BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of San Diego Gas and Electric Company (U 902 M) for Authority to Partially Fill the Local Capacity Requirement Need Identified in D. 14-03-004 and Enter Into a Purchase Power Tolling Agreement with Carlsbad Energy Center, LLC A 14-07-009 OPENING BRIEF OF SHELL ENERGY NORTH AMERICA (US), L.P. John W. Leslie McKenna Long & Aidridge LLP 600 West Broadway, Suite 2600 San Diego, California 92101 Tel: (619) 699-2536 Fax: (619) 232-8311 E-Mail: jleslie@mckennalong.com Date: December 10, 2014 Attorneys for Shell Energy North America (US), L.P. FILED 12-10-14 04:59 PM TABLE OF CONTENTS Pa2e INTRODUCTION 3 II. SUMMARY OF ARGUMENT 5 III. ARGUMENT 7 A. B. C. D. 1V. The Commission Should Encourage SDG&E to Engage in Balanced Capacity Procurement That is Needed to Integrate Increased Renewable Resources 7 Reliance on a 202 1-2022 In-Service Date for New Capacity Resources Will Produce a More Robust Solicitation 10 The Price Under the Carlsbad Energy Center PPTA Does Not Appear to Be “Competitive” 14 CAM Treatment Is Not Appropriate for Local Capacity Purchased by SDG&E to Replace Local Capacity Used for Bundled Sales Customers 15 CONCLUSION 16 1 TABLE OF AUTHORITIES Page(s) Commission Decisions D.13-03-029 (March 21, 2013) 4 D.14-03-004 (March 13, 2014) passim D.14-02-016 (February 5, 2014) 4 D. 14-11-027 (November 20, 2014) 15 Other Authorities State Water Resources Control Board, “Water Quality Control Policy on the Use of Coastal and Estvarine Waters for Power Plant Cooling,” as amended in Resolution No. 2013-0018 (Appendix A) (June 18, 2013) 11 12 BEFORE THE PUBLIC UTILiTiES COMMISSION OF THE STATE OF CALIFORNIA Application of San Diego Gas and Electric Company (U 902 M) for Authority to Partially Fill the Local Capacity Requirement Need Identified in D. 14-03-004 and Enter Into a Purchase Power Tolling Agreement with Carlsbad Energy Center, LLC A 14-07-009 OPENING BRIEF OF SHELL ENERGY NORTH AMERICA (US), L.P. In accordance with the schedule established by the Presiding Administrative Law Judge, and pursuant to Rule 13.11 of the Commission’s Rules, Shell Energy North America (US), L.P. (“Shell Energy”) files this opening brief to address the application submitted by San Diego Gas & Electric Company (“SDG&E”) on July 21, 2014 in the above-referenced proceeding. Shell Energy neither supports nor opposes SDG&E’s application. However, as the Commission considers whether to approve SDG&E’s application (in whole or in part), it should take into account the following: First, SDG&E’s request for approval of the 600 MW purchase power tolling agreement (“PPTA”) with the Carlsbad Energy Center is predicated on the need to meet the State Water Resources Control Board’s (“SWRCB”) December 31, 2017 once-through cooling (“OTC”) compliance deadline for the Encina generating facility. Although the current OTC compliance deadline for Enema is December 31, 2017, the OTC rules provide that the CAISO may request “suspension” of the OTC deadline if an existing power plant is necessary to meet system reliability. The evidence in this proceeding showed that the Encina facility is necessary to provide local capacity reliability in the San Diego sub-area. Suspension of the OTC deadline until 2021 or 2022 is possible, and would provide a greater opportunity for other projects, and other types of resources, to participate meaningfully in SDG&E’s all-source solicitation for up to 800 MW of local capacity resources. An extension of the OTC deadline would allow other resources to compete to provide all or a portion of the 600 MW proposed under the Carlsbad Energy Center PPTA. Second, capacity that is procured by SDG&E to replace SONGS should have the operational characteristics necessary to support and integrate the delivery of new renewable resources to the San Diego sub-area. Although the six 100 MW pealcer units proposed through the Carlsbad Energy Center PPTA have rapid “ramping” capability, peaker units by their nature have a very low load factor and will not be running most of the time. The evidence established that peaker units do not provide VAR support or regulation when they are not running. Other resources, including pumped hydro storage, provide regulation, VAR support and ancillary services, all of which would better support imports as well as renewable resource integration. Resources other than peaker units would be a better “fit” to meet all or a substantial portion of the local reliability needs in the San Diego sub-area. Third, the capacity price under the Carlsbad Energy Center PPTA has not been provided publicly, but the Commission can assess whether the price is competitive. With currently available information, the Commission can compare the price under the PPTA with the price of 2 local RA capacity in the San Diego