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ALJ/JF2/eg3 Date of Issuance 4/5/2019

Decision 19-03-012 March 28, 2019

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking to Establish


Policies and Cost Recovery Mechanisms
for Generation Procurement and Rulemaking 01-10-024
Renewable Resource Development

DECISION DENYING PROTECT OUR COMMUNITIES FOUNDATION


PETITION FOR MODIFICATION OF DECISION 06-09-021,
CONCERNING OTAY MESA ENERGY CENTER

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TABLE OF CONTENTS

Title Page

DECISION DENYING PROTECT OUR COMMUNITIES FOUNDATION


PETITION FOR MODIFICATION OF DECISION 06-09-021,
CONCERNING OTAY MESA ENERGY CENTER ..................................................... 1
Summary ............................................................................................................................ 2
1. Background .................................................................................................................. 3
2. Compliance with Rule 16.4 ........................................................................................ 5
2.1. Changed Circumstances or Facts ..................................................................... 6
2.1.1. Positions of the Parties .......................................................................... 6
2.1.2. Discussion ............................................................................................... 8
2.2. Timeliness of Filing of the PFM ........................................................................ 9
2.2.1. Positions of the Parties .......................................................................... 9
2.2.2. Discussion ............................................................................................. 11
2.3. POC’s Position as a Non-Party to the Original Proceeding ....................... 12
2.3.1. Positions of the Parties ........................................................................ 12
2.3.2. Discussion ............................................................................................. 13
3. Substantive Arguments of POC PFM .................................................................... 14
3.1. Approval Process for the Original PPA ........................................................ 14
3.1.1. Positions of the Parties ........................................................................ 14
3.1.2. Discussion ............................................................................................. 16
3.2. Advice Letter 3294-E ........................................................................................ 17
3.2.1. Positions of the Parties ........................................................................ 17
3.2.2. Discussion ............................................................................................. 18
3.3. Commission, Federal Energy Regulatory Commission, and Court
Precedent on PPA Approvals ......................................................................... 18
3.3.1. Positions of the Parties ........................................................................ 19
3.3.2. Discussion ............................................................................................. 23
4. POC’s Request for Stay............................................................................................. 24
4.1. Positions of the Parties ..................................................................................... 24

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TABLE OF CONTENTS
Con’t
Title Page

4.2. Discussion .......................................................................................................... 25


5. Comments on Proposed Decision ........................................................................... 25
6. Assignment of Proceeding ....................................................................................... 28
Findings of Fact ............................................................................................................... 28
Conclusions of Law ........................................................................................................ 29
ORDER ............................................................................................................................. 30

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DECISION DENYING PROTECT OUR COMMUNITIES FOUNDATION


PETITION FOR MODIFICATION OF DECISION 06-09-021,
CONCERNING OTAY MESA ENERGY CENTER

Summary
This decision denies the Protect Our Communities Foundation (POC)
petition for modification (PFM) of Decision (D.) 06-09-021 which approved a
revised power purchase agreement (PPA) of San Diego Gas & Electric Company
(SDG&E) for the Otay Mesa Energy Center (OMEC) Generating Plant, as well as
D.06-02-031, which approved the earlier version of the PPA.
This decision finds that the Commission could summarily dismiss the PFM
on the grounds of non-compliance with Rule 16.4 of the Commission’s Rules of
Practice and Procedure, since POC did not support its claim of changed
circumstances, nor was the filing of the PFM timely. However, we choose to
discuss the merits of the PFM as well, in order to affirm our support for the
importance of stability in contractual relationships that lead to electric
infrastructure to support California’s energy market. The OMEC PPA was
approved by the Commission in 2006 and the contract has led to the construction
and operation of a power plant. The Commission will not revisit the PPA more
than 12 years after its initial approval, based on broad and vague assertions of
changed circumstances by a party that was not involved in the original
proceeding. While the Commission may have the authority to modify its
decisions from time to time, it does so judiciously and with a high threshold even
under normal circumstances. For a party that is not a party to the contract, nor to
the original proceeding, the bar is even higher. POC has presented no evidence
that State law or Commission decisions require the abrogation of a portion of the
OMEC PPA, and its PFM is therefore denied.
This proceeding is closed.

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1. Background
In Decision 06-09-021, the Commission approved a ten-year power
purchase tolling agreement between San Diego Gas & Electric Company
(SDG&E) and the Otay Mesa Energy Center (OMEC).1 The approved contract
was revised from an earlier approved version (approved in D.06-02-031), and
included a Put Option and a Call Option, under which SDG&E would have the
opportunity to own and operate at set prices following the expiration of the
approved 10-year PPA.

D.06-09-021 described the Put and Call Options as follows:

The Put Option, exercisable at OMEC’s sole discretion at the


end of the ten-year PPA, would require SDG&E to purchase
the Otay Mesa plant at a set price [of $280 million]. The Call
Option, exercisable at SDG&E’s sole discretion at the end of
the ten-year PPA, would require OMEC to sell the Otay Mesa
plant at a set price [of $377 million].2 Pursuant to the terms of
the Put Option, there would be no additional Commission
review or approval required before OMEC’s potential exercise
of the option. Under the price set for the Put Option, SDG&E
would own the Otay Mesa plant in 2019 at a price that would
be significantly below that of the Net Book Value of the
Palomar Energy Center (Palomar) in 2019.3
Under the terms of the Call Option, SDG&E would seek
further Commission review and approval prior to exercising
that option. The agreed upon price for Otay Mesa under the

1Calpine developed and operates OMEC through a wholly-owned subsidiary called OMEC,
LLC. We will refer to the two interchangeably in this decision.
2At the time of issuance of D.06-09-021, the prices of the options were confidential under the
Commission’s confidentiality rules, but have since been made public.
3 In D.06-09-021, at 5, footnote 2, the Commission explained that “Palomar is in SDG&E’s
service territory, is similar in size and type to Otay Mesa, and is a SDG&E owned asset.
Therefore, Palomar is a comparable asset against which to evaluate Otay Mesa.”

