SUBJECT: Submission of the Tule Wind Contract for Procurement of Renewable Energy from SCEs 2014 Renewables Portfolio Standard Solicitation

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1 STATE OF CALIFORNIA Edmund G. Brown Jr., Governor PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE SAN FRANCISCO, CA May 25, 2016 Advice Letters 3287-E and 3287-E-A Russell G. Worden Director, State Regulatory Operations Southern California Edison Company 8631 Rush Street Rosemead, CA SUBJECT: Submission of the Tule Wind Contract for Procurement of Renewable Energy from SCEs 2014 Renewables Portfolio Standard Solicitation Dear Mr. Worden: Advice Letters 3287-E and 3287-E-A are effective as of April 21, 2016, per Resolution E-4746 Ordering Paragraphs. Sincerely, Edward Randolph Director, Energy Division

2 Russell G. Worden Managing Director, State Regulatory Operations April 1, 2016 ADVICE 3287-E-A (U 338-E) PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ENERGY DIVISION SUBJECT: Supplement to Advice 3287-E, Submission of the Tule Wind Contract for Procurement of Renewable Energy From SCE s 2014 Renewables Portfolio Standard Solicitation I. PURPOSE Southern California Edison Company ( SCE ) submits this supplemental advice filing to correct valuation and other information that impacts the Appendices to Advice Letter (AL) 3287-E. These changes are made in accordance with General Order ( GO ) 96-B, General Rule 7.5.1, which authorizes utilities to make additional changes to an advice letter through the filing of a supplemental advice filing. Except as indicated in this supplemental advice filing, this supplemental advice filing supplements in part and does not change the substance of AL 3287-E. II. CORRECTIONS TO APPENDICES A THROUGH D Since SCE filed AL 3287-E, SCE discovered that there was an error in its calculation of the locational congestion adders SCE s valuation tool used to evaluate offers in SCE s 2014 Renewables Portfolio Standard ( RPS ) solicitation. The error caused congestion adders to be undervalued for some projects. Specifically, for projects in locations and during time periods with forecasted congestion benefits, the projects were incorrectly valued as having congestion costs by the same amount. To correct this error, SCE has re-run the valuation analysis with the correct congestion adders to determine the degree to which, if any, the congestion adders affected valuation and selection. SCE determined that the congestion adders had an immaterial impact on valuation and selection. P.O. Box Rush Street Rosemead, California (626) Fax (626)

3 ADVICE 3287-E-A (U 338-E) April 1, 2016 This supplemental advice filing provides correct valuation figures that were calculated using the correct congestion adders. As a result of the correct congestion adders, the net market value of the Tule Wind contract increased. III. LIST OF APPENDICES SCE modifies and corrects Appendices A through D. Changes are indicated in red with strike throughs for deletions and underlines for additions. Appendices A and B are replaced in their entirety. Appendix C amends portions of the Report of the Independent Evaluator Review. SCE provides only the corrected page to Appendix D. SCE requests that the California Public Utilities Commission ( Commission or CPUC ) issue a resolution containing findings in the form requested in this Supplemental Advice Letter within three months. In accordance with GO 96-B, the confidentiality of information included in this Supplemental Advice Letter is described below. This Supplemental Advice Letter contains confidential appendices as listed below. Corrected Confidential Appendix A: Corrected Confidential Appendix B: Corrected Confid./Public Appendix C: Corrected Confidential Appendix D: Consistency with Commission Decisions and Rules and Project Development Status 2014 Solicitation Overview Amended Independent Evaluator Report Contract Summary IV. CONFIDENTIALITY As in AL 3287-E, SCE requests confidential treatment of corrected Appendices A through D to this supplemental advice filing. The information for which SCE is seeking confidential treatment is identified in the Confidentiality Declaration attached as Appendix H to AL 3287-E. The confidential version of this supplemental advice filing will be made available to appropriate parties (in accordance with SCE s Proposed Protective Order, as discussed below) upon execution of the required non-disclosure agreement. Parties wishing to obtain access to the confidential version of this supplemental advice filing may contact Rebecca Meiers-De Pastino in SCE s Law Department at Rebecca.Meiers.DePastino@sce.comor to obtain a non-disclosure agreement.

