PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

ENERGY DIVISION				                 RESOLUTION E-3645
 NOVEMBER 4, 1999

RESOLUTION

Resolution E-3645.  Southern California Edison Company Requests Authorization and Determination of Reasonableness for Restructuring of a Qualifying Facility Contract with Delano Energy Company, Inc.  Approved.

By SCE Advice Letter 1390-E Filed July 7, 1999

SUMMARY

In Advice Letter 1390-E, Southern California Edison Company (SCE) proposes for Commission approval a Contract Termination Agreement (Agreement) between SCE and Delano Energy Company, Inc. (Delano).  The Agreement provides for:
o	termination of the Amended and Restated Power Purchase Contract (Contract) on December 31, 1999, instead of September 3, 2020 as specified in the Contract; and
o	supplemental monthly termination payments to Delano in return for early termination.

The advice letter claims, and accompanying documentation demonstrates, that the contract restructuring results in positive ratepayer savings under all reasonable scenarios.

Prior to this filing, and as required by D.98-12-066, SCE submitted this advice letter to the Office of Ratepayer Advocates (ORA) for review.  ORA requested certain modifications, which were agreed to by SCE and ORA, and are incorporated into the proposed Agreement:

Specifically, SCE requests a resolution:
o	approving as reasonable the Agreement;
o	authorizing recovery of all payments that SCE has made and will make to Delano under the Agreement through SCE’s Annual Transition Cost Proceeding or any other mechanism authorized by the Commission, subject only to SCE’s prudent administration of the Agreement;  

o	finding that the Agreement provides $40 million of expected ratepayer savings, and that SCE is entitled to a shareholder incentive of $2.4 million.     

No protests were filed in response to this advice letter.  

The advice letter is approved without modifications. 

BACKGROUND

Contract and Project Overview

On May 14, 1984, SCE entered into a 30 year Interim Standard Offer No. 4 (ISO4) based power purchase contract (Original Contract) with Valley Power Corporation and Valley Power Energy Trust (together, known as Valley Power).  On February 6, 1987, Valley sold an interest in the project to Signal Energy Systems, Inc. (Signal Energy), which later acquired all of Valley Power’s interest in the project and formed Signal Delano Energy Company (Signal Delano).  On May 14, 1987, Valley Power Assigned the Contract to Signal Delano.  On July 31, 1987, SCE and Signal Delano entered into an Amended and Restated Power Purchase Contract, which split the project into two phases, provided for dispatch, and modified the energy and capacity payment provisions.  On November 2, 1987, Signal Delano changed its name to Wheelabrator Delano Energy Company (Wheelabrator).  In July 1988, Wheelabrator was sold to the Energy Systems Division of Thermo Electron.  In connection with this sale, Wheelabrator changed its name to Delano Energy Company, Inc. on July 8, 1988.  

At the time that the Original Contract was executed, Valley Power selected energy payment Option 1 for the first ten years of the 30-year term (First Period).  Under this option, the First Period energy price is based on 100 percent of the Commission-approved Forecast of Marginal Cost of Energy.  Energy Payments for the remaining 20 years (Second Period) were to be made at a price equal to SCE’s posted short-run avoided cost of energy, including an Energy Loss Adjustment Factor (ELAF) multiplier.  Capacity payments were to be made according to Option B – Firm Capacity.

As noted above, the Contract superseded the Original Contract on July 31, 1987.  It retained the basic energy and capacity payments provisions, with modifications associated with the addition of prescribed dispatch and with splitting the project into two phases (associated with the project’s two units, nominally rated at 28.5 MW and 22.5 MW).  Subsequent to the placement into operation of both units, the

 capacity price has been $179/kW-year.  This payment is subject to the firm capacity performance requirements defined in the Contract.  Delano is also eligible for bonus payments if the project exceeds certain performance thresholds.

Between September 1, 1995 and July 29, 1997, Delano participated in SCE’s Negotiated Curtailment Program.  On five occasions during that period, Delano agreed to short-term curtailments in exchange for a negotiated payment from SCE.