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Call Option is slightly higher than the Net Book Value for
Palomar in 2019, but SDG&E believes the price will be
significantly less than market alternatives available at that
time.
SDG&E has chosen not to exercise the Call Option, which has since
expired. If OMEC wishes to exercise its Put Option, it must provide notice to
SDG&E by no later than April 1, 2019.
On November 13, 2018, Protect Our Communities Foundation (POC) filed
a petition for modification (PFM) of D.06-09-021. POC seeks to modify the 2006
decision to remove Commission authorization for the exercise of the Put Option
by OMEC and to remove any future option for SDG&E to purchase OMEC.
POC argues that there have been far-reaching statutory changes regarding
energy procurement since 2006, and that OMEC exercising its Put Option would
violate the mandates of Senate Bill (SB) 350 (DeLeon, 2015), SB 100
(DeLeon, 2018), and other laws that express Legislative direction toward
reduction of greenhouse gases (GHG), decreasing reliance on fossil fuel
generation, decreasing power plant pollution, and increasing investment in
renewable resources in disadvantaged Communities.
POC also attached to its PFM a protest to SDG&E’s Advice Letter 3294-E,
filed on October 26, 2018. In the advice letter, SDG&E requests Commission
approval of a resource adequacy contract between SDG&E and OMEC that
would result in OMEC agreeing not to exercise its Put Option under the OMEC
PPA.
Responses to the POC PFM were filed on December 13, 2018 by SDG&E,
the Independent Energy Producers Association (IEP), and Calpine Corporation
and OMEC (jointly). All responses opposed the PFM filed by POC.
On January 4, 2019, POC filed a reply to the responses.

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2. Compliance with Rule 16.4


Before addressing the merits of the PFM filed by POC in November 2018,
there is a question of whether the Commission should properly consider the PFM
at all. Rule 16.4 of the Commission’s Rules of Practice and Procedure.4 Rule 16.4
states, in relevant part:

(b) A petition for modification of a Commission decision must


concisely state the justification for the requested relief and
must propose specific wording to carry out all requested
modifications to the decision. Any factual allegations must
be supported with specific citations to the record in the
proceeding or to matters that may be officially noticed.
Allegations of changed facts must be supported by an
appropriate declaration or affidavit.

(d) Except as provided in this subsection, a petition for


modification must be filed and served within one year of
the effective data of the decision proposed to be modified.
If more than one year has elapsed, the petition must also
explain why the petition could not have been presented
within one year of the effective date of the decision. If the
Commission determines that the late submission has not
been justified, it may on that ground issue a summary
denial of the petition.

(e) If the petitioner was not a party to the proceeding in which


the decision proposed to be modified was issued, the
petition must state specifically how the petitioner is
affected by the decision and why the petitioner did not
participate in the proceeding earlier.

4 All subsequent references to Rules in this decision refer to the Commission’s Rules of Practice
and Procedure, unless otherwise specified.

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2.1. Changed Circumstances or Facts


Rule 16.4 requires that allegations of changed facts must be supported
with specific citations to the record in the proceeding or to matters that may be
officially noticed. In addition, allegations of changed facts must be supported by
an appropriate declaration or affidavit.

2.1.1. Positions of the Parties


In its PFM, POC points to a number of changed facts or policies to justify
its PFM. In particular, POC points to SB 350 (DeLeón, 2015) and SB 100
(DeLeón, 2018). POC argues that the Commission must comply with express
legislative direction to 1) procure and expand the use of renewable energy and
decrease use of fossil fuel generation, 2) decrease greenhouse gases, 3) decrease
power plant pollution, and 4) increase investment in renewable resources in
disadvantaged communities. POC argues these directives are embedded in
SB 350 and SB 100, and that the SDG&E contract with OMEC violates these
statutes.
POC argues that the legal and factual landscape has vastly changed
since 2006, completely undermining any reasons for SDG&E to continue to honor
its contract with OMEC. POC also argues that there have been other material
changes to SDG&E’s position, with the 2015 City of San Diego’s Climate Action
Plan that mandates that 100 percent of the city’s load be served with renewable
resources by 2035, as well as the growth of community choice aggregation
(CCA). If City of San Diego load departs from SDG&E service, POC points out
that SDG&E would lose nearly half of its load. In addition, POC argues that the
lack of load growth along with the displacement of gas-fired generation with
renewable energy and storage, could not have been anticipated in 2006.

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Further, POC argues that the OMEC PPA is in conflict with current state
mandates to increase use of renewables and phase out fossil-fueled generation.
In particular, POC points to the portions of SB 350 that relate to the 50 percent
renewables portfolio standard (RPS) requirement, and the portions of SB 100 that
require compliance with GHG reduction requirements.
Finally, POC argues that the OMEC contract violates D.18-02-018 which
requires compliance with a GHG emissions target in 2030, among other things.
SDG&E, in its response, strongly disagrees with POC’s assertion that there
are changed facts and circumstances that justify abrogating the Put Option the
Commission approved in the OMEC contract. First, as a threshold matter,
SDG&E notes that POC failed to support any of its allegations of changed facts
with supporting declarations.
Second, SDG&E argues that the Commission is prohibited from
conducting an after-the-fact reasonableness review by Public Utilities (Pub. Util.)
Code Section 454.5(d)(2), which is how they characterize POC’s proposal. Third,
SDG&E argues that the agreement with OMEC does not violate any RPS
requirements, since SDG&E is on track to meet its obligations under the RPS
program. Fourth, SDG&E points out that SB 100 requirements are for the
year 2045, which is after the expiration of OMEC’s projected useful life.
Finally, SDG&E argues that the OMEC contract does not violate any
provisions of D.18-02-018, because it is not a new facility. Thus, in sum, SDG&E
concludes that POC has failed to support its allegations of changed
circumstances.
IEP argues that nothing about the OMEC contract violates any state law or
regulatory decision of the Commission. IEP says that no statute pointed to by
POC prohibits contracting with any fossil-fueled resources. IEP argues that, in

