III. Discussion

At the PHC, the assigned Administrative Law Judge (ALJ) confirmed that the proceeding would not consider cost allocation but that the cost-follows-contract methodology established in Decision (D.) 04-12-014 would remain. In addition, it was established that the DWR contracts themselves were not at-issue, but for planning purposes the Commission wanted to address whether the IOUs needed any of the contracts reallocated to enable them to manage their portfolios and to plan for their procurement needs.

PG&E discussed proposals for the Kings River, CCSF, Sunrise and Coral1 contracts. In regards to the Kings River contract, PG&E would be willing to take interim operational control of that contract. PG&E discussed that the 2005 DWR cost allocation proceeding, D.04-12-014, determined the basic cost-follows contract framework and that for 2005 only PG&E would be allocated the costs associated with the Kings River contract. However, all the other issues involved with this contract were not wrapped up in D. 04-12-014 because the Kings River contract was not operational when that decision was issued. CCSF was also not allocated in that decision because the pricing issues still need to be resolved. When the CCSF contract is solid and the project is built, PG&E opines that it might make sense to allocate CCSF to PG&E, but thinks it is premature to do so now.

PG&E also vigorously opposes the suggestion by SDG&E that the Sunrise contract should be reallocated from SDG&E to PG&E. This proposal by SDG&E first emerged in SDG&E's motion in R.01-10-024 seeking Commission approval of new energy resource contracts that were the winning bids from a SDG&E Request for Proposal (RFP). Specifically, SDG&E asked the Commission to reallocate the Sunrise contract to PG&E as a condition precedent to the Commission's approval of the Otay Mesa Generating Plant (OMGP), since the Sunrise contract would be superfluous and burdensome with all SDG&E's new resources. The Commission refused to address that request in its decision approving OMGP, D.04-06-011, and deferred any discussion of that proposal to this proceeding.

SCE offered for consideration that it would take Sunrise from SDG&E IF (1) SCE was allocated Williams D contract or the Product D contract associated with the Williams contract, and (2) the Sempra contract was reallocated from SCE to SDG&E. SCE also suggested that it could take all of the Williams contracts, Products A, B, C and D, but only if it no longer had the Sempra contract. SCE determined that it needs the Williams D contract for operational purposes, but it does not need both Williams D and Sempra. In response to PG&E's suggestion for the reallocation of the Coral contact, SCE opposes any allocation of Coral to SP 15. SCE accepts the cost-follows-contract methodology set forth in D.04-12-014.

SDG&E proposed that the Alamitos Unit 5 of the Williams D contract be reallocated from SDG&E to SCE for the remainder of the contract term and pursuant to the methodology adopted in D.04-12-014, the fixed annual adjustment amounts to SDG&E would be scaled up to represent an annual increase of approximately $60 million per year. The other DWR contracts would remain with SDG&E - including Sunrise. SDG&E recommended keeping Sempra with SCE because it is a very large must-take contract, 1200 to 1900 megawatts (MW)2, where the Williams D contract is 1200 MWs of dispatchable power. SDG&E does not want the Sempra contract, especially if it still has Sunrise. Sunrise has a capacity of 500 MWs. The energy from the Sempra contract alone represents about 75% of SDG&E's entire bundled load and if it was reallocated to SDG&E, SDG&E is concerned that it would result in operational inefficiencies for the utility on a number of scales.

ORA presented the simple proposal of maintaining the status quo and not reallocating any of the DWR contracts.

DWR weighed in on the CCSF, Kings River and Williams D contracts. DWR proposes allocating both CCSF and Kings River to PG&E and does not think it is premature to address the CCSF issue now. Since DWR and PG&E reached an agreement on Kings River there is no issue in dispute on that contract. Of considerable concern to DWR is the possibility that some of the contracts that were allocated in D.02-09-053 might be modified now by the Commission and then DWR's schedules for the operating agreements for those contracts could be affected. We require the utilities to file advice letters to modify Schedule 1 of the Operating Agreements, or Operating Order in the case of SCE, to reflect the contract allocation adopted by this decision. In particular, DWR does not want the Williams D contract reallocated by unit, rather than by contract or a contract product, because that would cause operational complexities in DWR's power supply program. We therefore do not reallocate the Williams D. contract by unit.

TURN suggested that to the extent the Commission reallocates a contract from one IOU to another, that movement would affect the annual adjustments under the adopted cost allocation methodology, and the numbers should be moved in a straightforward mechanical manner to match any reallocation.

After reviewing the comments, reply comments and statements from the PHC, we find that it is reasonable at this time to reallocate the DWR Kings River and CCSF contracts to PG&E. We affirm the agreement reached between DWR and PG&E on the Kings River contract.

While some parties were concerned that we should not allocate the CCSF contract now since not all of the terms and conditions are finalized, we are mindful of the arguments presented by DWR in favor of allocating the CCSF contract to PG&E at this time because it would save future proceeding time. Therefore, we allocate CCSF to PG&E, subject to the following terms and conditions the contract is allocated after (1) approval of the CCSF Board of Supervisors to proceed with a sale of Initial Bonds to finance the facilities covered by the DWR contract with CCSF; and (2) expiration of DWR's rights to termination without recourse under sections 4.02(1)(b) and (c) of the DWR/CCSF contract.

We are not reallocating the Sempra or Sunrise DWR contracts at this time. If the IOUs have resource or reliability needs that can be met by utilizing a DWR contract that is allocated to another IOU, the IOUs are free to make reallocation swaps that allow them to meet their grid reliability obligations and that are consistent with the Commission's previous decisions addressing DWR contract allocation and the associated cost recovery mechanisms.

,effective January 1, 2008, request of to separately allocate the reliability must run (RMR) portion of the Huntington Beach 1 portion of the Williams D contract to an IOU for operational purposes. If that issue is still of concern to DWR, it can be addressed in the 2006 long term procurement proceeding.While encouraging the IOUs to negotiate on the side for arrangements that meet their specific resource and reliability needs, we emphasize that no bilateral negotiations should upset the IOUs' adopted procurement plans.

1 The Coral contract was not one of the contracts identified in the ACR that was subject to possible reallocation, so we are not addressing it in this decision.

2 The Sempra contract ranges from 1200 MW to 1900 MW depending on the time of year.

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