San Diego Union Tribune
November 27, 2018
By: Jeff McDonald

The day after Mayor Kevin Faulconer announced a landmark public power-buying program for the city, San Diego Gas & Electric backed away from its long-standing position that it was legally obligated to purchase a natural gas-fired plant in Otay Mesa for $280 million.

Instead of acquiring the plant, SDG&E told the California Public Utilities Commission in a letter last month that the company wants a new five-year contract with the owner, Calpine Corp., for rights to the power generated by the Otay Mesa Energy Center.

SDG&E is seeking the agreement, likely worth hundreds of millions of dollars, even though the company acknowledged it may not need the electricity because San Diego and other cities are forming power-buying alternatives known as community choice aggregation, or CCAs.

“SDG&E could be serving less than half of the load in its service territory within the next few years,” utility executives told regulators in a Oct. 26 letter. “Departure of the city of San Diego alone eliminates SDG&E’s need for the (Otay Mesa) resource.”

Company officials said the proposed Calpine agreement is a good deal for ratepayers even though SDG&E could pay more under the contract than it would spend to buy the plant outright.

“The agreement pricing and cost is confidential, and SDG&E believes the agreement is beneficial for customers by reducing costs,” spokesman Joseph Britton wrote in an email. “The agreement has been submitted to the CPUC for (its) concurrence and approval.”

Under California Public Utilities Commission rules, contracts between utilities and power generators remain confidential for three years. Even after that, the amount consumers pay under specific agreements is difficult to ascertain because the rates are often combined in public reports rather than broken down individually.

SDG&E said the proposed five-year deal was reviewed by a committee of commission staff and other stakeholders to ensure the price is reasonable.

But environmentalists and consumer advocates are skeptical.

“Buying more expensive polluting gas as we transition to 100 percent renewables is unnecessary and unjustified, and will be a bad deal for ratepayers and clean air,” said Nicole Capretz, the Climate Action Campaign executive director who was instrumental in convincing Faulconer to pursue community choice in San Diego.

Under CCAs, public entities decide what sources of electricity they want. Most choose renewable sources like wind and solar rather than less climate-friendly power plants like the one in Otay Mesa, which burns natural gas.

Investor-owned utilities like SDG&E continue to maintain power lines and process billings under the community choice model.

CCA members who leave the traditional utility are charged an “exit fee” to compensate utilities for their longer-term investments. According to estimates from SDG&E, the San Diego fee will be increased from 2.5 cents to 3.3 cents per kilowatt-hour. That would equate to an exit fee of $16.50 per month for a prospective residential customer using 500 kilowatt hours a month.

The proposed agreement between Calpine and SDG&E may be an effort by each side to buy time until the rules governing community choice are more clear. It’s possible neither company wants long-term ownership of a fossil fuel-burning plant at a time when California is moving toward 100 renewable power.

“From a risk perspective, SDG&E believes a shorter-term capacity agreement is relatively more attractive in an environment where the resource adequacy and procurement model in California is in the process of fundamental reform,” SDG&E wrote to the commission.

In his Oct. 25 announcement, Faulconer said community choice aggregation would save consumers money and allow the city to meet its climate goals years ahead of a state mandate that 100 percent of California electricity comes from renewable sources by 2045.

“I want San Diego to lead this region into a cleaner future,” the mayor said.

In its 2019 rate-setting proceeding now before the utilities commission, initiated before Faulconer embraced community choice, SDG&E asserted that it was legally obliged to purchase the Otay Mesa plant and requested $280 million in future billings to finance the purchase and millions more to operate the facility. No decision has been issued in that application.

The Otay Mesa Energy Center can generate just over 600 megawatts, enough electricity to power some 330,000 homes. It opened in 2009 after Calpine secured a 10-year agreement with SDG&E. The original contract expires next October.

Even before the plant opened, the utilities commission added language to the deal granting Calpine the right to sell the facility to SDG&E for $280 million prior to April 2019. The same amendment, known as a put-call option, gave SDG&E the option to require Calpine to sell it the plant for $377 million.

The utility said without the five-year agreement, Calpine would exercise its right under the put-call option.

“SDG&E evaluated a number of factors and believes that, as compared against the ownership option, the proposed contract is beneficial to customers,” Britton wrote.

Bill Powers is a board member of the Protect Our Communities Foundation, a San Diego nonprofit that is opposed to SDG&E contract. Ratepayers already were charged hundreds of millions of dollars for power from the Otay Mesa plant and a new agreement is unnecessary, he said.

“In effect, it’s an end run,” Powers said. “The whole deal was squirrelly from day one. That put-call option was always difficult to defend.”

The Protect Our Communities Foundation has called on the commission to change its previous decision granting Calpine and SDG&E rights to buy and sell the Otay Mesa plant.

The put-call option was not the only unusual aspect of the original Calpine-SDG&E deal.

According to a one-time utility lawyer, former utilities commission president Michael Peevey coerced SDG&E into signing the 10-year contract with Calpine in exchange for permission to acquire the Palomar Energy Center in Escondido.

Kelly Foley, who was a lawyer for SDG&E sister company Sempra Energy Resources back in the 2000s, told a state Senate committee in 2015 that Peevey made it clear that SDG&E would not be permitted to buy the Escondido plant if it did not sign the $740 million Calpine deal.

“It’s important to relay to the Legislature that while it’s problematic, what’s more problematic is that it was business as usual,” Foley testified before the Senate Committee on Energy, Utilities and Communications.

Lawmakers on the committee, which is chaired by Sen. Ben Hueso, D-San Diego, asked no questions and took no action as a result of the testimony. SDG&E issued a statement at the time defending the contract and saying it had complied with all commission rules.

The Foley disclosure came about six months after the California Attorney General’s Office opened a criminal investigation into state utilities commission practices.

The commission spent more than $12 million on private lawyers in response to the probe.

Despite judges finding probable cause that felonies were committed and issuing at least six search warrants, no charges resulted from the criminal investigation.