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fact, SB 100 acknowledges the continued need for some fossil-fueled resources by
setting an RPS target at less than 100 percent. In addition, IEP argues, SB 100
implicitly recognized that natural gas generation would be needed to reliably
serve load during the transition to higher renewable energy penetration goals.
Calpine and OMEC argue that the POC PFM makes broad and vague
statements about the changes in California’s energy landscape and policy goals
that cannot serve as the basis for modifying a 12-year-old decision or eviscerating
an existing contract. They argue that given the declines in renewable and
conventional energy prices in recent years, such a precedent would put at risk
almost every prior decision in which the Commission has approved a long-term
contract.
2.1.2. Discussion
While POC is correct that California energy policy is continually evolving
toward cleaner resources, we agree with SDG&E, IEP, Calpine, and OMEC, that
this policy evolution does not specifically prohibit any aspect of the OMEC
contract approved by the Commission in D.06-09-021. POC points to nothing in
state law or Commission regulation that would be violated by the OMEC
contract.
Even if a statute does result in a change of circumstances, it is typical for
the statute to apply going forward, and not to affect a decision made in the past,
especially as far in the past as the OMEC PPA approval. But in this case, no
statute or Commission decision mandates that the OMEC PPA, or its Put Option
in particular, be abrogated.
It is also the case that in 2006, the Commission was already considering the
transition to renewable and clean energy sources, and was implementing an RPS
requirement at that time as well, though the percentage requirement was lower.

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So the clean energy policy evolution is not new, and was contemplated at the
time the OMEC PPA was approved by the Commission.
However, POC’s PFM is not deficient in providing affidavits as to the
changed facts that POC alleges, because had the contract been in violation of
state law, it would be sufficient to point to laws or decisions that have changed to
create the rationale for the PFM.
Still, we find that POC’s PFM does not sufficiently justify any changed
circumstances that would lead us to conclude that its PFM must be granted or
even considered.

2.2. Timeliness of Filing of the PFM


Rule 16.4 also requires filing of a PFM within one year of the issuance of
the Decision, or an explanation as to why the PFM could not have been filed in
that timeframe.

2.2.1. Positions of the Parties


POC states that it filed the PFM at this time because “SDG&E’s attempts to
include OMEC in its IRP [integrated resource plan] and to require ratepayers to
pay for OMEC’s post-2019 operation are in conflict with SB 350, SB 100, and
D.18-02-018 and because SDG&E has asserted the primary of the 2006 Settlement
Decision [D.06-09-021] in the GRC [general rate case] and LTPP/IRP [long term
procurement planning/integrated resource planning] proceedings and in its
Advice Letter 3294-E.”
SDG&E argues that POC failed to justify why it waited over twelve years
to file the PFM, on the eve of the deadline for OMEC to exercise the Put Option.
SDG&E points out that POC has been actively involved in challenging many of
the major electric procurement matters involving SDG&E for at least the last five
years. POC’s involvement reflects POC’s broad exposure to local and statewide

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electric procurement issues and policies, the electric procurement planning


process, and related issues. Thus, SDG&E argues that POC either knew or
should have known about the OMEC Put Option much earlier than POC
represents.
SDG&E also points out that OMEC was identified in 2013 by SDG&E in
its 2012 LTPP proceeding as an existing facility for purposes of local reliability
needs, and that POC was as party to that proceeding. SDG&E argues that the
LTPP process has been in existence since shortly after the Commission opened
this rulemaking, and POC has been actively involved in at least the last five
years.
In addition, SDG&E points out that POC is a party to SDG&E’s GRC,
which has been pending since 2017. Thus, SDG&E argues that POC could or
should have known about the OMEC Put Option.
Further, SDG&E argues that the Commission should dismiss the PFM on
the ground of laches. SDG&E cites to the Commission’s description of laches in
D.15-05-004, as follows:
Codified in 1872 among the Maxims of Jurisprudence in
California’s Civil Code, the equitable Doctrine of Laches
provides: “The law helps the vigilant, before those who sleep
on their rights.” (Civil Code § 3527.) In more modern terms,
this Commission has explained, “[l]aches is unreasonable
delay in asserting a right which renders the granting of relief
inequitable.”5
SDG&E argues that POC has “slept on its rights” by not acting before now.

5 D.15-05-004, at 22.

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Finally, SDG&E points out that some of the changed circumstances that
POC points to, particularly SB 350, have been in place since 2015. Thus, there is
no particular justification for the timing of POC’s PFM in November 2018.
For all these reasons, SDG&E argues that the Commission should
summarily deny POC’s PFM.
POC, in its reply to the responses, argues that it should not have filed its
PFM sooner, because the issues would not have been ripe, since it was unknown
which of the Put or Call Options in the OMEC PPA might be exercised. POC
also claims that it had no prior knowledge of the terms of the OMEC PPA
because the contract terms were only discussed in general terms in D.06-09-021
and SDG&E refused to provide the documentation to POC until shortly before
the PFM was filed. POC claims it became aware of the Put Option only when
preparing testimony in the exit fee power charge indifference amount
proceeding, Application 17-06-026. In addition, POC states that although the
GRC application has been pending since 2017, POC only became a party more
recently, gaining access to the crucial information about the OMEC PPA.

