SUBJECT: Submission of an Agreement Between SCE and Watson Cogeneration Company

Transcription

1 STATE OF CALIFORNIA Edmund G. Brown Jr., Governor PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE SAN FRANCISCO, CA May 26, 2015 Advice Letters: 3151-E Russell G. Worden Director, State Regulatory Operations Southern California Edison Company 8631 Rush Street Rosemead, California SUBJECT: Submission of an Agreement Between SCE and Watson Cogeneration Company Dear Mr. Worden: Advice Letter 3151-E is effective as of May 21, 2015, per Resolution E-4714 Ordering Paragraphs. Sincerely, Edward Randolph, Director Energy Division

2 ADVICE LETTER (AL) SUSPENSION NOTICE ENERGY DIVISION Utility Name: Southern California Edison Date Utility Notified: January 5, 2015 via: Utility No./Type: U 338-E [ x ] to: advicetariffmanager@sce.com Advice Letter No.: 3151-E Fax No.: (626) Date AL filed: December 17, 2014 ED Staff Contact: Noel Crisostomo Utility Phone No.: (626) For Internal Purposes Only: Date Calendar Clerk Notified: / / Date Commissioners/Advisors Notified: / / [X] INITIAL SUSPENSION (up to 120 DAYS) This is to notify that the above-indicated AL is suspended for up to 120 days beginning January 6, 2015 for the following reason(s) below. If the AL requires a Commission resolution and the Commission s deliberation on the resolution prepared by Energy Division extends beyond the expiration of the initial suspension period, the advice letter will be automatically suspended for up to 180 days beyond the initial suspension period. [ ] Section 455 Hearing is Required. A Commission resolution may be required to address the advice letter. [ ] Advice Letter Requests a Commission Order. [ X ] Advice Letter Requires Staff Review Expected duration of initial suspension period: 120 days. [ ] FURTHER SUSPENSION (up to 180 DAYS beyond initial suspension period) The AL requires a Commission resolution and the Commission s deliberation on the resolution prepared by Energy Division has extended beyond the expiration of the initial suspension period. The advice letter is suspended for up to 180 days beyond the initial suspension period. If you have any questions regarding this matter, please contact Noel Crisostomo at or via at Noel.Crisostomo@cpuc.ca.gov. cc: Damon Franz, damon.franz@cpuc.ca.gov Maria Salinas, edtariffunit@cpuc.ca.gov Joni Templeton, joni.templeton@sce.com Megan Scott-Kakures, AdviceTariffmanager@sce.com Michael Hoover, Karyn.Gansecki@sce.com Katie Sloan, Katie.sloan@sce.com Protestants to the advice letter:

3 Megan Scott-Kakures Vice President, State Regulatory Operations December 17, 2014 ADVICE 3151-E (U 338-E) PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION SUBJECT: Submission of Agreement Between Southern California Edison Company and Watson Cogeneration Company PURPOSE The purpose of this advice letter is to seek approval of an agreement for the purchase of energy, capacity and all related products between Southern California Edison Company ( SCE ) and Watson Cogeneration Company ( Watson ) (the Watson Agreement ). BACKGROUND A. Combined Heat and Power Settlement In 2008, diverse parties with divergent interests, including the three investor-owned utilities ( IOUs ), representatives of Qualifying Facilities ( QFs ), 1 customer advocacy groups, and the California Public Utilities Commission ( Commission ), engaged in settlement negotiations to, among other things, resolve numerous disputes between the IOUs and QFs before the Commission and state court. After a year and a half of 1 The Public Utility Regulatory Policies Act of 1978 ( PURPA ) established a class of generating facilities known as QFs, which, in the furtherance of a variety of energy policy goals, receive special rate and regulatory treatment. QFs fall into two categories: (1) qualifying small power production facilities and (2) qualifying cogeneration facilities. For the purpose of this Advice Letter, QFs are defined as: An electric energy generating facility that complies with the qualifying facility definition established by PURPA and any FERC rules... implementing PURPA and has filed with FERC (i) an application for FERC certification,... which FERC has granted, or (ii) a notice of self - certification..... CHP Settlement Agreement, Term Sheet, Glossary of Defined Terms, at p. 73. P.O. Box Rush Street Rosemead, California (626) Fax (626)

4 ADVICE 3151-E (U 338-E) December 17, 2014 negotiations, the participating parties reached an agreement that, among other things, developed a state Combined Heat and Power ( CHP ) program, which includes megawatt ( MW ) and greenhouse gas ( GHG ) emissions reduction targets, and settled all outstanding CHP/QF litigation issues. The parties then filed a joint motion for Commission approval of the QF and CHP Settlement Agreement, Term Sheet and attached Exhibits ( Settlement ). 2 Rule 12.1(d) of the Commission s Rules of Practice and Procedure provides that [t]he Commission will not approve settlements, whether contested or uncontested, unless the settlement is reasonable in light of the whole record, consistent with law, and the public interest. To assess reasonableness, the Commission considers, among other things, whether the settlement negotiations were at arms-length and whether the parties were adequately represented. 3 After considering the Settlement as a whole, its individual elements, as well as the interests at stake, the Commission approved the Settlement, finding it to be (1) reasonable, (2) the product of protracted, arms-length negotiations between sophisticated and well-represented parties with divergent interests, all of whom were required to compromise on some things, and none of whom received everything they wanted, 4 and (3) in furtherance of the state policy objectives embodied in California Public Utilities Code Section 372(a), Assembly Bill 32, and the Energy Action Plan II. 5 Of specific relevance to this Advice Letter, the Settlement allows for [b]ilaterally negotiated and executed [Combined Heat and Power Purchase Power Agreements ( CHP PPAs )] as one of the procurement options in this CHP Program. The Settlement also provides that the pricing, terms, and conditions for those PPAs will be according to the executed and approved PPA. 6 In addition, in furtherance of the state s policies, the Settlement s state CHP program sets forth GHG emissions reduction targets, to which the Watson Agreement could contribute. 7 While SCE generally prefers competitive solicitations as a method of procurement, SCE is willing to consider bilateral offers when bilaterals (i) present a compelling value proposition, and (ii) include unique benefits not likely to be attainable through a competitive solicitation. The Watson Agreement meets these criteria. 2 Any capitalized terms used in this Advice Letter but not defined herein have the meaning set forth in the Combined Heat and Power Settlement Agreement Term Sheet at Decision ( D. ) , 30 CPUC 2d 189, 89 (approving Pacific Gas and Electric Co. s Diablo Canyon settlement as in the public interest). 4 D at pp. 28, 35, Conclusion of Law No Id. at pp. 35, 37, 38, Conclusion of Law No Term Sheet 4.3.1, Term Sheet ,

