 proposals are received, eliminate proposals within each category that are noticeably more expensive across the entire range of expected operating conditions, with a cross-check to determine whether the remaining proposals meet or exceed the desired quantity for procurement. This process will be used to short-list proposals for evaluation of transmission costs downstream of the intertie. Proposals that are eliminated may be reconsidered should a proposal that was initially short-listed be rejected or withdrawn during negotiations. 4. Evaluate the remaining proposals using SDG&E’s production cost model. For evaluation purposes, proposals for Alternative II and Alternative III will be evaluated on the same timeline with the same discount rate. Secondary benefits of each bid will be evaluated assuming the same market value for supplemental ancillary services. x2 Each Respondent shall be responsible for including “gen-tie” cost in its Proposal as presently required by the FERC. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 11 May 16, 2003 Revision 0 5. The proposals will then be evaluated relative to the anticipated transmission network upgrade costs attributable to the addition of the generation resource at the location identified by the Respondent. The proposals will be re-ranked relative to the total cost basis. 6. Renewable products will be evaluated relative to the lesser of total cost or the CPUC procurement benchmark price. Respondents proposing renewable resources shall provide the pricing information indicated on the Proposal Response Forms and an anticipated capacity factor. Renewable resource proposals shall indicate if Public Goods Charge (PGC) funds have been obtained or if the proposal is contingent upon receipt of PGC funds. 7. Demand reduction products will be assessed relative to the cost of similar existing demand reduction products within California to the extent that such costs are available. 8. Final selection will be from those minimum-cost proposals that collectively meet the desired procurement quantity for the given year. 9. Qualitative factors used to differentiate proposals of similar cost3 include the following: a. Benefits to minority and low income areas b. Resource diversity c. Environmental stewardship d. Ability to advance schedule e. Technology and operational flexibility f. Reliability g. Development risk h. Financing plan i. Corporate capabilities, credit, and proven experience These factors will be used to qualitatively differentiate proposals with similar costs for those resources under consideration near the annual procurement target. SDG&E requests that Respondents elaborate in their proposal on the benefits of their project with regard to the qualitative factors. 10. The evaluation process and results will be presented to SDG&E’s PRG for its review and input. After addressing PRG comments and recommendations, SDG&E will submit the results to the CPUC for its consideration, review, and approval. The PRG comprises non-market participants, consisting of members from the CPUC, CEC, ORA, CDWR, TURN, UCAN, NRDC, and the Ca. Farm Bureau. SDG&E has utilized these resources in the evaluation of previous RFPs. As these entities are a party to a non-disclosure agreement with SDG&E, utility-specific confidential information is made available to the PRG to assist in its review of the bids and their evaluation. The process outlined above contemplates the integration of least-cost and best-fit concepts. Furthermore, best-fit is relevant not only to the overall portfolio, but to transmission assessment, where the attributes of 3 The term “similar cost” is used to indicate expected indifference by the PRG and CPUC as to the cost of one bid or another. The PRG will have access to SDG&E’s evaluation and the quantitative and qualitative components of those bids prior to SDG&E’s recommendation filing to the CPUC. