SDG&E provides electric power to approximately 1.15 million customers within its service territory. Its service territory encompasses all of San Diego County and a narrow strip along the southern portion of Orange County. Electric power needed to meet the demands of SDG&E’s service territory is either (a) imported through SDG&E’s two transmission power links (i.e., the Southwest Power Link, which transports power from Arizona and the southwest, and the South-of-SONGS Path, which transports power from the San Onofre Nuclear Generating Station [SONGS]), or (b) generated at SDG&E’s Encina and South Bay Power Plants. Additional electric power is obtained from SDG&E’s 19 combustion turbines (CTs) located at nine sites throughout San Diego County.(1)

The ability of SDG&E to import power is limited by the transmission capacities of its power links. The transmitting capacities of the 500-kilovolt (kV) Southwest Power Link and the five 230 kV lines that form the South-of-SONGS Path (the interconnection to Southern California Edison Company [Edison] at San Onofre) are roughly 970 megawatts (MW) and 1,800 MW, respectively. The South-of-SONGS Path is capable of transmitting up to 1,900 MW if the Southwest Power Link is out of service. Of the power that can be imported into SDG&E’s system from the South-of-SONGS Path, a maximum of roughly 430 MW comes from SDG&E’s 20 percent ownership interest in SONGS. Due to additional importing constraints, the maximum electric power that SDG&E can import is roughly 2,450 MW at a given time.

The Encina and South Bay Power Plants, including their CTs, have generating capacities of 965 MW and 706 MW, respectively. The 17 additional CTs located at seven other sites can provide an additional 253 MW of generating capacity. In addition to SDG&E’s power generating assets, qualifying facilities (QFs) on SDG&E’s system add an additional 174 MW of power.(2)

Generally speaking, SDG&E’s electric power resources are very limited, but have been adequate to meet the need for system reliability and to satisfy customer demand. The extent to which the energy demands of SDG&E’s service area are met through imported electric power or by generation is a function of economics and system reliability. Historically, if electricity can be imported at a lower cost, SDG&E tends to import more power, while otherwise it tends to generate more power.

On December 20, 1995, the California Public Utilities Commission (CPUC) issued a policy decision providing for the restructuring of the California electric industry. In this decision, the CPUC requested that Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (Edison), the state’s two largest utilities, voluntarily divest at least 50 percent of their fossil-fueled generating assets to address concerns over their possible market power in the restructured electricity market. In September 1996, California’s electric industry restructuring legislation, Assembly Bill 1890 (AB 1890), was signed into law. AB 1890 endorsed a competitive generation industry separate from utility power transmission and distribution operations. (See Attachment B, Regulatory Background, for a discussion of electric industry restructuring.) Both AB 1890 and several CPUC decisions have required that generation assets be valued for the purpose of calculating the competitive transition charges, or CTCs, associated with the assets.(3) Sale is one method of measuring the market value of generation assets.

In its efforts to further competition, the CPUC did not specifically request that SDG&E divest ownership of 50 percent of its fossil-fueled generating capacity, as it did with PG&E and Edison. Instead, SDG&E initially voluntarily proposed to divest its assets in furtherance of its business objectives and to advance the CPUC’s efforts to foster competition in the electric industry. Specifically, SDG&E’s Application No. 97-12-039 seeks approval from the CPUC to "sell its generating assets in furtherance of its business objectives including, without limitation, implementing innovative strategies to achieve the best possible competitive positioning to maximize its opportunities in the new energy marketplace." According to SDG&E’s Proponent’s Environmental Assessment (PEA), the proposed sales would result in a more competitive market and lower energy prices for consumers.

As described in Section 1, Introduction, a series of events (namely the merger of Enova Corporation, the parent company of SDG&E, and Pacific Enterprises into Sempra Energy) since the divestiture application was originally filed have resulted in the CPUC ordering the sale of SDG&E’s natural gas-fired generation assets. The order (D.98-03-073) specifies that "on or before December 31, 1999, SDG&E shall sell its gas-fired generation facilities to nonaffiliates of the merged company." This order therefore applies to the Encina and South Bay Power Plants and 15 of the 17 remaining CTs being divested. Two of the CTs (the CT at the Division Substation and one of the CTs at the North Island Naval Air Station) are fueled by diesel only and are not directly addressed by this order, but are proposed to be sold.