sub-area for the 20 12-2016 period, as compiled by the Energy Division in its annual report on resource adequacy. Moreover, the price under the PPTA should be compared against the prices that are bid in SDG&E’s September 2014 all-source RFO. If the price under the Carlsbad Energy Center PPTA is not competitive with the prices bid by alternative projects (conventional resources and preferred resources) in SDG&E’s concurrent RFO, SDG&E’ s ratepayers would be better served by either rejecting SDG&E’ s application or by limiting the quantity of capacity purchased by SDG&E under the Carlsbad Energy Center PPTA. It may be more cost-effective for SDG&E to subscribe to alternative projects to meet some or all of the 600 MW capacity commitment under the Carlsbad Energy Center PPTA. Evaluation of the bids in SDG&E’ s all-source RFO will determine the “least cost, best fit” resources to meet SDG&E’ s local capacity requirement. Finally, the Commission should not, as SDG&E otherwise proposes, grant “CAM” treatment for the net capacity cost of the capacity that is approved under the Carlsbad Energy Center PPTA. The Commission must establish “cost causation” before deciding how to allocate the net cost of the capacity. If the Commission determines that the new capacity will replace capacity (e.g., SONGS capacity) that was used by SDG&E exclusively to serve its bundled sales customers, the net cost of the capacity should be allocated to bundled sales customers, not through the CAM. I. INTRODUCTION On March 13, 2014, the Commission issued a decision (D.14-03-004) in Track IV of its long term procurement planning (“LTPP”) proceeding (R.12-03-0l4). The Commission’s Track IV decision addressed the amount of local capacity procurement that SDG&E and Southern California Edison Company (“SCE”) must secure by 2022 in order to replace the local 3 capacity lost with the closure of SONGS, and that will arise based on compliance with OTC requirements. In D. 14-03-004, the Commission authorized SDG&E to purchase between 500 MW and 800 MW of local capacity by the end of 2021. Decision at p. 143 (Ordering Paragraph No. 2) (emphasis added). Of this incremental local capacity procurement, the Commission directed SDG&E to purchase at least 200 MW, and up to 800 MW, from “preferred” resources, including a minimum of 25 MW from storage. Id. In D. 14-02-016 (February 5, 2014), the Commission approved SDG&E’s PPTA for 300 MW from the Pio Pico facility. Approval of the Pio Pico PPTA was based in part on the need to have capacity available for the planned shutdown of Enema units 1-3 at the end of 2017. D.14-02-016 at p. 3, citing D.13-03-029 (March 21, 2013). Since the Commission’s approval of the Pio Pico application, NRG (the owner of the Encina facility, and the owner of the Carlsbad Energy Center) decided to retire Encina units 4 and 5 by December 31, 2017, as well. On July 21, 2014, SDG&E filed the instant application requesting authority to purchase 600 MW of its local reliability capacity obligation from the Carlsbad Energy Center. SDG&E’s PPTA with Carlsbad Energy Center is the product of bilateral negotiation with NRG. The Carlsbad Energy Center consists of six new GE LMS 100 generating units (simple cycle peaking units) that will be located on land adjacent to the Encina facility. The Carlsbad Energy Center is scheduled to initiate commercial operation on November 1, 2017. In accordance with the SWRCB ‘s current OTC regulations, the Encina facility (all five units) is scheduled to be retired on December 31, 2017. 4 SDG&E initiated an all-source RFO for up to 800 MW of local capacity, including at least 200 MW of preferred resources, in September 2014. Tr. 1/14 (Baerman, SDG&E). The PPTA for the Carlsbad Energy Center is outside the RFO process. II. SUMMARY OF ARGUMENT SDG&E witness Daniel Baerman testified that SDG&E currently is conducting an “all source” RFO for up to 800 MW of local reliability capacity to meet its local capacity procurement obligation, as directed in D. 14-03-004. Tr. 1/14. Mr. Baerman also testified, however, that if this Carlsbad Energy Center PPTA application is approved, 600 MW out of the 800 MW solicited through the RFO will be satisfied. Tr. 1/39. Mr. Baerman testified that if this application is approved, SDG&E’ s RFO solicitation will be limited to 200 MW of preferred resources. Tr. 1/41. Mr. Baerman testified further that regardless of the quality or the character of the projects that are bid into the all-source RFO, and whether or not the projects bid in through the RIO may be “better” than the Carlsbad Energy Center PPTA, SDG&E’s contract for 600 MW with Carlsbad Energy Center will proceed if it is approved by the Commission. Tr. 1/44. In view of the alternative resources, including preferred resources, that may be available by the end of 2021 to meet all