4 ADVICE 3287-E-A (U 338-E) April 1, 2016 In accordance with GO 96-B, a copy of SCE s Proposed Protective Order was attached as Appendix I to AL 3287-E. It is appropriate to accord confidential treatment to the information for which SCE requests confidential treatment in the first instance in the advice letter process because such information is entitled to confidentiality protection pursuant to D , 1 and is required to be filed by advice letter as part of the process for obtaining Commission approval of RPS power purchase and sale agreements. SCE would object if the information were disclosed in an aggregated format. The information in this supplemental advice letter for which SCE requests confidential treatment, the pages on which the information appears, and the length of time for which the information should remain confidential are provided in Appendix H to AL 3287-E. This information is entitled to confidentiality protection pursuant to D (as provided in the Investor-Owned Utility ( IOU ) Matrix). 2 The specific provisions of the IOU Matrix that apply to the confidential information in this Advice Letter are identified in Appendix H to AL 3287-E. V. TIER DESIGNATION Pursuant to GO 96-B, Energy Industry Rule 5.3, SCE submits this Supplemental Advice Letter with a Tier 3 designation, which is the same Tier designation as the original filing, Advice 3287-E. VI. EFFECTIVE DATE This Supplemental Advice Letter will become effective upon Commission approval. VII. NOTICE SCE asks that the Commission, pursuant to GO 96-B, General Rule 7.5.1, maintain the original protest and comment period designated in Advice 3287-E and not reopen the protest period. The modifications included in this supplemental advice filing do not make substantive changes that would affect the overall evaluation of the filing. In accordance with General Rule 4 of GO 96-B, SCE is furnishing copies of this Supplemental Advice Letter to the interested parties shown on the attached R and GO 96-B service lists. Address change requests to the GO 96-B service list should be directed to AdviceTariffManager@sce.com or (626) For changes to any other service list, please contact the Commission s Process Office at (415) or ProcessOffice@cpuc.ca.gov. 1 D at 80 (Ordering Paragraphs 1 and 2). 2 Id., Appendix 1.

5 ADVICE 3287-E-A (U 338-E) April 1, 2016 Further, in accordance with Public Utilities Code Section 491, notice to the public is hereby given by filing and keeping the Supplemental Advice Letter at SCE s corporate headquarters. To view other SCE advice letters filed with the Commission, log on to SCE s web site at All questions concerning this Supplemental Advice Letter should be directed to Dawn Anaiscourt at (415) or by electronic mail at Dawn.Anaiscourt@sce.com. Southern California Edison Company RGW:da/rmdp:cm Enclosures /s/ Russell G. Worden Russell G. Worden

6 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) #: 3287-E-A Tier Designation: 3 Subject of AL: Supplement to Advice 3287-E, Submission of the Tule Wind Contract for Procurement of Renewable Energy From SCE s 2014 Renewables Portfolio Standard Solicitation Keywords (choose from CPUC listing): Compliance, Agreements, Procurement AL filing type: Monthly Quarterly Annual One-Time Other 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 See Appendix H in SCE Advice 3287-E If yes, specification of confidential information: 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: Rebecca Meiers-De Pastino, Law Department, (626) or Rebecca.Meiers.DePastino@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: N/A 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.

7 All other correspondence regarding this AL filing, unless otherwise authorized by the Commission shall be sent to: CPUC, Energy Division Attention: Tariff Unit 505 Van Ness Avenue San Francisco, California Russell G. Worden Managing Director, 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: Rebecca Meiers-De Pastino Attorney Southern California Edison Company 2244 Walnut Grove Avenue, 3 rd Floor Rosemead, CA Facsimile: (626) Rebecca.Meiers.DePastino@sce.com

8 Corrected CONFIDENTIAL Appendix A Consistency with Commission Decisions & Rules and Project Development Status Confidential Protected Materials Public Disclosure Prohibited

9 Corrected CONFIDENTIAL Appendix B 2014 Solicitation Overview Confidential Protected Materials Public Disclosure Prohibited

10 Corrected CONFIDENTIAL Appendix C Amended Independent Evaluator Report Confidential Protected Materials Public Disclosure Prohibited

11 Corrected PUBLIC Appendix C Amended Independent Evaluator Report

12 Southern California Edison Company 2014 Renewable Resource Solicitation Amended Report of the Independent Evaluator Review of Power Purchase Agreement with Tule Wind LLC MarchSeptember, Prepared by Merrimack Energy Group, Inc. Merrimack M Energy And New Energy Opportunities, Inc.

13 Table of Contents Executive Summary.. 2 I Renewable RFP Overview II. Role of the Independent Evaluator III. Adequacy of Outreach to Potential Sellers IV. Fairness and Appropriateness of RPS Bid Evaluation and Selection Methodology. 29 V. Administration of the Bid Evaluation Process 50 VI. Reasonableness of the Evaluation, Selection and Contract Negotiation Process.. 62 VII. The Tule PPA and the Fairness of the Contract Negotiations...67 VIII. Does the Tule PPA Merit Commission Approval?...75 Appendix A: SCE s Least Cost Best Fit Evaluation Methodology Appendix B: Time of Delivery Periods and Product Payment Allocation Factors Appendix C: SCE 2014 RPS RFP Proposal List and Summary Appendix D: SCE Shortlisted Proposals 2014 RPS RFP Appendix E: SCE Final Evaluation Merrimack Energy Group, Inc. 1