On December 19, 1997, SDG&E filed an application (Application No. 97-12-039) with the CPUC to sell (divest) its electric generation facilities, a refueling facility, and long-term power supply contracts through a competitive auction process. Specifically, SDG&E proposes to sell its two fossil-fueled power plants (the Encina and South Bay Power Plants), 17 additional CTs, the 24th Street Terminal Refueling Facility, its 20 percent interest in SONGS, and 11 long-term power supply contracts. The power plants, the CTs, and the 24th Street Terminal Refueling Facility are tangible assets wholly owned by SDG&E, operated by and within the discretionary control of SDG&E. SDG&E’s ownership interest in SONGS and the long-term power supply contracts are intangible assets in that the discretionary operational control of these generating assets does not reside with SDG&E and in that SDG&E holds no ownership interest in the QFs or out-of-state utilities that produce electricity under the power supply contracts and only a passive ownership interest in SONGS. The locations of SDG&E’s tangible and intangible assets being divested are shown in Figures 2.1and 2.2 respectively. By selling these assets, SDG&E would divest itself of approximately 2,736 MW of its combined generating capacity and firm capacity guaranteed from its ownership interest in SONGS and long-term power supply contracts. The CPUC has discretionary approval authority over the general terms of the Asset Sale Agreement, the Operation and Maintenance (O&M) Agreement, and the Bidding Contract of each proposed sale.

The Independent System Operator (ISO), the entity responsible for the operation and control of the statewide transmission system, has designated SDG&E’s Encina and South Bay Power Plants and all 17 additional CTs as "must-run" generating facilities needed to ensure local load reliability and to maintain the rating of regional transmission facilities.(4) The new owner would be assigned SDG&E’s "must-run" contracts with the ISO to ensure the availability of these generating facilities.

As described in its application, SDG&E proposes to sells its tangible assets in the following three packages:

• Encina Power Plant (includes one CT)
• South Bay Power Plant (includes one CT) and the 24th Street Terminal Refueling Facility
• Remaining 17 CTs at seven locations

One or more buyers may purchase these tangible asset packages. No other bundling of assets is proposed. One or more buyers may also purchase SDG&E’s intangible assets (SONGS ownership interest and 11 long-term power supply contracts).

Subsequent to the filing of Application No. 97-12-039, SDG&E and the San Diego Unified Port District (Port District) announced an agreement whereby SDG&E would transfer ownership of the South Bay Power Plant, the 24th Street Terminal Refueling Facility and other SDG&E lands to the Port District through a negotiated sale and donation rather than selling those facilities through an auction process. The assets that would be transferred to the Port District under the negotiated agreement by SDG&E include:

• the personal property, improvements, equipment and fixtures at the South Bay Power Plant, including the plant and all related operating equipment;

• the South Bay Power Plant site, including the land upon which the switchyard is located, consisting of approximately 116 acres;

• the 24th Street Terminal Refueling Facility;

• the former liquefied natural gas (LNG) site adjacent to the southern boundary of the South Bay Power Plant site, consisting of approximately 33 acres; and

• additional land owned by SDG&E (and used by SDG&E for transmission purposes), which is located immediately to the north of the South Bay Power Plant between J and F Streets, consisting of approximately 16 acres.

These latter two properties, totaling approximately 49 acres, were not proposed by SDG&E to be sold through the auction process. Pursuant to the agreement between SDG&E and the Port District, SDG&E will refrain in the near term from offering the South Bay plant for sale by auction. If the details of the negotiated sale are not finalized by November 30, 1998, 60 days after the signing of the agreement, then the agreement between SDG&E and the Port District will terminate and SDG&E would recommence the auction of the South Bay Power Plant as originally proposed in its divestiture application. Regardless of the manner in which the sale of the South Bay Power Plant is conducted (i.e., auction or negotiation) or the identity of the purchaser, the transfer of ownership would be subject to approval by the CPUC. In order fully to account for and evaluate the impacts of the transfer of the South Bay assets, this Initial Study addresses as the project both the potential negotiated sale to the Port District and the potential sale through an auction process to an unidentified party, which would involve identical physical facilities but less real property.