or a portion of SDG&E’s local capacity procurement obligation (between 500 and 800 MW), the Commission should carefully consider whether a bilateral contract for 600 MW of gas-fired peaking capacity is the least-cost, best-fit resource by which to meet a large portion of SDG&E’s local capacity procurement obligation. If the current OTC deadline of December 31, 2017 can be extended by four or five years, alternative project 5 developers will have a greater opportunity to compete to meet the need for local capacity resources in the San Diego sub-area. SDG&E witness Baerman testified that the planned closure of NRG’ s Encina plant at the end of 2017 (to meet the current OTC compliance deadline) is a “critical driver” in the selection of the Carlsbad Energy Center to fill SDG&E’s local capacity need. Ex. 1 at p. 7. Carlsbad Energy witness George Piantka testified that the planned retirement of Encina at the end of 2017 is “one of the reasons” why the Carlsbad Energy Center is needed by the end of 2017. Ex. 3 at p. 2. Mr. Piantka acknowledged, however, that he is not aware of any other reason why the Carlsbad Energy Center is needed in that timeframe. Tr. 1/183-84. The Conmñssion should take note that maintaining the current OTC deadline for Encina provides the Carlsbad Energy Center with a competitive advantage in meeting SDG&E’s local capacity procurement obligation. Carlsbad Energy Center witness Scott Valentino testified that the “Carlsbad Energy Center is years ahead of any other natural gas-fired project that might be under development in the San Diego service area.” Ex. 2 at p. 5. Mr. Valentino testified that he is not aware of any other potential project that could compete with the Carlsbad Energy Center to meet a 2017 deadline. Tr. 1/132. Mr. Valentino acknowledged, however, that if the OTC compliance deadline for the Encina facility were to be extended by the SWRCB for a number of years, there would be an opportunity for other developers to compete with the Carlsbad Energy Center to achieve commercial operation prior to the closure of Enema. Tr. 1/131. SDG&E witness Baerman agreed that if the OTC compliance deadline for Encina were to be extended to 2022, “[tjhat would certainly increase [the] chances” that a competing resource could be brought on line within that time frame. Tr. 1/42. 6 The Commission should not assume that it is “hamstrung” by the current December 31, 2017 OTC compliance deadline, or that it must approve SDG&E’s application for 600 MW of gas-fired peaking resources from the Carlsbad Energy Center in order to meet a local capacity procurement need that will arise at the end of 2017. As discussed below, the CAISO has the authority to request suspension of the OTC compliance deadline if the Encina facility is needed for local reliability. The Commission should consider whether gas-fired peaking units provide the least-cost, best-fit resources to meet the needs of the grid for system inertia, VAR support and frequency response, especially in view of the loss of SONGS. As a result of D. 14-03-004, the Commission has a unique opportunity to identify and encourage innovative capacity procurement to facilitate increased renewable energy delivery to the San Diego sub-area. SDG&E’s all-source solicitation provides the opportunity for bidders to present cost-effective and operationally flexible capacity procurement options. Approval of SDG&E’s proposed bilateral contract for 600 MW of gas-fired peaking generation would preempt the competitive procurement process that otherwise could result from SDG&E’s RFO. The Commission should not undermine the RFO process by considering the Carlsbad Energy Center proposal outside the context of the all-source solicitation. III. ARGUMENT A. The Commission Should Encourage SDG&E to Engage in Balanced Capacity Procurement That is Needed to Integrate Increased Renewable Resources In order to integrate new renewable energy supplies, renewable resources must be balanced by resources that can provide frequency response and VAR support. Peaking facilities generally have a low capacity factor (are only on-line for limited time periods), resulting in very limited ability to provide VAR support. Peaking facilities also do not provide the frequency 7 response that is needed to stabilize the grid upon the loss of a generation unit or transmission line. In addition, due to their expected low capacity factor, peakers do not provide consistent system inertia, which is the ability of a power system to support imported energy. The characteristics of peaking facilities raise serious questions about whether a PPTA for 600 MW of peaking capacity is consistent with the need to integrate increased renewable supplies into SDG&E’ s local reliability area. Carlsbad Energy Center witness Valentino testified that the proposed peaking