14 Executive Summary Effective July 15, 2015, Southern California Edison Company ( SCE ) executed a power purchase and sale agreement ( PPA ) with Tule Wind LLC ( Tule ) for the purchase of all the electric energy, capacity, Resource Adequacy ( RA ) Benefits, and Green Attributes produced by a proposed 132 MW wind energy generating facility to be constructed in San Diego County, California. The Delivery Point under the PPA with Tule ( Tule PPA ) is at the interconnection with the California Independent System Operator ( CAISO )- controlled grid at the 138 kv Boulevard Substation. The PPA was executed by SCE pursuant to the company s 2014 Request for Proposals from Eligible Renewable Energy Resource Suppliers for Renewable Products ( 2014 Renewable RFP ). SCE launched the 2014 Renewable RFP on December 18, 2014, and received proposals on February 2, SCE expects to execute a total of including 132 MW of energy, capacity and Green Attributes purchased under the PPA with Tule. 1 Through the 2014 Renewable RFP, SCE solicited Proposals from bidders ( Seller or Sellers ) to supply either a Bundled Energy Product (product qualifying as Portfolio Content Category 1 product) or REC Product (Product qualifying as Portfolio Content Category 3) from Eligible Renewable Energy Resources ( ERR or ERR Generating Facility ). Products qualifying as Portfolio Content Category 1 2 include all electric energy produced by an ERR as well as all attributes, including all Green Attributes, all Capacity Attributes, and all Resource Adequacy Benefits generated by, associated with or attributable to the output of the ERR Generating Facility. Products qualifying as Category 3 encompass only Renewable Energy Credits, all associated Green Attributes, and Western Renewable Energy Generation Information System ( WREGIS ) certificates evidencing the authenticity of the REC product. 3 1 Capitalized terms when used with reference to the Tule PPA and not otherwise defined herein are as defined in the Tule PPA. 2 The first portfolio content category ( Category 1 ) is delineated in the California Public Utilities Commission s Decision Implementing Portfolio Content Categories for the Renewables Portfolio Standard Program, D (2011). It consists of products from renewable energy generators: with a first point of interconnection to the Western Electric Coordinating Council transmission system within the boundaries of a California Balancing Authority Area ( CBA ); or with a first point of interconnection with an electricity distribution system used to serve end users within the boundaries of a CBA; or where the renewable generation is scheduled into a CBA without substituting electricity from another source; or where the generation from the renewable facility is dynamically transferred to a CBA. 3 Category 3 products are generally unbundled RECs and are as defined in Public Utilities Code Section (b)(3) and D Merrimack Energy Group, Inc. 2

15 Pursuant to the 2014 Renewable RFP, SCE received a large number of proposals from renewable energy developers, reviewed and evaluated the proposals relative to the eligibility and conformance requirements listed in the Procurement Protocol document for the solicitation, evaluated and ranked the proposals, and determined which of those proposals to include on a short list for potential negotiations and contracting. Table ES-1 provides a short description of the projects for which contracts werehave been or are expected to be executed. Tables ES-1: Contracts from 2014 Renewable Energy Solicitation Seller Parent Company Sempra U.S. Gas & Power Project Name Mesquite Solar 2 Type Vintage Forecasted Commercial Operation Date Term (Years) Contract Capacity (MW) 4 Annual Deliveries (GWh) Solar PV New 1/1/ NextEra Energy Resources 5 Blythe Solar II Solar PV New 11/1/ Contract Capacity amounts are as set forth in Section 1.01(h) of each PPA. 5 Merrimack Energy Group, Inc. 3

16 Broadview Energy KW, LLC 6 Broadview Energy JN, LLC Recurrent Energy LLC 7 Broadview Energy KW, LLC Broadview Energy JN, LLC RE Garland Wind New 12/1/ Wind New 12/1/ Solar PV New 4/1/ Iberdrola S.A NextEra Energy Resources NextEra Energy Resources NextEra Energy Resources Enel Green Power Calpine Corporation Tule Wind Project SEGS III SEGS IV SEGS V Wind New 9/1/ Solar Thermal Solar Thermal Solar Thermal Existing 3/1/ Existing 3/1/ Existing 2/1/ TKO (South Bear Creek) Small Hydro Existing 1/15/ Geysers Geothermal Existing 1/1/ Merrimack Energy Group, Inc. 4

17 The Tule project is a 132 MW wind energy project being developed approximately 60 miles east of the city of San Diego. The project is expected to deliver approximately 381 GWh/year to SCE over a 15-year delivery term. The forecasted date for commercial operation under the PPA is September 1, 2017,. The owner of Tule, Iberdrola Renewables, LLC ( Iberdrola Renewables or Iberdrola ), Prior to the launch of the RFP, SCE retained Merrimack Energy Group, Inc. ( Merrimack Energy ) as the Independent Evaluator ( IE ) for the 2014 Renewable RFP in accordance with regulatory requirements of the California Public Utilities Commission ( CPUC or Commission ). 9 Following the receipt and evaluation of proposals and selection of the shortlist, Merrimack Energy submitted its Report on the Bid Evaluation and Short List Selection Process and Results ( IE Short List Report ), which was filed with SCE s advice letter seeking approval of the short list. 10 The Imperial Irrigation District ( IID ) filed a protest to SCE s short list, primarily objecting to SCE s use of transmission adders for projects interconnecting with IID with network upgrade costs, to which SCE filed a reply supporting its short list. On April 29, 2015, the Energy Division suspended a decision on the advice letter for up to 120 days effective May 23, 2015 in order to allow time for additional staff review. On July 14, 2015, the Energy Division issued a draft resolution approving SCE s shortlist report but directed SCE to re-evaluate IID-interconnected offers such that the differences between the CAISO tariff and the IID Open Access Transmission Tariff are considered. On September 18, 2015, the Commission issued Resolution E-4726 and directed SCE to reassess its evaluation of IID-interconnected bid projects in this solicitation, specifically to consider the difference between the reimbursement method used by the CAISO a repayment with interest on network upgrade costs paid by a generator and the method used by IID a credit of network upgrade costs to transmission costs incurred by the IID generator. 11. As addressed in the IE Short List Report, the IE is required to conduct a range of activities to review, assess, and scrutinize SCE s processes in implementing its solicitation process. Generally, Merrimack Energy found that the short-listing decisions were reasonable based 8 9 New Energy Opportunities, Inc. is serving as a subcontractor to Merrimack Energy in this engagement. 10 Advice Letter 3209-E, dated April 23, On September 28, 2015, SCE filed a Tier 1 Advice Letter re-evaluating proposals from its 2014 solicitation that were interconnected to the Imperial Irrigation District s electrical system such that the differences between the CAISO Tariff and the Imperial Irrigation District Open Access Transmission Tariff were considered. Merrimack Energy Group, Inc. 5