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 12 May 16, 2003 Revision 0 the various proposals are reflected in an overall cost basis, thereby allowing for ranking and selection. The above process, by its reliance on an economic dispatch production cost model encourages the use of leastcost resources. This will encompass additional economic sales and excess energy sales resulting from the new resources added to the portfolio. The use of the production cost model, however, is not needed to forecast overall portfolio cost, but rather the incremental differences in cost for the portfolio with and without each proposed resource. 8. Proposal Duration All proposals must remain valid through SDG&E’s bid evaluation, contract execution between SDG&E and the selected Respondent(s), and CPUC approval. 9. Confidentiality EXCEPT WITH THE PRIOR WRITTEN CONSENT OF SDG&E, RESPONDENTS MAY NOT DISCLOSE (OTHER THAN BY ATTENDANCE ALONE AT ANY MEETING TO WHICH MORE THAN ONE RESPONDENT IS INVITED BY SDG&E) TO ANY OTHER RESPONDENT OR POTENTIAL RESPONDENT THEIR PARTICIPATION IN THIS RFP, AND RESPONDENTS MAY NOT DISCLOSE, COLLABORATE ON, OR DISCUSS WITH ANY OTHER RESPONDENT, BIDDING STRATEGIES OR THE SUBSTANCE OF PROPOSALS, INCLUDING WITHOUT LIMITATION THE PRICE OR ANY OTHER TERMS OR CONDITIONS OF ANY INDICATIVE OR FINAL PROPOSAL. SDG&E WILL ATTEMPT TO MAINTAIN THE CONFIDENTIALITY OF ALL PROPOSALS, PROVIDED, HOWEVER, THAT SUCH INFORMATION IS CLEARLY IDENTIFIED BY RESPONDENT AS “PROPRIETARY AND CONFIDENTIAL” ON THE PAGE ON WHICH PROPRIETARY INFORMATION APPEARS. SUCH INFORMATION MAY, HOWEVER, BE MADE AVAILABLE TO ITS AGENTS, ADVISORS, OR CONTRACTORS FOR THE PURPOSE OF EVALUATING RESPONDENT’S PROPOSAL, BUT SUCH AGENTS, ADVISORS, OR CONTRACTORS SHALL BE REQUIRED TO OBSERVE THE SAME CARE WITH RESPECT TO DISCLOSURE AS SDG&E. SDG&E WILL OTHERWISE KEEP RESPONDENT’S PROPOSAL CONFIDENTIAL. RESPONDENT ACKNOWLEDGES, HOWEVER, THAT ALL INFORMATION CONTAINED IN A PROPOSAL MAY BE SUBJECT TO REVIEW BY THE PRG, ONE OR MORE OF THE REGULATORY COMMISSIONS HAVING JURISDICTION OVER SDG&E, INCLUDING THEIR STAFFS IN CONNECTION WITH REGULATORY PROCEEDINGS, AND ANY OTHER GOVERNMENTAL AUTHORITY OR JUDICIAL BODY WITH JURISDICTION OVER THE SUBJECT OF THIS RFP. SUCH INFORMATION MAY ALSO BE SUBJECT TO LEGAL DISCOVERY. BY SUBMITTING A PROPOSAL, RESPONDENT AGREES TO ALLOW SDG&E TO SUBMIT ITS PROPOSALS FOR REVIEW BY THE PRG AND THE CPUC, PROVIDED, HOWEVER THAT SDG&E SHALL REASONABLY REQUEST CONFIDENTIAL TREATMENT OF SUCH PROPOSALS BY THE PRG AND THE CPUC. IN ADDITION, THE RESPONDENT AGREES TO ALLOW SDG&E TO USE THE RESULTS OF THE RFP AS INFORMATION, TESTIMONY, OR EVIDENCE IN ANY PROCEEDING BEFORE ANY REGULATORY COMMISSIONS WITH JURISDICTION OVER SDG&E, OR IN ANY PROCEEDING BEFORE ANY OTHER GOVERNMENTAL AUTHORITY OR JUDICIAL BODY WITH JURISDICTION RELATING TO THE SUBJECT OF THIS RFP, PROVIDED, HOWEVER, THAT IN THE EVENT SUCH INFORMATION IS TO BE DISCLOSED, SDG&E WILL PROVIDE ADVANCE WRITTEN NOTICE TO RESPONDENT AND, AT THE EXPENSE OF RESPONDENT, SHALL COOPERATE FULLY IN ALLOWING RESPONDENT TO OBTAIN A PROTECTIVE ORDER OR OTHER MEANS OF PROTECTING ITS INTERESTS. SDG&E, SEMPRA ENERGY, AND ANY OF THEIR SUBSIDIARIES, HOWEVER, DISCLAIM ANY AND ALL LIABILITY TO A RESPONDENT FOR DAMAGES OF ANY KIND RESULTING FROM DISCLOSURE OF ANY OF RESPONDENT’S INFORMATION. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 13 May 16, 2003 Revision 0 10. Credit Terms and Conditions SDG&E has the unilateral right to evaluate and determine the ability of the Respondent to perform relative to this project. The Respondent is required to complete, execute, and submit the RFP credit application as part of its proposal. The application requests financial and other relevant information needed to demonstrate creditworthiness. Respondents may download the application from the RFP Website. All credit support arrangements (e.g., parent guarantee, performance bond, subordinated security interest, letter of credit) must be negotiated prior to a proposal being accepted as a winning proposal. A model guarantee and a model letter of credit may be downloaded from the RFP Website. For questions regarding credit terms, please contact Mr. Brent Mishler at (213) 244-3908. Questions and answers will not be subject to disclosure to other parties. 11. Proposal Costs SDG&E WILL NOT REIMBURSE RESPONDENTS FOR THEIR EXPENSES UNDER ANY CIRCUMSTANCES, REGARDLESS OF WHETHER THE RFP PROCESS PROCEEDS TO A SUCCESSFUL CONCLUSION OR IS ABANDONED BY SDG&E IN ITS SOLE DISCRETION. 