5 ADVICE 3151-E (U 338-E) December 17, 2014 B. Negotiations Between Watson Cogeneration Company and SCE Watson is currently delivering energy and capacity to SCE under a Transition PPA that expires at the end of the CHP Settlement Transition Period (July 1, 2015). In June 2014, Watson approached SCE and requested to begin bilateral negotiations of a CHP PPA to take effect following the termination of Watson s Transition PPA. To ensure that the Watson Agreement was competitive, SCE evaluated Watson s offer using the same methodology and forward price curves employed in CHP RFO 2, SCE s most recently-completed CHP RFO, and compared Watson s bilateral offer against those offers selected in CHP RFO 2. Watson s bilateral offer (both with and without a countable GHG emissions reduction) compares favorably with offers selected in CHP RFO 2. See Confidential Appendix A for more detail on evaluation. SCE and Watson completed substantive negotiations on the new agreement on or around October 28, 2014, and finalized contract language on November 13, See Confidential Appendix C for additional detail on specific deal terms. The terms of the Watson offer were presented to SCE s energy procurement Risk Management Committee ( eprmc ) and Cost Allocation Methodology ( CAM ) Group on November 3 and 5, 2014, respectively. SCE executed the Watson Agreement on November 14, C. SCE CHP Request for Offers 2 and CHP Request for Offers 3 Section of the Term Sheet directs the IOUs to conduct RFOs exclusively for CHP resources as a means of achieving the MW and GHG emissions reduction targets set forth in the Settlement. 8 Section of the Term Sheet requires the IOUs to conduct three RFOs during the Initial Program Period 9 under the Settlement. 10 SCE s 2013 CHP RFO ( CHP RFO 2 ) is the second of the three RFOs that SCE will conduct during the Initial Program Period. SCE launched the CHP RFO 2 on September 12, SCE required interested CHP parties to submit indicative offers on November 7, SCE evaluated the indicative offers and created a short-list of bidders on December 19, SCE then negotiated contracts with the short-listed bidders. The short-listed bidders with whom SCE reached an agreement submitted final binding offers on February 27, SCE used the final valuation and selection process vetted through the CAM Group and approved by its eprmc for evaluating and selecting successful offers. After a short postponement, SCE presented the successful offers to its eprmc and the CAM Group 8 See Term Sheet at p The Initial Program Period is defined as the period commencing on the Settlement Effective Date and concluding forty-eight (48) months thereafter. See Term Sheet at p See Term Sheet at pp

6 ADVICE 3151-E (U 338-E) December 17, 2014 on April 8 and 10, 2014, respectively. SCE notified all of the parties that submitted successful offers of their selection on April 10, SCE used the data gathered from the successful offers to determine that the Watson Agreement was competitive and reasonable as compared to CHP RFO 2 offers. SCE launched its 2014 CHP RFO ( CHP RFO 3 ) on November 13, Indicative Offers are due January 8, DESCRIPTION OF WATSON FACILITY AND AGREEMENT A. General Watson Project Summary Project Summary Project Name Watson Cogeneration Company Owner/Developer Tesoro Corporation (51%)/NRG (49%) Technology CCGT Capacity (MW) 274 MW (Summer), 279 MW (Winter) Expected Generation (GWh/Year) 2,249 Delivery Pattern (As-available, Firm, Utility Prescheduled Facility) Firm Delivery/Contract Term (months) 84 months Vintage (New / Existing / Repower/Expanded/Utility Prescheduled Existing Facility) Location (city and state) Carson, CA Source of Agreement (e.g., RFO or Bilateral Negotiations) Bilateral Negotiations The Watson Agreement is attached as Confidential Appendix B. A summary of the Watson Agreement is attached as Confidential Appendix C. A comparison of the Watson Agreement with the CHP RFO Pro-Forma PPA is attached as Confidential Appendix D. B. General Watson Project Description Watson Cogeneration Company consists of a combined cycle facility which has four parallel gas turbine-driven power generator/heat recovery steam generator ( GTG/HRSG ) trains, two parallel steam turbine-driven power generators ( STG ), associated auxiliaries and utilities, a control room, and an electrical substation. Electric metering and telemetry are compliant with the California Independent System Operator ( CAISO ) Tariff. The Useful Thermal Energy Output is supplied to the Tesoro Los Angeles Refinery - Carson Operations (the Host ) and is measured through a steam flow meter.