18 on the 2014 Renewable RFP requirements and evaluation criteria set forth in SCE s Procurement Protocol. 12 The primary purpose of this report is (1) to describe and assess the fairness of the RFP process following SCE s short listing decisions, which included a three-month period during which SCE and short listed bidders negotiated contract terms and conditions, conducted evaluations of any updated offers, and executed PPAs; and (2) to describe, with specificity, the fairness of the contract negotiation process with respect to the Tule PPA, the price, economic ranking, and other attributes of the Tule PPA and project, and whether the Tule PPA merits Commission approval. In addition, this report includes an assessment of the entire RFP process, including a description of IE activities and assessment of SCE s process from the IE Short List Report to final selection. Key findings are outlined in this executive summary. SCE s outreach activities, which included contacting a large number of prospective Sellers, holding a 2014 RPS Solicitation Request for Proposals Conference via Webex for prospective Sellers, and disseminating substantial information about the RFP on its website or the Accion Power website, were effective, as evidenced by the robust response to the RFP in terms of number of proposals, types of resources proposed, initial delivery dates, quality of the proposals submitted and importantly, maturity of the proposals submitted. SCE s approach adopted for this RFP was to apply fairly strict threshold requirements, notably that Sellers had to have a Phase II Interconnection Study or equivalent in order to participate. Although the number of proposals responding to this RFP was lower than recent RPS solicitations, including the 2013 Renewable RFP, the response was still very competitive with a more balanced combination of existing and new projects as well as more mature and viable projects competing. SCE s project team was thorough in conducting its due diligence review to determine if the proposals received conformed to the completeness and eligibility requirements of the RFP and SCE worked diligently with Sellers to remedy any curable deficiencies. SCE s Least Cost Best Fit ( LCBF ) evaluation methodology was generally implemented in a consistent manner and was effective in assessing a range of projects, technologies, contract terms and product sizes in a fair, consistent, and technology neutral manner. Under this approach, once proposals are received, SCE begins an initial review for completeness and conformity with the Procurement Protocol. After or during this review and assessment, SCE performs a quantitative assessment of each proposal individually and subsequently ranks them based on the Proposal s benefit and cost relationship. The result of the quantitative analysis is a merit-order ranking of all complete and conforming Proposals Net Market Value (previously referred to as Renewable Premiums) 13 that help define the 12 The Procurement Protocol is a public document describing the renewable energy products being sought, the 2014 Renewable RFP submission requirements, and SCE s preferences and evaluation criteria. 13 SCE had previously referred to its evaluation and ranking metric as Renewable Premium, which was essentially costs minus benefits. In recent solicitations, a number of projects were evaluated with a negative Merrimack Energy Group, Inc. 6

19 preliminary shortlist. Based on this analysis and qualitative considerations, a short-list is selected. The IE has concluded that the proposal evaluation process was fairly administered and was a thorough, consistent, and comprehensive process. Furthermore, the flexibility included in the final selection and the portfolio approach used by SCE to inform the ultimate selection served to lower expected gross costs for customers relative to a pure rank order selection process (based on expected net costs taking into consideration forecasted market values for energy and capacity). 16 The methodology and proposed Short List selection were vetted with SCE s Procurement Review Group ( PRG ) prior to final selection. Renewable Premium value, indicating that the cost associated with the project was lower than the benefits provided. For this solicitation, SCE transitioned to a Net Market Value metric which is essentially project benefits minus project costs. As a result, under this metric, the best or highest ranked projects will have a positive value instead of a negative value, as under the Renewable Premium metric. 14 Net Market Value is calculated by subtracting costs from benefits. Benefits are comprised of separate capacity, energy, curtailment (if applicable), and congestion components (congestion reduction if applicable). Costs include the contract payments, debt equivalence, congestion cost, renewable integration cost adder, and, if applicable, transmission network upgrade costs. SCE discounts the annual benefit and cost streams to a common base year. The result of the quantitative analysis is a merit order ranking of all complete and conforming offers by Net Market Value, which is the foundation upon which a series of alternative shortlist portfolios is established. 16 Section IV of this report provides a detailed description of the evaluation methodology and the adjustments made by SCE that led to lower expected gross customer costs Merrimack Energy Group, Inc. 7