12. Contingencies CPUC Review and Approval: 1. All PPA and Demand Reduction Agreements entered into by SDG&E and a selected Respondent will be subject to and contingent upon (1) the issuance by the CPUC of a decision approving the agreements that does not materially alter the commercial aspects of the agreements; (2) a finding by the CPUC that the payments under the agreements are reasonable; and (3) a finding that SDG&E is authorized to recover the full amount of any payment made to Respondent under the agreements from SDG&E's customers in rates through any existing or future cost recovery mechanism that may be developed or instituted by the CPUC. 2. SDG&E will make available to its PRG each response to this RFP and will review the results of its evaluation and ranking of the proposals with the PRG. 3. All Turnkey Natural Gas-Fired Generating Unit Purchase Agreements entered into by SDG&E and a selected Respondent and SDG&E’s ownership, and operation of such unit will be subject to and contingent upon the issuance Certificate of Public Convenience and Necessity by the CPUC in a form deemed satisfactory to SDG&E at its sole discretion. 4. All proposals and agreements shall be contingent upon completion of detailed interconnection and delivery studies, which shall determine the costs of any required transmission network upgrades reasonably necessary to reliably permit the delivery of energy from the Respondent’s facility to SDG&E’s grid. Promptly after the completion of such detailed studies and cost estimates, if it is determined that costs exceed preliminary estimates used for the purpose of initial proposal evaluation, SDG&E may, at its sole discretion, reject the proposal or terminate an agreement based on its estimate of the proposal’s or agreement’s life-cycle cost associated with such network upgrades. If FERC policy in place at that time requires that generators pay for costs associated with such network upgrades, Respondent shall also have the right to withdraw its proposal or terminate the agreement. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 14 May 16, 2003 Revision 0 13. Rejection of Proposals SDG&E MAKES NO GUARANTEE THAT A CONTRACT AWARD SHALL RESULT FROM THIS RFP. SDG&E RESERVES THE RIGHT AT ANY TIME, AT ITS SOLE DISCRETION, TO ABANDON THIS RFP PROCESS, TO CHANGE THE BASIS FOR EVALUATION OF PROPOSALS, TO TERMINATE FURTHER PARTICIPATION IN THIS PROCESS BY ANY PARTY, TO ACCEPT ANY PROPOSAL OR TO ENTER INTO ANY DEFINITIVE AGREEMENT, TO EVALUATE THE QUALIFICATIONS OF ANY RESPONDENT OR THE TERMS AND CONDITIONS OF ANY PROPOSAL, OR TO REJECT ANY OR ALL PROPOSALS, ALL WITHOUT NOTICE AND WITHOUT ASSIGNING ANY REASONS AND WITHOUT LIABILITY OF SEMPRA ENERGY, SDG&E, OR ANY OF THEIR SUBSIDIARIES, AFFILIATES, OR REPRESENTATIVES TO ANY RESPONDENT. SDG&E SHALL HAVE NO OBLIGATION TO CONSIDER ANY PROPOSAL. 14. Supplemental Information SDG&E reserves the right to request additional information from individual Respondents or to request all Respondents to submit supplemental materials in fulfillment of the content requirements of this RFP or to meet additional information needs of SDG&E. SDG&E also reserves the unilateral right to waive any technical or format requirements contained in the RFP. 15. Definitions CPUC: California Public Utilities Commission CAISO Service Area: System of transmission lines and associated facilities that have been placed under the Operational Control of the ISO EEI Agreement: The SDG&E standard Cover Sheet to the Edison Electric Institute Master Power Purchase and Sale Agreement along with the underlying Edison Electric Institute Master Power Purchase, Sale Agreement, and Confirmation Agreement FERC: Federal Energy Regulatory Commission ISO: California Independent System Operator, a California public benefit corporation, or its successor in interest ISO Tariff: FERC-approved and effective tariff and protocols of the ISO, as modified or superseded from time to time On-Peak Hours: All hours ending 0700 to 2200 Monday through Saturday, Pacific Prevailing Time (PPT) Off-Peak Hours: All hours