July 9, 2008

Q&A from the 2008 All Source LTRFO Mailbox

1)In conducting the market valuation of Offers, how will PG&E compare:

  1. Indexed price Offers vs. fixed price Offers?
  2. Pricing where PG&E takes the greenhouse gas cost responsibility pursuant to section 9.3 of the PPA vs. pricing where the Seller takes the greenhouse gas cost responsibility and Section 9.3 does not apply?
  1. PG&E has a preference for fixed price Offers and price certainty. When comparing indexed price Offers to fixed price Offers, PG&E will take into account a risk premium associated with an indexed price Offer. PG&E will apply its forecast of the index plus a confidence level adjustment, based on the historic movement of the GDP Implicit Price Deflator index. For example, if PG&E decides that historic movement of the GDP Implicit Price Deflator index warrants a confidence level adjustment of 2%, and PG&E’s forecast of the GDP Implicit Price Deflator index for a given year is 3%, then PG&E will apply an index of 5% for the indexed price Offers in its market valuation for that year. See numerical example below.
  1. PG&E will apply a specific GHG cost forecast to its Market Valuation similar to the treatment of other forecast variables such as energy, fuel costs, inflation, etc. In comparing Offer pricing where PG&E takes the greenhouse gas cost responsibility vs pricing where the Seller takes the greenhouse gas cost responsibility, PG&E will analyze a range of greenhouse gas compliance costs moving above and below the forecast of those compliance costs to assess how the overall Market Valuation for the Offer may be impacted.

Numerical Example

2 Offers, identical machines, have the same HR and operating costs, start year and term. Offer A has a fixed capacity price at $240/kW-yr. Offer B is indexed at the GDP implicit price deflator, with the Notice To Proceed milestone 2 yrs out. Offer B’s base year capacity price is $220/kW-yr. On a forecast basis (before applying a risk premium), the indexed price bid has a capacity price of $233.40/kW-yr in year 2. After applying the risk premium, the capacity price for market value assessment becomes $242.55/kW-yr. So despite Offer B’s having a lower anticipated capacity price after applying the GDP deflator, when accounting for the risk premium, Offer A will have a superior overall market valuation.

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