The project is located in SCE service territory in the San Joaquin Valley, five miles south of Delano, CA, and approximately 25 miles north of Bakersfield.  The generating facility is a biomass-fired steam-electric power plant constructed in two phases.  Each unit consists of a bubbling fluidized bed boiler and an axial flow tandem-compound turbine generator.  Currently, urban wood waste and local agricultural waste (orchard prunings and trees removed for replacement) are the major sources of fuel.

The generating facility has been in full compliance with all permit requirements throughout its operating history.  No modifications are expected to be necessary to meet the more stringent requirements of the 1990 amendments to the Federal Clean Air Act. 

Historical and Projected Performance 

Phase 1 of the project began to operate in parallel with the SCE transmission system on June 29, 1990, and began firm operation on September 4, 1990.  Phase 2 began firm operation on July 20, 1993.  Absent the Agreement, the Contract’s First Period will end on September 3, 2000, and the Second Period will extend from September from September 4, 2000 until September 3, 2020.

The capacity factor has averaged above 74% every year since 1991 and, when adjusted for the effect of the Negotiated Curtailment Program, above 83% since 1996.

As part of the restructuring Agreement negotiation process, SCE considered the economic and technical viability of the project in order to determine the likelihood that the project would continue to operate throughout its remaining Contract term at historical levels.  This included an analysis of the generating facility as well as other considerations such as the availability of sufficient fuel at reasonable prices.  To verify its own analyses SCE retained the services of Rigo & Rigo Associates, Inc. (Rigo & Rigo), an independent engineering consultant with expertise in waste-fueled energy systems.  Based on a site visit and other research, Rigo & Rigo prepared a report concluding that the project will remain technically and economically viable until the end of the original Contract term (i.e., the year 2020).  This report was made available to the ORA as well as Energy Division as part of the advice letter filing.

Negotiations for Contract Restructuring

In early 1997, SCE contacted Delano about a possible buyout of the remaining term of SCE’s power purchase obligations under the Contract.  In September 1997, SCE presented Delano with a formal buyout proposal, but no agreement was reached.  During 1998, another entity, Citizens Power LLC (Citizens), was involved in Contract restructuring negotiations, but these were unproductive, and beginning in January of 1999, Citizens ceased to be involved in discussions.  Finally, during April and May of 1999, SCE and Delano negotiated and finalized the terms of the buyout.

SCE and Delano signed the Execution Agreement on May 21, 1999.

Summary of the Restructuring

The main points of the Agreement are as follows:
o	the Commission must approve the Agreement; 
o	if approved, the Contract shall terminate on December 31, 1999 (20 years and 8 months earlier than provided for in the Contract);
o	in exchange for terminating the contract, SCE shall make 82 monthly payments to Delano, terminating December 2006.

Summary of Customer Benefits

Customers will benefit from the avoidance of capacity payments during the remainder of the term of the Contract, as well as from the replacement of energy payments with energy purchases from the market.  SCE has provided detailed documentation for the expected level of ratepayer savings.  Expected savings are $40 million, net of the termination payments.  For reasons of confidentiality, and to facilitate future buyout negotiations, the amount of the termination payments are not being disclosed in this resolution.  Under the proposed restructuring, SCE shareholders will receive an incentive payment of $2.4 million.

Procedure for Filing QF Contract Restructurings

In Decision 98-12-066, the Commission established a Restructuring Advice Letter Filing (RALF) procedure for review of Qualifying Facility (QF) contract restructurings.  This procedure provides for Commission approval of QF contract restructurings by means of a resolution in response to the filing of an advice letter.  A key feature of this process is a letter from ORA accompanying the advice letter, stating its neutrality or support.  ORA reviewed the proposed advice letter prior to its being filed.  ORA requested certain modifications, which were agreed to by SCE and ORA, and are incorporated into the proposed terms of the Contract restructuring.

Decision 98-12-066 states that a proposed resolution approving the restructuring advice letter shall make at least the following findings:
o	that the restructuring is reasonable;
o	that all payments to be made pursuant to the restructuring shall be recovered through the Annual Transition Cost Proceeding or other Commission-approved mechanism, subject only to the utility’s prudent administration of the restructuring agreement.

