January 18, 1995 Commission Decision

Project Manager: Terry Maderos

Staff Counsel: David Mundstock

Hearing Officer: Stan Valkosky

Presiding Member: Chairman Charles Imbrecht

Associate Member: Commissioner Richard Bilas

Project Summary

Background

The Commission granted certification to SEPCO on May 11, 1994. At all times during the AFC proceeding, the project was represented to be a cogeneration facility consisting of both a natural gas fired powerplant and an ethanol manufacturing facility (the thermal host). The application was processed as a 12-month AFC (exempt from an NOI) because of its cogeneration status.

Petition for Modification

On July 1, 1994, the licensees, Sacramento Municipal Utility District Financing Authority (SMUDFA) and Sacramento Power Inc., filed a Petition for License Modification under section 1769 of the Commission's regulations. The petition sought to allow SEPCO to operate as a stand-alone combined-cycle powerplant (without the ethanol plant), rather than as the cogeneration facility specified in the CEC decision. Licensees wished to accomplish this change by deleting Conditions of Certification Reliability 4 and Efficiency 1. The petition also sought to substitute stationary source air emission offsets for agricultural waste credits. Licensees' August 5, 1994 amendment to the petition added a request to change the project's water supply source.

Licensees stated that the petition was a response to concerns raised in the financial community about the joint SEPCO project. It was felt that a direct linkage between the unproven ethanol facility and the powerplant would be detrimental to powerplant financing. The powerplant would be more financially secure if it could operate on its own. However, licensees insisted that their intention remained to build the SEPCO facility as originally described, including the ethanol plant.

CEC Staff Response

1. Project description.

Licensees maintained that SEPCO was still a cogeneration facility, subject to future determinations regarding the ethanol plant's feasibility. However, they desired a license for a stand-alone power plant. CEC staff found this to be a contradictory project description which prevented any proper analysis of the petition. (Energy Commission Staff's Response to the July 15, 1994 Committee Order).

2. Changed circumstances.

Under section 1769(a) of the CEC regulations, the petition for modification had to discuss changed circumstances since the AFC proceeding or else explain why the issue had not been raised during the siting case. The petition asserted that the changed circumstances were reflected in a June 23, 1994 letter from Bear Stearns, SMUD's project underwriters. This letter, dated six weeks after certification stated: "As you know, Bear Stearns has taken the position that a direct linkage between the operation of the ethanol facility and the power plant would be detrimental to the financing of the powerplant."

The phrase "As you know" suggested that these financing concerns had been raised by Bear Sterns to the SEPCO applicants well prior to the June 23, 1994 letter. Proof of such early notice was later provided when licensees filed Amendment No. 1 to their Development Agreement. This document, signed by SMUDFA and SPI in March of 1994, overtly required SPI/ARK to obtain a CEC permit that allowed for a stand-alone combined cycle powerplant without the cogeneration requirement. Thus, months before SEPCO was certified as a cogeneration plant, applicants had already decided that the project would have to be significantly modified for financial reasons. Applicants failed to inform the CEC of Amendment No. 1's existence until after they filed the petition for modification.

CEC staff therefore concluded that licensees had utterly failed to assert any changed circumstances since certification which could justify their petition for modification of the cogeneration requirement. Staff attempted to establish this point on the record at the August 16, 1994 Committee Hearing at pages 88-126 of the Reporter's Transcript. 

3. The Sher Bill and alternatives.

Licensees now claimed that the Sher Bill (A.B. 1884, Chapter 1108, Statutes of 1993) should apply to the project. The Sher Bill amended Public Resources Code section 25540.6(a)(1) to allow a new NOI exemption for natural gas-fired powerplants resulting from competitive solicitation or negotiation. This legislation became effective during the original AFC proceeding, but applicants chose not to invoke it at that time, apparently fearful of delaying the case. SEPCO's exemption from the NOI was thus based solely upon its cogeneration status.

SEPCO appeared to qualify for the Sher Bill's NOI exemption provided the licensees defined it as a stand-alone facility and submitted an alternative site analysis in accordance with the bill's provisions at Public Resources Code section 25540.6(b). The ethanol plant's special needs (proximity to the rice fields and rail transport) had constrained both applicant and staff work on alternative sites in the original AFC. A stand-alone combined-cycle plant would be a very different project with brand new site selection criteria, none of which the applicants had ever discussed.

4. Water supply.

Licensees had been unable to obtain the surface water supply from the Natomas Central Mutual Water Company that was described in the AFC. The petition now proposed substituting new sources of both surface and ground water to be acquired through a complex set of agreements involving several different water districts in conjunction with an existing pipeline expansion project.