on Sunday, all hours on a North American Reliability Council [NERC] or any successor organization) holiday, and all hours ending 0100 to 0600 PPT and all hours ending 2300 to 2400 PPT on Monday through Saturday. PRG: Procurement Review Group established in accordance with D.02-08-071 RFP Website: Extranet Website that will accessible to Respondents and will be used for posting of RFP information, communications, questions and answers, and submittal of proposals San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 15 May 16, 2003 Revision 0 Respondent: Any entity that submits one or more Proposals in response to this RFP Renewable Energy Credit: Any and all credits, benefits, emissions reductions, offsets, and allowances, howsoever entitled, attributable from the facility. Environmental Attributes include but are not limited to: (1) any avoided emissions of pollutants to the air, soil or water such (subject to the foregoing) sulfur oxides (SOx), nitrogen oxides (NOX), carbon monoxide (CO) and other pollutants; (2) any avoided emissions of carbon dioxide (CO2), methane (CH4) and other greenhouse gases (GHG) that have been determined by the United Nations Intergovernmental Panel on Climate Change to contribute to the actual or potential threat of altering the Earth’s climate by trapping heat in the atmosphere; and (3) the reporting rights such as Green Tag Reporting Rights to these avoided emissions. Green Tag Reporting Rights are the right of a Green Tag Purchaser to report the ownership of accumulated Green Tags in compliance with Federal or state law, if applicable, and to a Federal or state agency or any other party at the Green Tag Purchaser’s discretion, and include without limitation those accruing under Section 1605(b) of The Energy Policy Act of 1992 and any present or future federal, state, or local law, regulation or bill, and international or foreign emissions trading program. Green Tags are accumulated on kWh basis and one Green Tag represents the Environmental Attributes associated with one (1) MWh of energy. Environmental Attributes do not include any energy, capacity, reliability, or other power attributes from the project nor production tax credits or certain other financial incentives existing now or in the future associated with the construction or operation of the energy projects. 16. Proposal Response Forms The Proposal Response Forms’ instructions, cover letter, and schedules are posted on the RFP Website for download by Respondents. 17. Term Sheets Term sheets for Alternative II and Alternative III, available for viewing and download on the RFP Website, are provided to illustrate terms and conditions to be negotiated and incorporated into a final contract. SDG&E expects the final contract shall include, but will not be limited to, the terms and conditions shown. Comments or exceptions to the term sheets shall be included with all proposals. San Diego Gas & Electric Company RFP for Grid Reliability Capacity Page 16 May 16, 2003 Revision 0 18. Attachments The following are considered attachments to the RFP and are available for viewing and downloading from the RFP Website. No. Title 1. Alternative II Proposal Response Forms 2. Alternative III Proposal Response Forms 3. Alternative II Model Term Sheet 4. Alternative III Model Term Sheet 5. Credit Application 6. Model Guaranty 7. Model Letter of Credit 8. Performance Specifications 9. Proposal Response Form Instructions and Cover Letter CERTIFICATE OF SERVICE I hereby certify that I have served this day a copy of the foregoing 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 CAPACITY RFP, AND FOR APPROVAL OF THE COST RECOVERY AND RATEMAKING MECHANISMS ASSOCIATED THEREWITH (Unredacted) on all California Public Utilities Commission staff and members of SDG&E's Procurement Review Group, or their attorney’s of record in R.01-10-024 via electronic service per ruling in this proceeding. All others on the service list are today being served with a Notice of Availability pursuant to Rule 2.3(c) which is also being served electronically. Dated at San Diego, California, this 7th day of October, 2003. _______________________________ Annie Ruiz