facilities will operate at a 10-20 percent capacity factor, with a maximum capacity factor of 30 percent (the limit imposed by the air permits.) Tr. 1/134, 136. CAISO witness Robert Sparks testified that when the CAISO modeled SDG&E’s Track IV reliability requirement in R.12-03-014, the CAISO modeled a 558 MW combined cycle generation project in the Carlsbad area to address “numerous thermal overloads and voltage stability problems” that were identified in the absence of a facility in the Carlsbad area. Ex. 4 at p. 3. Mr. Sparks acknowledged that a combined cycle facility generally operates at a higher capacity factor than a peaking facility. Tr. 2/311. In light of Mi. Sparks’ expressed concern about voltage stability and “degradation of deliverability of renewable generation in the Imperial Valley,” (Ex. 4 at p. 8), it is questionable whether peaking units with a low capacity factor are the best resources to meet the local reliability need created by the loss of SONGS. SDG&E witness Baerman acknowledged that with increased reliance on renewable generation to meet the State’s RPS requirements, there is an increased need for grid balancing services and ancillary services. Tr. 1/50. CAISO witness Sparks testified that the CAISO has prepared studies showing the benefits of replacing OTC generation with “flexible” generation (peaker units and combined cycle units (Tr. 2/316)), which include “the ability to provide ancillary services” and “inertia and 8 governor control to respond to changes in frequency and provide system stability.. . .“ Ex. 4 at p. 7. Mr. Sparks explained that system inertia (coupled with governor control) responds to a “large loss of resources.” Tr. 2/313.1 Mr. Sparks acknowledged, however, that system inertia can only be provided when a generating facility is jjj. Tr. 3/315. Because a peaker unit will operate at a capacity factor of 10 to 20 percent, a peaker unit will be unable to provide system inertia most of the time. Similarly, Mr. Sparks alluded to the benefit of flexible generation being able to provide ancillary services such as “regulation,” “ramping,” “spinning reserves,” and “voltage support.” Tr. 2/317, 318. Mr. Sparks testified that these ancillary services reflect “the ability to ramp and control the generation output either up or down to maintain frequency, maintain line loadings, [and] voltage.” Tr. 2/318. Mr. Sparks acknowledged that in order for a generation facility to provide “regulation” and “voltage support,” the facility must be “on line.” Tr. 2/318. A further issue arises with respect to “overgeneration.” Mr. Sparks testified that as the delivery of renewable generation increases, there are certain times of the year of the day -- when there is low to moderate load but a large amount of -- -- and certain times even too much -- solar generation. Tr. 2/319. Mr. Sparks testified that in an “overgeneration” situation, the ability of a generation facility to be off line is a “good attribute.” Tr. 2/320. Mr. Sparks acknowledged, however, that pumped storage would be a better resource than a peaker unit in an overgeneration condition, because pumped storage can prevent the curtailment of renewable generation. Tr. 1 Mr. Sparks testified that when a large input of power is lost, the frequency of the system is depressed. To avoid a slowdown of frequency (and consequent load-shedding), the system operator wants “potential energy built up in the inertia of the power plants to allow the system to absorb the loss of the resources. The governors allow. the generators themselves, the mechanical parts, to start producing more mechanical power. That turns into more electrical power to avoid this frequency drop.” Tr. 2/314. . 9 . 2/320. Mr. Sparks agreed that while a peaker unit has the ability to be shut off so that it is not producing, a storage facility has the ability to charge or pump water, thus preventing the curtailment of renewable generation. Tr. 2/3 20. The evidence established that in a changing resource environment in which renewable projects comprise an increasing share of the supply portfolio, peaker units may not be the optimal resource to integrate these new supplies. Other resources, including pumped hydro storage, provide system inertia, VAR support and frequency response, all of which are necessary to integrate renewables and provide system stability. Furthermore, pumped storage can mitigate “overgeneration.” In D. 14-03-004, the Commission stated that “[wjithin the categories that include preferred resources, bulk energy storage and large pumped hydro facilities should not be excluded.” Decision at p. 102. The Commission should consider whether 600 MW of gas-fired peaker capacity is the “best fit” resource to replace the loss of SONGS. Alternatively, it may be preferable to limit the amount of peaker capacity