20 In terms of the short-list selection process, SCE exercised discretion, in several contexts, In the short-listing process, SCE included a quantitative assessment of network upgrade costs of projects interconnecting with IID (Alternative Net Market Value). Prior to the 2013 RPS solicitation, SCE had not included reimbursable network upgrade costs from balancing authorities other than the CAISO in its RPS evaluation process as transmission adders for the reason that under existing CAISO tariffs IID customers and not California investor-owned utility customers will ultimately pay for such transmission upgrades. 19 SCE s management determined that it imposed a risk on SCE s customers not to The Procurement Documents do not address this issue specifically. Merrimack Energy Group, Inc. 8

21 include the cost of such upgrades in its evaluation due to the possibility that, as IID network upgrade costs increase to help support renewable projects to meet California s RPS obligations, the costs may ultimately be charged to CAISO and the California investor-owned utilities and their customers. In addition, SCE also indicated that it believed that treating projects interconnecting to any California balancing authority in the same manner put competing projects on a level playing field and take into account costs that would be incurred by California customers generally. While SCE characterized this treatment of non- CAISO California balancing authority network upgrade costs as a qualitative consideration, SCE applied the network upgrade costs quantitatively in what it referred to as the Alternative Renewable Premium metric. IID had protested SCE s treatment of network upgrade costs in the context of SCE s 2013 RPS advice letters, and the Commission approved all of SCE s advice letters. SubsequentlyRecently, the Commissionin a draft resolution, the Energy Division has directed SCE to reassess its evaluation of IID-interconnected bid projects in this solicitation, specifically to consider the difference between the reimbursement method used by the CAISO a repayment with interest on network upgrade costs paid by a generator and the method used by IID a credit of network upgrade costs to transmission costs incurred by the IID generator. 20 While several of these factors are included in the description of SCE s Least-Cost Best-Fit (LCBF) methodology, some of the other factors used in decision making were not explicitly addressed in SCE s LCBF methodology and therefore not directly communicated to bidders. If SCE wishes to use a similar approach (or a modified approach) in the next RPS solicitation, Merrimack Energy recommends that it amend its articulated LCBF methodology to reflect more closely how it intends to conduct its evaluation and selection process. 21 This should assist bidders in developing offers that will better address SCE s 20 Resolution E-4726The draft resolution has yet to be finalized, and, as of now, SCE has not conducted the reassessment directed by the Energy Division. 21 Merrimack Energy also suggests that SCE clarify the measures it desires to use to assess lower cost, whether, for example, the focus should be on levelized cost per MWh, present value costs, nominal costs or some combination of the foregoing and the relationship with contract term length. Merrimack Energy Group, Inc. 9

22 objectives. It will also facilitate Commission review of SCE s proposed evaluation methodology. For purposes of the 2014 RPS solicitation, Merrimack Energy generally found SCE s approach to be reasonable. SCE utilized a one-step process to solicit offers and negotiate PPAs in the 2014 RPS solicitation as opposed to the two-step process used in the 2013 RPS RFP. In turn, the pricing of these projects likely reflected the higher level of ITC 30% compared to 10%--available under current law for pre-2017 in-service dates. In the context of these contract negotiations, SCE used opportunities presented when bidders offered changes from their original bids, such as earlier or later start dates, to obtain contract concessions, usually in the form of lower prices. SCE decided to execute contracts with all shortlisted counterparties with which it could reach agreement on a PPA. The particular start dates, term length, and pricing tended to reflect SCE s priorities for earlier start dates, and more Compliance Period 3 MWs, lower gross costs, and shorter contract term lengths. In the IE s opinion, this was a reasonable exercise of business judgment by SCE consistent with the LCBF qualitative considerations of. Overall, it is the IE s assessment that SCE reasonably designed and fairly implemented the 2014 Renewable RFP and appropriately selected the Tule proposal. The Tule project had a high ranking in terms of project viability, the PPA was fairly negotiated, and, in the IE s opinion, the Tule PPA merits Commission approval. Merrimack Energy Group, Inc. 10