7 ADVICE 3151-E (U 338-E) December 17, 2014 The facility has a nameplate capacity of MW. The overall energy balance reported in Exhibit B of the PPA is the publicly available information from Watson Cogeneration Company s QF certification. The Generating Facility is interconnected to SCE s Hinson Substation system and has a service voltage of 220 kv. C. Safety SCE is strongly committed to safety in all aspects of its business. CHP sellers are responsible for the safe construction and operation of their generating facilities and compliance with all applicable safety regulations. To address those issues over which it has the most visibility and control the delivery of electricity products to SCE in a reliable, safe, and operationally sound manner SCE s CHP Pro Forma PPA provides that the seller must operate the generating facility in accordance with Prudent Electrical Practices See Exhibit A to the Watson Agreement, which defines Prudent Electrical Practices as follows: Prudent Electrical Practices means those practices, methods and acts that would be implemented and followed by prudent operators of electric generating facilities in the Western United States, similar to the Generating Facility, during the relevant time period, which practices, methods and acts, in the exercise of prudent and responsible professional judgment in the light of the facts known at the time a decision was made, could reasonably have been expected to accomplish the desired result consistent with good business practices, reliability and safety. Prudent Electrical Practices includes, at a minimum, those professionally responsible practices, methods and acts described in the preceding sentence that comply with the manufacturer s warranties, restrictions in this Agreement, and the requirement of Governmental Authorities, WECC standards, the CAISO and Applicable Laws...

8 ADVICE 3151-E (U 338-E) December 17, 2014 Per Energy Division guidance, SCE requested from Watson information concerning any past safety violations at the facility. Below is a matrix containing the response received: Year Safety Violation No N/A Summary of Violation Contractor twisted and sprained ankle on scaffolding. OSHA recordable due to treatment and restricted duty. Status Completed and closed N/A Electrician tripped and suffered broken thumb. Completed and closed N/A Contract worker punctured the lower lip and chipped 3 teeth when an aluminum bar hit worker in the mouth. Completed and closed N/A Operator received several stiches after a wrench slipped while opening a valve and struck worker in the face. Completed and closed. See Appendix C for more detail on specific provisions addressing safety in the Watson Agreement. SETTLEMENT ACCOUNTING FOR CHP PROCUREMENT AND GHG EMISSIONS REDUCTION TARGET Set forth below are the Settlement s MW and Emission Reduction Targets and the amount procured in the Watson Agreement that would be counted toward those targets. Target SCE s End of Initial Program Period Target 13 Quantities Procured from Watson Toward SCE s Settlement Target MW 1,402 MW 385 MW GHG Emissions Reduction Target 2.17 MMT MMT 15 A. MW Targets Pursuant to the Term Sheet, SCE must procure at least 1,402 MW ( MW Target ) of CHP through the CHP Procurement Processes by the end of the Initial Program Period. 12 No associated OSHA claim or citation numbers; recordable injuries are reported on the OSHA 300 Log Form. 13 The initial program period runs from November 23, 2011 to November 22, MMT = million metric tons. 15 See Appendices A and C for additional information on Watson s countable GHG Emissions Reductions

9 ADVICE 3151-E (U 338-E) December 17, 2014 To calculate a contract s impact on SCE s CHP MW target, Section of the Term Sheet provides: Existing CHP Facilities are gas-fired Topping cycle CHP Facilities that exported and delivered electric power to an IOU listed by QF ID number in each IOU s July 2010 Cogeneration and Small Power Production Report (July 2010 Semi-Annual Report) Contract Nameplate, as amended, if necessary. The MWs counted for New PPAs executed with Existing CHP Facilities will be the published Contract Nameplate value, unless otherwise noted in this Settlement. 16 Watson is a gas-fired topping-cycle CHP Facility that exported and delivered electric power to SCE. Watson is listed as QFID 2053 in SCE s July 2010 Cogeneration and Small Power Production Report with a contract nameplate of 385 MW. Accordingly, as set forth in Table 2 above, the Watson Agreement contributes 385 MW toward SCE s MW Target. B. GHG Emissions Reduction Targets Section 6 of the Term Sheet sets forth the GHG Emissions Reduction Target ( GHG Target ) by which each IOU s CHP PPAs are measured, and Section 7 provides specific account methods for each type of CHP Facility. Watson proposes to institute a change in operations that will result in emissions reductions. Accordingly, SCE calculated the emissions reductions counting toward SCE s GHG Target per Section Per this calculation, SCE projects that Watson will contribute 25,709 MT toward the GHG Target. 17 More detail on these calculations and Watson s potential for emissions reductions is included in Appendices A and C. 16 Term Sheet at p In addition to this change in operations at the Watson facility, Tesoro, Watson s 51% owner and owner of the Carson refinery (Watson s steam host), represented that this contract would facilitate the integration of the Carson refinery with the adjacent Wilmington refinery (also owned by Tesoro). According to Tesoro, this optimization and reconfiguring will achieve operational efficiencies and further reduce GHG emissions at these refineries, possibly up to 225,000 MT per year. See Public Appendix A-2 for Watson s description of the Los Angeles Refinery Integration and Compliance Project (the LARIC Project White Paper ).