purchased by SDG&E in order to diversify SDG&E’s local capacity portfolio with other resources, including pumped hydro storage and other capacity that can integrate renewable resources into the San Diego sub-area. B. Reliance on a 2021-2022 In-Service Date for New Capacity Resources Will Produce a More Robust Solicitation The Commission should not assume that the Carlsbad Energy Center is the only resource that can meet SDG&E’s local capacity procurement obligation in a timely manner. Resources beyond the Carlsbad Energy Center, conventional or otherwise, alone or in combination, may be able to meet the local capacity requirements and the 2022 timeline set forth in D. 14-03-004. The capability of other resources can only be determined, however, through review of the results of SDG&E’s all-source RFO. In its review of the bids submitted through the RFO, SDG&E should 10 combine and value grid products such as system inertia, VAR support and frequency response, all of which are needed to integrate additional renewable supplies into the mix of local capacity resources serving the grid. Carlsbad Energy Center witness Valentino testified that “[i]t would not be possible [for the Carlsbad Energy Center] to meet a 2017 commercial operation date if Commission approval of SDG&E’s application is delayed to complete a comparison process using results from SDG&E’s RFO.” Ex. 2 at p. 8. Similarly, SDG&E witness Baerman testified that “waiting for the outcome of an all-source RFO would prolong the procurement process to such a degree that meeting the December 31, 2017, OTC retirement date would be unlikely.” Ex. 1 at p. 7. NRG and SDG&E rely upon the SWRCB’s current OTC compliance deadline as a convenient excuse for SDG&E not to consider other, least-cost, best fit resources to meet SDG&E’s local capacity procurement obligation. The Commission should consider that an extension of the compliance deadline could be approved, thereby opening up additional procurement alternatives to meet SDG&E’s local capacity procurement obligation. CAISO witness Sparks testified that at the present time, the Encina facility is needed for local reliability in the San Diego sub-area. Tr. 2/299300.2 He testified further that if the Enema facility were to close at the end of 2017 without any replacement capacity, this could jeopardize local reliability and create voltage stability problems and renewable deliverability problems from the Imperial Valley area. Tr. 2/299-300. 2 SDG&E witness Baerman testified that SDG&E currently contracts with the entire Encina facility to meet a portion of SDG&E’s local RA capacity obligation. Tr. 1/3 8. Mr. Sparks testified that the CAISO’ s 2013-2014 transmission planning process (“TPP”) assumes that SDG&E will have Track 4 resources operational prior to 2018 peak load conditions to resolve potential “overloading” concerns on the Ellis-Johanna and Ellis-Santiago 230 kV lines. Ex. 4 at p. 5; Tr. 2/298. Mr. Sparks testified that this TPP assumption reflects a further (footnote continued) 11 Carlsbad Energy witness Piantka acknowledged, however, that the CAISO has the authority to request an extension of the OTC deadline for the Encina facility. Tr. 1/191. In D. 14-03-004, the Commission stated that “it may be possible to extend OTC deadlines if it is necessary to ensure reliability.” Decision at p. 86. The OTC rules provide for a suspension of the compliance date for existing power plants, for longer than 90 days, as follows: (b) Suspension of Final Compliance Date for Longer Than 90 Days, or consecutive less than 90 day suspensions, for Existing Power Plants Within CAISO Jurisdiction. If CATS 0 determines that continued operation of an existing power plant is necessary to maintain the reliability of the electric system, CAISO shall provide written notification to the State Water Board, the Regional Water Board with jurisdiction over the existing power plant, and the SACCWIS. if the Executive Directors of the CEC and CPUC do not object in writing within 10 days to CAISO’s determination, the notification provided pursuant to this paragraph will suspend the final compliance date for 90 days. During the 90-day time suspension or within 90 days of receiving a written notification from CAISO, the State Water Board shall conduct a hearing in accordance with paragraph (d) to determine whether to suspend the final compliance date for more than the original 90 days pending, if necessary, full evaluation of amendments to final compliance dates contained in the policy. 