2.2.2. Discussion
We agree with SDG&E here that the timing of POC’s PFM is, at best,
curious, and appears to be most connected to the filing of SDG&E’s
Advice Letter 3294-E on October 26, 2018, after which this POC PFM was
quickly filed. It is clear that POC could have filed such a PFM at any time since
the contract was approved. POC has been actively engaged in
procurement-related matters for at least the past five years, as pointed out by
SDG&E. POC does not offer adequate justification for why it did not file the
PFM, for example, after the passage of SB 350, or after the issuance of

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D.18-02-018, or once SDG&E’s GRC was filed in 2017, if it felt that those actions
showed the changed circumstances that POC argues here.
Thus, we conclude that the Commission could summarily deny this PFM
according to the principle of laches. For reasons discussed further below,
however, the Commission wishes to respond to the substantive aspects of POC’s
petition at this time. Thus, we will not dismiss POC’s PFM solely on the basis of
timing, though we could.

2.3. POC’s Position as a Non-Party to the Original Proceeding


POC was not a party to this proceeding at the time of issuance of
D.06-02-031 or D.06-09-021. Rule 16.4 of the Commission’s Rules of Practice and
Procedure contemplates that non-parties may file petitions for modification, but
requires that a petitioner must “state specifically how the petitioner is affected by
the decision and why the petitioner did not participate in the proceeding earlier.”

2.3.1. Positions of the Parties


In its PFM, POC acknowledges that it was not a party to this proceeding at
the time that the decisions related to the OMEC PPA were rendered by the
Commission. POC states that it was not in existence at the time of the opening of
this rulemaking in 2001, and that the organization became a non-profit 501(c)(3)
entity in 2009. POC states that it is based in San Diego County and advocates on
behalf of Southern California utility ratepayers against fossil-fueled energy
development and in support of transition to sustainable energy systems.
In its response to the PFM, SDG&E argues that although POC was not in
existence at the time this proceeding was opened, POC’s own web site states that
“POC was founded in 2005…to fight SDG&E’s proposed Sunrise Powerlink
transmission line project. ”SDG&E therefore argues that even if it was not yet
incorporated as non-profit, POC existed and could have intervened in this

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proceeding by protesting the July 2006 Joint Petition that led to D.06-09-021.
Thus, SDG&E concludes that the Commission should summarily deny the
instant PFM, and cites to several prior decisions where this was done, such as
D.15-05-004 and D.07-11-026.
IEP opposes POC’s standing to file this PFM, and argues that if the
Commission allows POC standing in this case, it encourages any person or entity
unhappy with the Commission’s decisions to form a new organization to evade
Rule 16.4 and its requirements. IEP also argues that an application for rehearing
on the 2006 decisions would have been more appropriate than this PFM.
Calpine and OMEC argue similarly about the inappropriateness of POC
filing this PFM, particularly at this late date.

2.3.2. Discussion
Since Rule 16.4 allows for non-parties to file petitions for modification, we
will not summarily dismiss POC’s PFM on this basis alone. POC represents the
interests of a group of ratepayers in the San Diego area, and does so in numerous
proceedings before the Commission. Given this proceeding is very old and
opened before POC existed in any form, it is understandable why POC was not a
party originally.
However, given the nexus between POC’s organizational purpose and the
contract approved in 2006, as discussed above, it is unclear why POC did not
intervene at any subsequent period during the pendency of this proceeding. We
also agree with IEP that this is not an open invitation for new entities to be
formed in order to file petitions for modification many years after decisions are
rendered.
In sum, we will consider the merits of the PFM filed by POC and not
summarily dismiss it, but the Commission would have that option legally should

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it choose to exercise it. Instead, we discuss the merits of the PFM, in order to
render a decision on that basis.

3. Substantive Arguments of POC PFM


Having decided above that we will consider the merits of POC’s PFM, this
section addresses the particular issues raised therein, including whether the
original approval of the OMEC PPA violated the Commission’s rules, whether a
modification to the OMEC PPA can be considered via Advice Letter, and
whether changed laws, policy, or circumstances justify a change to the OMEC
PPA.

3.1. Approval Process for the Original PPA


In this section we discuss the process that led to the Commission approval
of the OMEC PPA in D.06-09-021, which modified D.06-03-021.

3.1.1. Positions of the Parties


POC, in its petition, argues that the process that led to the approval of the
OMEC PPA in D.06-09-021 was procedurally improper. POC characterizes the
process as a “rushed decision without regard to standard Commission practice
and process.”6 D.06-09-021 was a decision addressing a PFM of D.06-03-021.
POC argues that the PFM was granted “with no hearings, no record evidence,
and no analysis.”7 In addition, POC characterizes the 2006 PFM by SDG&E as a
“settlement agreement” and not a petition for modification, since all parties had
signed on in support of the modified terms of the original contract.

6 POC November 13, 2018 PFM, at 4.


7 Ibid.

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SDG&E’s response takes issues with all of these arguments by POC.