10 ADVICE 3151-E (U 338-E) December 17, 2014 EMISSIONS PERFORMANCE STANDARD The Watson Agreement is compliant with the Emissions Performance Standard ( EPS ) that the Commission adopted in D Pursuant to D , the EPS is applicable to covered procurement, meaning long-term financial commitments, such as an electricity contract with a term of five years or more, for baseload generation. Covered procurement must have a GHG emissions rate no higher than the GHG emissions rate of a combined-cycle gas turbine ( CCGT ) powerplant, 18 which D found was 1,100 lbs per MWh. 19 Baseload generation is defined as electricity generation from a power plant that is designed and intended to provide electricity at an annualized plant capacity factor of at least 60%. 20 Annualized plant capacity factor means [t]he ratio of the annual amount of electricity produced, measured in kilowatt hours, divided by the annual amount of electricity the unit could have produced if it had been operated at its maximum permitted capacity, expressed in kilowatt hours. The CCGT baseload power plants in operation on D s effective date, or that had a California Energy Commission ( CEC ) final permit decision to operate as of June 30, 2007, are deemed automatically compliant with the EPS. 21 D directs utility buyers to examine historical plant capacity factors for the underlying facility to determine whether the EPS applies. 22 The Watson Agreement is for a term of seven years and thus qualifies as a long-term financial commitment for the purposes of D The facility also qualifies as baseload generation per the aforementioned definition. Thus, the Watson Agreement constitutes covered procurement subject to the EPS. Because the Watson facility s prime mover is a CCGT that was in operation as of January 25, 2007, the effective date of D , the Watson facility is automatically EPS compliant. COST ALLOCATION MECHANISM GROUP PARTICIPATION The Settlement authorizes the utilities to enter into contracts for CHP resources and to recover the net costs of the resources from all bundled service customers, direct access ( DA ) customers, and community choice aggregation ( CCA ) customers, and others. SCE s CAM Group includes Procurement Review Group ( PRG ) participants as well as certain other non-wholesale market participant representatives of bundled service, DA 18 D at p D , Finding of Fact D at p. 4; Publ. Util. Code 8340 (a). 21 D , Finding of Fact D at 187.

11 ADVICE 3151-E (U 338-E) December 17, 2014 and CCA customers. SCE s PRG participants include representatives from various divisions within the Commission, the Office of Ratepayer Advocates, The Utility Reform Network, California Utility Employees, the Union of Concerned Scientists, and the California Department of Water Resources. SCE consulted with its CAM Group regarding the Watson Agreement on November 5, The CAM group asked a number of questions about the payment structure and about the nature of the GHG emissions reduction associated with Watson s planned change in operations. SCE properly responded to all comments and questions, and provided additional data as requested. INDEPENDENT EVALUATOR ( IE ) SCE engaged Merrimack Energy Group, Inc. ( Merrimack Energy ) to act as the IE for its CHP RFO 2 and related Settlement procurement activities. Although not required by the Settlement 23 Watson and SCE agreed to use Merrimack Energy as the IE for this bilateral negotiation. Merrimack Energy was present during nearly all substantive conversations between SCE and Watson, and was copied on exchanges of all key documents. Merrimack Energy also served as an independent third party reviewer of sensitive data related to Watson s proposed change in operations, and has reviewed SCE s valuation methodology for the Watson offers. Merrimack Energy s IE report is found in Public Appendix F-1 (public version) and Confidential Appendix F-2 (confidential version). CONFIDENTIALITY In accordance with D , D , D , D and General Order (GO) 96-B, SCE requests confidential treatment of the material in the confidential appendices as set forth below. Confidential Appendix A-1: Public Appendix A-2: Confidential Appendix B: Confidential Appendix C: Confidential Appendix D Offer Evaluation Methodology and GHG Calculations Watson s Los Angeles Refinery Integration and Compliance Project White Paper 24 Watson Agreement Watson Agreement Summary Comparison of Agreement with SCE s CHP Pro Forma PPA 23 See Term Sheet section This document was prepared by Watson and the information contained therein was not independently verified by SCE.

12 ADVICE 3151-E (U 338-E) December 17, 2014 Confidential Appendix E: Public Appendix F-1/ Confidential Appendix F-2: Public Appendix G: Public Appendix H: [Intentionally blank] Independent Evaluator Report Confidentiality Declaration Proposed Non-Disclosure Agreement The confidential material in this Advice Letter will be made available to non-market participant parties in accordance with and upon execution of SCE s Proposed Non- Disclosure Agreement. Parties wishing to obtain access to the confidential material of this Advice Letter may contact Joni Templeton in SCE s Law Department at Joni.Templeton@sce.com to obtain a non-disclosure agreement. The information in this Advice Letter for which SCE requests confidential treatment, and the length of time it should remain confidential, are provided in Public Appendix G. This information is entitled to confidentiality protection, as provided in the IOU Matrix, pursuant to D The specific provisions of the IOU Matrix that apply to the confidential information in this Advice Letter are identified in Public Appendix G. REQUEST FOR COMMISSION APPROVAL Commission approval is a condition precedent for certain pricing and other terms of the Watson Agreement. SCE therefore requests that the Commission issue a final and nonappealable resolution containing: 1. Approval of the Watson Agreement in its entirety; 2. A finding that the Watson Agreement, and SCE s entry into the Watson Agreement, is reasonable and prudent for all purposes, subject only to further review with respect to the reasonableness of SCE s administration of the Watson Agreement; 3. A finding that the 385 MW associated with the Watson Agreement applies toward SCE s procurement target of 1,402 MW of CHP capacity in the Initial Program Period, as established by the QF/CHP Program; 4. A finding that the 25,709 MT GHG reductions associated with the Watson Agreement applies toward SCE s GHG Emissions Reduction Target; 5. A finding that the Watson Agreement is automatically EPS compliant; 6. A finding that SCE s costs under the Watson Agreement shall be recovered through SCE s CAM; and 7. Any other relief the Commission finds just and reasonable.