4 These rules apply to the Encina facility. Mr. Sparks testified, however, that if the Commission were to reject SDG&E’s application, he does not know whether the CAISO would seek to suspend the OTC compliance deadline for the Encina facility. Tr. 2/364. Similarly, Carlsbad Energy Center witness Piantka testified that if SDG&E’s application were to be rejected, NRG (continuedfrom previous page) assumption that the Encina plant will be retired by the end of 2017 in compliance with the State’s OTC policy. Tr. 2/298-99. Mr. Sparks testified that the CAISO’s determination that new resources under Track IV must be in place by 2018 is predicated on the fact that Encina will have to be retired by the end of 2017. Tr. 2/302. -- -- “State Water Resources Control Board, “Water Quality Control Policy on the Use of Coastal and Estvarine Waters for Power Plant Cooling,” as amended in Resolution No. 2013-0018 (Appendix A), Section 2.B.2 (b) (June 18, 2013). 12 has not considered whether it would support a CATS 0 recommendation to suspend the OTC compliance deadline for the Encina facility. Tr. 1/185. Mr. Valentino testified that NRG has taken no actions to extend or suspend the current OTC compliance deadline for the Encina facility. Tr. 1/127-28. Mr. Piantka testified that if the OTC deadline for Encina were to be extended to the end of 2021, he does not know whether there is a revenue investment stream available to support the capital expenditures that would be necessary to maintain the Enema facility over the extended period. Ex. 3 at p. 7; Tr. 1/187. It is surprising that the CAISO has not considered whether the deadline for OTC compliance should be extended if SDG&E’ s application herein is rejected. Witnesses for SDG&E and NRG asserted that no other conventional gas-fired resource could be brought on line by the end of 2017, and the CAISO’ s witness stated that some resource the Carlsbad Energy Center -- -- either Encina or must be in place at the end of 2017 to address local reliability needs in the San Diego sub-area. In view of the need for capacity to be in place to meet San Diego’s local reliability requirements at the end of 2017, it is likely that if the Commission were to reject SDG&E’s application, the CATS 0 would have to exercise its authority under the OTC rules to request a suspension of the OTC compliance deadline for Enema. The Commission should consider whether the long-term benefit of acquiring a more diverse capacity portfolio by 2021 outweighs Mr. Piantka testified that extending the life of the Encina facility through a capital investment would violate the settlement agreement between NRG and the City of Carlsbad, and would cause NRG to incur penalties. Lx. 3 at p. 7; Tr. 1/189-90. Mr. Valentino testified, however, that if SDG&E’s application is rejected by the Commission, no party to the settlement would be bound by it, and NRG would have none of the obligations that it agreed to under the settlement. Tr. 1/133-34. 13 the short-term benefit of retiring NRG’ s Encina facility in 2017, to replace it with six 100 MW peaker units under NRG’s Carlsbad Energy Center PPTA. C. The Price Under the Carlsbad Ener2y Center PPTA Does Not Appear to Be “Competitive” SDG&E witness Baerman testified that the capacity price under the PPTA with Carlsbad Energy Center is “reasonable” and “competitive.” Ex. 1 at pp. 9-10. Although the contract price is not publicly disclosed, Mr. Baerman stated that the price “compares favorably” with the price under SDG&E’s recently approved PPTA with Pio Pico. . at p. 10. The Energy Division’s April 2014 Resource Adequacy Report (for 2012)6 cites prices for local RA capacity in SDG&E’s local reliability area for the period 2012-20 16. The Energy Division’s Report shows that the weighted average price for local RA capacity in the San Diego IV area for the period 2012-20 16 was $4.39IkW-month, with 85 percent of the capacity at a price at or below $ 10.241kW-month. Report at p. 27. The Commission must consider, in light of public information regarding the current price of local RA capacity, whether the agreed upon capacity price under the Carlsbad Energy Center PPTA is reasonable. The price under the Carlsbad Energy Center PPTA also must be compared with the prices offered by bidders in SDG&E’s all-source RFO. The Commission should await the results of the RFO to determine whether the Carlsbad Energy Center is the least-cost, best-fit resource to meet the local reliability need in the San Diego sub-area. 6 “2012 Resource Adequacy Report,” produced by the Staff of the California Public Utilities Commission (issued April 2014). 