Docket No. 85-AFC-1

September 17, 1986 Commission Decision Granting Certification

Project Manager: Darrel Woo

Staff Counsel: Dick Ratliff, John Chandley (demand)

Hearing Officer: David Mundstock

Presiding Member: Commissioner Doug Noteware

AFC Filing and the NOI Exemption

On May 31, 1985, the Atlantic Richfield Company (ARCO) submitted its Application for Certification (AFC) for a 391 megawatt (MW) cogeneration plant (385 MW net) at the Watson Refinery in Carson. Under Public Resources Code section 25540.6(a) as it then existed, such a large cogeneration plant exceeding 300 MW could only be exempted from the Notice of Intention (NOI) requirement by CEC regulation. Otherwise an NOI, with consideration of at least three alternative sites would have to be filed.

Section 1763(a) of the Commission’s regulations (since repealed) allowed for the NOI exemption "if the Commission determines that there are no feasible alternative sites because the thermal energy to be produced or recovered by the facility can only be used at one specific site." A Committee hearing determined that the ARCO-Watson cogeneration plant, intended to service the Watson Refinery, clearly met this test, and the Committee recommendation to grant the NOI exemption was ratified by the full Commission on July 10, 1985. That same day the Commission also accepted the AFC as data adequate.

Project Description

The ARCO-Watson Cogeneration Project was to be fueled primarily by natural gas, with refinery gas as a back-up fuel. The powerplant would generate 45 MW for internal use at the Watson Refinery and 340 MW for sale to Southern California Edison (SCE) under a 20-year, non-standard contract.

The project was located in Carson, south of the Los Angeles International Airport, near Long Beach, a heavily industrial area with many refineries. The Watson Refinery was required by the South Coast Air Quality Management District (SCAQMD) to reduce its air emissions. The cogeneration plant would replace old, inefficient boilers with a less polluting source of steam for the refinery, thus improving air quality and helping ARCO comply with SCAQMD’s directives. The retired boilers would also serve as air emission offsets for the powerplant.

Environmental Review (Uncontested)

No intervenors came forward to oppose the project. CEC staff and the applicant cooperated during the review process, leading to stipulations on all environmental and engineering subjects. The conditions of certification proposed by CEC staff and ARCO-Watson were adopted by the Committee and the Commission.

Demand Conformance (Adjudicated)

Overview

As the ARCO-Watson Cogeneration Project approached evidentiary hearings in mid 1986, CEC staff had concluded that the number of proposed powerplants (both AFCs and SPPEs) seeking Energy Commission approval greatly exceeded the need for new facilities in the SCE service area as established under the 1985 Electricity Report 5 (ER 5). CEC staff thus presented testimony challenging the need for a series of facilities, starting with Arco-Watson and Champlin (Docket No. 85-SPPE-7). In each of these proceedings with a demand conformance adjudication, the applicant won and CEC staff lost. After this series of defeats, in which the challenged powerplants were all found needed by several Committees and the Commission as a whole, CEC staff ceased to adjudicate demand conformance. (In hindsight, the Energy Commission made the right choices in licensing all of these plants. They were truly needed, and became essential sources of electricity during the post de-regulation supply crisis that began in 2000.)

The ER V Need Tests (Unspecified Reserved Need Test)

The 1985 Electricity Report (ER 5) established four demand conformance or "need" tests, designed to be used in succession. ARCO-Watson was evaluated under the second of these, the Unspecified Reserved Need Test. This test had five separate conditions which ARCO-Watson had to pass in order to be found needed.

Condition 1: The proposed facility will not exceed the remaining unfilled unspecified "reserved need."

The Commission had assigned ARCO a 385 MW portion of unspecified reserved need, so it automatically passed this condition. (Pages 19-20 of the CEC Decision.)

Condition 2(a): For projects in which the risk of cost overruns is not borne by ratepayers, e.g., Qualifying Facilities (QFs) under the Public Utilities Regulatory Policy Act (PURPA), power from the facility will be sold to a utility at or below the utility’s avoided cost as determined by the applicable ratemaking body.

The Federal Energy Regulatory Commission (FERC) had granted the ARCO-Watson project QF status. Both applicant and staff witnesses agreed that payments to ARCO would be below SCE’s avoided costs as defined by the PUC in the applicable Standard Offer contracts. ARCO-Watson passed Condition 2(a). (Pages 20-21 of the CEC Decision.)