13 ADVICE 3151-E (U 338-E) December 17, 2014 SCE asks the Commission to approve the Agreement within 365 days to meet the requirements of the contract. TIER DESIGNATION Pursuant to Section of the Settlement, which provides that IOUs will utilize a Tier 3 Advice Letter for all other PPAs (new, repowering, or existing PPAs that contain any material modification of the PPAs approved in this Settlement), SCE submits this Advice Letter with a Tier 3 designation. EFFECTIVE DATE This Advice Letter will become effective upon Commission approval. NOTICE Anyone wishing to protest this advice filing may do so by letter via U.S. Mail, facsimile, or electronically, any of which must be received no later than 20 days after the date of this advice filing. Protests should be mailed to: California Public Utilities Commission, Energy Division Attention: Tariff Unit 505 Van Ness Avenue San Francisco, California edtariffunit@cpuc.ca.gov California Public Utilities Commission, Energy Division Attn: Noel Crisostomo 505 Van Ness Avenue San Francisco, California noel.crisostomo@cpuc.ca.gov In addition, protests and all other correspondence regarding this advice letter should also be sent by letter and transmitted via facsimile or electronically to the attention of: Megan Scott-Kakures Vice President, State Regulatory Operations Southern California Edison Company 8631 Rush Street Rosemead, California Facsimile: (626) AdviceTariffManager@sce.com

14 ADVICE 3151-E (U 338-E) December 17, 2014 Michael R. Hoover Director, State Regulatory Affairs Southern California Edison Company c/o Karyn Gansecki 601 Van Ness Avenue, Suite 2030 San Francisco, California Facsimile: (415) Karyn.Gansecki@sce.com With a copy to: Joni Templeton Attorney Southern California Edison Company 2244 Walnut Grove Avenue, 3 rd Floor Rosemead, CA Facsimile: (626) Joni.Templeton@sce.com There are no restrictions on who may file a protest, but the protest shall set forth specifically the grounds upon which it is based and shall be submitted expeditiously. In accordance with General Rule 4 of GO 96-B, SCE is serving copies of this advice filing to the interested parties shown on the attached GO 96-B, R , and A et al service lists. Address change requests to the GO 96-B service list should be directed by electronic mail to AdviceTariffManager@sce.com or at (626) For changes to all other service lists, please contact the Commission s Process Office at (415) or by electronic mail at Process_Office@cpuc.ca.gov. Further, in accordance with Public Utilities Code Section 491, notice to the public is hereby given by filing and keeping the advice filing at SCE s corporate headquarters. To view other SCE advice letters filed with the Commission, log on to SCE s web site at For questions, please contact Katie Sloan at (626) or by electronic mail at Katie.Sloan@sce.com. Southern California Edison Company MSK:ks:jm Enclosures /s/ Megan Scott-Kakures Megan Scott-Kakures

15 CALIFORNIA PUBLIC UTILITIES COMMISSION ADVICE LETTER FILING SUMMARY ENERGY UTILITY MUST BE COMPLETED BY UTILITY (Attach additional pages as needed) Company name/cpuc Utility No.: Southern California Edison Company (U 338-E) Utility type: Contact Person: Darrah Morgan ELC GAS Phone #: (626) PLC HEAT WATER Disposition Notice to: EXPLANATION OF UTILITY TYPE ELC = Electric GAS = Gas PLC = Pipeline HEAT = Heat WATER = Water (Date Filed/ Received Stamp by CPUC) Advice Letter (AL) #: 3151-E Tier Designation: 3 Subject of AL: Submission of Agreement Between Southern California Edison Company and Watson Cogeneration Company Keywords (choose from CPUC listing): AL filing type: Monthly Quarterly Annual One-Time Other Compliance, Contracts, Agreements, Procurement If AL filed in compliance with a Commission order, indicate relevant Decision/Resolution #: Does AL replace a withdrawn or rejected AL? If so, identify the prior AL: Summarize differences between the AL and the prior withdrawn or rejected AL: Confidential treatment requested? Yes No If yes, specification of confidential information: See Appendix G Confidential information will be made available to appropriate parties who execute a nondisclosure agreement. Name and contact information to request nondisclosure agreement/access to confidential information: Joni Templeton, Law Department, (626) or Joni.templeton@sce.com Resolution Required? Yes No Requested effective date: Upon Commission Approval Estimated system annual revenue effect: (%): Estimated system average rate effect (%): No. of tariff sheets: -0- When rates are affected by AL, include attachment in AL showing average rate effects on customer classes (residential, small commercial, large C/I, agricultural, lighting). Tariff schedules affected: None Service affected and changes proposed 1 : Pending advice letters that revise the same tariff sheets: N/A 1 Discuss in AL if more space is needed.