14 D. CAM Treatment Is Not Appropriate for Local Capacity Purchased by SDG&E to Replace Local Capacity Used for Bundled Sales Customers SDG&E witness Baerman proposes to recover the capacity costs under the Carlsbad Energy Center PPTA through the CAM. Ex. 1 at pp. 14-17. In support of his proposed CAM approach, Mr. Baerman testified as follows: In determining applicability of the CAM to authorized procurement, it is important to recognize and distinguish between an IOU’s obligations as a load serving entity (“LSE”) to procure energy and capacity to serve its bundled customers versus its obligation as a regulated IOU to ensure that new resources are built in order to meet long-term grid reliability needs. In its role as an LSE procuring energy and capacity to serve its bundled customers, SDG&E’s procurement activity provides a benefit only to its bundled customers. On the other hand, in its role as a regulated IOU procuring new resources to ensure grid reliability, SDG&E’ s procurement activity provides a benefit to all customers in SDG&E’s service area. Ex. 1 atp. 15. The Commission should inquire into whether CAM treatment is appropriate in the circumstances surrounding SDG&E’s application. In D.14-1 1-027 (November 20, 2014), the Commission stated that the appropriate allocation mechanism for the costs of capacity purchased by the IOUs to meet the local procurement obligation identified in D. 14-03-004 “remains to be determined in applications pursuant to D. 14-03-004.” Decision at p. 10. The Commission continued: [P]otential CAM treatment is a live issue in A. 14-07-009... .“ Id. The Commission should not adopt CAM treatment in this proceeding, or any other proceeding, when an IOU seeks CAM treatment for local capacity procurement that replaces the IOU’ s local capacity that was used and paid for by bundled sales customers. While SONGS was in-service, ESPs fulfilled their own local capacity obligations with capacity they acquired on their own. The closure of SONGS does not alter an ESP’s obligation to purchase its own local RA capacity. CAM treatment for the capacity purchased by SDG&E to replace SONGS would impose substantial additional capacity costs on direct access customers, 15 while limiting the competitive options available to ESPs to meet their RA capacity procurement obligations. The need for SDG&E to obtain local capacity for the San Diego sub-area stems from the need to replace SONGS, which provided energy and capacity to SDG&E’s bundled customers. As noted in Mr. Baerman’s testimony, when an IOU holds capacity for its bundled customers, replacement of that capacity should not trigger CAM treatment. Ex. 1 at p. 15. If the Commission approves all or any portion of SDG&E’s proposed PPTA with Carlsbad Energy Center, the Commission should not approve CAM treatment for the local capacity under that contract. The cost of capacity procured to replace capacity that previously served bundled customers should be charged exclusively to bundled customers. Iv. CONCLUSION Justification for approval of SDG&E’s PPTA with NRG for the 600 MW Carlsbad Energy Center outside the RFO process is based on the retirement of NRG’s Enema generating facility at the end of 2017. NRG’s failure to pursue an extension or suspension of the OTC compliance deadline for the Enema facility benefits NRG’s pursuit of Commission approval of the Carlsbad Energy Center PPTA. Adherence to the current OTC compliance deadline makes it more difficult, if not impossible, for other projects (conventional generation as well as preferred resources) to compete to provide alternative resources that can be in service by 2018. Alternative resources may have operational characteristics that are more consistent with the State’s loading order and that more efficiently integrate the delivery of renewable energy into the San Diego sub-area, but these resources may be pre-empted by the Commission’s approval of the Carlsbad Energy Center PPTA. 16 The CAISO has authority to request a suspension of the OTC compliance deadline if continued operation of an existing power plant is necessary to maintain system reliability. The Enema facility is needed for local reliability. In D. 14-03-004, the Commission authorized SDG&E to procure between 500 and 800 MW to meet its local capacity requirements by the end of 2021. Decision at p. 143. Suspension of the OTC compliance deadline until December 31, 2021 will enable other resources to compete with NRG on a level playing field to provide all or a portion of the local reliability capacity authorized in D. 14-03-004. Finally, if the Commission approves all or some portion of the Carlsbad Energy Center PPTA, the Commission should not approve CAM treatment for the net capacity costs of this capacity. The local reliability capacity that would be provided by the Carlsbad Energy Center is replacement capacity for capacity that serves SDG&E’ s bundled sales customers. Direct access customers should not be required to pay for resources that are used by SDG&E to serve bundled sales customers. Respectfully submitted, akbk Jifl W. Leslie McKenna Long & Aldridge LLP 600 West Broadway, Suite 2600 San Diego, California 92101 Tel: (619) 699-2536 Fax: (619) 232-8311 E-Mail: jleslie@mckennalong.com Date: December 10, 2014 Attorneys for Shell Energy North America (US), L.P. USW 804791660.1 17