SDG&E believes that the Commission proceeded in the manner required by law
when it issued D.06-09-021 and that the decision was supported by findings and
substantial evidence.
SDG&E notes that POC’s assertions of alleged legal errors in a
2006 decision are not the proper subject of a petition for modification. Rather,
legal errors are to be addressed in an application for rehearing, the deadline for
which was within 30 days of the issuance of the decision and that time has long
since passed. Thus, SDG&E argues that the Commission should dismiss POC’s
PFM on this basis alone.
SDG&E also argues that the Commission’s decision in D.06-09-021 was
anchored in the record that led to the approval of D.06-02-031, which included
evidentiary hearings, as well as substantial evidence included in detailed
declarations included in the Joint Petition for modification that led to
D.06-09-021. SDG&E states that any party could have filed a protest to the
July 2006 PFM, and none did so. SDG&E argues that while no evidentiary
hearings were held on the 2006 PFM, the Commission is not obligated to hold
hearings if there are no contested material issues of fact.
In addition, SDG&E points out at D.06-09-021 itself contains abundant
language discussing the contract terms, including the Call and Put Options at
issue in this POC PFM. D.06-09-021 also discusses the need for the OMEC power
plant after the expiration of the revised PPA.
Finally, SDG&E argues the 2006 PFM was properly presented and that the
idea that it should have been presented as a settlement agreement instead is
nonsensical. SDG&E states that there is also no reason the 2006 PFM needed to
be filed as a new application. SDG&E also dismisses POC’s citation to a court

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decision in the case of the Oakley power plant, since that decision was
unpublished, making citing to it prohibited. Regardless, SDG&E states that that
decision bears no resemblance to the circumstances of this OMEC PPA.
IEP also points out that if POC had issues with the legality of the
Commission’s 2006 decision approving the contract, the proper procedure would
require a filing of an application for rehearing, or a petition for modification
within one year.
Calpine and OMEC also argue that the Commission rendered its decisions
in 2006 on the basis of a long history and well-developed evidentiary record.
Calpine and OMEC point out that there was a competitive solicitation process
that led to the approval of the PPA. The Commission held evidentiary hearings
and determined that the PPA benefits ratepayers, is reasonable, and is in the
public interest. Calpine and OMEC also emphasize that the Commission made
clear in D.06-09-021 that “pursuant to the terms of the Put Option, there would
be no additional Commission review or approval required before OMEC’s
potential exercise of the option.”8

3.1.2. Discussion
SDG&E, IEP, Calpine and OMEC are correct that the appropriate avenue
for challenging the legality of a Commission decision is through an application
for rehearing filed up to 30 days after the Commission renders its decision. We
will not, more than 12 years later, entertain arguments that the Commission’s
decision from 2006 was rendered unlawfully. Regardless, there appears to be no
basis for the allegations, since the decision was based on the record, evidentiary

8 D.06-09-021, at 5.

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hearings had been held previously, and no party challenged the legality of the
decision at the time.
Further, it is not lost on us that POC asks us to change the terms of a
contract through a petition for modification, at the same time complaining that it
was inappropriate for the Commission to entertain modifications to the contract
through a petition for modification in 2006.
Finally, how the Commission rendered its decision in 2006 is completely
irrelevant anyway. D.06-09-021 became final and unappealable many years ago,
and we will not revisit it here.

3.2. Advice Letter 3294-E


In this section, we discuss the relationship between Advice Letter (AL)
3294-E, filed by SDG&E on October 26, 2018, and the OMEC PPA approved in
D.06-09-021.

3.2.1. Positions of the Parties


POC argues in its PFM that it was inappropriate for SDG&E to file AL
3294-E, since it modifies the OMEC PPA to allow SDG&E to take delivery of
power from SDG&E for another 4 years and 11 months, while Calpine agrees not
to exercise the Put Option included in the contract approved in D.06-09-021.
Instead, POC argues that the Commission should grant its PFM and remove the
Put Option altogether. However, even in the absence of that, POC argues that a
contract modification to a contract already approved by the /Commission cannot
and should not be filed by an AL.
Calpine and OMEC argue that approval of the Advice Letter is the only
way to avoid SDG&E becoming the owner of the OMEC power plant, since
D.06-09-021 expressly stated that there was no need for further Commission
review of the Put or Call Options prior to their being exercised. Calpine and

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OMEC argue that if the Commission wishes to avoid SDG&E ownership, then
the Advice Letter should be approved, and not POC’s PFM.

3.2.2. Discussion
It is important to note that the resource adequacy contract confirmation
between SDG&E and OMEC beginning in October 2019 is a separate contract
that is not the subject of this decision in this proceeding. While the two actions
are clearly connected, since if the Commission approves the resource adequacy
contract then Calpine has agreed not to exercise its Put Option on April 1, 2019,
there are actually two separate contracts. The merits of the resource adequacy
contract are being addressed in resolutions in response to the Advice Letter.
However, it is important to note that Commission rules do not require
filings for preapproval for certain contracts of less than five years in duration, as
specified in approved bundled procurement plans. SDG&E filed the advice letter
voluntarily as part of its agreement with Calpine, in order to ensure Commission
approval.
Thus, it was not inappropriate for SDG&E to file the advice letter, though
we do note that it is a bit unusual, especially given the circumstances that this
issue is also contained within its 2017 GRC filing. Nonetheless, the
appropriateness of the resource adequacy contract itself is not our subject here.
We simply conclude that because it is a separate contract, it does not constitute a
modification of the OMEC PPA approved in D.06-09-021.

3.3. Commission, Federal Energy Regulatory Commission, and


Court Precedent on PPA Approvals
In this section, we address the circumstances under which this
Commission, the Federal Energy Regulatory Commission (FERC), and the courts
allow or do not allow for modifications to approved contracts.