23 I Renewable Request for Proposals ( RFP ) Overview On December 18, 2014, Southern California Edison Company ( SCE ) issued its 2014 Renewable RFP. SCE solicited proposals from Bidders ( Sellers ) to supply either Bundled Energy Product or REC Product from Eligible Renewable Energy Resources sufficient to permit SCE to execute renewable power purchase and sale agreements ( PPAs ) in substantially the form as SCE s Pro Forma Renewable Power Purchase and Sale Agreement ( Pro Forma PPA ) or the Pro Forma Master Renewable Energy Credit Purchase Agreement ( Pro Forma REC Purchase Agreement ), as applicable, both posted on the Accion Power s RPS Proposal Website. Through the 2014 Renewable RFP solicitation, SCE sought Proposals for product qualifying as Portfolio Content Category 1 ( Category 1 ) or REC Product qualifying as Portfolio Content Category 3 ( Category 3 ). Category 1 includes all electric energy produced by an ERR Generating Facility throughout the term of the Final Agreement, net of Station Use; all Green Attributes; all Capacity Attributes, if any; and all Resource Adequacy Benefits, if any; generated by, associated with, or attributable to the output of the ERR Generating Facility. 22 Category 3 encompasses only Renewable Energy Credits ( RECs ), all associated Green Attributes, and Western Renewable Energy Generation Information System ( WREGIS ) certificates evidencing the authenticity of the REC Product. REC Product does not include the energy generated as part of the creation of the RECs. All REC Product transactions must be for period of 10 years or more. The basic solicitation requirements and conditions are set forth in the 2014 Renewable RFP Procurement Protocol. These include: 1. SCE will only consider Proposals to purchase Bundled Energy Product or REC Product from ERR Generating Facilities with commercial operation dates (the COD ) or initial delivery dates to SCE on January 1, 2016 or later; 2. SCE will consider proposals to purchase REC Product from new or existing ERR Generating Facilities; 3. SCE will consider Proposals from Sellers with ERR Generating Facilities that are located outside the State of California but only if they can deliver Product that qualifies as Category 1 or Category SCE will not consider Proposals to deliver any Portfolio Content Category 2 products, such as firmed and shaped product; 22 Capitalized terms in this report are as defined in the Procurement Protocol, unless otherwise specified or where terms pertain to the Tule PPA (and are defined in the Tule PPA). 23 Category 1 projects are those: with a first point of interconnection to the Western Electric Coordinating Council transmission system within the boundaries of a California Balancing Authority Area; or with a first point of interconnection with an electricity distribution system used to serve end users within the Merrimack Energy Group, Inc. 11

24 4. SCE is only soliciting Bundled Energy Product or REC Product from ERR Generating Facilities which possess: (1) a completed Phase II Interconnection Study or equivalent, (2) a signed Interconnection Agreement, or (3) an equivalent or better interconnection study, agreement, process, or exemption. Further, the interconnection arrangements must support the ERR Generating Facility s forecasted COD. Should Seller s interconnection arrangement indicate an interconnection date later than the ERR Generating Facility s forecasted COD, the proposal will not be given further consideration; 5. Seller may propose any term length equal to or greater than 10 years. If a Seller submits a long-term Proposal with a term length of more than 20 years, the Seller shall also submit an alternative Proposal with a 20 year term; 6. SCE will accept mutually inclusive proposals (i.e. package deals or any similar requirements by Seller that an individual proposal may only be selected by SCE if other specific Proposals are also selected). Seller must clearly identify all Proposals with a mutual-inclusive limitation. Seller must clearly identify the discount to the individual Proposal or aggregate Product Price, if any, associated with any package deal; 7. SCE will accept mutually-exclusive proposals (e.g., flat vs escalating pricing for the same ERR Generating Facility or 15-year vs 20-year term for the same ERR Generating Facility). Seller must clearly identify all Proposals with a mutualexclusivity limitation; 8. Proposals for Bundled Energy Product or REC Product delivered from ERR Generating Facilities with Contract Capacity of 500 kw or greater are eligible to participate in this RPS solicitation; 9. Seller s Proposal must demonstrate Site Control or the Proposal will not be given further consideration. SCE intends that the definition of Site and Site Control not only mean the land upon which the ERR Generating Facility is expected to be located, but also encompass any rights-of-way or other real property rights (e.g. land on which Seller s generation tie line between the ERR Generating Facility and the Interconnection Point shall be constructed) necessary for Seller to be able to deliver the Product to SCE; 10. For Bundled Energy Product, Seller s generating facility must be a new, existing or repowered generating facility that is an ERR; boundaries of a CBA; or where the renewable generation is scheduled into a CBA without substituting electricity from another source; or where the generation from the renewable facility is dynamically transferred to a CBA. Category 3 Products primarily involve REC-only products. Merrimack Energy Group, Inc. 12

25 11. Sellers must submit Product pricing for Proposals based on the inclusion of zero (0) or fifty (50) hours per year of unpaid curtailment as further outlined in this Protocol; 12. SCE will consider Proposals with energy storage. Sellers should include a description as well as the operating parameters of the proposed storage facility in the Proposal Structure Letter; 13. Through the RPS solicitation, SCE continues to solicit ERR Generating Facilities in the Western Los Angeles sub-area of the Los Angeles basin local reliability area ( Western LA Basin sub-area ) to meet local capacity requirements ( LCR ) and specifically, resources that are interconnected to SCE s distribution system in the Johanna and Santiago sub-station area to meet SCE s Preferred Resource Pilot ( PRP ) goals, which may also be met by ERR Generating Facilities; 14. SCE encourages Women-Owned, Minority-Owned, and Service Disabled Veteran- Owned Business Enterprises ( WMDVBE ) to participate in the RFP; 15. SCE will only consider Proposals that are substantially complete and include all of the applicable information, representations, warranties, and covenants as set forth in the Form of Seller s Proposal; 16. The primary method for exchange of information or documents concerning this RPS solicitation, including any such exchange concerning the preparation or submission of Proposals to SCE, will be via the RPS Proposal Website. SCE evaluates and ranks Proposals based on Least-Cost Best-Fit principles in accordance with criteria set forth by the CPUC in D and D ( LCBF Decisions ), and D The LCBF analysis evaluates both quantitative and qualitative aspects of each Proposal to estimate its value to SCE s customers and its relative value in comparison to other Proposals. SCE s LCBF methodology will be discussed in detail in Section IV of this Report and Appendix A. SCE followed a multi-step approach designed to result in shortlist selection as described in the Procurement Protocol. In this process, once Proposals are received, SCE begins an initial review for completeness and conformity with the Procurement Protocol. The review includes an initial screen for required submission criteria such as, for Bundled Energy Product, a conforming delivery point, commercial on-line date during 2016 or later, a valid interconnection study, minimum project size, and the submission of all required Proposal package elements. Sellers Proposals that are substantially complete but lacking required information are allowed a reasonable cure period to remedy any deficiencies. Following this check for conformity, SCE conducts an additional review to determine the reasonableness of Proposal parameters such as generation profiles and capacity factors. SCE works directly with Sellers to resolve any issues and ensure the data is ready for Merrimack Energy Group, Inc. 13