Regardless of the mechanism of sale, as to both the Encina and South Bay Power Plants, SDG&E would retain ownership of certain facilities and equipment located on the land, such as the switchyards, interconnection facilities, grid-related switching equipment, communication equipment and facilities, and proprietary computer software and hardware, that relate to electricity transmission and distribution. In addition, SDG&E would reserve to itself easements over such lands to enable SDG&E to access, operate, maintain and upgrade such facilities and equipment, and to perform its environmental remediation obligations. SDG&E also proposes to retain the land owned by SDG&E associated with the CTs, except those associated with the Encina and South Bay Power Plants. The four CTs located at North Island, the Naval Station, and the Naval Training Center are located on land owned by the United States Navy. SDG&E’s access rights to the Navy property are provided through a service agreement between SDG&E and the Navy. The current agreement was extended at the end of September 1998 for 30 months. Access rights to the Navy property held by SDG&E would be transferred to the selected buyer. The remaining CTs are located on SDG&E property that must be retained for transmission, distribution and other purposes. SDG&E would provide the buyer with long-term leases and related easements to these properties.

Where applicable, SDG&E is proposing a two-step process for its auctions, similar to the processes approved by the CPUC for recent divestiture applications from Edison (Application No. 96-11-046) and PG&E (Application Nos. 96-11-020 and 98-01-008). In the first step, SDG&E requests the CPUC to issue an interim decision approving SDG&E’s proposed auction process, proposed contracts, and proposed ratemaking. In the second part of the process, SDG&E would conduct the proposed auctions. If SDG&E were to receive satisfactory bids for some or all of its generating assets being divested, it would then negotiate final contracts with the winning bidder(s) and submit the final contracts to the CPUC for approval.

Specifically, SDG&E’s Application No. 97-12-039 seeks the following from the CPUC:

1. A determination that SDG&E’s fossil-fueled power plants, CTs, SONGS ownership interest, and long-term power supply contracts are no longer necessary or useful in the performance of SDG&E’s duties to the public, or alternatively, that SDG&E’s proposed divestiture of these assets is in the public interest;

2. A determination that SDG&E’s proposed divestitures are reasonable and would not impair the reliability of the electric supply;

3. Approval of SDG&E’s proposed auction process;

4. A determination that SDG&E’s proposed auction process would establish the fair market value of the auctioned assets;

5. A determination that SDG&E need not entertain post-auction overbids;

6. Approval of SDG&E’s proposed ratemaking for the sales;

7. Approval of SDG&E’s proposed auction-related contracts, including sales agreements and O&M contracts;

8. Authorization to obtain recovery of its estimated future generation-related environmental clean-up costs in a subsequent application.

9. A determination that: (1) SDG&E’s proposed generation divestitures are not subject to CEQA because they do not constitute a "project" within the meaning of CEQA; (2) that CEQA does not apply to SDG&E’s divestitures because they fall within a categorical exemption to CEQA; or, alternatively (3) that a Negative Declaration under CEQA is appropriate because SDG&E’s divestitures will not cause one or more significant effects on the environment.

The general characteristics of each plant to be sold are presented in Table 2.1 and are described below.

The Encina Power Plant, SDG&E’s largest fossil-fueled power plant, is located on a 671-acre site at 4600 Carlsbad Boulevard in the City of Carlsbad. The area in the vicinity of the plant is highly developed, consisting principally of residential areas and associated shopping centers. Figure 2.3 shows the location of the Encina Power Plant. The portion of the site targeted for sale, consisting of approximately 386 acres, includes all of SDG&E’s lands used for generation purposes, and substantially all of the three Agua Hedionda lagoons. SDG&E would retain approximately 291 acres of the site. Figure 2.4 delineates the approximate boundaries of the property either being sold or retained. Surrounding land uses include residential uses to the north; residential, commercial, and industrial uses to the south; open space to the east; and the Pacific Ocean to the west. Popular recreational and fishing areas are in the immediate vicinity of the plant.