16 Protests and all other correspondence regarding this AL are due no later than 20 days after the date of this filing, unless otherwise authorized by the Commission, and shall be sent to: CPUC, Energy Division Attention: Tariff Unit 505 Van Ness Avenue San Francisco, California Megan Scott-Kakures Vice President, State Regulatory Operations Southern California Edison Company 8631 Rush Street Rosemead, California Facsimile: (626) Michael R. Hoover Director, State Regulatory Affairs c/o Karyn Gansecki Southern California Edison Company 601 Van Ness Avenue, Suite 2030 San Francisco, California Facsimile: (415) With a copy to: Joni Templeton Attorney Southern California Edison Company 2244 Walnut Grove Avenue, 3 rd Floor Rosemead, California Facsimile: (626) Joni.templeton@sce.com

17 Confidential Appendix A-1 Offer Evaluation Methodology and GHG Calculations

18 Confidential Addendum Appendix A-1 Offer Evaluation Methodology and GHG Calculations

19 Public Appendix A-2 Watson s Los Angeles Refinery Integration and Compliance Project White Paper ( LARIC Project White Paper )

20 Successful Tesoro Integration Requires Competitive Power Purchase Agreement Executive Summary When Tesoro announced its plan to purchase the former BP Carson refinery and associated logistics and marketing assets in August, 2012, the company said the successful integration would help protect muchneeded jobs, and help ensure reliable supply of transportation fuels all while reducing Green House Gas (GHG) emissions. In summary, the transaction would generate benefits good for consumers, good for the community and good for the environment. Our successful delivery of these commitments is dependent upon the stability of the Watson Cogeneration business, and in turn obtaining a Power Purchase Agreement (PPA) with competitive pricing. Tesoro is committed to help meeting the energy needs of California Consumers, and with a competitive PPA, we ll be able to continue the 26 year history of the Watson Cogeneration plant helping to deliver reliable availability of transportation fuels to the area. Watson Critical to Successful Delivery of Integration Benefits Tesoro purchased BP s Southern California assets, including the majority ownership interest and operatorship of Watson, in June The acquisition builds on Tesoro s demonstrated commitment to deliver safe, reliable, and environmentally responsible energy to California consumers during a period when others were shutting down refineries or preparing to exit the California market. In contrast, Tesoro recognized the unique opportunity to integrate the Carson and Wilmington refineries into one operation to capture efficiencies that reduce costs, provide production flexibility to meet changing demands, and reduce the sulfur content of fuels to meet Tier 3 gasoline regulations, while also improving the environment through emissions reductions in GHG and criteria pollutants, such as SOx and NOx. Watson is the core, critical energy infrastructure that drives this transformation. The superior, industryrecognized reliability of Watson provides Tesoro with the confidence in production reliability that is required to connect the refineries and shutdown the Los Angeles Refinery Wilmington Fluid Catalytic Cracking unit (FCC), driving significant emissions reductions. Tesoro will be able to then shift core transportation fuel production to Los Angeles Refinery Carson while maintaining the overall volume of transportation fuels historically produced by the Carson and Wilmington refineries. This shift will enable Watson to supply power for more than 75% of the integrated refinery s transportation fuels production. Additional engineering studies are underway to evaluate the potential for Watson to provide electrical power for the entire Carson and Wilmington refining complex (Tesoro s Integrated Los Angeles Refinery, LAR ), which will further reduce the likelihood of gasoline shortages caused by electrical outages. The Los Angeles Refinery Integration and Compliance project ( LARIC ) is expected to reduce future GHG emissions by approximately 225,000 tonnes per year CO 2 e, S0x emissions by approximately 60 tons per year, and NOx emissions by approximately 100 tons per year. Clearly, the benefits of continued reliable operation of Watson are significant for Californians, the environment, and reliable electricity 1

21 and transportation fuels supply. Permitting and detailed engineering efforts for the LARIC are underway. The Notice of Preparation and Initial Study was submitted to the South Coast Air Quality Management District (SCAQMD) and issued for public comment in July Tesoro expects to complete the permit process in 2015 and to execute the bulk of construction activities from late 2015 through 2018, enabling the 2017 transportation fuel production shift to Los Angeles Refinery Carson and the shutdown of the Wilmington FCC. Watson Provides Critical Energy Infrastructure for California as other Power Generation Sources are Being Eliminated Up to 7700 megawatts (MW) of Southern California power generation is retired or retiring through 2020 (source: Preliminary Reliability Plan for LA Basin and San Diego, August 30, 2013). For example, the San Onofre Nuclear Generating Station was shuttered (June 2013) taking 2200MW of base-load power off the grid, and California has a plan to eliminate some 3800 MW of capacity along the Southern California coast by eliminating once-through cooling by 2020 (source: Preliminary Reliability Plan for LA Basin and San Diego, August 30, 2013 by CPUC/CEC/CAISO). Meanwhile, local energy demand is growing approximately 400 MW/yr. To improve reliability in this service area, the report suggests an all of the above energy strategy including up to 4600 MW of new/repowered energy is needed within just the LA Basin to help provide reliability and local benefits such as voltage support (Source: 2013 Integrated Energy Policy Report). Watson is the largest base-loaded Combined Heat and Power ( CHP ) facility in California and is located within the west LA Basin local reliability area. Watson exports enough energy to power more than 200,000 homes and has the capability to provide voltage support to help with local reliability. Because Watson is a CHP facility, it also provides the safe and reliable thermal energy required to turn crude oil into usable transportation fuels at the former Carson refinery. According to the California Energy Almanac, petroleum-based fuels are the energy behind 96 percent of California s transportation demands. There is approximately two million barrels per day of refinery capacity in California to convert crude oil into the fuels needed to run California. During the last energy crisis, the State of California recognized that providing reliable transportation fuels was a critical public service. As a result, the State protected transportation fuels production by bestowing the Essential Use protections on refineries and their vital ancillary facilities such as Watson. These protections include avoiding rolling blackouts to these critical facilities so that transportation fuels may continue to be produced safely and reliably. As an example of the critical infrastructure for producing transportation fuels, the Tesoro Los Angeles Refinery is a provider of essential clean transportation fuels to Southern California. The facility is capable of providing approximately 35% of the clean CARB gasoline sold in the Los Angeles basin, 40% of the jet fuel for Los Angeles International Airport (LAX) and two million gallons per day of CARB ultra-low sulfur diesel. 2