26 evaluation. Through the Accion Power Website the IE is copied on any communications between SCE and the Sellers. After this review, SCE performs a quantitative assessment of each Proposal individually and subsequently ranks them based on the Proposal s benefit and cost relationship. The total benefits and costs are used to calculate the Net Market Value for each complete and conforming Proposal. Benefits are comprised of separate capacity and energy components, congestion and curtailments benefits, while costs include the contract payments, debt equivalence, integration cost, congestion cost, and transmission cost. SCE discounts the monthly benefit and cost streams to a common base date. The result of the quantitative analysis is a merit-order ranking of all complete and conforming proposal s Net Market Values that assist in defining the Short-List. Following the quantitative analysis SCE conducts a qualitative assessment, including use of the Project Viability Calculator for the most competitive Proposals. This analysis utilizes the Project Viability Calculator to assess certain factors including the experience of the company/development team, technology, and development milestones. Additional attributes such as transmission area/cluster, generating facility location, seller concentration, project size, dispatchability, and contribution to other program goals are also considered in the qualitative analysis. These qualitative attributes are then considered to either eliminate non-viable Proposals or Proposals with other qualitative attributes or add Projects with high viability to the final short-list of Proposals, or to determine tie-breakers, if any. Following its analysis, SCE consults with its PRG regarding the proposed Short-List and specific evaluation criteria. SCE then develops a final Short-List and negotiates with the Short-Listed Sellers after notification of Short-Listing. Whether a Proposal selected through this process results in an executed contract depends on the outcome of negotiations between SCE and the Seller. SCE executes contracts and then submits them to the Commission for approval through advice letter filings. SCE s 2014 RPS RFP includes several changes from the company s previous RPS solicitations, including the following: SCE continued to require a Phase II Interconnection Study for projects (or an equivalent of more advanced interconnection study or exemption) as it did in the 2013 RPS solicitation; In addition to soliciting long-term Category 1 products, SCE sought proposals for long-term Category 3 unbundled REC transactions; Utilizing a one-step solicitation process rather than the two-step process used in the 2013 RPS solicitation (in the 2013 RPS solicitation, short-listed bidders were required to negotiate PPAs before they submitted best and final offers, but in the 2014 RPS solicitation, SCE negotiated PPAs with short-listed bidders without a second bid submission process); Merrimack Energy Group, Inc. 14

27 SCE required bidders to propose pricing based on two economic curtailment scenarios, both without the banked curtailment and pay-back provisions. The Procurement Protocol requires sellers proposing Category 1 products to provide two bids based on different curtailment protocols: o Option 1: Sellers offer pricing based on SCE having the right to issue unpaid curtailment orders for up to 50 hours per year. Any Curtailment Order (as defined in Section 3.12(g)(iii) of the 2014 Pro Forma PPA) in excess of the 50 hours multiplied by the applicable contract capacity would be paid at the contract price; o Option 2: Sellers offer pricing based on SCE having to pay the contract price for all Curtailment Orders. SCE evaluated both bids and selected the bid that represents the best value to SCE s customers. Some of these and other matters are addressed in the Commission s decision adopting 2014 RPS procurement plans. 24 In that decision, the Commission made the following directives that pertain to SCE s 2014 RPS RFP: The Commission approved SCE s proposal to use CAISO s 10-year forecast of import capability from IID in lieu of the previously ordered 1,400 MW capability assumption; SCE s proposal to change the minimum size requirement for a RPS bid from 1.5 MW to 500 kw was approved; SCE s proposal to use one set of TOD factors rather than two based on interconnection deliverability status, as was used in its 2013 RPS solicitation, was approved; The Commission approved SCE s proposal to include in its Pro Forma PPA a provision that gave SCE the right to approve material project design changes in its sole discretion; The Commission denied SCE s request to remove Pro Forma PPA language that provided (in the 2013 Pro Forma PPA) that in the event federal tax credits expire before the project goes into operation the commercial operation date milestone could be extended or the Seller would have the right to terminate the PPA; A request to reinstate shortlist exclusivity (used prior to the 2013 RPS RFP) was denied; SCE s proposal to reduce its payment obligations for excessive deliveries in its Pro Forma PPA was approved; SCE s approach in requiring bidders to submit bids with two different economic curtailment treatments (previously described) was approved; The IOUs were required to incorporate a requirement for bidders that projects, at a minimum, have a project deemed complete or equivalent status with respect to their major land use permit application; With respect to resource adequacy ( RA ) value in the quantitative evaluation, the IOUs were directed to report (a) their RA price curves and (b) their bid rankings 24 D (Nov. 24, 2014). Merrimack Energy Group, Inc. 15