The Encina Power Plant consists of five steam turbines, five boilers, one CT, and associated facilities (e.g., a switchyard where the plant interconnects with the transmission grid, an administration building, and fuel oil storage tanks). SDG&E owns all of the generating equipment at the plant, except Unit 5, which is currently owned by PSEG Resources, Inc. (PSEG recently purchased the unit from Bank of America.) PSEG currently leases the unit back to SDG&E for operation and has agreed to continue that lease-back arrangement with the new owner after divestiture. Figure 2.5 shows the layout of these facilities on the plant site. All of the steam turbine units use natural gas as their primary fuel, but are capable of burning residual fuel oil (i.e., No. 6 fuel oil) when natural gas is unavailable or uneconomic. Residual fuel oil use in the steam turbines is partially controlled by annual emission limits established by the San Diego Air Pollution Control District (SDAPCD). (See Section 4.5, Air Quality, for a discussion of applicable air quality regulations and emission limits.) Combined, the five steam turbines have a generating capacity of roughly 951 MW and are capable of providing about 30 to 40 percent of San Diego County’s total energy requirements. The CT has a generating capacity of roughly 14 MW of electricity. The CT is used to facilitate the start-up of the steam turbine units in the case of a system blackout ("black start" capability) and for peaking purposes. The CT uses natural gas as its primary fuel, but is capable of burning diesel fuel. The total generating capacity of the plant is 965 MW. The general characteristics of the Encina Power Plant units are described in Table 2.1 .

The Encina Power Plant also includes a residual fuel oil and petroleum storage facility. The fuel storage area consists of 11 above-ground storage tanks. Seven of the tanks contain back-up residual fuel oil. Of the remaining tanks, one contains displacement oil, while the other three contain diesel fuel for operating the CT. Combined, the 11 tanks have a total storage capacity of 71.6 million gallons. All of these tanks are included in the sale. An offshore marine terminal, consisting of seven buoys and a pipeline to the tank storage area, was developed to receive bulk residual fuel oil and displacement oil via barge or ship at the site. The marine terminal is included in the sale of the plant. Diesel fuel for the CTs is brought to the site via trucks. The residual fuel oil and petroleum storage facility is included in the area being divested. Natural gas is delivered to the site via SDG&E’s natural gas transmission and distribution system.

Other facilities in the area being sold include a guard station, an administration building, a machine shop, various water tanks, a multi-use structure, a shop/office building, and parking facilities. SDG&E would retain the switchyard property, facilities and equipment and would reserve an easement to access, maintain and operate such facilities and equipment and other areas used for transmission and distribution purposes.

SDG&E proposes to reparcelize the lands on which the Encina Power Plant is located in order to separate the power generation assets from the power transmission and distribution assets. This action would involve a modification of lot lines through a lot line adjustment process. The lot line adjustment process would relocate existing property lines, but would not create new lots. SDG&E has stated that the lot line adjustments would conform to all jurisdictional zoning requirements, including development standards for street frontage, minimum lot area, and width.

The South Bay Power Plant is located on a 116-acre site located at 990 Bay Boulevard in the City of Chula Vista. In addition to the South Bay Power Plant site, SDG&E owns a roughly 33-acre site just south of the power plant that includes a now-decommissioned liquid natural gas (LNG) storage facility and a 16-acre transmission corridor that runs north of the power plant and adjacent to a railroad right-of-way. If the plant is sold to the Port District, SDG&E would sell all the physical facilities on the power plant site to the Port District and would donate all of the land from the power plant site, the former LNG site and the transmission corridor to the Port District (a total of approximately 165 acres of land). Figure 2.6 shows the location of the South Bay Power Plant, as well as other SDG&E property that would be donated to the Port District if the plant is purchased by the Port District. Figure 2.7 delineates the approximate boundaries of the property that would be donated to the Port District if the plant is purchased by the Port District. Figure 2.7 also shows the approximate boundaries of the property that would be sold or retained should the agreement between SDG&E and the Port District be terminated and the auction of the South Bay Power Plant be recommenced. The site is zoned industrial and is within the area of Chula Vista’s Bayfront Redevelopment Project. Surrounding land uses include industrial and recreational uses to the north; industrial uses to the south; commercial and industrial uses to the east; and San Diego Bay to the west.