22 Watson Cogeneration Company History Reliability of California s fuel supply is very much dependent on the reliability of its refineries. At the heart of refineries are steam-generating plants which produce the heat needed to process crude oil into useful transportation fuels. Transportation fuels supply can be disrupted by an upset of steam or electric service to a refinery. That potential for interruption is why refineries were recognized as Essential Use facilities those facilities providing a critical public service -- during the energy crisis and, as a result, given protections against rolling blackouts. Watson was established in the 1980s as a result of two major regulatory developments the Public Utility Policies Act of 1978 (PURPA) and the 1984 NOx emissions control standards issued by the South Coast Air Quality Management District (SCAQMD). At the time the new emissions standards were established, ARCO utilized four 1950s vintage boilers to provide the steam heat necessary for the conversion of crude oil into transportation fuels. In order to meet the new emissions standards, ARCO made the decision to build a cogeneration plant or a Combined Heat and Power (CHP) plant to substantially reduce air emissions while providing reliable electricity supply to Southern California. After Watson s startup, ARCO removed all the old refinery boilers, leaving Watson as the sole supplier of purchased steam and power to the refinery. Watson is now owned and operated by subsidiaries of Tesoro Corporation and NRG Energy. Electrical Reliability Improves Fuel Supply Reliability Data from the DOE suggests that 19% of refinery outages are caused by electrical failures (source: Hydrocarbon Publishing Company, July 2013). A quick survey of publicly available data for Southern California refineries show some of the power-related outages just in the past five years (note: not an exhaustive list): Company Date Public Reports (if available) XOM Torrance Nov 10 Oct 12 May

23 Aug 14 Bay-Torrance-ExxonMobil-Refinery-Burn-Off-a-Safety- Precaution-Not-a-Fire html Jun 13 Sep 13 P66 Sep /news/Refinery-Status-Shell-Reports-Unit-Upset-at- Martinez-Calif-Refinery / Tesoro Wilmington Mar 10 May 10 Mar 11 Jun 11 Sep 11 Sep 12 Aug 13 In contrast, the LAR Carson refinery has been remarkably reliable and has had zero electric or steam related outages over the past five years and has experienced only one complete power disruption in the more than 26 year history of Watson. Watson was designed to provide reliable steam and power to the refinery and export reliable power to the California electrical grid. The design includes redundant steam headers, double-ended (redundant) electrical transmission lines to both Southern California Edison ( SCE ) and the refinery, and it provides reliable operation on a variety of fuel sources such as refinery produced fuel gas, butane, or natural gas. In addition, the Watson interconnection with SCE is at 220KV - - the highest distribution voltage which is highly reliable and significantly less prone to service interruptions than lower voltage levels. The result of the design and operation of the Watson facility is a very reliable facility when compared against publicly available benchmarks for base-loaded facilities. 4

24 Table 1: Watson Reliability versus Benchmarks 6 year average Industry Watson Cogen Delta Company (Source: 1Q Combined Cycle Journal base load class E ) Reliability 98.1% 99.6% +1.5% Utilization 70.3% 93.2% +19.9% With demonstrated superior reliability, Watson provides the core reliability for California motor fuel supply by reducing supply disruptions which often follow refinery shutdowns caused by power disruption. Watson s critical contribution to the reliable supply of California motor fuels was demonstrated during every one of the previously listed power-related refinery shutdowns: the Carson refinery continued to operate throughout each of the incidents. Two notable illustrations of superior reliability of fuels supply occurred in October 2012 and January In October 2012, a power interruption caused the ExxonMobil Torrance refinery to shut down during a period of low product inventories, which resulted in gasoline shortages and sharp gasoline price increases, which led to emergency intervention by the State. However, the excellent reliability of Watson allowed the Carson refinery to operate at normal capacity through the incident, reducing the impact of the fuel shortage on consumers. Similarly, during the 1994 Northridge earthquake, Watson provided reliable steam and power throughout the earthquake and its aftermath, allowing the Carson refinery to provide an uninterrupted supply of transportation fuels to the area. Carson was the only LA basin refinery to run without interruption during the crisis. Conclusion As a West-Coast focused, American manufacturer of transportation fuels, Tesoro is committed to safe, reliable and environmentally responsible energy production for California. The Watson Cogeneration facility, and a supporting, competitively-priced Power Purchase Agreement, will enable Tesoro to successfully deliver on its commitments to protect refinery jobs, help ensure reliable supply of transportation fuels and reduce Green House Gas emissions. 5

25 Confidential Appendix B Watson Agreement

26 Confidential Appendix C Watson Agreement Summary

27 Confidential Appendix D Comparison of Agreement with SCE s CHP Pro Forma PPA

28 Appendix E [Intentionally blank]

29 Public Appendix F-1 Independent Evaluator Report

30 Southern California Edison Company Public Version Independent Evaluator Report Bilateral Negotiation and Power Purchase Agreement with Watson Cogeneration Company December 2014 Prepared by Merrimack Energy Group, Inc. Merrimack M Energy and New Energy Opportunities, Inc.