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3.3.1. Positions of the Parties


In its PFM, POC argues that past Commission decisions cannot bind future
Commissions, and that the Commission has the authority and duty to modify
D.06-09-021. POC argues that the OMEC PPA would lead to unjust and
unreasonable rates, and thus must be amended. For authority to make the
requested modification to the OMEC PPA to remove the Put Option, POC points
to Pub. Util. Code § 1708, which states: “The Commission may at any time, upon
notice to the parties, and with opportunity to be heard as provided in the case of
complaints, rescind, alter, or amend any order or decision made by it.”
Since POC has also argued that the 2006 decision adopted a “settlement,”
POC also argues that settlements are not precedential by the Commission’s
settlement rules.
SDG&E argues that POC is ignoring that § 1708 must be viewed in the
broader statutory context, in particular the electric procurement statutes that the
Legislature enacted after the California energy crisis in 2000-2001. SDG&E
argues that the Commission cannot abrogate, or deny rate recovery for,
previously-approved electric procurement contracts as a matter of law. SDG&E
cites to § 454.5, which eliminates after-the-fact reasonableness reviews of an
electrical corporation’s actions in compliance with an approved procurement
plan. Thus, SDG&E contends that this limits the Commission’s authority to
amend contracts after the fact.
SDG&E points out that if the Commission were to abrogate the Put
Option, not only would there be an adverse impact on SDG&E and OMEC, but
the marketplace as a whole would receive a troubling signal, since all actors
depend on regulatory certainty for the market to function effectively. SDG&E
argues that if any party could come back and argue “changed circumstances” at

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any time, contracting parties would all have difficulty relying on contractual
agreements at all.
IEP argues that the POC claim that Calpine/OMEC and SDG&E will not
be prejudiced if the Commission alters the terms of the PPA is implausible. IEP
points out that is based on an assumption that the Put Option has no value. In
fact, according to IEP’s analysis, the Put and Call Options were negotiated as
components that make up the entire value of the PPA. IEP argues that
eliminating even one option will upset the balance of risks and rewards mutually
agreed upon by the parties. IEP argues that whether the option is exercised or
not, such an option has considerable potential value in the future, and altering
any element of that balance results in a reallocation of risks and rewards that the
parties to the PPA did not intend or agree to.
IEP also acknowledges that the Commission has the authority to modify
earlier decisions based on § 1708, but argues that the key question is not whether
the Commission can modify prior contracts, but whether it should. IEP argues
that the Commission’s and California’s energy and environmental goals require
attracting private capital to build the facilities needed. If the Commission were
to amend this contract, IEP suggests, the sanctity of contracts would be
compromised and the Commission would send a chill to the private investment
and development community about the stability of the California electricity
market at a critical time. IEP emphasizes that if the Commission were to back
away from its historic respect for the terms of approved contracts, it would create
a huge hurdle to attracting investment capital necessary to meet future energy
and GHG emissions reduction goals.

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Finally, like SDG&E, IEP points to § 454.5 that eliminates the


Commission’s ability to conduct after-the-fact reasonableness reviews on
contracts that are preapproved.
Calpine and OMEC argue that this Commission, the FERC, and the courts
throughout the country have consistently determined that the terms of the
long-term energy contracts must be preserved to ensure reliable supplies of
power. They argue that undermining the sanctity of energy contracts would
severely impair the value of existing and future contracts approved by the
Commission, lead to significant litigation, and diminish the Commission’s ability
to use long-term contracting to foster investment in the infrastructure needed to
achieve the state’s energy policy goals.
Calpine and OMEC argue that new legislation should not disturb the
contractual obligations, and that the Commission has been very cautious about
interfering with existing contracts even when a party to the contract has sought
changes based on new legislation.9 Finally, Calpine and OMEC point to the
Mobile-Sierra doctrine based on the Supreme Court decision that generally
obligates FERC to treat any freely negotiated wholesale transaction as satisfying
the requirement of the Federal Power Act that rates be just and reasonable,
unless FERC finds that the arrangement represents serious harm to the public
interest. Calpine and OMEC also note that FERC also approved the OMEC PPA.
Calpine and OMEC also represent that the OMEC facility was financed,
designed, and constructed under the 2006 PPA terms, which included the
Call and Put Options and that therefore SDG&E was very involved in the Otay
Mesa construction process. Thus, Calpine and OMEC argue that disturbing this

9 Calpine/OMEC cite to D.88-12-090 at 3, in support of this argument.

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PPA now would fundamentally alter the balance in the contract, harm the
expectations of the contractual counterparties, and “inflict millions of dollars in
damage.”10
Next, Calpine and OMEC argue that modifying the PPA as POC suggests
would violate the Contracts Clause of the U.S. and California Constitutions.
Both Constitutions provide that states shall pass no laws impairing the
obligations of private contracts. Calpine and OMEC argue that modifying the
PPA to remove the Put Option would constitute a substantial impairment of the
contractual relationship between OMEC and SDG&E.
In addition, Calpine and OMEC argue that removing the Put Option from
the contract would also violate the Takings clause of the U.S. and California
Constitutions. Takings occur when an owner is deprived of “all economically
beneficial use” of its property due to government action. Calpine and OMEC
argue that removal of the Put Option would deprive OMEC of economic use of
Otay Mesa, as well as the original buyer for whom the plant was built, while
giving OMEC little ability to find a new buyer.
POC, in its reply to the responses to its PFM, points out that the only
changes to the OMEC PPA between D.06-02-031 and D.06-09-021 were the
addition of the Put and Call Options and pricing. POC states that there is no
support for claims that removal of these options would alter the economic
balance of the contract. Thus, POC concludes that the Put Option is severable
from the rest of the contract provisions.
POC also argues that there is no legal justification to support Calpine’s
claims that removal of the Put Option would constitute a Constitutional taking

10 Calpine and OMEC December 13, 2018 response to POC PFM, at 10.

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since Calpine has already been paid for the plant’s construction and output over
the life of the contract thus far, and Calpine has further options for selling the
plant and/or its output other than just to SDG&E.