Commission Policies on Contract Restructurings

In Decision 99-02-085, the Commission issued the following rulings regarding QF restructurings:  
o	the standard of reasonableness is “in light of the whole record, consistent with the law, and in the public interest...” (Finding of Fact #1); the Commission declined to adopt a new standard for reasonableness (Conclusion of Law # 3);
o	the filing of advice letters should be voluntary for both the utility and the QF (Order # 3);
o	utility decisions in restructuring negotiations should be subject to reasonableness reviews regarding anti-competitive behavior (Order #4);
o	the shareholder incentive to renegotiate QF contracts is retained at the level of 10% of estimated ratepayer savings; this will be trued up, however, to adjust for the time value of money associated with the time lag between the initial filing of the net present value of the savings and the final Commission approval of the contract restructuring (Orders # 5, 6, and 7).

NOTICE

Notice of SCE’s Advice Letter 1390-E was made by publication in the Commission Daily Calendar and by mailing copies to interested parties.

PROTESTS

No protests were filed in response to this advice letter.

DISCUSSION

It is Commission policy to foster ratepayer savings by encouraging QF contract restructurings.  Previous Commission decisions (D.98-12-066 and D.99-02-085) have provided the procedural framework for the processing of QF contract restructurings via advice letter and resolution and also the guidelines to be used in evaluating the advice letters.  

In conformance with Commission guidelines regarding RALFs, SCE included with its advice letter submission a letter from ORA stating that it finds the proposed Delano Contract restructuring reasonable.

SCE hired an independent firm to study whether the Delano facility would continue to be viable were it not for the contract restructuring, i.e., until 2020.  The study concluded that the facility would be viable both technically and economically until the end of its contract life.

The estimated savings to ratepayers resulting from the Contract restructuring are robust and substantial.

Because this Contract restructuring provides robust ratepayer savings under a variety of scenarios, it is in ratepayer interests and should be approved.  Furthermore, all payments to be made pursuant to the restructuring should be recovered through a Commission-approved mechanism such as the Annual Transition Cost Proceeding, subject only to the utility’s prudent administration of the restructuring agreement.

COMMENTS

This is an uncontested matter in which the resolution grants the relief requested.  Accordingly, pursuant to PU Code Section 311(g)(2), the otherwise applicable 30-day period for public review and comment is being waived.

FINDINGS

1.	In Advice Letter 1390-E, filed on July 7, 1999, SCE proposes that the Commission find reasonable a restructuring of the biomass QF Contract with Delano.

2.	In conformance with Commission policies regarding RALFs, SCE included with its advice letter submission a letter from ORA stating that it finds the proposed Delano Contract restructuring reasonable.

3.	The current Contract with Delano is a 30-year ISO4 contract which ends on September 3, 2020.  The Contract contains both energy and capacity payment components.

4.	An independent study supports the claim that were it not for the Contract restructuring, Delano would be viable both technically and economically through the end of the current Contract term.

5.	Under the proposed restructuring, SCE’s obligation to procure power from Delano will end on December 31, 1999.  In exchange, SCE will pay Delano a series of monthly payments ending in December 2006.  Ratepayer savings will result from the replacement of energy and capacity payments under the Contract with energy procured from the market.

6.	No protests were filed against this advice letter.

7.	The Contract restructuring is reasonable.  

8.	All payments that SCE has made and will make under the Agreement should be authorized to be recovered through the Annual Transition Cost Proceeding or any other mechanism authorized by the Commission, subject only to SCE’s prudent administration of the Agreement.  

9.	SCE is entitled to a shareholder incentive.     

Therefore it is ordered that:

1.	SCE Advice Letter 1390-E shall be approved.

2.	SCE shall revise its list of Contracts and Deviations to include the Agreement ordered above and shall file such revised tariff sheets with the Commission within sixty (60) days of the effective date of this resolution.

3.	This resolution shall be made effective today.

I certify that the foregoing resolution was duly introduced, passed, and adopted at a conference of the Public Utilities Commission of the State of California held on November 4, 1999; the following Commissioners voting favorably thereon:

														_______________________
						
								    	WESLEY M. FRANKLIN
								         	      Executive Director

									    RICHARD A. BILAS
									   	President
									    HENRY M. DUQUE
									    JOSIAH L. NEEPER
									    JOEL Z. HYATT
									    CARL W. WOOD
									       Commissioners