Project Manger: Eileen Allen

Staff Counsel: Jeff Ogata

Hearing Officer Susan Gefter

Presiding Member: Commissioner Robert Laurie

AFC Filing, Data Adequacy, and Project Description.

Otay Mesa Generating Company, an affiliate of PG&E National Group, filed the Otay Mesa Application for Certification on August 2, 1999, for a nominal 510 MW natural gas-fired powerplant. However, the project was intended to be sold to Calpine Corporation after certification, with Calpine building, owning, and operating the plant, and affiliates of PG&E National Energy Group contracting for up to 250 MW of the output. Technically still a merchant plant, the energy supply crisis led to changed situations under which the Otay Mesa facility already had a must run contract with the California Independent System Operator (Cal-ISO). The long-standing need for new powerplants in San Diego was finally being addressed. (See South Bay, for SDG&E's prior lack of success.) The Otay Mesa facility would clearly contribute to overall system reliability. Otay Mesa's AFC was found data adequate by the Energy Commission on October 6, 1999.

The Otay Mesa site is located 15 miles southeast of downtown San Diego, at the base of the San Ysidro Mountains, about 1.5 miles north of the United States/Mexico border. It was an undeveloped area of fallow agricultural land being turned into a San Diego County industrial/commercial development area. The site's nearest residential neighbors were in correctional facilities. Tijuana was the closest city, but no Mexican intervenors ever came forward. Otay Mesa was one proceeding in which the neighbors turned out not to matter. The project's use of dry cooling technology, instead of the traditional cooling towers with their heavy water demands, solved water supply problems.

Issues.

Air Quality - Mobile Offsets

Otay Mesa was a pioneer, California's first successful project utilizing mobile offsets, technically known as Mobile Emission Reduction Offsets (MERCs). All other powerplants had offset their new emissions by reductions in air pollution from stationary sources, such as oil refineries or manufacturing plants. Sufficient conventional offsets of that type were virtually unobtainable in San Diego, especially for Oxides of Nitrogen (NOx), a leading powerplant pollutant.. If Otay Mesa had been limited to stationary source offsets, the project would most likely never have been licensed.

Instead, Otay Mesa proposed to reduce air pollution from boats and garbage trucks. Otay Mesa contracted with the San Diego Harbor Excursion fleet and Western Maritime fleet to replace their heavily polluting diesel ship engines with modern, lower emitting diesel engines. Waste Management 's garbage trucks would be converted by Otay Mesa from diesel to natural gas engines, again resulting in a significant NOx emission reduction. Thus, applicant pays to reduce pollution, and receives the credits in the form of offsets, with unique sources, ships and trucks.

Mobile offsets were unprecedented, controversial, difficult to calculate, and, most importantly, they needed official blessing in the form of a brand new program to be adopted by the San Diego County Air Pollution Control District (air district) in consultation with the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (ARB). Otay Mesa's mobile offsets would not become a reality until these agencies all reached a consensus, and the air district finalized its program after completing an Environmental Impact Report.

This process of creating a mobile offsets program took a great deal of time. The air district did not approve Otay Mesa's mobile offsets until September 8, 2000, eleven months into the AFC. The air district's final Determination of Compliance (DOC) was promptly issued on September 18, 2000, which then allowed Energy Commission evidentiary hearings on air quality to go forward in November 2000, leading to the belated completion of the Otay Mesa AFC proceeding.

Reliability - Natural Gas Supply

Intervenors Duke Energy and Cabrillo Power asserted that Otay Mesa's use of natural gas would cause their own powerplant facilities (South Bay and Encina to be curtailed, due to shortages of natural gas in the San Diego region caused by lack of pipeline capacity. This issue was seriously adjudicated, with Duke and Cabrillo witnesses facing off against a coalition of CEC staff, applicant and SDG&E experts, all arguing over computer modeling profiles of SDG&E natural gas/electricity supply forecast scenarios. The SDG&E/CEC staff/Otay Mesa position was that Otay could be reliably served with natural gas by SDG&E without impacting other electricity generators such as South Bay and Encina.

Duke and Cabrillo were Otay Mesa's competitors, since they had purchased the South Bay and Encina plants from SDG&E under the utility divestiture portion of electric industry restructuring. Otay Mesa, as the new plant, would be much more efficient than the older, former utility generators. However, Duke and Cabrillo claimed the natural gas shortages triggered by Otay Mesa would force the burning of fuel oil by their plants to produce electricity, greatly increasing pollution in the San Diego area. The Committee and Commission found these assertions regarding the burning of fuel oil to be too speculative for serious consideration.

Ultimately, the Committee and Commission relied upon SDG&E's assurances that Otay Mesa would not degrade system reliability or increase gas delivery constraints, adding that review of the SDG&E system by the California Public Utilities Commission and the Independent System Operator provided additional safeguards. (Page 89 of the Commission Decision.)

Adoption.

The Energy Commission unanimously certified the Otay Mesa Generating Project on April 18, 2001. It was the 14^th merchant plant licensed by the Commission, but the first AFC ever granted in San Diego. SDG&E had helped Otay Mesa succeed at the CEC, where the local utility itself had failed to site any new powerplants. Mobile offsets, although still opposed as unreliable and speculative by some environmental groups, had scored an important breakthrough.

Calpine purchased Otay Mesa as planned and prepared to begin construction. The schedule called for Otay Mesa to be completed in 2003. This project is one of many delayed by Calpine and other powerplant developers in the current uncertain financial climate. Construction is now on hold and the Energy Commission lists the Otay Mesa completion date as "Unknown".