3.3.2. Discussion
The issues discussed in this section are the primary reason we have chosen
not to dismiss the POC PFM summarily, and instead to render a decision on the
substance of the petition. We wish to reaffirm the Commission’s commitment to
the primacy of contractual obligations once the Commission has approved the
contract.
We agree with SDG&E, IEP, Calpine, and OMEC, that the sanctity of
contracts is paramount and that market actors need to have faith and confidence
in this Commission’s commitment to uphold its commitment to an approved
contract, just as we expect the contractual counterparties to do the same.
The OMEC PPA has been approved by the Commission and in operation
for over 12 years. A power plant was constructed and has been operated under
it, and there is nothing in the laws or regulatory decisions passed since the
contract was approved that suggest that the PPA is contrary to Commission or
state policy or requirements.
There may be cases where extraordinary circumstances warrant a
modification to an approved contract, but we do not find that any extraordinary
circumstances are in play in this situation. Even if they were, we agree with IEP
and Calpine/OMEC that it is important to preserve, to the extent possible, the
balance that was achieved by the contractual counterparties in the original PPA.
Thus, it is relatively frequent that the Commission entertains modifications
to contracts that are brought by the counterparties, since circumstances may
change during the operation of the contract. However, consideration of such

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modifications is fundamentally different than entertaining contractual


modifications suggested by non-parties to the contract, who may be unaware of
the economic tradeoffs struck in the negotiations. Thus, the Commission has a
high bar for modifications of approved contracts to begin with, but the bar is
even higher for third parties such as POC; such modifications should only be
considered under extraordinary circumstances.
We agree with SDG&E, IEP, Calpine, and OMEC that it is important for
this Commission to affirm its commitment to the sanctity of contracts, especially
given the need for contracts to meet our long-term energy needs.

4. POC’s Request for Stay


POC included in its PFM a request for a stay of the Put Option in the
OMEC PPA while this PFM was pending before the Commission. In issuing a
stay, the Commission considers the following factors: 1) whether the moving
party will suffer serious or irreparable harm if the stay is not granted; 2) whether
the moving party is likely to prevail on the merits; 3) a balance of the harm to the
moving party (or the public interest) if the stay is not granted and the decision is
later reversed, against the harm to the other parties (or the public interest) if the
stay is granted and the decision is later affirmed; and 4) other factors relevant to
the particular case.

4.1. Positions of the Parties


POC included a request for a stay because they argue that the ratepayers
will suffer irreparable harm if SG&E is forced to take ownership of OMEC if
Calpine exercises the Put Option on April 1, 2019. POC also argues that the
resource adequacy contract filed in SDG&E’s Advice Letter 3294-E represents an
admission by SDG&E that the contract does not represent reasonable costs for
ratepayers. In addition, because the Advice Letter represents that the terms of

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the contract may be changed, POC argues that they are likely to prevail on the
merits of their PFM. Thus, time is of the essence and POC requests an immediate
stay.
SDG&E argues that POC’s request for a stay does not satisfy any of the
factors the Commission uses to evaluate such a request. SDG&E states that
POC’s waiting 12 years to file this PFM undercuts any argument of any
immediate and irreparable harm. In addition, they argue that POC is unlikely to
prevail on the merits. Further, they point out that even if the stay is granted,
OMEC will not be eliminated as a generating source, and thus the ultimate
benefits POC is seeking will not come to pass.
Calpine and OMEC argue that POC did not make any showing of why
POC would suffer any irreparable harm. Instead, they argue that Calpine and
OMEC will suffer irreparable harm. Further, they argue that POC is unlikely to
prevail on the merits and thus a stay is not warranted.

4.2. Discussion
Since we have discussed the merits of the PFM in this decision, there is no
reason for the Commission to grant a stay of the Put Option in the OMEC PPA.
POC does not prevail on the merits of their PFM. Thus, the POC request for a
stay is denied.
5. Comments on Proposed Decision
The proposed decision of Administrative Law Judge Lau in this matter
was mailed to the parties in accordance with Section 311 of the Public Utilities
Code and comments were allowed under Rule 14.3 of the Commission’s Rules of
Practice and Procedure. Comments were filed on March 7, 2019 by IEP and POC.
Reply comments were filed on March 12, 2019 by Calpine and OMEC, jointly,
SDG&E, and POC.

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IEP’s comments were completely supportive of the proposed decision, and


pointed out that at a time when the financial condition of California’s electric
utilities is uncertain and under review by the credit rating agencies, it is
particularly important for the Commission to affirm the sanctity of contracts. We
agree.
POC, on the other hand, reargued its entire petition for modification in its
comments on the proposed decision. POC represented that it did not seek to
invalidate the 2004 contract, only the additional Put/Call Options that were
negotiated and added to the contract approved in 2006. POC also argued that
leaving this contract in place would result in unjust and unreasonable rates,
because of the Put/Call Option “sweeteners” to the original contract and because
Otay Mesa will likely become a stranded asset in the near future. These
arguments are already addressed; we do not make modifications to this decision
based on them.
In addition, POC’s comments argued that the proposed decision errs by
suggesting that only parties to contracts should be allowed to seek modification
of them. However, the decision merely states that there is a “high bar” for
ordering modifications of a contract already reviewed and approved by the
Commission, not that parties are not permitted to suggest them. Finally, POC
argued that the Commission cannot find a need for the power output from Otay
Mesa, since the need determination is based on the CAISO LCR study from
May 1, 2018. However, the need determination for the Otay Mesa contract that is
relevant is the one made in 2006. The Commission does not need to make a need
determination in considering whether to grant a petition for modification of an
existing approved contract.