So long as SEPCO avoided use of Rio Linda area groundwater, CEC staff had no fundamental objection the proposed new water supply. This time, CEC staff issued data requests calling for signed contracts between licensees and the various water districts they intended to rely upon. Signed contracts were provided which enabled staff to understand and analyze the intricate new proposal, although they still did not guarantee any particular water supply.

SEPCO now intended to obtain surface water from Folsom Lake (when available), in combination with groundwater from the Northridge Water District. It was a conjunctive use program, where when surplus surface water was available, it would be used to recharge groundwater levels. When surface water was not available, the groundwater could then be used.

Staff analyzed various scenarios before concluding that sufficient surface water was likely to be obtained so that the project would not cause a significant adverse impact upon the Northridge area's groundwater supplies. (Energy Commission Staff's Water Supply Testimony, December 13, 1994).

5. Air Quality

Applicants now proposed banked offsets from the Marysville and Rocklin areas together with a reduction in permitted NOx emissions from the combustion turbine. Because the new offsets were further away from Rio Linda than the anticipated agricultural waste offsets (and all downwind from the site), CEC staff initially felt that the banked offsets would not adequately mitigate actual SEPCO project impacts. Staff filed testimony challenging use of the banked offset credits, which would have led to a dispute between staff on one side, against a coalition of the applicant, the Air Resources Board, and several local air districts.

Committee Response

The Committee issued an Order on September 9, 1994 which declared that it would consider "only the SEPCO project as currently configured and certified [i.e. as a cogenerator with the ethanol facility as steam host] in the Commission decision."

The Committee Order solved the project description dilemma. Applicants would have to build the cogeneration facility as originally proposed. The focus shifted to providing licensees with greater security that the powerplant could continue to operate if the ethanol plant fails after construction. The Conditions of Certification requiring a cogeneration facility could thus be amended and clarified rather than eliminated.

Resolving Air Quality

With the ethanol plant still considered an integral part of the project, it now became possible to resolve air quality issues. Since the ethanol plant required the same feedstock as before, the proposed new stationary source offsets would in reality supplement rather than replace the original agricultural waste offsets. Even if the new offsets were officially substituted for the prior emission credits, the air quality benefits from not burning ag waste would continue to exist. CEC Staff thus did not have to question the effectiveness of the stationary source offsets.

The only problem would come if licensees sold their surplus agricultural waste offsets to someone else who used them as a credit against additional emissions. This concern was resolved by a negotiated compromise: new Air Quality Condition 81. The applicants agreed not to sell any emission reduction credits for two years, during which time all parties (including the ARB) would work together to develop a methodology for evaluating future offset sales, with the intention of balancing project impacts and offset benefits.

Commission Decision

The January 18, 1995 Commission Decision stated on page 10 that its "underlying necessary presumption . . . is that both the ethanol production and powerplant elements of the SEPCO project will be built." The Decision added new language to Condition of Certification Efficiency 1 specifying that if the ethanol plant fails after construction, the powerplant may continue to operate while the project owner/operator seeks to restore compliance with the cogeneration requirement in accordance with the provisions of Reliability Condition 4.

Reliability Condition 4 was re-written to allow the powerplant significant flexibility, including limited operation without a thermal host and, if all else fails, the possibility of operating a stand-alone combined cycle powerplant.

The Commission also approved modifications to the original decision allowing the applicants' proposed new stationary source air emissions offsets and new water supply options.

Post License Modification Developments

The SEPCO project was never built due to a contractual dispute between SMUDFA and the ethanol plant partners. Essentially SMUD concluded that that the project had no future as a cogeneration plant due to perceived unreliability of the legally mandated ethanol thermal host. Unable to build the stand-alone powerplant it wanted, SMUD preferred to abandon the project entirely.

SMUDFA terminated its development agreement with the ethanol plant entities on June 28, 1996. SMUDFA's July 5, 1996 petition to the CEC for a hearing on the termination (in accordance with Ordering paragraph 8A on pages 11-12 of the January 18, 1995 Modification Decision) led to an inconclusive proceeding in which no action was taken, Docket No. 92-AFC-2C.

The ethanol plant developers then sued SMUD and SMUDFA for breach of contract in Sacramento County Superior Court, Action No. 96AS01524. The parties reached an out of court settlement in which the ethanol developers retained all rights to the Energy Commission SEPCO license for a cogeneration plant. However, they were unable to build either facility and their CEC license ultimately expired. (See License Extension Petition, Docket No. 92-AFC-2C, at the conclusion of the SEPCO Docket No. 92-AFC-2 summary.)