The South Bay Power Plant consists of four steam turbines, four boilers, one CT, and associated facilities (e.g., a switchyard, a control building, and fuel oil storage tanks). Figure 2.8 shows the layout of these facilities on the plant site. All of the steam turbine units use natural gas as their primary fuel, but are capable of burning residual fuel oil when natural gas is unavailable or uneconomic. Residual fuel oil use in the steam turbines is partially controlled by annual emission limits established by the SDAPCD. (See Section 4.5, Air Quality, for a discussion of applicable air quality regulations and emission limits.) Combined, the four steam turbines have a generating capacity of roughly 693 MW and are capable of providing about 20 to 30 percent of San Diego County’s total energy requirements. The CT has a generating capacity of roughly 13 MW. The CT is used to facilitate the start-up of the steam turbine units in the case of a system blackout (black start capability) and for peaking purposes. The CT uses JP-5 jet fuel as its primary fuel, and uses natural gas only as a startup assist fuel. The total generating capacity of the plant is 706 MW. The general characteristics of the South Bay Power Plant units are described in Table 2.1 .

The South Bay Power Plant also includes a residual fuel oil and petroleum storage facility. The fuel storage area consists of nine above-ground storage tanks. Seven of the tanks contain residual fuel oil. The two remaining tanks contain displacement oil and JP-5 jet fuel. Combined, the nine tanks have a total storage capacity of 75.2 million gallons. All of these tanks are included in the sale. JP-5 jet fuel is brought to the site via trucks. Residual fuel oil is brought to the site via an eight-inch pipeline that connects the plant’s residual fuel oil storage facility to SDG&E’s 24th Street Terminal Refueling Facility in National City; the pipeline connecting the two facilities is roughly five miles long. (See discussion below under 24th Street Terminal Refueling Facility for a detailed description of the facility.) Displacement oil may also be delivered to the site from the 24th Street Terminal Refueling Facility or by truck. The 24th Street Terminal Refueling Facility and the pipeline connection to the 24th Street Terminal Refueling Facility are being sold in conjunction with the South Bay Power Plant. Natural gas is delivered to the site via SDG&E’s natural gas transmission and distribution system.

Other facilities included in the area being sold include a guard station, an administration building, various engineering buildings and trailers, water tanks, and parking facilities.

The 24th Street Terminal Refueling Facility is a receiving station for marine shipments of residual fuel oil destined for the South Bay Power Plant. Ships off-load fuel oil at the Port District’s marine terminal that is then transferred to the 24th Street Terminal Refueling Facility for storage. The refueling facility is located on West 24th Street in National City, along the eastern shore of South San Diego Bay, and is on land leased to SDG&E. SDG&E’s lease with the Port District has expired and is being extended on a month-to-month basis. SDG&E does not have the authority to assign the lease with the Port District to a new owner of the facility should the auction process be recommenced, but the Port District could enter into a new lease agreement with the purchaser.

The site is bound by West 24th Street, Quay Avenue, West 28th Street, and Terminal Avenue. Figures 2.9 and 2.10 show the location and an aerial view of the 24th Street Terminal Refueling Facility, respectively. Residual oil is pumped to the South Bay Power Plant via an eight-inch pipeline, approximately five miles in length. The 24th Street Terminal Refueling Facility has three fuel storage tanks with storage capacity of up to 12.4 million gallons of residual oil and 1.4 million gallons of displacement oil. Combined, the three tanks have a total storage capacity of roughly 13.9 million gallons. The displacement oil stored at the refueling facility is used to fill the pipeline between residual fuel oil shipments to the power plant. This procedure is required because residual fuel oil, which must be heated to flow, will solidify and clog pipelines at ambient temperatures. The 24th Street Terminal Refueling Facility is being sold in the same package as the South Bay Power Plant.