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SDG&E’s reply comments argued that POC’s comments on the proposed


decision were legally flawed and did not meet the requirements for comments on
proposed decisions laid out in the Commission’s Rules of Practice and Procedure
(Rules).
SDG&E further argued that POC misrepresented the proposed decision’s
conclusions, particularly on the point about which parties may amend a contract.
SDG&E is correct that we do not find that non-parties to contracts, including the
Commission, may never seek amendments to contracts, but rather that
amendments should only be taken in extraordinary circumstances, which do not
exist here.
SDG&E further argued that no party has perfect knowledge of the future,
and that approved, long-term contracts are forward-looking and bind all parties,
by their very nature. Facts may always change, according to SDG&E, but that
alone does not warrant undermining contract stability.
Calpine and OMEC’s comments requested that the Commission approve
the proposed decision as written. They also pointed out that POC’s comments
did not comply with Rule 14.3 of the Commission’s Rules.
Further, Calpine and OMEC argued that the policy evolution since the
original contract approval does not justify modifying a 12-year-old contract.
They also argued that POC’s characterization of the Put/Call options as
“sweeteners” is completely inaccurate, since the original approval was
conducted appropriately and lawfully.
Finally, Calpine and OMEC argued that, contrary to POC’s assertions,
removing the Put/Call Options in the contract would constitute a modification to
an approved contract, and would undermine the contract stability necessary to

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achieve the exact policy objectives that POC’s petition purportedly represents.
We tend to agree.
In sum, the only modifications we make to this proposed decision are to
improve its clarity.
6. Assignment of Proceeding
Liane M. Randolph is the assigned Commissioner and Julie A. Fitch is the
assigned Administrative Law Judge in this proceeding.
Findings of Fact
1. D.06-09-021 approved a ten-year power purchase agreement between
SDG&E and OMEC, which included both a Put and a Call Option in the contract
that would result in SDG&E becoming the owner of the OMEC power plant.
Both Options were discussed at length in D.06-09-021.
2. The OMEC PPA Call Option has expired.
3. The OMEC PPA Put Option expires on April 1, 2019 if Calpine does not
exercise the option before then.
4. SDG&E has submitted via Advice Letter 3294-E a request for Commission
preapproval of a resource adequacy contract that would begin after the
expiration of the OMEC PPA approved in D.06-09-021. Calpine and SDG&E
have agreed that if the Commission approves the resource adequacy contract in
response to the Advice Letter, Calpine will not exercise the Put Option in the
current OMEC PPA.
5. Rule 16.4 of the Commission’s Rules of Practice and Procedure governs the
filing of petitions for modification, and requires that parties identify changed
facts or circumstances; explain why a petition was not filed within one year of
the effective date of the decision, with justification; and explain why, if the
petitioner was not a party to the decision proposed to be modified, how the

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petitioner is affected by the decision and why the petitioner did not participate in
the proceeding earlier.
6. POC was not a party to the original proceeding that led to the adoption of
D.06-09-021.
7. SDG&E filed its GRC in 2017 and included in it the cost in the event of
Calpine exercising its Put Option.
8. POC requested a stay of the Put Option included in the OMEC PPA
approved in D.06-09-021, as part of its PFM.
9. The Commission has the authority, under Public Utilities Code 1708, to
modify prior decisions, should it choose to do so.

Conclusions of Law
1. The OMEC PPA approved in D.09-06-021 does not violate any state law or
Commission decision, including, but not limited to, SB 350 (DeLeón, 2015),
SB 100 (DeLeón, 2018), and D.18-02-018.
2. The Commission has been considering the transition to renewable energy
sources since before 2006.
3. POC’s PFM does not sufficiently justify any changed circumstances that
require it to be granted.
4. POC’s PFM is not timely and it fails to justify why the Commission should
consider such a late filing.
5. The Commission could summarily dismiss the POC PFM as untimely
under the principle of laches.
6. The Commission could summarily dismiss the POC PFM for not justifying
sufficient changed circumstances.
7. Rule 16.4 allows for PFMs to be filed by parties who were not parties in the
original underlying proceeding that led to the decision requested to be modified.

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8. The legality of the adoption of D.06-09-021 is not at issue in this decision.


The time for legal challenges to that decision passed 30 days after it was issued.
No applications for rehearing were filed.
9. The request in AL 3294-E is not being adjudicated in this proceeding.
10. The Commission may reconsider prior decisions, with authority granted
under Section 1708 of the Public Utilities. However, there is longstanding
Commission precedent affirming the sanctity of contracts, once approved.
11. The Commission should consider modifications to contracts from
non-parties to the contracts only under extraordinary circumstances. The
circumstances described by POC in this PFM do not meet this standard.
12. It is important for the Commission to preserve, to the extent possible and
absent extraordinary circumstances, the balance of interests between parties to
contracts that have been approved by the Commission.
13. POC’s request for a stay does not support that POC would suffer
irreparable harm or that POC is likely to prevail on the merits of its PFM;
therefore, the request for a stay should be denied.

O R D E R
IT IS ORDERED that:
1. The petition for modification of Decision 06-09-021 filed on
November 13, 2018 by Protect Our Communities Foundation is denied.
2. The request for a stay of the Put Option in the contract approved in
Decision 06-09-021 is denied.

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3. Rulemaking 01-10-024 is closed.


This order is effective today.
Dated March 28, 2019, at San Francisco, California.

MICHAEL PICKER
President
LIANE M. RANDOLPH
MARTHA GUZMAN ACEVES
CLIFFORD RECHTSCHAFFEN
GENEVIEVE SHIROMA
Commissioners

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Related Interests