28 based on Net Qualifying Capacities ( NQCs ) based on use of the existing exceedance methodology (which would be used for evaluation purposes) and effective load carrying capability ( ELCC ) capacity methodology; 25 The Commission directed for purposes of the 2014 RPS solicitations that the IOUs use an interim Renewable Integration Cost Adder ( RICA ), consisting of: o A variable component: $3/MWh for solar and $4/MWh for wind; and o A fixed component calculated by each IOU. These solicitation elements were incorporated by SCE in its RPS Protocol, Pro Forma PPA, and/or its evaluation process, as applicable. II. Role of the Independent Evaluator A. Regulatory Requirements for the Independent Evaluator The requirements for participation by an IE in utility solicitations are outlined in Decisions ( D ) (Findings of Fact 94-95, Ordering Paragraph 28), D (Finding of Fact 20, Conclusion of Law 3, Ordering Paragraph 8) of the CPUC, D and D The role of the IEs in California IOU procurement processes has evolved over the past ten years. In D (December 16, 2004), the CPUC required the use of an IE by investor-owned utilities ( IOUs ) in resource solicitations where there is an affiliated bidder or bidders, or where the utility proposed to build a project or where a bidder proposed to sell a project or build a project under a turnkey contract that would ultimately be owned by a utility. The CPUC generally endorsed the guidelines issued by the Federal Energy Regulatory Commission ( FERC ) for independent evaluation where an affiliate of the purchaser is a bidder in a competitive solicitation, but stated that the role of the IE would not be to make binding decisions on behalf of the utilities or administer the entire process. 26 Instead, the IE would be consulted by the IOU, along with the Procurement Review Group ( PRG ) on the design, administration, and evaluation aspects of the Request for Proposals. The Decision identifies the technical expertise and experience of 25 SCE did not utilize an ELCC methodology to calculate RA value in this solicitation. Based on discussions with SCE, it is our understanding that SCE completed an alternative Net Market Value calculation using ELCC for informational purposes and intends to provide the results of its assessment of the offers from the solicitation using an ELCC methodology with its Short-List Report. 26 Decision at The FERC guidelines are set forth in Ameren Energy Generating Company, 108 FERC 61,081 (June 29, 2004). Merrimack Energy Group, Inc. 16

29 the IE with regard to industry contracts, quantitative evaluation methodologies, power market derivatives, and other aspects of power project development. From a process standpoint, the IOU could contract directly with the IE, in consultation with its PRG, but the IE would coordinate with the Energy Division. In D (May 25, 2006), the CPUC required each IOU to employ an IE regarding all RFPs issued pursuant to the RPS, regardless of whether there were any utility-owned or affiliate-owned projects under consideration. This was extended to any long-term contract for new generation in D (July 21, 2006). In addition, the CPUC directed the IE for each RFP to provide separate reports (a preliminary report with the shortlist and final reports with IOU advice letters to approve contracts) on the entire bid, solicitation, evaluation and selection process, with the reports submitted to the utility, PRG, and CPUC and made available to the public (subject to confidential treatment of protected information). The IE would also make periodic presentations regarding its findings to the utility and the utility s PRG consistent with preserving the independence of the IE by ensuring free and unfettered communication between the IE and the CPUC s Energy Division, and an open, fair, and transparent process that the PRG could confirm. In 2007, the use of an IE was required for any competitive solicitation seeking products for a term of more than three months in D (December 21, 2007). Also, the process for retaining IEs was modified substantially, with IOUs developing a pool of qualified IEs subject to feedback and any recommendations from the IOU s PRG and the Energy Division, an internal review process for IE candidates, and final approval of IEs by the Energy Division. In 2008, in D , the CPUC changed the minimum term requirements from three months to two years, and reiterated that an IE must be utilized whenever an affiliate or utility bidder participates in the RFO, regardless of contract duration. In D issued on June 18, 2009 in Rulemaking , Order Instituting Rulemaking to Continue Implementation and Administration of California Renewable Portfolio Standard Program, the CPUC required that bilateral contracts should be reviewed according to the same processes and standards as contracts that come through a solicitation. This includes review by the utility s PRG and its IE, including a report filed by the IE. In D issued on July 29, 2010, the Commission reaffirmed the role of the IE and required the Energy Division to revise the IE Template to ensure that the IEs focus on their core responsibility of evaluating whether an IOU conducted a well-designed, fair, and transparent RFO for the purpose of obtaining the lowest market prices for ratepayers, taking into account many factors (e.g. project viability, transmission access, etc.). This IE report is submitted in conformance with the above requirements and is generally consistent with the requirements outlined in the CPUC s 2014 RPS Solicitation Shortlist Report Template. B. Description of Key IE Roles Merrimack Energy Group, Inc. 17