Condition 3: The power from the facility matches the load conditions of the service area(s) in which the power is delivered.

This was the most controversial and time consuming element of the Unspecified Reserved Need Test, in large part because CEC staff and ARCO could not agree on how a project demonstrates that it "matches loads."

In practice, ARCO accepted the key staff criteria and attempted to prove that its facility would displace utility oil and gas plants all of the time, thus satisfying Condition 3.

The fuel displacement theory was that a newer, more efficient plant matched a utility’s load and was needed if it displaced older, less efficient utility oil and gas units. ARCO’s witnesses, relying upon ER V assumptions, presented testimony with and without ELFIN computer modeling to show that ARCO-Watson’s electricity would displace power from SCE’s existing plants. (Pages 22-30 of the CEC Decision.)

CEC staff rejected ER 5’s assumptions regarding the SCE system because they did not include economy energy, which staff felt was available to SCE from sources such as the Department of Water Resources (DWR). While ER 5 included zero economy energy, CEC staff testimony assumed its existence, and then sought to prove that this was the energy ARCO-Watson would displace part of the time, rather than SCE’s oil and gas units. (Pages 31-35 of the CEC Decision.)

After hearing testimony on the operation of the SCE/DWR contract, the Committee determined that CEC staff had failed to rebut ER 5’s presumption of zero economy energy in the SCE system. (Pages 35-36 of the CEC Decision.)

The Committee also declined to accept CEC staff calculations which presumed that all powerplants currently seeking certification should be included in the SCE system as candidates for displacement. Instead, the Committee followed ER 5 language which declared that only projects which have received agency approval are considered likely to be available. In practice, this meant that Champlin was added to the SCE system for analysis purposes, but not any of the AFCs trailing behind ARCO in the CEC review pipeline.

Using ER 5 assumptions, the Committee thus concluded that the evidence showed ARCO-Watson would displace utility oil and gas plants all of the time, meeting Condition 3. (Pages 36-40, 47 of the CEC Decision.)

Condition 4(a): There is sufficient remaining total need for energy (including necessary fuel displacement to achieve the adopted statewide 33 percent cap on oil and gas use) in the utility service area(s) in which the power is proposed to be delivered.

ARCO-Watson’s ability to satisfy this condition turned upon whether Pacific Northwest resources were added to the SCE system, reducing the total need for energy. Staff wished to add some of these additional resources in order to correct what staff alleged was an error in the ER 5 adopted figures for SCE. This was a change in the staff position from prior siting cases in which staff had relied upon the very same ER 5 calculations they now challenged as erroneous. Testimony was also offered by staff and applicant concerning the disputed status of specific new agreements under negotiation that might provide additional electricity to SCE. (Pages 47-58 of the CEC Decision.)

The Committee declined to alter ER 5 adopted figures relating to Pacific Northwest energy, considering them to be fixed assumptions. Where staff challenged rebuttable ER 5 presumptions concerning new contracts, the Committee found that staff had failed to sufficiently prove its case. The Committee calculations determined that ARCO-Watson satisfied Condition 4(a). (Pages 58-69 of the CEC Decision.)

Condition 4(b): To the extent that the need for a facility is based on oil or gas displacement, the applicant must also demonstrate that the facility will, in fact, displace the amount of oil and gas in California with which it is proposed to be credited.

While the parties provided witnesses to dispute this condition, the Committee concluded that the matter had already been resolved in applicant’s favor by the ARCO-Watson showing under Condition 3 that it would displace utility oil and gas units 100% of the time. (Pages 73-74 of the CEC Decision.)

Conclusion: The Committee, and later the Commission, therefore concluded that ARCO-Watson satisfied each and every condition of the ER 5 Unspecified Reserved Need Test, and was in conformance with the Commission’s adopted demand forecast. ARCO-Watson was needed. (Pages 74-75 of the CEC Decision.)

Adoption

CEC Staff challenged the Committee’s demand conformance findings right up until the September 17, 1986 Business Meeting at which the matter was to be heard. However, at the Business Meeting, staff did not re-argue its case, allowing for an uncontested and unanimous certification.

At 385 MW, ARCO-Watson was in 1986 the largest powerplant ever licensed by the Energy Commission. This record held until 1999, when the gigantic 500-1000 MW combined cycle projects began to receive licenses following electric industry restructuring (de-regulation).