31 Table of Contents I. Introduction and Executive Summary II. The Settlement Agreement and SCE s Procurement Actions to Date III. The Watson Facility, the PPA Negotiations and the Terms of the Watson PPA 13 IV. The Role of the Independent Evaluator..23 V. The Reasonableness of SCE s Decision to Bilaterally Negotiate and Execute the Watson PPA VI. Countability of MWs and GHG Reductions Under the CHP Settlement...32 VII. Does the Watson PPA Merit Commission Approval? Confidential Appendices Merrimack Energy Group, Inc. 1

32 I. Introduction and Executive Summary A. Executive Summary Effective November 17, 2014, Southern California Edison Company ( SCE ) executed a power purchase agreement ( PPA ) with Watson Cogeneration Company ( Watson ) for the purchase of capacity and energy from Watson s existing combined heat and power generation facility ( Watson Facility ) co-located with the Carson refinery in Carson, California. This PPA (the Watson PPA ) was entered into pursuant to a bilateral contract negotiation that began two months after the conclusion of SCE s second CHP Request for Offers ( CHP RFO ) and concluded shortly after the launch of the third of three CHP RFOs required under the Qualifying Facility and Combined Heat and Power Program Settlement Agreement ( CHP Settlement or Settlement Agreement ). The Watson PPA has a contract term of seven years with deliveries commencing on July 1, Bilateral negotiations of this type are allowable under the terms of the CHP Settlement, with resulting PPAs subject to approval of the California Public Utilities Commission ( CPUC or Commission ). 1 The CHP Settlement had been negotiated by SCE and the two other major investorowned utilities ( IOUs ) in California, four advocacy groups for combined heat and power ( CHP )/qualifying facilities ( QFs ) and other independent generators and two ratepayer advocacy organizations. 2 Necessary regulatory approvals were received from the CPUC in Decision and subsequent orders 3 and the Federal Energy Regulatory Commission ( FERC ), 4 with FERC granting an application to terminate the California IOU s mandatory purchase obligation with respect to QFs in excess of 20 MW pursuant to section 201(m) of the Public Utility Regulatory Policies Act of 1978 ( PURPA ). 5 The Settlement became effective on November 23, 2011 ( Settlement Effective Date ). 6 1 See Settlement Agreement 4.3.1, The parties to the CHP Settlement were SCE, Pacific Gas and Electric Company, San Diego Gas & Electric Company, Independent Energy Producers Association, Cogeneration Association of California, California Cogeneration Association, Energy Producers and Users Coalition, The Utility Reform Network, and the Division of Ratepayer Advocates. 3 Decision Adopting Proposed Settlement, D (December 21, 2010), Decision Granting Petition to Modify Decision , D (July 15, 2011), Decision Granting, In Part, Petition to Modify Decision and Request to Establish a Settlement Agreement Effective Date and Grant Motion for Closure, D (October 11, 2011), Order Dismissing Application for Rehearing of Decision (October 18, 2011), and Order Denying Rehearing of Decision On Certain Issues Raised by the City and County of San Francisco (October 24, 2011).. 4 Order Granting Application to Terminate Purchase Obligation, 135 FERC 61,234 (June 16, 2011) U.S.C. 824a-3(m) (2006). 6 The CPUC s orders of approval became final and non-appealable 30 days after the issuance on October 24, 2011 of the CPUC s Order Denying Rehearing of Decision On Certain Issues Raised by the City and County of San Francisco. Merrimack Energy Group, Inc. 2

33 Under the Settlement Agreement, SCE has a MW target to enter into PPAs with qualifying CHP projects of 1,402 MW before the end of the Initial Program Period, which concludes on November 23, SCE launched the 2014 CHP RFO (the third of three CHP RFOs) on November 13, 2014, shortly before SCE executed its PPA with Watson. Not including this Watson PPA, SCE has executed PPAs and has either obtained necessary regulatory approvals or is awaiting regulatory approval for 964 MW, resulting in 438 MW of additional PPAs needed for SCE to meet its target. Under the Settlement Agreement, the number of countable CHP MW for Watson is 385 MW. If the Watson PPA is approved, SCE will need only 53 additional MW to meet its MW target, but if it is not approved its MW target remains at 438 MW. The other target for SCE under the Settlement Agreement is to achieve 2.17 million metric tons ( MT ) of greenhouse gas ( GHG ) reductions by December 31, 2020 (subject to adjustment by the CPUC in the Long Term Procurement Planning ( LTPP ) proceeding). 8 SCE, through the agreements approved by the Commission, has obtained approximately 240,000 MT of GHG reductions approximately 11 percent of the target. The Watson Facility is a natural gas-fired topping cycle cogeneration facility that provides three outputs: (1) steam for use at the refinery, (2) electricity for use at the refinery, and (3) electricity for export to the grid. Currently, Watson has a Transition PPA with SCE (pursuant to the Settlement Agreement) which expires on June 30, The agreement with Watson involves SCE s purchase of baseload energy and 274 MW of firm contract capacity during the summer months and 279 MW during the non-summer months. As part of the PPA, Watson proposes to change its operation of steam driven gas compressors at the Watson Facility so that less natural gas will be required to produce steam to maintain the gas compressors in a state of readiness when they are not required to maintain gas pressure. Based on tests conducted by Watson following engineering estimates, Watson expects that this will result in a reduction of 25,709 MT per year of GHG. If the Commission approves the GHG reductions, While this method of GHG reduction is novel under the Settlement Agreement, to the IE s knowledge, it does appear to fall within the change of operations provision, or could be reasonably construed as such, under Section of the CHP Settlement. In addition, Further, Watson asserts that obtaining a long-term PPA will facilitate the ability of Tesoro, the majority owner of Watson, to shift transportation fuel production from its Wilmington refinery to its Carson refinery, 7 Settlement Agreement See Settlement Agreement , 6.2. Merrimack Energy Group, Inc. 3