SDG&E owns and operates 17 CTs (in addition to the CTs located at the Encina and South Power Plants), which have historically been operated only during times of peak energy demand, usually only during summer periods. The 17 CTs (and associated facilities) proposed for divestiture are located throughout the southwestern portion of SDG&E’s service territory. Combined, the 17 CTs provide approximately 253 MW of total generating capacity. Each of these units has historically been operated less than 100 hours per year. However, following the commencement of the restructured electricity market in March 1998, the dispatch requirements from the ISO have required that the CTs run at significantly higher levels. The 17 CTs are being sold as a single package.

The general characteristics of each of the CTs are presented in Table 2.2 and described below. Natural gas is the primary fuel used in most of SDG&E’s CTs. The Division Substation CT and one of the North Island Naval Air Station CTs burn only diesel. Natural gas used in the CTs is delivered to the sites via SDG&E’s natural gas transmission and distribution system.

There is one 13 MW CT at SDG&E’s Division Substation located at 3200 Harbor Drive in the City of San Diego. The unit was installed in 1966. Specific components being divested by SDG&E include the CT, a control cab for the CT, a 20,000-gallon water tank (used for oxides of nitrogen [NOx] emission reduction), a water unloading area and water injection skid, compressed air (used for black starts of the CT), and a maintenance shed. Diesel fuel for the operation of the CT is delivered to the site via a pipeline that connects to the diesel storage tank at the nearby Naval Station CT site in the City of San Diego. Since the CT sites are being sold as a package, the new owner would have access and rights to the pipeline connecting the two sites. Figures 2.11 and 2.12 show the location and an aerial view of the Division Substation CT, respectively. The site is bordered by a Navy parking lot to the northwest and southwest, an SDG&E switchyard to the southeast, and Harbor Drive to the northeast. A chain-link fence surrounds the site.

Implementation of the proposed divestiture application entails discretionary decision-making by the CPUC. The CPUC is responsible for considering and making the determination as to what level of environmental review is required under the California Environmental Quality Act (CEQA). Furthermore, the CPUC is the lead agency under CEQA and is responsible for preparing this Initial Study, as defined in Section 15365 of the CEQA Guidelines, to determine if the proposed divestiture of SDG&E’s fossil-fueled generating assets, refueling facility, ownership interest in SONGS, and the power supply contracts may have a significant effect on the environment. This Initial Study provides the CPUC with adequate information to determine whether an Environmental Impact Report (EIR) or a Negative Declaration should be prepared.

The CPUC Energy Division staff has recommended to the CPUC Commissioners that a Notice of Exemption under CEQA be prepared and filed with respect to the proposed sale by SDG&E of its intangible assets (i.e., SDG&E’s ownership interest in SONGS and the long-term power supply contracts, discussed above). The three independent bases for such exemption from CEQA are as follows:

1. Approval by the CPUC of SDG&E’s sale of the intangible assets would not be a "project" under CEQA because the transfer of such assets has no potential for resulting in a physical change (CEQA Guidelines Sections 15061[b][1] and 15378). The sale of the power contracts and the interest in SONGS would not change the underlying operations of the electricity generating facilities involved, since such operations would not be controlled by the new owner, and thus the transfer of the intangible assets would not produce any physical changes.

2. The sale of SDG&E’s intangible assets would merely result in the continued operation of existing electricity generating facilities, involving negligible or no expansion of use of such facilities (CEQA Guidelines Section 15301).

3. There is no possibility that the transfer of the intangible assets may have a significant effect on the environment (CEQA Guidelines Section 15061[b][3]). Again, the sale of the power contracts and the interest in SONGS would not change the underlying operations of the electricity generating facilities involved since they would not be controlled by the new owner. Thus, the transfer of the intangible assets could not result in significant environmental impacts.