2. Background

The Commission opened this investigation to consider whether to penalize Constellation NewEnergy, Inc. (CNE) on the evidence presented by the Consumer Protection and Safety Division (CPSD) that CNE failed to secure adequate resources for the month of January 2009 in violation of system resource adequacy requirements. Decision (D.) 05-10-042, which implements the resource adequacy requirements program, concludes as a matter of law that "a penalty equal to three times the monthly cost for new capacity is an appropriate sanction for an LSE's [load-serving entity] failure to acquire the capacity needed to meet its [resource adequacy] obligation." (Conclusion of Law 21.) D.06-06-064, which adopted further refinements to the resource adequacy requirements program, concludes as a matter of law that $40 per kilowatt (kW)-year is a reasonable and appropriate measure of the cost of new capacity for purposes of resource adequacy requirement penalties. (Conclusion of Law 26.)

As set forth in the order instituting this investigation, CPSD alleged that CNE's December 1, 2008 resource adequacy compliance filing for its
January 2009 procurement obligation was deficient because, although the compliance advice letter indicated that CNE met its obligation, it included contracts totaling 180 MW which were not valid for January 2009. CPSD asserts that CNE is therefore in violation of the Commission's resource adequacy requirements and that, pursuant to the penalty formula established in
D.06-06-064, it should be penalized $1.8 million.

The assigned Commissioner's May 11, 2010 scoping memo and ruling identified the following issues to be addressed in this proceeding:

1. Did CNE fail to file a valid month-ahead system resource adequacy compliance advice letter as required by
Resolution E-4017?

2. If so, what is the standard for determining whether to assess a penalty and in what amount?

a. Does D.05-10-042 establish strict liability for a penalty for violation of resource adequacy requirements, pursuant to the formula set forth therein? or,

b. Do the principles historically used by the Commission in assessing fines, as set forth in the Affiliate Rulemaking Decision, D.98-12-075, apply to the assessment of a penalty for violation of resource adequacy requirements?

3. If the Affiliate Rulemaking Decision principles apply,

a. What harm was caused by virtue of the violation?

b. What was CNE's conduct in preventing, detecting, correcting, disclosing and rectifying the violation?

c. What amount of fine will achieve the objective of deterrence based on CNE's financial resources?

d. What fine or sanction has the Commission imposed under reasonably comparable factual circumstances?

e. Under the totality of circumstances and evaluating the harm from the perspective of the public interest, what is the appropriate fine or sanction?

The matter was set for evidentiary hearing on September 27, 2010, to take evidence on the material factual issues.

By joint motion filed September 24, 2010, and granted by the Administrative Law Judge's (ALJ) e-mail ruling that same day and affirmed here, the parties requested that the evidentiary hearing be taken off calendar in anticipation that they would shortly reach a settlement of the matter.

By joint motions filed October 1, 2010, the parties moved for approval of a proposed settlement of the matter and for the admission of the parties' prepared testimony into evidence.¹

¹ The prepared testimony is collectively offered as a single exhibit including (1) a public version of the March 4, 2010, "CPSD Investigative Report on CNE," sponsored by Peter Spencer; (2) the July 21, 2010, "Prepared Direct Testimony of Edward MacKay on Behalf of CNE;" (3) the July 21, 2010, "Prepared Direct Testimony of Mary Lynch on Behalf of CNE;" (4) the September 6, 2010, "Rebuttal of the CPSD to the Testimony of CNE," sponsored by Peter Spencer; and (5) the September 21, 2010, "Prepared Testimony of Edward MacKay on Behalf of CNE in Rebuttal to the September 8, 2010 Testimony of Peter Spencer." The exhibit is hereby admitted into the evidentiary record.